UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended March 31, 2008



| ̈ | 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





Canyon Bancorp

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 20-4346215                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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)





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 large accelerated file, an accelerated file, or a non-accelerated file. See definition of Accelerated Filer, Large Accelerated Filer and Smaller Reporting Company in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filer   ̈     Accelerated Filer   ̈     Non-accelerated File   ̈     Small Reporting Company  x

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

Number of shares outstanding of
common stock, as of May 6, 2008 is 2,479,927.

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











---

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 |  | 11
|ITEM 3                         |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | 31
|ITEM 4T                        |  | Controls and Procedures                                                               |  | 31
|PART II  OTHER INFORMATION    |  | 32                                                                                   
|ITEM 1                         |  | Legal Procedures                                                                      |  | 32
|ITEM 1a                        |  | Risk Factors                                                                          |  | 32
|ITEM 2                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 32
|ITEM 3                         |  | Defaults upon Senior Securities                                                       |  | 32
|ITEM 4                         |  | Submission of Matters to a Vote of Security Holders                                   |  | 32
|ITEM 5                         |  | Other Information                                                                     |  | 32
|ITEM 6                         |  | Exhibits                                                                              |  | 32
|SIGNATURES                     |  | 33                                                                                   



1



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Part I - Financial Information

Item 1 - Financial Statements

The following interim financial statements of Canyon Bancorp (the
Company) are as of March 31, 2008 and December 31, 2007. 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 March 31, 2008 and December 31, 2007 and for the three
months ended March 31, 2008 and 2007 are consolidated for the Company and the Bank. 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-Q. 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 March 31, 2008 and December 31, 2007

Consolidated Statements of Operations

For the three months ended March 31, 2008 and 2007

Consolidated Statements of Cash Flows

For the three months ended March 31, 2008 and 2007

Consolidated Statements of Comprehensive Income

For the three months ended March 31, 2008 and 2007

Notes to the Unaudited Consolidated Financial Statements



2



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CANYON BANCORP

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)



|                                                                                                                                                |  |                      |         |                     |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | ------------------- | - | ------- | -
|                                                                                                                                                |  | 3/31/2008(Unaudited) |         | 12/31/2007(Audited) |  
|Assets                                                                                                                                          |  |                      |         |                     |   |         |  
|Cash and cash equivalents                                                                                                                       |  | $                    | 24,234  |                     | $ | 13,562  |  
|Interest-bearing deposits in other financial institutions                                                                                       |  |                      |        |                     |   |        |  
|Investment securities available for sale                                                                                                        |  |                      | 10,018  |                     |   | 12,196  |  
|Federal Home Loan Bank and Federal Reserve Bank and Pacific Coast Bankers Bank restricted stock, at cost                                       |  |                      | 1,890   |                     |   | 1,890   |  
|Loans held for sale                                                                                                                             |  |                      | 636     |                     |   | 123     |  
|Loans receivable, net                                                                                                                           |  |                      | 250,800 |                     |   | 248,468 |  
|Furniture, fixtures and equipment                                                                                                               |  |                      | 5,561   |                     |   | 5,680   |  
|Income tax receivable                                                                                                                           |  |                      | 889     |                     |   | 909     |  
|Deferred tax asset                                                                                                                              |  |                      | 1,420   |                     |   | 1,430   |  
|Foreclosed assets                                                                                                                               |  |                      | 3,090   |                     |   | 3,073   |  
|Other assets                                                                                                                                    |  |                      | 1,640   |                     |   | 1,825   |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Total Assets                                                                                                                                    |  | $                    | 300,178 |                     | $ | 289,156 |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Liabilities and Stockholders Equity                                                                                                            |  |                      |         |                     |   |         |  
|Deposits:                                                                                                                                       |  |                      |         |                     |   |         |  
|Demand deposits                                                                                                                                 |  | $                    | 79,786  |                     | $ | 73,961  |  
|NOW accounts                                                                                                                                    |  |                      | 13,346  |                     |   | 14,223  |  
|Savings and money market                                                                                                                        |  |                      | 95,747  |                     |   | 79,262  |  
|Time certificate of deposits                                                                                                                    |  |                      | 59,840  |                     |   | 63,181  |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Total Deposits                                                                                                                                  |  |                      | 248,719 |                     |   | 230,627 |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Other borrowed funds                                                                                                                            |  |                      | 20,899  |                     |   | 28,160  |  
|Other Liabilities                                                                                                                               |  |                      | 1,911   |                     |   | 1,795   |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Total Liabilities                                                                                                                               |  |                      | 271,529 |                     |   | 260,582 |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Commitments and contingencies                                                                                                                   |  |                      |        |                     |   |        |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Stockholders Equity:                                                                                                                           |  |                      |         |                     |   |         |  
|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; 2,479,927 shares issued and outstanding as of of March 31, 2008 and
December 31, 2007 |  |                      | 23,513  |                     |   | 23,513  |  
|Accumulated other comprehensive income unrealized (loss) on investment securities available-for-sale                                            |  |                      | 8       |                     |   | (15     | )
|Retained earnings                                                                                                                               |  |                      | 5,128   |                     |   | 5,076   |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Total Stockholders Equity                                                                                                                      |  |                      | 28,649  |                     |   | 28,574  |  
|                                                                                                                                                |  |                      |         |                     |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                      |  | $                    | 300,178 |                     | $ | 289,156 |  
|                                                                                                                                                |  |                      |         |                     |   |         |  

See accompanying notes to financial statements.



3



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CANYON BANCORP

Consolidated Statement of Operations

(Unaudited)

For the three months ended March 31, 2008 and 2007

(Dollars in thousands, except per share amounts)



|                                                          |  |         |           |   |           |   |          
|--------------------------------------------------------- |  | ------- | --------- | - | --------- | - | ---------
|                                                          |  | 3/31/08 |           |   | 3/31/2007
|Interest income:                                          |  |         |           |   |           |   |          
|Loans receivable                                          |  | $       | 4,854     |   |           | $ | 4,820    
|Federal funds sold                                        |  |         | 80        |   |           |   | 179      
|Interest bearing deposits in other financial institutions |  |         |          |   |           |   | 17       
|Investment securities available for sale                  |  |         | 132       |   |           |   | 141      
|                                                          |  |         |           |   |           |   |          
|Total interest income                                     |  |         | 5,066     |   |           |   | 5,157    
|Interest expense:                                         |  |         |           |   |           |   |          
|Deposits                                                  |  |         | 1,325     |   |           |   | 1,343    
|Other borrowed funds                                      |  |         | 289       |   |           |   |         
|                                                          |  |         |           |   |           |   |          
|Total interest expense                                    |  |         | 1,614     |   |           |   | 1,343    
|Net interest income                                       |  |         | 3,452     |   |           |   | 3,814    
|Provision for loan losses                                 |  |         | 1,160     |   |           |   | 90       
|                                                          |  |         |           |   |           |   |          
|Net interest income after provision for loan losses       |  |         | 2,292     |   |           |   | 3,724    
|                                                          |  |         |           |   |           |   |          
|Noninterest income:                                       |  |         |           |   |           |   |          
|Service charges and fees                                  |  |         | 193       |   |           |   | 166      
|Loan related fees                                         |  |         | 36        |   |           |   | 178      
|Lease administration fees                                 |  |         | 96        |   |           |   | 222      
|Automated teller machine fees                             |  |         | 179       |   |           |   | 163      
|Net loss on sale of foreclosed assets                     |  |         | (19       | ) |           |   |         
|Net gain on sale of investment securities                 |  |         | 21        |   |           |   |         
|                                                          |  |         |           |   |           |   |          
|Total noninterest income                                  |  |         | 506       |   |           |   | 729      
|                                                          |  |         |           |   |           |   |          
|Noninterest expenses:                                     |  |         |           |   |           |   |          
|Salaries and employee benefits                            |  |         | 1,358     |   |           |   | 1,429    
|Occupancy and equipment expense                           |  |         | 395       |   |           |   | 372      
|Professional fees                                         |  |         | 53        |   |           |   | 70       
|Data processing                                           |  |         | 166       |   |           |   | 144      
|Marketing and advertising expense                         |  |         | 135       |   |           |   | 115      
|Foreclosed asset expense, net                             |  |         | 26        |   |           |   |         
|Director and shareholder expense                          |  |         | 146       |   |           |   | 112      
|Other operating expense                                   |  |         | 447       |   |           |   | 409      
|                                                          |  |         |           |   |           |   |          
|Total noninterest expenses                                |  |         | 2,726     |   |           |   | 2,651    
|                                                          |  |         |           |   |           |   |          
|Earnings before income taxes                              |  |         | 72        |   |           |   | 1,802    
|Income tax expense                                        |  |         | 20        |   |           |   | 731      
|                                                          |  |         |           |   |           |   |          
|Net earnings                                              |  | $       | 52        |   |           | $ | 1,071    
|                                                          |  |         |           |   |           |   |          
|Earnings rer share:                                       |  |         |           |   |           |   |          
|Basic                                                     |  | $       | 0.02      |   |           | $ | 0.44     
|                                                          |  |         |           |   |           |   |          
|Diluted                                                   |  | $       | 0.02      |   |           | $ | 0.42     
|                                                          |  |         |           |   |           |   |          
|Weighted average shares outstanding:                      |  |         |           |   |           |   |          
|Basic                                                     |  |         | 2,479,927 |   |           |   | 2,439,174
|                                                          |  |         |           |   |           |   |          
|Diluted                                                   |  |         | 2,536,790 |   |           |   | 2,543,346
|                                                          |  |         |           |   |           |   |          

See accompanying notes to financial statements.



