** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549**

**FORM10-QSB**

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

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

**CHINO COMMERCIAL BANCORP******(Exact name of registrant asspecified 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’s telephone number, including area code:  **(909) 393-8880**

**Notapplicable**(Former name or former 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 August 1, 2006, therewere 825,953 shares of Chino Commercial Bancorp Common Stock outstanding.

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

 

 

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**ChinoCommercial BancorpJune 30, 2006**

INDEX
| PART I – FINANCIAL  INFORMATION                                                                       |                                                                                   |
|------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|
|                                                                                                       |                                                                                   |
| Item 1 – Financial Statements (unaudited)                                                             |                                                                                   |
|                                                                                                       | Statements of  Financial Condition as of June 30, 2006 and December 31, 2005           |   |
|                                                                                                       | Statements of Operations  for the three and six months ended June 30, 2006 and 2005    |   |
|                                                                                                       | Statements of  Changes in Stockholders’ Equity for the Period ended June 30, 2006 |   |
|                                                                                                       | Statements of Cash Flows  for the six months ended June 30, 2006 and 2005              |   |
|                                                                                                       | Notes to Financial  Statements                                                         |   |
| Item 2 –  Management’s Discussion and Analysis of Financial Condition and 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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CHINO COMMERCIAL BANK  N. A.STATEMENTS OF FINANCIAL CONDITION
| ** **                                                                                                                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                       | ** ** | **(unaudited)**   | ** ** | **(audited)**         | ** ** |
| ASSETS:                                                                                                                                                                                          |       |              |       |                  |       |
| Cash and Due from Banks                                                                                                                                                                          |       | $                 | 5,218,760  |                  | $          | 5,328,842 |   |
| Federal Funds Sold                                                                                                                                                                               |       | 9,155,000         |       | 11,370,000            |       |
| Cash and Cash equivalents                                                                                                                                                                        |       | 14,373,760        |       | 16,698,842            |       |
| Interest-bearing  deposits at banks                                                                                                                                                              |       | 7,122,000         |       | 6,030,000             |       |
| Investment Securities  available for sale                                                                                                                                                        |       | 15,105,602        |       | 16,311,377            |       |
| Investment Securities  held to maturity (fair value approximates $5,180,028 at June 30, 2006 and  $5,764,134 at December 31, 2005)                                                               |       | 5,369,702         |       | 5,850,687             |       |
| Federal Reserve Bank  stock, at cost                                                                                                                                                             |       | 159,600           |       | 159,600               |       |
| Federal Home Loan Bank  stock, at cost                                                                                                                                                           |       | 407,100           |       | 362,600               |       |
| Pacific Coast Bankers’  Bank stock, at cost                                                                                                                                                 |       | 50,000            |       | 50,000                |       |
| Total  investments                                                                                                                                                                               |       | 28,214,004        |       | 28,764,264            |       |
| Loans                                                                                                                                                                                            |       |              |       |                  |       |
| Construction                                                                                                                                                                                     |       | 3,369,860         |       | 2,790,712             |       |
| Real estate                                                                                                                                                                                      |       | 33,939,533        |       | 30,444,344            |       |
| Commercial                                                                                                                                                                                       |       | 8,962,174         |       | 8,295,573             |       |
| Farm/Agriculture                                                                                                                                                                                 |       | 322,712           |       | 330,920               |       |
| Installment                                                                                                                                                                                      |       | 313,725           |       | 633,504               |       |
| Unearned fees  and discounts                                                                                                                                                                     |       | (145,827          | )          | (144,106              | )          |
| Allowance for  loan losses                                                                                                                                                                       |       | (572,390          | )          | (544,140              | )          |
| Total Loans                                                                                                                                                                                      |       | 46,189,787        |       | 41,806,807            |       |
| Fixed Assets, net                                                                                                                                                                                |       | 2,302,120         |       | 1,936,168             |       |
| Accrued Interest  Receivable                                                                                                                                                                     |       | 354,067           |       | 314,849               |       |
| Prepaid & Other  Assets                                                                                                                                                                      |       | 1,880,786         |       | 1,811,979             |       |
| Total Assets                                                                                                                                                                                     |       | $                 | 93,314,524 |                  | $          | 91,332,909 |   |
| LIABILITIES:                                                                                                                                                                                     |       |              |       |                  |       |
| Deposits                                                                                                                                                                                         |       |              |       |                  |       |
| Non-interest  Bearing                                                                                                                                                                            |       | $                 | 59,484,320 |                  | $          | 62,610,963 |   |
| Interest Bearing                                                                                                                                                                                 |       |              |       |                  |       |
| Money market                                                                                                                                                                                     |       | 21,280,312        |       | 16,793,824            |       |
| Savings                                                                                                                                                                                          |       | 1,144,417         |       | 913,249               |       |
| Time deposits of  $100,000 or greater, due in one year                                                                                                                                           |       | 1,920,629         |       | 2,216,104             |       |
| Time deposits  less than $100,000, due in one year                                                                                                                                               |       | 1,519,075         |       | 1,487,803             |       |
| Total Deposits                                                                                                                                                                                   |       | 85,348,753        |       | 84,021,943            |       |
| Accrued Interest  Payable                                                                                                                                                                        |       | 29,079            |       | 28,858                |       |
| Accrued Expenses &  Other Payables                                                                                                                                                           |       | 693,304           |       | 588,068               |       |
| Total  Liabilities                                                                                                                                                                               |       | 86,071,136        |       | 84,638,869            |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                        |       |              |       |                  |       |
| Common Stock,  authorized 10,000,000 shares with a par value of $3.33 per share; issued and  outstanding 825,953 shares and 818,453 shares at June 30, 2006 and December  31, 2005, respectively |       | 2,753,205         |       | 2,728,230             |       |
| Additional  paid-in capital                                                                                                                                                                      |       | 2,623,798         |       | 2,590,600             |       |
| Retained  earnings                                                                                                                                                                               |       | 2,039,991         |       | 1,497,818             |       |
| Accumulated  other comprehensive loss                                                                                                                                                            |       | (173,606          | )          | (122,608              | )          |
| Total Equity                                                                                                                                                                                     |       | 7,243,388         |       | 6,694,040             |       |
| Total Liabilities &  Equity                                                                                                                                                                  |       | $                 | 93,314,524 |                  | $          | 91,332,909 |   |

