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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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(Mark One)



|x | Quarterly Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission
File Number: 333-135607



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Canyon Bancorp

(Exact name of registrant as specified in its charter)



|                                |  |                    
|------------------------------- |  | -------------------
|California                      |  | 20-4346215         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

1711 East Palm Canyon Drive, Palm Springs, CA 92264

(Address of principal executive offices)

(760) 325-4442

(Registrants telephone number, including area code)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



---

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

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

Transitional
Small Business Disclosure Format (check one): Yes ̈No  x

Number of shares outstanding of common stock, as of November 8, 2006 is 2,202,985.



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##### Table of Contents

TABLE OF CONTENTS



|                               |  |                                                                                       |  |   
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  | 2                                                                                    
|ITEM 1                         |  | Financial Statements                                                                  |  | 2 
|                               |  | Consolidated Balance Sheets (Unaudited)                                               |  | 3 
|                               |  | Consolidated Statements of Operations (Unaudited)                                     |  | 4 
|                               |  | Consolidated Statements of Cash Flows (Unaudited)                                     |  | 5 
|                               |  | Consolidated Statements of Comprehensive Income (Unaudited)                           |  | 6 
|                               |  | Notes to Unaudited Financial Statements                                               |  | 7 
|ITEM 2                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10
|ITEM 3                         |  | Controls and Procedures                                                               |  | 30
|PART II  OTHER INFORMATION    |  | 31                                                                                   
|ITEM 1                         |  | Legal Procedures                                                                      |  | 31
|ITEM 2                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 31
|ITEM 3                         |  | Defaults upon Senior Securities                                                       |  | 31
|ITEM 4                         |  | Submission of Matters to a Vote of Security Holders                                   |  | 31
|ITEM 5                         |  | Other Information                                                                     |  | 31
|ITEM 6                         |  | Exhibits                                                                              |  | 32
|SIGNATURES                     |  | 33                                                                                   



1



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##### Table of Contents

Part I - Financial Information

Item 1 - Financial Statements

The following interim financial statements of Canyon Bancorp (the
Company) are as of September 30, 2006 and December 31, 2005 and for the three months and nine months ended September 30, 2006 and 2005. The Company is a bank holding company that was incorporated on January 18, 2006,
under the laws of the State of California for the purpose of becoming the holding company for Canyon National Bank (the Bank). Shareholders of the Bank approved a one-bank holding company reorganization which was consummated on
June 30, 2006, pursuant to a Plan of Reorganization entered into on February 14, 2006. All outstanding shares of the Banks common stock were exchanged for shares of the Company on a one-for-one basis. Additionally, the Bank issued
100 shares of common stock to the Company. Therefore, the Company owns one hundred percent of the Bank as of June 30, 2006. In addition, each outstanding stock option granted previously to purchase the Banks common stock was converted
into an option to purchase the Companys common stock. Prior to the reorganization, the Company did not conduct any business operations.

Financial statements for September 30, 2006 and for the three and nine months ended September 30, 2006 are consolidated for the Company and the Bank. Financial statements for December 31, 2005 and for the three and nine
months ended September 30, 2005 are for the Bank only. These financial statements are unaudited and prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in
accordance with the instructions to Form 10-QSB. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. All significant intercompany accounts and transactions have been eliminated in
the consolidation. However, the financial statements reflect all adjustments (which include only normal recurring adjustments) which are, in the opinion of Management, necessary for a fair presentation of financial position, results of operations,
and cash flows for the interim periods presented and are normal and recurring.

Results for the periods as presented are not necessarily
indicative of results to be expected for the year as a whole.

Unaudited Consolidated Financial Statements

Consolidated Balance Sheets

As of
September 30, 2006 and December 31, 2005

Consolidated Statements of Operations

For the three months and nine months ended September 30, 2006 and 2005

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2006 and 2005

Consolidated Statements of Comprehensive Income

For the three months and nine months ended September 30, 2006 and 2005

Notes to the Unaudited
Consolidated Financial Statements



2



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CANYON BANCORP & SUBSIDIARY

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)



|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ------------------- | - | ------- | -
|                                                                                                                                                                             |  | 9/30/2006(Unaudited) |         |   | 12/31/2005(Audited) |  
|Assets                                                                                                                                                                       |  |                      |         |   |                     |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  | $                    | 13,212  |   |                     | $ | 27,576  |  
|Interest-bearing deposits in other financial institutions                                                                                                                    |  |                      | 3,000   |   |                     |   | 3,400   |  
|Investment securities available for sale                                                                                                                                     |  |                      | 22,617  |   |                     |   | 24,702  |  
|Federal Home Loan Bank and Federal Reserve Bank and Pacific Coast Bankers Bank restricted stock, at cost                                                                    |  |                      | 1,540   |   |                     |   | 1,412   |  
|Loans held for sale                                                                                                                                                          |  |                      |        |   |                     |   | 782     |  
|Loans receivable, net                                                                                                                                                        |  |                      | 199,747 |   |                     |   | 171,833 |  
|Furniture, fixtures and equipment                                                                                                                                            |  |                      | 4,593   |   |                     |   | 4,444   |  
|Income tax receivable                                                                                                                                                        |  |                      |        |   |                     |   | 69      |  
|Deferred tax asset                                                                                                                                                           |  |                      | 1,632   |   |                     |   | 1,384   |  
|Other assets                                                                                                                                                                 |  |                      | 1,699   |   |                     |   | 3,638   |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Total Assets                                                                                                                                                                 |  | $                    | 248,040 |   |                     | $ | 239,240 |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                         |  |                      |         |   |                     |   |         |  
|Deposits:                                                                                                                                                                    |  |                      |         |   |                     |   |         |  
|Demand deposits                                                                                                                                                              |  | $                    | 82,909  |   |                     | $ | 85,142  |  
|NOW accounts                                                                                                                                                                 |  |                      | 7,940   |   |                     |   | 8,271   |  
|Savings and money market                                                                                                                                                     |  |                      | 78,266  |   |                     |   | 89,642  |  
|Time certificate of deposits                                                                                                                                                 |  |                      | 54,233  |   |                     |   | 35,471  |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Total Deposits                                                                                                                                                               |  |                      | 223,348 |   |                     |   | 218,526 |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Other Liabilities                                                                                                                                                            |  |                      | 1,729   |   |                     |   | 1,263   |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Total Liabilities                                                                                                                                                            |  |                      | 225,077 |   |                     |   | 219,789 |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Commitments and contingencies                                                                                                                                                |  |                      |        |   |                     |   |        |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Stockholders Equity:                                                                                                                                                        |  |                      |         |   |                     |   |         |  
|Serial Preferred Stock, $5.00 par value; authorized 10,000,000 shares; none issued or outstanding                                                                            |  |                      |        |   |                     |   |        |  
|Common Stock, no par value; authorized 10,000,000 shares; 2,191,885 and 2,160,655 shares issued and outstanding as of September 30, 2006
and December 31, 2005, respectively |  |                      | 17,621  |   |                     |   | 5,402   |  
|Additional paid-in capital                                                                                                                                                   |  |                      |        |   |                     |   | 11,888  |  
|Accumulated other comprehensive income unrealized loss on investment securities available-for-sale                                                                           |  |                      | (140    | ) |                     |   | (234    | )
|Retained earnings                                                                                                                                                            |  |                      | 5,482   |   |                     |   | 2,395   |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Total Stockholders Equity                                                                                                                                                   |  |                      | 22,963  |   |                     |   | 19,451  |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                                                   |  | $                    | 248,040 |   |                     | $ | 239,240 |  
|                                                                                                                                                                             |  |                      |         |   |                     |   |         |  

See accompanying notes to consolidated financial statements.



3



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CANYON BANCORP & SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

For the three and nine months
ended September 30, 2006 and 2005

(Dollars in thousands, except per share amounts)



|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|--------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------ | - | --------- |  | - | --------- | - |  | - | --------- | -
|                                                          |  | Three months endedSeptember 30, |           | Nine months endedSeptember 30, |  
|                                                          |  | 2006                            |           | 2005                           |   | 2006      |  |   | 2005      |  
|Interest income:                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Loans receivable                                          |  | $                               | 4,528     |                                | $ | 3,347     |  | $ | 12,508    |   |  | $ | 9,369     |  
|Federal funds sold                                        |  |                                 | 164       |                                |   | 126       |  |   | 646       |   |  |   | 298       |  
|Interest bearing deposits in other financial institutions |  |                                 | 31        |                                |   | 29        |  |   | 119       |   |  |   | 57        |  
|Investment securities available for sale                  |  |                                 | 239       |                                |   | 228       |  |   | 714       |   |  |   | 699       |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Total Interest Income                                     |  |                                 | 4,962     |                                |   | 3,730     |  |   | 13,987    |   |  |   | 10,423    |  
|Interest expense on deposits and other borrowings         |  |                                 | 1,134     |                                |   | 534       |  |   | 2,875     |   |  |   | 1,335     |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Net Interest Income                                       |  |                                 | 3,828     |                                |   | 3,196     |  |   | 11,112    |   |  |   | 9,088     |  
|Provision for loan losses                                 |  |                                 | 100       |                                |   | 150       |  |   | 425       |   |  |   | 450       |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Net Interest Income After Provision for Loan Losses       |  |                                 | 3,728     |                                |   | 3,046     |  |   | 10,687    |   |  |   | 8,638     |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Noninterest income:                                       |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Service charges and fees                                  |  |                                 | 144       |                                |   | 124       |  |   | 423       |   |  |   | 381       |  
|Loan related fees                                         |  |                                 | 130       |                                |   | 135       |  |   | 431       |   |  |   | 345       |  
|Lease administration fees                                 |  |                                 | 299       |                                |   | 268       |  |   | 974       |   |  |   | 871       |  
|Automated teller machine fees                             |  |                                 | 149       |                                |   | 135       |  |   | 448       |   |  |   | 453       |  
|Net loss on disposition of fixed assets                   |  |                                 |          |                                |   |          |  |   | (3        | ) |  |   | (5        | )
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Total Noninterest Income                                  |  |                                 | 722       |                                |   | 662       |  |   | 2,273     |   |  |   | 2,045     |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Noninterest expenses:                                     |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Salaries and employee benefits                            |  |                                 | 1,373     |                                |   | 1,130     |  |   | 4,075     |   |  |   | 3,270     |  
|Occupancy and equipment expense                           |  |                                 | 392       |                                |   | 313       |  |   | 1,087     |   |  |   | 952       |  
|Professional fees                                         |  |                                 | 102       |                                |   | 67        |  |   | 268       |   |  |   | 223       |  
|Data processing                                           |  |                                 | 138       |                                |   | 106       |  |   | 401       |   |  |   | 334       |  
|Marketing and advertising expense                         |  |                                 | 99        |                                |   | 87        |  |   | 320       |   |  |   | 261       |  
|Director and shareholder expense                          |  |                                 | 112       |                                |   | 75        |  |   | 364       |   |  |   | 263       |  
|Other operating expense                                   |  |                                 | 396       |                                |   | 333       |  |   | 1,218     |   |  |   | 945       |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Total Noninterest Expenses                                |  |                                 | 2,612     |                                |   | 2,111     |  |   | 7,733     |   |  |   | 6,248     |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Earnings before income taxes                              |  |                                 | 1,838     |                                |   | 1,597     |  |   | 5,227     |   |  |   | 4,435     |  
|Income Tax Expense                                        |  |                                 | 760       |                                |   | 657       |  |   | 2,140     |   |  |   | 1,823     |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Net earnings                                              |  | $                               | 1,078     |                                | $ | 940       |  | $ | 3,087     |   |  | $ | 2,612     |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Earnings Per Share:                                       |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Basic                                                     |  | $                               | 0.49      |                                | $ | 0.44      |  | $ | 1.42      |   |  | $ | 1.23      |  
|Diluted                                                   |  | $                               | 0.47      |                                | $ | 0.44      |  | $ | 1.34      |   |  | $ | 1.14      |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Weighted Average Shares Outstanding:                      |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  
|Basic                                                     |  |                                 | 2,184,944 |                                |   | 2,149,249 |  |   | 2,175,842 |   |  |   | 2,130,762 |  
|Diluted                                                   |  |                                 | 2,295,595 |                                |   | 2,169,031 |  |   | 2,297,835 |   |  |   | 2,279,366 |  
|                                                          |  |                                 |           |                                |   |           |  |   |           |   |  |   |           |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