4



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CANYON BANCORP

Consolidated Statement of Cash Flows

(Unaudited)

For the three months ended March 31, 2008 and 2007

(Dollars in thousands)



|                                                                                   |  |      |        |   |      |   |        |  
|---------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                   |  | 2008 |        |   | 2007 |  
|Operating Activities:                                                              |  |      |        |   |      |   |        |  
|Net earnings                                                                       |  | $    | 52     |   |      | $ | 1,071  |  
|Adjustment to reconcile net earnings to net cash provided by operating activities: |  |      |        |   |      |   |        |  
|Amortization of deferred loan origination fees                                     |  |      | (164   | ) |      |   | (251   | )
|Depreciation of fixed assets                                                       |  |      | 163    |   |      |   | 150    |  
|Amortization of premium/discounts on investment securities, net                    |  |      | 4      |   |      |   | 1      |  
|Provision for loan losses                                                          |  |      | 1,160  |   |      |   | 90     |  
|Provision for unfunded commitment losses                                           |  |      | 10     |   |      |   |       |  
|Net gain on sale of securities available for sale                                  |  |      | (21    | ) |      |   |       |  
|Net loss on sale of other foreclosed assets                                        |  |      | 19     |   |      |   |       |  
|FHLB stock dividends received                                                      |  |      |       |   |      |   | (15    | )
|Net increase in loans held for sale                                                |  |      | (513   | ) |      |   | (667   | )
|Increase in other assets                                                           |  |      | 185    |   |      |   | 2,131  |  
|Decrease in incomes tax receivable                                                 |  |      | 20     |   |      |   | 493    |  
|Decrease in deferred income taxes                                                  |  |      | 10     |   |      |   |       |  
|Increase in other liabilities                                                      |  |      | 90     |   |      |   | 423    |  
|Excess tax benefit from share-based payment arrangements                           |  |      |       |   |      |   | (217   | )
|                                                                                   |  |      |        |   |      |   |        |  
|Net cash provided by operating activities                                          |  |      | 1,015  |   |      |   | 3,209  |  
|                                                                                   |  |      |        |   |      |   |        |  
|Investing Activities:                                                              |  |      |        |   |      |   |        |  
|Net increase in loans                                                              |  |      | (4,057 | ) |      |   | (7,668 | )
|Purchase of investment securities available for sale                               |  |      | (3,015 | ) |      |   |       |  
|Principal repayment of investment securities available for sale                    |  |      | 228    |   |      |   | 313    |  
|Proceeds from sale of securities available for sale                                |  |      | 2,021  |   |      |   |       |  
|Proceeds from maturing/called investment securities available for sale             |  |      | 3,000  |   |      |   | 2,000  |  
|Decrease in interest bearing deposits in other financial institutions              |  |      |       |   |      |   | 400    |  
|Proceeds from sale of foreclosed assets                                            |  |      | 693    |   |      |   |       |  
|Purchases of premises and equipment                                                |  |      | (44    | ) |      |   | (38    | )
|                                                                                   |  |      |        |   |      |   |        |  
|Net cash used in investing activities                                              |  |      | (1,174 | ) |      |   | (4,993 | )
|                                                                                   |  |      |        |   |      |   |        |  
|Financing Activities:                                                              |  |      |        |   |      |   |        |  
|Net increase in deposits non-term deposits                                         |  |      | 21,433 |   |      |   | 14,037 |  
|Net decrease in time certificates of deposit                                       |  |      | (3,341 | ) |      |   | (538   | )
|Net decrease in other borrowings                                                   |  |      | (7,261 | ) |      |   |       |  
|Proceeds for exercise of stock options                                             |  |      |       |   |      |   | 82     |  
|Excess tax benefit from shared-based payment arrangements                          |  |      |       |   |      |   | 217    |  
|                                                                                   |  |      |        |   |      |   |        |  
|Net cash provided by financing activities                                          |  |      | 10,831 |   |      |   | 13,798 |  
|                                                                                   |  |      |        |   |      |   |        |  
|Net Increase in Cash and Cash Equivalents                                          |  |      | 10,672 |   |      |   | 12,014 |  
|Cash and Cash Equivalents at the Beginning of the Period                           |  |      | 13,562 |   |      |   | 20,569 |  
|                                                                                   |  |      |        |   |      |   |        |  
|Cash and Cash Equivalents at the End of the Period                                 |  | $    | 24,234 |   |      | $ | 32,583 |  
|                                                                                   |  |      |        |   |      |   |        |  
|Supplemental Disclosure of Cash Flow Information:                                  |  |      |        |   |      |   |        |  
|Interest Paid                                                                      |  | $    | 1,638  |   |      | $ | 1,327  |  
|                                                                                   |  |      |        |   |      |   |        |  
|Non-Cash Investing Activities:                                                     |  |      |        |   |      |   |        |  
|Change in unrealized loss on investment securities available-for-sale              |  | $    | 39     |   |      | $ | 21     |  
|                                                                                   |  |      |        |   |      |   |        |  
|Transfer of loans to other real estate owned                                       |  | $    | 729    |   |      | $ |       |  
|                                                                                   |  |      |        |   |      |   |        |  

See accompanying notes to financial statements.



5



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CANYON BANCORP

Consolidated Statement of Comprehensive Income

(Unaudited)

For the three months ended
March 31, 2008 and 2007

(Dollars in Thousands)



|                                                                                                                                                      |  |         |    |         |   |      
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | -- | ------- | - | -----
|                                                                                                                                                      |  | 3/31/08 |    | 3/31/07
|Net earnings                                                                                                                                          |  | $       | 52 |         | $ | 1,071
|Other comprehensive income:                                                                                                                           |  |         |    |         |   |      
|Unrealized gain on investment securities available for sale, net of related income tax expense of $16 and $8 for March 31, 2008 and 2007,
repectively |  |         | 23 |         |   | 13   
|                                                                                                                                                      |  |         |    |         |   |      
|Comprehensive Income                                                                                                                                  |  | $       | 75 |         | $ | 1,084
|                                                                                                                                                      |  |         |    |         |   |      

See accompanying notes to financial statements.



6



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Notes to the Unaudited Financial Statements



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



|                  |  |                   |  |                   |  |                  
|----------------- |  | ----------------- |  | ----------------- |  | -----------------
|Declaration Date  |  | Record Date       |  | Payment Date      |  | Rate/Type        
|November 27, 2007 |  | December 11, 2007 |  | December 26, 2007 |  | 5% stock dividend

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



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

BUSINESS
COMBINATIONS: On December 4, 2007 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R), Business Combinations, the objective of which
is to improve, simplify and converge internationally the accounting for business combinations. SFAS 141(R) improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more
complete, comparable and relevant information for investors and other users of financial statements. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in
the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to
evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) also will reduce the complexity of existing generally accepted accounting principles (GAAP). SFAS 141(R) is effective for fiscal years
beginning after December 15, 2008. The Company is in the process of assessing the impact SFAS No. 141(R) would have on its financial condition and results of operations.

NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS: Also on December 4, 2007 FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements. The objective of SFAS No. 160 is to improve, simplify and converge internationally the reporting of noncontrolling interests in consolidated financial statements. SFAS No. 160 improves
the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same wayas equity in the consolidated financial
statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS No. 160 is effective
for fiscal years beginning after December 15, 2008. However, the Company does not have any noncontrolling (minority) interests in subsidiaries at this time and does not expect SFAS No. 160 to have any impact on the financial condition,
results of operations, or liquidity.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: On March 19, 2008 FASB issued SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys financial position, financial performance, and cash flows. SFAS No. 161 also improves transparency about the location and amounts of derivative instruments in an entitys
financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has historically not had derivative instruments or been involved in hedging
activities and, as such, does not expect SFAS No. 161 to have any impact on financial condition, results of operations or liquidity.



7



---

|3. | Share Based Compensation
|-- | ------------------------

The following table presents the
activity related to options for the three months ended March 31, 2008 and 2007.



|                                   |  |                |  |                               |      |                                          |           |                                   |   |        |  |         |                               |  |                                          |       |                                   |           |  |   |      
|---------------------------------- |  | -------------- |  | ----------------------------- | ---- | ---------------------------------------- | --------- | --------------------------------- | - | ------ |  | ------- | ----------------------------- |  | ---------------------------------------- | ----- | --------------------------------- | --------- |  | - | -----
|                                   |  | March 31, 2008 |  | March 31, 2007               
|                                   |  | Shares         |  | Weighted-AverageExercisePrice |      | Weighted-AverageRemainingContractualTerm |           | AggregateIntrinsicValue (in$000s) |   | Shares |  |         | Weighted-AverageExercisePrice |  | Weighted-AverageRemainingContractualTerm |       | AggregateIntrinsicValue (in$000s)
|Outstanding, beginning of year     |  | 158,706        |  | $                             | 9.46 |                                          |           |                                   |   |        |  | 207,910 |                               |  | $                                        | 8.30  |                                   |           |  |   |      
|Granted                            |  |               |  |                               |     |                                          |           |                                   |   |        |  |        |                               |  |                                          |      |                                   |           |  |   |      
|Cancelled                          |  |               |  |                               |     |                                          |           |                                   |   |        |  | (475    | )                             |  |                                          | 23.24 |                                   |           |  |   |      
|Exercised                          |  |               |  |                               |     |                                          |           |                                   |   |        |  | (23,100 | )                             |  |                                          | 3.55  |                                   |           |  |   |      
|                                   |  |                |  |                               |      |                                          |           |                                   |   |        |  |         |                               |  |                                          |       |                                   |           |  |   |      
|Outstanding, end of period         |  | 158,706        |  |                               | 9.46 |                                          | 3.9 Years |                                   | $ | 1,382  |  | 184,335 |                               |  |                                          | 8.86  |                                   | 4.6 Years |  | $ | 2,911
|                                   |  |                |  |                               |      |                                          |           |                                   |   |        |  |         |                               |  |                                          |       |                                   |           |  |   |      
|Options exercisable, end of period |  | 158,706        |  | $                             | 9.46 |                                          | 3.9 Years |                                   | $ | 1,382  |  | 185,335 |                               |  | $                                        | 8.86  |                                   | 4.6 Years |  | $ | 2,911
|                                   |  |                |  |                               |      |                                          |           |                                   |   |        |  |         |                               |  |                                          |       |                                   |           |  |   |      



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

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



|5. | Adoption of New Accounting Standards
|-- | ------------------------------------

In September 2006
FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with 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
January 1, 2008. The impact of adoption was not material.

In February 2007 FASB issued SFAS No. 159, Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the FASBs long-term measurement objectives for accounting for financial instruments. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect the fair value option for any additional financial assets or financial liabilities as of January 1, 2008.

Effective January 1, 2008, the Company determines the fair market values of certain financial instruments based on the fair value hierarchy
established in SFAS No. 157, Fair Value Measurements, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value.

