**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

**FORM10-QSB**

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended September 30, 2006**

**CHINO COMMERCIALBANCORP**

(Exactname of registrant as specified in its charter)

| **CALIFORNIA**                                  |   | **NO.  20-4797048**                |
|-------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation) |   | (IRS Employer  Identification No.) |

 

| **14345 Pipeline Avenue, Chino, California** |   | **91710-5642** |
|----------------------------------------------|--------|----------------|
| (Address of  Principal Executive Offices)    |   | (Zip Code)     |

 

Registrant’stelephone number, including area code:  **(909) 393-8880**

**Not applicable**

(Former name orformer address, if changed in the last fiscal year)

Check whether the issuer(1) has filed all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. xYes   oNo

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

APPLICABLE ONLY TOCORPORATE ISSUERS

On November 1, 2006,there were 814,453 shares of Chino Commercial Bancorp Common Stock outstanding.

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

 

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TABLE OF CONTENTS
| Part I – Financial Information |
|-------------------------------------|
|                                | Item 1 – Financial Statements (Unaudited) |
|                                | Consolidated Balance Sheets |
|                                | Consolidated Statements of  Operations |
|                                | Consolidated Statements of  Changes in Stockholders’ Equity |
|                                | Consolidated Statements of  Cash Flows |
|                                | Notes to the Unaudited  Financial Statements |
|                                |   |
|                                | Item  2 – Management’s Discussion & Analysis of Financial Condition &  Results of Operations |
|                                |   |
|                                | Item 3 – Controls and  Procedures |
|                                |   |
| Part II –  Other Information   |
|                                | Item 1 – Legal  Proceedings |
|                                | Item 2 –  Unregistered Sale of Equity Securities and Use of Proceeds |
|                                | Item 3 –  Defaults upon Senior Securities |
|                                | Item 4 –  Submission of Matters to Vote of Security Holders |
|                                | Item 5 – Other  Information |
|                                | Item 6  – Exhibits |
|                                |   |
| **Signatures**                      |
|                                     |  |  |

 

2

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**CHINOCOMMERCIAL BANCORP**

CONSLIDATEDBALANCE SHEETS

September 30, 2006and December 31, 2005
| ** **                                                                                                                                                                           | ** ** | **2006**        | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                                                                                           | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| ASSETS:                                                                                                                                                                              |       |            |       |       |       |
| Cash and Due from Banks                                                                                                                                                              |       | $               | 4,396,426  |       | $          | 5,328,842 |   |
| Federal Funds Sold                                                                                                                                                                   |       | 4,775,000       |       | 11,370,000 |       |
| Cash and Cash  equivalents                                                                                                                                                           |       | 9,171,426       |       | 16,698,842 |       |
| Interest-bearing deposits  at banks                                                                                                                                                  |       | 3,225,000       |       | 6,030,000  |       |
| Investment Securities  available for sale                                                                                                                                            |       | 13,243,674      |       | 16,311,377 |       |
| Investment Securities  held to maturity (fair value approximates $4,939,000 at September 30, 2006 and  $5,764,000 at December 31, 2005)                                              |       | 5,044,865       |       | 5,850,687  |       |
| Federal Reserve Bank  stock, at cost                                                                                                                                                 |       | 159,600         |       | 159,600    |       |
| Federal Home Loan Bank  stock, at cost                                                                                                                                               |       | 412,200         |       | 362,600    |       |
| Pacific Coast Bankers’  Bank stock, at cost                                                                                                                                     |       | 50,000          |       | 50,000     |       |
| Total  investments                                                                                                                                                                   |       | 22,135,339      |       | 28,764,264 |       |
| Loans                                                                                                                                                                                |       |            |       |       |       |
| Construction                                                                                                                                                                         |       | 4,175,191       |       | 2,790,712  |       |
| Real estate                                                                                                                                                                          |       | 35,407,896      |       | 30,444,344 |       |
| Commercial                                                                                                                                                                           |       | 11,294,078      |       | 8,295,573  |       |
| Farm/Agriculture                                                                                                                                                                     |       | 0               |       | 330,920    |       |
| Installment                                                                                                                                                                          |       | 574,024         |       | 633,504    |       |
| Unearned fees  and discounts                                                                                                                                                         |       | (137,405        | )          | (144,106   | )          |
| Allowance for  loan losses                                                                                                                                                           |       | (617,144        | )          | (544,140   | )          |
| Total Loans                                                                                                                                                                          |       | 50,696,640      |       | 41,806,807 |       |
| Fixed Assets, net                                                                                                                                                                    |       | 2,266,770       |       | 1,936,168  |       |
| Accrued Interest  Receivable                                                                                                                                                         |       | 388,877         |       | 311,849    |       |
| Prepaid & Other  Assets                                                                                                                                                          |       | 1,963,069       |       | 1,811,979  |       |
| Total Assets                                                                                                                                                                         |       | $               | 86,622,121 |       | $          | 91,329,909 |   |
|                                                                                                                                                                                 |       |            |       |       |       |
| LIABILITIES:                                                                                                                                                                         |       |            |       |       |       |
| Deposits                                                                                                                                                                             |       |            |       |       |       |
| Non-interest  Bearing                                                                                                                                                                |       | $               | 53,283,798 |       | $          | 62,610,963 |   |
| Interest Bearing                                                                                                                                                                     |       |            |       |       |       |
| Money market                                                                                                                                                                         |       | 20,110,401      |       | 16,793,824 |       |
| Savings                                                                                                                                                                              |       | 1,088,536       |       | 913,249    |       |
| Time deposits of  $100,000 or greater, due in one year                                                                                                                               |       | 2,427,596       |       | 2,216,104  |       |
| Time deposits  less than $100,000, due in one year                                                                                                                                   |       | 1,529,060       |       | 1,487,803  |       |
| Total Deposits                                                                                                                                                                       |       | 78,439,391      |       | 84,021,943 |       |
| Accrued Interest  Payable                                                                                                                                                            |       | 28,259          |       | 28,858     |       |
| Accrued Expenses &  Other Payables                                                                                                                                               |       | 582,671         |       | 588,068    |       |
| Total  Liabilities                                                                                                                                                                   |       | 79,050,321      |       | 84,638,869 |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                            |       |            |       |       |       |
| Common Stock,  authorized 10,000,000 shares with no par value, issued and outstanding  830,453 shares and 818,453 shares at September 30, 2006 and December 31,  2005, respectively. |       | 2,667,607       |       | 2,728,230  |       |
| Additional  paid-in capital                                                                                                                                                          |       | 2,753,205       |       | 2,590,600  |       |
| Retained  earnings                                                                                                                                                                   |       | 2,252,463       |       | 1,497,818  |       |
| Accumulated  other comprehensive loss                                                                                                                                                |       | (101,475        | )          | (122,608   | )          |
| Total Equity                                                                                                                                                                         |       | 7,571,800       |       | 6,694,040  |       |
| Total Liabilities &  Equity                                                                                                                                                      |       | $               | 86,622,121 |       | $          | 91,332,909 |   |

 

3

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**CHINOCOMMERCIAL BANCORP**

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(unaudited)
| ** **                                           | ** ** | **For the three months ending** | ** ** | **For the nine months ending** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **September 30,**                              | ** ** | **September 30,**                             | ** ** |
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest Income                                      |       |                                                |       |                                               |       |   |   |   |   |
| Interest Income  - Securities                        |       | $                                                   | 274,709    |                                               | $          | 254,125 |   | $ | 871,987 |   | $ | 708,432 |   |
| Interest Income  - Fed Funds                         |       | 75,886                                              |       | 128,302                                            |       | 262,462 |   | 263,007 |   |
| Interest and fee  income on Loans                    |       | 954,770                                             |       | 706,492                                            |       | 2,630,983 |   | 2,106,311 |   |
| Total Interest  Income                               |       | 1,305,365                                           |       | 1,088,919                                          |       | 3,765,432 |   | 3,077,750 |   |
| Interest Expense                                     |       |                                                |       |                                               |       |   |   |   |   |
| Interest Expense  - Deposits                         |       | 125,166                                             |       | 70,914                                             |       | 320,750 |   | 179,990 |   |
| Interest Expense  - Other Borrowings                 |       | 1,060                                               |       |                                               |       | 1,660 |   |   |   |
| Total Interest  Expense                              |       | 126,226                                             |       | 70,914                                             |       | 322,410 |   | 179,990 |   |
| Net interest  income                                 |       | 1,179,139                                           |       | 1,018,005                                          |       | 3,443,022 |   | 2,897,760 |   |
| Provision for loan  losses                           |       | 44,754                                              |       | 41,175                                             |       | 73,004 |   | 94,593 |   |
| Net interest  income after provision for loan losses |       | 1,134,385                                           |       | 976,830                                            |       | 3,370,018 |   | 2,803,167 |   |
| Non-interest income                                  |       |                                                |       |                                               |       |   |   |   |   |
| Service Charges  on Deposit Accounts                 |       | 149,386                                             |       | 126,141                                            |       | 413,260 |   | 346,676 |   |
| Other  miscellaneous fee income                      |       | 7,161                                               |       | 2,005                                              |       | 15,082 |   | 6,167 |   |
| Income from  Mortgage Banking                        |       | (1,740                                              | )          | 0                                                  |       | 0 |   | 17,697 |   |
| Income from Bank  Owned Life Insurance               |       | 15,402                                              |       | 16,514                                             |       | 45,587 |   | 47,987 |   |
| Total  Non-interest income                           |       | 170,209                                             |       | 144,660                                            |       | 473,929 |   | 418,527 |   |
| General &  Administrative Expenses               |       |                                                |       |                                               |       |   |   |   |   |
| Salaries &  Benefits                             |       | 432,901                                             |       | 348,456                                            |       | 1,275,274 |   | 1,065,997 |   |
| Occupancy &  Equipment                           |       | 105,556                                             |       | 67,061                                             |       | 307,509 |   | 194,173 |   |
| Data & Item  Processing                          |       | 60,536                                              |       | 57,940                                             |       | 183,247 |   | 162,722 |   |
| Advertising  & Marketing                         |       | 30,700                                              |       | 33,991                                             |       | 70,678 |   | 93,790 |   |
| Audit &  Professional fees                       |       | 116,397                                             |       | 37,380                                             |       | 205,760 |   | 132,651 |   |
| Insurance                                            |       | 6,217                                               |       | 6,037                                              |       | 18,557 |   | 18,001 |   |
| Directors’ fees  and expenses                   |       | 21,950                                              |       | 19,255                                             |       | 66,306 |   | 57,062 |   |
| Other expenses                                       |       | 187,359                                             |       | 150,672                                            |       | 481,662 |   | 487,812 |   |
| Total general  & administrative expenses         |       | 961,616                                             |       | 720,792                                            |       | 2,608,993 |   | 2,212,208 |   |
| Income before income  tax expense                    |       | 342,978                                             |       | 400,698                                            |       | 1,234,954 |   | 1,009,486 |   |
| Income tax expense                                   |       | 130,506                                             |       | 156,888                                            |       | 480,309 |   | 392,979 |   |
| Total income                                         |       | $                                                   | 212,472    |                                               | $          | 243,810 |   | $ | 754,645 |   | $ | 616,507 |   |
| Basic Earnings per  share                            |       | $                                                   | 0.26       |                                               | $          | 0.30 |   | $ | 0.92 |   | $ | 0.75 |   |
| Diluted Earnings per  share                          |       | $                                                   | 0.24       |                                               | $          | 0.28 |   | $ | 0.85 |   | $ | 0.70 |   |

 