CANYON BANCORP & SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

For the nine-months ended
September 30, 2006 and 2005

(Dollars in thousands)



|                                                                                   |  |                   |         |   |                   |   |         |  
|---------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                   |  | September 30,2006 |         |   | September 30,2005 |  
|Operating Activities:                                                              |  |                   |         |   |                   |   |         |  
|Net earnings                                                                       |  | $                 | 3,087   |   |                   | $ | 2,612   |  
|Adjustment to reconcile net earnings to net cash provided by operating activities: |  |                   |         |   |                   |   |         |  
|Amortization of deferred loan origination fees                                     |  |                   | (904    | ) |                   |   | (745    | )
|Depreciation of fixed assets                                                       |  |                   | 421     |   |                   |   | 418     |  
|Amortization of premium/discounts on investment securities, net                    |  |                   | (119    | ) |                   |   | (6      | )
|Net loss on disposition of fixed assets                                            |  |                   | 3       |   |                   |   | 5       |  
|FHLB stock dividends received                                                      |  |                   | (35     | ) |                   |   | (22     | )
|Provision for loan losses                                                          |  |                   | 425     |   |                   |   | 450     |  
|Net decrease in loans held for sale                                                |  |                   | 782     |   |                   |   |        |  
|Increase/(decrease) in other assets                                                |  |                   | 1,939   |   |                   |   | (268    | )
|Decrease in incomes tax receivable                                                 |  |                   | 69      |   |                   |   | 456     |  
|Increase is deferred tax asset                                                     |  |                   | (134    | ) |                   |   |        |  
|Increase in other liabilities                                                      |  |                   | 466     |   |                   |   | 703     |  
|Excess tax benefit from share-based payment arrangements                           |  |                   | (176    | ) |                   |   | (256    | )
|                                                                                   |  |                   |         |   |                   |   |         |  
|Net cash provided by operating activities                                          |  |                   | 5,824   |   |                   |   | 3,347   |  
|                                                                                   |  |                   |         |   |                   |   |         |  
|Investing Activities:                                                              |  |                   |         |   |                   |   |         |  
|Net increase in loans                                                              |  |                   | (27,435 | ) |                   |   | (13,494 | )
|Purchase of investment securities available for sale                               |  |                   | (6,878  | ) |                   |   | (11,975 | )
|Purchase of FHLB/FRB Stock                                                         |  |                   | (93     | ) |                   |   | (282    | )
|Proceeds from maturing investment securities available for sale                    |  |                   | 8,000   |   |                   |   | 14,000  |  
|Principal repayment of investment securities available for sale                    |  |                   | 1,238   |   |                   |   | 1,802   |  
|Increase/(decrease) in interest bearing deposits in other financial institutions   |  |                   | 400     |   |                   |   | (3,300  | )
|Proceeds from disposition of fixed assets                                          |  |                   |        |   |                   |   | 3       |  
|Purchases of premises and equipment                                                |  |                   | (573    | ) |                   |   | (462    | )
|                                                                                   |  |                   |         |   |                   |   |         |  
|Net cash used in investing activities                                              |  |                   | (25,341 | ) |                   |   | (13,708 | )
|                                                                                   |  |                   |         |   |                   |   |         |  
|Financing Activities:                                                              |  |                   |         |   |                   |   |         |  
|Net increase/(decrease) in deposits non-term deposits                              |  |                   | (13,940 | ) |                   |   | 17,793  |  
|Net increase in time certificates of deposit                                       |  |                   | 18,762  |   |                   |   | 8,819   |  
|Cash paid in lieu of fractional shares                                             |  |                   |        |   |                   |   | (6      | )
|Proceeds for exercise of stock options                                             |  |                   | 155     |   |                   |   | 189     |  
|Excess tax benefit from shared-based payment arrangements                          |  |                   | 176     |   |                   |   | 256     |  
|                                                                                   |  |                   |         |   |                   |   |         |  
|Net cash provided by financing activities                                          |  |                   | 5,153   |   |                   |   | 27,051  |  
|                                                                                   |  |                   |         |   |                   |   |         |  
|Net Increase in Cash and Cash Equivalents                                          |  |                   | (14,364 | ) |                   |   | 16,690  |  
|Cash and Cash Equivalents at the Beginning of the Period                           |  |                   | 27,576  |   |                   |   | 16,637  |  
|                                                                                   |  |                   |         |   |                   |   |         |  
|Cash and Cash Equivalents at the End of the Period                                 |  | $                 | 13,212  |   |                   | $ | 33,327  |  
|                                                                                   |  |                   |         |   |                   |   |         |  
|Supplemental Disclosure of Cash Flow Information:                                  |  |                   |         |   |                   |   |         |  
|Interest Paid                                                                      |  | $                 | 2,772   |   |                   | $ | 1,295   |  
|                                                                                   |  |                   |         |   |                   |   |         |  
|Taxes Paid                                                                         |  | $                 | 2,205   |   |                   | $ | 1,645   |  
|                                                                                   |  |                   |         |   |                   |   |         |  
|Non-Cash Investing Activities:                                                     |  |                   |         |   |                   |   |         |  
|Change in unrealized loss on investment securities available-for-sale              |  | $                 | 156     |   |                   | $ | (143    | )
|                                                                                   |  |                   |         |   |                   |   |         |  
|Income tax benefit from stock options exercised                                    |  | $                 | 176     |   |                   | $ | 245     |  
|                                                                                   |  |                   |         |   |                   |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

CANYON BANCORP & SUBSIDIARY

Consolidated Statements of Comprehensive Income

(Unaudited)

For the three-months and
six-months ended September 30, 2006 and 2005

(Dollars in Thousands)



|                                                                                                                                                                                                                                                                                              |  |                                  |       |      |                                 |     |      |  |      |       |  |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | ------------------------------- | --- | ---- |  | ---- | ----- |  | - | ----- | -
|                                                                                                                                                                                                                                                                                              |  | Three months ended September 30, |       |      | Nine months ended September 30, |    
|                                                                                                                                                                                                                                                                                              |  | 2006                             |       | 2005 |                                 |     | 2006 |  | 2005 |      
|Net earnings                                                                                                                                                                                                                                                                                  |  | $                                | 1,078 |      | $                               | 940 |      |  | $    | 3,087 |  | $ | 2,612 |  
|Other comprehensive income:                                                                                                                                                                                                                                                                   |  |                                  |       |      |                                 |     |      |  |      |       |  |   |       |  
|Unrealized gain/(loss) on investment securities available-for-sale, net of related income tax expense (benefit) of $106 and ($37) for the
three-months ended September 30, 2006 and 2005, respectively, and $63 and ($56) for the nine months ended September 30, 2006 and 2005, respectively |  |                                  | 158   |      |                                 | (55 | )    |  |      | 93    |  |   | (87   | )
|                                                                                                                                                                                                                                                                                              |  |                                  |       |      |                                 |     |      |  |      |       |  |   |       |  
|Comprehensive income                                                                                                                                                                                                                                                                          |  | $                                | 1,236 |      | $                               | 885 |      |  | $    | 3,180 |  | $ | 2,525 |  
|                                                                                                                                                                                                                                                                                              |  |                                  |       |      |                                 |     |      |  |      |       |  |   |       |  

See accompanying notes to consolidated financial statements.



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Notes to the Unaudited Consolidated Financial Statements



|1. | The Board of Directors of the Bank has declared the following stock dividends since the beginning of the periods covered by this report.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------



|                  |  |                  |  |                   |  |                  
|----------------- |  | ---------------- |  | ----------------- |  | -----------------
|Declaration Date  |  | Record Date      |  | Payment Date      |  | Rate/Type        
|April 19, 2005    |  | May 6, 2005      |  | May 24, 2005      |  | 5% stock dividend
|November 22, 2005 |  | December 7, 2005 |  | December 22, 2005 |  | 5% stock dividend

All share and per share amounts have been restated to reflect the increased number of shares
outstanding.



|2. | Current Accounting Pronouncements
|-- | ---------------------------------

FAIR VALUE
MEASUREMENTS: In September 2006 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value
measurements, FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for the fiscal year, including financial statements for an interim
period within that fiscal year.

POSTRETIREMENT PLANS: Also in September 2006, FASB issued Statement of Financial Accounting
Standards (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, which improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income
of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of
the fiscal year ending after December 15, 2006. The Company, which is an employer without publicly traded equity securities, is required to recognize the funded status of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after June 15, 2007.

SHARE-BASED PAYMENT: Effective January 1, 2006,
the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No.123(R)), using the modified prospective transition method and,
therefore, have not restated results for prior periods. Under this transition method, beginning in 2006 stock-based compensation expense is included in compensation expense for all stock-based compensation awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). However, the Company
incurred no share-based compensation expense during 2006 in that all options outstanding as of December 31, 2005 have been fully vested and no option grants were made in 2006 to date. Stock-based compensation expense for all stock-based
compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company has issued no options to date in 2006. Prior to the January 1, 2006
adoption of SFAS No. 123(R), the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). Accordingly,
the Company previously recognized no compensation cost for employee stock options. In March 2005, the Securities and Exchange Commission (the SEC) issued Staff Accounting Bulletin No. 107 (SAB No. 107) regarding the SECs
interpretation of SFAS No. 123(R) and the valuation of share-based payments for public companies. We have applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). See Note 3 to the Unaudited Consolidated Financial
Statements for a further discussion on stock-based compensation. There was no material impact to the Companys income before taxes for the adoption of SFAS No. 123(R).



7



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ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS: In March 2006, the Financial Accounting Standards
Board (FASB) issued SFAS No. 156, Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the
amortization method or fair value method for subsequent balance sheet reporting periods. SFAS No. 156 is effective as of an entity's first fiscal year beginning after September 15, 2006. Early adoption is permitted
as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.

ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS: In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140. SFAS No. 155 simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, by allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No. 133 Implementation
Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets, which provides such beneficial interests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125, by eliminating the restriction on passive derivative instruments that a qualifying
special-purpose entity may hold. This statement is effective for financial instruments acquired or issued after the beginning of our fiscal year 2007.

ACCOUNTING CHANGES AND ERROR CORRECTIONS: In May 2005, the FASB issued SFAS No. 154, Accounting for Changes and Error Corrections, which changes the accounting for and reporting of a change in
accounting principle. This statement also applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.
This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impractical to determine either the period - specific or cumulative effects of the change. SFAS No. 154 was
effective for accounting changes made in fiscal years beginning after December 15, 2005.

ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES: In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for
fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of application of FIN 48 these will be accounted for as an adjustment to retained earnings. The Company is currently assessing the impact of FIN 48
on its consolidated position and result of operations.



8



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##### Table of Contents

The following table presents the effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 in 2005.



|                                                                                               |  |                                                                                        |           |   |                                                                                       |           |  
|---------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------- | --------- | - | ------------------------------------------------------------------------------------- | --------- | -
|                                                                                               |  | For the Three Months Ended September 30, 2005 (dollars in thousands, except per share) |           |   | For the Nine Months Ended September 30, 2005 (dollars in thousands, except per share) |          
|Net income:                                                                                    |  |                                                                                        |           |   |                                                                                       |           |  
|As reported                                                                                    |  | $                                                                                      | 940       |   |                                                                                       | 2,612     |  
|Stock-based compensation using the intrinsic value method                                      |  |                                                                                        |          |   |                                                                                       |          |  
|Stock-based compensation that would have been reported using the fair value method of SFAS 123 |  |                                                                                        | (85       | ) |                                                                                       | (94       | )
|                                                                                               |  |                                                                                        |           |   |                                                                                       |           |  
|Pro forma net income                                                                           |  | $                                                                                      | 855       |   |                                                                                       | 2,518     |  
|                                                                                               |  |                                                                                        |           |   |                                                                                       |           |  
|Weighted Average Shares Outstanding - Basic                                                    |  |                                                                                        | 2,149,249 |   |                                                                                       | 2,130,762 |  
|Weighted Average Outstanding - Diluted                                                         |  |                                                                                        | 2,169,031 |   |                                                                                       | 2,279,366 |  
|Basic earnings per share:                                                                      |  |                                                                                        |           |   |                                                                                       |           |  
|As reported                                                                                    |  | $                                                                                      | 0.44      |   |                                                                                       | 1.23      |  
|Pro forma                                                                                      |  |                                                                                        | 0.40      |   |                                                                                       | 1.18      |  
|Diluted earnings per share:                                                                    |  |                                                                                        |           |   |                                                                                       |           |  
|As reported                                                                                    |  | $                                                                                      | 0.44      |   |                                                                                       | 1.14      |  
|Pro forma                                                                                      |  |                                                                                        | 0.40      |   |                                                                                       | 1.10      |  

