** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

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**FORM10-KSB**

**x ANNUAL REPORTPURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

For the fiscal year ended December 31, 2006

or

**o** TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from January 1, 2006 toDecember 31, 2006

Commission File No. **333-133061**

**PREMIERCOMMERCIAL BANCORP**

(Exact Name of Registrant as Specified in its Charter)

| **California**                            |   | **32-0120557**          |
|-------------------------------------------|--------|-------------------------|
| (State of other  jurisdiction of          |   | (IRS Employer           |
| incorporation or  organization)           |   | Identification  Number) |
|                                      |   |                    |
| **2400  East Katella Ave., Suite 200**    |   | ** **              |
| **Anaheim,  California**                  |   | **92806**               |
| (Address of  principal executive offices) |   | (Zip Code)              |

 

Registrant’s telephone number, including area code: **(714) 978-2552**

Securities registered pursuant to Section 12(g) of theAct: **None**

Securities registered pursuant to Section 12(b) of theAct: **None**

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.  Yes o   No   x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x    No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  o

Large accelerated filer  o                Acceleratedfiler  o                Non-acceleratedfiler  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).  Yes o  No x

The issuer’s revenues forthe most recent fiscal year: $22,991,000.

The aggregate value ofthe voting stocks held by non-affiliates of the issuer as of February 28, 2007,was $32,997,128, based on the average bid and asked prices of such stock.

Numberof Registrant’s shares of common stock outstanding at February 28, 2007 was2,635,491.

 

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###  

### **TABLE OF CONTENTS**

 
| PART I     |   |                                                                                                                                      |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                      |
| ITEM 1.    |   | DESCRIPTION  OF BUSINESS                                                                                                                  |
|       |   |                                                                                                                                      |
| ITEM 2.    |   | DESCRIPTION  OF PROPERTIES                                                                                                                |
|       |   |                                                                                                                                      |
| ITEM 3.    |   | LEGAL  PROCEEDINGS                                                                                                                        |
|       |   |                                                                                                                                      |
| ITEM 4.    |   | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                      |
|       |   |                                                                                                                                      |
| PART II    |   |                                                                                                                                      |
|       |   |                                                                                                                                      |
| ITEM 5.    |   | MARKET FOR  COMMON EQUITY AND RELATED STOCKHOLDER                                                                                         |
|       |   |                                                                                                                                      |
| ITEM 6.    |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND RESULTS OF OPERATIONS                                                 |
|       |   |                                                                                                                                      |
| ITEM 7.    |   | FINANCIAL STATEMENTS                                                                                                                      |
|       |   |                                                                                                                                      |
| ITEM 8.    |   | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                                     |
|       |   |                                                                                                                                      |
| ITEM 8A.   |   | CONTROLS AND  PROCEDURES                                                                                                                  |
|       |   |                                                                                                                                      |
| ITEM 8B.   |   | OTHER INFORMATION                                                                                                                         |
|       |   |                                                                                                                                      |
| PART III   |   |                                                                                                                                      |
|       |   |                                                                                                                                      |
| ITEM 9.    |   | DIRECTOR AND  EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT |
|       |   |                                                                                                                                      |
| ITEM 10    |   | EXECUTIVE  COMPENSATION                                                                                                                   |
|       |   |                                                                                                                                      |
| ITEM 11.   |   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                                          |
|       |   |                                                                                                                                      |
| ITEM 12    |   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                                                |
|       |   |                                                                                                                                      |
| ITEM 13.   |   | EXHIBITS                                                                                                                                  |
|       |   |                                                                                                                                      |
| ITEM 14.   |   | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                                   |
|       |   |                                                                                                                                      |
| SIGNATURES |   |                                                                                                                                      |

 

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**Forward-looking Statements**

Except forhistorical information contained herein, the matters discussed in this Form10-KSB contain forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Theseforward-looking statements represent estimates, projections and statements ofour beliefs concerning future events, business plans, objectives, expected operatingresults and the assumptions upon which those statements are based.  Forward-looking statements include withoutlimitation, any statement that may predict, forecast, indicate or imply futureresults, performance or achievements, and are typically identified with wordssuch as “believe,” “anticipate,” “expect,” “estimate,” “project,” “intend,” “will,”“may,” or words or phases of similar meaning.

We caution thatforward-looking statements are based largely on our expectations and aresubject to a number of known and unknown risks and uncertainties that aresubject to change based on factors which are, in many instances, beyond ourcontrol.  Actual results, performance orachievements could differ materially from those contemplated, expressed, orimplied by the forward-looking statements contained herein.  For a discussion of some of the risks anduncertainties that might cause such a difference, see Item 1. Business; RiskFactors.  Investors should not placeundue reliance on forward-looking statements as a prediction of actualresults.  We will not update theforward-looking statements to reflect actual results or changes in the factorsaffecting the forwarding-looking statements.

 

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**PART I**

**ITEM 1.          BUSINESS**

**Premier Commercial Bancorp**

We formed PremierCommercial Bancorp (“company” or “our company” or “our holding company”) in2004 to serve as a holding company for Premier Commercial Bank, Anaheim andPremier Commercial Bank Arizona, Mesa (“Bank” or “our Bank”). Our holdingcompany is a bank holding company registered with the Board of Governors of theFederal Reserve System (“Federal Reserve”) under the Bank Holding Company Actof 1956, as amended (“BHCA”). Our holding company’s activities consist ofowning the outstanding shares of our Bank in Anaheim, California, and our Bankin Mesa, Arizona, Premier Commercial Bancorp Statutory Trust I, PremierCommercial Bancorp Statutory Trust II and Premier Commercial Bancorp StatutoryTrust III. Unless the context indicates otherwise, all references in thisreport to “we”, “us”, and “our” refer to our company and our Bank on aconsolidated basis.

**Premier Commercial Bank**

Premier CommercialBank, N.A. (the “Bank”) is a national banking association organized under thelaws of the United States. The Bank commencedbusiness on November 28, 2001 and conducts a general commercial banking business. The Bank received itscharter from and is regulated by the Office of the Comptroller of the Currency(the “OCC”). The Bank’s deposit accounts are insured up to the applicable legallimits by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is amember of the Federal Reserve System. The Bank’s main and principal executiveoffices are located at 2400 E. Katella Avenue, Anaheim, California 92806.

**General Business**

Our Bank currentlyhas one full-service banking office in California providing services tocustomers in the Orange, Los Angeles, and San Diego Counties. Our principaloffice is located in Anaheim, California.

OurBank also operates a loan production/deposit production office in Irvine whichprincipally generates real-estate, commercial and SBA loans in California. OurBank also has a SBA loan production office in Woodland Hills.

OurBank offers a broad range of banking services, including personal and businesschecking accounts and various types of interest-bearing deposit accounts,including interest-bearing checking, money market, savings, IRA, SEP, and timecertificates of deposits. In addition, our Bank has developed a nationwide SBAlending program as a “preferred lender”. Through this program, we originate andfund both “7(a)” and “504” loans, primarily secured by commercial real estateproperty and guaranteed up to 85% by the Small Business Administration. Loanproducts include consumer installment (primarily automobile loans), home equitylines of credit, single-family residential construction loans, on both anowner-occupied and a non-owner basis, single family residential tract loans (over4 units), commercial construction and permanent loans for office, retail andindustrial buildings for owner-occupancy, investment and re-sale, commerciallines of credit, term loans and letters of credit for local businesses.

Wefund our lending activities primarily from our core deposit base and ourCertificate of Deposit Money Desk. We obtain deposits from the local marketwith no material portion (in excess of 10% of total deposits) dependent uponany one person, entity or industry.

OurBank also offers safe deposit boxes, night depository facilities, merchantcredit card services, notary services, traveler’s checks, note collection, wiretransfer services, cashiers checks, 24 hour ATM banking services, telephonebanking, internet banking, direct deposit, and automatic transfers betweenaccounts. Our Bank is a member of the regional ATM network and offersnationwide ATM access.

**Premier Commercial Bank Arizona**

Premier CommercialBank Arizona, N.A. (the “AZ Bank”) is a national banking association organizedunder the laws of the United States. The Bank commenced business on November 10, 2006 and conducts a general commercial banking business.The Bank received its charter from and is regulated by the Office of theComptroller of the Currency (the “OCC”). The Bank’s deposit accounts areinsured up to the applicable legal limits by the Federal Deposit InsuranceCorporation (the “FDIC”). The Bank is a member of the Federal Reserve System.The Bank’s main and principal executive offices are located at 1910 S. StapleyDrive, Mesa, Arizona 85204.

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**General Business**

Our Bank currentlyhas one full-service banking office in Arizona providing services to customersin the Maricopa County and Greater Phoenix area. The principal office islocated in Mesa, Arizona.

Our AZBank offers a broad range of banking services, including personal and businesschecking accounts and various types of interest-bearing deposit accounts,including interest-bearing checking, money market, savings, IRA, SEP, and timecertificates of deposits. In addition, our AZ Bank has developed a nationwideSBA lending program as a “preferred lender”. Through this program, we originateand fund both “7(a)” and “504” loans, primarily secured by commercial realestate property and guaranteed up to 85% by the Small Business Administration.Loan products include consumer installment (primarily automobile loans), homeequity lines of credit, single-family residential construction loans, on bothan owner-occupied and a non-owner basis, single family residential tract loans(over 4 units), commercial construction and permanent loans for office, retailand industrial buildings for owner-occupancy, investment and re-sale,commercial lines of credit, term loans and letters of credit for localbusinesses.

Wefund our lending activities primarily from our core deposit base and ourCertificate of Deposit Money Desk. We obtain deposits from the local marketwith no material portion (in excess of 10% of total deposits) dependent uponany one person, entity or industry.

Our AZBank also offers safe deposit boxes, night depository facilities, merchantcredit card services, notary services, traveler’s checks, note collection, wiretransfer services, cashiers checks, telephone banking, internet banking, directdeposit, and automatic transfers between accounts. Our Bank is a member of theregional ATM network and offers nationwide ATM access.

Our holdingcompany, as the parent of our Banks, has no operations and conducts no businessof its own other than owning our Bank in Anaheim, California and our Bank inMesa, Arizona, Premier Commercial Bancorp Statutory Trust I, Premier CommercialBancorp Statutory Trust II and Premier Commercial Bancorp Statutory Trust III.Accordingly, the discussion of the business which follows concerns the businessconducted by our Banks, unless otherwise indicated. No material portion of ourcompany’s business is seasonal.

**Our Business Strategy**

Our businessstrategy is to:

·                  Caterto small and medium sized businesses, executives and professionals, and thehospitality industry by offering quality, personalized financial services whichhave become less available due to consolidation in the banking industry.

·                  Buildour deposit base and loan portfolio through relationship banking that isattentive to the needs of our customers.

·                  TheBank continually investigates products and services where it can attain acompetitive advantage over others in the banking industry. In this way,management positions the Bank to offer those products and services requested byits customers ahead of its competition.

**Internal Growth**

Our internalgrowth strategy is primarily focused on “total relationship banking,” whichmeans developing a personalized package of financial services and providingsuperior service to customers with high transactional needs.  By focusing on customer relationships, webelieve that we fill a niche neglected by the larger banks.

Our target marketconsists of small businesses, executives and professionals in the Orange Countycommunity.  We have hired, and willcontinue to hire, highly motivated and well-compensated business developmentofficers to generate significant deposit relationships.  Our objective is to retain the most effectivebusiness development team of any community bank in Southern California and tosupport them with quality financial products and exceptional customerservice.  In addition, we have focused onselling financial products that bear a logical relationship to each other, suchas money market and time deposits.  Webelieve that our internal growth strategy sets us apart from other communitybanks in the region.

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**Employees**

As of December 31, 2006, we employed 57 full-timeequivalent employees at the Bank in Anaheim and 19 at the AZ Bank.  Part-time employees are converted tofull-time equivalent employees based on the percentage of their weekly hoursworked compared to 40 hours.  We believethat we enjoy satisfactory relations with our employees.

**Competition**

The bankingbusiness generally, and our market area specifically, is highly competitive.  A number of major banks have offices in ourmarket area and currently dominate loan and deposit origination.  We compete for deposits and loans principallywith these major banks, as well as with savings and loan associations, financecompanies, credit unions and numerous other financial institutions located inour market area.

Among theadvantages, which the major banks have over us, is their ability to financeextensive advertising campaigns and to offer the convenience of many retailoutlets.  Many of the major banksoperating in our service area offer services, such as trust and internationalbanking services, which we do not offer directly.  In addition, these larger banks usually havesubstantially higher limits than we do.

**SUPERVISION AND REGULATION**

**General**

Banking is acomplex, highly regulated industry.  Theprimary goals of the regulators are to maintain a safe and sound bankingsystem, protect depositors and the Federal Deposit Insurance Corporation’s (the“FDIC”) insurance fund, and facilitate the conduct of sound monetarypolicy.  In furtherance of these goals,Congress and the states have created several largely autonomous regulatoryagencies and enacted numerous laws that govern banks, bank holding companiesand the banking industry.  Consequently,the Company’s growth and earnings performance, as well as those of the Bank maybe affected not only by management decisions and general economic conditions,but also by the requirements of applicable state and federal statutes,regulations and the policies of various governmental regulatory authorities,including:

·                  the Office of the Comptroller of theCurrency (the “OCC”).

·                  the Federal Deposit InsuranceCorporation; and

·                  the Board of Governors of the FederalReserve System (the “FRB”);

The system ofsupervision and regulation applicable to the Company and the Bank governs mostaspects of their business, including:

·                  the scope of permissible businessactivities;

·                  investments;

·                  reserves that must be maintained againstdeposits;

·                  capital levels that must be maintained;

·                  the nature and amount of collateral thatmay be taken to secure loans;

·                  the establishment of new branches;

·                  mergers and consolidations with otherfinancial institutions; and

·                  the payment of dividends.

From time to time legislationis enacted which has the effect of increasing the cost of doing business andchanging the competitive balance between banks and other financial andnon-financial institutions.  Variousfederal laws enacted over the past several years have provided, among otherthings, for:

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·                  the maintenance of mandatory reserveswith the Federal Reserve Bank on deposits by depository institutions;

·                  the phasing-out of the restrictions onthe amount of interest which financial institutions may pay on certain types ofaccounts; and

·                  the authorization of various types of newdeposit accounts, such as “NOW” accounts, “Money Market Deposit” accounts and “SuperNOW” accounts, designed to be competitive with money market mutual funds andother types of accounts and services offered by various financial andnon-financial institutions.

The lendingauthority and permissible activities of certain non-bank financial institutionssuch as savings and loan associations and credit unions have been expanded, andfederal regulators have been given increased enforcement authority.  These laws have generally had the effect ofaltering competitive relationships existing among financial institutions,reducing the historical distinctions between the services offered by banks,savings and loan associations and other financial institutions, and increasingthe cost of funds to banks and other depository institutions.

**Thefollowing discussion of statutes and regulations affecting banks is only asummary, does not purport to be complete, and is qualified in its entirety byreference to the actual statutes and regulations.  No assurance can be given that the statutesand regulations will not change in the future. Moreover, any changes may have a material effect on our business.**

# **Supervisionand Regulation of the Banks**

**General**

The banks asnational banking associations, are also a members of the Federal ReserveSystem, are subject to regulation, supervision, and regular examination by theOCC, the FDIC and the FRB.  The Bank’sdeposits are insured by the FDIC up to the maximum extent provided by law.  The regulations of these agencies govern mostaspects of the Bank’s business. California law exempts all banks from usury limitations on interestrates.

**RecentLegislation**

***Sarbanes-Oxley Act.***  During July, 2002, President Bush signed intolaw the Sarbanes-Oxley Act of 2002.  Thepurpose of the Sarbanes-Oxley Act is to protect investors by improving theaccuracy and reliability of corporate disclosures made under the securitieslaws, and for other purposes.

The Sarbanes-Oxley Actamends the Securities Exchange Act of 1934 to prohibit a registered publicaccounting firm from performing specified non-audit services contemporaneouslywith a mandatory audit.  The Sarbanes-OxleyAct also vests the audit committee of an issuer with responsibility for theappointment, compensation, and oversight of any registered public accountingfirm employed to perform audit services. It requires each committee member to be a member of the board ofdirectors of the issuer, and to be otherwise independent.  The Sarbanes-Oxley Act further requires thechief executive officer and chief financial officer of an issuer to makecertain certifications as to each annual or quarterly report.

In addition, theSarbanes-Oxley Act requires officers to forfeit certain bonuses and profitsunder certain circumstances. Specifically, if an issuer is required to prepare an accountingrestatement due to the material noncompliance of the issuer as a result ofmisconduct with any financial reporting requirement under the securities laws,the chief executive officer and chief financial officer of the issuer shall berequired to reimburse the issuer for (1) any bonus or other incentive-based orequity-based compensation received by that person from the issuer during the12-month period following the first public issuance or filing with the SEC ofthe financial document embodying such financial reporting requirement; and (2)any profits realized from the sale of securities of the issuer during that 12-monthperiod.

The Sarbanes-Oxley Actalso instructs the SEC to require by rule:

1.               disclosure of all material off-balance sheettransactions and relationships that may have a material effect upon thefinancial status of an issuer; and

2.               the presentation of pro forma financial information ina manner that is not misleading, and which is reconcilable with the financialcondition of the issuer under generally accepted accounting principles.

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The Sarbanes-Oxley Actalso prohibits insider transactions in Premier Commercial’s stock during lockout periods of its pension plans, and any profits on such insider transactionsare to be disgorged.  In addition, thereis a prohibition of company loans to its executives, except in certain circumstances.  The Sarbanes-Oxley Act also provides formandated internal control report and assessment with the annual report and anattestation and a report on such report by Premier Commercial’s auditor.  The SEC also requires an issuer to institutea code of ethics for senior financial officers of the company.  Further, the Sarbanes-Oxley Act adds acriminal penalty of fines and imprisonment of up to 10 years for securitiesfraud.

***Regulation W.***  The FRB on October 31, 2002 approved a finalRegulation W that comprehensively implements sections 23A and 23B of theFederal Reserve Act.  Sections 23A and23B and Regulation W restrict loans by a depository institution to itsaffiliates, asset purchases by a depository institution from its affiliates,and other transactions between a depository institution and itsaffiliates.  Regulation W unifies in onepublic document the FRB’s interpretations of sections 23A and 23B.  Regulation W had an effective date of April1, 2003.

***Regulatory Capital Treatment of Equity Investments.***  In December of 2001 and January of 2002, theOCC, the FRB and the FDIC on the adopted final rules governing the regulatorycapital treatment of equity investments in non-financial companies held bybanks, bank holding companies and financial holding companies.  The final rules became effective on April 1,2002.  The new capital requirements applysymmetrically to equity investments made by banks and their holding companiesin non-financial companies under the legal authorities specified in the finalrules.  Among others, these include themerchant banking authority granted by the Gramm-Leach-Bliley Act and theauthority to invest in small business investment companies (“SBICs”) granted bythe Small Business Investment Act. Covered equity investments will be subject to a series of marginal Tier1 capital charges, with the size of the charge increasing as the organization’slevel of concentration in equity investments increases.  The highest marginal charge specified in thefinal rules requires a 25 percent deduction from Tier 1 capital for coveredinvestments that aggregate more than 25 percent of an organization’s Tier 1capital.  Equity investments throughSBICs will be exempt from the new charges to the extent such investments, inthe aggregate, do not exceed 15 percent of the banking organization’s Tier 1capital.  The new charges would not applyto individual investments made by banking organizations prior to March 13,2000.  Grandfathered investments made bystate banks under section 24(f) of the Federal Deposit Insurance Act also areexempted from coverage.

***USA Patriot Act.***  The terrorist attacks in September, 2001,have impacted the financial services industry and led to federal legislationthat attempts to address certain issues involving financial institutions.  On October 26, 2001, President Bushsigned into law the Uniting and Strengthening America by Providing AppropriateTools Required to Intercept and Obstruct Terrorism Act of 2001.

Part of the USA PatriotAct is the International Money Laundering Abatement and FinancialAnti-Terrorism Act of 2001 (“IMLA”). IMLA authorizes the Secretary of the Treasury, in consultation with theheads of other government agencies, to adopt special measures applicable tobanks, bank holding companies, and/or other financial institutions.  These measures may include enhancedrecordkeeping and reporting requirements for certain financial transactionsthat are of primary money laundering concern, due diligence requirementsconcerning the beneficial ownership of certain types of accounts, andrestrictions or prohibitions on certain types of accounts with foreignfinancial institutions.

Among its otherprovisions, IMLA requires each financial institution to: (i) establish ananti-money laundering program; (ii) establish due diligence policies,procedures and controls with respect to its private banking accounts andcorrespondent banking accounts involving foreign individuals and certainforeign banks; and (iii) avoid establishing, maintaining, administering, ormanaging correspondent accounts in the United States for, or on behalf of, aforeign bank that does not have a physical presence in any country.  In addition, IMLA contains a provisionencouraging cooperation among financial institutions, regulatory authoritiesand law enforcement authorities with respect to individuals, entities andorganizations engaged in, or reasonably suspected of engaging in, terroristacts or money laundering activities. IMLA expands the circumstances under which funds in a bank account maybe forfeited and requires covered financial institutions to respond undercertain circumstances to requests for information from federal banking agencieswithin 120 hours.  IMLA also amends theBHCA and the Bank Merger Act to require the federal banking agencies toconsider the effectiveness of a financial institution’s anti-money launderingactivities when reviewing an application under these acts.

IMLA became effectiveJuly 23, 2002.  our Banks have augmentedtheir systems and procedures to comply with IMLA.

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**Risk-BasedCapital Guidelines**

***General***.  The federal banking agencies have establishedminimum capital standards known as risk-based capital guidelines.  These guidelines are intended to provide ameasure of capital that reflects the degree of risk associated with a bank’soperations.  The risk-based capitalguidelines include both a new definition of capital and a framework forcalculating the amount of capital that must be maintained against a bank’sassets and off-balance sheet items.  Theamount of capital required to be maintained is based upon the credit risksassociated with the various types of a bank’s assets and off-balance sheetitems.  A bank’s assets and off-balancesheet items are classified under several risk categories, with each categoryassigned a particular risk weighting from 0% to 100%. The bank’s risk-basedcapital ratio is calculated by dividing its qualifying capital, which is thenumerator of the ratio, by the combined risk weights of its assets andoff-balance sheet items, which is the denominator of the ratio.

***QualifyingCapital***.  Abank’s total qualifying capital consists of two types of capital components: “corecapital elements,” known as Tier 1 capital, and “supplementary capitalelements,” known as Tier 2 capital.  TheTier 1 component of a bank’s qualifying capital must represent at least 50% oftotal qualifying capital and may consist of the following items that aredefined as core capital elements:

·                  common stockholders’ equity;

·                  qualifying non-cumulative perpetualpreferred stock (including related surplus); and

·                  minority interests in the equity accountsof consolidated subsidiaries.

The Tier 2component of a bank’s total qualifying capital may consist of the followingitems:

·                  a portion of the allowance for loan andlease losses;

·                  certain types of perpetual preferredstock and related surplus;

·                  certain types of hybrid capitalinstruments and mandatory convertible debt securities; and

·                  a portion of term subordinated debt andintermediate-term preferred stock, including related surplus.

***RiskWeighted Assets and Off-Balance Sheet Items***.  Assets and credit equivalent amounts ofoff-balance sheet items are assigned to one of several broad riskclassifications, according to the obligor or, if relevant, the guarantor or thenature of the collateral.  The aggregatedollar value of the amount in each risk classification is then multiplied bythe risk weight associated with that classification.  The resulting weighted values from each ofthe risk classifications are added together. This total is the bank’s totalrisk weighted assets.

A two-step processdetermines risk weights for off-balance sheet items, such as unfunded loancommitments, letters of credit and recourse arrangements.  First, the “credit equivalent amount” of theoff-balance sheet items is determined, in most cases by multiplying theoff-balance sheet item by a credit conversion factor.  Second, the credit equivalent amount istreated like any balance sheet asset and is assigned to the appropriate riskcategory according to the obligor or, if relevant, the guarantor or the natureof the collateral.  This result is addedto the bank’s risk weighted assets and comprises the denominator of therisk-based capital ratio.

***MinimumCapital Standards***. The supervisory standards set forth below specify minimum capital ratiosbased primarily on broad risk considerations. The risk-based ratios do not take explicit account of the quality ofindividual asset portfolios or the range of other types of risk, to which banksmay be exposed, such as interest rate, liquidity, market or operationalrisks.  For this reason, banks aregenerally expected to operate with capital positions above the minimum ratios.

All banks arerequired to meet a minimum ratio of qualifying total capital to risk weightedassets of 8%.  At least 4% must be in theform of Tier 1 capital, net of goodwill. The maximum amount of supplementary capital elements that qualifies asTier 2 capital is limited to 100% of Tier 1 capital, net of goodwill.  In addition, the combined maximum amount ofsubordinated debt and intermediate-term preferred stock that qualifies as Tier2 capital is limited to 50% of Tier 1 capital. The maximum amount of theallowance for loan and lease losses that qualifies as Tier 2 capital is limitedto 1.25% of gross risk weighted assets. The allowance for loan and lease losses in excess of this limit may, ofcourse, be maintained, but would not be included in a bank’s risk-based capitalcalculation.

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The federalbanking agencies also require all banks to maintain a minimum amount of Tier 1capital to total assets, referred to as the leverage ratio.  For a bank rated in the highest of the fivecategories used by regulators to rate banks, the minimum leverage ratio of Tier1 capital to total assets is 3%.  For allbanks not rated in the highest category, the minimum leverage ratio must be atleast 4% to 5%.  These uniform risk-basedcapital guidelines and leverage ratios apply across the industry.  Regulators, however, have the discretion toset minimum capital requirements for individual institutions which may besignificantly above the minimum guidelines and ratios.