4

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**CHINOCOMMERCIAL BANCORP**

CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)
| ** **                                                              | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **      | ** ** | **Unrealized**     | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|------------------|------------|------------|------------|------------------|------------|-----------------|------------|--------------------|------------|------------|------------|
| ** **                                                              | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **      | ** ** | **loss on**   | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **      | ** ** | **securities**     | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Number ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **      | ** ** | **available**      | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **of**           | ** ** | **Common** | ** ** | **Paid in** | ** ** | **Accumulated** | ** ** | **for**            | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Shares**       | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **Deficit**     | ** ** | **sale, net** | ** ** | **Total**  | ** ** |
| ** **                                                              | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **      | ** ** | ** **         | ** ** | ** ** | ** ** |
| Balance at  December 31, 2004                                           |       | 818,453          |       | $          | 2,728,230  |             | $          | 2,590,600       |       | $                  | 612,645    |       | $          | (30,181 | ) | $ | 5,901,294 |   |
|                                                                    |       |             |       |       |       |             |       |            |       |               |       |       |       |
| Comprehensive  income:                                                  |       |             |       |       |       |             |       |            |       |               |       |       |       |
| Net income                                                              |       |             |       |       |       |             |       | 885,173         |       |               |       | 885,173    |       |
| Change in unrealized loss on securities available  for sale, net of tax |       |             |       |       |       |             |       |            |       | (92,427            | )          | (92,427    | )          |
| Total comprehensive income                                              |       |             |       |       |       |             |       |            |       |               |       | 792,746    |       |
| Balance at  December 31, 2005                                           |       | 818,453          |       | 2,728,230  |       | 2,590,600        |       | 1,497,818       |       | (122,608           | )          | 6,694,040  |       |
| Comprehensive  income:                                                  |       |             |       |       |       |             |       |            |       |               |       |       |       |
| Net income                                                              |       |             |       |       |       |             |       | 754,645         |       |               |       | 754,645    |       |
| Change in unrealized loss on securities available  for sale, net of tax |       |             |       |       |       |             |       |            |       | 21,133             |       | 21,133     |       |
| Total comprehensive income                                              |       |             |       |       |       |             |       |            |       |               |       | 775,778    |       |
|                                                                    |       |             |       |       |       |             |       |            |       |               |       |       |       |
| Exercise of  stock options                                              |       | 12,000           |       | 24,975     |       | 64,785           |       |            |       |               |       | 89,760     |       |
|                                                                    |       |             |       |       |       |             |       |            |       |               |       |       |       |
| Stock based  compensation                                               |       |             |       |       |       | 12,222           |       |            |       |               |       | 12,222     |       |
| Balance at September  30, 2006                                          |       | 830,453          |       | $          | 2,753,205  |             | $          | 2,667,607       |       | $                  | 2,252,463  |       | $          | (101,475 | ) | $ | 7,571,800 |   |

 

5

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**CHINOCOMMERCIAL BANCORP**

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(unaudited)
| ** **                                                                     | ** ** | **For the nine months ending** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **September 30, 2006**                   | ** ** | **September 30, 2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                          |       |                                               |       |   |   |
| Net Income                                                                     |       | $                                                  | 754,645    |   | $ | 616,507 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                               |       |   |   |
| Provision for loan losses                                                      |       | 73,004                                             |       | 94,593 |   |
| Depreciation and amortization                                                  |       | 130,013                                            |       | 90,516 |   |
| Amortization of premiums and discounts on Investment  Securities               |       | (2,182                                             | )          | 32,676 |   |
| Amortization of unearned loan fees                                             |       | (62,472                                            | )          | (92,677 | ) |
| Stock based compensation                                                       |       | 12,222                                             |       |   |   |
| Net changes in:                                                                |       |                                               |       |   |   |
| Accrued interest receivable                                                    |       | (74,028                                            | )          | (27,743 | ) |
| Other assets                                                                   |       | (151,090                                           | )          | (82,340 | ) |
| Accrued interest payable                                                       |       | (599                                               | )          | 5,767 |   |
| Other liabilities                                                              |       | (5,397                                             | )          | 158,623 |   |
| Net cash provided by operating activities                                      |       | 674,116                                            |       | 795,922 |   |
|                                                                           |       |                                               |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                          |       |                                               |       |   |   |
| Activity in available for sale investment  securities:                         |       |                                               |       |   |   |
| Purchases                                                                      |       | (1,400,000                                         | )          | (3,811,043 | ) |
| Repayments and calls                                                           |       | 4,748,589                                          |       | 2,957,578 |   |
| Activity in held to maturity investment securities:                            |       |                                               |       |   |   |
| Purchases                                                                      |       |                                               |       | (2,940,717 | ) |
| Repayments and calls                                                           |       | 604,022                                            |       | 1,469,284 |   |
| Purchase of interest-bearing deposits in other banks                           |       | (7,645,250                                         | )          | (1,946,000 | ) |
| Redemption of interest-bearing deposits with banks                             |       | 10,450,250                                         |       | 1,988,000 |   |
| Purchase of stock investments, restricted                                      |       | (49,600                                            | )          | (75,000 | ) |
| Loan purchases                                                                 |       |                                               |       | (708,612 | ) |
| Loan participations sold                                                       |       |                                               |       | 1,300,000 |   |
| Loan originations and principal collections, net                               |       | (8,956,136                                         | )          | (5,924,014 | ) |
| Purchase of land for branch site                                               |       |                                               |       | (639,150 | ) |
| Purchase of premise and equipment                                              |       | (460,615                                           | )          | (507,543 | ) |
| Net cash provided by (used in) investment activities                           |       | (2,708,740                                         | )          | (8,837,217 | ) |
|                                                                           |       |                                               |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                          |       |                                               |       |   |   |
| Net increase in deposits                                                       |       | (5,582,552                                         | )          | 10,343,985 |   |
| Proceeds from the exercise of stock options                                    |       | 89,760                                             |       |   |   |
| Net cash provided by financing activities                                      |       | (5,492,792                                         | )          | 10,343,985 |   |
| Net increase in cash and cash equivalents                                      |       | (7,527,416                                         | )          | 2,302,690 |   |
|                                                                           |       |                                               |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                              |       | 16,698,842                                         |       | 13,299,688 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                    |       | $                                                  | 9,171,426  |   | $ | 15,602,378 |   |
| SUPPLEMENTARY  INFORMATION                                                     |       |                                               |       |   |   |
| Interest paid                                                                  |       | $                                                  | 323,009    |   | $ | 174,223 |   |
| Income taxes  paid                                                             |       | $                                                  | 684,000    |   | $ | 466,700 |   |

 

6

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CHINO COMMERCIAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**1) OneBank Holding Company Reorganization**

OnMarch 2, 2006, Chino Commercial Bancorp was incorporated for the purpose ofacquiring Chino Commercial Bank, N.A. (the “Bank”) in a one bank holding companyreorganization.    Effective July 1,2006, Chino Commercial Bancorp acquired all of the outstanding stock of theBank pursuant to a Plan of Reorganization, dated March 16, 2006, between ChinoCommercial Bancorp and the Bank (the “Reorganization”).  Pursuant to the Plan of Reorganization, theshares of the Bank’s common stock were exchanged for shares of the common stockof Chino Commercial Bancorp, no par value, on a one-for-one basis.  As a result, the Bank became a wholly ownedsubsidiary of Chino Commercial Bancorp, Chino Commercial Bancorp became theholding company for the Bank, and the shareholders of the Bank became theshareholders of Chino Commercial Bancorp.  Prior to the Reorganization, Chino Commercial Bancorp did not engage inany business.  Chino Commercial Bancorpand the Bank are collectively referred to herein as the “Company” unlessotherwise indicated.  Inasmuch as ChinoCommercial Bancorp did not acquire the outstanding shares of the Bank untilJuly 1, 2006, the financial information contained throughout this QuarterlyReport for periods prior to that date is for the Bank only.  Information since July 1, 2006 is for theCompany on a consolidated basis unless otherwise stated.

**(2)Summary of Accounting Policies**

*Basis of Presentation*: Theaccompanying unaudited balance sheets of the Company and the related unauditedstatements of operations, stockholders’ equity and cash flows for the three andsix months ended September 30, 2006 and 2005 have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial statements.  Theydo not, however, include all of the information and footnotes required by suchaccounting principles for complete financial statements.  In the opinion of management, all adjustmentsincluding normal recurring accruals considered necessary for a fairpresentation have been included. Operating results for the interim periods presented are not necessarilyindicative of the results that may be expected for any other interim period orfor the year as a whole. Certain prior period amounts have been reclassified toconform to current period classification. See Note 2 of the Bank’s Annual Report on Form 10-KSB for the year endedDecember 31, 2005 (filed as Exhibit 99.1 to the Company’s Form S-8 RegistrationStatement filed with the Securities and Exchange Commission on July 5, 2006)for a summary of significant accounting policies.

*Recently Issued Accounting Standards*:  On November 3, 2005, the Financial AccountingStandards Board (the “FASB”) issued FASB Staff Position (“FSP”) Nos. FAS 115-1and FAS 124-1, *The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments*. This FSPaddresses the determination as to when an investment is considered impaired,whether that impairment is other than temporary, and the measurement of animpairment loss. This FSP also includes accounting considerations subsequent tothe recognition of an other-than-temporary impairment and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments. This FSP nullifies certain requirements ofEITF Issue 03-1, and supersedes EITF Topic No. D-44, *Recognitionof Other-Than-Temporary Impairment upon the Planned Sale of a Security WhoseCost Exceeds Fair Value*. The guidance in this FSP amends FASBStatement No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. The FSP is effective forreporting periods beginning after December 15, 2005. The Company does notanticipate any material impact to its financial condition or results ofoperations as a result of the adoption of this FAS 115-1 and FAS 124-1.

In May 2005, the FASBissued SFAS No. 154, Accounting Changes and Error Corrections - A Replacement ofAPB Opinion No. 20 and FASB Statement No. 3. SFAS 154 replaces APB Opinion 20,Accounting Changes, and FASB Statement 3, Reporting Accounting Changes inInterim Financial Statements, and changes the accounting and reportingrequirements for a change in accounting principle. SFAS 154 applies to allvoluntary changes in an accounting principle, as well as to changes required bya new accounting pronouncement in the unusual instance that the pronouncementdoes not include specific transition provisions. SFAS 154 is effective foraccounting changes and error corrections made in fiscal years beginning afterDecember 15, 2005 and requires retrospective application to prior periods’financial statements for most voluntary changes in an accounting principle, unlessit is impracticable to do so. SFAS 154 did not change the guidance forreporting corrections of errors, changes in estimates or for justification of achange in accounting principle on the basis of preferability. The Company doesnot anticipate any material impact to its financial condition or results ofoperations as a result of the adoption of SFAS No. 154.

7

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In September 2006, theFASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in IncomeTaxes (an interpretation of FASB Statement No. 109”) which is effective for thefiscal years beginning after December 15, 2006 with earlier adoptionencouraged.  This interpretation wasissued to clarify the accounting for uncertainly in income taxes recognized inthe financial statements by prescribing a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return.  We are currently evaluating the potential impactof this interpretation.

OnSeptember 7, 2006, the Emerging Issues Task Force (EITF) reached a finalconsensus on the subject titled “Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Arrangements.”  The consensus is consistent with the EITF’stentative conclusion reached in June that the recognition of a liability isrequired for the postretirement benefits provided through an endorsementsplit-dollar life insurance arrangement. However, the final consensus differs from the tentative conclusion withregard to the nature and amount of the liability to be accrued and the timingof implementation.  Pursuant to the finalconsensus, if an employer has promised to pay a death benefit directly from thecompany to a participant (or designated beneficiary), then a liability for thepresent value of the death benefit must be accrued over the participant’srequired service period.  However, if theemployer has agreed to maintain a split-dollar arrangement and share someportion of the death benefits of the underlying insurance policy, then thepostretirement cost of insurance, rather than the death benefit, should beaccrued.  Since most of the Company’sagreements involving postretirement death benefits are split-dollararrangements associated with an underlying insurance policy, we anticipate thatour accrual requirement will, for the most part, be limited to thepostretirement cost of insurance.  Whileit is difficult to estimate at this point, the financial statement impactshould be significantly less than if we were required to accrue for the presentvalue of the death benefit.  The newguidance will be effective for fiscal years beginning after December 15,2007.  Transition to the new guidancerequires a cumulative-effect adjustment to retained earnings at the beginningof the year of implementation, to reflect the change in accounting principle.

EffectiveJanuary 1, 2006, the Company began recording compensation expense associatedwith stock-based awards in accordance with Statement of Financial AccountingStandards (SFAS) No. 123 (revised 2004), *Share-BasedPayment* (SFAS No. 123R) as interpreted by SEC Staff AccountingBulletin No. 107. SFAS No. 123R supersedes APB No. 25, and amends SFAS No. 95 *Statement of Cash Flows*. Generally, theapproach in SFAS No. 123R is similar to the approach described in SFAS No. 123,*Accounting for Stock Based Compensation*(SFASNo. 123). However, SFAS No. 123R requires all stock-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values at the date of grant. Stock-basedcompensation expense amount recorded was $4,074 and $12,222 for the three andnine months ended September 30, 2006. The Company selected to use the modifiedprospective method of adopting SFAS 123R. Thus, stock option expense isrecognized only for options that vested after January 1, 2006.  Future compensation expense may be greater ifadditional stock options are granted by the Company.