The following table presents the activity related to options for the nine months ended September 30, 2006.



|                                          |  |         |   |  |                                 |       |                                       |    
|----------------------------------------- |  | ------- | - |  | ------------------------------- | ----- | ------------------------------------- | ---
|                                          |  | Options |   |  | Weighted Average Exercise Price |       | Weighted Average Remaining Term (yrs)
|Options outstanding at December 31, 2005  |  | 236,931 |   |  | $                               | 8.48  |                                       |    
|Granted                                   |  |        |   |  |                                 |       |                                       |    
|Canceled                                  |  | (1,565  | ) |  | $                               | 24.73 |                                       |    
|Exercised                                 |  | (31,230 | ) |  | $                               | 4.94  |                                       |    
|                                          |  |         |   |  |                                 |       |                                       |    
|Options outstanding at September 30, 2006 |  | 204,136 |   |  | $                               | 8.90  |                                       | 4.6
|                                          |  |         |   |  |                                 |       |                                       |    
|Options exercisable at September 30, 2006 |  | 204,136 |   |  | $                               | 8.90  |                                       | 4.6



|4. | Reclassifications
|-- | -----------------

Certain reclassifications were made to
prior year presentations to conform to the current year. These reclassifications are of a normal recurring nature.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Introduction

The Company is a bank holding company with a single banking subsidiary. The Company was
incorporated on January 18, 2006, for the purpose of acquiring Canyon National Bank. Effective June 30, 2006, the Company acquired all of the stock of the Bank pursuant to a Plan of Reorganization dated February 14, 2006 between the
Company and the Bank. Pursuant to the Plan of Reorganization, the shares of the Banks common stock were exchanged for shares of the common stock of the Company on a share-for-share basis. As a result, upon the consummation of the
reorganization on June 30, 2006, the Bank became a wholly-owned subsidiary of the Company and the shareholders of the Bank became the shareholders of the Company. The Bank is a national banking association which was organized on March 6,
1998, and is headquartered in Palm Springs, California. Palm Springs is located in the Coachella Valley, which is located within Riverside County in Southern California. The Bank received its charter to commence the business of banking from the
Office of the Comptroller of the Currency (OCC) on July 10, 1998. Concurrent with OCC approval, FDIC deposit insurance became effective and began insuring depositors accounts up to $100,000. In July 1998, the Bank opened for
business and commenced banking operations at its main office located at 1711 East Palm Canyon Drive, Palm Springs, California. In addition to its main office, the Bank has three branch offices, one in Palm Springs and two in Palm Desert. The
Banks most recently opened branch, located at 77-933 Las Montanas Road, Palm Desert, California, commenced operations on March 23, 2006

As of November 8, 2006, the Companys 2,202,985 shares of Common Stock are held by 306 shareholders of record. Common Stock of the Company is traded on the OTC Bulletin Board under the symbol CYBA.

Forward Looking Statements

This Form 10-QSB includes
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. Words such as expects, anticipates, believes,
projects, and estimates or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, forecast in, or implied by such forward looking statements.

A variety of factors could have a material adverse impact on the Companys financial condition or results of operations, and should be considered
when evaluating the potential future financial performance of the Company. These include, but are not limited to, the possibility of deterioration in economic conditions in the Coachella Valley, the Companys service area; risks associated with
fluctuations in interest rates; liquidity risks; asset/liability matching risks; the competitive environment in which the Company operates and its impact upon the Companys net interest margin; increases in non-performing assets and net credit
losses that could occur, particularly in times of weak economic conditions or rising interest rates; and risks associated with the many current and future laws and regulations to which the Company is subject.

Critical Accounting Policies

The Companys
accounting policies are integral to understanding the results reported. Most complex accounting policies require Managements judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. The Company has established
detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing
methodologies occurs in an appropriate manner. The following is a brief description of current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses

The allowance for loan losses represents Managements best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans
charged-off, net of recoveries.

Management evaluates the allowance for loan losses on a monthly basis. Management believes that the
allowance for loan losses is a critical accounting estimate because it is based upon Managements assessment of



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##### Table of Contents

various factors affecting the collectibility of the loans, including current and projected economic conditions, past credit experience, delinquency status,
the value of the underlying collateral, if any, and a continuing review of the portfolio of loans and commitments. The Company determines the appropriate level of the allowance for loan losses, primarily based on an analysis of the various
components of the loan portfolio, including all significant credits on an individual basis. The loan portfolio is segmented into components. Each component would normally have similar characteristics, such as risk classification, type of loan, or
collateral. The following components of the portfolio are analyzed and an allowance for loan losses is provided for:



| |  |  | All significant credits on an individual basis that are classified doubtful or substandard.
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | All other significant credits reviewed individually. If no allocation can be determined for such credits on an individual basis, they shall be provided for as part of an appropriate
pool.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All other loans that are not included by our credit grading system in the population of loans reviewed individually, but are delinquent or are classified or designated special
mention (e.g., pools of smaller delinquent, special mention and classified commercial and industrial and real estate loans).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Homogenous loans that have not been reviewed individually, or are not delinquent, classified, or designated as special mention (e.g., pools of real estate mortgages).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All other loans that have not been considered or provided for elsewhere (e.g., pools of commercial and industrial loans that have not been reviewed, classified, or designated
special mention, standby letters of credit, and other off-balance sheet commitments to lend).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although Management believes
the level of the allowance for loan losses at September 30, 2006 is adequate to absorb losses inherent in the loan portfolio, a decline in the regional economy may result in increasing losses that cannot reasonably be predicted at this time.
For further information regarding the allowance for loan losses, see Financial ConditionAllowance for Loan Losses.

Available for Sale Securities

SFAS 115 requires that available for sale securities be carried at
fair value. The Company believes this is a critical accounting estimate in that the fair value of a security is based on quoted market prices or if quoted market prices are not available, fair values are extrapolated from the quoted
prices of similar instruments. Adjustments to the fair value of available for sale securities impact the consolidated financial statements by increasing or decreasing assets and stockholders equity.

Deferred Tax Assets

Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The
Company uses an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to
which they may be applied, the asset may not be realized and net income will be reduced.

Summary of Performance

Financial Condition Summary

The Companys total assets were $248.0 million at September 30, 2006, an increase of $8.8 million, or 3.7%, compared to total assets at December 31, 2005. The most significant changes in the Companys balance sheet
during the first nine months of 2006 are outlined below:



| |  |  | Net loans increased $27.1 million or 15.7% from December 31, 2005. Strong demand in the Coachella Valley market area contributed to the increase in net loans.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Investment securities available for sale decreased $2.1 million or 8.4% from December 31, 2006. The company added approximately $6.9 million in securities available for sale
during the first nine months of 2006, which were offset by principal repayments and maturities totaling $9.2 million for the same period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Total deposits increased $4.8 million or 2.2% from December 31, 2006, with noninterest-bearing demand deposits decreasing $2.2 million or 2.6% and interest-bearing deposits
increasing $7.0 million or 5.3%. The rise in market interest rates has attracted new depositors and led to a shift in existing deposit relationships from noninterest-bearing, savings and money market accounts to higher yielding time certificates of
deposit.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For additional information please see the section Financial Condition, below, starting on page 13.

Results of Operations Summary

Third quarter analysis. Net income in the third quarter of 2006 was $1,078,000, an increase of $138,000, or 14.7%, over the same period in 2005. Basic and diluted earnings per share were $0.49 and $0.47,
respectively for the three months ended September 30, 2006. This compares with $0.44 basic and diluted earnings per share for the same period in 2005. Return on average assets and return on average equity for the quarter ended
September 30, 2006 were 1.69% and 19.10%, respectively, as compared to 1.65% and 20.71%, respectively, for the same period in 2005.

The primary drivers behind the variance in net income for the quarter ended September 30, 2006 relative to the same period in 2005 are as follows:



| |  |  | Net interest income before provision for loan losses increased by $632,000, or 19.8%. This was due to an increase in average total loans and interest rates earned on those loans,
offset by an increase in interest rates paid on interest-bearing deposits and an increase in average total time certificates of deposit. The Companys net interest margin rose 35 basis points to 6.44%.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The provision for loan losses decreased $50,000, or 33.3%. The allowance for loan losses as of September 30, 2006 was 1.65% of total gross loans and was determined to be
acceptable by management.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest income increased $60,000, or 9.1%, due to higher service charges, lease administration fees and ATM fees.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest expense increased $501,000, or 23.7%, due principally to higher personnel costs, occupancy/equipment expense and data processing expense. $159,000 of this increase was
incurred for the Companys new Palm Desert branch, which was opened in March 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Nine month analysis. Net
income for the nine months ended September 30. 2006 was $3,087,000, an increase of $475,000, or 18.2%, over the same period in 2005. Basic and diluted earnings per share were $1.42 and $1.34, respectively for the nine months ended
September 30, 2006. This compares with $1.23 basic and $1.14 diluted earnings per share for the same period in 2005. Return on average assets and return on average equity for the nine months ended September 30, 2006 were 1.66% and 19.42%,
respectively, as compared to 1.57% and 20.63%, respectively, for the same period in 2005.

The primary drivers behind the variance in net
income for the nine months ended September 30, 2006 relative to the same period in 2005 are as follows:



| |  |  | Net interest income before provision for loan losses increased by $2,024,000, or 22.3%. This was due to an increase in average total loans and interest rates earned on those loans,
offset by an increase in interest rates paid on interest-bearing deposits and an increase in average total time certificates of deposit. The Companys net interest margin rose 48 basis points to 6.45%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The provision for loan losses decreased $25,000, or 5.6%. During the first nine months of 2006, charge-offs totaled $55,000 and recoveries totaled $57,000 compared to $85,000 in
charge-offs and $26,000 in recoveries for the same period in 2005. The allowance for loan losses as of September 30, 2006 and 2005 were 1.65% and 1.78%, respectively, of total gross loans.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest income increased $228,000, or 11.1%, due to higher service charges, lease administration fees and loan fees related to the Indian Home Loan Guarantee Program
(Section 184).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Noninterest expense increased $1,485,000, or 23.8%, due principally to higher personnel costs, occupancy/equipment expense and data processing expense. $377,000 of this increase was
incurred for the Companys new Palm Desert branch, which was opened in March 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For additional information please
see Results of Operations, below, starting on page 20.

Financial Condition

At September 30, 2006, total assets were $248.0 million compared to $239.2 million at December 31, 2005, resulting in an $8.8 million or 3.7%
increase in total assets over the nine-month period. Over this same nine-month period, net loans increased by $27.1 million or 15.7%, investment securities available for sale and interest bearing deposits in other financial institutions decreased by
$2.5 million or 8.8% and cash and cash equivalents decreased by $14.4 million or 52.1%. At September 30, 2006 and December 31, 2005, net loans comprised 80.5% and 71.8%, respectively, of total assets and the loan portfolio represented
89.4% and 78.6%, respectively, of deposits.

Loan Portfolio

The increase in loans from year-end 2005 to September 30, 2006 is primarily the result of an increase in construction loans. From year-end 2005,
gross loans increased by $28.3 million to $204.0 million at September 30, 2006. The largest loan category at September 30, 2006 is real estate loansexcluding construction loanswhich constitutes 54.3% of gross loans. Included in
these real estate loans are $70.5 million in commercial real estate loans, of which 59% were exclusively or substantially owner occupied. The next largest loan concentrations are construction loans (25.6% of gross loans) and commercial loans (17.0%
of gross loans) secured by non-real estate assets or made on an unsecured basis. Loans to consumers (that are not secured by real estate), including vehicle and unsecured personal loans, make up the smallest category of loans held by the Company
(3.1% of gross loans). With the exception of loans to Native Americans, a majority of the Companys loans are made by borrowers residing, or doing business, within the Coachella Valley and surrounding area. When collateral is used to secure a
loan, the collateral is generally secured by property located within the Coachella Valley. Loans to Native Americans are generally located throughout the State of California.

As a market niche, the Company has strategically identified lending to Native American individuals, tribal governments, and tribal related entities. It
is the Companys general policy to obtain a limited waiver of sovereign immunity to protect collateral or an income stream when collateral or a business is located on a reservation or the business is operated by a Native American government or
related entity. Total loans to Native American individuals, governments and related entities at September 30, 2006 total $25.2 million, or 12.3% of gross loans. Certain of the loans are guaranteed by the United States Government. At that same
date, loan balances of $16.1 million are guaranteed by the United States Bureau of Indian Affairs.