**OtherFactors Affecting Minimum Capital Standards**

The federalbanking agencies have established certain benchmark ratios of the allowance forloan losses to be held against classified assets.  The benchmark by federal banking agencies isthe sum of:

·                  100% of assets classified loss;

·                  50% of assets classified doubtful;

·                  15% of assets classified substandard; and

·                  estimated credit losses on other assetsover the upcoming twelve months.

The federalbanking agencies have recently revised their risk-based capital rules to takeaccount of concentrations of credit and the risks of engaging innon-traditional activities. Concentrations of credit refers to situations wherea lender has a relatively large proportion of loans involving a singleborrower, industry, geographic location, collateral or loan type.  Non-traditional activities are consideredthose that have not customarily been part of the banking business, but areconducted by a bank as a result of developments in, for example, technology,financial markets or other additional activities permitted by law orregulation.  The regulations requireinstitutions with high or inordinate levels of risk to operate with higherminimum capital standards.  The federalbanking agencies also are authorized to review an institution’s management ofconcentrations of credit risk for adequacy and consistency with safety andsoundness standards regarding internal controls, credit underwriting or otheroperational and managerial areas.

The federalbanking agencies also limit the amount of deferred tax assets that areallowable in computing a bank’s regulatory capital.  Deferred tax assets that can be realized fortaxes paid in prior carryback years and from future reversals of existingtaxable temporary differences are generally not limited.  However, deferred tax assets that can only berealized through future taxable earnings are limited for regulatory capitalpurposes to the lesser of:

·                  the amount that can be realized withinone year of the quarter-end report date; or

·                  10% of Tier 1 capital.

The amount of anydeferred tax in excess of this limit would be excluded from Tier 1 capital,total assets and regulatory capital calculations.

The federalbanking agencies have also adopted a joint agency policy statement whichprovides that the adequacy and effectiveness of a bank’s interest rate riskmanagement process, and the level of its interest rate exposure is a criticalfactor in the evaluation of the bank’s capital adequacy.  A bank with material weaknesses in itsinterest rate risk management process or high levels of interest rate exposurerelative to its capital will be directed by the federal banking agencies to takecorrective actions.  Financialinstitutions which have significant amounts of their assets concentrated inhigh risk loans or nontraditional banking activities, and who fail toadequately manage these risks, may be required to set aside capital in excessof the regulatory minimums.

**PromptCorrective Action**

The federalbanking agencies possess broad powers to take prompt corrective action toresolve the problems of insured banks. Each federal banking agency has issued regulations defining five capitalcategories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantlyundercapitalized,” and “critically undercapitalized.”  Under the regulations, a bank shall be deemedto be:

·                  “well capitalized” if it has a totalrisk-based capital ratio of 10.0% or more, has a Tier 1 risk-based capitalratio of 6.0% or more, has a leverage capital ratio of 5.0% or more, and is notsubject to specified requirements to meet and maintain a specific capital levelfor any capital measure;

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·                  “adequately capitalized” if it has atotal risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capitalratio of 4.0% or more, and a leverage capital ratio of 4.0% or more (3.0% undercertain circumstances) and does not meet the definition of “well capitalized;”

·                  “undercapitalized” if it has a totalrisk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capitalratio that is less than 4.0%, or a leverage capital ratio that is less than4.0% (3.0% under certain circumstances);

·                  “significantly undercapitalized” if ithas a total risk-based capital ratio that is less than 6.0%, a Tier 1risk-based capital ratio that is less than 3.0% or a leverage capital ratiothat is less than 3.0%; and

·                  “critically undercapitalized” if it has aratio of tangible equity to total assets that is equal to or less than 2.0%.

Banks areprohibited from paying dividends or management fees to controlling persons orentities if, after making the payment the bank would be “undercapitalized,”that is, the bank fails to meet the required minimum level for any relevantcapital measure.  Asset growth andbranching restrictions apply to “undercapitalized” banks.  Banks classified as “undercapitalized” arerequired to submit acceptable capital plans guaranteed by its holding company,if any.  Broad regulatory authority wasgranted with respect to “significantly undercapitalized” banks, includingforced mergers, growth restrictions, ordering new elections for directors,forcing divestiture by its holding company, if any, requiring management changes,and prohibiting the payment of bonuses to senior management.  Even more severe restrictions are applicableto “critically undercapitalized” banks, those with capital at or less than2%.  Restrictions for these banks includethe appointment of a receiver or conservator after 90 days, even if the bank isstill solvent.  All of the federalbanking agencies have promulgated substantially similar regulations toimplement this system of prompt corrective action.

A bank, based uponits capital levels, that is classified as “well capitalized,” “adequatelycapitalized” or “undercapitalized” may be treated as though it were in the nextlower capital category if the appropriate federal banking agency, after noticeand opportunity for hearing, determines that an unsafe or unsound condition, oran unsafe or unsound practice, warrants such treatment.  At each successive lower capital category, aninsured bank is subject to more restrictions. The federal banking agencies,however, may not treat an institution as “critically undercapitalized” unlessits capital ratios actually warrant such treatment.

Informationconcerning the Company’s and Bank’s capital adequacy at December 31, 2006 isset forth in Note P of the notes to our consolidated financial statementsincluded in Item 7.

**DepositInsurance Assessments**

The FDIC hasimplemented a risk-based assessment system in which the deposit insurancepremium relates to the probability that the deposit insurance fund will incur aloss.  The FDIC sets semi-annualassessments in an amount necessary to maintain or increase the reserve ratio ofthe insurance fund to at least 1.25% of insured deposits or a higher percentageas determined to be justified by the FDIC.

Under therisk-based assessment system adopted by the FDIC, banks are categorized intoone of three capital categories (“well capitalized,” “adequately capitalized,”and “undercapitalized”). Assignment of a bank into a particular capitalcategory is based on supervisory evaluations by its primary federalregulator.  After being assigned to aparticular capital category, a bank is classified into one of three supervisorycategories.  The three supervisorycategories are:

·                  Group A - financially sound with only afew minor weaknesses;

·                  Group B - demonstrates weaknesses thatcould result in significant deterioration; and

·                  Group C - poses a substantial probabilityof loss.

The capital ratiosused by the FDIC to define “well-capitalized,” “adequately capitalized” and “undercapitalized”are the same as in the prompt corrective action regulations.

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The assessmentrates are summarized below, expressed in terms of cents per $100 in insureddeposits:

|                         | ** ** | **Assessment Rates**  | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **Supervisory Group** | ** ** |
| **Capital Group**  | ** ** | **Group A**           | ** ** | **Group B** | ** ** | **Group C** | ** ** |
| Well Capitalized        |       | 0                          |       | 3 |   | 17 |   |
| Adequately  Capitalized |       | 3                          |       | 10 |   | 24 |   |
| Undercapitalized        |       | 10                         |       | 24 |   | 27 |   |

 

**InterstateBanking and Branching**

Banks have theability, subject to specific restrictions, to acquire by acquisition or mergerbranches located outside their home state. The establishment of new interstate branches is also possible in thosestates with laws that expressly permit it. Interstate branches are subject to many of the laws of the states inwhich they are located.

California lawauthorizes out-of-state banks to enter California by the acquisition of ormerger with a California bank that has been in existence for at least fiveyears, unless the California bank is in danger of failing or in certain otheremergency situations.  Interstatebranching into California is, however, limited to the acquisition of anexisting bank.

**EnforcementPowers**

In addition tomeasures taken under the prompt corrective action provisions, insured banks maybe subject to potential enforcement actions by the federal regulators forunsafe or unsound practices in conducting their businesses, or for violation ofany law, rule, regulation, condition imposed in writing by the regulatoryagency, or term of a written agreement with the regulatory agency.  Enforcement actions may include:

·                  the appointment of a conservator orreceiver for the bank;

·                  the issuance of a cease and desist orderthat can be judicially enforced;

·                  the termination of the bank’s depositinsurance;

·                  the imposition of civil monetarypenalties;

·                  the issuance of directives to increase capital;

·                  the issuance of formal and informalagreements;

·                  the issuance of removal and prohibitionorders against officers, directors and other institution-affiliated parties;and

·                  the enforcement of such actions throughinjunctions or restraining orders based upon a judicial determination that thedeposit insurance fund or the bank would be harmed if such equitable relief wasnot granted.

**FDICReceiverships**

The FDIC may beappointed as conservator or receiver of any insured bank or savingsassociation.  In addition, the FDIC mayappoint itself as sole conservator or receiver of any insured state bank orsavings association for any, among others, of the following reasons:

·                  insolvency;

·                  substantial dissipation of assets orearnings due to any violation of law or regulation or any unsafe or unsoundpractice;

·                  an unsafe or unsound condition totransact business, including substantially insufficient capital or otherwise;

·                  any willful violation of a cease anddesist order which has become final;

·                  any concealment of books, papers, recordsor assets of the institution;

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·                  the likelihood that the institution willnot be able to meet the demands of its depositors or pay its obligations in thenormal course of business;

·                  the incurrence or likely incurrence of lossesby the institution that will deplete all or substantially all of its capitalwith no reasonable prospect for the replenishment of the capital withoutfederal assistance; or

·                  any violation of any law or regulation,or an unsafe or unsound practice or condition which is likely to causeinsolvency or substantial dissipation of assets or earnings, or is likely toweaken the condition of the institution or otherwise seriously prejudice theinterests of its depositors.

As a receiver ofany insured depository institution, the FDIC may liquidate such institution inan orderly manner and dispose of any matter concerning such institution as theFDIC determines is in the best interests of that institution, its depositorsand the FDIC.  Further, the FDIC shall, asthe conservator or receiver, by operation of law, succeed to all rights,titles, powers and privileges of the insured institution, and of anyshareholder, member, account holder, depositor, officer or director of thatinstitution with respect to the institution and the assets of the institution;may take over the assets of and operate the institution with all the powers ofthe members or shareholders, directors and the officers of the institution andconduct all business of the institution; collect all obligations and money dueto the institution and preserve and conserve the assets and property of theinstitution.

**Safetyand Soundness Guidelines**

The federalbanking agencies have adopted guidelines to assist in identifying andaddressing potential safety and soundness concerns before capital becomesimpaired.  These guidelines establishoperational and managerial standards relating to:

·                  internal controls, information systemsand internal audit systems;

·                  loan documentation;

·                  credit underwriting;

·                  asset growth; and

·                  compensation, fees and benefits.

Additionally, thefederal banking agencies have adopted safety and soundness guidelines for assetquality and for evaluating and monitoring earnings to ensure that earnings aresufficient for the maintenance of adequate capital and reserves.  If an institution fails to comply with asafety and soundness standard, the appropriate federal banking agency mayrequire the institution to submit a compliance plan.  Failure to submit a compliance plan or toimplement an accepted plan may result in a formal enforcement action.

The federalbanking agencies have issued regulations prescribing uniform guidelines forreal estate lending.  The regulationsrequire insured depository institutions to adopt written policies establishingstandards, consistent with such guidelines, for extensions of credit secured byreal estate. The policies must address loan portfolio management, underwritingstandards and loan to value limits that do not exceed the supervisory limitsprescribed by the regulations.

**ConsumerProtection Laws and Regulations**

The bankregulatory agencies are focusing greater attention on compliance with consumerprotection laws and their implementing regulations.  Examination and enforcement have become moreintense in nature, and insured institutions have been advised to carefullymonitor compliance with various consumer protection laws and their implementingregulations.  Banks are subject to manyfederal consumer protection laws and their regulations, including:

·                  the Community Reinvestment Act;

·                  the Truth in Lending Act (the “TILA”);

·                  the Fair Housing Act (the “FH Act”);

·                  the Equal Credit Opportunity Act (the “ECOA”);

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·                  the Home Mortgage Disclosure Act or (the “HMDA”);and

·                  the Real Estate Settlement Procedures Act(the “RESPA”).

The CRA isintended to encourage insured depository institutions, while operating safelyand soundly, to help meet the credit needs of their communities.  The CRA specifically directs the federal bankregulatory agencies, in examining insured depository institutions, to assesstheir record of helping to meet the credit needs of their entire community,including low- and moderate-income neighborhoods, consistent with safe andsound banking practices.  The CRA furtherrequires the agencies to take a financial institution’s record of meeting itscommunity credit needs into account when evaluating applications for, amongother things, domestic branches, consummating mergers or acquisitions, orholding company formations.

The federalbanking agencies have adopted regulations which measure a bank’s compliancewith its CRA obligations on a performance-based evaluation system.  This system bases CRA ratings on aninstitution’s actual lending service and investment performance rather than theextent to which the institution conducts needs assessments, documents communityoutreach or complies with other procedural requirements.  The ratings range from a high of “outstanding”to a low of “substantial noncompliance.”

The ECOA prohibitsdiscrimination in any credit transaction, whether for consumer or businesspurposes, on the basis of race, color, religion, national origin, sex, maritalstatus, age (except in limited circumstances), receipt of income from publicassistance programs, or good faith exercise of any rights under the ConsumerCredit Protection Act.  In March, 1994,the Federal Interagency Task Force on Fair Lending issued a policy statement ondiscrimination in lending.  The policystatement describes the three methods that federal agencies will use to provediscrimination:

·                  overt evidence of discrimination;

·                  evidence of disparate treatment; and

·                  evidence of disparate impact.

This means that ifa creditor’s actions have had the effect of discriminating, the creditor may beheld liable - even when there is no intent to discriminate.

The FH Actregulates may practices, including making it unlawful for any lender todiscriminate against any person in its housing-related lending activitiesbecause of race, color, religion, national origin, sex, handicap, or familialstatus.  The FH Act is broadly writtenand has been broadly interpreted by the courts. A number of lending practices have been found to be, or may be considered,illegal under the FH Act, including some that are not specifically mentioned inthe FH Act itself.  Among those practicesthat have been found to be, or may be considered, illegal under the FH Act are:

·                  declining a loan for the purposes ofracial discrimination;

·                  making excessively low appraisals ofproperty based on racial considerations;

·                  pressuring, discouraging, or denyingapplications for credit on a prohibited basis;

·                  using excessively burdensomequalifications standards for the purpose or with the effect of denying housingto minority applicants;

·                  imposing on minority loan applicants moreonerous interest rates or other terms, conditions or requirements; and

·                  racial steering, or deliberately guidingpotential purchasers to or away from certain areas because of race.

The TILA isdesigned to ensure that credit terms are disclosed in a meaningful way so thatconsumers may compare credit terms more readily and knowledgeably.  As a result of the TILA, all creditors mustuse the same credit terminology and expressions of rates, the annual percentagerate, the finance charge, the amount financed, the total payments and thepayment schedule.

HMDA grew out ofpublic concern over credit shortages in certain urban neighborhoods.  One purpose of HMDA is to provide publicinformation that will help show whether financial institutions are serving thehousing credit needs of the neighborhoods and communities in which they arelocated.  HMDA also includes a “fairlending” aspect that 

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requires thecollection and disclosure of data about applicant and borrower characteristicsas a way of identifying possible discriminatory lending patterns and enforcinganti-discrimination statutes.  HMDArequires institutions to report data regarding applications for one-to-fourfamily real estate loans, home improvement loans, and multifamily loans, aswell as information concerning originations and purchases of those types ofloans.  Federal bank regulators rely, inpart, upon data provided under HMDA to determine whether depositoryinstitutions engage in discriminatory lending practices.

RESPA requireslenders to provide borrowers with disclosures regarding the nature and costs ofreal estate settlements.  Also, RESPAprohibits certain abusive practices, such as kickbacks, and places limitationson the amount of escrow accounts.

Violations ofthese various consumer protection laws and regulations can result in civilliability to the aggrieved party, regulatory enforcement including civil moneypenalties, and even punitive damages.

**OtherAspects of Banking Law**

The Company andthe Bank are also be subject to federal statutory and regulatory provisionscovering, among other things, security procedures, currency and foreigntransactions reporting, insider and affiliated party transactions, managementinterlocks, electronic funds transfers, funds availability, andtruth-in-savings.  There are also avariety of federal statutes which regulate acquisitions of control and theformation of bank holding companies.

**Impact ofMonetary Policies**

Banking is a businesswhich depends on rate differentials.  Ingeneral, the difference between the interest rate paid by a bank on itsdeposits and its other borrowings and the interest rate earned on its loans,securities and other interest-earning assets comprises the major source of thebank’s earnings.  These rates are highlysensitive to many factors which are beyond the bank’s control and, accordingly,the earnings and growth of the bank are subject to the influence of economicconditions generally, both domestic and foreign, including inflation,recession, and unemployment; and also to the influence of monetary and fiscalpolicies of the United States and its agencies, particularly the FRB.  The FRB implements national monetary policy,such as seeking to curb inflation and combat recession, by:

·                  its open-market dealings in United Statesgovernment securities;

·                  adjusting the required level of reservesfor financial institutions subject to reserve requirements;

·                  placing limitations upon savings and timedeposit interest rates; and

·                  adjustments to the discount rate applicableto borrowings by banks which are members of the Federal Reserve System.

The actions of theFRB in these areas influence the growth of bank loans, investments, anddeposits and also affect interest rates. The nature and timing of any future changes in the FRB’s policies andtheir impact on the Company and the Bank cannot be predicted; however,depending on the degree to which the Bank’s interest-earning assets andinterest-bearing liabilities are rate sensitive, increases in rates would havea temporary effect of decreasing our net interest margin, while decreases ininterest rates would have the opposite effect. In addition, adverse economic conditions could make a higher provisionfor loan losses a prudent course and could cause higher loan charge-offs, thusadversely affecting the Company’s and the Bank’s net income.

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**ITEM 2.          PROPERTIES**

Our Bank currentlyoperates out of our full-service headquarter in Anaheim, a Loan and DepositProduction Office in Irvine, and a SBA Loan Production Office in WoodlandHills.  Our AZ Bank operates out of ourfull-service headquarter in Mesa, Arizona. See Note D to the consolidatedfinancial statements included in Item 7 for additional detail on lease termsand commitments.

**ITEM 3.          LEGALPROCEEDINGS**

The Company is,from time to time, subject to various pending and threatened legal actionswhich arise out of the normal course of its business.

There are nomaterial proceedings adverse to the Company to which any director, officer,affiliate of the Company or 5% shareholder of the Company or the Banks, or anyassociate of any such director, officer, affiliate or 5% shareholder of theCompany or Bans is a party, and none of the above persons has a materialinterest adverse to the Banks.

**ITEM 4.          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matters were submitted to the shareholders duringthe period covered by this report.

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**PART II**

**ITEM 5.****                            ****MARKET FOR THE COMPANY’S COMMONSTOCK AND RELATED HOLDER MATTERS****MARKET INFORMATION**

Tradingin the Company’s common stock has not been extensive and such trades cannot becharacterized as amounting to an active trading market. The Company is aware oftwo securities dealers who consistently handle transactions in its commonstock, Stone & Youngbergh LLC (formerly The Seidler Companies,Incorporated), which is located at 42605 Moonridge Road, Big Bear Lake, CA92315, and RBC Dain Rauscher, which is located at 610 Newport Center Drive,#900, Newport Beach, CA 92660. Various other firms have handled singletransactions, but have not actively been available to assist in tradeactivities. The Company’s common stock is traded over the counter and listed onthe Over-The-Counter Bulleting Board (“OTCBB”) under the symbol “PCBP.OB”, butis not quoted on the NASDAQ Small Cap Market.

Thefollowing table summarizes the high and low trade prices for each quarterly periodended since January 1, 2005 for our common stock, as traded on the OTBB:

|                | ** ** | **2006**                              | ** ** | **2005**                              | ** ** |
|----------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **     | ** ** | **Approximate Sales Price** | ** ** | **Approximate Sales Price** | ** ** |
| ** **     | ** ** | **High**                              | ** ** | **Low**                               | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $                                     | 35.00      |                                  | $     | 21.50 |   | $ | 26.00 |   | $ | 19.80 |   |
| Second Quarter |       | $                                     | 25.00      |                                  | $     | 21.00 |   | $ | 23.00 |   | $ | 22.00 |   |
| Third Quarter  |       | $                                     | 22.26      |                                  | $     | 21.50 |   | $ | 24.00 |   | $ | 20.00 |   |
| Fourth Quarter |       | $                                     | 23.00      |                                  | $     | 21.50 |   | $ | 25.00 |   | $  | 21.75 |   |

 

**HOLDERS**

As ofFebruary 28, 2007, the total number of shares outstanding was 2,635,491 andthose shares were held be approximately 239 shareholders.

**CASH DIVIDENDS**

To date, we have not paid any cash dividends on ourcommon stock and it is unlikely that we will do so in the foreseeable future.

**EQUITY COMPENSATION PLAN INFRMATION**

The following table outlines the equity compensationplan information at December 31, 2006:

|                                                             | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column  (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation  Plan approved by security holders.     |       | 428,321                                                                                                                                               |       | $                                                                                                                | 5.40       |                                                                                                                                                                                                          | 4,520      |   |
| Equity Compensation  Plan not approved by security holders. |       | —                                                                                                                                                |       | —                                                                                                           |       | —                                                                                                                                                                                                        |       |
| Total                                                       |       | 428,321                                                                                                                                               |       | $                                                                                                                | 5.40       |                                                                                                                                                                                                          | 4,520      |   |

 

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**ITEM 6****                                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The followingsections set forth a discussion of the significant operating changes, businesstrends, financial condition, earnings, capital position, and liquidity thathave occurred in the year ended December 31, 2006 and 2005, together with anassessment, when considered appropriate, of external factors that may affect usin the future.  This discussion should beread in conjunction with our financial statements and notes included in thisprospectus.

**CRITICALACCOUNTING POLICIES**

The following summaries the critical accounting policies used by theCompany.  See Note A in the consolidatedfinancial statements for a complete summary of all significant accountingpolicies of the Company:

Use of Estimates in thePreparation of Financial Statements

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

Allowance for Loan Losses

The allowance for loanlosses is adjusted by charges to income and decreased by charge-offs (net ofrecoveries).  Management’s periodicevaluation of the adequacy of the allowance is based on the Company’s known andinherent risks in the portfolio, adverse situations that may affect theborrower’s ability to repay, the estimated value of any underlying collateral,and current economic conditions.

Gain on Sale of Loans

To calculate the gain(loss) on sale of loans, the Company’s investment in the loan is allocatedamong the retained portion of the loan, the servicing retained, theinterest-only strip and the sold portion of the loan, based on the relativefair market value of each portion.  Thegain (loss) on the sold portion of the loan is recognized at the time of salebased on the difference between the sale proceeds and the allocatedinvestment.  As a result of the relativefair value allocation, the carrying value of the retained portion isdiscounted, with the discount accreted to interest income over the life of theloan.  That portion of the excessservicing fees that represent contractually specified servicing fees(contractual servicing) are reflected as a servicing asset which is amortizedover an estimated life using a method approximating the level yield method; inthe event future prepayments exceed management’s estimates and future expectedcash flows are inadequate to cover the unamortized servicing asset, additionalamortization would be recognized.  Theportion of excess servicing fees in excess of the contractual servicing fees isreflected as interest-only (I/O) strips receivable, which are classified asinterest-only strips receivable available for sale and are carried at fairvalue.

Stock-Based Compensation

The Company has adopted SFAS No. 123(R) “*Shared-BasedPayment.” *This Statementgenerally requires entities to recognize the cost of employee services receivedin exchange for awards of stock options, or other equity instruments, based onthe grant-date fair value of those awards. This cost is recognized over the period which an employee is required toprovide services in exchange for the award, generally the vesting period.

Current AccountingPronouncements

In March 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS 156, *“Accounting for Servicing ofFinancial Assets — an Amendment of FASB Statement No. 140,”* (“SFASNo. 156”).  The provisions of thisstatement require the Company to initially value servicing asset or servicingliability at fair value.  SFAS No. 156also allows the Company to choose on the following measurement methodssubsequent to the initial fair value measurement: (1) the “fair-value-measurementmethod”, which measures servicing rights at fair value at each reporting date,with changes in fair value reported in earnings or (2) the “amortization method”,which allows continued amortization of servicing rights over the period ofestimated net servicing income or loss, consistent with the existingrequirements of SFAS No. 140.  Theprovisions of this standard are effective as of the first fiscal year

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beginning after September15, 2006.  The Company currently uses theamortization method to account for servicing rights, and expects to continuethis practice after implementing SFAS No. 156. The Company does not expect the adoption of SFAS No. 156 to have amaterial impact on its financial condition or results of operations.