The following provides a summary of the hierarchical levels, as defined by SFAS
No. 157, used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement date. Level 1 assets and liabilities may include debt and equity securities that are traded in an active exchange market and that are highly liquid and are actively traded in over-the-counter
markets.



8



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Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities may include
debt securities with quoted prices that are traded less frequently than exchange-traded instruments and other instruments whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally
from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts, residential mortgage and loans held-for-sale.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential MSRs, asset-backed securities (ABS), highly structured or
long-term derivative contracts and certain collateralized debt obligations (CDO) where independent pricing information was not able to be obtained for a significant portion of the underlying assets.

Fair Value Measurements

The Company
used the following methods and significant assumptions to estimate fair value:



| |  |  | Securities
| | - |  | ----------

The fair value of
securities available-for-sale is determined by obtaining quoted prices on nationally recognized exchanges or matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted
prices for the specific securities but rather relying on the securitys relationship to other benchmark quoted securities. Based on the composition of the Companys available for sale securities portfolio, all assets in this group are
recurring level 2 as of March 31, 2008.



| |  |  | Loans Held for Sale
| | - |  | -------------------

The fair value
of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted price exists, the fair value of the loan is determined using quoted prices for a similar asset or assets, adjusted for the specific
attributes of that loan. At March 31, 2008 Loans Held for Sale are non-recurring level 2.



| |  |  | Impaired Loans
| | - |  | --------------

A loan is considered
impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans which are collateral based are measured at the fair value of the loans collateral
value. A majority of the Companys loans are collateral dependent and, accordingly, are measured based on the fair value of such collateral. Impaired loans which are not collateral dependent are based on the present value of the expected future
cash flows. The Company measures impairment on all non-accrual loans and charges-off amounts in which the carrying cost of the loan exceeds fair value, less selling costs. Fair value of the loans collateral is determined by appraisals or
recent transaction prices for similar collateral, adjusted for costs to liquidate collateral. As such, the Company records impaired loans as non-recurring Level 2. At March 31, 2008, substantially all of the Companys impaired loans were
evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to Management or recent transaction prices for similar collateral.



| |  |  | Foreclosed Assets
| | - |  | -----------------

The fair value of
foreclosed assets is determined, when possible, using recent appraised values of the asset, recent transaction prices for similar assets or listed sales price. As such, the Company records foreclosed assets as non-recurring Level 2.



9



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The following table provides a summary as of March 31, 2008 of the financial instruments the Company
measures at fair value on a recurring basis:



|                                          |  |                               |   |         |   |         |  |                     |   |  |   |       
|----------------------------------------- |  | ----------------------------- | - | ------- | - | ------- |  | ------------------- | - |  | - | ------
|                                          |  | Fair Value Measurements Using
|                                          |  | Level 1                       |   | Level 2 |   | Level 3 |  | Assets atFair Value
|Assets:                                   |  |                               |   |         |   |         |  |                     |   |  |   |       
|Available for sale investment securities  |  | $                             |  |         | $ | 10,018  |  | $                   |  |  | $ | 10,018
|                                          |  |                               |   |         |   |         |  |                     |   |  |   |       
|Total assets measure on a recurring basis |  | $                             |  |         | $ | 10,018  |  | $                   |  |  | $ | 10,018
|                                          |  |                               |   |         |   |         |  |                     |   |  |   |       

The following table provides a summary as of March 31, 2008 of the financial instruments the
Company measures at fair value on a non-recurring basis:



|                                              |  |                               |   |         |   |         |  |                     |   |  |   |       
|--------------------------------------------- |  | ----------------------------- | - | ------- | - | ------- |  | ------------------- | - |  | - | ------
|                                              |  | Fair Value Measurements Using
|                                              |  | Level 1                       |   | Level 2 |   | Level 3 |  | Assets atFair Value
|Assets:                                       |  |                               |   |         |   |         |  |                     |   |  |   |       
|Loans held for sale                           |  | $                             |  |         | $ | 636     |  | $                   |  |  | $ | 636   
|Impaired loans                                |  |                               |  |         |   | 6,740   |  |                     |  |  |   | 6,740 
|Foreclosed assets                             |  |                               |  |         |   | 3,090   |  |                     |  |  |   | 3,090 
|                                              |  |                               |   |         |   |         |  |                     |   |  |   |       
|Total assets measure on a non-recurring basis |  | $                             |  |         | $ | 10,466  |  | $                   |  |  | $ | 10,466
|                                              |  |                               |   |         |   |         |  |                     |   |  |   |       



10



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|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. In December 2007 the Company purchased a parcel of land in the City of Indio, California for the
purposes of building a 6,500 to 6,800 square foot full service branch office. Pending approval of its construction plans by the City of Indio, construction of the new facility is expected to begin in the second half of 2008. Until the new facility
is completed, the Company may place a temporary branch facility on the parcel of land purchased or may lease a temporary location in order to commence offering banking services in the second half of 2008.

As of May 6, 2008, the Companys 2,479,927 shares of Common Stock are held by 297 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-Q includes forward-looking statements 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 Bank. These include, but are not limited to, the 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.



11



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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 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 the 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, 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 at March 31, 2008 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.

Financial Condition

At March 31, 2008, total
assets were $300.2 million compared to $289.2 million at December 31, 2007, resulting in an $11.0 million or 3.8% increase in total assets over the three-month period. Over this same three-month period, net loans receivable increased by $2.3
million or 0.9%, investment securities available for sale and interest bearing deposits in other financial institutions decreased by $2.2 million or 17.9% and cash and cash equivalents increased by $10.7 million or 78.7%. At March 31, 2008 and
December 31, 2007, net loans receivable comprised 83.6% and 85.9%, respectively, of total assets and represented 100.8% and 107.7%, respectively, of deposits.



12



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Loan Portfolio

The increase in loans receivable from year-end 2007 to March 31, 2008 is primarily the result of an increase of non-construction real estate loans. Non-construction real estate loans are primarily secured by
commercial real estate properties. From year-end 2007, gross loans increased by $2.9 million to $255.3 million at March 31, 2008. The largest loan category at March 31, 2007 is real estate loansexcluding construction loanswhich
constitutes 59.7% of gross loans. The next largest loan concentrations are commercial loans (21.3% of gross loans) secured by non-real estate assets or made on an unsecured basis and construction loans (17.3% of gross loans). 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 (1.7% 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 American entities are generally secured by collateral located in the State of California or other western states.

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
March 31, 2008 totaled $17.2 million, or 6.8% of gross loans, some of which are guaranteed by the United States Government. At that same date, loan balances of $7.9 million were guaranteed by the United States Bureau of Indian Affairs.

The composition of the Companys loan portfolio at March 31, 2008 and December 31, 2007 is set forth below:

Loan Portfolio Composition

(dollars in
thousands)



|                                                           |  |              |         |   |                  |       |   |        |   |         |         |  |       |  
|---------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | ----- | - | ------ | - | ------- | ------- |  | ----- | -
|                                                           |  | March 312008 |         |   | December 31,2007 |      
|                                                           |  | Amount       |         |   | Percent          |       |   | Amount |   |         | Percent | 
|Real estate:                                               |  |              |         |   |                  |       |   |        |   |         |         |  |       |  
|Construction                                               |  | $            | 44,181  |   |                  | 17.3  | % |        | $ | 46,182  |         |  | 18.3  | %
|Other                                                      |  |              | 152,370 |   |                  | 59.7  | % |        |   | 148,384 |         |  | 58.8  | %
|Commercial                                                 |  |              | 54,310  |   |                  | 21.3  | % |        |   | 53,018  |         |  | 21.0  | %
|Consumer                                                   |  |              | 4,472   |   |                  | 1.7   | % |        |   | 4,872   |         |  | 1.9   | %
|                                                           |  |              |         |   |                  |       |   |        |   |         |         |  |       |  
|Gross loans                                                |  |              | 255,333 |   |                  | 100.0 | % |        |   | 252,456 |         |  | 100.0 | %
|                                                           |  |              |         |   |                  |       |   |        |   |         |         |  |       |  
|Deferred loan origination fees and costs                   |  |              | (869    | ) |                  |       |   |        |   | (941    | )       |  |       |  
|Allowance for loan losses                                  |  |              | (3,664  | ) |                  |       |   |        |   | (3,047  | )       |  |       |  
|                                                           |  |              |         |   |                  |       |   |        |   |         |         |  |       |  
|Net loans                                                  |  | $            | 250,800 |   |                  |       |   |        | $ | 248,468 |         |  |       |  
|                                                           |  |              |         |   |                  |       |   |        |   |         |         |  |       |  
|Loans held for sale                                        |  | $            | 636     |   |                  |       |   |        | $ | 123     |         |  |       |  
|                                                           |  |              |         |   |                  |       |   |        |   |         |         |  |       |  
|Principal balance guaranteed by federally insured programs |  | $            | 7,874   |   |                  |       |   |        | $ | 8,043   |         |  |       |  
|                                                           |  |              |         |   |                  |       |   |        |   |         |         |  |       |  
|Principal balance outstanding to Native American entities  |  | $            | 17,243  |   |                  |       |   |        | $ | 17,516  |         |  |       |  
|                                                           |  |              |         |   |                  |       |   |        |   |         |         |  |       |  



13



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The weighted average interest rate on the loan portfolio at March 31, 2008, is 7.10%. At
March 31, 2008, eighty-five percent (85%) or $218.8 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. Seventy-eight percent
(78%) or $169.6 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 $11.6 million and $11.0 million at
March 31, 2008 and December 31, 2007, respectively.

Commercial Real Estate Loans

In December 2006, the OCC, Board of Governors of the Federal Reserve System; and FDIC (the Agencies) issued final joint Guidance on
Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (the Guidance). This Guidance applies to national banks and state chartered banks and was developed to reinforce sound risk management practices for
institutions with high and increasing concentrations of commercial real estate loans on their balance sheets.

For purposes of this
Guidance, commercial real estate (CRE) loans are exposures secured by raw land, land development and construction (including 1-4 family residential construction, multi-family property, and nonresidential property) where the primary or significant
source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing, or permanent financing of the property.