13



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##### Table of Contents

The composition of the Companys loan portfolio at September 30, 2006 and December 31,
2005 is set forth below:

Loan Portfolio Composition

(dollars in thousands)



|                                                           |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  
|---------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | ----- | - | ------ | - | ------- | ------- |  | ----- | -
|                                                           |  | September 30 2006 |         |   | December 31, 2005 |      
|                                                           |  | Amount            |         |   | Percent           |       |   | Amount |   |         | Percent | 
|Real estate:                                               |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  
|Construction                                               |  | $                 | 52,272  |   |                   | 25.6  | % |        | $ | 34,947  |         |  | 19.9  | %
|Other                                                      |  |                   | 110,763 |   |                   | 54.3  | % |        |   | 100,731 |         |  | 57.3  | %
|Commercial                                                 |  |                   | 34,592  |   |                   | 17.0  | % |        |   | 35,584  |         |  | 20.3  | %
|Consumer                                                   |  |                   | 6,376   |   |                   | 3.1   | % |        |   | 4,457   |         |  | 2.5   | %
|                                                           |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  
|Gross loans                                                |  |                   | 204,003 |   |                   | 100.0 | % |        |   | 175,719 |         |  | 100.0 | %
|                                                           |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  
|Deferred loan origination fees and costs                   |  |                   | (890    | ) |                   |       |   |        |   | (947    | )       |  |       |  
|Allowance for loan losses                                  |  |                   | (3,366  | ) |                   |       |   |        |   | (2,939  | )       |  |       |  
|                                                           |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  
|Net loans                                                  |  | $                 | 199,747 |   |                   |       |   |        | $ | 171,833 |         |  |       |  
|                                                           |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  
|Loans held for sale                                        |  | $                 |        |   |                   |       |   |        | $ | 782     |         |  |       |  
|                                                           |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  
|Principal balance guaranteed by federally insured programs |  | $                 | 16,085  |   |                   |       |   |        | $ | 18,096  |         |  |       |  
|                                                           |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  
|Principal balance outstanding to Native American entities  |  | $                 | 25,171  |   |                   |       |   |        | $ | 24,904  |         |  |       |  
|                                                           |  |                   |         |   |                   |       |   |        |   |         |         |  |       |  

The weighted average interest rate on the loan portfolio at September 30, 2006, is
8.70%1. At September 30, 2006, ninety-one percent (91%) or $185.9 million of loan principal balances
incorporate variable rate terms that reference an interest rate index such as Prime Rate, or a United States Treasury instrument. The outstanding principal balance of variable rate loans scheduled to adjust over the next twelve months is $141.5
million with $23.0 million scheduled to adjust from October 2007 to September 2008. Eighty-nine percent (89%), or $165.1 million, of variable rate loans are indexed to Prime Rate. The principal balance outstanding of fixed rate loans with maturity
dates five years or more into the future total approximately $6.5 million and $3.1 million at September 30, 2006 and December 31, 2005, respectively.

Off-Balance Sheet Arrangements

During the ordinary course of business, the Company provides various forms of credit facilities to meet the financing needs of its clients. These commitments to provide credit represent an obligation of the Company to
its clients, which is not represented within the Companys balance sheets. At September 30, 2006 and December 31, 2005, the Company had $67.4 million and $66.3 million, respectively, of off-balance sheet commitments to fund certain
loans. The composition of unfunded off-balance sheet loan commitments at September 30, 2006 is 53.3% undisbursed construction loans, 36.7% unused lines of credit, 4.2% unused home equity lines of credit, and 5.8% obligations under letters of
credit. These commitments represent a credit risk and potential future obligation of the Company.

---

|1 | Weighted average interest rate incorporates the amortization of deferred loan fees and costs along with the interest rate paid by borrowers.
|- | --------------------------------------------------------------------------------------------------------------------------------------------



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The effect on the Companys revenues, expenses, cash flows and liquidity from the unused portion of
loan commitments to provide credit cannot be reasonably predicted because there is no assurance that the lines of credit or other commitments will ever be used. However, unfunded commitments related to undisbursed construction loans are generally
predictable in that disbursements on these loan types are used to facilitate the completion of construction of residential or commercial properties.

Non-performing Assets

Non-performing assets are comprised of loans on non-accrual status, loans
restructured where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (OREO). Loans are generally placed on non-accrual status when they become 90 days
past due unless Management believes the loan is adequately collateralized and is in the process of collection. Loans may be restructured by Management when a borrower has experienced some change in financial status, causing an inability to meet the
original repayment terms, and where the Company believes the borrower will eventually overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar means that Management intends to offer for
sale.

Managements classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full
collectibility of principal or interest on the loan; at this point, the Company stops recognizing income from the interest on the loan and may provide an allowance for uncollected interest that had been accrued but unpaid if it is determined
uncollectible or the collateral is inadequate to support such accrued interest amount. These loans may or may not be collateralized, but collection efforts are pursued.

The table on the following page sets forth non-performing assets as of September 30, 2006, and 2005 and December 31, 2005, as well as adversely classified loans as of these dates. Loans classified as
nonperforming may also be adversely classified, resulting in the principal balance reported in both categories.

The allowance for loan
losses as a percentage of gross loans was 1.66% at September 30, 2006 and 1.67% at December 31, 2005.

At September 30,
2006, the outstanding principal balance of nonaccrual loans totaled $3.6 million which consisted of three real estate loans and one partially guaranteed commercial loan. All real estate loans are secured by real property located in the Coachella
Valley. The Company has initiated the foreclosure process on all properties and all loans which are accounted for on a nonaccrual basis are also adversely classified.

The largest nonaccrual loan has an outstanding principal balance of $1.5 million, is secured by undeveloped real estate and Management estimates the loan to value ratio to be approximately 20%. Subsequent to
September 30, 2006, the borrower repaid the loan in full. Two loans, secured by single family residential real estate having an aggregate outstanding principal balance of $1.8 million, are in the process of foreclosures due to the inability of
the borrower to make timely payments required under the loan agreements. Management believes the collateral value adequately supports the loan amount, including estimated liquidation costs. The final nonaccrual loan is a partially guaranteed
business loan which has an outstanding principal balance of $248,000 at September 30, 2006. Subsequent to the end of the quarter, the Bank has made a demand for repayment to the governmental agency guaranteeing the loan and the unguaranteed
portion of the loan has been charged off.

The increase in nonaccrual and adversely classified loans can be attributed to a slowdown in the
Coachella Valley real estate values. This slowdown is consistent with state and national trends. As a result of this slowdown, the level of unsold real estate units has increased, the average length of time a property is on the market has increased,
the volume of real estate sales has declined and the growth in real estate values have slowed significantly.



15



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##### Table of Contents

Non-performing Assets

(dollars in thousands)



|                                                                  |  |              |       |   |                  |   |        |   |  |   |       |  
|----------------------------------------------------------------- |  | ------------ | ----- | - | ---------------- | - | ------ | - |  | - | ----- | -
|                                                                  |  | September 30 |       |   | December 31 2005 |  
|                                                                  |  | 2006         |       |   | 2005             |   |       
|Other real estate owned                                           |  | $            |      |   |                  | $ |       |   |  | $ |      |  
|Nonaccrual loans1                                                 |  |              |       |   |                  |   |        |   |  |   |       |  
|Real Estate:                                                      |  |              |       |   |                  |   |        |   |  |   |       |  
|Construction                                                      |  |              |      |   |                  |   |       |   |  |   |      |  
|Other                                                             |  |              | 3,344 |   |                  |   | 238    |   |  |   | 349   |  
|Commercial                                                        |  |              | 248   |   |                  |   |       |   |  |   |      |  
|Consumer                                                          |  |              |      |   |                  |   |       |   |  |   |      |  
|Loans 90 days or more past due & still accruing                   |  |              |      |   |                  |   |       |   |  |   |      |  
|                                                                  |  |              |       |   |                  |   |        |   |  |   |       |  
|Total Nonperforming assets:                                       |  | $            | 3,592 |   |                  | $ | 238    |   |  | $ | 349   |  
|                                                                  |  |              |       |   |                  |   |        |   |  |   |       |  
|Adversely classified loans:1                                      |  |              |       |   |                  |   |        |   |  |   |       |  
|Substandard                                                       |  |              |       |   |                  |   |        |   |  |   |       |  
|Real estate                                                       |  |              |       |   |                  |   |        |   |  |   |       |  
|Construction                                                      |  |              |      |   |                  |   |       |   |  |   |      |  
|Other                                                             |  |              | 3,956 |   |                  |   | 1,688  |   |  |   | 1,824 |  
|Commercial                                                        |  |              | 210   |   |                  |   | 256    |   |  |   | 148   |  
|Consumer                                                          |  |              |      |   |                  |   |       |   |  |   | 133   |  
|                                                                  |  |              |       |   |                  |   |        |   |  |   |       |  
|Total substandard                                                 |  | $            | 4,166 |   |                  | $ | 1,944  |   |  | $ | 2,105 |  
|                                                                  |  |              |       |   |                  |   |        |   |  |   |       |  
|Doubtful                                                          |  |              |       |   |                  |   |        |   |  |   |       |  
|Real estate                                                       |  |              |       |   |                  |   |        |   |  |   |       |  
|Construction                                                      |  |              |      |   |                  |   |       |   |  |   |      |  
|Other                                                             |  |              |      |   |                  |   |       |   |  |   |      |  
|Commercial                                                        |  |              |      |   |                  |   |       |   |  |   |      |  
|Consumer                                                          |  |              |      |   |                  |   |       |   |  |   |      |  
|                                                                  |  |              |       |   |                  |   |        |   |  |   |       |  
|Total doubtful                                                    |  | $            |      |   |                  | $ |       |   |  | $ |      |  
|                                                                  |  |              |       |   |                  |   |        |   |  |   |       |  
|Total adversely classified loans                                  |  | $            | 4,166 |   |                  | $ | 1,944  |   |  | $ | 2,105 |  
|                                                                  |  |              |       |   |                  |   |        |   |  |   |       |  
|Ratio of adversely classified loans to gross loans at period end  |  |              | 2.0   | % |                  |   | 1.2    | % |  |   | 1.2   | %
|Ratio of allowance for loan losses to nonperforming loans2        |  |              | 93.7  | % |                  |   | 1231.9 | % |  |   | 842.1 | %
|Ratio of allowance for loan losses to adversely classified assets |  |              | 80.8  | % |                  |   | 150.8  | % |  |   | 139.6 | %



|1 | Nonaccrual loan balances are generally included with adversely classified assets.
|- | ---------------------------------------------------------------------------------



|2 | Nonperforming loans is defined as other real estate owned, nonaccrual loans and loans 90 days or more past due and still accruing.
|- | ----------------------------------------------------------------------------------------------------------------------------------

Allowance for Loan Losses

The Company maintains an allowance for loan losses at a level it considers adequate to cover the inherent risk of loss associated with its loan portfolio under prevailing economic conditions. In determining the adequacy of the allowance for
loan losses, Management takes into consideration growth trends in the portfolio, examination by financial institution supervisory authorities, prior loan charge-offs, net of recoveries, experience of the Companys lending staff, concentrations
of credit risk, delinquency trends, general economic conditions, the interest rate environment, and internal and external credit reviews.

The Company assesses the adequacy of the allowance on a monthly basis. This assessment is comprised of: (i) reviewing the adversely classified loans; (ii) estimating the loss potential for adversely classified loans; and
(iii) applying a risk factor to segregate loan portfolios that have similar risk characteristics.

To determine the adequacy of the
allowance for loan losses, Management employs a two-dimensional model that segregates loans into categories with similar risk profiles. Major loan categories include speculative construction and land loans, owner-occupied residential construction
loans, residential and commercial real estate loans,



16



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##### Table of Contents

commercial loans, and consumer loans. Loan balances are further segregated into outstanding principal balance and unfunded commitment amounts. To address the
risk associated with certain loans, Risk Classes are established to identify the level of risk posed by a particular loan or group of loans. Risk Classes are (in order from least to greatest risk) Exceptional, Very Good, Satisfactory, Acceptable,
Watch/Special Mention, Substandard, Doubtful, and Loss. For loans adversely classified (Substandard, Doubtful or Loss), Management estimates a specific allowance amount. For loans that are not adversely classified, a Risk Factor is applied to each
loan category for each Risk Class. As the risk of loss increases, the associated Risk Factor increases accordingly.