**SELECTEDFINANCIAL DATA**

The followingselected financial data with respect to the Company’s consolidated balancesheet as of December 31, 2006 and 2005 and its consolidated statements ofincome for the years then ended have been derived from the audited financialstatements included in this prospectus. This information should be read in conjunction with such financialstatements and the notes thereto.

|                                                                                 | ** ** | **At or For the**             | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                      | ** ** | **Period Ended December 31,** | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| **Summary of Operations:**                                                      |       |                                         |       |   |   |
| Interest Income                                                                 |       | $                                            | 19,804     |   | $ | 11,432 |   |
| Interest Expense                                                                |       | 7,018                                        |       | 2,980 |   |
| Net Interest  Income                                                            |       | 12,786                                       |       | 8,452 |   |
| Provision for  Loan Losses                                                      |       | 1,204                                        |       | 837 |   |
| Net Interest  Income after Provision for Loan Losses                            |       | 11,582                                       |       | 7,615 |   |
| Noninterest  Income                                                             |       | 3,187                                        |       | 3,501 |   |
| Noninterest  Expense                                                            |       | 12,533                                       |       | 8,317 |   |
| Income Before  Income Taxes                                                     |       | 2,237                                        |       | 2,799 |   |
| Income Taxes                                                                    |       | 901                                          |       | 1,111 |   |
| Minority  Interest in Loss of Subsidiary                                        |       | 123                                          |       | — |   |
| Net Income                                                                      |       | $                                            | 1,459      |   | $ | 1,688 |   |
|                                                                            |       |                                         |       |   |   |
| **Per Share Data (1):**                                                         |       |                                         |       |   |   |
| Earnings per  Share -Basic                                                      |       | $                                            | 0.65       |   | $ | 0.93 |   |
| Earnings per  Share - Diluted                                                   |       | $                                            | 0.58       |   | $ | 0.81 |   |
| Book Value                                                                      |       | $                                            | 11.94      |   | $ | 6.68 |   |
| Shares Used for  Basic Earnings per Share                                       |       | 2,232,388                                    |       | 1,688,386 |   |
| Shares Used for  Diluted Earnings per Share                                     |       | 2,523,207                                    |       | 2,079,745 |   |
|                                                                            |       |                                         |       |   |   |
| **Balance Sheet Summary:**                                                      |       |                                         |       |   |   |
| Total Assets                                                                    |       | $                                            | 341,612    |   | $ | 278,398 |   |
| Investment  Securities                                                          |       | 27,292                                       |       | 30,203 |   |
| Loans, net of  Deferred Fees and Costs                                          |       | 268,667                                      |       | 184,188 |   |
| Allowance for  Loan Losses (“ALL”)                                    |       | 3,074                                        |       | 1,890 |   |
| Total Deposits                                                                  |       | 287,796                                      |       | 254,523 |   |
| Total  Shareholders’ Equity                                                |       | 31,457                                       |       | 12,177 |   |
| Actual Shares  Outstanding (1)                                                  |       | 2,635,491                                    |       | 1,823,547 |   |
|                                                                            |       |                                         |       |   |   |
| **Selected Ratios:**                                                            |       |                                         |       |   |   |
| Return on  Average Assets                                                       |       | 0.51                                         | %          | 0.81 | % |
| Return on  Average Shareholders Equity                                          |       | 6.83                                         | %          | 15.04 | % |
| Net Interest  Margin                                                            |       | 4.73                                         | %          | 4.32 | % |
| ALLL to Loans                                                                   |       | 1.15                                         | %          | 1.03 | % |
| ALLL to  Non-performing Loans                                                   |       | 2605.1                                       | %          | N/A |   |
| Loans to  Deposits                                                              |       | 93.35                                        | %          | 72.37 | % |
| Shareholder’s  Equity to Assets                                            |       | 9.21                                         | %          | 4.37 | % |
| Efficiency Ratio                                                                |       | 78.46                                        | %          | 69.58 | % |
| Leverage capital  ratio                                                         |       | 10.40                                        | %          | 6.77 | % |
| Tier 1 capital  to risk weighted assets                                         |       | 9.90                                         | %          | 7.18 | % |
| Total risk based  capital ratio                                                 |       | 11.00                                        | %          | 10.22 | % |

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(1) Shares and per share data have been retroactivelyadjusted for the 5-for-4 stock split in 2006.

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##### **EARNINGSSUMMARY,**

Net income for 2006 was$1,459,000 a decrease of $229,143 or 13.6% compared to the 2005 net income of$1,688,000.  On a diluted basis, pershare net income was $0.58 in 2006 compared to $0.81 in 2005, a decrease of28.4%.  The decrease in earnings in 2006over 2005 was due to a combination of the following factors:

| Increase in net interest  income         |   | $          | 4,334,376 |   |
|------------------------------------------|--------|------------|-----------|--------|
| Increase in provision  for loan losses   |   | (367,000   | )         |
| Reduction in  non-interest income        |   | (314,154   | )         |
| Increase in noninterest  expense         |   | (4,215,760 | )         |
| Decrease in income tax  expense          |   | 209,895    |      |
| Minority Interest in  Loss of Subsidiary |   | 123,499    |      |
|                                     |   |       |      |
| Decrease in Net Income                   |   | $          | (229,144  | )      |

 

Net income for 2005 was$1,688,000 an increase of $534,000 or 46.3% compared to the 2004 net income of$1,154,000.  On a diluted basis, pershare net income was $0.81 in 2005 compared to $0.56 in 2004, an increase of43.8%.  The increase in earnings in 2005over 2004 was due to a combination of the following factors:

| Increase in net interest  income       |   | $          | 4,158,037 |   |
|----------------------------------------|--------|------------|-----------|--------|
| Increase in provision  for loan losses |   | (349,500   | )         |
| Decrease in noninterest  income        |   | (1,874,282 | )         |
| Increase in noninterest  expense       |   | (941,962   | )         |
| Increase in income tax  expense        |   | (458,000   | )         |
|                                   |   |       |      |
| Increase in Net Income                 |   | $          | 534,293   |   |

 

Each of thesechanges will be discussed in more detail in the following analysis.

The followingtable sets forth several key operating ratios for 2006 and 2005:

|                                                           | ** ** | **At or For the Year** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **Ended December 31,**           | ** ** |
| ** **                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Return on Average Assets                                  |       | 0.51                                       | %          | 0.81 | % |
| Return on Average  Equity                                 |       | 6.83                                       | %          | 15.04 | % |
| Average Shareholder’s Equity to Average Total Assets |       | 7.50                                       | %          | 5.38 | % |

 

**BALANCE SHEET SUMMARY**

The Companyexperienced substantial growth in 2006 as total assets reached $341.6 millionat December 31, 2006, an increase of $63.2 million or 22.7% over the December31, 2005 total assets of $278.4 million. The majority of this increase was centered in loans which increased$83.3 million or 45.7% from $182.3 million at December 31, 2005 to $265.6 millionat December 31, 2006.  On the other hand,federal funds sold decreased $26.0 million from $45.9 million at December 31,2005 to $19.9 million at December 31, 2006. The Company funded this growth primarily through deposits whichincreased $33.3 million or 13.1% from $254.5 million at December 31, 2005 to$287.8 million at December 31, 2006, as well as borrowings of $8.1 million.

The Company alsohad substantial growth in 2005 as total assets reached $278.4 million atDecember 31, 2005 compared $167.26 million in 2004, an increase of $111.2million or 66.5%.  $36.5 million of thisgrowth was in loans while investment securities increased $15 million andfederal funds sold increased $9.3 million. The 2005 growth in assets was funded primarily by deposit growth of$53.5 million as well as borrowings of $6.2 million.

20

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**DISTRIBUTIONOF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY**

The following tablespresent, for the periods indicated, the distribution of average assets,liabilities and shareholders’ equity, as well as the total dollar amounts ofinterest income from average interest-earning assets and the resultant yields,and the dollar amounts of interest expense and average interest-bearingliabilities, expressed both in dollars and in rates.  Non-accrual loans are included in thecalculation of the average balances of loans, and interest not accrued isexcluded (dollar amounts in thousands).
| ** **                                       | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | ** **                                                   | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | ** **                                                   | ** ** | **Interest** | ** ** | **Yield or** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Yield or** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Yield or** | ** ** |
| ** **                                       | ** ** | **Average**                                                  | ** ** | **Earned** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Earned** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Earned** | ** ** | **Rate** | ** ** |
| ** **                                       | ** ** | **Balance**                                                  | ** ** | **or Paid** | ** ** | **Paid** | ** ** | **Balance** | ** ** | **or Paid** | ** ** | **Paid** | ** ** | **Balance** | ** ** | **or Paid** | ** ** | **Paid** | ** ** |
| **Assets**                                       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Earning Assets:                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  Securities                           |       | $                                                            | 27,646     |   | $ | 1,061 |   | 3.84 | % | $ | 32,526 |   | $ | 1,055 |   | 3.24 | % | $ | 25,218 |   | $ | 569 |   | 2.26 | % |
| Federal  Funds Sold and Other                    |       | 23,356                                                       |       | 1,162 |   | 4.98 | % | 23,625 |   | 825 |   | 3.49 | % | 19,045 |   | 312 |   | 1.64 | % |
| Loans                                            |       | 219,537                                                      |       | 17,581 |   | 8.01 | % | 139,357 |   | 9,552 |   | 6.85 | % | 73,273 |   | 4,640 |   | 6.33 | % |
| Total Interest-Earning  Assets                   |       | 270,539                                                      |       | 19,804 |   | 7.32 | % | 195,508 |   | 11,432 |   | 5.85 | % | 117,536 |   | 5,521 |   | 4.70 | % |
|                                             |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Due from Bank                           |       | 7,491                                                        |       |   |   |   |   | 8,194 |   |   |   |   |   | 7,349 |   |   |   |   |   |
| Premises and Equipment                           |       | 624                                                          |       |   |   |   |   | 546 |   |   |   |   |   | 423 |   |   |   |   |   |
| Other Real Estate Owned                          |       | —                                                       |       |   |   |   |   | — |   |   |   |   |   | — |   |   |   |   |   |
| Accrued Interest and Other  Assets               |       | 8,370                                                        |       |   |   |   |   | 5,636 |   |   |   |   |   | 3,744 |   |   |   |   |   |
| Allowance for Loan Losses                        |       | (2,447                                                       | )          |   |   |   |   | (1,442 | ) |   |   |   |   | (796 | ) |   |   |   |   |
| Total Assets                                     |       | $                                                            | 284,577    |   |   |   |   |   | $ | 208,442 |   |   |   |   |   | $ | 128,256 |   |   |   |   |   |
| **Liabilities and Shareholders’  Equity**   |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Bearing  Liabilities:                   |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings,  Money Market and NOW                   |       | $                                                            | 107,333    |   | 3,601 |   | 3.35 | % | $ | 75,023 |   | 1,613 |   | 2.15 | % | 53,755 |   | $ | 864 |   | 1.61 | % |
| Time  Deposits under $100,000                    |       | 2,345                                                        |       | 60 |   | 2.56 | % | 1,758 |   | 44 |   | 2.50 | % | 1,716 |   | 35 |   | 2.04 | % |
| Time  Deposits of $100,000 or more               |       | 53,771                                                       |       | 2,421 |   | 4.50 | % | 27,532 |   | 882 |   | 3.20 | % | 13,608 |   | 306 |   | 2.25 | % |
| Short-term  Borrowings                           |       | 4,517                                                        |       | 233 |   | 5.16 | % | 1,849 |   | 61 |   | 5.44 | % | 390 |   | 21 |   | 0 |   |
| Long-term  Debt                                  |       | 10,847                                                       |       | 703 |   | 6.48 | % | 6,262 |   | 380 |   | 5.44 | % | 6,186 |   | 21 |   | 0 |   |
| Total Interest-Bearing  Liabilities              |       | 178,813                                                      |       | 7,018 |   | 3.92 | % | 112,424 |   | 2,980 |   | 2.65 | % | 69,469 |   | 1,226 |   | 1.76 | % |
|                                             |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-Bearing  Liabilities:                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand  Deposits                                 |       | 79,997                                                       |       |   |   |   |   | 83,996 |   |   |   |   |   | 48,230 |   |   |   |   |   |
| Other  Liabilities                               |       | 4,411                                                        |       |   |   |   |   | 798 |   |   |   |   |   | 392 |   |   |   |   |   |
| Shareholders’  Equity                       |       | 21,356                                                       |       |   |   |   |   | 11,224 |   |   |   |   |   | 10,165 |   |   |   |   |   |
| Total  Liabilities and Shareholders’ Equity |       | $                                                            | 284,577    |   |   |   |   |   | $ | 208,442 |   |   |   |   |   | $ | 128,256 |   |   |   |   |   |
| Net  Interest Income                             |       |                                                         |       | $ | 12,786 |   |   |   |   |   | $ | 8,452 |   |   |   |   |   | $ | 10,206 |   |   |   |
| Net Yield on Interest-Earning Assets             |       |                                                         |       |   |   | 4.73 | % |   |   |   |   | 4.32 | % |   |   |   |   | 5.22 | % |

 

21

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###  

**EARNINGSANALYSIS**

**NETINTEREST INCOME**

A significantcomponent of our earnings is net interest income.  Net interest income is the difference betweenthe interest we earn on our loans and investments and the interest we pay ondeposits and other interest-bearing liabilities.

Our net interestincome is affected by changes in the amount and mix of our interest-earningassets and interest-bearing liabilities, referred to as a “volume change”.  It is also affected by changes in the yieldswe earn on interest-earning assets and rates we pay on interest-bearingdeposits and other borrowed funds, referred to as a “rate change”.

The followingtable sets forth changes in interest income and interest expense for each majorcategory of interest-earning asset and interest-bearing liability, and theamount of change attributable to volume and rate changes for the yearsindicated.  Changes not solelyattributable to rate or volume have been allocated to volume and rate changesin proportion to the relationship of the absolute dollar amounts of the changesin each (dollar amounts in thousands).
| ** **                         | ** ** | **Year Ended December 31, 2006  versus  Year Ended December 31, 2005** | ** ** | **Year Ended December 31, 2005  versus  Year Ended December 31, 2004** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Increase (Decrease) Due  To Change in**                                                  | ** ** | **Increase (Decrease) Due To  Change in**                                                  | ** ** |
| ** **                         | ** ** | **Volume**                                                                                                     | ** ** | **Rate**                                                                                                       | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest-Earning Assets:**       |       |                                                                                                           |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Investment  Securities             |       | $                                                                                                              | (171       | )                                                                                                              | $          | (177 | ) | $ | 6 |   | $ | 194 |   | $ | 292 |   | $ | 486 |   |
| Federal Funds  Sold and Other      |       | (9                                                                                                             | )          | 346                                                                                                            |       | 337 |   | 90 |   | 423 |   | 513 |   |
| Loans                              |       | 6,212                                                                                                          |       | 1,817                                                                                                          |       | 8,029 |   | 4,501 |   | 411 |   | 4,912 |   |
| **Total  Interest Income**         |       | 6,032                                                                                                          |       | 2,340                                                                                                          |       | 8,372 |   | 4,785 |   | 1,126 |   | 5,911 |   |
|                               |       |                                                                                                           |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| **Interest-Bearing Liabilities:**  |       |                                                                                                           |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Savings, Money  Market and NOW     |       | 864                                                                                                            |       | 1,124                                                                                                          |       | 1,988 |   | 404 |   | 345 |   | 749 |   |
| Time Deposits  under $100,000      |       | 15                                                                                                             |       | 1                                                                                                              |       | 16 |   | 1 |   | 8 |   | 9 |   |
| Time Deposits of  $100,000 or more |       | 1,079                                                                                                          |       | 460                                                                                                            |       | 1,539 |   | 20 |   | 556 |   | 576 |   |
| Borrowings                         |       | 124                                                                                                            |       | 48                                                                                                             |       | 172 |   | 420 |   | — |   | 420 |   |
| Long-term Djept                    |       | 16                                                                                                             |       | 307                                                                                                            |       | 323 |   | — |   | — |   | — |   |
| **Total  Interest Expense**        |       | 2,098                                                                                                          |       | 1,940                                                                                                          |       | 4,038 |   | 845 |   | 909 |   | 1,754 |   |
| **Net Interest Income**            |       | $                                                                                                              | 3,934      |                                                                                                           | $          | 400 |   | $ | 4,334 |   | $ | 3,940 |   | $ | 217 |   | $ | 4,157 |   |

 

Net interestincome for 2006 was $12.8 million compared to $8.5 million in 2005.  This increase of $4,333,000 was due primarilyto a combination of a significant increase in average interest-earning assetsas well as an increase in the net yield on average interest-earningassets.  Average interest-earning assetsin 2006 were $270.5 million an increase of $75.0 million or 38.4% compared to$195.5 million in 2005.  In addition, theCompany’s net yield on these assets increased 41 basis points from 4.32% in2005 to 4.73% in 2006.  Net interestincome and the net yield on interest-earning assets are impacted by changes ininterest income and interest expense which are discussed in more detail in thefollowing paragraphs.

Interest income in2006 was $19.8 million an increase of $8.4 million or 73.2% from the $11.4million reported in 2005.  This increasewas impacted by several factors.  First,as noted above, the Company experienced substantial growth in its averageinterest-earning assets.  Thissubstantial growth accounted for $6.0 million of additional interest income, byfar the majority of the total change in 2006. The second factor that contributed to the increase in interest incomewas the overall improvement in the mix of average interest-earning assets.  Loans, the highest yielding asset increasedas a percentage of total interest-earning assets from 72% in 2005 to 81% in2006.  The final

22

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factor thatimpacted the increase in interest income in 2006 was the overall increasingrate environment.  During 2006, the primerate was increased four times and each time 25 basis points raising the primerate from 7.25% at the beginning of the year to 8.25% by the end of the year.  Due to this raising rate environment and theimprovement in the mix of interest-earning assets, the yield on average earningassets increased 147 basis points from 5.85% in 2005 to 7.32% in 2006.  This increase in yields added $2.3 million inadditional interest income in 2006.

Interest expensealso increased in 2006 from $3.0 million in 2005 to $7.0 million in 2006.  This increase of $4.0 million or 135.5%occurred for several reasons.  TheCompany funded the substantial increase in interest-earning assets primarilythrough additional deposits and borrowings. The increase in interest-bearingliabilities in 2006 was significant at $66.4 million or a 59.0% increase from$112.4 million in 2005 to $178.8 million in 2006.  This increase in average outstandinginterest-bearing liabilities added $2.1 million in additional interest expensein 2006.  The rising rate environmentalso impacted the Company’s cost of deposits and other borrowings.  The net rate paid on these liabilitiesincreased 127 basis points to 3.92% in 2006 from 2.65% in 2005, adding another$1,940,000 in interest expense in 2006.

Net interestincome for 2005 was $8.5 million compared to $4.3 million in 2004.  This increase of $861,000 was due primarilyto a combination of a significant increase in average interest-earning assetsas well as an increase in the net yield on average interest-earning assets.Average interest-earning assets in 2005 were $195.5 million and increase of$78.0 million or 66.4% compared to $117.5 million in 2004. In addition, theCompany’s net yield on these assets increased 67 basis points from 3.65% in2004 to 4.32% in 2005.

Interest income in2005 was $11.4 million, an increase of $5.9 million or 107.3% from the $5.5million reported in 2004. This increase was impacted by several factors, theCompany experienced substantial growth in its average interest-earning assets,the overall improvement in the mix of average interest-earning assets and theincreasing rate environment. Interest expense also increased in 2005 from $1.2million in 2004 to $3.0 million in 205 due to increases in interest-bearingliabilities as well as increases in the rates paid on these liabilities.

**NON-INTERESTINCOME**

The Bank receivesnon-interest income from three primary sources:

1) Loan referral fees

2) Gain on sale of SBAloans

3)Earnings on cash surrender value of life insurance

The Company’s loan referral fee program is an integral part of itsoperations and significant contributor to its profitability.  The Bank has an extensive network ofindependent loan brokers who refer commercial real estate loans to the Bank aswell as those loans generated by Bank personnel.  The Bank performs credit review, underwritingand packaging services on these loans and then receives a referral fee from thecorrespondent bank that ultimately funds the loan.  A commission is paid to referring independentloan brokers and reported as a non-interest expense.  During 2006, the Company received $2.8million in loan referral fees compared to $2.2 million in 2005.

The Company has also established a significant Small BusinessAdministration (“SBA”) loan department. This department originates SBA loans for which the Company periodicallysells off the government guaranteed portion. The Company’s decision to sell SBA loans is dependent on many factors,including its overall asset management goals and requirements.  During 2006, income from the sale of SBAloans was $420,000 a decrease of $595,000 or 58.6% over the $1.0 millionreported in 2005.  As of December 31,2006, the Company had in its loan portfolio guaranteed SBA loans totaling $4.4million that could be sold in future periods.

The Company has purchased single premium life insurance to provide forthe death benefit under its deferred compensation programs for executiveofficers.  Earnings on the cash surrendervalue of these policies totaled $125,833 in 2006 and $122,671 in 2005.

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**NON-INTEREST EXPENSE**

Non-interestexpense reflects our costs of products and services related to systems,facilities and personnel.  The Bank’sprimary components of non-interest expense are:

1)              Salaries andemployee benefits

2)              Occupancy andequipment expenses

3)              Commission paid onloan referrals

4)              Other operatingexpenses

During 2006,non-interest expenses, exclusive of commission paid on loan referrals was $11.2million compared to $7.2 million in 2005. The following table shows the primary components of non-interestexpense, exclusive of commissions on loan referrals, as well as the changesbetween 2006 and 2005:
| ** **                            | ** ** | ** **                           | ** ** | ** **         | ** ** | ** **         | ** ** | **2006 to** | ** ** | **2005 to** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|--------------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                            | ** ** | **YearEnded December 31,** | ** ** | **2005  Increase** | ** ** | **2004  Increase** | ** ** |
| ** **                            | ** ** | **2006**                             | ** ** | **2005**           | ** ** | **2004**           | ** ** | **(Decrease)**   | ** ** | **(Decrease)**   | ** ** |
| Salaries and  Employee Benefits       |       | $                                    | 6,449      |               | $          | 4,201              |       | $                | 3,596      |             | $          | 2,248 |   | $ | 605 |   |
| Occupancy and  Equipment Expenses     |       | 889                                  |       | 585                |       | 460                |       | 304              |       | 125              |       |
| Marketing and  Business Promotion     |       | 400                                  |       | 256                |       | 204                |       | 144              |       | 52               |       |
| Data Processing                       |       | 374                                  |       | 298                |       | 249                |       | 76               |       | 49               |       |
| Professional  Fees                    |       | 498                                  |       | 391                |       | 262                |       | 107              |       | 129              |       |
| Office Expenses                       |       | 419                                  |       | 345                |       | 240                |       | 74               |       | 105              |       |
| Loan Production  Expenses             |       | 277                                  |       | 399                |       | 224                |       | (122             | )          | 175              |       |
| Courier and  Delivery Expenses        |       | 277                                  |       | 185                |       | 148                |       | 92               |       | 37               |       |
| Regulatory Assessments  and Insurance |       | 185                                  |       | 122                |       | 96                 |       | 63               |       | 26               |       |
| Other Expenses                        |       | 1,433                                |       | 397                |       | 307                |       | 1,036            |       | 90               |       |
|                                  |       |                                 |       |               |       |               |       |             |       |             |       |
|                                  |       | $                                    | 11,201     |               | $          | 7,179              |       | $                | 5,786      |             | $          | 4,022 |   | $ | 1,393 |   |

 

The increasesabove were all related to the significant increase in assets at the Company in2006.  Average total assets in 2006 were$284.6 million compared to $208.4 million in 2005.

Commissions paidon loan referrals were $1.3 million in 2006 compared to $1.1 million in2005.  As discussed above, these expensesare directly related to the level of loan referral fees as well as SBA loansales as outside consultants are utilized in both processes.

**INCOME TAXES**

Income tax expensedecreased in 2006 to $901,000 from $1.1 million in 2005. Income before taxeswas $2.2 million in 2006 compared to $2.8 million in 2005.  The Company’s effective tax rate in 2006 was40.3% compared to 39.7% in 2005.

24

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**BALANCESHEET ANALYSIS**

**INVESTMENTPORTFOLIO**

The following tablesummarizes the amounts and distribution of our investment securities held as ofthe dates indicated, and the weighted average yields as of December 31, 2006(dollar amounts in thousands):

 
| ** **                             | ** ** | **2006**            | ** ** | **2005**          | ** ** |
|----------------------------------------|------------|---------------------|------------|-------------------|------------|
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Market  Value** | ** ** | **Weighted**

**Average  Yield** | ** ** | **Amortized  Cost** | ** ** | **Market  Value** | ** ** |
| Available-for-Sale Securities          |       |                |       |              |       |   |   |   |   |   |   |
|                                   |       |                |       |              |       |   |   |   |   |   |   |
| U.S. Treasury:                         |       |                |       |              |       |   |   |   |   |   |   |
| Within One Year                        |       | $                   | —     |              | $          | — |   |   |   | $ | — |   | $ | — |   |
|                                   |       |                |       |              |       |   |   |   |   |   |   |
| U.S. Government  Agencies:             |       |                |       |              |       |   |   |   |   |   |   |
| Within One Year                        |       | 14,796              |       | 14,691            |       | 2.94 | % | 2,997 |   | 2,981 |   |
| One to Five Years                      |       | 5,545               |       | 5,482             |       | 4.27 | % | 20,338 |   | 19,942 |   |
| Five to Ten Years                      |       | —              |       | —            |       |   |   | — |   | — |   |
| Total U.S. Government Agencies         |       | 20,341              |       | 20,173            |       | 3.31 | % | 23,335 |   | 22,923 |   |
|                                   |       |                |       |              |       |   |   |   |   |   |   |
| Other Investment  Securities:          |       |                |       |              |       |   |   |   |   |   |   |
| Within One Year                        |       | 979                 |       | 942               |       | 3.73 | % | 978 |   | 955 |   |
| One to Five Years                      |       | 283                 |       | 282               |       | 7.87 | % | — |   | — |   |
| Total Other Investment Securities      |       | 1,262               |       | 1,224             |       | 3.39 | % | 978 |   | 955 |   |
|                                   |       |                |       |              |       |   |   |   |   |   |   |
| Total Available-for-Sale Securities    |       | $                   | 21,603     |              | $          | 21,397 |   | 3.41 | % | $ | 24,313 |   | $ | 23,878 |   |
|                                   |       |                |       |              |       |   |   |   |   |   |   |
| Held-to-Maturity Securities            |       |                |       |              |       |   |   |   |   |   |   |
|                                   |       |                |       |              |       |   |   |   |   |   |   |
| State and  Municipal Governments (1):  |       |                |       |              |       |   |   |   |   |   |   |
| Within One Year                        |       | $                   | 337        |              | $          | 335 |   | 3.92 | % | $ | 331 |   | $ | 329 |   |
| One to Five Years                      |       | 4,373               |       | 4,273             |       | 4.19 | % | 4,064 |   | 3,995 |   |
| Five to Ten Years                      |       | 1,185               |       | 1,171             |       | 3.97 | % | 1,946 |   | 1,918 |   |
|                                   |       |                |       |              |       |   |   |   |   |   |   |
| Total State and  Municipal Governments |       | $                   | 5,895      |              | $          | 5,779 |   | 4.13 | % | $ | 6,341 |   | $ | 6,242 |   |

----

(1) Yields for state and municipal governments are actual, not taxequivalents

No other single issuer of investment securities, other than U.S.Governmental Agencies exceeds 10% of the Company’s shareholder equity.