Banks with CRE concentrations should have in place risk management practices consistent with this Guidance to mitigate the increased risks associated with such concentrations. The Guidance sets forth the following
criteria to determine whether a concentration in CRE lending warrants the use of heightened risk management practices: (i) total loans for construction, land development, and other land represent one hundred percent (100%) or more of the
Banks total capital; or (ii) total loan secured by multifamily proprieties, nonresidential properties, construction, land development, and other land represents three hundred percent (300%) or more of total capital.

Banks exceeding the threshold would be deemed to have a concentration in CRE loans and should have heightened risk management practices appropriate to
the degree of CRE concentration risk of these loans in their portfolios and consistent with the Guidance. The Agencies have excluded loans secured by owner-occupied properties from the CRE definition because their risk profiles are less influenced
by the condition of the general CRE market.

At March 31, 2008, the Company exceeded the Guidance threshold for construction and land
loans with these loan balances comprising 217% of total capital. The Companys ratio of total CRE loans to total capital was 332% at March 31, 2008 and also exceeded the Guidance threshold at that date. The Company believes it has adequate
risk management practices in place in that it:



| | a) | has secured United States Government guarantees on certain loans to mitigate potential losses, and
| | -- | --------------------------------------------------------------------------------------------------



| | b) | has instituted an extensive funds control process to disburse construction loan proceeds, and
| | -- | ---------------------------------------------------------------------------------------------



| | c) | has capital levels in excess of the well-capitalized amounts required by federal banking authorities to support possible future losses, and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------



| | d) | has modified its minimum underwriting standards in response to slower growth of real estate values and a general slowing in the local and national economies, and,
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | has instituted a reporting process to the Board of Directors to monitor concentrations.
| | -- | ---------------------------------------------------------------------------------------



14



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The table on the following page sets forth the amount of total loans outstanding as of March 31,
2008 for real estate loans by sub category and occupancy type.



|                            |  |                        |        |                   |   |         |  |   |        
|--------------------------- |  | ---------------------- | ------ | ----------------- | - | ------- |  | - | -------
|                            |  | As of March 31, 2008  
|                            |  | (Dollars in thousands)
|                            |  | OwnerOccupied          |        | Non OwnerOccupied |   | Total  
|Real Estate Loans           |  |                        |        |                   |   |         |  |   |        
|Construction                |  |                        |        |                   |   |         |  |   |        
|1 to 4 family residential   |  | $                      | 3,277  |                   | $ | 27,447  |  | $ | 30,724 
|Multifamily                 |  |                        |       |                   |   |        |  |   |       
|Commercial                  |  |                        | 1,493  |                   |   | 6,362   |  |   | 7,855  
|Land Improvements           |  |                        |       |                   |   | 5,602   |  |   | 5,602  
|Other                       |  |                        |        |                   |   |         |  |   |        
|1 to 4 Family Residential   |  |                        | 15,601 |                   |   | 12,836  |  |   | 28,437 
|Home Equity Lines of Credit |  |                        | 2,810  |                   |   | 3,800   |  |   | 6,610  
|Multifamily                 |  |                        |       |                   |   | 2,282   |  |   | 2,282  
|Commercial                  |  |                        | 54,727 |                   |   | 38,237  |  |   | 92,964 
|Land                        |  |                        |       |                   |   | 22,077  |  |   | 22,077 
|                            |  |                        |        |                   |   |         |  |   |        
|Total Real Estate Loans     |  | $                      | 77,908 |                   | $ | 118,643 |  | $ | 196,551
|                            |  |                        |        |                   |   |         |  |   |        

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 March 31, 2008 and December 31, 2007, the Company had $57.6 million and $56.6
million, respectively, of off-balance sheet commitments to fund certain loans. The composition of unfunded off-balance sheet loan commitments at March 31, 2008 is 19.0% undisbursed construction loans, 62.9% unused lines of credit, 5.1% unused
home equity lines of credit, and 13.0% obligations under letters of credit. These commitments represent a credit risk and potential future obligation of the Company.

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 allowance for loan losses as a percentage of gross loans was 1.43% at March 31, 2008 and 1.21% at
December 31, 2007.

At March 31, 2008, the outstanding principal balance of nonperforming assets totaled $9.8 million and
included $3.1 million in foreclosed assets and $6.7 million in nonaccrual loans. Nonperforming assets have increased during the first quarter 2008 due to the recent deterioration of real estate values throughout Southern California which includes
the Companys primary lending area.



15



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Foreclosed assets at March 31, 2008 consisted of nineteen residential real properties and personal property. Nonaccrual loans consisted of three
business loans, three real estate secured loans, and twelve construction loans. The business loans include one loan guaranteed by the United States Bureau of Indian Affairs. Management has determined the fair value of the collateral securing these
loans and has charged off the amount, if any, in which the recorded book value exceeds the fair value less sales costs. Should further deterioration in collateral values occur subsequent to March 31, 2008, further charge-offs may be necessary
in the future. The Company has initiated foreclosure procedures on the properties where borrowers have been unable to repay their loans in accordance with the contractual terms of the loan. Loan balances are reported net of a participation interests
sold to others and are sold without recourse. During the quarter, the Company repossessed four real estate properties which were collateral for nonperforming loans and two personal property items. The Company also initiated foreclosure procedures on
other nonperforming loans. A majority of the nonperforming assets are construction loans located in the Companys primary lending area.

The table on the following page sets forth non-performing assets as of March 31, 2008 and 2007, and December 31, 2007, as well as adversely classified loans as of these dates. Nonaccrual loans may also be adversely classified,
resulting in the principal balance reported in both categories.



16



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Non-performing Assets

(dollars in thousands)



|                                                                  |  |          |        |   |                 |   |       |   |  |   |       |  
|----------------------------------------------------------------- |  | -------- | ------ | - | --------------- | - | ----- | - |  | - | ----- | -
|                                                                  |  | March 31 |        |   | December 312007 |  
|                                                                  |  | 2008     |        |   | 2007            |   |      
|Foreclosed assets                                                 |  | $        | 3,090  |   |                 | $ |      |   |  | $ | 3,073 |  
|Nonaccrual loans1                                                 |  |          |        |   |                 |   |       |   |  |   |       |  
|Real Estate:                                                      |  |          |        |   |                 |   |       |   |  |   |       |  
|Construction                                                      |  |          | 4,348  |   |                 |   |      |   |  |   | 562   |  
|Other                                                             |  |          | 1,027  |   |                 |   | 1,544 |   |  |   | 561   |  
|Commercial                                                        |  |          | 1,365  |   |                 |   | 223   |   |  |   |      |  
|Consumer                                                          |  |          |       |   |                 |   |      |   |  |   |      |  
|Loans 90 days or more past due & still accruing                   |  |          |       |   |                 |   |      |   |  |   |      |  
|                                                                  |  |          |        |   |                 |   |       |   |  |   |       |  
|Total Nonperforming assets:2                                      |  |          | 9,830  |   |                 |   | 1,767 |   |  |   | 4,196 |  
|                                                                  |  |          |        |   |                 |   |       |   |  |   |       |  
|Adversely classified loans:1                                      |  |          |        |   |                 |   |       |   |  |   |       |  
|Substandard                                                       |  |          |        |   |                 |   |       |   |  |   |       |  
|Real estate                                                       |  |          |        |   |                 |   |       |   |  |   |       |  
|Construction                                                      |  |          | 15,268 |   |                 |   |      |   |  |   | 249   |  
|Other                                                             |  |          | 1,818  |   |                 |   | 2,066 |   |  |   | 1,836 |  
|Commercial                                                        |  |          | 1,341  |   |                 |   | 24    |   |  |   | 250   |  
|Consumer                                                          |  |          |       |   |                 |   |      |   |  |   | 2     |  
|                                                                  |  |          |        |   |                 |   |       |   |  |   |       |  
|Total substandard                                                 |  |          | 18,427 |   |                 |   | 2,090 |   |  |   | 2,337 |  
|                                                                  |  |          |        |   |                 |   |       |   |  |   |       |  
|Doubtful                                                          |  |          |        |   |                 |   |       |   |  |   |       |  
|Real estate                                                       |  |          |        |   |                 |   |       |   |  |   |       |  
|Construction                                                      |  |          |       |   |                 |   |      |   |  |   |      |  
|Other                                                             |  |          |       |   |                 |   |      |   |  |   |      |  
|Commercial                                                        |  |          |       |   |                 |   |      |   |  |   |      |  
|Consumer                                                          |  |          |       |   |                 |   |      |   |  |   |      |  
|                                                                  |  |          |        |   |                 |   |       |   |  |   |       |  
|Total doubtful                                                    |  |          |       |   |                 |   |      |   |  |   |      |  
|                                                                  |  |          |        |   |                 |   |       |   |  |   |       |  
|Total adversely classified loans                                  |  | $        | 18,427 |   |                 | $ | 2,090 |   |  | $ | 2,337 |  
|                                                                  |  |          |        |   |                 |   |       |   |  |   |       |  
|Ratio of adversely classified loans to gross loans at period end  |  |          | 7.2    | % |                 |   | 1.0   | % |  |   | 0.9   | %
|Ratio of nonaccrual loans to gross loans at period                |  |          | 2.6    | % |                 |   | 0.8   | % |  |   | 0.4   | %
|Ratio of allowance for loan losses to nonperforming assets2       |  |          | 37.3   | % |                 |   | 190.3 | % |  |   | 72.6  | %
|Ratio of allowance for loan losses to adversely classified assets |  |          | 19.9   | % |                 |   | 160.9 | % |  |   | 130.4 | %



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



|2 | Nonperforming assets is defined as foreclosed assets, nonaccrual loans and loans 90 days or more past due and still
accruing.
|- | -----------------------------------------------------------------------------------------------------------------------------



17



---

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, 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 below summarizes the three-months ended March 31, 2008 and 2007, and the year ended December 31, 2007, 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.