The process of
providing for loan losses involves judgmental discretion, and eventual losses may therefore differ from even the most recent estimates. Due to these limitations, the Company assumes that there are losses inherent in the current loan portfolio which
will be sustained, but have not yet been identified. The Company therefore attempts to maintain the allowance at an amount sufficient to cover such unknown but inherent losses.

There can be no assurance that future economic or other factors will not adversely affect borrowers, or collateral securing loans, or that the
Companys asset quality may not deteriorate through rapid growth, failure to identify and monitor potential problem loans or for other reasons, thereby causing increases to the allowance.

The table on the following page summarizes the nine months ended September 30, 2006 and 2005, and the year ended December 31, 2005, loan
balances at the end of such periods and the daily average balances for the respective periods; changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off, additions to the allowance which have
been charged against earnings, and certain ratios related to the allowance for loan losses.



17



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##### Table of Contents

Allowance for Loan Losses

(dollars in thousands)



|                                                                                  |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ------------------------------------ | - | ------- | - |  | - | ------- | -
|                                                                                  |  | For the Nine Months EndedSeptember 30, |         |   | For the Year Ended
December 31, 2005 |  
|                                                                                  |  | 2006                                   |         |   | 2005                                 |   |        
|Balances:                                                                         |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Average gross loans outstanding during period                                     |  | $                                      | 184,306 |   |                                      | $ | 158,648 |   |  | $ | 161,805 |  
|Total gross loans outstanding at end of period                                    |  |                                        | 204,003 |   |                                      |   | 164,315 |   |  |   | 175,719 |  
|Allowance for loan losses:                                                        |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Balance at beginning of period                                                    |  |                                        | 2,939   |   |                                      |   | 2,508   |   |  |   | 2,508   |  
|Provision for loan losses                                                         |  |                                        | 425     |   |                                      |   | 450     |   |  |   | 710     |  
|Loan charge-offs                                                                  |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Real Estate - Construction                                                        |  |                                        |        |   |                                      |   |        |   |  |   |        |  
|Real Estate - Other                                                               |  |                                        |        |   |                                      |   |        |   |  |   |        |  
|Commercial                                                                        |  |                                        |        |   |                                      |   | (49     | ) |  |   | (296    | )
|Consumer                                                                          |  |                                        | (55     | ) |                                      |   | (36     | ) |  |   | (44     | )
|                                                                                  |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Total loan charge-offs                                                            |  |                                        | (55     | ) |                                      |   | (85     | ) |  |   | (340    | )
|                                                                                  |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Recoveries                                                                        |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Real Estate - Construction                                                        |  |                                        |        |   |                                      |   |        |   |  |   |        |  
|Real Estate - Other                                                               |  |                                        |        |   |                                      |   |        |   |  |   |        |  
|Commercial                                                                        |  |                                        | 54      |   |                                      |   |        |   |  |   | 1       |  
|Consumer                                                                          |  |                                        | 3       |   |                                      |   | 59      |   |  |   | 60      |  
|                                                                                  |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Total recoveries                                                                  |  |                                        | 57      |   |                                      |   | 59      |   |  |   | 61      |  
|                                                                                  |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Net loan (charge-offs)/recoveries                                                |  |                                        | 2       |   |                                      |   | (26     | ) |  |   | (279    | )
|                                                                                  |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Balance at end of period                                                          |  | $                                      | 3,366   |   |                                      | $ | 2,932   |   |  | $ | 2,939   |  
|                                                                                  |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Ratios:                                                                           |  |                                        |         |   |                                      |   |         |   |  |   |         |  
|Net loan charge-offs/(recoveries) to average loans1                              |  |                                        | 0.00    | % |                                      |   | 0.02    | % |  |   | 0.17    | %
|Allowance for loan losses to gross loans at the end of the period                 |  |                                        | 1.65    | % |                                      |   | 1.78    | % |  |   | 1.67    | %
|Net loan charge-offs/(recoveries) to allowance for loan losses at end of period1 |  |                                        | -0.08   | % |                                      |   | 1.19    | % |  |   | 9.49    | %
|Net loan charge-offs/(recoveries) to provision for loan losses1                  |  |                                        | -0.47   | % |                                      |   | 5.78    | % |  |   | 39.30   | %



|1 | Interim periods annualized
|- | --------------------------

The Company intends to continue to concentrate the majority of its earning assets in commercial and real estate loans. In all forms of lending there are
inherent risks.

While the Company believes that its underwriting criteria are prudent, outside factors, such as recession in Southern
California in the early 1990s, the Los Angeles earthquake of 1994, or slowdown in the Southern California economy in line with the slowdown immediately following the September 11 terrorist attacks, could adversely impact credit
quality. A repeat of these types of events could cause deterioration in the Companys loan portfolio.

The Company attempts to
mitigate collection problems by supporting its loans by collateral. The Company also utilizes outside credit review processes to independently monitor loan quality. A loan sample group is reviewed periodically at which time new loans, large loans
and delinquent loans receive special attention. The use of the independent credit review process provides the Company with an objective review of Managements identification of risk classification. To supplement Managements internal risk
classification system, loans criticized during the credit review process or in conjunction with a regulatory examination, are downgraded with appropriate allowances added, if needed.

Although Management believes the allowance for loan losses at September 30, 2006 is adequate to absorb losses from known and inherent risks in the
portfolio, no assurance can be given that economic conditions, which adversely affect the Companys service areas or other circumstances, will not result in increased losses in the loan portfolio in the future.



18



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##### Table of Contents

Investment Securities

The fair value of the investment security portfolio available for sale at September 30, 2006 is $22.6 million with a 3.9% yield. This compares to a
fair value of $24.7 million at December 31, 2005 with a 3.44% yield. The unrealized loss on available for sale investment securities at September 30, 2006 is $234,000 or 1.0% of amortized cost.

Investment security portfolio activity during the first nine months of 2006 included the purchase of $6.9 million in investment securities available for
sale. Principal repayments and maturities of investment securities available for sale totaled $9.2 million for this same period. During 2005, the Company initiated a plan to purchase income tax-free debt securities to take advantage of their income
tax advantaged status. The portfolio of tax-free securities has an average life of 5.5 years compared to an average life of approximately 1.5 years for the entire investment portfolio.

The following table summarizes the amortized cost and fair value of the Companys available for sale investment security portfolio at
September 30, 2006 and December 31, 2005. The Company has no securities classified as held to maturity or trading.

Investment
Securities Available for Sale

(dollars in thousands)



|                           |  |                          |        |           |                         |         |  |     |           |  |      |                |  |           |        |         |   |        |           |     |   |  |      |  
|-------------------------- |  | ------------------------ | ------ | --------- | ----------------------- | ------- |  | --- | --------- |  | ---- | -------------- |  | --------- | ------ | ------- | - | ------ | --------- | --- | - |  | ---- | -
|                           |  | As of September 30, 2006 |        |           | As of December 31, 2005 |        
|                           |  | AmortizedCosts           |        | FairValue |                         | Percent |  |     | Yield (1) |  |      | AmortizedCosts |  | FairValue |        | Percent |   |        | Yield (1) |    
|US Treasury                |  | $                        | 7,981  |           | $                       | 7,967   |  | 35  | %         |  | 3.99 | %              |  | $         | 7,954  |         | $ | 7,904  |           | 32  | % |  | 3.71 | %
|US agencies                |  |                          | 6,997  |           |                         | 6,934   |  | 31  | %         |  | 3.23 | %              |  |           | 9,000  |         |   | 8,831  |           | 36  | % |  | 2.77 | %
|Mortgage-backed securities |  |                          | 5,404  |           |                         | 5,242   |  | 24  | %         |  | 3.92 | %              |  |           | 6,648  |         |   | 6,502  |           | 26  | % |  | 3.99 | %
|State and municipal bonds  |  |                          | 2,469  |           |                         | 2,474   |  | 10  | %         |  | 5.46 | %              |  |           | 1,491  |         |   | 1,465  |           | 6   | % |  | 3.57 | %
|                           |  |                          |        |           |                         |         |  |     |           |  |      |                |  |           |        |         |   |        |           |     |   |  |      |  
|Total                      |  | $                        | 22,851 |           | $                       | 22,617  |  | 100 | %         |  | 3.90 | %              |  | $         | 25,093 |         | $ | 24,702 |           | 100 | % |  | 3.44 | %
|                           |  |                          |        |           |                         |         |  |     |           |  |      |                |  |           |        |         |   |        |           |     |   |  |      |  



|1 | Yield on state and municipal bonds is stated on a tax equivalent basis
|- | ----------------------------------------------------------------------

Deposits

A
significant balance sheet component impacting the Companys net interest margin is its deposit base. The Companys net interest margin has improved to the extent that growth in deposits can be concentrated in less volatile and typically
less costly core deposits, which include demand deposit accounts, interest-bearing demand accounts (NOW accounts), savings and money market accounts and time deposits less than $100,000.

Total deposits at September 30, 2006 and December 31, 2005 were $223.3 million and $218.5 million, respectively. The largest category of
deposit accounts at September 30, 2006, is non-interest bearing demand deposits which make up 37.1% of total deposits. Savings and money market accounts represent 35.0% of total deposits. A number of depositors transferred funds from savings
and money market accounts and opened time deposit accounts, to take advantage of the high interest rate environment. At September 30, 2006 and December 31, 2005, the weighted average term to maturity of certificate of deposits was 7.1
months and 10.0 months, respectively. The weighted average interest rates paid on time deposits was 4.34% and 3.27% at September 30, 2006 and December 31, 2005, respectively.

The table on the following page reflects the major categories of deposits and deposits of Native American entities as a percentage of total deposits as
of September 30, 2006 and December 31, 2005.



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##### Table of Contents

Deposits

(dollars in thousands)



|                                     |  |                    |         |         |                   |   |        |   |         |  |       |  
|------------------------------------ |  | ------------------ | ------- | ------- | ----------------- | - | ------ | - | ------- |  | ----- | -
|                                     |  | September 30, 2006 |         |         | December 31, 2005 |  
|                                     |  | Amount             |         | Percent |                   |   | Amount |   | Percent | 
|Demand deposits                      |  | $                  | 82,909  |         | 37.1              | % |        | $ | 85,142  |  | 39.0  | %
|NOW Accounts                         |  |                    | 7,940   |         | 3.6               | % |        |   | 8,271   |  | 3.8   | %
|Savings and money market             |  |                    | 78,266  |         | 35.0              | % |        |   | 89,642  |  | 41.0  | %
|Time deposits $100,000 and greater   |  |                    | 42,810  |         | 19.2              | % |        |   | 27,389  |  | 12.5  | %
|Time deposits less than $100,000     |  |                    | 11,423  |         | 5.1               | % |        |   | 8,082   |  | 3.7   | %
|                                     |  |                    |         |         |                   |   |        |   |         |  |       |  
|Total Deposits                       |  | $                  | 223,348 |         | 100.00            | % |        | $ | 218,526 |  | 100.0 | %
|                                     |  |                    |         |         |                   |   |        |   |         |  |       |  
|Deposits of Native American Entities |  | $                  | 19,672  |         | 8.8               | % |        | $ | 22,635  |  | 10.1  | %
|                                     |  |                    |         |         |                   |   |        |   |         |  |       |  

Results of Operations

The net earnings during the three-month period ended September 30, 2006 were $1,078,00 or $0.47 per diluted share compared to net earnings of $940,000 or $0.44 per diluted share for the same quarter in 2005.
Higher net earnings in the quarter ending September 30, 2006 are primarily attributable to (i) a 20% increase in net interest income, (ii) a 9% increase in noninterest income, (iii) offset by a 24% increase in noninterest
expense.

The net earnings during the nine-month period ended September 30, 2006 were $3,087,000 or $1.34 per diluted share compared
to net earnings of $2,612,000 or $1.14 per diluted share for the same quarter in 2005. Higher net earnings in the nine months ending September 30, 2006 are primarily attributable to (i) a 22% increase in net interest income, (ii) a
11% increase in non-interest income, (iii) offset by a 24% increase in non-interest expense.

Net Interest Income
and Net Interest Margin

Net interest income, the principal source of earnings, represents the difference between interest and fees
earned from lending and investing activities and the interest paid on deposits used to fund those activities. Variations in the pricing, volume, and mix of loans, investments and deposits and their relative sensitivity to movements in interest rates
influence net interest income.