Securities may bepledged to meet security requirements imposed as a condition to receipt ofdeposits of public funds and other purposes. At December 31, 2006 and 2005, the Bank had pledged investmentsecurities carried at approximately $20.1 million and $19.9 million, respectively,to secure borrowing arrangements and other purposes.

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**LOAN PORTFOLIO**

The following table setsforth the components of total net loans outstanding in each category atDecember 31, 2006 and 2005 (dollar amounts in thousands):
| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| **Loans**                                       |       |     |       |     |       |
| Commercial Real Estate                          |       | $        | 206,995    |     | $          | 124,223 |   |
| Construction                                    |       | 12,906   |       | 18,600   |       |
| Commercial                                      |       | 22,725   |       | 22,831   |       |
| Small Business Administration (“SBA”) |       | 10,236   |       | 12,525   |       |
| Consumer , including Home Equity Loans          |       | 15,588   |       | 5,916    |       |
| **Total Loans**                                 |       | 268,450  |       | 184,095  |       |
| Net Deferred Loan Costs, net of Fees            |       | 218      |       | 93       |       |
| Allowance for Loan Losses                       |       | (3,074   | )          | (1,890   | )          |
|                                            |       |     |       |     |       |
| **Net Loans**                                   |       | $        | 265,594    |     | $          | 182,298 |   |
| ** **                                      |       |     |       |     |       |
| **Commitments**                                 |       |     |       |     |       |
| Letters of Credit                               |       | $        | 2,832      |     | $          | 1,575 |   |
| Undisbursed Loans                               |       | 50,318   |       | 48,195   |       |
|                                            |       |     |       |     |       |
| **Total Commitments**                           |       | $        | 53,150     |     | $          | 49,770 |   |

 

The following is abrief summary of the types of loans by major category as well as the specificunderwriting polices and collateral polices:

Commercial RealEstate — these loans include hotels, multi-family residential units, commercialoffice buildings, warehouses and small business locations.  These properties are both owner occupied andnon owner occupied.  We generally requireproof of adequate cash flow to service the debt as well as adequate collateralon these loans.  Loan to appraised valueof these loans generally ranges from 60% to 75% depending on the type ofproperty, ownership status and historical cash flows.  Due to our concentration in commercial realestate loans, we monitor quarterly the cash flow performance and real estatevalues on the majority of the loans in this category.

Construction Loans— these loans include construction projects for single family homes,multi-family residential units and commercial properties.  Generally these loans are made to buildersand developers with proven track records and geographically within our primaryservice area of Southern California.  Dueto the volatile nature of these loans, we monitor construction progress and thereal estate market quarterly on these projects.

Commercial Loans —these loans are generally to local businesses with long-standing relationshipswith our loan officers.  These loans canbe unsecured or secured depending on the overall financial strength of theborrower and any guarantors.  Most of ourcommercial borrowers also have substantial deposit account activity withus.  Commercial loans are monitored by acombination of financial statement review and on-site visits by our loanofficers.

Small BusinessAdministration Loans (“SBA”) — SBA loans can have the characteristic of ourcommercial real estate loans as well as our commercial loans.  The majority of our SBA loans are secured byowner-occupied real estate used in the borrowers business.  The loan to value ratio on real estatesecured SBA loans ranges from 75% to 90%.  As such, we monitor these loans in a similar fashion as described abovefor our commercial real estate loans.

Consumers —consumer loans, which include home equity lines, auto loans and other personalloans, are generally made to executives and owners of our business borrowers.

26

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**RISK ELEMENTS**

We assess andmanage credit risk on an ongoing basis through our lending policies.  We strive to continue our historically lowlevel of credit losses by continuing our emphasis on credit quality in the loanapproval process, active credit administration and regular monitoring.

In extendingcredit and commitments to borrowers, we generally require collateral and/orguarantees as security.  The repayment ofsuch loans is expected to come from cash flow or from proceeds from the sale ofselected assets of the borrower.  Ourrequirement for collateral and/or guarantees is determined on a case-by-casebasis in connection with our evaluation of the credit worthiness of theborrower.  Collateral held varies but mayinclude accounts receivable, inventory, property, plant and equipment,income-producing properties, residences and other real property.  We secure our collateral by perfecting ourinterest in business assets, obtaining deeds of trust, or outright possessionamong other means.

Once a loan ismade, we constantly monitor its performance to determine if any creditdeterioration has occurred.  All loansare initially graded for risk using a numeric system of 1 through 5 with 1being risk free and 5 being acceptable but with less than preferable secondarysource of repayment.  Once a loan hasbeen made, the loan officer is responsible for monitoring its performancerecommending it for inclusion on the watch list if deterioration occurs.  In addition, we have engaged an outsidecredit review firm to perform periodic reviews of our portfolio to search forunderwriting weakness and loan deterioration.

We believe thatour lending policies and underwriting standards will tend to minimize losses inan economic downturn, however, there is no assurance that losses will not occurunder such circumstances.

The following table showsthe maturity distribution of loan portfolio and the as well as the allocationbetween fixed and variable rate loans as of December 31, 2006 (dollar amountsin thousands):
| ** **                                       | ** ** | **Less Than  One Year** | ** ** | **Over One  Year But  Less Than  Five Years** | ** ** | **Over Five  Years** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------|------------|-----------|------------|
|                                             |       |                              |       |                                                              |       |                      |       |      |       |
| Commercial Real  Estate                          |       | $                            | 27,399     |                                                              | $          | 27,647                    |       | $         | 151,949    |   | $ | 206,995 |   |
| Construction                                     |       | 4,668                             |       | 2,792                                                             |       | 5,446                     |       | 12,906    |       |
| Commercial                                       |       | 11,224                            |       | 10,250                                                            |       | 1,251                     |       | 22,725    |       |
| Small Business  Administration (“SBA”) |       | (126                              | )          | (924                                                              | )          | 9,438                     |       | 10,236    |       |
| Consumer ,  including Home Equity Loans          |       | 476                               |       | 598                                                               |       | 14,514                    |       | 15,588    |       |
|                                             |       |                              |       |                                                              |       |                      |       |      |       |
|                                             |       | $                            | 43,641     |                                                              | $          | 42,211                    |       | $         | 182,598    |   | $ | 268,450 |   |
|                                             |       |                              |       |                                                              |       |                      |       |      |       |
| Loans with fixed  interest rates                 |       | $                            | 3,730      |                                                              | $          | 18,241                    |       | $         | 33,885     |   | $ | 55,856 |   |
| Loans with  variable interest rate:              |       |                              |       |                                                              |       |                      |       |      |       |
| Adjusting annually or sooner                     |       | 39,911                            |       | 23,920                                                            |       | 69,686                    |       | 133,517   |       |
| Adjusting in excess of annually                  |       | —                            |       | 50                                                                |       | 79,027                    |       | 79,077    |       |
|                                             |       |                              |       |                                                              |       |                      |       |      |       |
|                                             |       | $                            | 43,641     |                                                              | $          | 42,211                    |       | $         | 182,598    |   | $ | 268,450 |   |

 

27

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###  

**NONPERFORMING ASSETS**

The Bank has onlyexperienced one non-performing loan or asset from its inception on November 28,2001 through December 31, 2006.

The followingtable provides information with respect to the components of our nonperformingassets at the dates indicated (dollar amounts in thousands):

 

|                                                                 | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Loans 90 Days Past Due  and Still Accruing                      |       | $                | —     |   | $  | — |   |
| Nonaccrual Loans                                                |       | 118                   |       | — |   |
|                                                            |       |                  |       |   |   |
| Total Nonperforming  Loans                                      |       | 118                   |       | — |   |
|                                                            |       |                  |       |   |   |
| Other Real Estate Owned                                         |       | —                |       | — |   |
|                                                            |       |                  |       |   |   |
| Total Nonperforming  Assets                                     |       | $                     | 118        |   | $ | — |   |
|                                                            |       |                  |       |   |   |
| Nonperforming Loans as  a Percentage of Total Loans             |       | 0.04                  | %          | 0.00 | % |
| Allowance for Loan Loss  as a Percentage of Nonperforming Loans |       | 2605.10               | %          | N/A |   |
| Nonperforming Assets as a Percentage of Total Assets            |       | 0.03                  | %          | N/A |   |

 

28

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**PROVISIONAND ALLOWANCE FOR LOAN LOSSES**

The allowance forloan losses is maintained at a level that is considered adequate to provide forthe loan losses inherent in our loans. The provision for loan losses was $1,204,000 in 2006 compared to$837,000 in 2005.

The followingtable summarizes, for the years indicated, changes in the allowances for loanlosses arising from loans charged-off, recoveries on loans previously charged-off,and additions to the allowance which have been charged to operating expensesand certain ratios relating to the allowance for loan losses (dollar amounts inthousands):

|                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Outstanding  Loans:**                                       |       |     |       |     |       |
| Average for the Year                                          |       | $        | 219,537    |     | $     | 139,357 |   |
| End of the Year                                               |       | $        | 268,450    |     | $     | 184,095 |   |
| **Allowance  For Loan Losses:**                               |       |     |       |     |       |
| Balance at  Beginning of Year                                 |       | $        | 1,890      |     | $     | 1,053 |   |
| Actual Charge-Offs:                                           |       |     |       |     |       |
| Commercial                                                    |       | 20       |       | —   |       |
| Consumer                                                      |       | —   |       | —   |       |
| Real Estate                                                   |       | —   |       | —   |       |
| Total Charge-Offs                                             |       | 20       |       | —   |       |
| Less Recoveries:                                              |       |     |       |     |       |
| Commercial                                                    |       | —   |       | —   |       |
| Consumer                                                      |       | —   |       | —   |       |
| Real Estate                                                   |       | —   |       | —   |       |
| Total Recoveries                                              |       | —   |       | —   |       |
| Net Loans Charged-Off                                         |       | 20       |       | —   |       |
| Provision for Loan Losses                                     |       | 1,204    |       | 837      |       |
| Balance at End  of Year                                       |       | $        | 3,074      |     | $     | 1,890 |   |
| **Ratios:**                                                   |       |     |       |     |       |
| Net Loans Charged-Off to Average Loans                        |       | 0.01     | %          | 0.00     | %          |
| Allowance for Loan Losses toTotal Loans                       |       | 1.15     | %          | 1.03     | %          |
| Net Loans Charged-Off to Beginning Allowance for  Loan Losses |       | 1.06     | %          | 0.00     | %          |
| Net Loans Charged-Off to Provision for Loan Losses            |       | 1.66     | %          | 0.00     | %          |
| Allowance for  Loan Losses to Nonperforming Loans             |       | 2605.10  | %          | N/A      |       |

 

We believe thatthe allowance for loan losses is adequate. Quarterly detailed reviews areperformed to identify the risks inherent in the loan portfolio, assess theoverall quality of the loan portfolio and to determine the adequacy of theallowance for loan losses and the related provision for loan losses to becharged to expense.  These systematicreviews follow the methodology set forth by the FDIC in its 1993 policystatement on the allowance for loan losses.

The Company’scurrent methodology is a combination of specific reserves for criticized loansand general reserves for pass loans.  Thespecific loss factors utilized for the specific reserves are 5% — SpecialMention, 15% — Substandard, 50% — Doubtful and 100% — Loss. Allocations varydepending on the type of loan, related collateral, and other factors subject tomanagement’s judgment.  For the non-classifiedloan portfolio, the Company categories its loans into five loan pools:Consumer, Real Estate & Commercial RE, Construction, Commercial and SBA.The pass loss factor used is 0.75% for all loan pools with the exception of SBAloans which is assessed at a 1.00% loss factor. These percentages have remainedthe same as used in 2005.  The Bank thenadjusts these loss factors for twelve qualitative factors, including managementand staff, loan policy, economic factors, concentrations of credit, portfolioperformance and others. The qualitative factor takes into account the twelvecategories and uses a weighted average factor based on the ratings of eachcategory.

29

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The followingtable summarizes the allocation of the allowance for loan losses by loan typefor the years indicated and the percent of loans in each category to totalloans (dollar amounts in thousands):
| ** **                                       | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | ** **                      | ** ** | **Loan**                        | ** ** | ** ** | ** ** | **Loan** | ** ** |
| ** **                                       | ** ** | **Amount**                      | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Commercial Real  Estate                          |       | $                               | 2,447      |                            | 77.1       | % | $ | 1,294 |   | 77.1 | % |
| Construction                                     |       | 133                             |       | 4.8                             | %          | 203 |   | 4.8 | % |
| Commercial                                       |       | 236                             |       | 8.5                             | %          | 240 |   | 8.5 | % |
| Small Business  Administration (“SBA”) |       | 84                              |       | 3.8                             | %          | 92 |   | 3.8 | % |
| Consumer                                         |       | 174                             |       | 5.8                             | %          | 61 |   | 5.8 | % |
| Unallocated                                      |       | —                          |       | n/a                             |       | — |   | n/a |   |
|                                             |       | $                               | 3,074      |                            | 100.0      | % | $ | 1,890 |   | 100.0 | % |

 

**FUNDING**

Deposits are ourprimary source of funds.  The followingtable summarizes the distribution of average deposits and the average rates paidfor the period the years ended December 31, (dollar amounts in thousands):

|                                         | ** ** | **Year Ended December 31** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **Average**                               | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** |
| ** **                              | ** ** | **Balance**                               | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Rate** | ** ** |
| Savings, Money Markets and NOW Accounts |       | $                                         | 107,333    |   | 3.35 | % | $ | 75,023 |   | 2.15 | % |
| Time Deposits  under $100,000           |       | 2,345                                     |       | 2.56 | % | 1,758 |   | 2.50 | % |
| Time Deposits of  $100,000 or More      |       | 53,771                                    |       | 4.50 | % | 27,532 |   | 3.20 | % |
| Total Interest-Bearing Deposits         |       | 163,449                                   |       | 3.72 | % | 104,313 |   | 2.43 | % |
| Noninterest-Bearing Demand Deposits     |       | 79,997                                    |       | n/a |   | 83,996 |   | n/a |   |
| Total Average  Deposits                 |       | $                                         | 243,446    |   | 2.50 | % | $ | 188,309 |   | 1.35 | % |

 

The scheduledmaturity distribution of the Bank’s time deposits of $100,000 or greater, as ofDecember 31, 2006, were as follows (dollar amounts in thousands):

| Three Months or Less           |   | $      | 16,630 |   |
|--------------------------------|--------|--------|--------|--------|
| Over Three  Months to One Year |   | 43,546 |   |
| Over One Year to  Three Years  |   | 10,057 |   |
| Over Three Years               |   | 1,627  |   |
|                           |   | $      | 71,860 |   |

 

In addition todeposits, we may also supplement our funding needs with borrowings.  As of December 31, 2006, the Company hadborrowed $12.4 million in junior subordinated debt securities.  This type of borrowing was selected due toits favorable treatment under the regulatory capital guidelines.  See Note G in the audited financialstatements for more details on these borrowings and the related impact onregulatory capital requirements.

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The Company may alsoborrow up to $11,000,000 overnight on an unsecured basis from its primarycorrespondent banks.  In addition, it hastwo borrowing arrangements with Federal Home Loan Bank.  The first arrangement is a borrowing line forapproximately $78.9 million against which the Bank has pledged approximately$132.6 million of its outstanding loans. The second arrangement is a borrowing line for approximately $17.3million against which the Bank has pledged approximately $18.1 million of itsinvestment securities.

As of December 31, 2006the company has a $5.0 million outstanding borrowing against the Bank’sinvestment securities maturing January 03, 2007. As of December 31, 2005, noamounts were outstanding.

**LIQUIDITYAND INTEREST RATE SENSITIVITY**

The objective ofthe Bank’s asset/liability strategy is to manage liquidity and interest raterisks to ensure the safety and soundness of the Bank and its capital base,while maintaining adequate net interest margins and spreads to provide anappropriate return to our shareholders.

The table belowsets forth the interest rate sensitivity of our interest-earning assets andinterest-bearing liabilities as of December 31, 2006, using the interest ratesensitivity gap ratio.  For purposes ofthe following table, an asset or liability is considered rate-sensitive withina specified period when it can be repriced or matures within its contractualterms (dollar amounts in thousands):
| ** **                                | ** ** | ** ** | ** ** | **After**             | ** ** | **After One**  | ** ** | ** **          | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| ** **                                | ** ** | **Within** | ** ** | **Three Months** | ** ** | **Year But**   | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Three**  | ** ** | **But Within**   | ** ** | **Within**          | ** ** | **After**           | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Months** | ** ** | **One Year**     | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
| **Interest-Earning Assets:**              |       |       |       |                  |       |                |       |                |       |       |       |
| Federal Funds  Sold                       |       | $          | 19,875     |                  | $          | —              |       | $                   | —     |       | $          | — |   | $  | 19,875 |   |
| Investment  Securities                    |       | 6,731      |       | 9,239                 |       | 10,137              |       | 1,185               |       | 27,292     |       |
| Other Interest-Earning  Assets            |       | —     |       | 120                   |       | —              |       | —              |       | 120        |       |
| Gross Loans                               |       | 121,305    |       | 14,613                |       | 84,790              |       | 47,959              |       | 268,667    |       |
|                                      |       | $          | 147,911    |                  | $          | 23,972              |       | $                   | 94,927     |       | $          | 49,144 |   | $ | 315,954 |   |
| **Interest-Bearing Liabilities:**         |       |       |       |                  |       |                |       |                |       |       |       |
| Money Market,  Savings and NOW            |       | $          | 118,610    |                  | $          | —              |       | $                   | —     |       | $          | — |   | $ | 118,610 |   |
| Time Deposits  under $100                 |       | 531        |       | 794                   |       | 891                 |       | 30                  |       | 2,246      |       |
| Time Deposits  $100 and over              |       | 16,630     |       | 43,546                |       | 11,684              |       | —              |       | 71,860     |       |
| Borrowings                                |       | 5,000      |       | —                |       | —              |       | 12,372              |       | 17,372     |       |
|                                      |       | $          | 140,771    |                  | $          | 44,340              |       | $                   | 12,575     |       | $          | 12,402 |   | $ | 210,088 |   |
|                                      |       |       |       |                  |       |                |       |                |       |       |       |
| Interest Rate  Sensitivity Gap            |       | $          | 7,140      |                  | $          | (20,368             | )          | $                   | 82,352     |       | $          | 36,742 |   | $ | 105,866 |   |
| Cumulative  Interest Rate Sensitivity Gap |       | $          | 7,140      |                  | $          | (13,228             | )          | $                   | 69,124     |       | $          | 105,866 |   |   |   |
|                                      |       |       |       |                  |       |                |       |                |       |       |       |
| Ratios Based on  Total Assets             |       |       |       |                  |       |                |       |                |       |       |       |
| Interest Rate  Sensitivity Gap            |       | 2.09       | %          | (5.96                 | %)         | 24.11               | %          | 10.76               | %          | 30.99      | %          |
| Cumulative Interest  Rate Sensitivity Gap |       | 2.09       | %          | (3.87                 | %)         | 20.23               | %          | 30.99               | %          |       |       |
|                                           |            |            |            |                       |            |                     |            |                     |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Liquidity refersto our ability to maintain a cash flow adequate to fund both on-balance sheetand off-balance sheet requirements on a timely and cost-effective basis.  Potentially significant liquidityrequirements include funding of commitments to loan clients and withdrawalsfrom deposit accounts.

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**OFF-BALANCE SHEET ITEMS**

The Company’s mostsignificant off-balance sheet item is its commitment to extend credit whichtotaled $50.3 million, or 18.9% of outstanding loans, at December 31, 2006 and$48.2 million, or 27.1% of outstanding loans at December 31, 2005.  As noted above, the Company has arrangementsin place to fund these commitments if they were fully disbursed, which theCompany believes is unlikely.

In addition, theCompany has ongoing commitments under operating leases as described in Note Dof the audited financial statements included as Appendix F.

The Company alsohas seventeen derivatives with total notational value of $25.5 million asdescribed in Note R of the audited financial statements included as Appendix F.

**CAPITAL RESOURCES**

Shareholders’equity at December 31, 2006 was $31.5 million, a $1.5 million increase from$12.2 million at December 31, 2005.  Thisincrease was due primarily to earnings of $1.4 million and a secondary stockoffering that raised $17.5 million, net of costs.

In 1990, thebanking industry began to phase in new regulatory capital adequacy requirementsbased on risk-adjusted assets.  Theserequirements take into consideration the risk inherent in investments, loans,and other assets for both on-balance sheet and off-balance sheet items.  Under these requirements, the regulatoryagencies have set minimum thresholds for Tier 1 capital, total capital andleverage ratios.  The Company’s and Bank’srisk-based capital ratios, shown below as of December 31, 2006, have beencomputed in accordance with regulatory accounting policies.

 

|                                         | ** ** | **Minimum**      | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------|------------|------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Requirements** | ** ** | **Bank**                        | ** ** | **Company** | ** ** |
| Tier 1 Capital to Risk-Weighted  Assets |       | 4.00             | %          | 10.5                            | %          | 11.0 | % |
| Total Capital to Risk-Weighted  Assets  |       | 8.00             | %          | 9.5                             | %          | 9.9 | % |
| Tier 1 Capital to Average Assets        |       | 4.00             | %          | 10.4                            | %          | 10.4 | % |

 

**EFFECTS OF INFLATION**

The financialstatements and related financial information presented herein have beenprepared in accordance with GAAP, which require the measurement of financialposition and operating results in terms of historical dollars withoutconsidering changes in the relative purchasing power of money over time due toinflation.  Unlike most industrialcompanies, virtually all of the assets and liabilities of a financialinstitution are monetary in nature.  As aresult, interest rates have a more significant impact on a financialinstitution’s performance than the effects of general levels of inflation.  Interest rates do not necessarily move in thesame direction or same magnitude as the price of goods and services.

 

32

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**ITEM 7.                  FINANCIAL STATEMENTS**

----

**INDEPENDENT AUDITORS’ REPORT**

# **  ON THE CONSOLIDATED FINANCIAL STATEMENT****S**

----

**FINANCIALSTATEMENTS**

**  Consolidated Balance Sheets**

# **  Consolidated Income Statements**

# **  Consolidated Statementof Changes in Shareholders’ Equity**

# **  Consolidated Statements of Cash Flows**

**   Notes to Consolidated Financial Statements**

----

 

33

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# ****

######  

######  

###### **INDEPENDENT AUDITORS’ REPORT**

Board of Directors and Shareholders ofPremier Commercial Bancorp and Subsidiaries

We have audited the accompanying consolidated balancesheets of Premier Commercial Bancorp and Subsidiaries as of December 31, 2006and 2005, and the related consolidated income statements, changes in shareholders’equity, and cash flows for the years then ended. These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Premier Commercial Bancorp and Subsidiaries as of December 31, 2006and 2005, and the results of its operations and its cash flows for the yearsthen ended, in conformity with accounting principles generally accepted in theUnited States of America.

****

Laguna Hills, CaliforniaMarch 8, 2007

 

 

 

 

 

 

 

****

** **

34

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**December31, 2006 and 2005**

 
| ** **                                                       | ** ** | ** **  | ** **  | ** **  | ** ** |
|------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **ASSETS**                                                       | ** ** | **2006**    | ** **  | **2005**    | ** ** |
|                                                             |       |        |        |        |       |
| Cash and Due  from Banks                                         |       | $           | 14,977,102  |        | $          | 10,553,082 |   |
| Federal Funds  Sold                                              |       | 19,875,000  |        | 45,850,000  |       |
| **TOTAL CASH AND CASH EQUIVALENTS**                              |       | 34,852,102  |        | 56,403,082  |       |
| ** **                                                       |       |        |        |        |       |
| Time Deposits in  Other Financial Institutions                   |       | 120,000     |        | 220,000     |       |
|                                                             |       |        |        |        |       |
| Investment  Securities Available for Sale                        |       | 21,397,161  |        | 23,861,962  |       |
| Investment  Securities Held to Maturity                          |       | 5,895,148   |        | 6,340,984   |       |
| **TOTAL INVESTMENT SECURITIES**                                  |       | 27,292,309  |        | 30,202,946  |       |
| ** **                                                       |       |        |        |        |       |
| Loans:                                                           |       |        |        |        |       |
| Commercial Real Estate                                           |       | 206,994,592 |        | 124,222,975 |       |
| Construction                                                     |       | 12,906,441  |        | 18,599,755  |       |
| Commercial                                                       |       | 22,725,252  |        | 22,831,041  |       |
| Small Business Administration (“SBA”)                  |       | 10,235,753  |        | 12,525,158  |       |
| Consumer, Including Home Equity Loans                            |       | 15,587,650  |        | 5,916,466   |       |
| **TOTAL LOANS**                                                  |       | 268,449,688 |        | 184,095,395 |       |
| Deferred Loan  Costs, Net of Fees                                |       | 217,566     |        | 92,592      |       |
| Allowance for  Loan Losses                                       |       | (3,074,157  | )           | (1,889,500  | )          |
| **NET LOANS**                                                    |       | 265,593,097 |        | 182,298,487 |       |
| ** **                                                       |       |        |        |        |       |
| Premises and  Equipment                                          |       | 2,732,908   |        | 580,586     |       |
| Federal Reserve  and Federal Home Loan Bank Stock — at Cost |       | 2,029,900   |        | 1,216,550   |       |
| Accrued Interest                                                 |       | 1,481,136   |        | 1,066,317   |       |
| Cash Surrender  Value of Life Insurance                          |       | 3,013,662   |        | 2,905,836   |       |
| Deferred Income  Taxes, Net                                      |       | 1,289,971   |        | 701,000     |       |
| Other Assets                                                     |       | 3,206,542   |        | 2,802,800   |       |
|                                                             |       |        |        |        |       |
|                                                             |       | $           | 341,611,627 |        | $          | 278,397,604 |   |

 

 

 

 

 

 

The accompanying notes are anintegral part of these financial statements.