18



---

Allowance for Loan Losses

(dollars in thousands)



|                                                                                  |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---------------------------------- | - | ------- | - |  | - | ------- | -
|                                                                                  |  | For the Three Months EndedMarch 31, |         |   | For the Year EndedDecember 31,2007 |  
|                                                                                  |  | 2008                                |         |   | 2007                               |   |        
|Balances:1                                                                        |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Average gross loans outstanding during period                                     |  | $                                   | 255,033 |   |                                    | $ | 214,845 |   |  | $ | 227,829 |  
|Total gross loans outstanding at end of period                                    |  |                                     | 255,333 |   |                                    |   | 214,916 |   |  |   | 252,456 |  
|Allowance for loan losses:                                                        |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Balance at beginning of period                                                    |  |                                     | 3,047   |   |                                    |   | 3,422   |   |  |   | 3,422   |  
|Provision for loan losses                                                         |  |                                     | 1,160   |   |                                    |   | 90      |   |  |   | 1,310   |  
|Loan charge-offs                                                                  |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Real Estate - Construction                                                        |  |                                     | (203    | ) |                                    |   |        |   |  |   | (782    | )
|Real Estate - Other                                                               |  |                                     | (141    | ) |                                    |   |        |   |  |   | (135    | )
|Commercial                                                                        |  |                                     | (195    | ) |                                    |   | (143    | ) |  |   | (746    | )
|Consumer                                                                          |  |                                     | (22     | ) |                                    |   | (7      | ) |  |   | (24     | )
|                                                                                  |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Total loan charge-offs                                                            |  |                                     | (561    | ) |                                    |   | (150    | ) |  |   | (1,687  | )
|                                                                                  |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Recoveries                                                                        |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Real Estate - Construction                                                        |  |                                     | 12      |   |                                    |   |        |   |  |   |        |  
|Real Estate - Other                                                               |  |                                     |        |   |                                    |   |        |   |  |   | 1       |  
|Commercial                                                                        |  |                                     | 5       |   |                                    |   |        |   |  |   | 1       |  
|Consumer                                                                          |  |                                     | 1       |   |                                    |   |        |   |  |   |        |  
|                                                                                  |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Total recoveries                                                                  |  |                                     | 18      |   |                                    |   |        |   |  |   | 2       |  
|                                                                                  |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Net loan (charge-offs)/recoveries                                                |  |                                     | (543    | ) |                                    |   | (150    | ) |  |   | (1,685  | )
|                                                                                  |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Balance at end of period                                                          |  | $                                   | 3,664   |   |                                    | $ | 3,362   |   |  | $ | 3,047   |  
|                                                                                  |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Ratios:                                                                           |  |                                     |         |   |                                    |   |         |   |  |   |         |  
|Net loan charge-offs/(recoveries) to average loans2                              |  |                                     | 0.85    | % |                                    |   | 0.28    | % |  |   | 0.74    | %
|Allowance for loan losses to gross loans at the end of the period                 |  |                                     | 1.43    | % |                                    |   | 1.56    | % |  |   | 1.21    | %
|Net loan charge-offs/(recoveries) to allowance for loan losses at end of period1 |  |                                     | 59.28   | % |                                    |   | 17.85   | % |  |   | 55.30   | %
|Net loan charge-offs/(recoveries) to provision for loan losses                   |  |                                     | 46.81   | % |                                    |   | 166.67  | % |  |   | 128.63  | %



|1 | Excludes loans held for sale
|- | ----------------------------



|2 | 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. Further, the Company does not engage in subprime lending.

While the Company believes that its underwriting criteria are
prudent, outside factors, such as a continuing deterioration in the Southern California economy as precipitated by the recent disruptions in the secondary mortgage markets and decreased demand for mortgage loans could adversely impact our credit
quality. Previous outside events, such as the 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 also 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.



19



---

Although Management believes the allowance for loan losses at March 31, 2008 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.

Investment Security and Interest Bearing Deposits at Other Financial Institutions

The fair value of the investment security portfolio available for sale at March 31, 2008 is $10.0 million with a 4.07% yield (5.10% tax equivalent
yield). This compares to a fair value of $12.2 million at December 31, 2007 with a 4.55% yield. The unrealized gain on available for sale investment securities at March 31, 2008 is $14,000 ($8,000 net of related income taxes) or 0.1% of
amortized cost.

During the first three months of 2008, principal repayments and maturities of investment securities available for sale
totaled $3.2 million and purchases of investment securities totaled $3.0 million. Also during the first three months of 2008, the Company sold $2.0 million of investment securities and recognized a gain of $21,000. Since 2006, the Company has
purchased income tax-free debt securities to take advantage of their income tax advantaged status. The portfolio of tax-free securities has an 8.0 years average life compared to an average life of approximately 4.9 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 March 31, 2008 and December 31, 2007. The Company has no securities classified as held to maturity or trading.



|                           |  |                     |        |           |                        |         |  |     |       |  |      |                |  |           |        |         |   |        |       |     |   |  |      |  
|-------------------------- |  | ------------------- | ------ | --------- | ---------------------- | ------- |  | --- | ----- |  | ---- | -------------- |  | --------- | ------ | ------- | - | ------ | ----- | --- | - |  | ---- | -
|                           |  | As ofMarch 31, 2008 |        |           | As ofDecember 31, 2007 |        
|                           |  | AmortizedCosts      |        | FairValue |                        | Percent |  |     | Yield |  |      | AmortizedCosts |  | FairValue |        | Percent |   |        | Yield |    
|US agencies                |  | $                   | 1,000  |           | $                      | 1,001   |  | 10  | %     |  | 5.44 | %              |  | $         | 5,000  |         | $ | 5,019  |       | 41  | % |  | 5.41 | %
|Mortgage-backed securities |  |                     | 3,649  |           |                        | 3,638   |  | 36  | %     |  | 4.18 | %              |  |           | 3,878  |         |   | 3,818  |       | 32  | % |  | 4.22 | %
|State and municipal bonds  |  |                     | 5,355  |           |                        | 5,379   |  | 54  | %     |  | 3.74 | %              |  |           | 3,344  |         |   | 3,359  |       | 27  | % |  | 3.66 | %
|                           |  |                     |        |           |                        |         |  |     |       |  |      |                |  |           |        |         |   |        |       |     |   |  |      |  
|Total                      |  | $                   | 10,004 |           | $                      | 10,018  |  | 100 | %     |  | 4.07 | %              |  | $         | 12,222 |         | $ | 12,196 |       | 100 | % |  | 4.55 | %
|                           |  |                     |        |           |                        |         |  |     |       |  |      |                |  |           |        |         |   |        |       |     |   |  |      |  

Deposits

Total deposits at March 31, 2008 were $248.7 million compared to $230.6 million at December 31, 2007. The largest category of deposit accounts at March 31, 2008, is savings and money market accounts
which make up 38.5% of total deposits. Thirty-two percent of total deposits are non-interest bearing demand deposits. At March 31, 2008 and December 31, 2007, the weighted average term to maturity of certificate of deposits was 8.1 months
and 7.7 months, respectively. The weighted average interest rates paid on time deposits was 4.20% and 4.70% at March 31, 2008 and December 31, 2007, respectively.

Deposits of Native American entities totaled $23.9 million and $19.8 million at March 31, 2008 and December 31, 2007, respectively. These
deposits represent 9.6% and 8.6%, respectively, of total deposits.



20



---

The table below reflects the major categories of deposits as a percentage of total deposits as of
March 31, 2008 and December 31, 2007.

Deposits

(dollars in thousands)



|                                   |  |                |         |         |                   |   |        |   |         |  |       |  
|---------------------------------- |  | -------------- | ------- | ------- | ----------------- | - | ------ | - | ------- |  | ----- | -
|                                   |  | March 31, 2008 |         |         | December 31, 2007 |  
|                                   |  | Amount         |         | Percent |                   |   | Amount |   | Percent | 
|Demand deposits                    |  | $              | 79,786  |         | 32.1              | % |        | $ | 73,961  |  | 32.0  | %
|NOW Accounts                       |  |                | 13,346  |         | 5.4               | % |        |   | 14,223  |  | 6.2   | %
|Savings and money market           |  |                | 95,747  |         | 38.5              | % |        |   | 79,262  |  | 34.4  | %
|Time deposits $100,000 and greater |  |                | 40,839  |         | 16.4              | % |        |   | 45,366  |  | 19.7  | %
|Time deposits less than $100,000   |  |                | 19,001  |         | 7.6               | % |        |   | 17,815  |  | 7.7   | %
|                                   |  |                |         |         |                   |   |        |   |         |  |       |  
|Total Deposits                     |  | $              | 248,719 |         | 100.0             | % |        | $ | 230,627 |  | 100.0 | %
|                                   |  |                |         |         |                   |   |        |   |         |  |       |  

Borrowings

To manage liquidity, the Company has unsecured Federal Funds purchased lines of credit outstanding with two correspondent banks. The terms and conditions of the credit facilities allow the Company to borrow funds, for
short periods of time, and are subject to the availability of funds from the correspondent bank. The combined maximum limits for the unsecured Federal Funds purchased lines of credit at both March 31, 2008 and December 31, 2007 were $13
million. The Company had no outstanding balances on these unsecured lines of credit as of March 31, 2008 or December 31, 2007.

The Company is also a member of the Federal Home Loan Bank of San Francisco (FHLB-SF). FHLB-SF has underwritten the Company to allow for a maximum borrowing limit of 25% of assets with terms to 360 months, subject to certain
terms and conditions and requiring sufficient collateral be pledged. Collateral pledged can be in the form of qualified loans or qualified investment securities. At March 31, 2008 and December 31, 2007, the Companys borrowing limit
from the FHLB-SF was $60.8 million and $63.1 million, respectively, of which $20.0 million and $28.0 million was outstanding at March 31, 2008 and December 31, 2007, respectively. Subsequent to March 31, $5 million of short term
advances was repaid.

The following table summarizes the Companys advances outstanding at March 31, 2008:



|       |        |                   |            |      |      |   |                |       |               |            |            |      
|------ | ------ | ----------------- | ---------- | ---- | ---- | - | -------------- | ----- | ------------- | ---------- | ---------- | -----
|Amount |        | Type of Advance 1 |            | Rate |      |   | Variable/Fixed |       | Maturity Date |            | Collateral
|$      | 5,000  |                   | Short term |      | 4.72 | % |                | Fixed |               | 4/18/2008  |            | Loans
|       |        |                   |            |      |     
|       | 5,000  |                   | Long term  |      | 5.01 | % |                | Fixed |               | 8/3/2009   |            | Loans
|       | 5,000  |                   | Long term  |      | 3.96 | % |                | Fixed |               | 12/28/2009 |            | Loans
|       | 5,000  |                   | Long term  |      | 4.61 | % |                | Fixed |               | 9/7/2010   |            | Loans
|       |        |                   |            |      |      |   |                |       |               |            |            |      
|       | 15,000 |                   |            |      |      |   |                |       |               |            |            |      
|       |        |                   |            |      |     
|$      | 20,000 |                   |            |      | 4.58 | % |                |       |               |            |            |      
|       |        |                   |            |      |      |   |                |       |               |            |            |      



|1 | Short term advances are defined as overnight borrowings plus term advances having a maturity of less than one year. Long
term advances have a maturity equal to or greater than one year.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Securities sold under agreement to repurchase, which
are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. As of
March 31, 2008 and December 31, 2007 the Company had $899,000 and $160,000 in securities sold under agreement to repurchase, respectively.