The yield earned on interest earning assets for the quarter ended September 30, 2006 was 8.35%
compared to 7.11% for the quarter ended September 30, 2005. Interest bearing liability costs for the third quarter of 2006 were 3.26% compared to 1.74% for the third quarter of 2005. The net interest margin or net interest income divided by
average interest earning assets for the third quarter of 2006 and 2005 was 6.44% and 6.09%, respectively.

The yield earned on interest
earning assets for the nine months ended September 30, 2006 was 8.12% compared to 6.85% for the nine months ended September 30, 2005. Interest bearing liability costs for the same period of 2006 were 2.85% compared to 1.49% for the same
period of 2005. The net interest margin or net interest income divided by average interest earning assets for the nine months ended September 30, 2006 and 2005 was 6.45% and 5.97%, respectively.

Loan, investment securities and federal funds sold yields generally increased from 2005 to 2006 primarily due to: a) repricing of these assets at higher
yields, and b) higher interest rates charged on new loans.

The Rate Volume Analysis tables set forth the changes in net interest income
and disaggregates the effects that volume, or average balances, and interest rates have on the Companys interest earning assets and interest bearing liabilities. For the three and nine months ended September 30, 2006, the increase in net
interest income over the same prior year period is primarily attributable to the volume growth within the loan and investment portfolios combined with increases in asset yields. Higher interest rates paid on deposit accounts offset the increases in
interest income.



20



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##### Table of Contents

The tables set forth below and on the following page present the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and interest-bearing liabilities. They distinguish between the increase or decrease related to: (i) changes in balances, and (ii) changes in interest rates. For
each category of interest-earning assets and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (i.e., changes in volume multiplied by the old rate), and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume).

Rate Volume Analysis

For the three months ended September 30, 2006 compared to September 30, 2005

(dollars in thousands)



|                              |  |                                          |     |   |        |   |       |  |   |      
|----------------------------- |  | ---------------------------------------- | --- | - | ------ | - | ----- |  | - | -----
|                              |  | Increases (Decreases) Due to Changes in:
|                              |  | Volume 1                                 |     |   | Rate 1 |   | Total
|Interest earning assets       |  |                                          |     |   |        |   |       |  |   |      
|Loans2                        |  | $                                        | 761 |   |        | $ | 420   |  | $ | 1,181
|Federal funds sold            |  |                                          | (19 | ) |        |   | 57    |  |   | 38   
|Investment securities         |  |                                          | (39 | ) |        |   | 52    |  |   | 13   
|                              |  |                                          |     |   |        |   |       |  |   |      
|Total interest income         |  | $                                        | 703 |   |        | $ | 529   |  | $ | 1,232
|                              |  |                                          |     |   |        |   |       |  |   |      
|Interest bearing liabilities  |  |                                          |     |   |        |   |       |  |   |      
|NOW accounts                  |  | $                                        | 1   |   |        | $ | 7     |  | $ | 8    
|Savings and money market      |  |                                          | (54 | ) |        |   | 262   |  |   | 208  
|Time certificates of deposits |  |                                          | 247 |   |        |   | 137   |  |   | 384  
|                              |  |                                          |     |   |        |   |       |  |   |      
|Total interest expense        |  | $                                        | 194 |   |        | $ | 406   |  | $ | 600  
|                              |  |                                          |     |   |        |   |       |  |   |      
|Net interest income           |  | $                                        | 509 |   |        | $ | 123   |  | $ | 632  
|                              |  |                                          |     |   |        |   |       |  |   |      



|1 | Changes in the interest earned and interest paid due to both the rate and volume have been allocated to the change due to volume and the change due to rate in
proportion to the relationship of the absolute dollar amounts of the changes in each.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Loans are net of the allowance for loan losses, deferred fees and related direct costs.
|- | ---------------------------------------------------------------------------------------



21



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##### Table of Contents

Rate Volume Analysis

For the nine months ended September 30, 2006 compared to September 30, 2005

(dollars in thousands)



|                              |  |                                          |       |   |        |   |       |  |   |      
|----------------------------- |  | ---------------------------------------- | ----- | - | ------ | - | ----- |  | - | -----
|                              |  | Increases (Decreases) Due to Changes in:
|                              |  | Volume 1                                 |       |   | Rate 1 |   | Total
|Interest earning assets       |  |                                          |       |   |        |   |       |  |   |      
|Loans2                        |  | $                                        | 1,636 |   |        | $ | 1,503 |  | $ | 3,139
|Federal funds sold            |  |                                          | 121   |   |        |   | 227   |  |   | 348  
|Investment securities         |  |                                          | (70   | ) |        |   | 147   |  |   | 77   
|                              |  |                                          |       |   |        |   |       |  |   |      
|Total interest income         |  | $                                        | 1,687 |   |        | $ | 1,877 |  | $ | 3,564
|                              |  |                                          |       |   |        |   |       |  |   |      
|Interest bearing liabilities  |  |                                          |       |   |        |   |       |  |   |      
|NOW accounts                  |  | $                                        | 1     |   |        | $ | 18    |  | $ | 19   
|Savings and money market      |  |                                          | (109  | ) |        |   | 688   |  |   | 579  
|Time certificates of deposits |  |                                          | 606   |   |        |   | 336   |  |   | 942  
|                              |  |                                          |       |   |        |   |       |  |   |      
|Total interest expense        |  | $                                        | 498   |   |        | $ | 1,042 |  | $ | 1,540
|                              |  |                                          |       |   |        |   |       |  |   |      
|Net interest income           |  | $                                        | 1,189 |   |        | $ | 835   |  | $ | 2,024
|                              |  |                                          |       |   |        |   |       |  |   |      



|1 | Changes in the interest earned and interest paid due to both the rate and volume have been allocated to the change due to volume and the change due to rate
proportionate to the relationship of the absolute dollar amounts of the changes in each.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Loans are net of the allowance for loan losses, deferred fees and related direct costs.
|- | ---------------------------------------------------------------------------------------



22



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##### Table of Contents

The tables set forth below and on the following page show the Companys average balances of
interest-earning assets, interest-earning liabilities, interest income and expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for
the periods indicated:

Distribution, Yield and Rate Analysis of Net Income

(dollars in thousands)



|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|------------------------------------------ |  | ------------------------------------ | ------- | ---------------------- | ------------------------------------ | ------------ |  | ---- | -------------- |  | ---------------------- | ------- | ------------ | - | ----- |  | ---- | -
|                                           |  | Three months endedSeptember 30, 2006 |         |                        | Three months endedSeptember 30, 2005 |             
|                                           |  | AverageBalance                       |         | InterestIncome/Expense |                                      | Yield/Cost 1 |  |      | AverageBalance |  | InterestIncome/Expense |         | Yield/Cost 1 |  
|Interest earning assets                    |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Loans2                                     |  | $                                    | 195,918 |                        | $                                    | 4,528        |  | 9.17 | %              |  | $                      | 161,694 |              | $ | 3,347 |  | 8.21 | %
|Federal funds sold                         |  |                                      | 12,342  |                        |                                      | 164          |  | 5.27 | %              |  |                        | 14,316  |              |   | 126   |  | 3.49 | %
|Investment securities                      |  |                                      | 27,452  |                        |                                      | 270          |  | 3.90 | %              |  |                        | 32,085  |              |   | 257   |  | 3.18 | %
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total interest-earning assets              |  |                                      | 235,712 |                        |                                      | 4,962        |  | 8.35 | %              |  |                        | 208,095 |              |   | 3,730 |  | 7.11 | %
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Non-interest earning assets                |  |                                      | 17,179  |                        |                                      |              |  |      |                |  |                        | 18,067  |              |   |       |  |      |  
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total assets                               |  | $                                    | 252,891 |                        |                                      |              |  |      |                |  | $                      | 226,162 |              |   |       |  |      |  
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Interest bearing liabilities               |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|NOW deposits                               |  | $                                    | 8,956   |                        | $                                    | 13           |  | 0.58 | %              |  | $                      | 7,189   |              | $ | 4     |  | 0.22 | %
|Savings deposits and money market          |  |                                      | 77,532  |                        |                                      | 573          |  | 2.93 | %              |  |                        | 89,361  |              |   | 364   |  | 1.62 | %
|Time deposits                              |  |                                      | 51,609  |                        |                                      | 548          |  | 4.21 | %              |  |                        | 24,977  |              |   | 166   |  | 2.64 | %
|Other borrowed funds                       |  |                                      | 6       |                        |                                      | 0            |  | 8.43 | %              |  |                        |        |              |   |      |  | 0.00 | %
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total interest-bearing liabilities         |  |                                      | 138,103 |                        |                                      | 1,134        |  | 3.26 | %              |  |                        | 121,527 |              |   | 534   |  | 1.74 | %
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Demand deposits                            |  |                                      | 90,523  |                        |                                      |              |  |      |                |  |                        | 85,182  |              |   |       |  |      |  
|Non-interest-bearing liabilities           |  |                                      | 1,878   |                        |                                      |              |  |      |                |  |                        | 1,445   |              |   |       |  |      |  
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total liabilities                          |  |                                      | 230,504 |                        |                                      |              |  |      |                |  |                        | 208,154 |              |   |       |  |      |  
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Stockholders equity                       |  |                                      | 22,387  |                        |                                      |              |  |      |                |  |                        | 18,008  |              |   |       |  |      |  
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total liabilities and stockholders equity |  | $                                    | 252,891 |                        |                                      |              |  |      |                |  | $                      | 226,162 |              |   |       |  |      |  
|                                           |  |                                      |         |                        |                                      |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Net interest spread3                       |  |                                      |         |                        | $                                    | 3,828        |  | 5.09 | %              |  |                        |         |              | $ | 3,196 |  | 5.37 | %
|Net interest margin4                       |  |                                      |         |                        |                                      |              |  | 6.44 | %              |  |                        |         |              |   |       |  | 6.09 | %



|1 | Interest rates for interim periods have been annualized
|- | -------------------------------------------------------



|2 | Excludes allowance for loan losses
|- | ----------------------------------



|3 | Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities
|- | ------------------------------------------------------------------------------------------------------------------------



|4 | Represents net interest income as a percentage of average interest-earning assets
|- | ---------------------------------------------------------------------------------



23



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##### Table of Contents

Distribution, Yield and Rate Analysis of Net Income

(dollars in thousands)



|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|------------------------------------------ |  | ----------------------------------- | ------- | ---------------------- | ----------------------------------- | ------------ |  | ---- | -------------- |  | ---------------------- | ------- | ------------ | - | ------ |  | ---- | -
|                                           |  | Nine months endedSeptember 30, 2006 |         |                        | Nine months endedSeptember 30, 2005 |             
|                                           |  | AverageBalance                      |         | InterestIncome/Expense |                                     | Yield/Cost 1 |  |      | AverageBalance |  | InterestIncome/Expense |         | Yield/Cost 1 |  
|Interest earning assets                    |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Loans2                                     |  | $                                   | 183,394 |                        | $                                   | 12,508       |  | 9.12 | %              |  | $                      | 157,816 |              | $ | 9,369  |  | 7.94 | %
|Federal funds sold                         |  |                                     | 17,793  |                        |                                     | 646          |  | 4.85 | %              |  |                        | 13,336  |              |   | 298    |  | 2.99 | %
|Investment securities                      |  |                                     | 29,022  |                        |                                     | 833          |  | 3.84 | %              |  |                        | 32,256  |              |   | 756    |  | 3.13 | %
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Total interest-earning assets              |  |                                     | 230,209 |                        |                                     | 13,987       |  | 8.12 | %              |  |                        | 203,408 |              |   | 10,423 |  | 6.85 | %
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Non-interest earning assets                |  |                                     | 18,138  |                        |                                     |              |  |      |                |  |                        | 18,512  |              |   |        |  |      |  
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Total assets                               |  | $                                   | 248,347 |                        |                                     |              |  |      |                |  | $                      | 221,920 |              |   |        |  |      |  
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Interest bearing liabilities               |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|NOW deposits                               |  | $                                   | 8,970   |                        | $                                   | 34           |  | 0.51 | %              |  | $                      | 8,698   |              | $ | 15     |  | 0.23 | %
|Savings deposits and money market          |  |                                     | 80,099  |                        |                                     | 1,507        |  | 2.52 | %              |  |                        | 89,406  |              |   | 928    |  | 1.39 | %
|Time deposits                              |  |                                     | 46,037  |                        |                                     | 1,334        |  | 3.87 | %              |  |                        | 22,026  |              |   | 392    |  | 2.38 | %
|Other borrowed funds                       |  |                                     | 3       |                        |                                     | 0            |  | 8.33 | %              |  |                        |        |              |   |       |  | 0.00 | %
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                     | 135,109 |                        |                                     | 2,875        |  | 2.85 | %              |  |                        | 120,130 |              |   | 1,335  |  | 1.49 | %
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Demand deposits                            |  |                                     | 90,274  |                        |                                     |              |  |      |                |  |                        | 83,515  |              |   |        |  |      |  
|Non-interest-bearing liabilities           |  |                                     | 1,716   |                        |                                     |              |  |      |                |  |                        | 1,343   |              |   |        |  |      |  
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Total liabilities                          |  |                                     | 227,099 |                        |                                     |              |  |      |                |  |                        | 204,988 |              |   |        |  |      |  
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Stockholders equity                       |  |                                     | 21,248  |                        |                                     |              |  |      |                |  |                        | 16,932  |              |   |        |  |      |  
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Total liabilities and stockholders equity |  | $                                   | 248,347 |                        |                                     |              |  |      |                |  | $                      | 221,920 |              |   |        |  |      |  
|                                           |  |                                     |         |                        |                                     |              |  |      |                |  |                        |         |              |   |        |  |      |  
|Net interest spread3                       |  |                                     |         |                        | $                                   | 11,112       |  | 5.28 | %              |  |                        |         |              | $ | 9,088  |  | 5.37 | %
|Net interest margin4                       |  |                                     |         |                        |                                     |              |  | 6.45 | %              |  |                        |         |              |   |        |  | 5.97 | %