35

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**December31, 2006 and 2005**
| ** **                                                                                                                                                                                                                                                                                                              | ** ** | ** **  | ** **  | ** **  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                            | ** ** | **2006**    | ** **  | **2005**    | ** ** |
| Deposits:                                                                                                                                                                                                                                                                                                               |       |        |        |        |       |
| Noninterest-Bearing Demand                                                                                                                                                                                                                                                                                              |       | $           | 95,079,901  |        | $     | 110,381,270 |   |
| Savings, NOW and Money Market Accounts                                                                                                                                                                                                                                                                                  |       | 118,609,866 |        | 101,570,397 |       |
| Time Deposits Under $100,000                                                                                                                                                                                                                                                                                            |       | 2,246,549   |        | 1,520,525   |       |
| Time Deposits $100,000 and Over                                                                                                                                                                                                                                                                                         |       | 71,860,167  |        | 41,050,567  |       |
| **TOTAL DEPOSITS**                                                                                                                                                                                                                                                                                                      |       | 287,796,483 |        | 254,522,759 |       |
| ** **                                                                                                                                                                                                                                                                                                              |       |        |        |        |       |
| Other Borrowings                                                                                                                                                                                                                                                                                                        |       | 5,000,000   |        | —      |       |
| Junior Subordinated  Debt Securities                                                                                                                                                                                                                                                                                    |       | 12,372,000  |        | 9,279,000   |       |
| Accrued Interest  and Other Liabilities                                                                                                                                                                                                                                                                                 |       | 3,605,104   |        | 2,418,879   |       |
| **TOTAL LIABILITIES**                                                                                                                                                                                                                                                                                                   |       | 308,773,587 |        | 266,220,638 |       |
| ** **                                                                                                                                                                                                                                                                                                              |       |        |        |        |       |
| Minority  Interest in Subsidiaries                                                                                                                                                                                                                                                                                      |       | 1,381,000   |        | —      |       |
|                                                                                                                                                                                                                                                                                                                    |       |        |        |        |       |
| Commitments and  Contingencies — Notes D and J                                                                                                                                                                                                                                                                     |       | —      |        | —      |       |
|                                                                                                                                                                                                                                                                                                                    |       |        |        |        |       |
| Shareholders’  Equity:                                                                                                                                                                                                                                                                                             |       |        |        |        |       |
| Common stock — no par value; authorized 10,000,000  shares;  Issued and outstanding 2,635,491 shares at December 31, 2006  and 1,823,547 shares at December 31, 2005                                                                                                                                               |       | 27,459,095  |        | 9,807,880   |       |
| Retained Earnings                                                                                                                                                                                                                                                                                                       |       | 4,150,274   |        | 2,691,031   |       |
| Accumulated Other Comprehensive Income: Net  Unrealized  Losses on Available-for-Sale Securities, Net of Taxes,  of $123,776 and $271,764 as of December 31, 2006 and  2005, respectively; and Unrealized Loss on Cash Flow  Hedge, net of taxes, of $28,553 and $50,181 as of December 31,  2006 and 2005 respectively |       | (152,329    | )           | (321,945    | )          |
| **TOTAL SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                     |       | 31,457,040  |        | 12,176,966  |       |
| ** **                                                                                                                                                                                                                                                                                                              |       |        |        |        |       |
|                                                                                                                                                                                                                                                                                                                    |       | $           | 341,611,627 |        | $          | 278,397,604 |   |

 

 

 

 

 

 

The accompanying notes are anintegral part of these financial statements.

36

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##### **PREMIER COMMERCIAL BANCORP AND SUBSIDIARIES**

**CONSOLIDATEDINCOME STATEMENTS**

**For theYears Ended December 31, 2006 and 2005**

 
| ** **                                               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                               |       |       |       |       |       |
| **INTEREST  INCOME**                                     |       |       |       |       |       |
| Interest and Fees on Loans                               |       | $          | 17,580,638 |       | $          | 9,551,333 |   |
| Interest on Investment Securities — Taxable         |       | 989,445    |       | 1,015,344  |       |
| Interest on Investment Securities — Nontaxable      |       | 71,413     |       | 39,725     |       |
| Other Interest Income                                    |       | 1,162,426  |       | 825,136    |       |
| **TOTAL INTEREST INCOME**                                |       | 19,803,922 |       | 11,431,538 |       |
| **INTEREST  EXPENSE**                                    |       |       |       |       |       |
| Interest on Savings, NOW and Money Market Accounts       |       | 3,600,921  |       | 1,613,035  |       |
| Interest on Time Deposits                                |       | 2,480,918  |       | 925,379    |       |
| Interest on Borrowings                                   |       | 935,820    |       | 441,237    |       |
| **TOTAL INTEREST EXPENSE**                               |       | 7,017,659  |       | 2,979,651  |       |
|                                                     |       |       |       |       |       |
| **NET INTEREST INCOME**                                  |       | 12,786,263 |       | 8,451,887  |       |
| ** **                                               |       |       |       |       |       |
| Provision for  Loan Losses                               |       | 1,204,000  |       | 837,000    |       |
| **NET INTEREST INCOME AFTER PROVISION FOR LOAN  LOSSES** | ** ** | 11,582,263 | ** ** | 7,614,887  | ** ** |
| **NONINTEREST  INCOME**                                  |       |       |       |       |       |
| Loan Referral Fees                                       |       | 2,851,036  |       | 2,235,950  |       |
| Gain on Sale of SBA Loans                                |       | 419,580    |       | 1,014,595  |       |
| Loss on Sale of Investment Securities                    |       | (20,002    | )          | —     |       |
| Earnings on Cash Surrender Value of Life Insurance       |       | 125,833    |       | 122,672    |       |
| Other Income (Loss)                                      |       | (189,168   | )          | 128,216    |       |
|                                                     |       | 3,187,279  |       | 3,501,433  |       |
| **NONINTEREST  EXPENSE**                                 |       |       |       |       |       |
| Salaries and Employee Benefits                           |       | 6,448,907  |       | 4,200,744  |       |
| Occupancy and Equipment Expenses                         |       | 888,503    |       | 584,572    |       |
| Commissions Paid on Loan Referrals                       |       | 1,331,545  |       | 1,138,182  |       |
| Other Expenses                                           |       | 3,863,738  |       | 2,393,435  |       |
|                                                     |       | 12,532,693 |       | 8,316,933  |       |
| **INCOME BEFORE INCOME TAXES AND**                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **MINORITY INTEREST**                                    |       | 2,236,849  |       | 2,799,387  |       |
| Income Taxes                                             |       | 901,105    |       | 1,111,000  |       |
| Minority  Interest in Loss of Subsidiary                 |       | 123,499    |       | —     |       |
| **NET INCOME**                                           |       | $          | 1,459,243  |       | $          | 1,688,387 |   |
| ** **                                               |       |       |       |       |       |
| **NET INCOME PER SHARE — BASIC**                    |       | $          | 0.65       |       | $          | 0.93 |   |
| **NET  INCOME PER SHARE — DILUTED**                 |       | $          | 0.58       |       | $          | 0.81 |   |

 

 

 

 

The accompanying notes arean integral part of these financial statements.

37

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###### **PREMIER COMMERCIAL BANCORP AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

**For theYears Ended December 31, 2006 and 2005**
| ** **                                                                | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                                | ** ** | ** **        | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Other**    | ** ** | ** **        | ** ** |
| ** **                                                                | ** ** | **Comprehensive** | ** ** | **Number of**    | ** ** | ** ** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **Income**        | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Earnings** | ** ** | **Income**        | ** ** | **Total**  | ** ** |
|                                                                      |       |              |       |                  |       |       |       |         |       |              |       |       |       |
| **Balance at January 1, 2005**                                            |       |              |       | 1,823,547             |       | $          | 9,807,880  |         | $          | 1,004,347         |       | $          | (92,829    | ) | $ | (10,719,398 | ) |
|                                                                      |       |              |       |                  |       |       |       |         |       |              |       |       |       |
| Cash Paid for Fractional  Shares Resulting from Stock Split               |       |              |       |                  |       |       |       | (1,702       | )          |              |       | (1,702     | )          |
|                                                                      |       |              |       |                  |       |       |       |         |       |              |       |       |       |
| **Comprehensive Income:**                                                 |       |              |       |                  |       |       |       |         |       |              |       |       |       |
| Net  Income                                                               |       | $                 | 1,688,386  |                  |       |       |       |         | 1,688,386  |              |       |       | 1,688,386  |   |
| Unrealized  Loss on Cash Flow Hedge, Net of Tax of $33,453                |       | (50,182           | )          |                  |       |       |       |         |       | (50,182           | )          | (50,182    | )          |
| Unrealized  Loss on Available-for-Sale Securities, Net of Tax of $117,625 |       | (178,934          | )          |                  |       |       |       |         |       | (178,934          | )          | (178,934   | )          |
| **Total Comprehensive Income**                                            |       | $                 | 1,459,270  |                  |       |       |       |         |       |              |       |       |       |   |
|                                                                      |       |              |       |                  |       |       |       |         |       |              |       |       |       |
| **Balance at December 31, 2005**                                          |       |              |       | 1,823,547             |       | 9,807,880  |       | 2,691,031    |       | (321,945          | )          | 12,176,966 |       |
|                                                                      |       |              |       |                  |       |       |       |         |       |              |       |       |       |
| Stock-based Compensation                                                  |       |              |       | 12,187                |       | 197,437    |       |         |       |              |       | 197,437    |       |
| Secondary Stock  Offering, net of costs of $139,731                       |       |              |       | 799,757               |       | 17,453,778 |       | —       |       |              |       | 17,453,778 |       |
| **Comprehensive Income:**                                                 |       |              |       |                  |       |       |       |         |       |              |       |       |       |
| Net  Income                                                               |       | $                 | 1,459,243  |                  |       |       |       |         | 1,459,243  |              |       |       | 1,459,243  |   |
| Unrealized  Gain on Cash Flow Hedge, Net of Tax of $14,419                |       | 21,628            |       |                  |       |       |       |         |       | 21,628            |       | 21,628     |       |
| Unrealized  Gain on Available-for-Sale Securities, Net of Tax of $97,001  |       | 147,988           |       |                  |       |       |       |         |       | 147,988           |       | 147,988    |       |
| **Total Comprehensive Income**                                            |       | $                 | 1,628,859  |                  |       |       |       |         |       |              |       |       |       |   |
|                                                                      |       |              |       |                  |       |       |       |         |       |              |       |       |       |
| **Balance at December 31, 2006**                                          |       |              |       | 2,635,491             |       | $          | 27,459,095 |         | $          | 4,150,274         |       | $          | (152,329   | ) | $ | 31,457,040 |   |

 

 

 

38

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###### **PREMIER COMMERCIAL BANCORP AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**For theYears Ended December 31, 2006 and 2005**
| ** **                                                                          | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **OPERATING  ACTIVITIES**                                                           |       |        |       |        |       |
| Net Income                                                                          |       | $           | 1,456,243  |        | $          | 1,688,386 |   |
| Adjustments to Reconcile Net Income to Net Cash   Provided by Operating Activities: |       |        |       |        |       |
| Depreciation and Amortization                                                       |       | 284,073     |       | 205,759     |       |
| Provision for Loan Losses                                                           |       | 1,204,000   |       | 837,000     |       |
| Gain on Sale of Investment Securities                                               |       | 20,002      |       | —      |       |
| Gain on Sale of SBA Loans                                                           |       | (419,580    | )          | (1,014,595  | )          |
| Net Increase in Cash Surrender Value of Life  Insurance                             |       | (107,826    | )          | (108,559    | )          |
| Deferred Income Taxes                                                               |       | (700,000    | )          | (417,000    | )          |
| Stock-based Compensation                                                            |       | 197,437     |       | —      |       |
| Other Items                                                                         |       | 404,962     |       | 308,992     |       |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                                       |       | 2,339,311   |       | 1,499,983   |       |
| **INVESTING  ACTIVITIES**                                                           |       |        |       |        |       |
| Change in Time Deposits in Other Financial  Institutions                            |       | 100,000     |       | (220,000    | )          |
| Purchase of Investment Securities Available for Sale                                |       | (492,014    | )          | (993,310    | )          |
| Sale of Investment Securities Available for Sale                                    |       | 2,979,200   |       | —      |       |
| Maturities/Calls of Investment Securities Available  for Sale                       |       | 651,000     |       | 9,100,000   |       |
| Purchase of Investment Securities Held to Maturity                                  |       | —      |       | (6,451,751  | )          |
| Maturities/Calls of Investment Securities Held to  Maturity                         |       | —      |       | 110,000     |       |
| Purchases of Federal Reserve Bank                                                   |       |        |       |        |       |
| Federal Home Loan Bank Stock                                                        |       | (813,350    | )          | (469,100    | )          |
| Increase in Loans                                                                   |       | (90,599,627 | )          | (97,950,405 | )          |
| Proceeds from Sale of SBA Loans                                                     |       | 6,520,597   |       | 12,796,315  |       |
| Purchases of Premises and Equipment                                                 |       | (2,437,598  | )          | (398,521    | )          |
| **NET CASH USED BY INVESTING ACTIVITIES**                                           |       | (84,091,792 | )          | (84,476,772 | )          |
| **FINANCING  ACTIVITIES**                                                           |       |        |       |        |       |
| Net Increase in Demand Deposits and Savings Accounts                                |       | 1,738,100   |       | 81,108,425  |       |
| Net Increase in Time Deposits                                                       |       | 31,535,624  |       | 24,385,998  |       |
| Change in Borrowings                                                                |       | 8,093,000   |       | 3,093,000   |       |
| Procees from Secondary Stock Offering, net                                          |       | 17,453,777  |       | —      |       |
| Change in Borrowings                                                                |       | 1,381,000   |       | —      |       |
| **NET CASH PROVIDED BY FINANCING ACTIVITIES**                                       |       | 60,201,501  |       | 108,587,423 |       |
| **INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                |       | (21,550,980 | )          | 25,610,634  |       |
| Cash and Cash  Equivalents at Beginning of Period                                   |       | 56,403,082  |       | 30,792,448  |       |
|                                                                                |       |        |       |        |       |
| **CASH AND CASH EQUIVALENTS AT END OF YEAR**                                        |       | $           | 34,852,102 |        | $          | 56,403,082 |   |
| **Supplemental  Disclosures of Cash Flow Information:**                             |       |        |       |        |       |
| Interest Paid                                                                       |       | $           | 6,774,389  |        | $          | 3,100,123 |   |
| Taxes Paid                                                                          |       | $           | 1,910,000  |        | $          | 1,855,000 |   |

 

39

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###  

**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

Principles ofConsolidation

The consolidatedfinancial statements include the accounts of Premier Commercial Bancorp, itswholly owned subsidiary, Premier Commercial Bank, N.A. and its 86.5% ownedsubsidiary, Premier Commercial Bank Arizona, N.A. (the “Banks”), collectivelyreferred to herein as the “Company.”  Allsignificant intercompany transactions have been eliminated.

Nature of Operations

The Company has been organized as a single operatingsegment and operates one full-service office in Anaheim, California and one inMesa, Arizona.  The Company’s primarysources of revenue are providing loans to customers, who are predominatelysmall and middle-market businesses and individuals and originating governmentguaranteed loans for sale to institutional investors in the secondarymarket.  The Company also generates feeincome by servicing the sold government guaranteed loans and co-originatingcommercial real estate loans with another regional lender.

Use of Estimates in thePreparation of Financial Statements

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

Cash and Cash Equivalents

For purposes of reportingcash flows, cash and cash equivalents include cash, due from banks and federalfunds sold.  Generally, federal funds aresold for one-day periods.

Cash and Due From Banks

Banking regulationsrequire that banks maintain a percentage of their deposits as reserves in cashor on deposit with the Federal Reserve Bank. The Company was in compliance with all reserve requirements as ofDecember 31, 2006.

The Company maintainsamounts due from banks, which exceed federally insured limits.  The Company has not experienced any losses insuch accounts.

40

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - Continued**

Investment Securities

Bonds, notes, anddebentures for which the Company has the positive intent and ability to hold tomaturity are reported at cost, adjusted for premiums and discounts that arerecognized in interest income using the interest method over the period tomaturity. Investments not classified as trading securities nor as held tomaturity securities are classified as available-for-sale securities andrecorded at fair value.  Unrealized gainsor losses on available-for-sale securities are excluded from net income andreported as an amount net of taxes as a separate component of othercomprehensive income included in shareholders’ equity.  Premiums or discounts on held-to-maturity andavailable-for-sale securities are amortized or accreted into income using theinterest method.  Realized gains orlosses on sales of held-to-maturity or available-for-sale securities are recordedusing the specific identification method.

Declines in the fairvalue of individual held-to-maturity and available-for-sale securities belowtheir cost that are other-than-temporary result in write-downs of theindividual securities to their fair value. The related write-downs are included in earnings as realizedlosses.  In estimatingother-than-temporary impairment losses, management considers the length of timeand the extent to which the fair value has been less than cost, the financialcondition and near-term prospects of the issuer, and the intent and ability ofthe Bank to retain its investment in the issuer for a period of time sufficientto allow for any anticipated recovery in fair value.

Loans

Loans receivable thatmanagement has the intent and ability to hold for the foreseeable future oruntil maturity or payoff are reported at their outstanding unpaid principalbalances reduced by any charge-offs or specific valuation accounts and net ofany deferred fees or costs on originated loans, or unamortized premiums ordiscounts on purchased loans.

Loan origination fees andcertain direct origination costs are capitalized and recognized as anadjustment of the yield of the related loan.

Loans on which theaccrual of interest has been discontinued are designated as non-accrualloans.  The accrual of interest on loansis discontinued when principal or interest is past due 90 days (based oncontractual terms) or when, in the opinion of management, there is reasonabledoubt as to collectibility.  When loansare placed on non-accrual status, all interest previously accrued but notcollected is reversed against current period interest income.  Income on non-accrual loans is subsequentlyrecognized only to the extent that cash is received and the loan’s principalbalance is deemed collectible.  Interestaccruals are resumed on such loans only when they are brought current withrespect to interest and principal and when, in the judgment of management, theloans are estimated to be fully collectible as to all principal and interest.

41

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

###### **December 31, 2006 and 2005**

**NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - Continued**

Loans - Continued

The Company considers aloan to be impaired when it is probable that the Company will be unable tocollect all amounts due (principal and interest) according to the contractualterms of the loan agreement.  Measurementof impairment is based on the expected future cash flows of an impaired loan,which are to be discounted at the loan’s effective interest rate, or measuredby reference to an observable market value, if one exists, or the fair value ofthe collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basisexcept that collateral-dependent loans for which foreclosure is probable aremeasured at the fair value of the collateral. The Company recognizes interest income on impaired loans based on itsexisting methods of recognizing interest income on non-accrual loans.

The Company has adoptedStatement of Financial Accounting Standard (“SFAS”) No. 140, *“Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities.”* The Statement provides accounting and reporting standards for transfersand servicing of financial assets and extinguishments of liabilities.  Under this Statement, after a transfer offinancial assets, an entity recognizes the financial and servicing assets itcontrols and liabilities it has incurred, derecognizes financial assets whencontrol has been surrendered, and derecognizes liabilities when extinguished.

To calculate the gain(loss) on sale of loans, the Company’s investment in the loan is allocatedamong the retained portion of the loan, the servicing retained, theinterest-only strip and the sold portion of the loan, based on the relativefair market value of each portion.  Thegain (loss) on the sold portion of the loan is recognized at the time of salebased on the difference between the sale proceeds and the allocatedinvestment.  As a result of the relativefair value allocation, the carrying value of the retained portion isdiscounted, with the discount accreted to interest income over the life of theloan.  That portion of the excessservicing fees that represent contractually specified servicing fees(contractual servicing) are reflected as a servicing asset which is amortizedover an estimated life using a method approximating the level yield method; inthe event future prepayments exceed management’s estimates and future expectedcash flows are inadequate to cover the unamortized servicing asset, additionalamortization would be recognized.  Theportion of excess servicing fees in excess of the contractual servicing fees isreflected as interest-only (I/O) strips receivable, which are classified asinterest-only strips receivable available for sale and are carried at fairvalue.

Allowance for Loan Losses

The allowance for loanlosses is adjusted by charges to income and decreased by charge-offs (net ofrecoveries).  Management’s periodicevaluation of the adequacy of the allowance is based on the Company’s known andinherent risks in the portfolio, adverse situations that may affect theborrower’s ability to repay, the estimated value of any underlying collateral,and current economic conditions.

42

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###### **PREMIER COMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - Continued**

Premises and Equipment

Premises andequipment are carried at cost less accumulated depreciation andamortization.  Depreciation is computedusing the straight-line method over the estimated useful lives, which rangesfrom three to seven years for furniture and equipment. Leasehold improvementsare amortized using the straight-line method over the estimated useful lives ofthe improvements or the remaining lease term, whichever is shorter.  Expenditures for betterments or major repairsare capitalized and those for ordinary repairs and maintenance are charged tooperations as incurred.

Advertising Costs

The Company expenses thecosts of advertising in the period incurred.

Income Taxes

Deferred income taxes arecomputed using the asset and liability method, which recognizes a liability orasset representing the tax effects, based on current tax law, of futuredeductible or taxable amounts attributable to events that have been recognizedin the financial statements.  A valuationallowance is established to reduce the deferred tax asset to the level at whichit is “more likely than not” that the tax asset or benefits will be realized.

Comprehensive Income

The Companyadopted Statement of SFAS No. 130, *“Reporting ComprehensiveIncome,”* which requires the disclosure of comprehensive income andits components.  Changes in unrealizedgain or loss on available-for-sale securities, net of taxes, and unrealizedgain or loss on cash flow hedges, net of taxes, are the only components of othercomprehensive income for the Company.

Disclosure aboutFair Value of Financial Instruments

SFAS No. 107specifies the disclosure of the estimated fair value of financialinstruments.  The Company’s estimatedfair value amounts have been determined by the Company using available marketinformation and appropriate valuation methodologies.

However,considerable judgment is required to develop the estimates of fair value.  Accordingly, the estimates are notnecessarily indicative of the amounts the Company could have realized in acurrent market exchange.  The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.

Although management isnot aware of any factors that would significantly affect the estimated fairvalue amounts, such amounts have not been comprehensively revalued for purposesof these financial statements since the balance sheet date and, therefore,current estimates of fair value may differ significantly from the amountspresented in the accompanying notes.

43

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES - Continued**

# Derivative Financial Instruments

Derivativefinancial instruments may be constructed to act as hedges either (1) to protectagainst adverse changes in the fair value of assets, liabilities, firmcommitments to purchase or sell specific assets or liabilities, or (2) toprotect against adverse cash flows associated with these items or otherprobable transactions.  The asset,liability, or firm commitment is referred to as the hedged or underlyingitem.  The hedge is constructed so thatits fair value or the cash flows arising from the derivative transaction changein response to certain events in an offsetting manner to the changes in thefair value or cash flows of the underlying item.

All derivativesmust be recorded at their current fair value on the balance sheet.  Changes in the fair value of the derivativeresults in a gain or loss for the Company. Recognition of these gains and losses depends on how the derivative isclassified.  If certain conditions aremet, derivatives may be specifically classified or designated as fair valuehedges or cash flow hedges.

Fair value hedgesare intended to reduce or eliminate the exposure to adverse changes in the fairvalue of a specific underlying item. Gains or losses in the hedging instrument are recognized in the incomestatement during the period that the change in fair value occurred.  The offsetting gain or loss on the hedgeditem which is attributable to the risk being hedged is also recognized in theincome statement for the same period. Hedge ineffectiveness results if the changes in fair values of thederivative and the underlying item do not exactly offset.  This ineffectiveness is included in earningsin the period in which it occurs.

Cash flow hedgesare intended to hedge exposure to variable cash flows of a forecastedtransaction or an underlying instrument. They are effective to the extent that the Bank receives additional cashflows from the hedge when it receives lower cash flows from the hedged item andvice-versa.  The effective portion of ahedge gain or loss is initially reported as a component of other comprehensiveincome and subsequently reclassified into earnings when the forecastedtransaction affects earnings.  Theineffective portion of the gain or loss is reported in earnings immediately.

If a derivativedoes not meet the requirements for designation as one of these specificcategories of hedge, gains or losses associated with changes in its fair valueare immediately recognized in the income statement.

The term “notionalamount” is a measure of quantity in a derivative instrument.  In the case of a fair value or cash flowhedge, it will generally be the same amount as the balance of the underlyingasset or liability.  In the case of otherderivatives, the amount may differ from the balance of any underlyinginstruments.

44

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

# **NOTE A -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued**

Stock-Based Compensation

The Company hasadopted SFAS No. 123(R) “*Shared-Based Payment.” *This Statement generally requiresentities to recognize the cost of employee services received in exchange forawards of stock options, or other equity instruments, based on the grant-datefair value of those awards.  This cost isrecognized over the period which an employee is required to provide services inexchange for the award, generally the vesting period.

Change inAccounting Principle

The Companyadopted SFAS No. 123(R) on January 1, 2006 using the “modified prospectivemethod”.  Under this method compensationexpense is recognized using the fair-value method for all new stock optionawards as well as any existing awards that are modified, repurchased orcancelled after January 1, 2006 and prior periods are not restated.  In addition, the unvested portion ofpreviously awarded options outstanding as of January 1, 2006 will also berecognized as expense over the requisite service period based on the fair valueof those options as previously calculated at the grant date under the pro-formadisclosures of SFAS No. 123.  The fairvalue of each grant is estimated using the Black-Scholes option pricingmodel.  Adopting SFAS No. 123(R) had nomaterial impact on the Company results of operations as the Company hadaccelerated vesting for the majority of the outstanding options in 2005.