21



---

Results of Operations

The net earnings during the three-month period ended March 31, 2008 were $52,000 or $0.02 per diluted share compared to net earnings of $1,071,000 or $0.42 per diluted share for the same quarter in 2007. Lower
net earnings in the quarter ended March 31, 2008 are primarily attributable to (i) an increase in the provision for loan losses, (ii) a increase in interest expense  specifically for borrowed funds  and, (iii) a
decline in noninterest income.

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 March 31, 2008 was 7.32% compared to 8.57% for the quarter ended March 31,
2007. Interest bearing liability costs for the first quarter of 2008 were 3.39% compared to 3.73% for the first quarter of 2007. The net interest margin or net interest income divided by average interest earning assets for the first quarter of 2008
and 2007 was 4.99% and 6.34%, respectively.

Loan, federal funds sold and investment security yields generally decreased from 2007 to 2008
primarily due to: a) repricing of these assets at lower yields, and b) lower interest rates charged on new assets. While interest bearing yields decreased from 2007 to 2008, total interest expense increased significantly in 2008 due to the increase
in volume of borrowed funds.

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-months ended March 31, 2008, the decrease in net interest income over the same prior year
period is primarily attributable to increase in volume of interest bearing liabilities  specifically borrowed funds  which more than offset the decrease in interest rates paid. Earning assets showed substantial growth, but that was not
sufficient to offset the decline in rates earned.



22



---

The table set forth below presents the dollar amount of changes in interest income and interest expense
for major components of interest-earning assets and interest-bearing liabilities. It distinguishes 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 March 31, 2008 compared to March 31, 2007

(dollars in thousands)



|                              |  |                                          |     |   |        |   |      |       |  |   |      |  
|----------------------------- |  | ---------------------------------------- | --- | - | ------ | - | ---- | ----- |  | - | ---- | -
|                              |  | Increases (Decreases) Due to Changes in: |    
|                              |  | Volume 1                                 |     |   | Rate 1 |   |      | Total | 
|Interest earning assets       |  |                                          |     |   |        |   |      |       |  |   |      |  
|Loans2                        |  | $                                        | 820 |   |        | $ | (786 | )     |  | $ | 34   |  
|Federal funds sold            |  |                                          | (42 | ) |        |   | (57  | )     |  |   | (99  | )
|Investment securities         |  |                                          | (11 | ) |        |   | (15  | )     |  |   | (26  | )
|                              |  |                                          |     |   |        |   |      |       |  |   |      |  
|Total interest income         |  |                                          | 767 |   |        |   | (858 | )     |  |   | (91  | )
|                              |  |                                          |     |   |        |   |      |       |  |   |      |  
|Interest bearing liabilities  |  |                                          |     |   |        |   |      |       |  |   |      |  
|NOW accounts                  |  | $                                        | 4   |   |        | $ | (27  | )     |  | $ | (23  | )
|Savings and money market      |  |                                          | 129 |   |        |   | (152 | )     |  |   | (23  | )
|Time certificates of deposits |  |                                          | 37  |   |        |   | (9   | )     |  |   | 28   |  
|Other borrowed funds          |  |                                          | 289 |   |        |   |     |       |  |   | 289  |  
|                              |  |                                          |     |   |        |   |      |       |  |   |      |  
|Total interest expense        |  |                                          | 459 |   |        |   | (188 | )     |  |   | 271  |  
|                              |  |                                          |     |   |        |   |      |       |  |   |      |  
|Net interest income           |  | $                                        | 308 |   |        | $ | (670 | )     |  | $ | (362 | )
|                              |  |                                          |     |   |        |   |      |       |  |   |      |  



|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.
|- | ---------------------------------------------------------------------------------------

For the first quarter, the primary reason for the decrease in net interest income from 2007 to 2008 is lower interest rates earned on loans which was
offset by the increases in average loan and liability balances



23



---

The table set forth below shows 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 endedMarch 31, 2008 |         |                        | Three-months endedMarch 31, 2007 |             
|                                           |  | AverageBalance                   |         | InterestIncome/Expense |                                  | Yield/Cost 1 |  |      | AverageBalance |  | InterestIncome/Expense |         | Yield/Cost 1 |  
|Interest earning assets                    |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Loans2                                     |  | $                                | 254,399 |                        | $                                | 4,854        |  | 7.67 | %              |  | $                      | 214,569 |              | $ | 4,820 |  | 9.11 | %
|Federal funds sold                         |  |                                  | 10,880  |                        |                                  | 80           |  | 2.96 | %              |  |                        | 15,167  |              |   | 196   |  | 5.24 | %
|Investment securities                      |  |                                  | 13,164  |                        |                                  | 132          |  | 4.03 | %              |  |                        | 14,253  |              |   | 141   |  | 4.01 | %
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total interest-earning assets              |  |                                  | 278,443 |                        |                                  | 5,066        |  | 7.32 | %              |  |                        | 243,989 |              |   | 5,157 |  | 8.57 | %
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Non-interest earning assets                |  |                                  | 21,847  |                        |                                  |              |  |      |                |  |                        | 17,120  |              |   |       |  |      |  
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total assets                               |  | $                                | 300,290 |                        |                                  |              |  |      |                |  | $                      | 261,109 |              |   |       |  |      |  
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Interest bearing liabilities               |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|NOW deposits                               |  | $                                | 13,284  |                        | $                                | 31           |  | 0.94 | %              |  | $                      | 12,264  |              | $ | 54    |  | 1.79 | %
|Savings deposits and money market          |  |                                  | 90,651  |                        |                                  | 608          |  | 2.70 | %              |  |                        | 75,397  |              |   | 631   |  | 3.39 | %
|Time deposits                              |  |                                  | 62,041  |                        |                                  | 686          |  | 4.45 | %              |  |                        | 58,372  |              |   | 658   |  | 4.57 | %
|Other borrowed funds                       |  |                                  | 25,706  |                        |                                  | 289          |  | 4.52 | %              |  |                        |        |              |   |      |  | 0.00 | %
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total interest-bearing liabilities         |  |                                  | 191,682 |                        |                                  | 1,614        |  | 3.39 | %              |  |                        | 146,033 |              |   | 1,343 |  | 3.73 | %
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Demand deposits                            |  |                                  | 77,715  |                        |                                  |              |  |      |                |  |                        | 87,921  |              |   |       |  |      |  
|Non-interest-bearing liabilities           |  |                                  | 1,999   |                        |                                  |              |  |      |                |  |                        | 1,956   |              |   |       |  |      |  
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total liabilities                          |  |                                  | 271,396 |                        |                                  |              |  |      |                |  |                        | 235,910 |              |   |       |  |      |  
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Stockholders equity                       |  |                                  | 28,894  |                        |                                  |              |  |      |                |  |                        | 25,199  |              |   |       |  |      |  
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Total liabilities and stockholders equity |  | $                                | 300,290 |                        |                                  |              |  |      |                |  | $                      | 261,109 |              |   |       |  |      |  
|                                           |  |                                  |         |                        |                                  |              |  |      |                |  |                        |         |              |   |       |  |      |  
|Net interest spread3                       |  |                                  |         |                        | $                                | 3,452        |  | 3.93 | %              |  |                        |         |              | $ | 3,814 |  | 4.84 | %
|Net interest margin4                       |  |                                  |         |                        |                                  |              |  | 4.99 | %              |  |                        |         |              |   |       |  | 6.34 | %



|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
|- | ---------------------------------------------------------------------------------



24



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Noninterest income

Non-interest income for the three months ended March 31, 2008 totaled $506,000 compared to $729,000 for the three months ended March 31, 2007. Deposit account related service charges and fees collected and
automated teller machine (ATM) fees increased in the first quarter 2007 over the same quarter last year. However, loan related fees and lease administration fees declined by $142,000 and $126,000, respectively, during this period due to
lower transaction volume. ATM fee revenues are generated primarily from servicing ATMs owned by others, for whom the Company performs settlement, monitoring, claims processing, and related services. Lease administration fees are collected
under a subcontract with the Agua Caliente Band of Cahuilla Indians, a principal shareholder of the Company, for certain allotted reservation land transfers.

Loan related fees are made up of two primary revenue drivers: mortgage banking fees and fees earned on servicing government guaranteed loans, primarily Section 184 fees as discussed below. Mortgage banking
activity generated fee revenues of $21,700 during the first quarter of 2008 compared to $25,800 generated during the first quarter of the prior year. Credit market turmoil combined with substantial softening of real estate market activity in 2008
contributed to the decline in mortgage banking revenues from the prior year. In 2005, the Company expanded its tribal services division by offering loans pursuant to the U.S. Department of Housing and Urban Developments 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 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. The Company acts as a broker in originating HUD Section 184 loans in eight Western states. The Company does not
retain or service loans originated under this program. During the first quarter of 2008, the Company earned $9,700 in Section 184 fees, compared to $139,700 during the first quarter of 2007.

In addition to mortgage banking fees and Section 184 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.

Noninterest Expense

For the quarter ended March 31, 2008 and 2007 noninterest expenses totaled $2,726,000 and $2,651,000, respectively. Decreases in
salaries and employee benefits  related to lower estimated annual incentive accrual  and professional fees  related to lower consultant fees  only partially offset increases in other categories of noninterest expense.
Occupancy and equipment, data processing, marketing, directors and shareholders and other operating expenses all showed modest increases. Also, costs incurred to maintain foreclosed assets in the first quarter 2008 were $26,000 while no such costs
were incurred during the prior year.



25



---

The table below reflects noninterest income, noninterest expense, and net noninterest expense.