|1 | Interest rates for interim periods have been annualized
|- | -------------------------------------------------------



|2 | Excludes allowance for loan losses
|- | ----------------------------------



|3 | Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities
|- | ------------------------------------------------------------------------------------------------------------------------



|4 | Represents net interest income as a percentage of average interest-earning assets
|- | ---------------------------------------------------------------------------------

Non-interest income

Non-interest income for the three months ended September 30, 2006 totaled $722,000 compared to $662,000 for the three months ended September 30, 2005. For the nine-month periods ended September 30, 2006 and 2005, non-interest
income totaled $2,273,000 and $2,045,000, respectively. Loan related fees and lease administration fees accounted for a majority of the non-interest income for both the third quarter and nine-month period.

The Company initiated lease administration activities in October 2002 for certain allocated reservation land transfers under a subcontract with the Agua
Caliente Band of Cahuilla Indians, a principal shareholder of the Company. ATM fee revenues are generated primarily from servicing ATMs owned by the Agua Caliente Band of Cahuilla Indians or other Native American tribes, for whom the Company
performs settlement, monitoring, claims processing, and related services.

Loan related fees are made up of two primary revenue drivers:
mortgage banking fees and fees earned on servicing government guaranteed loans. Mortgage banking activity generated fee revenues of $108,000 and $117,000 during the third quarter of 2006 and 2005, respectively, and $367,000 and $293,000 for the nine
months ended September 30, 2006 and 2005, respectively. Total mortgage banking revenues increased in 2006 due to the expansion of the Section 184 loan program. In 2005, the Company expanded its tribal services division by offering loans
pursuant to the Indian Home Loan Guarantee Program (Section 184). Congress established this program in 1994 and it was designed to offer home ownership, property rehabilitation, and new construction opportunities for



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eligible Native American tribes, Native American authorities, and Native American individuals. To qualify for a loan under this program, borrowers and
properties must meet pre-established criteria. This program is administered by the United States Department of Housing and Urban Development. The Company acts as a broker in originating Section 184 loans for which a fee is earned. The Company
does not retain or service loans originated under this program. Section 184 mortgage banking fees were $69,000 and $39,000 for the third quarter of 2006 and 2005, respectively, and $215,000 and $62,000 for the nine months ended
September 30, 2006 and 2005, respectively.

In addition to mortgage banking fees, the Company also generates loan related fees for
loan servicing activities on loan participations sold to others and servicing fees derived from certain loans guaranteed by the Bureau of Indian Affairs.

Non-interest Expense

For the quarter ended September 30, 2006 and 2005 non-interest expenses
totaled $2.6 million and $2.1 million, respectively. For the nine months ended September 30, 2006 and 2005 non-interest expenses totaled $7.7 million and $6.2 million, respectively. Increases in salaries and employee benefits, marketing and
advertising, and other operating expense is primarily attributed to personnel merit and performance increases, expansion of facilities and equipment. Also personnel additions have been made to service the larger loan/deposit portfolios and products
and to support compliance efforts. The formation of the Holding Company led to additional legal fee expense of $29,000 in quarter and $37,000 in the nine months, as compared to the same periods in 2005. Furthermore, non-interest expenses of $159,000
and $377,000 were incurred for the three and nine months ended September 30, 2006, respectively, for the Companys new Palm Desert branch, which opened in March 2006.



25



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##### Table of Contents

The table below reflects non-interest income, non-interest expense, and net non-interest expense.

Non-Interest Income and Non-Interest Expense

(dollars in thousands)



|                                                                              |  |                                 |       |   |                                 |     |   |        |   |       |           |  |     |        |  |   |           |   |  |        |   |  |           |       |   |  |     |  
|----------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------- | --- | - | ------ | - | ----- | --------- |  | --- | ------ |  | - | --------- | - |  | ------ | - |  | --------- | ----- | - |  | --- | -
|                                                                              |  | Three months EndedSeptember 30, |       |   | Nine months Ended September 30, |    
|                                                                              |  | 2006                            |       |   | 2005                            |     |   | 2006   |   |       | 2005      | 
|                                                                              |  | Amount                          |       |   | % ofTotal                       |     |   | Amount |   |       | % ofTotal |  |     | Amount |  |   | % ofTotal |   |  | Amount |   |  | % ofTotal |      
|Non-interest income:                                                          |  |                                 |       |   |                                 |     |   |        |   |       |           |  |     |        |  |   |           |   |  |        |   |  |           |       |   |  |     |  
|Service charges and fees                                                      |  | $                               | 144   |   |                                 | 20  | % |        | $ | 124   |           |  | 19  | %      |  | $ | 423       |   |  | 18     | % |  |           | 381   |   |  | 19  | %
|Loan related fees                                                             |  |                                 | 130   |   |                                 | 18  | % |        |   | 135   |           |  | 20  | %      |  |   | 431       |   |  | 19     | % |  |           | 345   |   |  | 17  | %
|Lease administration fees                                                     |  |                                 | 299   |   |                                 | 41  | % |        |   | 268   |           |  | 41  | %      |  |   | 974       |   |  | 43     | % |  |           | 871   |   |  | 43  | %
|Automated teller machine fees                                                 |  |                                 | 149   |   |                                 | 21  | % |        |   | 135   |           |  | 20  | %      |  |   | 448       |   |  | 20     | % |  |           | 453   |   |  | 22  | %
|Net (loss) on disposition of fixed assets                                     |  |                                 |       |   |                                 |     |   |        |   |      |           |  | 0   | %      |  |   | (3        | ) |  | 0      | % |  |           | (5    | ) |  | -1  | %
|                                                                              |  |                                 |       |   |                                 |     |   |        |   |       |           |  |     |        |  |   |           |   |  |        |   |  |           |       |   |  |     |  
|Total noninterest income                                                      |  |                                 | 722   |   |                                 | 100 | % |        |   | 662   |           |  | 100 | %      |  |   | 2,273     |   |  | 100    | % |  |           | 2,045 |   |  | 100 | %
|                                                                              |  |                                 |       |   |                                 |     |   |        |   |       |           |  |     |        |  |   |           |   |  |        |   |  |           |       |   |  |     |  
|Non-interest expenses:                                                        |  |                                 |       |   |                                 |     |   |        |   |       |           |  |     |        |  |   |           |   |  |        |   |  |           |       |   |  |     |  
|Salaries and employee benefits                                                |  |                                 | 1,373 |   |                                 | 53  | % |        |   | 1,130 |           |  | 53  | %      |  |   | 4,075     |   |  | 53.0   | % |  |           | 3,270 |   |  | 53  | %
|Occupancy and equipment expense                                               |  |                                 | 392   |   |                                 | 15  | % |        |   | 313   |           |  | 15  | %      |  |   | 1,087     |   |  | 14.0   | % |  |           | 952   |   |  | 15  | %
|Professional fees                                                             |  |                                 | 102   |   |                                 | 4   | % |        |   | 67    |           |  | 3   | %      |  |   | 268       |   |  | 3.0    | % |  |           | 223   |   |  | 4   | %
|Data processing                                                               |  |                                 | 138   |   |                                 | 5   | % |        |   | 87    |           |  | 4   | %      |  |   | 401       |   |  | 5.0    | % |  |           | 261   |   |  | 4   | %
|Marketing and advertising expense                                             |  |                                 | 99    |   |                                 | 4   | % |        |   | 75    |           |  | 4   | %      |  |   | 320       |   |  | 4.0    | % |  |           | 263   |   |  | 4   | %
|Directors and shareholders expense                                            |  |                                 | 112   |   |                                 | 4   | % |        |   | 106   |           |  | 5   | %      |  |   | 364       |   |  | 5.0    | % |  |           | 334   |   |  | 5   | %
|Other operating expense                                                       |  |                                 | 396   |   |                                 | 15  | % |        |   | 333   |           |  | 16  | %      |  |   | 1,218     |   |  | 16.0   | % |  |           | 945   |   |  | 15  | %
|                                                                              |  |                                 |       |   |                                 |     |   |        |   |       |           |  |     |        |  |   |           |   |  |        |   |  |           |       |   |  |     |  
|Total noninterest expenses:                                                   |  |                                 | 2,612 |   |                                 | 100 | % |        |   | 2,111 |           |  | 100 | %      |  |   | 7,733     |   |  | 100    | % |  |           | 6,248 |   |  | 100 | %
|                                                                              |  |                                 |       |   |                                 |     |   |        |   |       |           |  |     |        |  |   |           |   |  |        |   |  |           |       |   |  |     |  
|Net non-interest expense                                                      |  | $                               | 1,890 |   |                                 |     |   |        | $ | 1,449 |           |  |     |        |  | $ | 5,460     |   |  |        |   |  | $         | 4,203 |   |  |     |  
|                                                                              |  |                                 |       |   |                                 |     |   |        |   |       |           |  |     |        |  |   |           |   |  |        |   |  |           |       |   |  |     |  
|Net non-interest expense as a percentage of average total assets (annualized) |  |                                 | 3.00  | % |                                 |     |   |        |   | 2.54  | %         |  |     |        |  |   | 4.43      | % |  |        |   |  |           | 2.53  | % |  |     |  

Provision for Loan Losses

For the quarter ended September 30, 2006, the provision for loan losses the Company charged against current period earnings was $100,000 compared to
$150,000 for the prior years same quarter. For the nine months ended September 30, 2006, the provision for loan losses the Company charged against current period earnings was $425,000 compared to $450,000 for the same period in 2005.

Provisions for loan losses are made monthly in anticipation of credit risks, which are inherent in the business of making loans. The
Company sets aside an allowance for loan losses through charges to earnings. The charges are reflected in the income statement as provision for loan losses. The provision for loan losses represents the amount charged against current period earnings
to achieve an allowance for loan losses that in Managements judgment is adequate to absorb losses inherent in the Companys loan portfolio. The procedures for monitoring the adequacy of the allowance, as well as detailed information
concerning the allowance itself, are included above under Allowance for Loan Losses.

Liquidity

At September 30, 2006 and December 31, 2005 the Company had 15.7% and 23.3%, respectively, of total assets in cash and cash equivalents, federal
funds sold, interest-bearing deposits in other financial institutions and investment securities. Management deems this level of liquidity, combined with borrowing capacity, sufficient to



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support and meet the immediate and anticipated cash needs of the Company. The Companys sources of liquidity include deposits inflows, repayments of
loans and securities, sales/calls/maturities of investment securities, reduction in Federal Funds sold, and borrowing funds from correspondent banks, the Federal Reserve Bank Discount Window, the Federal Home Loan Bank of San Francisco (FHLB-SF), or
through repurchase agreement lines established. The Companys federal funds line of credit at correspondent banks is $13.0 million. In addition, as a member of the FHLB-SF, the Company may borrow funds up to 25% of its assets. Borrowing from
the FHLB-SF must be collateralized by either qualified loans or investment securities. Uses of liquidity include funding loans, deposit outflows and the purchase of investment securities and fixed assets.