Prior to theadoption of SFAS No. 123(R), the Company accounted for stock-based awards usingthe intrinsic value method prescribed in Accounting Principles Board (“APB”)Opinion No. 25, “*Accounting for Stock Issued to Employees,”*and related interpretations.  Accordingly,compensation cost for stock options was measured as the excess, if any, of thequoted market price of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock.  All of the Company’s stock option grantsincluded exercise prices equal to the Company’s current market price per share;accordingly, no compensation expense was reported using the intrinsic valuemethod of APB Opinion No. 25.

Had compensation cost forthe Company’s stock option plans been determined based on the fair value at thegrant dates for awards under those plans consistent with the method of SFAS No.123(R), the Company’s net income and income per share would have changed to thepro forma amounts indicated below:

|                                                                                                    | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------|------------|
| Net Income                                                                                         |       |     |       |
| As Reported                                                                                        |       | $        | 1,688,386  |   |
| Stock-Based Compensation using Intrinsic Value  Method                                             |       | —   |       |
| Stock-Based Compensation that would have been  reported using the Fair Value Method of SFAS 123(R) |       | (147,905 | )          |
| Pro Forma                                                                                          |       | $        | 1,540,481  |   |
|                                                                                               |       |     |       |
| Basic Income Per  Share:                                                                           |       |     |       |
| As Reported                                                                                        |       | $        | 0.93       |   |
| Pro Forma                                                                                          |       | $        | 0.84       |   |
|                                                                                               |       |     |       |
| Diluted Income  Per Share:                                                                         |       |     |       |
| As Reported                                                                                        |       | $        | 0.81       |   |
| Pro Forma                                                                                          |       | $        | 0.74       |   |

 

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

# **NOTE A -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**

Current AccountingPronouncements

In March 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS 156, *“Accounting for Servicing of Financial Assets — an Amendment of FASB StatementNo. 140,”* (“SFAS No. 156”). The provisions of this statement require the Company to initially valueservicing asset or servicing liability at fair value.  SFAS No. 156 also allows the Company tochoose on the following measurement methods subsequent to the initial fairvalue measurement: (1) the “fair-value-measurement method”, which measuresservicing rights at fair value at each reporting date, with changes in fairvalue reported in earnings or (2) the “amortization method”, which allowscontinued amortization of servicing rights over the period of estimated netservicing income or loss, consistent with the existing requirements of SFAS No.140.  The provisions of this standard areeffective as of the first fiscal year beginning after September 15, 2006.  The Company currently uses the amortizationmethod to account for servicing rights, and expects to continue this practiceafter implementing SFAS No. 156.  TheCompany does not expect the adoption of SFAS No. 156 to have a material impacton its financial condition or results of operations.

Earnings Per Share (EPS)

Basic EPS excludes dilution and is computed bydividing income available to common stockholders by the weighted-average numberof common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if optionsor other contracts to issue common stock were exercised or converted intocommon stock or resulted in the issuance of common stock that then shared inthe earnings of the entity.

Financial Instruments

In the ordinary course of business, the Company hasentered into off-balance sheet financial instruments consisting of commitmentsto extend credit, commercial letters of credit, and standby letters ofcredit.  Such financial instruments arerecorded in the financial statements when they are funded or related fees areincurred or received

Reclassifications

Certainreclassifications have been made to the 2005 financial statements to conform tothe classifications used in 2006.

 

46

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###  

**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

# **NOTE B -INVESTMENT SECURITIES**

Investment securities have been classified in the balance sheetaccording to management’s intent.  Thecarrying amount of investment securities and their approximate fair values atDecember 31 were as follows:

 
| ** **                        | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|-----------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                        | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                        | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| Available-for-Sale  Securities:   |       |          |       |           |       |           |       |       |       |
| December 31,  2006:               |       |          |       |           |       |           |       |       |       |
| U.S. Government  Agencies         |       | $             | 20,341,154 |           | $          | 6,071          |       | $          | (174,198   | ) | $ | 20,173,027 |   |
| Other Investment  Securities      |       | 1,262,299     |       | —         |       | (38,165        | )          | 1,224,134  |       |
|                              |       |          |       |           |       |           |       |       |       |
|                              |       | $             | 21,603,453 |           | $          | 6,071          |       | $          | (212,363   | ) | $ | 21,397,161 |   |
| December 31, 2005:                |       |          |       |           |       |           |       |       |       |
| U.S. Government  Agencies         |       | $             | 23,334,355 |           | $          | —         |       | $          | (411,758   | ) | $ | 22,922,597 |   |
| Other Investment  Securities      |       | 978,889       |       | —         |       | (39,524        | )          | 939,365    |       |
|                              |       |          |       |           |       |           |       |       |       |
|                              |       | $             | 24,313,244 |           | $          | —         |       | $          | (451,282   | ) | $ | 23,861,962 |   |
| Held-to-Maturity  Securities:     |       |          |       |           |       |           |       |       |       |
| December 31,  2006:               |       |          |       |           |       |           |       |       |       |
| State and  Municipal Governments: |       |          |       |           |       |           |       |       |       |
| Taxable                           |       | $             | 4,137,771  |           | $          | —         |       | $          | (98,626    | ) | $ | 4,039,145 |   |
| Nontaxable                        |       | 1,757,377     |       | 1,397          |       | (18,698        | )          | 1,740,076  |       |
|                              |       |          |       |           |       |           |       |       |       |
|                              |       | $             | 5,895,148  |           | $     | 1,397          |       | $          | (117,324   | ) | $ | 5,779,221 |   |
| December 31,  2005:               |       |          |       |           |       |           |       |       |       |
| State and  Municipal Governments: |       |          |       |           |       |           |       |       |       |
| Taxable                           |       | $             | 4,501,871  |           | $          | —         |       | $          | (83,189    | ) | $ | 4,418,682 |   |
| Nontaxable                        |       | 1,839,113     |       | 2,921          |       | (18,222        | )          | 1,823,812  |       |
|                              |       |          |       |           |       |           |       |       |       |
|                              |       | $             | 6,340,984  |           | $          | 2,921          |       | $          | (101,411   | ) | $ | 6,242,494 |   |

 

Investment securities carried at $20,173,027 and $19,941,596 at December31, 2006 and 2005, respectively, were pledged to secure borrowing arrangementsdiscussed in Note F as well as other purposes.

 

During 2006 the Company sold investment securities with a net bookvalue of $2,999,202 for $2,979,200, resulting in a recognized loss of $20,002.

 

The gross unrealized loss and related estimated fair value ofinvestment securities that have been in a continuous loss position for lessthan twelve month and more than twelve months at December 31, are summarized inthe following table:

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

# **NOTE B -INVESTMENT SECURITIES - Continued**

| ** **                  | ** ** | **Less Than Twelve Months** | ** ** | **More Than Twelve Months** | ** ** | **Total**      | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|----------------|------------|
| ** **                  | ** ** | **Unrealized**                             | ** ** | **Estimated**                              | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                  | ** ** | **Loss**                                   | ** ** | **Fair Value**                        | ** ** | **Loss**       | ** ** | **Fair Value** | ** ** | **Loss** | ** ** | **Fair Value** | ** ** |
| December 31,  2006:         |       |                                       |       |                                       |       |           |       |   |   |   |   |   |   |
| U.S. Government Agencies    |       | $                                     | —     |                                       | $     | —         |       | $  | (174,198 | ) | $  | 14,420,801 |   | $  | (174,198 | ) | $  | 14,420,801 |   |
| Other Investment Securities |       | (1,673                                     | )          | 281,738                                    |       | (36,492        | )          | 942,397 |   | (38,165 | ) | 1,224,135 |   |
| Municipals                  |       | (1,377                                     | )          | 305,854                                    |       | (115,947       | )          | 5,159,971 |   | (117,324 | ) | 5,465,825 |   |
|                        |       |                                       |       |                                       |       |           |       |   |   |   |   |   |   |
|                        |       | $                                          | (3,050     | )                                          | $          | 587,592        |       | $ | (326,637 | ) | $ | 20,523,169 |   | $ | (329,687 | ) | $ | 21,110,761 |   |
| December 31,  2005:         |       |                                       |       |                                       |       |           |       |   |   |   |   |   |   |
| U.S. Government Agencies    |       | $                                     | (83,543    | )                                          | $     | 5,458,111      |       | $  | (328,215 | ) | $  | 17,464,485 |   | $  | (411,758 | ) | $  | 22,922,596 |   |
| Other Investment Securities |       | —                                     |       | —                                     |       | (39,524        | )          | 939,366 |   | (39,524 | ) | 939,366 |   |
| Municipals                  |       | (101,411                                   | )          | 5,846,574                                  |       | —         |       | — |   | (101,411 | ) | 5,846,574 |   |
|                        |       |                                       |       |                                       |       |           |       |   |   |   |   |   |   |
|                        |       | $                                          | (184,954   | )                                          | $          | 11,304,685     |       | $ | (367,739 | ) | $ | 18,403,851 |   | $ | (552,693 | ) | $ | 29,708,536 |   |

 

As of December 31, 2006, the Company had twenty five investmentsecurities where estimated fair value had declined 1.5% from the Company’samortized cost.  Management evaluatesinvestment securities for other-than temporary impairment taking intoconsideration the extent and length of time the fair value has been less thancost, the financial condition of the issuer and whether the Company has theintent and ability to retain the investment for a period of time sufficient toallow for any anticipated recovery in fair value. As of December 31, 2006, nodeclines in value are deemed to be other-than-temporary.

 

The amortized cost and estimated fair value of all investmentsecurities as of December 31, 2006 by contractual maturity are shownbelow.  Expected maturities may differfrom contractual maturities as borrowers may have the right to call or prepaythe obligation with or without prepayment penalties.

 
| ** **                        | ** ** | **Available-for-Sale Securities** | ** ** | **Held-to-Maturity Securities** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **Amortized**                          | ** ** | **Fair**                             | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                        | ** ** | **Cost**                               | ** ** | **Value**                            | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Due in One Year  or Less          |       | $                                      | 15,775,043 |                                 | $          | 15,633,112 |   | 337,000 |   | $ | 334,993 |   |
| Due from One  Year to Five Years  |       | 5,828,410                              |       | 5,764,049                            |       | 4,372,771 |   | 4,272,947 |   |
| Due from Five  Years to Ten Years |       | —                                 |       | —                               |       | 1,185,377 |   | 1,171,281 |   |
|                              |       |                                   |       |                                 |       |   |   |   |   |
|                              |       | $                                      | 21,603,453 |                                 | $          | 21,397,161 |   | $ | 5,895,148 |   | $ | 5,779,221 |   |
|                                   |            |                                        |            |                                      |            |  |  |  |  |  |  |  |  |

 

48

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**PREMIER COMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE C**-**LOANS**

The Company’s loan portfolio consists primarily of loans to borrowerswithin Orange County, California. Although the Company seeks to avoid concentrations of loans to a singleindustry or based upon a single class of collateral, real estate and realestate associated businesses are among the principal industries in the Company’smarket area and, as a result, the Company’s loan and collateral portfolios are,to some degree, concentrated in those industries.

 

The Company also originated SBA loans for sale to institutionalinvestors.  Substantial portions of theCompany’s revenues are from origination of loans guaranteed by the SmallBusiness Administration under its various programs and sale of the guaranteedportions of those loans.  Funding forthese SBA programs depends on annual appropriations by the U.S. Congress.

 

The Company was servicing approximately $18,807,000 and $21,997,000 inSBA loans previously sold as of December 31, 2006 and 2005, respectively.  The Company has recorded servicing assetsrelated to these loans totaling $228,942 and $585,058 as of December 31, 2006and 2005, respectively.  The estimatedfair value of the servicing assets approximated the carrying amount at December31, 2006 and 2005.  Fair value isestimated by discounting estimated future cash flows from the servicing assetsusing discount rates that approximate current market rates over the expectedlives of the loans being serviced.  Forpurposes of measuring impairment, the Company has identified each servicingasset with the underlying loan being serviced. A valuation allowance is recorded if the fair value is below thecarrying amount of the asset.

 

The Company may also receive a portion of subsequent interestcollections on loans sold that exceed the contractual servicing fee.  In that case the Company records aninterest-only strip based on the relative fair market value of it and the othercomponents of the loan. The Company had interest-only strips of $65,459 and$152,041 as of December 31, 2006 and 2005, respectively.  The estimated fair value of the interest-onlystrips approximated the carrying amount at December 31, 2006 and 2005.  Fair value is estimated by discountingestimated future cash flows from the interest-only strips using assumptionssimilar to those used in valuing servicing assets.

 

A summary of the changes in the allowance for loanlosses as of December 31 follows:

 

|                                                | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                           |       |      |       |      |       |
| Balance at  Beginning of Year                  |       | $         | 1,889,500  |      | $          | 1,052,500 |   |
| Additions to the  Allowance Charged to Expense |       | 1,204,000 |       | 837,000   |       |
| Recoveries on  Loans Charged Off               |       | —    |       | —    |       |
|                                           |       | 3,093,500 |       | 1,889,500 |       |
| Less Loans  Charged Off                        |       | (19,343   | )          | —    |       |
|                                           |       |      |       |      |       |
|                                           |       | $         | 3,074,157  |      | $          | 1,889,500 |   |

 

The Company didnot have any significant non-performing or impaired loans outstanding duringthe years ended December 31, 2006 and 2005.

49

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**PREMIER COMMERCIAL BANCORP ANDSUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE D - PREMISES AND EQUIPMENT**

A summary of premises andequipment as of December 31 follows:

|                                                 | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|
| Furniture,  Fixtures, and Equipment             |       | $         | 1,168,994  |      | $          | 552,865 |   |
| Computer  Equipment                             |       | 708,628   |       | 498,210   |       |
| Leasehold  Improvements                         |       | 1,760,796 |       | 156,316   |       |
|                                            |       | 3,638,418 |       | 1,207,391 |       |
| Less Accumulated  Depreciation and Amortization |       | (905,510) |       | (626,805  | )          |
|                                            |       |      |       |      |       |
|                                            |       | $         | 2,732,908  |      | $          | 580,586 |   |

 

At December 31, 2006, thefuture lease rental payable under noncancellable operating lease commitmentsfor the Company’s Anaheim and Arizona main office and additional suites usedfor administrative purposes was as follows:

 

| 2007       |   | $         | 1,032,000 |   |
|------------|--------|-----------|-----------|--------|
| 2008       |   | 1,147,000 |      |
| 2009       |   | 1,176,000 |      |
| 2010       |   | 1,103,000 |      |
| 2011       |   | 1,230,000 |      |
| Thereafter |   | 3,151,000 |      |
|       |   |      |      |
|       |   | $         | 8,839,000 |   |

 

The minimum rental payments shown above are given for the existinglease obligations and are not a forecast of future rental expense. The Company’sAnaheim main office, which is subject to a sublease, and the leases for theadditional suites all expire on October 2013 with the exception to the Irvinefacility which expires December 2011. Arizona’s main office expires October 2016.

 

Total rental expense was approximately $506,500 for the year endedDecember 31, 2006 and $325,000 for the year ended December 31, 2005.

50

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE E - DEPOSITS**

At December 31, 2006, thescheduled maturities of time deposits are as follows:

| Due in One Year or Less       |   | $          | 61,500,763 |   |
|-------------------------------|--------|------------|------------|--------|
| Due from One to  Three Years  |   | 10,509,413 |       |
| Due from Three  to Five Years |   | 2,096,540  |       |
|                          |   |       |       |
|                          |   | $          | 74,106,716 |   |

 

**NOTE F****- BORROWING ARRANGEMENTS**

The Company may borrow up to $11,000,000 overnight on an unsecuredbasis from its primary correspondent banks. In addition, it has two borrowing arrangements with Federal Home LoanBank.  The first arrangement is aborrowing line for approximately $78.9 million against which the Company haspledged approximately $132.6 million of its outstanding loans.  The second arrangement is a borrowing linefor approximately $17.3 million against which the Company has pledgedapproximately $18.1 million of its investment securities.

 

As of December 31, 2006 the Company has a $5.0 million outstandingborrowing against the bank’s investment securities maturing January 3, 2007including interest at 5.3%.  As ofDecember 31, 2005, no amounts were outstanding.

 

## **NOTE G - JUNIORSUBORDINATED DEBT SECURITIES**

On December 10, 2004, the Company issued $6,186,000 of juniorsubordinated debt securities (the “debt securities”) to Premier CommercialBancorp Trust I, a statutory trust created under the laws of the State ofDelaware.  These debt securities aresubordinated to effectively all borrowings of the Company and are due andpayable on March 15, 2035.  Interest ispayable quarterly on these debt securities at a fixed rate of 6.05% per annumfrom December 10, 2004 until March 15, 2010 and thereafter at a variable perannum rate, reset quarterly, equal to LIBOR plus 2.05%. The debt securities canbe redeemed for 103.14% of the principal balance in 2006, 102.355% in 2007,101.57% in 2008, 100.785% in 2009 and at par thereafter.  The debt securities can also be redeemed atpar prior to that date if certain events occur that impact the tax treatment orthe capital treatment of the issuance.

 

On December 23, 2005, the Company issued $3,093,000 of juniorsubordinated debt securities (the “debt securities”) to Premier CommercialBancorp Trust II, a statutory trust created under the laws of the State ofDelaware.  These debt securities aresubordinated to effectively all borrowings of the Company and are due andpayable on March 15, 2036.  Interest ispayable quarterly on these debt securities at a fixed rate of 6.64% per annumfrom December 23, 2005 until December 15, 2012 and thereafter at a variable perannum rate, reset quarterly, equal to LIBOR plus 1.75%. The debt securities canbe redeemed for 103.525% of the principal balance in 2006, 103.021% in 2007,102.518% in 2008, 102.014% in 2009, 101.511% in 1010, 101.007% in 2011,100.504% in 2012 and at par thereafter. The debt securities can also be redeemed at par prior to that date ifcertain events occur that impact the tax treatment or the capital treatment ofthe issuance.

51

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**PREMIER COMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

## **NOTE G - JUNIORSUBORDINATED DEBT SECURITIES — Continued**

On June 30, 2006, the Company issued $3,093,000 of junior subordinateddebt securities (the “debt securities”) to Premier Commercial Bancorp TrustIII, a statutory trust created under the laws of the State of Delaware.  These debt securities are subordinated toeffectively all borrowings of the Company and will have a thirty-year maturity.  Interest will be payable quarterly on thesedebt securities at a floating rate of LIBOR plus 1.85% per annum. The debtsecurities can be redeemed for 103.021% of the principal balance in 2007,102.517% in 2008, 102.013% in 2009, 101.509% in 2010, 101.005% in 2011,100.501% in 2012 and at par thereafter. The debt securities can also be redeemed at par prior to that date ifcertain events occur that impact the tax treatment or the capital treatment ofthe issuance. The Company has entered into a cash flow hedge to lock in a fixedinterest rate of 7.04% on these borrowings through 2013 when the borrowings canbe prepaid without penalty.  The cashflow hedge is further discussed in Note R.

 

The Company also purchased a 3% minority interest in Premier CommercialBancorp Trust I, II and III.  The balanceof the equity of Premier Commercial Bancorp Trust I, II and III is comprised ofmandatorily redeemable preferred securities.

 

Under FASB Interpretation (FIN) No. 46, *“Consolidation of Variable Interest Entities, an interpretation of ARBNo. 51,”* the Company is not allowed to consolidate PremierCommercial Bancorp Trust I, II and III into the Company financialstatements.  The Federal Reserve Boardhas confirmed to the Company that these mandatorily redeemable preferredsecurities qualify as Tier 1 Capital (up to 25% of other components of Tier 1Capital) and the remainder as Tier 2 Capital.

 

52

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE H - INCOME TAXES**

The provision for incometaxes for the years ended December 31, consists of the following:

|          | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------|------------|-----------|------------|-----------|------------|
| Current: |       |      |       |      |       |
| Federal  |       | $         | 1,154,000  |      | $          | 1,147,000 |   |
| State    |       | 447,105   |       | 381,000   |       |
|     |       | 1,601,105 |       | 1,528,000 |       |
| Deferred |       | (700,000  | )          | (417,000  | )          |
|     |       |      |       |      |       |
|     |       | $         | 901,105    |      | $          | 1,111,000 |   |

 

The following is asummary of the components of the net deferred tax asset recognized in theaccompanying statements of financial condition at December 31:

|                                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Deferred Tax Assets:                                  |       |      |       |      |       |
| Pre-Opening  Expenses                                 |       | $         | 392,000    |      | $          | 36,000 |   |
| Allowance for  Loan Losses Due to Tax Limitation      |       | 1,198,000 |       | 689,000   |       |
| California  Franchise Taxes                           |       | 192,000   |       | 129,000   |       |
| Unrecognized  Loss on Investment Securities and Hedge |       | 102,000   |       | 213,000   |       |
| Deferred  Compensation                                |       | 146,000   |       | 109,000   |       |
| Other Items                                           |       | 18,000    |       | 43,000    |       |
|                                                  |       | 2,048,000 |       | 1,219,000 |       |
|                                                  |       |      |       |      |       |
| Deferred Tax Liabilities:                             |       |      |       |      |       |
| Cash Basis  Reporting for Tax Purposes                |       | (108,000  | )          | (161,000  | )          |
| Capitalized Loan  Costs Deducted for Tax Purposes     |       | (419,000  | )          | (292,000  | )          |
| Depreciation  Differences                             |       | (68,000   | )          | (65,000   | )          |
| Other Items                                           |       | (163,000  | )          | —    |       |
|                                                  |       | (758,000  | )          | (518,000  | )          |
|                                                  |       |      |       |      |       |
| Net Deferred Tax Assets                               |       | $         | 1,290,000  |      | $          | 701,000 |   |

 

53

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE H - INCOME TAXES - Continued**

A comparison of thefederal statutory income tax rates to the Company’s income tax rates atDecember 31 follow:
| ** **                                   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|
| ** **                                   | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Statutory Federal Tax                        |       | $          | 760,000    |     | 34.0       | % | $ | 952,000 |   | 34.0 | % |
| State Franchise Tax,  Net of Federal Benefit |       | 160,000    |       | 7.1      | %          | 196,000 |   | 7.0 | % |
| Tax-Free Earnings                            |       | (81,000    | )          | (3.6     | )%         | (50,000 | ) | (1.8 | )% |
| Other Items, Net                             |       | 62,105     |       | 2.8      | %          | 13,000 |   | 0.5 | % |
|                                         |       |       |       |     |       |   |   |   |   |
| Actual Tax Expense                           |       | $          | 901,105    |     | 40.3       | % | $ | 1,111,000 |   | 39.7 | % |

 

**NOTE I - OTHER EXPENSES**

Other expenses as ofDecember 31 are comprised of the following:

|                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Marketing and Business  Promotion                                          |       | $        | 400,093    |     | $          | 255,791 |   |
| Data Processing                                                            |       | 374,354  |       | 298,376  |       |
| Professional Fees                                                          |       | 497,955  |       | 390,783  |       |
| Office Expenses                                                            |       | 418,940  |       | 344,660  |       |
| Loan Production  Expenses                                                  |       | 277,164  |       | 398,933  |       |
| Courier and Delivery  Expenses                                             |       | 277,417  |       | 185,090  |       |
| Organizational Costs  and Expenses-  Premier Commercial Bank Arizona, N.A. |       | 752,199  |       | —   |       |
| Regulatory Assessments  and Insurance                                      |       | 184,787  |       | 122,445  |       |
| Other Expenses                                                             |       | 680,828  |       | 397,357  |       |
|                                                                       |       |     |       |     |       |
|                                                                       |       | $        | 3,863,738  |     | $          | 2,393,435 |   |

 

54

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###### **PREMIER COMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE J - COMMITMENTS**

In the ordinary course of business, the Company entersinto financial commitments to meet the financing needs of its customers.  These financial commitments includecommitments to extend credit and standby letters of credit.  Those instruments involve to varying degrees,elements of credit and interest rate risk not recognized in the Company’sfinancial statements.

The Company’s exposure to loan loss in the event ofnonperformance on commitments to extend credit and standby letters of credit isrepresented by the contractual amount of those instruments.  The Company uses the same credit policies inmaking commitments as it does for loans reflected in the financial statements.

As of December 31,2006 and 2005, the Company had the following outstanding financial commitmentswhose contractual amount represents credit risk:

 

|                               | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------------------|------------|-----------|------------|-----------|------------|
| Commitments to Extend  Credit |       | $         | 50,317,636 |      | $          | 48,195,000 |   |
| Standby Letters of  Credit    |       | 2,831,949 |       | 1,575,000 |       |
|                          |       |      |       |      |       |
|                          |       | $         | 53,149,585 |      | $          | 49,770,000 |   |

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Since many of the commitments areexpected to expire without being drawn upon, the total amounts do notnecessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-casebasis.  The amount of collateral obtainedif deemed necessary by the Company is based on management’s credit evaluationof the customer.  The majority of theCompany’s commitments to extend credit and standby letters of credit aresecured by real estate.

**NOTE K - RELATED PARTYTRANSACTIONS**

In the ordinary course ofbusiness, the Company has granted loans to certain directors and the companieswith which they are associated.  In theCompany’s opinion, all loans and loan commitments to such parties are made onsubstantially the same terms including interest rates and collateral, as thoseprevailing at the time of comparable transactions with other persons.  The total outstanding commitment of theseloans was approximately $1,575,000 and $1,591,000 at December 31, 2006 and 2005,respectively.

Deposits from relatedparties held by the Bank at December 31, 2006 and 2005 amounted toapproximately $19,499,000 and $9,976,000, respectively.