Thefair value of each option granted is estimated on the date of grant using theBlack-Scholes option-pricing model.  TheCompany uses the following input variables as of the grant date, to arrive atthe fair value of stock options:

1)                                      Grantdate

2)                                      Optionsgranted

3)                                      Exerciseprice

4)                                      Stockprice on date of grant

5)                                      Expecteddividend rate

6)                                      Expectedvolatility (based on historical volatility of the Company’s stock)

7)                                      Riskfree interest rate on grant date

8)                                      Expectedterm

9)                                      Expectedforfeiture rate

Priorto January 1, 2006, the Company accounted for its stock options under therecognition and measurement principles of Accounting Principle Board (APB)Opinion No. 25, *Accounting for Stock Issuedto Employees*, and related interpretations. Accordingly, nostock-based employee compensation cost was reflected in net earnings prior toJanuary 1, 2006 as all options to purchase common stock of the Company had anexercise price equal to, or greater than, the market value of the underlyingcommon stock on the date of grant.

The following table illustrates the pro-forma effecton net income and earnings per share for the three and nine months endedSeptember 30, 2005:

8

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| ** **                                                             | ** ** | **Three months**            | ** ** | **Nine months**             | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                             | ** ** | **ended**                        | ** ** | **ended**                        | ** ** |
| ** **                                                             | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| Reported net  earnings                                                 |       | $                                | 243,810    |                             | $          | 616,507 |   |
| Stock-based  employee compensation expense, net of related tax effects |       | 2,903                            |       | 8,709                            |       |
| Pro forma net  earnings                                                |       | $                                | 240,907    |                             | $          | 607,798 |   |
| Reported basic  net earnings per share                                 |       | $                                | 0.30       |                             | $          | 0.75 |   |
| Reported diluted  net earnings per share                               |       | $                                | 0.28       |                             | $          | 0.70 |   |
| Pro forma basic  net earnings per share                                |       | $                                | 0.28       |                             | $          | 0.70 |   |
| Pro forma diluted net  earnings per share                              |       | $                                | 0.27       |                             | $          | 0.69 |   |

 

**(3) Earnings per share**

BasicEPS excludes dilution and is computed by dividing earnings available to commonstockholders by the weighted average number of common shares outstanding forthe period.  Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock or resulted from theissuance of common stock that then shared in earnings.

Theweighted-average number of shares used in computing basic and diluted earningsper share is as follows:

**Earningper share Calculation**

**For theThree Months Ended September 30, 2006**
| ** **                                                          | ** ** | **2006**   | ** ** | **2005**     | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Per** | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Per** | ** ** |
| ** **                                                          | ** ** | **Net**    | ** ** | **Average**  | ** ** | **Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per** | ** ** |
| ** **                                                          | ** ** | **Income** | ** ** | **Shares**   | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                                |       |       |       |         |       |   |   |   |   |   |   |   |   |
| Basic earnings  per share                                           |       | $          | 212,472    |         | 828,953    |   | $ | 0.26 |   | $ | 243,810 |   | 818,453 |   | $ | 0.30 |   |
|                                                                |       |       |       |         |       |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares: assumed exercise of outstanding options |       |       |       | 66,053       |       | (0.02 | ) |   |   | 66,947 |   | (0.02 | ) |
| Diluted earnings per  share                                         |       | $          | 212,472    |         | 895,006    |   | $ | 0.24 |   | $ | 243,810 |   | 885,400 |   | $ | 0.28 |   |

 

Earning per shareCalculation

For the NineMonths Ended September 30, 2006
| ** **                                                          | ** ** | **2006**   | ** ** | **2005**     | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Per** | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Per** | ** ** |
| ** **                                                          | ** ** | **Net**    | ** ** | **Average**  | ** ** | **Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Share** | ** ** |
| ** **                                                          | ** ** | **Income** | ** ** | **Shares**   | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                                |       |       |       |         |       |   |   |   |   |   |   |   |   |
| Basic earnings  per share                                           |       | $          | 754,645    |         | 823,620    |   | $ | 0.92 |   | $ | 616,507 |   | 818,453 |   | $ | 0.75 |   |
|                                                                |       |       |       |         |       |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares: assumed exercise of outstanding options |       |       |       | 65,952       |       | (0.07 | ) |   |   | 65,681 |   | (0.05 | ) |
| Diluted earnings per  share                                         |       | $          | 754,645    |         | 889,572    |   | $ | 0.85 |   | $ | 616,507 |   | 884,134 |   | $ | 0.70 |   |

 

9

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** (4) Stock Option Plan**

Under the Company’s stock option plan, theCompany may grant incentive stock options and non-qualified stock options toits directors, officers and employees. Incentive options begin vesting afterone year from the date of grant at a rate of 33% per year. Non-qualifiedoptions vest as follows: 25% on the date of grant, and 25% per year beginningon the first anniversary of the date of grant. All options expire 10 yearsafter date of grant.

There were no options granted during the ninemonths ended September 30, 2006.

**(5) Off-Balance-Sheet Commitments**

The Company is a party to credit-related financialinstruments with off-balance-sheet risk in the normal course of business tomeet the financing needs of its customers. These financial instruments includecommitments to grant loans, unadvanced lines of credit, standby letters ofcredit and commercial letters of credit. Such commitments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the balance sheet.

The Company’s exposure to credit loss is representedby the contractual amount of these commitments. The Company uses the samecredit policies in making commitments as it does for on-balance-sheetinstruments. At September 30, 2006 and December 31, 2005, the Company had $6.2million and $8.8 million, respectively, of off-balance sheet commitments toextend credit.  These commitmentsrepresent a credit risk to the Company. At September 30, 2006 and December 31, 2005, the Company had unadvancedstandby letters of credit of $285,300 and $315,300, respectively.

Commitmentsto grant loans are agreements to lend to customers as long as there is noviolation of any condition established in the contract. Commitments generallyhave fixed expiration dates or other termination clauses and may requirepayment of a fee. Since some of the commitments may expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements. The Company evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary bythe Company upon extension of credit, is based on management’s creditevaluation of the customer. Collateral held varies but may include accountsreceivable, inventory, equipment, income-producing commercial properties,residential properties, and properties under construction.

## **Item2: Management’s Discussion and Analysis of Financial Conditions and Results ofOperations**

ChinoCommercial Bancorp is the holding company for Chino Commercial Bank, N.A.headquartered in Chino, California. Effective July 1, 2006, Chino Commercial Bancorp acquired all of theoutstanding shares of the Bank pursuant to a Plan of Reorganization dated March16, 2006.  Since the Reorganization wasnot effective until July 1, 2006, and since Chino Commercial Bancorp conductedno operations prior thereto, the financial information contained throughoutthis Quarterly Report, including the discussion and analysis thereof,  for periods prior to that date is for theBank only.  Information since July 1,2006 is for the Company on a consolidated basis unless otherwise stated. Anydiscussion should be read in conjunction with the financial statements of theCompany and the notes related thereto presented elsewhere herein.

**ForwardLooking Information**

Certainmatters discussed in this report contain forward-looking statements within themeaning of Section 21E of the Securities Exchange Act of 1934 (the “ExchangeAct”), that involve substantial risks and uncertainties.  When used in this report, or in the documentsincorporated by reference herein, the words “anticipate,” “believe,”“estimate,” “may,” “intend,” “expect,” and similar expressions identify certainof such forward-looking statements. Actual results could differ materially from such forward-lookingstatements contained herein.  Factorsthat could cause future results to vary from current expectations include, butare not limited to, the following: changes in economic conditions (bothgenerally and more specifically in the markets in which the Company operates);changes in interest rates, deposit flows, loan demand, real estate values andcompetition; changes in accounting principles, policies or guidelines and ingovernment legislation and regulation (which change from time to time and overwhich the Company has no control); other factors affecting the Company’soperations, markets, products and services; and other risks detailed in thisForm 10-QSB and in the Company’s other reports filed with the Securities andExchange Commission (“SEC”) pursuant to the SEC’s rules and regulations.  Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof.  TheCompany undertakes no obligation to publicly revise these forward-looking statementsto reflect events or circumstances that arise after the date thereof.

10

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**Critical Accounting Policies**

The preparation of financial statements in accordancewith accounting principles generally accepted in the United States of Americarequires management to make a number of judgments, estimates and assumptionsthat affect the reported amount of assets, liabilities, income and expenses inthe Company’s financial statements and accompanying notes.  Management believes that the judgments,estimates and assumptions used in preparation of the Company’s financialstatements are appropriate given the factual circumstances as of September 30,2006.

Variouselements of the Company’s accounting policies, by their nature, are inherentlysubject to estimation techniques, valuation assumptions and other subjectiveassessments.  Critical accountingpolicies are those that involve the most complex and subjective decisions andassessments and have the greatest potential impact on the Company’s results ofoperation.  In particular, management hasidentified one accounting policy that, due to judgments, estimates andassumptions inherent in this policy, and the sensitivity of the Company’sfinancial statements to those judgments, estimates and assumptions, arecritical to an understanding of the Company’s financial statements.  This policy relates to the methodology thatdetermines the Company’s allowance for loan losses.  Management has discussed the development andselection of this critical accounting policy with the Company’s Audit Committeeof the Board of Directors.  AlthoughManagement believes the level of the allowance at September 30, 2006 isadequate to absorb losses inherent in the loan portfolio, a decline in theregional economy may result in increasing losses that cannot reasonably bepredicted at this time.   For furtherinformation regarding the allowance for loan losses see “Comparison ofFinancial Condition at September 30, 2006 and December 31, 2005 Allowance forLoan Losses” included elsewhere herein.

**Overviewof the Results of Operations**

For the three months ended September 30, 2006, theCompany posted net income of $212,472 or $0.24 per diluted share as compared tonet income of $243,810 or $0.28 per diluted share for the three months endedSeptember 30, 2005. For the nine months ended September 30, 2006, the Companyposted net income of $754,645 or $0.85 per diluted share as compared to a netincome of $616,507 or $0.70 per diluted share for the nine months endedSeptember 30, 2005.  The Company’s netincome decreased by 12.85% in the third quarter of 2006 as compared to the sameperiod in 2005, due primarily to the non-recurring cost of approximately$90,000 associated with the forming Chino Commercial Bancorp, all of which wasexpensed in the third quarter of 2006. Net income improved by 22.41% for thenine months ended September 30, 2006 as compared to the same period in2005.  The annualized return on averageequity was 11.45% and the annualized return on average assets was 0.97% for thequarter ended September 30, 2006 compared to a 15.21% return on average equityand a 1.11% return on average assets for the quarter ended September 30, 2005.The annualized return on average equity was 13.75% and the annualized return onaverage assets was 1.13% for the nine months ended September 30, 2006 comparedto a 13.23% return on average equity and a 0.99% return on average assets forthe nine months ended September 30, 2005. The increase in the return on average assets is attributable to theincrease on the yield on the earning assets along with the growth in averageloan balances for the period ended September 30, 2006.

Total non-interestbearing deposits declined from $62.6 million on December 31, 2005 to $53.3million for reporting period ended September 30, 2006 resulting from a generalcontraction in the deposit accounts of a number of the Company’s customerswhich are engaged in real estate related industries. The most prominentcontraction occurred in a number of Escrow Trust accounts reflecting an generalslowdown of real estate sales. Overall, the total number of deposit accountsincreased during this period, however, the average balances per accountdeclined. See “Financial Condition – Comparison of Financial Condition atSeptember 30, 2006 and December 31, 2005 – General.”

The Companyexperienced a slight decline in interest-earning assets of $1.9 million or2.31% to $79.6 million with average interest-bearing liabilities increasing by$5.5 million or 28.62% to $24.9 million yielding a net interest margin of 5.93%or a 93 basis point increase for the three months ended September 30, 2006 ascompared to same quarter’s results in 2005. For the nine months ended September 30, 2006, average interest-earningassets increased $4.0 million or 5.19% to $80.3 million with averageinterest-bearing liabilities increasing by $7.0 million or 40.78% to $24.0million yielding a net interest margin of 5.72% or a 64 basis point increasefrom the same period of the prior year. The Company’s Investment Securities andFederal Funds decreased while loan balances increased during the most recentquarter. Decreases in average deposit balances reduced the Company’s fundsavailable to invest in overnight Federal Funds.

11

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The Provision forLoan Losses was $44,754 for the three months ended September 30, 2006 ascompared to $41,175 for the three months ended September 30, 2005. TheProvision for Loan Losses decreased by $21,589 to $73,004 for the nine monthsended September 30, 2006 as compared to $94,593 for the nine months ended September30, 2005***. ***The decline is indicative of aseasoned loan portfolio and a migration analysis of the loan portfolioreflecting no loan losses since inception.