 

See accompanying notes tothe financial statements.

3

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CHINO COMMERCIAL BANK, N. A.STATEMENTS OF OPERATIONS(unaudited)
| ** **                                          | ** ** | **For the three months ending** | ** ** | **For the six months ending** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                                   | ** ** | **June 30,**                                 | ** ** |
| ** **                                          | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest Income                                     |       |                                                |       |                                              |       |   |   |   |   |
| Interest Income - Securities                        |       | $                                                   | 304,404    |                                              | $          | 232,747 |   | $ | 597,278 |   | $ | 454,307 |   |
| Interest Income - Fed Funds                         |       | 108,702                                             |       | 74,553                                            |       | 186,576 |   | 134,705 |   |
| Interest and fee income on Loans                    |       | 865,034                                             |       | 751,245                                           |       | 1,676,213 |   | 1,399,819 |   |
| Total Interest Income                               |       | 1,278,140                                           |       | 1,058,545                                         |       | 2,460,067 |   | 1,988,831 |   |
| Interest Expense                                    |       |                                                |       |                                              |       |   |   |   |   |
| Interest Expense - Deposits                         |       | 115,678                                             |       | 59,528                                            |       | 195,584 |   | 109,076 |   |
| Interest Expense - Other Borrowings                 |       | 300                                                 |       |                                              |       | 600 |   |   |   |
| Total Interest Expense                              |       | 115,978                                             |       | 59,528                                            |       | 196,184 |   | 109,076 |   |
| Net interest income                                 |       | 1,162,162                                           |       | 999,017                                           |       | 2,263,883 |   | 1,879,755 |   |
| Provision for  loan losses                          |       | 19,500                                              |       | 36,350                                            |       | 28,250 |   | 53,418 |   |
| Net interest income after provision for loan losses |       | 1,142,662                                           |       | 962,667                                           |       | 2,235,633 |   | 1,826,337 |   |
| Non-interest  income                                |       |                                                |       |                                              |       |   |   |   |   |
| Service Charges on Deposit Accounts                 |       | 134,926                                             |       | 111,600                                           |       | 263,874 |   | 220,535 |   |
| Other miscellaneous fee income                      |       | 4,793                                               |       | 2,467                                             |       | 7,921 |   | 4,162 |   |
| Income from Mortgage Banking                        |       | 1,740                                               |       | 11,479                                            |       | 1,740 |   | 17,697 |   |
| Income from Bank Owned Life Insurance               |       | 15,504                                              |       | 15,656                                            |       | 30,185 |   | 31,473 |   |
| Total Non-interest income                           |       | 156,963                                             |       | 141,202                                           |       | 303,720 |   | 273,867 |   |
| General &  Administrative Expenses              |       |                                                |       |                                              |       |   |   |   |   |
| Salaries & Benefits                             |       | 433,195                                             |       | 383,045                                           |       | 842,373 |   | 717,541 |   |
| Occupancy & Equipment                           |       | 97,314                                              |       | 64,093                                            |       | 201,953 |   | 127,112 |   |
| Data & Item Processing                          |       | 61,753                                              |       | 53,912                                            |       | 122,711 |   | 104,782 |   |
| Advertising & Marketing                         |       | 25,529                                              |       | 34,227                                            |       | 39,978 |   | 59,799 |   |
| Audit & Professional fees                       |       | 45,541                                              |       | 45,326                                            |       | 89,363 |   | 95,271 |   |
| Insurance                                           |       | 6,196                                               |       | 5,982                                             |       | 12,340 |   | 11,964 |   |
| Directors’ fees and expenses                   |       | 22,285                                              |       | 19,252                                            |       | 44,356 |   | 37,807 |   |
| Other expenses                                      |       | 152,326                                             |       | 178,552                                           |       | 294,303 |   | 337,140 |   |
| Total general & administrative expenses         |       | 844,139                                             |       | 784,389                                           |       | 1,647,377 |   | 1,491,416 |   |
| Income before  income tax expense                   |       | 455,486                                             |       | 319,480                                           |       | 891,976 |   | 608,788 |   |
| Income tax  expense                                 |       | 177,844                                             |       | 123,850                                           |       | 349,803 |   | 236,091 |   |
| Total income                                        |       | $                                                   | 277,642    |                                              | $          | 195,630 |   | $ | 542,173 |   | $ | 372,697 |   |
| Basic Earnings  per share                           |       | $                                                   | 0.34       |                                              | $          | 0.24 |   | $ | 0.66 |   | $ | 0.46 |   |
| Diluted Earnings per  share                         |       | $                                                   | 0.31       |                                              | $          | 0.22 |   | $ | 0.61 |   | $ | 0.42 |   |