Provision for Income Taxes

The provision for income taxes was $760,000 and $657,000 for the quarter ended September 30, 2006 and 2005, respectively. The provision for income taxes was $2,140,000 and $1,823,000 for the nine months ended September 30, 2006
and 2005, respectively. The increase in the income tax provision is commensurate with growth in pre-tax income. The Companys effective tax rate was 41% for each of these periods.

Interest Rate Risk

The principal objective of interest rate risk management is to manage the
financial components of the Companys assets and liabilities so as to optimize net income under varying interest rate environments. The focus of this process (often referred to as asset/liability management) is the development,
analysis, implementation and monitoring of earnings enhancement strategies that provide stable earnings and capital levels during periods of changing interest rates.

The Company manages the balance between rate-sensitive assets and rate-sensitive liabilities being repriced in any given period with the objective of stabilizing net interest income during periods of fluctuating
interest rates. The Company considers its rate-sensitive assets to be those which either contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans, certain investment securities and
federal funds sold. Rate-sensitive liabilities are those which allow for periodic interest rate changes and include time certificates, certain savings and interest-bearing demand deposits. The difference between the aggregate amount of assets and
liabilities that are repricing at various time frames is called the interest rate sensitivity gap. Generally, if repricing assets exceed repricing liabilities in any given time period the Company would be deemed to be
assetsensitive for that period. If repricing liabilities exceed repricing assets in a given time period the Company would be deemed to be liability-sensitive for that period. The Company intends to seek to maintain a
balanced position over the period of one year in which it has no significant asset or liability sensitivity to ensure net interest margin stability in times of volatile interest rates. This will be accomplished by maintaining a significant level of
loans and deposits available for repricing within one year.

At September 30, 2006 the Company was asset sensitive, with approximately
$161 million in interest-earnings assets repricing within one year compared to $135 million in interest-bearing liabilities repricing within that same period of time.

The change in net interest income may not always follow the general expectations of an asset-sensitive or liability-sensitive balance sheet during periods of changing interest rates. This
possibility results from interest rates earned or paid changing by differing increments and at different time intervals for each type of interest-sensitive asset and liability.

Capital Resources and Adequacy

Shareholders equity was $23.0 million or 9.3% of total assets
at September 30, 2006. The ratio of shareholders equity to total assets at December 31, 2005 was 8.1%. The increase in the equity to asset ratio is due to capital growth (18.1%) outpacing asset growth (3.7%). The Companys
capital level exceeded the regulatory defined minimum capital requirement of Tier 1 and Tier 2 capital to total assets and/or risk-weighted assets at September 30, 2006 and December 31, 2005. Furthermore, all capital ratios exceed the
regulatory minimum requirements for a Well Capitalized institution. The Prompt Corrective Action Guidelines to the FDIC Improvement Act (FDICIA) requires a Well Capitalized financial institution to maintain a
Leverage Capital Ratio of 5.0% or greater; a Tier 1 Risk-Based Capital Ratio of 6% or greater; and a Total Risk-Based Capital Ratio of 10.0% or greater, provided that such institution is not subject to a regulatory order, agreement or directive to
meet and maintain a specified capital level.



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##### Table of Contents

The Companys actual capital amounts and ratios as of September 30, 2006 and December 31,
2005 are calculated for the Bank only and are presented in the following table:

Regulatory Capital

(Bank only)

(dollars in thousands)



|                                                |  |                    |        |   |                            |        |   |                    |        |  
|----------------------------------------------- |  | ------------------ | ------ | - | -------------------------- | ------ | - | ------------------ | ------ | -
|                                                |  | September 30, 2006 |       
|                                                |  | Tier 1 Capital     |        |   | Tier 1 Risk-Based Capital  |        |   | Risk-BasedCapital  |       
|Actual capital:                                 |  |                    |        |   |                            |        |   |                    |        |  
|Amount                                          |  | $                  | 22,844 |   |                            | 22,844 |   |                    | 25,319 |  
|Ratio                                           |  |                    | 9.0    | % |                            | 11.6   | % |                    | 12.9   | %
|                                                |  |                    |        |   |                            |        |   |                    |        |  
|FDICIA well capitalized required capital:       |  |                    |        |   |                            |        |   |                    |        |  
|Amount                                          |  | $                  | 12,643 |   |                            | 11,814 |   |                    | 19,691 |  
|Ratio                                           |  |                    | 5.0    | % |                            | 6.0    | % |                    | 10.0   | %
|                                                |  |                    |        |   |                            |        |   |                    |        |  
|FDICIA adequately capitalized required capital: |  |                    |        |   |                            |        |   |                    |        |  
|Amount                                          |  | $                  | 10,115 |   |                            | 7,876  |   |                    | 15,753 |  
|Ratio                                           |  |                    | 4.0    | % |                            | 4.0    | % |                    | 8.0    | %
|                                                |  |                    |        |   |                            |        |   |                    |        |  
|                                                | 
|                                                |  | December 31, 2005  |       
|                                                |  | Tier 1 Capital     |        |   | Tier 1 Risk- Based Capital |        |   | Risk-Based Capital |       
|Actual capital:                                 |  |                    |        |   |                            |        |   |                    |        |  
|Amount                                          |  | $                  | 19,685 |   |                            | 19,685 |   |                    | 21,867 |  
|Ratio                                           |  |                    | 8.4    | % |                            | 11.3   | % |                    | 12.6   | %
|                                                |  |                    |        |   |                            |        |   |                    |        |  
|FDICIA well capitalized required capital:       |  |                    |        |   |                            |        |   |                    |        |  
|Amount                                          |  | $                  | 11,743 |   |                            | 10,417 |   |                    | 17,361 |  
|Ratio                                           |  |                    | 5.0    | % |                            | 6.0    | % |                    | 10.0   | %
|                                                |  |                    |        |   |                            |        |   |                    |        |  
|FDICIA adequately capitalized required capital: |  |                    |        |   |                            |        |   |                    |        |  
|Amount                                          |  | $                  | 9,394  |   |                            | 6,944  |   |                    | 13,889 |  
|Ratio                                           |  |                    | 4.0    | % |                            | 4.0    | % |                    | 8.0    | %
|                                                |  |                    |        |   |                            |        |   |                    |        |  



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##### Table of Contents

The following table reconciles the Banks capital in accordance with generally accepted accounting
principles to its Tier 1 leveraged, Tier 1 risk-based and risk-based capital as of September 30, 2006 and December 31, 2005:

Regulatory Capital

(Bank only)

(dollars in thousands)



|                                                                                                                             |  |                   |        |   |                  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                             |  | September 30,2006 |        |   | December 31,2005 |  
|Capital in accordance with generally accepted accounting principles                                                          |  | $                 | 22,704 |   |                  | $ | 19,451 |  
|Adjustments for Tier 1 capital and Tier 1 risk based capital - unrealized (loss) on investment securities available for sale |  |                   | (140   | ) |                  |   | (234   | )
|                                                                                                                             |  |                   |        |   |                  |   |        |  
|Total Tier 1 capital and Tier 1 risk-based capital                                                                           |  |                   | 22,844 |   |                  |   | 19,685 |  
|Adjustments for risk-based capital - allowance for credit losses1                                                            |  |                   | 2,475  |   |                  |   | 2,182  |  
|                                                                                                                             |  |                   |        |   |                  |   |        |  
|Total risk-based capital                                                                                                     |  | $                 | 25,319 |   |                  | $ | 21,867 |  
|                                                                                                                             |  |                   |        |   |                  |   |        |  



|1 | Limited to 1.25% of risk-weighted assets.
|- | -----------------------------------------



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##### Table of Contents

|Item 3. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures

The Companys Chief Executive Officer and its Chief Financial
Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the Evaluation Date),
have concluded that as of the Evaluation Date, the Companys disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company,
particularly during the period in which this quarterly report was being prepared. There were no significant changes in the Companys internal controls over financial reporting during the quarter ended September 30, 2006 that has materially
affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.

Disclosure controls
and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no significant changes in the Companys internal controls over financial reporting that occurred in the third quarter of 2006 that have materially affected, or are reasonably likely to materially affect the Companys
internal control over financial reporting.



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##### Table of Contents

Part II- Other Information

Item 1 - Legal Proceedings

As of September 30, 2006, the Company was not a party to any significant
legal proceedings.

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

Not applicable

Item 3 - Defaults upon Senior Securities

Not applicable

Item 4 - Submission of Matters to a Vote of Security Holders

Not applicable

Item 5 - Other Information

Not applicable



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##### Table of Contents

Item 6 - Exhibits



|               |  |                                                                                                                                                                    
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                                                            
|3.1            |  | Articles of Incorporation of Canyon Bancorp (1)                                                                                                                    
|               | 
|3.2            |  | By-Laws of Canyon Bancorp (1)                                                                                                                                      
|               | 
|10.1           |  | 1998 Stock Option Plan of Canyon National Bank, assumed by Registrant on June 30, 2006 (1)                                                                         
|               | 
|10.2           |  | 2000 Stock Option Plan of Canyon National Bank, assumed by Registrant on June 30, 2006 (1)                                                                         
|               | 
|10.3           |  | Employment Agreement dated March 1, 1998 between Canyon National Bank and Stephen G. Hoffmann (1)                                                                  
|               | 
|10.4           |  | Salary Continuation Agreement dated September 1, 2003 between Canyon National Bank and Stephen G. Hoffmann (1)                                                     
|               | 
|10.5           |  | Salary Continuation Agreement dated September 1, 2003 between Canyon National Bank and Jonathan J. Wick (1)                                                        
|               | 
|10.6           |  | Lease between Canyon National Bank and Smoke Tree Village Shopping Center dated February 10, 1998 (Main Office) (1)                                                
|               | 
|10.7           |  | Heritage Plaza Lease dated April 16, 2004 between Canyon National Bank and the Agua Caliente Development Authority (Palm Springs Branch Office) (1)                
|               | 
|10.8           |  | Lease dated July 25, 2005 between Canyon National Bank and DBP Investments, LLC (Second Palm Desert Branch) (1)                                                    
|               | 
|10.9           |  | Voting and Stock Transfer Agreement between Canyon National Bank and Agua Caliente Band of Cahuilla Indians dated February 19, 1998 (1)                            
|               | 
|10.10          |  | Amendment to Voting and Stock Transfer Agreement between Canyon National Bank, Canyon Bancorp and Agua Caliente Band of Cahuilla Indians dated February 1, 2006 (1)
|               | 
|10.11          |  | Commitment letter dated February 1, 2006 among Canyon Bancorp, Canyon National Band and the Federal Reserve Board (1)                                              
|               | 
|10.12          |  | Subcontract for TESA Services between Canyon National Bank and the Agua Caliente Band of Cahuilla Indians dated October 1, 2002 (1)                                
|               | 
|10.13          |  | Salary Continuation Agreement dated June 30, 2006 between Canyon National Bank and Jeffery Gobble(2)                                                               
|               | 
|10.14          |  | Salary Continuation Agreement dated May 15, 2006 between Canyon National Bank and Stephen Hoffmann(2)                                                              
|               | 
|11             |  | Statement re: computation of per share earnings (3)                                                                                                                
|               | 
|31.1           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act                                                                         
|               | 
|31.2           |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act                                                                         
|               | 
|32             |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act                                             



|(1) | Incorporated by reference from the Companys Registration Statement on Form S-8 as filed with the SEC on July 5, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference from the Companys Form 10-QSB for the quarter ended June 30, 2006.
|--- | ---------------------------------------------------------------------------------------------



|(3) | The information for this Exhibit is incorporated from notes to the unaudited financial statements.
|--- | --------------------------------------------------------------------------------------------------



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##### Table of Contents

Signatures

In accordance with the requirements of the Exchange Act, the Company has caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |  |  |                                                                              
|----------------------- |  |  |  | -----------------------------------------------------------------------------
|                        |  |  |  | Canyon Bancorp                                                               
|                        |  |  |  | (Registrant)                                                                 
|                        |  | 
|Date: November 13, 2006 |  |  |  | /s/ Stephen G. Hoffmann                                                      
|                        |  |  |  | Stephen G. Hoffmann                                                          
|                        |  |  |  | President and Chief Executive Officer                                        
|                        |  | 
|                        |  |  |  | /s/ Jonathan J. Wick                                                         
|                        |  |  |  | Jonathan J. Wick                                                             
|                        |  |  |  | Executive Vice President, Chief Operating Officer and Chief Financial Officer



33