Total non-interest income increased by $25,549 or17.7% for the three months ended September 30, 2006 as compared to the threemonths ended September 30, 2005. Total non-interest income increased by $55,402or 13.2% for the nine months ended September 30, 2006 as compared to the ninemonths ended September 30, 2005.   Theincrease in both periods is primarily due to an overall increase in the numberof deposit accounts with analysis charges as well as other service charges,causing an increase in service charges on deposit accounts of $23,245 or 18.4%for the three months ended September 30, 2006 and $66,584 or 19.2% for the ninemonths ended September 30, 2006.  Thisincrease was partially offset by mortgage banking fee income which declined by$1,740 during the comparable three month period and by $17,697 during thecomparable nine month. These prior period fees were earned through referrals ofsingle-family mortgage loans to third party conduits. As market conditionsallow, the Company anticipates referring single-family mortgage loans to thirdparty conduits and receiving additional broker fees in the future.

Non-interestexpenses increased by $240,824 or 33.4% for the three months ended September30, 2006 and increased by $396,785 or 17.94% for the nine months endedSeptember 30, 2006 due primarily to the formation of the Company, additionalstaff for the new Ontario branch as well as occupancy and equipment expenses ofthe new Ontario branch.  The holdingcompany formation costs were recorded in July and August, 2006 and the Ontariobranch was opened on January 5, 2006.

**EarningsPerformance**

**NetInterest Income and Net Interest Margin**

The Company’s netinterest margin was 5.93% and 5.72% for the three and nine months endedSeptember 30, 2006 as compared to 5.08% and 5.06% for the three and nine monthsended September 30, 2005.  The increasein the net interest margin was due to a combination of the rise on the yieldearned on the loan portfolio, as loans re-price in a rising interest rateenvironment, and the relative increase in the average loan portfolio as apercentage of total interest-earning assets. The ratio of average net loans tototal average assets increased to 55.7% for the three months ended September30, 2006 from 42.6% for the comparable period in 2005; and to 51.4% for thenine months ended September 30, 2006 from 45.0% for the comparable period in2005. Interest increased from 7.52% to 7.83%. or 31 basis points, for thequarters ended September 30, 2005 compared to 2006; and from 7.55% to 7.69%, or14 basis points, for the nine months ended September 30 2005 compared to 2006..The increase from these factors was somewhat offset by a decrease in theproportion of non-interest bearing deposits to total deposits, which decreasedfrom 76.2% to 68.6% of average total deposits for the three months endedSeptember 30, 2006 and 2005, respectively; and from 77.6% to 70.3% of averagetotal deposits for the nine months ended September 30, 2006 and 2005,respectively

Interest incomeincreased $216,446 or 19.9% and $687,682 or 22.3% to $1,305,365 and $3,765,432,respectively, for the three and nine months ended September 30, 2006 ascompared with $1,088,919 and $3,077,750, respectively, for the three and ninemonths ended September 30, 2005.  Asreflected in the rate/volume analysis on page 15 and 16, the primary reason forthe increase is attributed to market rate increases. Volume (or the increase inaverage balances) created $152,000 and $248,000 of income for the three andnine months ended September 30, 2006, respectively, as compared to $242,000 and$521,000, respectively for the same periods ended September 30, 2005.

The largestincrease in interest income was due to the increase in interest income on totalloans. Average net loans increased to $48.8 million for the three months endedSeptember 30, 2006, compared to $37.5 million at September 30, 2005, andincreased to 55.7% of total average assets from 42.6% of average assets for thesame periods. Average interest-earning assets decreased $1.9 million or 2.3% to$79.6 million for the three months ended September 30, 2006 as compared to$81.4 million for the three months ended September 30, 2005.  The yield on average earning assets increasedby 121 basis points to 6.56% for the three months ended September 30, 2006 from5.35% for the three months ended September 30, 2005 as investment securityyields increased to 4.40% from 3.55% and Fed funds rates increased to 5.28%from 3.35%.  The decrease in averageinterest-bearing assets is primarily due to decrease in Fed funds sold whichdecreased by $9.4 million or 62.01% in the three months ended September 30,2006 as compared to the three months ended September 30, 2005.

12

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Averageinterest-earning assets increased $4.0 million or 5.2% to $80.3 million for thenine months ended September 30, 2006 as compared to $76.3 million for the ninemonths ended September 30, 2005.  Theyield on average earning assets increased by 87 basis points to 6.25% for thenine months ended September 30, 2006 from 5.38% for the nine months endedSeptember 30, 2005 as loan yields increased to 7.69% from 7.55% and Fed fundsrates rose to 4.82% from 2.99% and investment security yields rose 79 basis pointsto 4.24% from 3.45%. Average net loans increased by $8.4 million or 11.0% inthe nine months ended September 30, 2006 as compared to the nine months endedSeptember 30, 2005. The average balance of Federal funds sold decreased by $4.5million.

The average yieldon loans increased to 7.69% for the nine months ended September 30, 2006 ascompared to 7.55% for the nine months ended September 30, 2005.  The increase was primarily the result of theimpact of the interest rate environment. The average yield on loans increased to 7.83% for the three months endedSeptember 30, 2006 from 7.52% for the three months ended September 30, 2005.The growth in the average loan balances is reflective of the loan demandscreated by the business opportunities in the Inland Empire area.

The average yieldon the aggregate average balance of securities (U. S. Government agencies,mortgage-backed securities and other securities) increased to 4.40% and 4.24%,respectively, for the three and nine months ended September 30, 2006 and from3.55% and 3.45%, respectively, for the three and nine months ended September30, 2005.  The increase in the thirdquarter of 2006 on yields on investment securities reflects short-term interestrate rise, and the repricing of certain adjustable rate mortgage backedsecurities. The average interest-earning aggregate balance of securitiesdecreased to $25.0 million for the three months ended September 30, 2006 from$28.7 million for the three months ended September 30, 2005. The average aggregatebalance of securities increased slightly to $27.4 million for the nine monthsended September 30, 2006. This represents a $23 thousand increase over theaverage aggregate balance of the nine months ended September 30, 2005.

The average yieldon Federal funds sold increased to 5.28% and 4.82%, respectively, for the threeand nine months ended September 30, 2006 from 3.38% and 2.99%, respectively,for the three and nine months ended September 30, 2005.  The increase in the rates was attributableprimarily to the rise in Federal funds rates. The average interest-earning balance of Federal funds sold decreased to$9.4 million and $4.5 million for the three and nine months ended September 30,2006 from $15.2 million and $11.8 million for the three and nine months endedSeptember 30, 2005.  This decrease inFederal funds sold resulted from the growth in the loan and investmentportfolios.

Interest expenseincreased $55,312 or 78.0% and $142,420 or 79.1% to $126,226 and $322,410 forthe three and nine months ended September 30, 2006 from $70,914 and $179,990for the three and nine months ended September 30, 2005.  Average interest-bearing liabilitiesincreased by $5.5 million and $6.9 million to $24.9 million and $24.0 millionthree and nine months ended September 30, 2006 from $19.4 million and $17.1million for the same periods of the prior year. The increase in averageinterest-bearing liabilities was coupled with an increase of 55 basis pointsand 38 basis points for the three and nine months ended September 30, 2006 ascompared to the three and nine months ended September 30, 2005,respectively.  The increase in interestrates was due to the rise in the short-term interest rates.  To offset this rise, the Company continues tomaintain a high ratio of average non-interest bearing deposits in comparison toaverage total deposits with a ratio of 68.6% and 70.3% for the three and ninemonths ended September 30, 2006 as compared to 76.2% and 77.6% for the threeand nine months ended September 30, 2005. Average non-interest bearing deposits increased by $5.5 million and $7.0million for the three and nine months ended September 30, 2006 as compared tothe same periods for 2005.

The tables belowset forth certain information relating to the Company for the three and ninemonths ended September 30, 2006 and 2005. The yields and costs are derived bydividing income or expense by the average balances of assets or liabilities,respectively, for the periods shown below. Average balances are derived fromaverage daily balances.  Yields includefees that are considered adjustments to yields. The tables reflect the Company’s average balances of assets, liabilitiesand shareholders’ equity; the amount of interest income or interest expense;the average yield or rate for each category of interest-earning assets andinterest-bearing liabilities; and the net interest spread and the net interestmargin for the periods indicated:

13

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**Distribution,Yield and Rate Analysis of Net Income**

(dollars inthousands)

(unaudited)
| ** **                                                        | ** ** | **For the three months ended** | ** ** | **For the three months ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                        | ** ** | **September 30, 2006**                   | ** ** | **September 30, 2005**                   | ** ** |
| ** **                                                        | ** ** | **Average**                                        | ** ** | **Income/**                                        | ** ** | **Average** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Average** | ** ** |
| ** **                                                        | ** ** | **balance**                                        | ** ** | **Expense**                                        | ** ** | **Yield/Rate4** | ** ** | **balance** | ** ** | **Expense** | ** ** | **Yield/Rate4** | ** ** |
| Assets                                                            |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest-earnings  assets                                         |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net loans1                                                        |       | $                                                  | 48,769     |                                               | $          | 955 |   | 7.83 | % | $ | 37,541 |   | $ | 706 |   | 7.52 | % |
| Securities of U.S. government agencies                            |       | 6,905                                              |       | 61                                                 |       | 3.53 | % | 7,957 |   | 57 |   | 2.87 | % |
| Mortgage-backed securities                                        |       | 11,586                                             |       | 130                                                |       | 4.49 | % | 13,099 |   | 127 |   | 3.88 | % |
| Other securities                                                  |       | 6,534                                              |       | 84                                                 |       | 5.14 | % | 7,665 |   | 71 |   | 3.71 | % |
| Federal funds sold                                                |       | 5,762                                              |       | 75                                                 |       | 5.28 | % | 15,173 |   | 128 |   | 3.35 | % |
| Total interest-earning assets                                     |       | 79,556                                             |       | $                                                  | 1,305      |   | 6.56 | % | 81,435 |   | $ | 1,089 |   | 5.35 | % |
| Non-interest  earning assets                                      |       | 7,966                                              |       |                                               |       |   |   | 6,778 |   |   |   |   |   |
| Total assets                                                      |       | $                                                  | 87,522     |                                               |       |   |   |   | $ | 88,213 |   |   |   |   |   |
|                                                              |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Liabilities and  Stockholders’ Equity                        |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                                     |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Money market deposits                                             |       | $                                                  | 19,855     |                                               | $          | 97 |   | 1.95 | % | $ | 14,558 |   | $ | 49 |   | 1.35 | % |
| Savings                                                           |       | 1,504                                              |       | 1                                                  |       | 0.27 | % | 1,057 |   | 1 |   | 0.38 | % |
| Time deposits < $100,000                                       |       | 1,505                                              |       | 10                                                 |       | 2.66 | % | 1,566 |   | 8 |   | 2.03 | % |
| Time deposits equal to or > $100,000                           |       | 2,018                                              |       | 17                                                 |       | 3.37 | % | 2,174 |   | 13 |   | 2.37 | % |
| Other borrowing                                                   |       | 12                                                 |       | 1                                                  |       |   |   | 0 |   | 0 |   | 0.00 | % |
| Total interest-bearing liabilities                                |       | 24,894                                             |       | 126                                                |       | 2.02 | % | 19,355 |   | 71 |   | 1.46 | % |
| Non-interest  bearing deposits                                    |       | 54,439                                             |       |                                               |       |   |   | 62,047 |   |   |   |   |   |
| Non-interest  bearing liabilities                                 |       | 829                                                |       |                                               |       |   |   | 401 |   |   |   |   |   |
| Stockholders’  equity                                        |       | 7,360                                              |       |                                               |       |   |   | 6,410 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |       | $                                                  | 87,522     |                                               |       |   |   |   | $ | 88,213 |   |   |   |   |   |
|                                                              |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net interest  income                                              |       |                                               |       | $                                                  | 1,179      |   |   |   |   |   | $ | 1,018 |   |   |   |
| Net interest  spread 2                                            |       |                                               |       |                                               |       | 4.54 | % |   |   |   |   | 3.89 | % |
| Net interest  margin 3                                            |       |                                               |       |                                               |       | 5.93 | % |   |   |   |   | 5.00 | % |
| Ratio of  interest-earning assets to interest-bearing liabilities |       |                                               |       |                                               |       | 319.58 | % |   |   |   |   | 420.74 | % |

 

----

1      Amortizationof loan fees have been included in the calculation of interest income. Loanfees were approximately $15,390 for the three months ended September 30, 2006as compared to $19,115 for the three months ended September 30, 2005.   Loans are net of the allowance for loanlosses, deferred fees and related direct costs.