Noninterest Income and Noninterest Expense

(dollars in thousands)



|                                                                             |  |                             |       |   |           |     |   |        |   |       |           |  |     |  
|---------------------------------------------------------------------------- |  | --------------------------- | ----- | - | --------- | --- | - | ------ | - | ----- | --------- |  | --- | -
|                                                                             |  | Three-months EndedMarch 31, |      
|                                                                             |  | 2008                        |       |   | 2007      |    
|                                                                             |  | Amount                      |       |   | % ofTotal |     |   | Amount |   |       | % ofTotal | 
|Noninterest income:                                                          |  |                             |       |   |           |     |   |        |   |       |           |  |     |  
|Service charges and fees                                                     |  | $                           | 193   |   |           | 38  | % |        | $ | 166   |           |  | 23  | %
|Loan related fees                                                            |  |                             | 36    |   |           | 7   | % |        |   | 178   |           |  | 24  | %
|Lease administration fees                                                    |  |                             | 96    |   |           | 19  | % |        |   | 222   |           |  | 31  | %
|Automated teller machine fees                                                |  |                             | 179   |   |           | 36  | % |        |   | 163   |           |  | 22  | %
|Net loss on sale of foreclosed assets                                        |  |                             | (19   | ) |           | -4  | % |        |   |      |           |  | 0   | %
|Net gain on sale of investment securities                                    |  |                             | 21    |   |           | 4   | % |        |   |      |           |  | 0   | %
|                                                                             |  |                             |       |   |           |     |   |        |   |       |           |  |     |  
|Total noninterest income                                                     |  |                             | 506   |   |           | 100 | % |        |   | 729   |           |  | 100 | %
|                                                                             |  |                             |       |   |           |     |   |        |   |       |           |  |     |  
|                                                                             |  |                             |       |   |           | .   |   |        |   |       |           |  |     |  
|Noninterest expenses:                                                        |  |                             |       |   |           |     |   |        |   |       |           |  |     |  
|Salaries and employee benefits                                               |  |                             | 1,358 |   |           | 50  | % |        |   | 1,429 |           |  | 54  | %
|Occupancy and equipment expense                                              |  |                             | 395   |   |           | 15  | % |        |   | 372   |           |  | 14  | %
|Professional fees                                                            |  |                             | 53    |   |           | 2   | % |        |   | 70    |           |  | 3   | %
|Data processing                                                              |  |                             | 166   |   |           | 6   | % |        |   | 144   |           |  | 6   | %
|Marketing and advertising expense                                            |  |                             | 135   |   |           | 5   | % |        |   | 115   |           |  | 4   | %
|Directors and shareholders expense                                           |  |                             | 146   |   |           | 5   | % |        |   | 112   |           |  | 4   | %
|Foreclosed asset expense, net                                                |  |                             | 26    |   |           | 1   | % |        |   |      |           |  | 0   | %
|Other operating expense                                                      |  |                             | 447   |   |           | 16  | % |        |   | 409   |           |  | 15  | %
|                                                                             |  |                             |       |   |           |     |   |        |   |       |           |  |     |  
|Total noninterest expenses:                                                  |  |                             | 2,726 |   |           | 100 | % |        |   | 2,651 |           |  | 100 | %
|                                                                             |  |                             |       |   |           |     |   |        |   |       |           |  |     |  
|Net noninterest expense                                                      |  | $                           | 2,220 |   |           |     |   |        | $ | 1,922 |           |  |     |  
|                                                                             |  |                             |       |   |           |     |   |        |   |       |           |  |     |  
|Net noninterest expense as a percentage of average total assets (annualized) |  |                             | 2.96  | % |           |     |   |        |   | 2.94  | %         |  |     |  

Provision for Loan Losses

For the quarter ended March 31, 2008, the provision for loan losses the Company charged against current period earnings was $1,160,000 compared to $90,000 for the prior years same quarter. The slowing of
local and national real estate markets led Management to downgrade a number of construction loans to substandard and/or non-accrual. The Company made a substantial provision for loan losses against current period earnings. As a result of this
provision, Management deems the level of its allowance for loan losses at March 31, 2008 to be adequate.

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.



26



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Liquidity

At March 31, 2008 and December 31, 2007 the Company had 12.0% and 9.6%, 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 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 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 on 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. More information is provided above under
Borrowings.

Provision for Income Taxes

The provision for income taxes was $20,000 and $731,000 for the quarter ended March 31, 2008 and 2007, respectively. The decrease in the income tax provision is commensurate with the decline in pre-tax income.
The Companys effective tax rate was 27.8% for the first quarter of 2007 and 40.6% for the first quarter of 2007.

Asset Liability Management and
Interest Rate Sensitivity

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.

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.

Net interest income simulation. As of March 31, 2008, the Company used a simulation model to measure the estimated changes in net interest
income that would result over the next 12 months from increasing and decreasing interest rates. This model is an interest rate management tool and the results are not necessarily an indication of our future net interest income. This model has
inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. The model assumes no growth in either the Companys interest-sensitive assets or liabilities over the next 12 months;
therefore, the results reflect an interest rate shock to a static balance sheet.



27



---

This analysis calculates the difference between net interest income forecasted using both increasing and
decreasing interest rate scenarios and net interest income forecasted using a base market interest rate. In order to arrive at the base case, the Companys balance sheet at March 31, 2008 was extended one year and any assets and
liabilities that would contractually reprice or mature during that period were repriced using the products pricing as of March 31, 2008. Changes that may vary significantly from these assumptions include loan and deposit growth or
contraction, changes in the mix of earning assets or funding sources, and future asset/liability management decisions, all of which may have significant effects on the Companys net interest income.

The table below presents as of March 31, 2008, forecasted net interest income and net interest margin for the next twelve months using a base market
interest rate and the estimated change to the base scenario given incremental upward and downward movements in interest rates of 100, 200 and 300 basis points.



|                       |  |                              |        |                           |      |   |                             |      |   |                                              |       |  
|---------------------- |  | ---------------------------- | ------ | ------------------------- | ---- | - | --------------------------- | ---- | - | -------------------------------------------- | ----- | -
|Interest rate scenario |  | Estimated NetInterest Income |        | PercentageChange FromBase |      |   | Estimated NetInterestMargin |      |   | Estimated NetInterest MarginChange From Base |      
|                       |  | (Dollars in thousands)       |       
|Up 300 basis points    |  | $                            | 15,839 |                           | 6.2  | % |                             | 5.73 | % |                                              | 0.33  | %
|Up 200 basis points    |  | $                            | 15,512 |                           | 4.0  | % |                             | 5.61 | % |                                              | 0.21  | %
|Up 100 basis points    |  | $                            | 15,233 |                           | 2.1  | % |                             | 5.51 | % |                                              | 0.11  | %
|BASE CASE              |  | $                            | 14,920 |                           |      |   |                             | 5.40 | % |                                              |       |  
|Down 100 basis points  |  | $                            | 14,808 |                           | -0.8 | % |                             | 5.36 | % |                                              | -0.04 | %
|Down 200 basis points  |  | $                            | 14,593 |                           | -2.2 | % |                             | 5.29 | % |                                              | -0.11 | %
|Down 300 basis points  |  | $                            | 14,118 |                           | -5.4 | % |                             | 5.12 | % |                                              | -0.28 | %

The simulation results indicate the Companys interest rate risk position was asset sensitive
as the simulated impact of an upward movement in interest rates would result in increases in net interest income over the next 12 month period while a downward movement in interest rates would result in a decrease in net interest income over the
next 12 months.

Market Value of Equity

The Company measures the impact of market interest rate changes on the net present value of estimated cash flows from its assets, liabilities and off-balance sheet items, defined as market value of equity, using a simulation model. This
simulation model assesses the changes in the market value of the Companys interest-sensitive financial instruments that would occur in response to an incremental increase or decrease in market rates of 100, 200 and 300 basis points. This
analysis assigns significant value to noninterest-bearing deposit balances. The projections are by their nature forward-looking and therefore inherently uncertain, and include various assumptions regarding cash flows and interest rates. This model
in an interest rate risk management tool and the results are not necessarily an indication of the Companys actual future results. Actual results may vary significantly from model results. Loan prepayments and deposit attrition, changes in the
mix of earning assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions.

The base case is determined by applying various current market discount rates to the estimated cash flows from different types of assets, liabilities and off-balance sheet items existing at March 31, 2008. The
table below shows the projected change in the market value of equity for the set of rate shocks presented as of March 31, 2008:



|                       |  |                        |        |                           |      |   |                           |       |   |                                             |        |  
|---------------------- |  | ---------------------- | ------ | ------------------------- | ---- | - | ------------------------- | ----- | - | ------------------------------------------- | ------ | -
|Interest rate scenario |  | EstimatedMarket Value  |        | PercentageChange FromBase |      |   | Percentage ofTotal Assets |       |   | Ratio of EstimatedMarket Value toBook Value |       
|                       |  | (Dollars in thousands) |       
|Up 300 basis points    |  | $                      | 39,836 |                           | -3.3 | % |                           | 13.71 | % |                                             | 139.05 | %
|Up 200 basis points    |  | $                      | 40,047 |                           | -2.8 | % |                           | 13.65 | % |                                             | 139.78 | %
|Up 100 basis points    |  | $                      | 40,446 |                           | -1.8 | % |                           | 13.64 | % |                                             | 141.18 | %
|BASE CASE              |  | $                      | 41,199 |                           |      |   |                           | 13.72 | % |                                             | 143.81 | %
|Down 100 basis points  |  | $                      | 43,217 |                           | 4.9  | % |                           | 14.18 | % |                                             | 150.85 | %
|Down 200 basis points  |  | $                      | 43,128 |                           | 4.7  | % |                           | 14.04 | % |                                             | 150.54 | %
|Down 300 basis points  |  | $                      | 39,164 |                           | -4.9 | % |                           | 12.70 | % |                                             | 136.70 | %

The results of the market value of equity model indicate that an increase in interest rates would
decrease the Companys market value of equity from the base case while a decrease in interest rates would increase the market value of equity in the down 100 and down 200 basis point scenarios. The Company considers a down 300 basis point
scenario to be unlikely given current market interest rates.