 

55

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE L -EARNINGS PER SHARE (EPS)**

The following is areconciliation of net income and shares outstanding to the income and number ofshares used to compute EPS:
| ** **                                           | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | **Income** | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| Net Income as Reported                               |       | $          | 1,459,243  |       |       |   | $ | 1,688,386 |   |   |   |
| Weighted Average  Shares Outstanding During the Year |       |       |       | 2,232,388  |       |   |   | 1,823,547 |   |
| **Used in  Basic EPS**                               |       | 1,459,243  |       | 2,232,388  |       | 1,688,386 |   | 1,823,547 |   |
| Dilutive Effect  of Outstanding Stock Options        |       |       |       | 290,819    |       |   |   | 256,198 |   |
|                                                 |       |       |       |       |       |   |   |   |   |
| **Used in  Dilutive EPS**                            |       | $          | 1,459,243  |       | 2,523,207  |   | $ | 1,688,386 |   | 2,079,745 |   |

 

# **NOTE M -STOCK OPTION AND RESTRICTED STOCK PLANS**

Under the terms of theCompany’s stock option plan, officers and key employees may be granted bothnonqualified and incentive stock options and directors, who are not also anofficer or employee, may only be granted nonqualified stock options.  The stock option plan provides for options topurchase 436,748 shares of common stock at a price not less than 100% of the fairmarket value of the stock on the date of grant. Stock options are granted at aprice not less than 100% of the fair market value of the stock on the date ofgrant. Stock options expire no later than ten years from the date of the grantand generally vest over five years.  Thestock option plan provides for accelerated vesting if there is a change ofcontrol as defined in the stock option plan.

The Company didnot grant any new options under the stock option plan in 2006 and 2005.

A summary of the status of the Company’s stock optionplan as of December 31, 2006 and changes during the year then ended ispresented below:

 

|                                   | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|-----------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  Beginning of Year |       | 428,321    |       | $             | 5.40       |            |       |          |       |   |
| Granted                           |       | —     |       | —        |       |            |       |          |       |
| Exercised                         |       | —     |       | —        |       |            |       |          |       |
| Forfeited                         |       | —     |       | —        |       |            |       |          |       |
| Outstandingat End of  Year        |       | 428,321    |       | $             | 5.40       |            | 5.2 Years  |          | $          | 7,305,000 |   |
|                              |       |       |       |          |       |            |       |          |       |
| Options Exercisable               |       | 424,844    |       | $             | 5.35       |            | 5.2 Years  |          | $          | 7,268,000 |   |

 

56

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

# **NOTE M -STOCK OPTION AND RESTRICTED STOCK PLANS - Continued**

No options underthe stock option plan were exercised in 2006 and 2005 and there was no materialdeferred compensation relating to the stock option plan as of December 31,2006.

The Company alsohas a restricted stock plan whereby 85,000 shares of the Company’s common stockmay be granted to officers and directors. Under the Plan, grants may include vesting periods up to ten years butno less that two years.  A summary of theactivity in the Company’s restricted stock plan during the year ended December31, 2006, is presented below:

|                                | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|--------------------------------|------------|------------|------------|----------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Grant-Date**       | ** ** |
| **Nonvested Shares**      | ** ** | **Shares** | ** ** | **Fair Value**  | ** ** |
| Nonvested at January 1,  2006  |       | 24,375     |       | $                    | 16.20      |   |
| New Stock Grants in  2006      |       | 24,375     |       | $                    | 21.50      |   |
| Shares Vested and  Issued      |       | (12,187    | )          | $                    | 16.20      |   |
| Shares Forfeited               |       | —     |       | —               |       |
|                           |       |       |       |                 |       |
| Nonvested at December 31, 2006 |       | 36,563     |       | $                    | 19.73      |   |

 

As of December 31,2006, there was unrecognized compensation costs related to the restricted stockplan of $434,485 of which $368,977 will be recognized in 2007 and $65,508 willbe recognized in 2008.  The total fairvalue of shares vested in 2006 was $271,000. No shares were vested in 2005.

In addition, theCompany’s majority owned subsidiary, Premier Commercial Bank Arizona, NA, has aseparate stock option plan under which 155,000 shares were granted in late2006.  Compensation costs related tothese grants were minor in 2006 but as of December 31, 2006, unrecognizedcompensation costs totaled $490,000 which will be recognized over aweighted-average period of 2.9 years. See also Note T for subsequent events impacting the subsidiary and itsstock option plan.

57

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS**

The fair value of a financial instrument is the amountat which the asset or obligation could be exchanged in a current transactionbetween willing parties, other than in a forced or liquidation sale.  Fair value estimates are made at a specificpoint in time based on relevant market information and information about thefinancial instrument.  These estimates donot reflect any premium or discount that could result from offering for sale atone time the entire holdings of a particular financial instrument.  Because no market value exists for asignificant portion of the financial instruments, fair value estimates arebased on judgments regarding future expected loss experience, current economicconditions, risk characteristics of various financial instruments, and otherfactors.  These estimates are subjectivein nature, involve uncertainties and matters of judgment and, therefore, cannotbe determined with precision.  Changes inassumptions could significantly affect the estimates.

Fair value estimates are based on financialinstruments both on and off the balance sheet without attempting to estimate thevalue of anticipated future business and the value of assets and liabilitiesthat are not considered financial instruments. Additionally, tax consequences related to the realization of theunrealized gains and losses can have a potential effect on fair value estimatesand have not been considered in many of the estimates.

The following methods and assumptions were used toestimate the fair value of significant financial instruments:

Financial Assets

The carrying amounts of cash, short-term investments,due from customers on acceptances, and bank acceptances outstanding areconsidered to approximate fair value. Short-term investments include federal funds sold, securities purchasedunder agreements to resell, and interest bearing deposits with Banks.  The fair values of investment securities,including available-for-sale, are generally based on quoted market prices.  The fair value of loans are estimated using acombination of techniques, including discounting estimated future cash flowsand quoted market prices of similar instruments where available.

Financial Liabilities

The carrying amounts of deposit liabilities payable ondemand, commercial paper, and other borrowed funds are considered toapproximate fair value.  For fixedmaturity deposits, fair value is estimated by discounting estimated future cashflows using currently offered rates for deposits of similar remainingmaturities.  The fair value of long-termdebt is based on rates currently available to the Company for debt with similarterms and remaining maturities.

Derivative Instruments

The fair value of derivative instruments are basedupon quoted market prices.  For 2005,these values are included in other liabilities.

58

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS -Continued**

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit andstandby letters of credit is estimated using the fees currently charged toenter into similar agreements.  The fairvalue of these financial instruments is not material.

The estimated fair value of financial instruments atDecember 31, 2006 and 2005 is summarized as follows (dollar amounts inthousands):
| ** **                              | ** ** | **2006**     | ** ** | **2005**  | ** ** |
|-----------------------------------------|------------|--------------|------------|-----------|------------|
| ** **                              | ** ** | **Carrying** | ** ** | **Fair**  | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                              | ** ** | **Value**    | ** ** | **Value** | ** ** | **Value** | ** ** | **Value** | ** ** |
| **Financial  Assets:**                  |       |         |       |      |       |   |   |   |   |
| Cash and Due From Banks                 |       | $            | 14,977     |      | $          | 14,977 |   | $  | 10,553 |   | $ | 10,553 |   |
| Federal Funds Sold                      |       | 19,875       |       | 19,875    |       | 45,850 |   | 48,850 |   |
| Time Deposits in Other Banks            |       | 120          |       | 120       |       | 220 |   | 220 |   |
| Investment Securities                   |       | 27,292       |       | 27,176    |       | 30,203 |   | 30,104 |   |
| Loans, Net                              |       | 265,593      |       | 262,424   |       | 182,298 |   | 178,642 |   |
| Federal Reserve Bank and FHLB Stock     |       | 2,030        |       | 2,030     |       | 1,217 |   | 1,217 |   |
| Cash Surrender Value Life Insurance     |       | 3,014        |       | 3,014     |       | 2,906 |   | 2,906 |   |
| Investment in Annuities                 |       | 745          |       | 745       |       | 805 |   | 805 |   |
| Accrued Interest                        |       | 1,481        |       | 1,481     |       | 1,066 |   | 1,066 |   |
|                                    |       |         |       |      |       |   |   |   |   |
| **Financial  Liabilities:**             |       |         |       |      |       |   |   |   |   |
| Deposits                                |       | 287,796      |       | 286,680   |       | 254,523 |   | 255,107 |   |
| Other Borrowings                        |       | 5,000        |       | 4,999     |       | — |   | — |   |
| Junior Subordinated Debt Securities     |       | 12,372       |       | 12,372    |       | 9,279 |   | 9,279 |   |
| Accrued Interest  and Other Liabilities |       | 3,605        |       | 3,605     |       | 2,419 |   | 2,419 |   |
|                                         |            |              |            |           |            |  |  |  |  |  |  |  |  |

 

**NOTE P - REGULATORY MATTERS**

The Company and the Banks are subject to variousregulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory, and possibly additionaldiscretionary, actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

59

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTE P - REGULATORY MATTERS - Continued**

Quantitative measures established by regulation toensure capital adequacy require the Banks to maintain minimum amounts andratios (set forth in the table below) of total and Tier 1 capital (as definedin the regulations) to risk-weighted assets (as defined), and of Tier 1 capital(as defined) to average assets (as defined). Management believes, as of December 31, 2006, that the Banks meets allcapital adequacy requirements to which it is subject.

As of December 31, 2006, the most recent notificationfrom the Office of the Comptroller of the Currency (the “OCC”) categorized theBanks as well capitalized under the regulatory framework for prompt correctiveaction (there are no conditions or events since that notification thatmanagement believes have changed the Bank’s category).  To be categorized as well capitalized, theBanks must maintain minimum ratios as set forth in the table below.  The following table also sets forth theCompany’s and its primary Bank’s actual capital amounts and ratios (dollaramounts in thousands):
| ** **                               | ** ** | ** ** | ** ** | ** **                                    | ** ** | **Amount of Capital Required**                             | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Actual** | ** ** | **For Capital  Adequacey Purposes** | ** ** | **Well-Capitalized   Under Prompt  Corrective Provisions** | ** ** |
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**                                     | ** ** | **Amount**                                                                | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| December 31, 2006                        |       |       |       |                                          |       |                                                                      |       |   |   |   |   |   |   |
| Company                                  |       |       |       |                                          |       |                                                                      |       |   |   |   |   |   |   |
| Total Capital (to Risk-Weighted Assets)  |       | $          | 34,473     |                                          | 11.0       | %                                                                         | $          | 25,203 |   | 8.0 | % | $ | 31,504 |   | 10.0 | % |
| Tier 1 Capital (to Risk-Weighted Assets) |       | $          | 31,289     |                                          | 9.9        | %                                                                         | $          | 12,601 |   | 4.0 | % | $ | 18,902 |   | 6.0 | % |
| Tier 1 Capital (to Average Assets)       |       | $          | 31,289     |                                          | 10.4       | %                                                                         | $          | 11,263 |   | 4.0 | % | $ | 14,079 |   | 5.0 | % |
| Premier  Commercial Bank, N.A.           |       |       |       |                                          |       |                                                                      |       |   |   |   |   |   |   |
| Total Capital (to Risk-Weighted Assets)  |       | $          | 32,357     |                                          | 10.5       | %                                                                         | $          | 24,699 |   | 8.0 | % | $ | 30,874 |   | 10.0 | % |
| Tier 1 Capital (to Risk-Weighted Assets) |       | $          | 29,187     |                                          | 9.5        | %                                                                         | $          | 12,350 |   | 4.0 | % | $ | 18,524 |   | 6.0 | % |
| Tier 1 Capital (to Average Assets)       |       | $          | 29,187     |                                          | 10.4       | %                                                                         | $          | 11,269 |   | 4.0 | % | $ | 14,087 |   | 5.0 | % |
|                                     |       |       |       |                                          |       |                                                                      |       |   |   |   |   |   |   |
| December 31, 2005                        |       |       |       |                                          |       |                                                                      |       |   |   |   |   |   |   |
| Company                                  |       |       |       |                                          |       |                                                                      |       |   |   |   |   |   |   |
| Total Capital (to Risk-Weighted Assets)  |       | $          | 23,694     |                                          | 10.2       | %                                                                         | $          | 18,491 |   | 8.0 | % | $ | 23,114 |   | 10.0 | % |
| Tier 1 Capital (to Risk-Weighted Assets) |       | $          | 16,636     |                                          | 7.2        | %                                                                         | $          | 9,245 |   | 4.0 | % | $ | 13,868 |   | 6.0 | % |
| Tier 1 Capital (to Average Assets)       |       | $          | 16,636     |                                          | 6.8        | %                                                                         | $          | 9,824 |   | 4.0 | % | $ | 12,280 |   | 5.0 | % |
| Premier  Commercial Bank, N.A.           |       |       |       |                                          |       |                                                                      |       |   |   |   |   |   |   |
| Total Capital (to Risk-Weighted Assets)  |       | $          | 23,092     |                                          | 10.0       | %                                                                         | $          | 18,450 |   | 8.0 | % | $ | 23,063 |   | 10.0 | % |
| Tier 1 Capital (to Risk-Weighted Assets) |       | $          | 21,155     |                                          | 9.2        | %                                                                         | $          | 9,225 |   | 4.0 | % | $ | 13,838 |   | 6.0 | % |
| Tier 1 Capital  (to Average Assets)      |       | $          | 21,155     |                                          | 8.6        | %                                                                         | $          | 9,808 |   | 4.0 | % | $ | 12,260 |   | 5.0 | % |

 

The Banks are restricted as to the amount of dividendsthat can be paid to the holding company. Dividends declared by national banks that exceed net income (as defined by OCCregulations) for the current year plus retained net income for the precedingtwo years must be approved by the OCC. Also, the Banks may not pay dividends that would result in capitallevels being reduced below the minimum requirements shown above.

With certain exceptions, the Company may not pay adividend to its shareholders unless its retained earnings equal at least theamount of the proposed dividend.

60

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2006 and 2005**

## **NOTE Q - FORMATION OFPREMIER COMMERCIAL BANCORP**

On May 19, 2004, PremierCommercial Bancorp acquired all the outstanding shares of the Bank by issuing1,458,891 shares of common stock in exchange for the surrender of alloutstanding shares of the Bank’s common stock. There was no cash involved in this transaction.  The acquisition was accounted for like apooling of interests and the consolidated financial statements contained hereinhave been restated to give full effect to this transaction.

Premier CommercialBancorp has no significant business activities other than its investment inPremier Commercial Bank, N.A., Premier Commercial Bank Arizona, N.A and itsinvestment and related borrowings from Premier Commercial Bancorp Trusts 1, 2and 3 discussed in Note G.  Accordingly,no separate financial information on the Company is provided.

**NOTE R -DERIVATIVE FINANCIAL INSTRUMENTS**

The Company hasestablished policies and procedures to permit limited use of off-balance sheetderivatives to help manage interest rate risk.

# **Interest Rate Swaps to Manage Interest Rate Risk**

The Company has enteredinto interest rate swaps to mitigate interest rate risk on several of its fixedrate loans.  Under the terms of theswaps, the Company pays a fixed rate of interest to the counterparty and receivesa floating rate of interest.  This swaphad the effect of converting the fixed rate loans into a variable or floatingrate loans. As of December 31, 2006 the swaps estimated fair value was$(542,608) thousand which was adjusted through earnings along with the similarfair market value increase in the related loan. The swaps have a total notional value of $22,542,105 and expire between2016 and 2021.  The notional value,payment terms and expiration date match the amount, payment terms and maturityof the specific fixed rate loan for which it is matched.

Cash Flow Hedge

The Company has alsoentered into a cash flow hedge to manage the cash flows from a forecastedvariable rate borrowing of junior subordinated debt securities.  This hedge had the effect of converting thevariable rate forecasted borrowing into a fixed rate obligation.  The effective portion of this hedge’s loss atDecember 31, 2006 was $(47,588) and was reported as a component of othercomprehensive income, net of taxes of $19,035. The cash flow hedge has anotional value of $3,000,000 and expires June 15, 2013.  The notional value, payment terms andexpiration date match the amount, payment terms and projected maturity of thevariable rate forecasted borrowing for which it is matched.

Cash balance totaling$579,000 and time deposits totaling $120,000 have been pledged at theinstitution from which the Company purchased these derivatives as collateralfor the potential losses in these items.

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**PREMIERCOMMERCIAL BANCORP AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December31, 2006 and 2005**

**NOTES - STOCK SPLITS**

On December 15,2004, the Bancorp’s Board of Directors approved a 5-for-4 stock split of theCompany’s outstanding common stock effective for January 19, 2005.

On January 18,2006, the Bancorp’s Board of Directors approved a 5-for-4 stock split of theCompany’s outstanding common stock effective for February 1, 2006.

All of theper-share data in these financial statements and footnotes have beenretroactively adjusted to reflect these splits.

**NOTE T — SUBSEQUENTEVENT**

On February 27,2007, the Company entered into a Stock Purchase and Sale Agreement (the “Agreement”)whereby the Company will sell its majority interest in the partially ownedsubsidiary, Premier Commercial Bank Arizona, N.A. (“PCB AZ”), to a group whichincludes the current minority shareholders of PCB AZ.  The purchase price for the shares owned bythe Company is $11 million subject to reductions if the shareholders equity ofthe PCB AZ is below $9 million at the time of sale.  In addition, at the time of sale, all stockoptions in the PCB AZ granted to directors and officers of the Company would beforfeited.  The transaction must becompleted by August 1, 2007, unless extended by mutual consent of all parties,or the Agreement is terminated.

If the Agreementis terminated, the Company has agreed to purchase the outstanding shares of theminority shareholders for their initial purchase price.  In addition, all warrants and stock optionsgranted to the minority shareholders will be forfeited.

The Agreement andsubsequent transfer or ownership is subject to approval by various regulators,including the OCC.

 

62

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**ITEM 8.**                    CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUING AND FINANCIAL DISCLOSURES

None.

**ITEM 8A.       CONTROLSAND PROCEDURES**

(a)                                  Evaluationof disclosure controls and procedures.

Within 90 days prior tothe date of this report. The Company carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures. Based on thisevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded the Company’s disclosure controls and procedures (as defined in Rules13a-14(c) and 15-d-14(c) under the Securities Exchange Act of 1934 (The “ExchangeAct”) are effective to ensure that information required to be disclosed by theCompany in reports that if files or submits under the Exchange Act is recorded,processed, summarized and reported to the Company’s management within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.

(b)                                 Changesin internal control.

Subsequent to the date oftheir evaluation, there were no significant changes in the Company’s internalcontrols or in other factors that could significantly affect the Company’sdisclosure controls and procedures, and there were no corrective actions withregard to significant deficiencies and material weaknesses based on suchevaluation.

**ITEM 8B.       OTHERINFORMATION**

None

 

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PART III

**ITEM9.  DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION16(A) OF THE EXCHANGE ACT**

Directors and Executive Officers

The following table sets forth the names of, and certain information concerning, the directors and executive officers of the Company.  Each director is elected for a period of one year and thereafter serves until successor is duly elected by the stockholders and qualifies.  Officers serve at the will of the Board of Directors
| **Name**            | ** ** | **Age** | ** ** | **Position with  Registrant**                      | ** ** | **Director   or Officer   Since** | ** ** | **Business Experience During   the Past Five Years**                                                                                                           | ** ** | **Other Directorships   Held in Reporting   Companies** |
|---------------------|------------|---------|------------|----------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|
| Kenneth J. Cosgrove |       | 59      |       | Chairman and Chief Executive Officer               |       | 2004                              |       | Chairman and Chief Executive Officer of Premier  Commercial Bank, N.A. and Premier Commercial Bancorp; Chairman of Premier  Commercial Bank Arizona, N.A.      |       | None                                                    |
| E. Eugene Hatz      |       | 68      |       | Vice Chairman                                      |       | 2004                              |       | Vice President and Secretary, Hamilton Materials,  Inc.                                                                                                        |       | None                                                    |
| Richard T. Letwak   |       | 64      |       | Director                                           |       | 2004                              |       | Partner, Letwak & Bennett, certified public  accountants.                                                                                                  |       | None                                                    |
| Robert C. Matranga  |       | 64      |       | Director                                           |       | 2004                              |       | Chief Executive Officer, Bomel Construction Company,  Inc., a concrete and general contractor                                                                  |       | None                                                    |
| Ashokkumar R. Patel |       | 45      |       | Director, President                                |       | 2004                              |       | President of Premier Commercial Bank, N.A. and  Premier Commercial Bancorp; President and Chief Executive Officer of Premier  Commercial Bank Arizona, N.A.    |       | None                                                    |
| Steven Perryman     |       | 64      |       | Director                                           |       | 2004                              |       | Retired; Formerly Group Chairman, TEC Worldwide,  Inc.                                                                                                         |       | None                                                    |
| Melvin W. Smith     |       | 63      |       | Director                                           |       | 2004                              |       | President, Mel Smith Electric, Inc., an electrical  and general contractor                                                                                     |       | None                                                    |
| Ronald P. Thon      |       | 62      |       | Director                                           |       | 2004                              |       | President & Chief Executive Officer, Thon  Insurance Services, Inc.                                                                                        |       | None                                                    |
| Anthony M. Vitti    |       | 63      |       | Director                                           |       | 2004                              |       | Attorney in private practice                                                                                                                                   |       | None                                                    |
| Stephen W. Pihl     |       | 45      |       | Exec. Vice President & Chief Credit Officer    |       | 2004                              |       | Executive Vice President and Chief Credit Officer,  Premier Commercial Bank, N.A. and Executive Vice President, Premier  Commercial Bancorp                    |       | None                                                    |
| Viktor R. Uehlinger |       | 53      |       | Exec. Vice President & Chief Financial Officer |       | 2004                              |       | Executive Vice President and Chief Financial Officer  of Premier Commercial Bank, N.A., Premier Commercial Bancorp, and Premier  Commercial Bank Arizona, N.A. |       | None                                                    |

 

None of the executiveofficers were selected pursuant to any arrangement or understanding other thanwith the directors and executive officers of the Company acting within theircapacities as such.  There are no family 

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relationships between anyof the directors and executive officers of the Company. There are no materialproceedings to which any executive officer of the Company or any associate ofany executive officer of the Company is a party or has an interest materiallyadverse to the Company.  No class of theCompany’s securities are required to be registered under the SecuritiesExchange Act of 1934, and therefore compliance with Section 16 of theSecurities Exchange Act of 1934 is not applicable.

Code of Ethics

Premier Commercial Bancorp has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

A copy of the Company’s Code of Ethics is contained as Exhibit 14.1 to this Form 10-KSB.  Premier Commercial Bancorp hereby undertakes to provide to any person without charge, upon request, a copy of such code of ethics. Such request may be made in writing to the board of directors at the address of the issuer.

Corporate Governance

*Material Changes in the Procedures for Shareholder Nomination of Directors*

The Company did not have any material changes to the procedures by whichshareholders may recommend nominees to the board of directors of the Company.

*Audit Committee*

The Company has a separately-designatedstanding audit committee.  The AuditCommittee is composed of Chairman Richard Letwak, and Steve Perryman and GeneHatz. The Board has determined that each member of the Audit Committee is “independent”within the meaning of the rules and regulations of the SEC.  The Board has determined that the AuditCommittee does not have an “audit committee financial expert,” as that term isdefined in Item 401(h) of SEC Regulation S-K, because (i) none of the membersof the Audit Committee possesses all the requisite qualifications to beconsidered an “audit committee financial expert” and (ii) thus far, the Boardhas not been able to successfully recruit an individual who qualifies as an “auditcommittee financial expert” and who would be willing to serve on the AuditCommittee in that capacity.  In thefuture as a Board vacancy occurs, the Board of Directors will attempt torecruit a member who will meet the SEC definition of “audit committee financialexpert”.

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**ITEM 10.  EXECUTIVE COMPENSATION**

 

**Summary Compensation Table**

 
| **Name and Principal  Position**                                                     | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus  (3)** | ** ** | **Stock  Awards** | ** ** | **Option  Awards  (1) (2)** | ** ** | **Non-Equity  Incentive  Plan   Compensation  (3)** | ** ** | **Changes in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings (4)** | ** ** | **All Other  Compensation  (5)** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------------|------------|-------------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------|------------|
| **(a)**                                                                                        | ** ** | **(b)**  | ** ** | **(c)**    | ** ** | **(d)**        | ** ** | **(e)**           | ** ** | **(f)**                          | ** ** | **(g)**                                                  | ** ** | **(h)**                                                                                               | ** ** | **(i)**                               | ** ** | **(j)**   | ** ** |
| Kenneth J. Cosgrove  CEO of the Company and  Premier Commercial Bank                           |       | 2006     |       | $          | 225,000    |           | $          | 75,000            |       | $                                | 134,375    |                                                     | $          | 0                                                                                                     |       | $                                     | 0          |      | $          | 76,117 |   | $ | 17,000 |   | $ | 527,492 |   |
| Ashokkumar R. Patel  President of the Company  and Premier Commercial  Bank                    |       | 2006     |       | $          | 225,000    |           | $          | 75,000            |       | $                                | 134,375    |                                                     | $          | 0                                                                                                     |       | $                                     | 0          |      | $          | 16,543 |   | $ | 17,000 |   | $ | 467,918 |   |
| Viktor R. Uehlinger  EVP and Chief Financial  Officer                                          |       | 2006     |       | $          | 155,000    |           | $          | 62,500            |       | $                                | 26,875     |                                                     | $          | 0                                                                                                     |       | $                                     | 0          |      | $          | 17,176 |   | $ | 11,250 |   | $ | 272,801 |   |
| Steven W. Pihl  EVP of the Company and  EVP/Chief Lending  Officer of Premier  Commercial Bank |       | 2006     |       | $          | 175,000    |           | $          | 100,000           |       | $                                | 49,313     |                                                     | $          | 0                                                                                                     |       | $                                     | 0          |      | $          | 8,207 |   | $ | 12,000 |   | $ | 344,520 |   |

 

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(1)        The Company has not granted optionawards since 2002.

(2)                        Theamounts in column (f) reflect the dollar amount recognized for financialstatement report purposes for the fiscal year end December 31, 2006, inaccordance with FAS 123(R).  Assumptions usedin the calculation of these amounts are included in footnote M to the Company’saudited financial statements for the fiscal year ended December 31, 2006included in this report on Form 10-KSB.