2      Representsthe average rate earned on interest-earning assets less the average ratepaid on interest-bearing liabilities.

3          Representsnet interest income as a percentage of average interest-earning assets.

4      AverageYield/Rate is based upon actual dollars based on a 360 day year, 30 days permonth.

14

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**Distribution,Yield and Rate Analysis of Net Income**

(dollars inthousands)

(unaudited)
| ** **                                                        | ** ** | **For the nine months ended** | ** ** | **For the nine months ended** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **September 30, 2006**                  | ** ** | **September 30, 2005**                  | ** ** |
| ** **                                                        | ** ** | **Average**                                       | ** ** | **Income/**                                       | ** ** | **Average** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Average** | ** ** |
| ** **                                                        | ** ** | **balance**                                       | ** ** | **Expense**                                       | ** ** | **Yield/Rate4** | ** ** | **balance** | ** ** | **Expense** | ** ** | **Yield/Rate4** | ** ** |
| Assets                                                            |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest-earnings  assets                                         |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net loans 1                                                       |       | $                                                 | 45,624     |                                              | $          | 2,631 |   | 7.69 | % | $ | 37,198 |   | $ | 2,106 |   | 7.55 | % |
| Securities of U.S. government agencies                            |       | 7,363                                             |       | 186                                               |       | 3.37 | % | 6,789 |   | 140 |   | 2.75 | % |
| Mortgage-backed securities                                        |       | 12,417                                            |       | 409                                               |       | 4.39 | % | 13,183 |   | 375 |   | 3.79 | % |
| Other securities                                                  |       | 7,618                                             |       | 277                                               |       | 4.85 | % | 7,403 |   | 194 |   | 3.49 | % |
| Federal funds sold                                                |       | 7,273                                             |       | 262                                               |       | 4.82 | % | 11,761 |   | 263 |   | 2.99 | % |
| Total interest-earning assets                                     |       | 80,295                                            |       | $                                                 | 3,765      |   | 6.25 | % | 76,334 |   | $ | 3,078 |   | 5.38 | % |
| Non-interest  earning assets                                      |       | 8,545                                             |       |                                              |       |   |   | 6,372 |   |   |   |   |   |
| Total assets                                                      |       | $                                                 | 88,840     |                                              |       |   |   |   | $ | 82,706 |   |   |   |   |   |
|                                                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Liabilities and  Stockholders’ Equity                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                                     |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Money market deposits                                             |       | $                                                 | 19,267     |                                              | $          | 250 |   | 1.73 | % | $ | 12,428 |   | $ | 122 |   | 1.31 | % |
| Savings                                                           |       | 1,344                                             |       | 3                                                 |       | 0.30 | % | 948 |   | 2 |   | 0.28 | % |
| Time deposits < $100,000                                       |       | 1,485                                             |       | 27                                                |       | 2.42 | % | 1,652 |   | 23 |   | 1.86 | % |
| Time deposits equal to or > $100,000                           |       | 1,926                                             |       | 41                                                |       | 2.84 | % | 2,044 |   | 33 |   | 2.16 | % |
| Other borrowing                                                   |       | 12                                                |       | 1                                                 |       |   |   | 0 |   | 0 |   | 0.00 | % |
| Total interest-bearing liabilities                                |       | 24,034                                            |       | $                                                 | 322        |   | 1.79 | % | 17,072 |   | $ | 180 |   | 1.41 | % |
| Non-interest bearing deposits                                     |       | 56,794                                            |       |                                              |       |   |   | 59,152 |   |   |   |   |   |
| Non-interest bearing liabilities                                  |       | 879                                               |       |                                              |       |   |   | 271 |   |   |   |   |   |
| Stockholders’ equity                                         |       | 7,133                                             |       |                                              |       |   |   | 6,211 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |       | $                                                 | 88,840     |                                              |       |   |   |   | $ | 82,706 |   |   |   |   |   |
|                                                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net interest  income                                              |       |                                              |       | $                                                 | 3,443      |   |   |   |   |   | $ | 2,898 |   |   |   |
|                                                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net interest  spread 2                                            |       |                                              |       |                                              |       | 4.47 | % |   |   |   |   | 3.97 | % |
| Net interest  margin 3                                            |       |                                              |       |                                              |       | 5.72 | % |   |   |   |   | 5.08 | % |
| Ratio of  interest-earning assets to interest-bearing liabilities |       |                                              |       |                                              |       | 334.09 | % |   |   |   |   | 447.13 | % |

 

----

1      Amortizationof loan fees have been included in the calculation of interest income. Loan feeincome was $62,472 for the nine months ended September 30, 2006 as compared to$106,070 for the nine months ended September 30, 2005.   Loans are net of the allowance for loanlosses, deferred fees and related direct costs.

2      Representsthe average rate earned on interest-earning assets less the average ratepaid on interest-bearing liabilities.

3.         Represents net interestincome as a percentage of average interest-earning assets.

4      Average Yield/Rate is based upon actualdollars and annualized based on a 360 day year and 30 day month.

15

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**Rate/VolumeAnalysis**

The following table presents the extent to whichchanges in interest rates and changes in the volume of interest-earning assetsand interest-bearing liabilities have affected the Company’s interest incomeand expense during the periods indicated. The variances attributable to both the volume and rate changes have beenallocated to volume and rate changes in proportion to the relationship of theabsolute dollar amount of the changes in each:
| ** **                              | ** ** | **For the three months ended   September 30,** | ** ** | **For the nine months ended   September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2006 vs. 2005**                                                  | ** ** | **2006 vs. 2005**                                                 | ** ** |
| ** **                              | ** ** | **Increase (Decrease) Due to**                                | ** ** | **Increase (Decrease) Due to**                               | ** ** |
| ** **                              | ** ** | **Volume**                                                                   | ** ** | **Rate**                                                                    | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
|                                    |       |                                                                         |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets                |       |                                                                         |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Net Loans                               |       | $                                                                            | 219        |                                                                        | $          | 30 |   | $ | 249 |   | $ | 485 |   | $ | 40 |   | $ | 525 |   |
| Securities of U. S. Government agencies |       | (9                                                                           | )          | 13                                                                          |       | 4 |   | 13 |   | 33 |   | 46 |   |
| Mortgage-backed securities              |       | (16                                                                          | )          | 19                                                                          |       | 3 |   | (23 | ) | 57 |   | 34 |   |
| Other securities                        |       | (11                                                                          | )          | 24                                                                          |       | 13 |   | 6 |   | 77 |   | 83 |   |
| Federal funds sold                      |       | (102                                                                         | )          | 49                                                                          |       | (53 | ) | (125 | ) | 124 |   | (1 | ) |
| Total interest-earning assets           |       | (26                                                                          | )          | 242                                                                         |       | 216 |   | 166 |   | 521 |   | 687 |   |
|                                    |       |                                                                         |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities           |       |                                                                         |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Money market and NOW                    |       | 22                                                                           |       | 26                                                                          |       | 48 |   | 80 |   | 48 |   | 128 |   |
| Savings deposits                        |       | 0                                                                            |       | 0                                                                           |       | 0 |   | 1 |   | 0 |   | 1 |   |
| Time deposits < $100,000             |       | (1                                                                           | )          | 2                                                                           |       | 1 |   | (2 | ) | 6 |   | 4 |   |
| Time deposits equal to or > $100,000 |       | (1                                                                           | )          | 5                                                                           |       | 4 |   | (2 | ) | 10 |   | 8 |   |
| Other borrowing                         |       | 1                                                                            |       | 0                                                                           |       | 1 |   | 1 |   | 0 |   | 1 |   |
| Total interest-bearing liabilities      |       | 23                                                                           |       | 32                                                                          |       | 55 |   | 86 |   | 56 |   | 142 |   |
| Change in net interest income           |       | $                                                                            | (49        | )                                                                           | $          | 210 |   | $ | 161 |   | $ | 80 |   | $ | 465 |   | $ | 545 |   |

 

As shown above,the rate variance contributed $210,000 to the Company’s net interest income inthe third quarter of 2006 relative to the third quarter of 2005, while thevolume decreased $49,000, netting a gain in net interest income of $161,000over the previous quarter. The Company faired better on a year-to-datecomparison of $465,000 increase in rate, and $89,000 increase in volumeresulting in a net gain in net interest income of $545,000 for the nine monthperiod of 2006 as it relates to the same period of the prior year’s results.Both volume and rate in the loan portfolio increased in both period comparisonsas the Company concentrates on increasing its loan portfolio. No purchases ofInvestment Securities were made in the most recent quarter as the Companyreallocates its funds to the loan portfolio. The reduction of the InvestmentSecurities is a result of pay downs and maturities. Overnight Federal Fundsdecreased in volume as a direct of the decline in demand deposits as discussedin the Deposit section. Although the Company does not aggressively seek MoneyMarket and NOW accounts, increases in both volume and rate have increased inboth period comparison.

16

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**Provision for Loan Losses**

The Provision forloan losses was $44,754 and $73,004 for the three and nine months endedSeptember 30, 2006 as compared to $41,175 and $94,593 for the three and ninemonths ended September 30, 2005.   Alldowngraded credits were current as of September 30, 2006 and no principallosses have been recorded and no credits were on nonaccrual.  The allowance for loan losses was $617,144 or1.20% of gross loans receivable at September 30, 2006 as compared to $544,140or 1.28% of gross loans receivable at December 31, 2005 and $501,640 or 1.25%of gross loans receivable at September 30, 2005.  The decline is indicative of a seasoned loanportfolio and a migration analysis of the loan portfolio reflecting no loanlosses since inception.

Provisions to theallowance for loan losses are made monthly if needed, in anticipation of futurepotential loan losses.  The monthlyprovision is calculated on a predetermined formula to ensure adequacy as theportfolio grows.  The formula is composedof various components.  Allowance factorsare utilized in estimating the adequacy of the allowance for loan losses.  The allowance is determined by assignedspecific allowances for all loans.  Ashigher allowance levels become necessary as a result of this analysis, theallowance for loan losses will be increased through the provision for loanlosses.  The procedures for monitoringthe adequacy of the allowance, and detailed information on the allowance, areincluded below under “Allowance for Loan Losses.”

**Non-Interest Income**

Non-interest income was $170,209 and $473,929 for thethree and nine months ended September 30, 2006 as compared to $144,660 and $418,527for the three and nine months ended September 30, 2005.  The increase of $25,549 or 17.7% for thecomparable three month periods and $54,402 or 13.2% for the comparable ninemonth periods resulted from the increase in the service charge income on depositaccounts.  This increase was partiallyoffset by decreases in income from mortgage banking of $1,740 and $17,697 forthe respective periods, respectively.

Non-InterestIncome
| ** **                                 | ** ** | **Non-Interest Income for three months** | ** ** | **Non-Interest Income for nine months** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                 | ** ** | **ended September 30**                             | ** ** | **ended September 30**                            | ** ** |
| ** **                                 | ** ** | **2006**                                                     | ** ** | **2005**                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **Amount**                                                   | ** ** | **% of Total**                                    | ** ** | **Amount** | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| ** **                                 | ** ** | ** **                                                   | ** ** | ** **                                                  | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service Charges on deposit accounts        |       | $                                                            | 149        |                                                        | 87.7       | % | $ | 126 |   | 86.9 | % | $ | 413 |   | 87.1 | % | $ | 347 |   | 82.8 | % |
| Other miscellaneous fee income             |       | 7                                                            |       | 4.1                                                         | %          | 2 |   | 1.4 | % | 15 |   | 3.2 | % | 6 |   | 1.4 | % |
| Income from Mortgage banking               |       | (2                                                           | )          | -1.2                                                        | %          | 0 |   | 0.0 | % | 0 |   | 0.0 | % | 18 |   | 4.3 | % |
| Income from Bank Owned Life Insurance      |       | 16                                                           |       | 9.4                                                         | %          | 17 |   | 11.7 | % | 46 |   | 9.7 | % | 48 |   | 11.5 | % |
| Total non-interest income                  |       | $                                                            | 170        |                                                        | 100.0      | % | $ | 145 |   | 100.0 | % | $ | 474 |   | 100.0 | % | $ | 419 |   | 100.0 | % |
| As a percentage  of average earning assets |       |                                                         |       | 0.85                                                        | %          |   |   | 0.65 | % |   |   | 0.79 | % |   |   | 0.67 | % |

 

Total annualized non-interest income as a percentage of average assetsincreased to 0.85% from 0.65% for the three months ended September 30, 2006 ascompared to the three months ended September 30, 2005 and to 0.79% from 0.67%for the nine months ended September 30, 2006 as compared to the nine monthsended September 30, 2005.  The increasewas due primarily to the additional fee income from service charges on depositaccounts as the deposit base for service charges continues to grow.