28



---

Gap Analysis

As part of the interest rate management process, the Company uses a gap analysis. A gap analysis provides information about the volume and repricing characteristics and relationship between the amounts of interest-sensitive assets and
interest-bearing liabilities at a particular point in time. An effective interest rate strategy attempts to match the volume of interest-sensitive assets and interest-bearing liabilities repricing over different time intervals. The table on the next
page illustrates the volume and repricing characteristics of the Companys balance sheet at March 31, 2008 over the indicated time intervals.

Interest Rate Sensitivity Analysis

as of March 31, 2008

(dollars in thousands)



|                                                                       |  |                                     |         |   |            |   |        |          |  |   |              |   |  |   |        |   |  |   |        
|---------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---------- | - | ------ | -------- |  | - | ------------ | - |  | - | ------ | - |  | - | -------
|                                                                       |  | Amounts Subject to Repricing Within |         |   | Total     
|                                                                       |  | 3 monthsand less                    |         |   | 3-12months |   |        | 1-5years |  |   | After 5years |   | 
|Interest-earning assets                                                |  |                                     |         |   |            |   |        |          |  |   |              |   |  |   |        |   |  |   |        
|Loans held for sale1                                                   |  | $                                   |        |   |            | $ |       |          |  | $ |             |   |  | $ | 636    |   |  | $ | 636    
|Loans receivable1, 2                                                   |  |                                     | 116,249 |   |            |   | 31,432 |          |  |   | 83,418       |   |  |   | 17,494 |   |  |   | 248,593
|Investment securities available for sale3                              |  |                                     | 27      |   |            |   | 1,335  |          |  |   | 3,073        |   |  |   | 5,583  |   |  |   | 10,018 
|Federal funds sold                                                     |  |                                     | 10,315  |   |            |   |       |          |  |   |             |   |  |   |       |   |  |   | 10,315 
|                                                                       |  |                                     |         |   |            |   |        |          |  |   |              |   |  |   |        |   |  |   |        
|Total                                                                  |  |                                     | 126,591 |   |            |   | 32,767 |          |  |   | 86,491       |   |  |   | 23,713 |   |  |   | 269,562
|                                                                       |  |                                     |         |   |            |   |        |          |  |   |              |   |  |   |        |   |  |   |        
|                                                                       |  |                                     |         |   |            |   |        |          |  |   |              |   |  |   |        |   |  |   |        
|Interest-bearing liabilities                                           |  |                                     |         |   |            |   |        |          |  |   |              |   |  |   |        |   |  |   |        
|NOW accounts                                                           |  |                                     | 13,346  |   |            |   |       |          |  |   |             |   |  |   |       |   |  |   | 13,346 
|Savings and money market                                               |  |                                     | 95,747  |   |            |   |       |          |  |   |             |   |  |   |       |   |  |   | 95,747 
|Time deposits $100,000 and greater                                     |  |                                     | 17,019  |   |            |   | 18,102 |          |  |   | 5,718        |   |  |   |       |   |  |   | 40,839 
|Time deposits less than $100,000                                       |  |                                     | 4,695   |   |            |   | 12,053 |          |  |   | 2,253        |   |  |   |       |   |  |   | 19,001 
|Other borrowings                                                       |  |                                     | 5,899   |   |            |   |       |          |  |   | 15,000       |   |  |   |       |   |  |   | 20,899 
|                                                                       |  |                                     |         |   |            |   |        |          |  |   |              |   |  |   |        |   |  |   |        
|Total                                                                  |  | $                                   | 136,706 |   |            | $ | 30,155 |          |  | $ | 22,971       |   |  | $ |       |   |  | $ | 189,832
|                                                                       |  |                                     |         |   |            |   |        |          |  |   |              |   |  |   |        |   |  |   |        
|Interest rate sensitivity gap                                          |  | $                                   | (10,115 | ) |            | $ | 2,612  |          |  | $ | 63,520       |   |  | $ | 23,713 |   |  | $ | 79,730 
|Cumulative interest rate sensitivity gap                               |  |                                     | (10,115 | ) |            |   | (7,503 | )        |  |   | 56,017       |   |  |   | 79,730 |   |  |   |        
|Cumulative interest rate sensitivity gap ratio (based on total assets) |  |                                     | -3.9    | % |            |   | -2.9   | %        |  |   | 21.5         | % |  |   | 30.6   | % |  |   |        



|1 | Excludes deferred loan origination fees and costs.
|- | --------------------------------------------------



|2 | Excludes non-accrual loans and allowance for loan losses.
|- | ---------------------------------------------------------



|3 | Excludes investments in equity securities which has no stated maturity.
|- | -----------------------------------------------------------------------

Capital Resources and Adequacy

Shareholders
equity was $28.6 million or 9.54% of total assets at March 31, 2008. The ratio of shareholders equity to total assets at December 31, 2007 was 9.88%. The decrease in the equity to asset ratio is due to asset growth (3.8%) outpacing
capital growth (0.3%). The Bank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 March 31, 2008 and December 31, 2007. 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.



29



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The Banks actual capital amounts and ratios as of March 31, 2008 and December 31, 2007
are presented in the following table:

Regulatory Capital

(dollars in thousands)



|                                                |  |                   |        |   |                         |        |   |                   |        |  
|----------------------------------------------- |  | ----------------- | ------ | - | ----------------------- | ------ | - | ----------------- | ------ | -
|                                                |  | March 31, 2008    |       
|                                                |  | Tier 1Capital     |        |   | Tier 1Risk-BasedCapital |        |   | Risk-BasedCapital |       
|Actual capital:                                 |  |                   |        |   |                         |        |   |                   |        |  
|Amount                                          |  | $                 | 27,783 |   |                         | 27,783 |   |                   | 31,061 |  
|Ratio                                           |  |                   | 9.3    | % |                         | 10.6   | % |                   | 11.9   | %
|                                                |  |                   |        |   |                         |        |   |                   |        |  
|FDICIA well capitalized required capital:       |  |                   |        |   |                         |        |   |                   |        |  
|Amount                                          |  | $                 | 14,985 |   |                         | 15,704 |   |                   | 26,173 |  
|Ratio                                           |  |                   | 5.0    | % |                         | 6.0    | % |                   | 10.0   | %
|                                                |  |                   |        |   |                         |        |   |                   |        |  
|FDICIA adequately capitalized required capital: |  |                   |        |   |                         |        |   |                   |        |  
|Amount                                          |  | $                 | 11,988 |   |                         | 10,469 |   |                   | 20,939 |  
|Ratio                                           |  |                   | 4.0    | % |                         | 4.0    | % |                   | 8.0    | %
|                                                |  |                   |        |   |                         |        |   |                   |        |  
|                                                | 
|                                                |  | December 31, 2007 |       
|                                                |  | Tier 1Capital     |        |   | Tier 1Risk-BasedCapital |        |   | Risk-BasedCapital |       
|Actual capital:                                 |  |                   |        |   |                         |        |   |                   |        |  
|Amount                                          |  | $                 | 27,700 |   |                         | 27,700 |   |                   | 30,857 |  
|Ratio                                           |  |                   | 9.8    | % |                         | 10.7   | % |                   | 11.9   | %
|                                                |  |                   |        |   |                         |        |   |                   |        |  
|FDICIA well capitalized required capital:       |  |                   |        |   |                         |        |   |                   |        |  
|Amount                                          |  | $                 | 14,096 |   |                         | 15,528 |   |                   | 25,880 |  
|Ratio                                           |  |                   | 5.0    | % |                         | 6.0    | % |                   | 10.0   | %
|                                                |  |                   |        |   |                         |        |   |                   |        |  
|FDICIA adequately capitalized required capital: |  |                   |        |   |                         |        |   |                   |        |  
|Amount                                          |  | $                 | 11,277 |   |                         | 10,352 |   |                   | 20,704 |  
|Ratio                                           |  |                   | 4.0    | % |                         | 4.0    | % |                   | 8.0    | %
|                                                |  |                   |        |   |                         |        |   |                   |        |  

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 March 31, 2008 and December 31, 2007:

Regulatory Capital

(dollars in thousands)



|                                                                                                                             |  |                |        |                   |   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ----------------- | - | ------ | -
|                                                                                                                             |  | March 31, 2008 |        | December 31, 2007 |  
|Capital in accordance with generally accepted accounting principles                                                          |  | $              | 27,791 |                   | $ | 27,685 |  
|Adjustments for Tier 1 capital and Tier 1 risk based capital - unrealized (loss) on investment securities available for sale |  |                | 8      |                   |   | (15    | )
|                                                                                                                             |  |                |        |                   |   |        |  
|Total Tier 1 capital and Tier 1 risk-based capital                                                                           |  |                | 27,783 |                   |   | 27,700 |  
|Adjustments for risk-based capital - allowance for credit losses1                                                            |  |                | 3,278  |                   |   | 3,157  |  
|                                                                                                                             |  |                |        |                   |   |        |  
|Total risk-based capital                                                                                                     |  | $              | 31,061 |                   | $ | 30,857 |  
|                                                                                                                             |  |                |        |                   |   |        |  



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

The Company is a small bank holding company under the Federal Reserve Boards guidelines, and thus qualifies for an
exemption from the consolidated risk-based and leverage capital adequacy guidelines applicable to bank holding companies with assets of $500 million or more. However, while not required to do so under the Federal Reserve Boards capital
adequacy guidelines, the Company still maintained levels of capital on a consolidated basis which qualified it as well capitalized as of March 31, 2008.



30



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|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|------- | ---------------------------------------------------------

Please see the section above titled Asset/Liability Management and Interest Rate Sensitivity in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations which provides an
update to the Companys quantitative and qualitative disclosure about market risk. This analysis should be read in conjunction with text under the caption Interest Rate Risk Management in the Companys Annual Report on Form
10-K for the year ended December 31, 2007, which text is incorporated here by reference. This analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the
beginning of Item 2 regarding such forward-looking information.



|Item 4T. | 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 March 31, 2008 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 first quarter of 2008 that have materially affected, or are reasonably likely to materially affect the Companys internal control over financial reporting.



31



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Part II- Other Information

Item 1 - Legal Proceedings

As of March 31, 2008, the Company was not a party to any significant
legal proceedings.

Item 1a - Risk Factors

Not applicable

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

Item 6 - Exhibits



|     |  |                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|     | 
|32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



32



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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: May 14, 2008 |  |  |  | /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