(3)                        TheCompany’s named executive officers participate in a bonus plan in whichpayments are determined based on the achievement of certain financialperformance measures and, in all but the case of the Company’s Chief ExecutiveOfficer, in addition based on the achievement of certain position specificoperational goals.  Amounts in thiscolumn represent payments earned in 2006 and paid in March of 2007 under thisplan.

(4)                        Theamounts in column (h) reflect the actuarial increase in the present value ofthe named executive officer’s benefits under the officer’s salary continuationagreement. The amounts are established by the Company determined using interestrate assumptions consistent with those used in the Company’s financialstatements.

(5)                        Theamounts in column (i) include auto allowance and the Company’s contributionunder the 401(k) Plan.

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Outstanding Equity Awards at Fiscal Year-End

 
| ** **       | ** ** | **Option Awards**                                                                 | ** ** | **Stock Awards**                                                                    | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **       | ** ** | ** **                                                                             | ** ** | ** **                                                                               | ** ** | **Equity  Incentive Plan  Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity  Incentive  Plan  Awards:** | ** ** | **Equity  Incentive  Plan  Awards:** | ** ** |
| **Name**         | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number  of Shares  or Units  of  Stock  That  Have Not  Vested** | ** ** | **!) **Market  value of  Shares or  Units of  Stock  That Have  Not  Vested($) | ** ** | **Number of  Unearned  Shares,  Units or  Other  Rights That  Have Not  Vested** | ** ** | **Market or  Payout  Value of  Unearned  Shares,  Units or  Other  Rights That  Have Not  Vested ($)** | ** ** |
| **(a)**          | ** ** | **(b)**                                                                                | ** ** | **(c)**                                                                                  | ** ** | **(d)** | ** ** | **(e)** | ** ** | **(f)** | ** ** | **(g)** | ** ** | **(h)** | ** ** | **(i)** | ** ** | **(j)** | ** ** |
| Ken Cosgrove     |       | 68,359                                                                                 |       | 0                                                                                        |       | 0 |   | $ | 5.12 |   | Dec. 2011 |   | 3,125 |   | $ | 70,312 |   | $ | 0 |   | $ | 0 |   |
|                  |       | 13,672                                                                                 |       |                                                                                     |       |   |   | $ | 5.89 |   | Dec. 2011 |   | 6,250 |   | $ | 140,625 |   |   |   |   |   |
|             |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ash Patel        |       | 68,359                                                                                 |       | 0                                                                                        |       | 0 |   | $ | 5.12 |   | Dec. 2011 |   | 3,125 |   | $ | 70,312 |   | $ | 0 |   | $ | 0 |   |
|                  |       | 13,672                                                                                 |       |                                                                                     |       |   |   | $ | 5.89 |   | Dec. 2011 |   | 6,250 |   | $ | 140,625 |   |   |   |   |   |
|             |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Viktor Uehlinger |       | 19,531                                                                                 |       | 0                                                                                        |       | 0 |   | $ | 5.12 |   | Dec. 2011 |   | 938 |   | $ | 21,105 |   | $ | 0 |   | $ | 0 |   |
|                  |       | 6,836                                                                                  |       |                                                                                     |       |   |   | $ | 5.89 |   | Dec. 2011 |   | 1,875 |   | $ | 42,188 |   |   |   |   |   |
|             |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stephen Pihl     |       | 19,531                                                                                 |       | 0                                                                                        |       | 0 |   | $ | 5.12 |   | Dec. 2011 |   | 625 |   | $ | 14,063 |   | $ | 0 |   | $ | 0 |   |
|                  |       | 6,836                                                                                  |       |                                                                                     |       |   |   | $ | 5.89 |   | Dec. 2011 |   | 1,250 |   | $ | 28,125 |   |   |   |   |   |

 

Mr. Cosgrove,Chief Executive Officer of Premier Commercial Bank and Premier CommercialBancorp, has an employment agreement for a term, commencing October 1, 2004 andending December 31, 2007.  Under theagreement, Mr. Cosgrove receives an annual base salary, which is periodicallyincreased.  Under the agreement Mr.Cosgrove is entitled to an annual bonus. Mr. Cosgrove is provided an automobile allowance, is entitled to accrueup to four weeks vacation time during each year and to have business expensesreimbursed.  If Mr. Cosgrove isterminated for committing a wrong against Premier Commercial Bank, he will notbe paid any compensation upon termination. However, if Mr. Cosgrove is terminated without cause, he will receive 18months salary if terminated.  In theevent of a change of control of Premier Commercial Bancorp and Mr. Cosgrove isterminated or given a different position, title or reduction in base salary,then Premier Commercial Bancorp will have to pay him two years worth of histhen current base salary plus the bonus earned for the preceding year, subjectto reduction if any of such payment would constitute an excess parachutepayment.

Mr. Cosgrove alsohas a salary continuation agreement which provides that Premier CommercialBancorp will pay him $75,000 per year for 15 years in 180 payments followinghis retirement from Premier Commercial Bancorp at age 65 or later (“RetirementAge”).  In the event of disability whileMr. Cosgrove is actively employed prior to Retirement Age, he will receive alump sum amount within ninety days following termination of employment due todisability based on the accrual balance for the number of years the agreementhas been in place with a minimum payment of $50,550, and a maximum payment of$717,478.  In the event of terminationwithout cause, Mr. Cosgrove shall receive a lump sum amount within ninety daysfollowing termination of employment based on a set vesting schedule  In the event of a change of control ofPremier Commercial Bancorp followed by either voluntary or involuntarytermination of Mr. Cosgrove’s employment within twelve months of the change ofcontrol, he will receive $75,000 per year for 15 years in 180 paymentsfollowing his attainment of age 65.  Inthe event Mr. Cosgrove is entitled to salary continuation benefits and diesprior to receiving all 180 monthly payments, then no further payments are to bepaid pursuant to the salary continuation agreement after his death, but thebeneficiaries of Mr. Cosgrove shall be entitled to benefits of a split dollaragreement between Mr. Cosgrove and Premier Commercial Bancorp.  Pursuant to the split dollar agreement, uponMr. Cosgrove’s death, his properly designated beneficiaries would receive$717,478.

Mr. Patel, Presidentand Chief Operating Officer of Premier Commercial Bank and Premier CommercialBancorp, has an employment agreement for a term, commencing October 1, 2004 andending December 31, 2007.  Under the 

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agreement, Mr.Patel receives an annual base salary, with periodic increases.  Under the agreement Mr. Patel is entitled toan annual bonus.  Mr. Patel is providedan automobile allowance, is entitled to accrue up to four weeks vacation timeduring each year and to have business expenses reimbursed.  If Mr. Patel is terminated for committing awrong against Premier Commercial Bank, he will not be paid any compensationupon termination.  However, if Mr. Patelis terminated without cause, he will receive 18 months salary ifterminated.  In the event of a change ofcontrol of Premier Commercial Bancorp and Mr. Patel is terminated or given adifferent position, title or reduction in base salary, then Premier CommercialBancorp will have to pay him two years worth of his then current base salaryplus the bonus earned for the preceding year, subject to reduction if any ofsuch payment would constitute an excess parachute payment.

Mr. Patel also hasa salary continuation agreement which provides that Premier Commercial Bancorpwill pay him $75,000 per year for 15 years in 180 payments following hisretirement from Premier Commercial Bancorp at age 65 or later (“Retirement Age”).  In the event of disability while Mr. Patel isactively employed prior to Retirement Age, he will receive a lump sum amountwithin ninety days following termination of employment due to disability basedon the accrual balance for the number of years the agreement has been in placewith a minimum payment of $10,986, and a maximum payment of $717,478.  In the event of termination without cause,Mr. Patel shall receive a lump sum amount within ninety days followingtermination of employment based on a vesting schedule.  In the event of a change of control ofPremier Commercial Bancorp followed by either voluntary or involuntarytermination of Mr. Patel’s employment within twelve months of the change ofcontrol, he will receive $75,000 per year for 15 years in 180 paymentsfollowing his attainment of age 65.  Inthe event Mr. Patel is entitled to salary continuation benefits and dies priorto receiving all 180 monthly payments, then no further payments are to be paidpursuant to the salary continuation agreement after his death, but thebeneficiaries of Mr. Patel shall be entitled to benefits of a split dollaragreement between Mr. Patel and Premier Commercial Bancorp.  Pursuant to the split dollar agreement, uponMr. Patel’s death, his properly designated beneficiaries would receive$717,478.

Mr. Pihl,Executive Vice President and Chief Credit Officer of Premier Commercial Bankand Premier Commercial Bancorp, has a salary continuation agreement whichprovides that Premier Commercial Bancorp will pay him $38,000 per year for 15years in 180 payments following his retirement from Premier Commercial Bancorpat age 65 or later (“Retirement Age”). In the event of disability while Mr. Pihl is actively employed prior toRetirement Age, he will receive a lump sum amount within ninety days followingtermination of employment due to disability based on the accrual balance forthe number of years the agreement has been in place with a minimum payment of$5,450, and a maximum payment of $363,522. In the event of termination without cause, Mr. Pihl shall receive a lumpsum amount within ninety days following termination of employment based on avesting schedule.  In the event of achange of control of Premier Commercial Bancorp followed by either voluntary orinvoluntary termination of Mr. Pihl’s employment within twelve months of thechange of control, he will receive $38,000 per year for 15 years in 180 paymentsfollowing his attainment of age 65.  Inthe event Mr. Pihl is entitled to salary continuation benefits and dies priorto receiving all 180 monthly payments, then no further payments are to be paidpursuant to the salary continuation agreement after his death, but thebeneficiaries of Mr. Pihl shall be entitled to benefits of a split dollaragreement between Mr. Pihl and Premier Commercial Bancorp.  Pursuant to the split dollar agreement, uponMr. Pihl’s death, his properly designated beneficiaries would receive $363,522.

Mr.Uehlinger, Executive Vice President and Chief Financial Officer of PremierCommercial Bank and Premier Commercial Bancorp, has a salary continuationagreement which provides that Premier Commercial Bancorp will pay him $38,000per year for 15 years in 180 payments following his retirement from PremierCommercial Bancorp at age 65 or later (“Retirement Age”).  In the event of disability while Mr.Uehlinger is actively employed prior to Retirement Age, he will receive a lumpsum amount within ninety days following termination of employment due todisability based on the accrual balance for the number of years the agreementhas been in place with a minimum payment of $11,407, and a maximum payment of$363,522.  In the event of termination withoutcause, Mr. Uehlinger shall receive a lump sum amount within ninety daysfollowing termination of employment based on a vesting schedule.  In the event of a change of control ofPremier Commercial Bancorp followed by either voluntary or involuntary terminationof Mr. Uehlinger’s employment within twelve months of the change of control, hewill receive $38,000 per year for 15 years in 180 payments following hisattainment of age 65.  In the event Mr.Uehlinger is entitled to salary continuation benefits and dies prior toreceiving all 180 monthly payments, then no further payments are to be paidpursuant to the salary continuation agreement after his death, but thebeneficiaries of Mr. Uehlinger shall be entitled to benefits of a split dollaragreement between Mr. Uehlinger and Premier Commercial Bancorp.  Pursuant to the split dollar agreement, uponMr. Uehlinger’s death, his properly designated beneficiaries would receive$363,522.

Eachofficer also receives restricted stock awards under the Company’s plan.  All grants vest in equal yearly installmentsover a two year period.  In 2005, Mr.Cosgrove and Mr. Patel were each granted 5,000 shares, Mr. Pihl was 

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granted1,500 and Mr. Uehlinger 1,000.  Thesegrants have since been adjusted for the Company’s February 2006 stocksplit.  In 2006, Mr. Cosgrove and Patelwere each granted 6,250 shares, Mr. Pihl was granted 1,875 and Mr. Uehlinger1,250.

Compensation of Directors

**Director Compensation Table**

 
| **Name**    | ** ** | **Fees  Earned or  Paid in  Cash** | ** ** | **Stock  Awards** | ** ** | **Option Awards  (1)** | ** ** | **Non-Equity  Incentive Plan  Compensation** | ** ** | **Change in Pension Value  and Nonqualified Deferred  Compensation Earnings (2)** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|-------------|------------|----------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| **(a)**     | ** ** | **(b)**                                      | ** ** | **(c)**           | ** ** | **(d)**                     | ** ** | **(e)**                                           | ** ** | **(f)**                                                                                                              | ** ** | **(g)**                          | ** ** | **(h)**   | ** ** |
| E. Hatz     |       | $                                            | 16,050     |              | $          | 26,875                      |       | $                                                 | 0          |                                                                                                                 | $          | 0                                |       | $         | 0          |   | $ | 0 |   | $ | 42,925 |   |
| R. Letwak   |       | $                                            | 15,800     |              | $          | 26,875                      |       | $                                                 | 0          |                                                                                                                 | $          | 0                                |       | $         | 0          |   | $ | 0 |   | $ | 42,675 |   |
| R. Matranga |       | $                                            | 20,450     |              | $          | 26,875                      |       | $                                                 | 0          |                                                                                                                 | $          | 0                                |       | $         | 0          |   | $ | 0 |   | $ | 47,325 |   |
| S. Perryman |       | $                                            | 23,000     |              | $          | 26,875                      |       | $                                                 | 0          |                                                                                                                 | $          | 0                                |       | $         | 0          |   | $ | 0 |   | $ | 49,875 |   |
| M. Smith    |       | $                                            | 25,600     |              | $          | 26,875                      |       | $                                                 | 0          |                                                                                                                 | $          | 0                                |       | $         | 0          |   | $ | 0 |   | $ | 52,475 |   |
| R. Thon     |       | $                                            | 15,650     |              | $          | 26,875                      |       | $                                                 | 0          |                                                                                                                 | $          | 0                                |       | $         | 0          |   | $ | 0 |   | $ | 42,525 |   |
| A. Vitti    |       | $                                            | 14,200     |              | $          | 26,875                      |       | $                                                 | 0          |                                                                                                                 | $          | 0                                |       | $         | 0          |   | $ | 0 |   | $ | 41,075 |   |

 

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(1)   Theamounts in column (d) reflect the dollar amount recognized for financialstatement report purposes for the fiscal year end December 31, 2006, inaccordance with FAS 123(R).  Assumptionsused in the calculation of these amounts are included in footnote M to theCompany’s audited financial statements for the fiscal year ended December 31,2006 included in this report on Form 10-KSB.

Board membersreceive director fees for attendance at regular meetings of $750 per meeting,$200 per committee meeting, $300 for the chairman of the committee, and anannual retainer of $5,000.  In addition,in December, 2001, each of the outside directors was granted a stock option toacquire 15,625 shares, and in November, 2002, each of the outside directors wasgranted a stock option to acquire 7,813 shares. Also, in 2005 and 2006, each outside director received a restrictedstock award grant of 1,000 shares for 2005 and 1,250 shares in 2006.  The 2005 grants have since been adjusted as aresult of the February 2006 stock split by the Company.  All restricted stock award grants vest inequal yearly installments over a two year period.

**ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

Management of theCompany knows of no person who owns, beneficially or of record, eitherindividually or together with associates, 5 percent or more of the outstandingshares of the Company’s common stock, except as set forth in the tablebelow.  The following table sets forth,as of March 1, 2007, the number and percentage of shares of the Company’soutstanding common stock beneficially owned, directly or indirectly, by each ofthe Company’s directors and principal shareholders and by the directors andofficers of the Company as a group.  Theshares “beneficially owned” are determined under Securities and ExchangeCommission Rules, and do not necessarily indicate ownership for any otherpurpose.  In general, beneficialownership includes shares over which the director, principal shareholder orofficer has sole or shared voting or investment power and shares which suchperson has the right to acquire within 60 days of March 1, 2007.  Unless otherwise indicated, the personslisted below have sole voting and investment powers of the shares beneficiallyowned.  Management is not aware of anyarrangements which may, at a subsequent date, result in a change of control ofthe Company.

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| ** **                                                  | ** ** |
|-------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Amount and Nature of** | ** ** |
| **Beneficial Owner**                                   | ** ** | **Beneficial Ownership** | ** ** | **Percent of **Class(1) | ** ** |
| Kenneth J.  Cosgrove                                        |       | 190,450 | (2) | 7.01 | % |
| E. Eugene Hatz                                              |       | 80,890 | (3) | 3.04 | % |
| Richard T.  Letwak                                          |       | 52,481 | (4) | 1.97 | % |
| Robert C.  Matranga                                         |       | 130,283 | (5) | 4.90 | % |
| Ashokkumar R.  Patel                                        |       | 122,613 | (6) | 4.51 | % |
| Steven Perryman                                             |       | 82,132 | (7) | 3.09 | % |
| Melvin W. Smith                                             |       | 172,107 | (8) | 6.48 | % |
| Ronald P. Thon                                              |       | 102,794 | (9) | 3.87 | % |
| Anthony M. Vitti                                            |       | 33,203 | (10) | 1.25 | % |
|                                                        |       |   |   |   |   |
| Directors and  executive officers as a group (numbering 11) |       | 1,025,515 | (11) | 34.03 | % |

 

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(1)                                  Includesshares subject to options that are exercisable within 60 days of March 1,2007.  These are treated as issued andoutstanding for the purpose of computing the percentage of  each director and the directors and executiveofficers as a group, but not for the purpose of computing the percentage ofclass of any other person.

(2)                                  Includes82,031 shares acquirable by the exercise of stock options.  Mr. Cosgrove has shared voting and investmentpowers as to 70,538 shares.  Mr. Cosgrove=saddress is c/o Premier Commercial Bank, N.A., 2400 E. Katella Avenue, Suite125, Anaheim, California 92806.

(3)                                  Includes23,438 shares acquirable by the exercise of stock options.

(4)                                  Includes23,438 shares acquirable by the exercise of stock options.  Mr. Letwak has shared voting and investmentpowers as to 24,310 of these shares.

(5)                                  Includes23,438 shares acquirable by the exercise of stock options.

(6)                                  Includes82,031 shares acquirable by the exercise of stock options.

(7)                                  Includes23,438 shares acquirable by the exercise of stock options.

(8)                                  Includes19,532 shares acquirable by the exercise of stock options.  Mr. Smith has shared voting and investmentpowers over 152,575 shares.  Mr. Smith=saddress is c/o Premier Commercial Bank, N.A., 2400 E. Katella Avenue, Suite125, Anaheim, California 92806.

(9)                                  Includes23,438 shares acquirable by the exercise of stock options.  Mr. Thon has shared voting and investmentpowers over 28,466 of these shares.

(10)                            Includes23,438 shares acquirable by the exercise of stock options.

(11)                            Includes377,894 shares acquirable by the exercise of stock options.

**ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

Some of theCompany’s directors and executive officers and their immediate families as wellas the companies with which they may have interest in, have had loans with theCompany’s subsidiaries, Premier Commercial Bank, N.A., and/or PremierCommercial Bank Arizona, N.A. (the “Banks”) in the ordinary course of the Banks’business.  In addition, the Banks expectto have loans with these persons in the future. In the Company’s and the Banks’ management opinion, all these loans andcommitments to lend were made in the ordinary course of business, were made incompliance with applicable laws on substantially the same terms, includinginterest rates and collateral, as those prevailing for comparable transactionswith other persons of similar creditworthiness and, in the opinion ofmanagement, did not involve more than a normal risk of collectibility orpresent other unfavorable features.

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*Director Independence*

The Board has determinedthat each of the following non-employee directors is “independent” within themeaning of the listing standards and rules of NASDAQ.
| E. Eugene Hatz     | Richard T. Letwak |
|--------------------|-------------------|
| Robert C. Matranga | Steven Perryman   |
| Melvin W. Smith    | Ronald P. Thon    |
| Anthony M. Vitti   |              |

 

The Audit Committee iscomposed of Chairman Richard Letwak and Steve Perryman and Gene Hatz.  The Board has determined that each member ofthe Audit Committee is “independent” within the meaning of the rules andregulations of NASD.

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###  

**ITEM 13.               EXHIBITS**
|   | 3.1    | Articles of Incorporation as amended (A)                                                                                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                         |
|   | 3.2    | Bylaws as amended (A)                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                         |
|   | 4.1    | Specimen stock certificate (A)                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.1   | Premier Commercial Bank, N.A. Employees Retirement  Plan and Trust (Tiered Profit Sharing/401(k) Plan) (A)                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.2   | Premier Commercial Bank, N.A. 2001 Stock Option  Plan, as amended and form of Incentive and Nonqualified Stock Option  Agreements (A)                                                                                                        |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.3   | Premier Commercial Bancorp Restricted Stock Award  Plan and form of Executive Officer Restricted Stock Award Agreement, form of  Senior Officer Restricted Stock Award Agreement, and form of Director  Restricted Stock Award Agreement (A) |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.4   | Form of Board of Directors Retainer Agreement (A)                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.5   | Director Deferred Fee Agreement of Mel Smith dated  July 15, 2004 (A)                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.6   | Employment agreement of Kenneth J. Cosgrove dated  December 22, 2004 (A)                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.7   | Employment agreement of Ashokkumar Patel dated  December 22, 2004 (A)                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.8   | Salary continuation agreement dated April 1, 2004  between Kenneth J. Cosgrove and Premier Commercial Bank and Addendum A to the  agreement (A)                                                                                              |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.9   | Salary continuation agreement dated April 1, 2004  between Ashok R. Patel and Premier Commercial Bank and Addendum A to the  agreement (A)                                                                                                   |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.10  | Salary continuation agreement dated April 1, 2004  between Viktor R. Uehlinger and Premier Commercial Bank and Addendum A to the  agreement (A)                                                                                              |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.11  | Salary continuation agreement dated April 1, 2004  between Stephen W. Pihl and Premier Commercial Bank and Addendum A to the  agreement (A)                                                                                                  |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.12  | Lease for the property located at 2400 E. Katella  Avenue, Suite 125 (A)                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.13  | Lease for the property located at 2400 E. Katella  Avenue, Suite 200 (A)                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                         |
|   | 10.14  | Stock Purchase and Sale Agreement (B)                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                         |
|   | 14.1   | Code of Ethics (A)                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                         |
|   | 21.1   | Subsidiaries of the Registrant.                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                         |
|   | 31.1   | Certification of CEO pursuant to Section 302 of  Sarbanes-Oxley                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                         |
|   | 31.2   | Certification of CFO pursuant to Section 302 of  Sarbanes-Oxley                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                         |
|   | 32.1   | Certification of CEO pursuant to Section 906 of  Sarbanes-Oxley                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                         |
|   | 32.2   | Certification of CFO pursuant to Section 906 of  Sarbanes-Oxley                                                                                                                                                                              |

 

(A)  Previously filed as part of and is herebyincorporated by reference from, the Registration Statement form SB-2 filed withthe Commission on April 7, 2006.

(B)  Previously filed as part of and is herebyincorporated by reference from, the Form 8-K Filed with the Commission March 5,2007.

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**ITEM 14.               Principal Accountant Fees and Services**

The Board ofDirectors selected Vavrinek, Trine, Day & Co. LLP (“VTD”) as the Company’sindependent accountant for the fiscal year ended December 31, 2006. VTD auditedthe Company’s financial statements for the fiscal year ended December 31 2006,and has been the Company’s accountant since its incorporation. All professionalservices rendered by VTD concerning the fiscal year ended December 31, 2006,were furnished at customary rates and terms. The Audit Committee of the Boardof Directors ahs reviewed the non-audit services rendered by VTD and believesthat such services were compatible with maintaining independence.

The aggregate feesbilled by VTD for professional services rendered for the audit of the Company’sannual financial statements for the fiscal year ended December 31, 2006, andassistance with our SB-2 filing and for the reviews of the financial statementsincluded in the Company’s Annual Reports on Form 10-KSB and Quarterly Reportson Form 10-QSB for 2006 were $87,000.

Fees fortax-related services were billed by VTD to the Company in the amount of  $11,000 for the last fiscal year.

VTD did not billthe Company any fees related to products or services during 2006 other thanthose described above.

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**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

**PremierCommercial Bank, N.A.**
| Date:  | March 30, 2007 | **/s/**Kenneth J. Cosgrove | ** ** |
|--------|----------------|----------------------------|------------|
|   |           | Kenneth J. Cosgrove        |
|   |           | Chief Executive Officer,   |
|   |           | Chairman and Director      |
|   |           |                       |
|   |           |                       |
| Date:  | March 30, 2007 | **/s/**Viktor R. Uehlinger | ** ** |
|   |           | Viktor R. Uehlinger        |
|   |           | Chief Financial Officer,   |
|   |           | Secretary                  |

 

Inaccordance with the Securities Exchange Act, this report has been signed by thefollowing persons on behalf of the registrant and in the capacities on thedates indicated:
| Signature           |   | Title    |   | Date           |
|---------------------|--------|----------|--------|----------------|
|                |   |     |   |
| /s/ Gene Hatz       |   | Director |   | March 30, 2007 |
| Gene Hatz           |   |     |   |
|                |   |     |   |
| /s/ Richard Letwak  |   | Director |   | March 30, 2007 |
| Richard Letwak      |   |     |   |
|                |   |     |   |
| /s/ Robert Matranga |   | Director |   | March 30, 2007 |
| Robert Matranga     |   |     |   |
|                |   |     |   |
| /s/ Ashok Patel     |   | Director |   | March 30, 2007 |
| Ashok Patel         |   |     |   |
|                |   |     |   |
| /s/ Steve Perryman  |   | Director |   | March 30, 2007 |
| Steve Perryman      |   |     |   |
|                |   |     |   |
| /s/ Mel Smith       |   | Director |   | March 30, 2007 |
| Mel Smith           |   |     |   |
|                |   |     |   |
| /s/ Ronald P. Thon  |   | Director |   | March 30, 2007 |
| Ronald P. Thon      |   |     |   |
|                |   |     |   |
| /s/ Anthony Vitti   |   | Director |   | March 30, 2007 |
| Anthony Vitti       |   |     |   |

 

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