17

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The service charges on deposit accounts, customer feesand miscellaneous income are comprised primarily of fees charged to depositaccounts and depository related services. Fees generated from deposit accounts consist of periodic service feesand fees that relate to specific actions, such as the return or payment of checkspresented against accounts with insufficient funds.  Depository related services include fees formoney orders and cashier’s checks, placing stop payments on checks,check-printing fees, wire transfer fees, fees for safe deposit boxes and feesfor returned items or checks that were previously deposited.  Service charges increased $23,245 or 18.4% to$149,386 for the three months ended September 30, 2006 and increased $66,584 or19.2% to $413,260 for the nine months ended September 30, 2006. The increasewas primarily attributable to activity on a higher number of deposit accountsduring 2006. The Company periodically reviews service charges to maximizeservice charge income while still maintaining competitive pricing.  Service charge income on deposit accountsincreases with the growing deposit volume and number of accounts and to theextent fees are not waived.  Therefore,as the number and balances of deposit accounts increases, the nominal servicecharge income is expected to increase.

For the three and nine months ended September 30,2006, the Company did not receive any fees for referring mortgage loans tothird party conduits. In fact, due to the discovery of an error inclassification fee income of $1,740 was reversed in the third quarter reportingperiod resulting in reported incomes of ($1,740) and $0.00 for those respectivereporting periods.  In the prior year,the Company received fees for the three and nine months ended September 30,totaling $0.00 and $17,697, respectively. As market conditions allow, theCompany anticipates referring single-family mortgage loans to third partyconduits and receiving additional broker fees in the future.

**Non-Interest Expense**

The following table sets forth the non-interestexpense for the three and nine months ended September 30, 2006 as compared to thethree and nine months ended September 30, 2005:

Non-Interest Expense
| ** **                                              | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006 vs. 2005**                                                | ** ** | **2006 vs. 2005**                                               | ** ** |
| ** **                                              | ** ** | **2006**                                                                   | ** ** | **2005**                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | **Amount**                                                                 | ** ** | **% of Total**                                                  | ** ** | **Amount** | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| ** **                                              | ** ** | ** **                                                                 | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and  employee benefits                         |       | $                                                                          | 433        |                                                                      | 45.1       | % | $ | 349 |   | 48.6 | % | $ | 1,275 |   | 48.9 | % | $ | 1,066 |   | 48.2 | % |
| Occupancy and  equipment                                |       | 106                                                                        |       | 11.0                                                                      | %          | 67 |   | 9.3 | % | 308 |   | 11.8 | % | 194 |   | 8.8 | % |
| Data processing                                         |       | 61                                                                         |       | 6.3                                                                       | %          | 58 |   | 8.0 | % | 183 |   | 7.0 | % | 163 |   | 7.4 | % |
| Deposit products  and services                          |       | 37                                                                         |       | 3.8                                                                       | %          | 88 |   | 12.2 | % | 198 |   | 7.6 | % | 261 |   | 11.8 | % |
| Professional  fees                                      |       | 117                                                                        |       | 12.2                                                                      | %          | 37 |   | 5.1 | % | 206 |   | 7.9 | % | 132 |   | 6.0 | % |
| Advertising and  marketing                              |       | 31                                                                         |       | 3.2                                                                       | %          | 34 |   | 4.7 | % | 71 |   | 2.7 | % | 94 |   | 4.2 | % |
| Directors’ fees  and expenses                      |       | 22                                                                         |       | 2.3                                                                       | %          | 19 |   | 2.6 | % | 66 |   | 2.5 | % | 57 |   | 2.6 | % |
| Printing and  supplies                                  |       | 16                                                                         |       | 1.7                                                                       | %          | 13 |   | 1.8 | % | 45 |   | 1.7 | % | 36 |   | 1.6 | % |
| Telephone                                               |       | 7                                                                          |       | 0.7                                                                       | %          | 6 |   | 0.8 | % | 24 |   | 0.9 | % | 15 |   | 0.7 | % |
| Insurance                                               |       | 6                                                                          |       | 0.6                                                                       | %          | 6 |   | 0.8 | % | 19 |   | 0.7 | % | 18 |   | 0.8 | % |
| Reserve for  undisbursed lines of credit                |       | (15                                                                        | )          | -1.6                                                                      | %          | (3 | ) | -0.4 | % | (30 | ) | -1.1 | % | 30 |   | 1.3 | % |
| Other expenses                                          |       | 141                                                                        |       | 14.7                                                                      | %          | 47 |   | 6.5 | % | 244 |   | 9.4 | % | 146 |   | 6.6 | % |
| Total non-interest expenses                             |       | $                                                                          | 962        |                                                                      | 100.0      | % | $ | 721 |   | 100.0 | % | $ | 2,609 |   | 100.0 | % | $ | 2,212 |   | 100.0 | % |
| Non-interest expense as a percentage of average  assets |       |                                                                       |       | 4.33                                                                      | %          |   |   | 3.59 | % |   |   | 4.21 | % |   |   | 3.61 | % |
| Efficiency ratio                                        |       |                                                                       |       | 71.27                                                                     | %          |   |   | 68.77 | % |   |   | 66.61 | % |   |   | 69.19 | % |

 

Total annualized non-interest expenses as a percentage of averageassets increased to 4.33% from 3.59% for the three months ended September 30,2006 as compared to three months ended September 30, 2005 and to 4.21% from 

18

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3.61% for the nine monthsended September 30, 2006 as compared to the nine months ended September 30,2005 due to increased staffing needs, the opening of a new branch office, andthe formation of the holding company, as discussed below.  The efficiency ratio increased in the mostrecent three-month period to 71.3% as compared to 68.8% for the same period in2005 due mainly to organization costs incurred while forming the holding company.However, on a year-to-date basis the efficiency ratio decreased to 66.6% in2006 compared to 69.2% for the comparable period in 2005.

Non-interest expenses were $961,616 and $2.6 million for the three andnine months ended September 30, 2006 as compared to $720,792 and $2.2 millionfor the three and nine months ended September 30, 2005.  Expenses, which denoted unusually high dollarfluctuations, were Salaries and employee benefits, Occupancy and equipment,Professional fees, and Other Expenses. Salaries and employee benefits expense increased to $432,901 and $1.3million for the three and nine months ended September 30, 2006 as compared to$348,456 and $1.1 million for the three and nine months ended September 30,2005 due to higher average full-time equivalent staff primarily due to theopening of the Ontario branch on January 5, 2006. Occupancy and equipmentexpenses increased to $105,556 and $307,509, respectively, for the three andnine months ended September 30, 2006 as compared to $67,061 and $194,173,respectively, for the three and nine months ended September 30, 2005 dueprimarily to the opening of the Ontario branch and the expenses incurred withtwo (Chino and Ontario) locations. Professional fees increased to $116,397 and$205,760, respectively, for the three and nine months ended September 30, 2006as compared to $37,380 and $132,651, respectively, for the three and ninemonths ended September 30, 2005. The increase in Professional fees was dueprimarily to the non-recurring Legal and Accounting fees incurred forming theholding company. Other Expenses increased to $141,000 and $344,000,respectively, for the three and nine months ended September 30, 2006 ascompared to $47,000 and $146,000, respectively, the three and nine months endedSeptember 30, 2005. Included in these increases were organizational costsincurred in forming the holding company. Reserve for undisbursed lines ofcredit decreased by ($15,268) and ($30,268), respectively, for the three andnine months ended September 30, 2006 as compared to ($3,175) and $29,757 forthe comparable periods ended September 30, 2005.  The decrease in undisbursed lines of creditreflects the decline in the amount of outstanding commitments unfunded by theCompany***.***  Expenses for this period may not necessarily be representative of futureperiods of operations.  Futurenon-interest expenses are anticipated to be higher due to expected loan anddeposit volumes and staffing increases.

**Provision for Income Taxes**

During the threeand nine months ended September 30, 2006, the Company had current income taxexpenses of $130,506 and $480,309, respectively, at effective tax rates of38.1% and 38.9%, respectively, for those same periods.   During the three and nine months endedSeptember 30, 2005, the income tax expenses incurred were $156,888 and$392,979, respectively at effective tax rates of 39.2% and 38.9% for the threeand nine months ended September 30, 2005, respectively.

The income tax rate used in determining the Company’sincome tax provision or benefit, if any, is 34% for federal income tax purposesand 7.15% for state income taxes, net of federal tax benefit.  Generally, the current tax expense is theresult of applying the current tax rate to taxable income.  The deferred portion is intended to accountfor the fact that income on which taxes are paid differs from financialstatement pre-tax income because some items of income and expense arerecognized in different years for income tax purposes than in the financialstatements.  These recognition anomaliescause “temporary differences”; eventually, all taxes are paid.

**FinancialCondition**

**Comparison of Financial Condition atSeptember 30, 2006 and December 31, 2005**

**General**

Total assets decreased from $91.3 million to $86.6million or 5.2% between December 31, 2005 and September 30, 2006, resultingfrom a general contraction in the deposit accounts of a number of the Company’scustomers which are engaged in real estate related industries. The mostprominent contraction occurred in a number of Escrow Trust accounts reflectingan general slowdown of real estate sales. Overall, the total number of depositaccounts increased during this period, however, the average balances peraccount declined.

Because of the Company’s relatively lowLoan-to-Deposit ratio and high liquidity ratio, management has elected not tosupplement the contraction in deposit totals with Brokered Deposits orhigh-cost Time Certificates of Deposit.

19

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Additional deposit contraction in future periods mayoccur if the economic activity of the real estate industry continues to slow,however, the Company is actively seeking to develop alternative andsupplemental business relationships with other companies and individuals in aneffort to offset the potential reductions and more fully leverage the Company’scapital.

**Loan Portfolio**

During the nine months ended September 30, 2006, theCompany’s net loan portfolio increased by $8.9 million to $50.7 million atSeptember 30, 2006 as compared to $41.8 million at December 31, 2005.  Net loans increased due to a $1.4 millionincrease in construction loans, a $5.0 million increase in real estate loansand a $3.0 million increase in commercial loans which were partially offset bya $59,000 decrease in installment loans. The largest loan category at September 30, 2006 was real estate loans,which consist of commercial, agriculture, and consumer real estate loansexcluding construction loans, which constitute 68.8% of gross loans.  In anticipation of possible deterioration ineconomic conditions, though Management believes these credits to be properlyunderwritten, the Company has elected to take real estate collateral as anabundance of caution on a number of commercial loans.  Though the result of this strategy may be to reflecta concentration of assets into real estate secured credits, Management believesthe underlying collateral will support overall credit quality and minimizeprincipal risk of the portfolio.  Thenext largest loan concentration at September 30, 2006 was commercial loansconstituting 22.0% of gross loans.  Thecomposition of the Company’s loan portfolio at September 30, 2006 and December31, 2005 is set forth below:

Loan Portfolio
|                  | ** ** | **At September 30, 2006** | ** ** | **At December 31, 2005** | ** ** |
|------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **       | ** ** | **Amount**                               | ** ** | **Percentage**                          | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | ** **                               | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Construction     |       | $                                        | 4,175      |                                    | 8.1        | % | $ | 2,791 |   | 6.6 | % |
| Real estate      |       | 35,395                                   |       | 68.8                                    | %          | 30,444 |   | 71.6 | % |
| Commercial       |       | 11,294                                   |       | 22.0                                    | %          | 8,295 |   | 19.5 | % |
| Farm/Agriculture |       | 0                                        |       | 0.0                                     | %          | 331 |   | 0.8 | % |
| Installment      |       | 587                                      |       | 1.1                                     | %          | 634 |   | 1.5 | % |
| Gross loans      |       | $                                        | 51,451     |                                    | 100.0      | % | $ | 42,495 |   | 100.0 | % |

 

The weighted average yield on the loan portfolio as ofSeptember 30, 2006 was 7.69% and the weighted average contractual term of theloan portfolio is approximately 6.1 years. Individual loan interest rates may require interest rate changes morefrequently than at maturity due to adjustable interest rate terms incorporatedinto certain loans.  At September 30,2006**,**approximately 61.1% of loanswere variable rate loans tied to adjustable rate indices such as Prime Rate.

**Off-Balance Sheet Arrangements**

During the ordinarycourse of business, the Company will provide various forms of credit lines tomeet the financing needs of its customers. These commitments to provide credit represent an obligation of theCompany to its customers, which is not represented in any form within thebalance sheets of the Company.  AtSeptember 30, 2006 and December 31, 2005, the Company had $6.2 million and $8.8million, respectively, of off-balance sheet commitments to extend credit.  These commitments are the result of existingunused lines of credit and unfunded loan commitments.  These commitments represent a credit risk tothe Bank.  At September 30, 2006 andDecember 31, 2005, the Bank had unadvanced standby letters of credit of$285,300 and $315,300, respectively. These letters of credit of credit are sometimes unsecured and may notnecessarily be drawn upon to the total extent to which the Bank is committed.

Theeffect on the Company’s revenues, expenses, cash flows and liquidity from theunused portion of the commitments to provide credit cannot be reasonablypredicted because there is no guarantee that the lines of credit will ever beused.

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**Non-performing Assets**

Non-performing assets are comprised of loans onnon-accrual status, loans 90 days or more past due and still accruing interest,loans restructured where the terms of repayment have been renegotiatedresulting in a reduction or deferral of interest or principal, and other realestate owned (“OREO”).  Loans are generallyplaced on non-accrual status when they become 90 days past due unlessManagement believes the loan is adequately collateralized and in the process ofcollection.  Loans may be restructured byManagement when a borrower has experienced some change in financial status,causing an inability to meet the original repayment terms, and where theCompany believes the borrower will eventually overcome those circumstances andrepay the loan in full.  OREO consists ofproperties acquired by foreclosure or similar means that Management intends tooffer for sale.

Management’s classification of a loan as non-accrualis an indication that there is a reasonable doubt as to the full collectibilityof principal and/or interest on the loan; at this point, the Company stopsrecognizing income from the interest on the loan and may reserve anyuncollected interest that had been accrued but unpaid if it is determineduncollectible or the collateral is inadequate to support such accrued interestamount.  These loans may or may not becollateralized, but collection efforts are continuously pursued.

At September 30, 2006 and December 31, 2005, theCompany had no non-performing assets, loans on non-accrual status, restructuredloans, or OREO.  At September 30, 2006and December 31, 2005, the Company had criticized loans totaling $2.9 millionor 6.36% of average loans and $1.3 million or 3.01% of average loans,respectively.  All criticized loans werecurrent as of September 30, 2006 and December 31, 2005.  Criticized loans increased due to twocredits: one due to construction delays and the other due to lower revenues in2005.  Management has little or noexpectation for principal loss arising from these classified assets.  Though the Company had no non-performingassets at September 30, 2006, in the future, Management anticipates a certainlevel of problem assets and adversely classified loans as they are an inherentpart of the lending process. Accordingly, the Company has established and maintains an allowance forloan losses which amounted to $617,144 at September 30, 2006 and $544,140 atDecember 31, 2005.

**Allowance for Loan Losses**

The Bank maintains an allowance for loan losses at alevel Management considers adequate to cover the inherent risk of lossassociated with its loan portfolio under prevailing and anticipated economicconditions.  In determining the adequacyof the allowance for loan losses, Management takes into consideration growthtrends in the portfolio, examination by financial institution supervisoryauthorities, prior loan loss experience of the Bank’s Management,concentrations of credit risk, delinquency trends, general economic conditions,the interest rate environment, and internal and external credit reviews.

The Bank formally assesses the adequacy of theallowance on a quarterly basis.  This assessmentis comprised of: (i) reviewing the adversely classified, delinquent orotherwise problematic loans; (ii) generating an estimate of the loss potentialin each loan; (iii) adding a risk factor for industry, economic or otherexternal factors; and (iv) evaluating the present status of each loan and theimpact of potential future events.

Allowance factors are utilized in the analysis of theallowance for loan losses.  Allowancefactors ranging from 0.65% to 2.00% are applied to disbursed loans that areunclassified and uncriticized.  Allowancefactors averaging approximately 0.50% are applied to undisbursed loans.  Allowance factors are not applied to loanssecured by bank deposits or to loans held for sale, which are recorded at thelower of cost or market.

The process of providing for loan losses involvesjudgmental discretion, and eventually losses may therefore differ from even themost recent estimates.  Due to theselimitations, the Bank assumes that there are losses inherent in the currentloan portfolio but which have not yet been identified.  The Bank therefore attempts to maintain theallowance at an amount sufficient to cover such unknown but inherent losses.

At September 30, 2006 and December 31, 2005, theallowance for loan losses was $617,144 and $544,140, respectively.  The ratios of the allowance for loan lossesto total loans at September 30, 2006 and December 31, 2005 were 1.20% and1.28%, respectively.

There can be no assurances that future economic orother factors will not adversely affect the Bank’s borrowers, or that theBank’s asset quality may not deteriorate through rapid growth, failure toidentify and monitor potential problem loans or for other reasons, therebycausing loan losses to exceed the current allowance.

The table on the following page summarizes, as of andfor the three months ended September 30, 2006 and 2005 and the year endedDecember 31, 2005, the loan balances at the end of the period and the dailyaverage loan 

21

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balances during the period; changes in the allowance for loan lossesarising from loan charge-offs, recoveries on loans previously charged-off, andadditions to the allowance which have been charged against earnings, andcertain ratios related to the allowance for loan losses.

Allowance for LoanLosses
|                                                                             | ** ** | **As of and for the** | ** ** | **As of and for the** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                  | ** ** | **Period Ended**                | ** ** | **Year Ended**                  | ** ** |
| ** **                                                                  | ** ** | **September 30,**               | ** ** | **December 31,**                | ** ** |
| ** **                                                                  | ** ** | **2006**                             | ** ** | **2005**                             | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | **(dollars in thousands)** | ** ** |
| **Balances:**                                                               |       |                                 |       |                                 |       |   |   |
| Average total loans outstanding during period                               |       | $                                    | 45,624     |                                 | $          | 37,198 |   | $ | 38,154 |   |
| Total loans outstanding at the end of the period                            |       | $                                    | 51,451     |                                 | $          | 40,256 |   | $ | 42,495 |   |
| Allowance for  loan losses:                                                 |       |                                 |       |                                 |       |   |   |
| Balance at the beginning of the period                                      |       | $                                    | 544        |                                 | $          | 407 |   | $ | 407 |   |
| Total charge-offs                                                           |       | 11                                   |       | 0                                    |       | 0 |   |
| Total recoveries                                                            |       | 11                                   |       | 0                                    |       | 0 |   |
| Net loan charge-offs or recoveries                                          |       | 0                                    |       | 0                                    |       | 0 |   |
|                                                                        |       |                                 |       |                                 |       |   |   |
| Provision for loan losses                                                   |       | 73                                   |       | 95                                   |       | 137 |   |
| Balance at the end of the period                                            |       | $                                    | 617        |                                 | $          | 502 |   | $ | 544 |   |
| ** **                                                                  | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** |
| **Ratios:**                                                                 | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net loan charge-offs to average total loans                                 |       | N/A                                  |       | N/A                                  |       | N/A |   |
| Provision for loan losses to average total loans                            |       | 0.16                                 | %          | 0.26                                 | %          | 0.36 | % |
| Allowance for loan losses to total loans at the end  of the period          |       | 1.20                                 | %          | 1.25                                 | %          | 1.28 | % |
| Net loan charge-offs to allowance for loan losses at  the end of the period |       | N/A                                  |       | N/A                                  |       | N/A |   |
| Net loan  charge-offs to Provision for loan losses                          |       | N/A                                  |       | N/A                                  |       | N/A |   |

 

While Management believes that the amount of theallowance at September 30, 2006 was adequate, there can be no assurances thatfuture economic or other factors will not adversely affect the Bank’sborrowers, or that the Bank’s asset quality may not deteriorate through rapidgrowth, failure to identify and monitor potential problem loans or for otherreasons, thereby causing loan losses to exceed the current allowance.

**Investment Portfolio**

The market value of the Bank’s investment portfolio atSeptember 30, 2006 was $18.2 million having a yield of 4.25%.  This compares to an investment portfolio of$22.1 million at December 31, 2005 having a 3.54% yield.  The primary category of investment in theportfolio at September 30, 2006 was mortgage-backed securities.  At September 30, 2006, 28.8% of themortgage-backed securities were tied to adjustable rate indices such as LIBORor CMT. Management does not anticipate purchasing additional investmentsecurities until loan demand declines.

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The table below summarizes the carrying value andmarket value and distribution of the Bank’s investment securities at September30, 2006 and December 31, 2005:
|                            | ** ** | **September 30, 2006**     | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Carrying**                         | ** ** | **Fair**                        | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                 | ** ** | **Value**                            | ** ** | **Value**                       | ** ** | **Value** | ** ** | **Value** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)** | ** ** |
| Held to  maturity:         |       |                                 |       |                            |       |   |   |   |   |
| Mortgage-backed securities |       | $                                    | 4,351      |                            | $          | 4,224 |   | $ | 5,123 |   | $ | 5,017 |   |
| Corporate bonds            |       | 250                                  |       | 260                             |       | 285 |   | 295 |   |
| Municipal                  |       | 444                                  |       | 455                             |       | 443 |   | 452 |   |
| Total held to maturity     |       | 5,045                                |       | 4,939                           |       | 5,851 |   | 5,764 |   |
|                       |       |                                 |       |                            |       |   |   |   |   |
| Available for  sale:       |       |                                 |       |                            |       |   |   |   |   |
| Municipal                  |       | 748                                  |       | 748                             |       | 343 |   | 343 |   |
| Federal agency             |       | 5,938                                |       | 5,938                           |       | 7,677 |   | 7,677 |   |
| Mortgage-backed            |       | 6,559                                |       | 6,559                           |       | 8,291 |   | 8,291 |   |
| Total available for sale   |       | 13,245                               |       | 13,245                          |       | 16,311 |   | 16,311 |   |
| Total                      |       | $                                    | 18,290     |                            | $          | 18,184 |   | $ | 22,162 |   | $ | 22,075 |   |

 

There were no material changes since December 31, 2005in the maturities or repricing of the investment securities.

**Deposits**

Total depositsdecreased $5.6 million or 6.67% to $78.4 million at September 30, 2006 from$84.0 million at December 31, 2005 primarily due to the decrease in demanddeposit accounts, which decreased $9.3 million or 14.9% to $53.3 million atSeptember 30, 2006 from $62.6 million at December 31, 2005.  The general reduction in deposit balances isrelated to reductions in real estate related industries, such as escrowdeposits and brokerage deposits. See “Financial Condition — Comparison ofFinancial Condition at September 30, 2006 and December 31, 2005 — General”above. This decrease was partially offset by an increase in money marketaccount balances which increased by $3.3 million to $20.1 million at September30, 2006 from $16.8 million at December 31, 2005.  As interest rates rise, depositors tend toadjust balances into higher yielding account balances.  The deposit mix of non-interest bearing fundsto total deposits was 67.9% at September 30, 2006 and 74.5% at December 31,2005.    Information concerning theaverage balance and average rates paid on deposits by deposit type for thethree months ended September 30, 2006 and 2005 is contained in the“Distribution, Yield and Rate Analysis of Net Income” tables appearing on pages14 through 16 above in the section entitled “Net Interest Income and NetInterest Margin.”  At September 30, 2006and December 31, 2005, the Bank had deposits from related parties of $8.0million and $14.2 million, respectively. Further, at September 30, 2006 and December 31, 2005, deposits fromescrow companies represented 39% and 47% of the Bank’s total deposits,respectively.  There are some escrowcompany deposits which are also classified as deposits from related parties.

**Borrowings**

At September 30,2006 and December 31, 2005, the Bank had no FHLB advances or overnightborrowings outstanding.   On December 21,2005, the Bank entered into a stand by letter of credit with the FHLB for$800,000.  This stand-by letter of creditwas issued as collateral for local agency deposits that the Bank ismaintaining.

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**Stockholders’ Equity**

Total stockholders’ equity was $7.6 million atSeptember 30, 2006 and $6.7 million at December 31, 2005.  There was an overall increase of $877,760comprised of:  net income of $754,645; anincrease in common stock and additional paid in capital of $89,760 from theexercise of stock options covering 12,000 shares; and an increase in additionalpaid-in capital of $12,222 attributable to the stock option compensationexpense; offset by an decrease of $21,133 in unrealized losses on securitiesavailable for sale.

**Liquidity**

Maintenance of adequate liquidity requires thatsufficient resources be available at all times to meet the Bank’s cash flowrequirements.  Liquidity in a bankinginstitution is required primarily to provide for deposit withdrawals and thecredit needs of its customers and to take advantage of investment opportunitiesas they arise.  Liquidity managementinvolves the Bank’s ability to convert assets into cash or cash equivalentswithout significant loss, and to raise cash or maintain funds without incurringexcessive additional cost.  The Bankmaintains a portion of its funds in cash, deposits in other banks, overnightinvestments, and securities held for sale.  Liquid assets include cash and due from banks, less the federal reserverequirement; Federal funds sold; interest-bearing deposits in financialinstitutions, unpledged investment securities available for sale, FederalReserve Bank; Federal Home Loan Bank; Pacific Coast Bankers’ Bank stock investments, restricted at cost; andcash surrender value of life insurance. At September 30, 2006, the Bank’s liquid assets totaled approximately$23.5 million and its liquidity level, measured as the percentage of liquidassets to total assets, was 27.1%.  AtDecember 31, 2005, the Bank’s liquid assets totaled approximately $39.0 millionand its liquidity level, measured as the percentage of liquid assets to totalassets, was 42.7%.  Managementanticipates that liquid assets and the liquidity level will decline as the Bankbecomes more leveraged in the future.

Although the Bank’s primary sources of liquidityinclude liquid assets and a stable deposit base, the Bank has Fed funds linesof credit of $3 million and $2 million with Union Bank of California andPacific Coast Bankers’ Bank, respectively. The Bank is a member of the Federal Home Loan Bank (“FHLB”).  As a member of the FHLB, the Bank may borrowfunds collateralized by the Bank’s securities or qualified loans up to 25% ofits total asset base.

**Capital Resources**

The Bank is subject to various regulatory capitalrequirements administered by the federal banking agencies.  Failure to meet minimum capital requirementscan trigger mandatory and possibly additional discretionary actions by theregulators that, if undertaken, could have a material effect on the Bank’sfinancial statements and operations. Under capital adequacy guidelines and regulatory framework for promptcorrective action, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accepted accountingpractices.  The Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk-weightings, and other factors.

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain the following minimum ratios: Total risk- based capital ratio of at least 8%, Tier 1 Risk-basedcapital ratio of at least 4%, and a leverage ratio of at least 4%.  Total capital is classified into twocomponents:  Tier 1 (common shareholdersequity, qualifying perpetual preferred stock to certain limits, minorityinterests in equity accounts of consolidated subsidiary and trust preferredsecurities to certain limits, less goodwill and other intangibles) and Tier 2(supplementary capital including allowance for possible credit losses tocertain limits, certain preferred stock, eligible subordinated debt, and otherqualifying instruments).

The Bank had TotalRisk-Based and Tier I Risk-Based capital ratios of 13.06% and 12.03%,respectively at September 30, 2006, as compared to 13.21% and 12.14%,respectively at December 31, 2005.  AtSeptember 30, 2006 and December 31, 2005, the Bank’s Leverage Capital Ratioswere 8.61% and 7.54%, respectively.  Asof September 30, 2006 and December 31, 2005, the Bank was“well-capitalized.”  To be categorized aswell-capitalized the Bank must maintain Total Risk-Based, Tier I Risk-Based,and Tier I Leverage Ratios of at least 10%, 6% and 5%, respectively.

Chino CommercialBancorp is a “small bank holding company” under the Federal Reserve Board’sguidelines, and thus qualifies for an exemption from the consolidatedrisk-based and leverage capital adequacy guidelines applicable to bank holdingcompanies with assets of $500 million or more. However, while not required todo so under the Federal Reserve Board’s capital adequacy guidelines, theCompany still maintains levels of capital on a consolidated basis which qualifyit as “well capitalized.”  As ofSeptember 30, 2006, the Company’s Total Risk-Based and Tier I Risk-Basedcapital ratios were 13.27% and 12.25%, respectively, and its Leverage CapitalRatio was 8.78%.

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**Interest Rate Risk Management**

The principal objective of interest rate riskmanagement (often referred to as “asset/liability management”) is to manage thefinancial components of the Bank’s assets and liabilities so as to optimize therisk/reward equation for earnings and capital in relation to changing interestrates.  In order to identify areas ofpotential exposure to rate changes, the Bank calculates its repricing gap on aquarterly basis.   It also performs anearnings simulation analysis and market value of portfolio equity calculationon a quarterly basis to identify more dynamic interest rate exposures thanthose apparent in standard repricing gap analysis.

The Bank manages the balance between rate-sensitiveassets and rate-sensitive liabilities being repriced in any given period withthe objective of stabilizing net interest income during periods of fluctuatinginterest rates.  Rate-sensitive assetseither contain a provision to adjust the interest rate periodically or maturewithin one year.  Those assets includecertain loans, certain investment securities and federal funds sold.  Rate-sensitive liabilities allow for periodicinterest rate changes and include time certificates, certain savings andinterest-bearing demand deposits.  Thedifference between the aggregate amount of assets and liabilities that arerepricing at various time frames is called the interest rate sensitivity“gap.”  Generally, if repricing assetsexceed repricing liabilities in any given time period the Bank would be deemedto be “asset-sensitive” for that period, and if repricing liabilities exceedrepricing assets in any given period the Bank would be deemed to be“liability-sensitive” for that period. The Bank seeks to maintain a balanced position over the period of oneyear in which it has no significant asset or liability sensitivity, to ensurenet interest margin stability in times of volatile interest rates.  This is accomplished by maintaining asignificant level of loans and deposits available for repricing within oneyear.

The Bank is generally asset sensitive, meaning thatnet interest income tends to rise as interest rates rise and net interestincome tends to decline as interest rates fall. At September 30, 2006,approximately 61.1% of loans have terms that incorporate variable interestrates.  Most variable rate loans areindexed to the Bank’s prime rate and changes occur as the prime ratechanges.  Approximately 19.9% of allfixed rate loans at September 30, 2006 mature within twelve months.

Regarding the investment portfolio, a preponderance ofthe portfolio consists of fixed rate products with typical average lives ofbetween three and five years.  Themortgage-backed security portfolio receives monthly principal repayments whichhas the effect of reducing the securities average lives as principal repaymentslevels may exceed expected levels. Additionally, agency securities contain options by the agency to callthe security, which would cause repayment prior to scheduled maturity.

Liability costs are generally based upon, but notlimited to, U.S. Treasury interest rates and movements and rates paid by localcompetitors for similar products.

The change in net interest income may not alwaysfollow the general expectations of an “asset-sensitive” or“liability-sensitive” balance sheet during periods of changing interestrates.  This possibility results frominterest rates earned or paid changing by differing increments and at differenttime intervals for each type of interest-sensitive asset and liability.  The interest rate gaps reported arise when assetsare funded with liabilities having different repricing intervals.  Since these gaps are actively managed andchange daily as adjustments are made in interest rate views and market outlook,positions at the end of any period may not reflect the Bank’s interest ratesensitivity in subsequent periods.  TheBank attempts to balance longer-term economic views against prospects forshort-term interest rate changes in all repricing intervals.

The Bank uses Risk Monitor software forasset/liability management in order to simulate the effects of potentialinterest rate changes on the Bank’s net interest margin.  These simulations provide static informationon the projected fair market value of the Bank’s financial instruments underdiffering interest rate assumptions.  Thesimulation program utilizes specific loan and deposit maturities, embeddedoptions, rates and re-pricing characteristics to determine the effects of agiven interest rate change on the Bank’s interest income and interestexpense.  Rate scenarios consisting ofkey rate and yield curve projections are run against the Bank’s investment,loan, deposit and borrowed funds portfolios. The rate projections can be shocked (an immediate and sustained changein rates, up or down*).   *The Bank typically uses standardinterest rate scenarios in conducting the simulation of upward and downwardshocks of 100 and 200 basis points (“bp”). As of September 30, 2006, there hasbeen no material change in interest rate risk since December 31, 2005.

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**Risk Management**

Various types of risk are inherent in the business ofbanking.  Federal regulators have adoptedexamination guidelines that scrutinize not only the bank’s level of risk, butalso its ability to manage and control that risk.  Regulators evaluate risks that affectcapital, liquidity, and compliance to determine their potential effect on thesafety and soundness of the Bank. Certain risks may be covered by insurance coverage, but management mustestablish a risk management approach that addresses all areas of risk.

The Bank has in place acceptable limits for each ofthe risks identified by the regulatory environment.  The Bank has defined the types of risk, andhas mechanisms in place to manage, monitor and report these risks.  Specifically, the Bank focuses on nine riskcategories within each area of the Bank. Those include credit risk, interest rate risk, liquidity risk,market/strategic risk, transaction risk and compliance risk.

**Item 3: CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

The Bank’s ChiefExecutive Officer and its Chief Financial Officer, after evaluating theeffectiveness of the Bank’s disclosure controls and procedures as defined inExchange Act Rules 13a-15(e) promulgated under the Exchange Act as of the endof the period covered by this report (the “Evaluation Date”) have concludedthat as of the Evaluation Date, the Bank’s disclosure controls and procedureswere adequate and effective to ensure that material information relating to theBank would be made known to them by others within the Bank, particularly duringthe period in which this report was being prepared.  Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in the reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byus in the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

**Changesin Internal Controls**

There were no significant changes in the Bank’sinternal controls over financial reporting or in other factors in the thirdquarter of 2006 that have materially affected, or are reasonably likely tomaterially affect, the Bank’s internal controls over financial reporting.

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**PART II**

**Item1:   Legal Proceedings** -None

**Item 2:  Unregistered Sales of Equity Securities andUse of Proceeds** - None

**Item 3:  Default of Senior Securities**- None

**Item 4:  Submission of Matters to Vote of SecurityHolders -** None

**Item 5:  Other Information** -None

**Item 6:  Exhibits**
| 3.1   | Articles of Incorporation of Chino Commercial  Bancorp (1)                                                                           |
|-------|--------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   | Bylaws of Chino Commercial Bancorp (1)                                                                                               |
| 10.1  | 2000 Stock Option Plan (1)                                                                                                           |
| 10.2  | Chino Commercial Bank, N.A. Salary Continuation Plan  (1)                                                                            |
| 10.3  | Salary Continuation and Split Dollar Agreements for  Dann H. Bowman (1)                                                              |
| 10.4  | Employment Agreement for Dann H. Bowman (2)                                                                                          |
| 10.5  | Salary Continuation and Split Dollar Agreements for  Roger Caberto (1)                                                               |
| 10.6  | Item Processing Agreement between the Bank and  InterCept Group (1)                                                                  |
| 10.7  | Data Processing Agreement between the Bank and  InterCept Group (1)                                                                  |
| 10.8  | Lease between Chino Commercial Bank, N.A. and Majestic  Realty Co., as amended                                                       |
| 10.9  | Indenture dated as of October 27, 2006 between U.S.  Bank National Association, as Trustee, and Chino Commercial Bancorp, as  Issuer |
| 10.10 | Amended and Restated Declaration of Trust of Chino  Statutory Trust I, dated as of October 27, 2006                                  |
| 10.11 | Guarantee Agreement between Chino Commercial Bancorp  and U.S. Bank National Association dated as of October 27, 2006                |
| 11    | Statement Regarding Computation of Net Income Per  Share (3)                                                                         |
| 21    | Subsidiaries of Registrant (4)                                                                                                       |
| 31.1  | Certification of Chief Executive Officer (Section  302 Certification)                                                                |
| 31.2  | Certification of Chief Financial Officer (Section  302 Certification)                                                                |
| 32    | Certification of Periodic Financial Report (Section  906 Certification)                                                              |

 

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| (1) | Incorporated by reference to the exhibit of the same  number on the Company’s Registration Statement on Form S-8 as filed with the  Securities and Exchange Commission on July 5, 2006. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Incorporated by reference to exhibit 10.1 to the  Company’s Form 8-K Current Report filed with the Securities and Exchange  Commission on November 13, 2006.                            |
| (3) | The information required by this exhibit is  incorporated from Note 3 of the Bank’s Financial Statements included herein.                                                               |
| (4) | Incorporated by reference to the exhibit of the same  number on the Company’s Form 10-QSB for the quarter ended June 30, 2006                                                           |

 

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities and Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: November 13, 2006 | ** ** | **CHINO  COMMERCIAL BACORP**          |
|--------------------------|------------|---------------------------------------|
|                     | ** ** | ** **                            |
|                     | ** ** | ** **                            |
|                     | By:        | /s/ Dann H. Bowman                    |   |
|                     |       | Dann H. Bowman                        |
|                     |       | President and Chief Executive Officer |
|                     |       |                                  |
|                     |       |                                  |
|                     | By:        | /s/ Sandra F. Pender                  |   |
|                     |       | Sandra F. Pender                      |
|                     |       | Chief Financial Officer               |
|                          |            |                                       |  |  |

 

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