 

See accompanyingnotes to the financial statements.

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CHINO COMMERCIAL BANKSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 
| ** **                                                              | ** ** | ** **         | ** ** | ** ** | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                              | ** ** | ** **         | ** ** | ** ** | ** ** | **Additional**   | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Number of** | ** ** | **Common** | ** ** | **Paid in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Shares**         | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **Earnings** | ** ** | **Loss**          | ** ** | **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                                                              |       |               |       |       |       |             |       | 542,173      |       |              |       | 542,173    |       |
| Change in unrealized loss on securities available  for sale, net of tax |       |               |       |       |       |             |       |         |       | (50,998           | )          | (50,998    | )          |
| Total comprehensive income                                              |       |               |       |       |       |             |       |         |       |              |       | 491,175    |       |
| Exercise of  stock options                                              |       | 7,500              |       | 24,975     |       | 25,050           |       |         |       |              |       | 50,025     |       |
| Stock based  compensation                                               |       |               |       |       |       | 8,148            |       |         |       |              |       | 8,148      |       |
| Balance at June 30,  2006 (unaudited)                                   |       | 825,953            |       | $          | 2,753,205  |             | $          | 2,623,798    |       | $                 | 2,039,991  |       | $          | (173,606 | ) | $ | 7,243,388 |   |

 

See accompanyingnotes to the financial statements.

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CHINO COMMERCIALBANK, N.A.STATEMENTS OF CASH FLOWS(unaudited)
| ** **                                                                                      | ** ** | **For the six months ending** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **June 30,  2006**                           | ** ** | **June 30, 2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                           |       |                                              |       |   |   |
| Net Income                                                                                      |       | $                                                 | 542,173    |   | $ | 372,697 |   |
| Adjustments to reconcile net income to net cash                                                 |       |                                              |       |   |   |
| Provided by operating activities:                                                               |       |                                              |       |   |   |
| Provision for loan losses                                                                       |       | 28,250                                            |       | 53,418 |   |
| Depreciation and amortization                                                                   |       | 102,339                                           |       | 58,897 |   |
| Net accretion/amortization of (discounts) premiums  on investment securities available for cash |       | (2,182                                            | )          | 23,689 |   |
| Amortization of deferred loan fees                                                              |       | (47,083                                           | )          | (75,549 | ) |
| Amortization of stock option expense                                                            |       | 8,148                                             |       |   |   |
| Net changes in:                                                                                 |       |                                              |       |   |   |
| Accrued interest receivable                                                                     |       | (39,218                                           | )          | (13,613 | ) |
| Other assets                                                                                    |       | (68,807                                           | )          | (16,693 | ) |
| Accrued interest payable                                                                        |       | 221                                               |       | 13,537 |   |
| Other liabilities                                                                               |       | 105,236                                           |       | 854 |   |
| Net cash provided by operating activities                                                       |       | 629,077                                           |       | 417,237 |   |
|                                                                                            |       |                                              |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                           |       |                                              |       |   |   |
| Activity in available for sale investment  securities:                                          |       |                                              |       |   |   |
| Purchases                                                                                       |       | (1,400,000                                        | )          | (1,495,980 | ) |
| Repayments and calls                                                                            |       | 2,607,670                                         |       | 1,607,247 |   |
| Activity in held to maturity investment securities:                                             |       |                                              |       |   |   |
| Purchases                                                                                       |       |                                              |       | (1,951,275 | ) |
| Repayments and calls                                                                            |       | 479,078                                           |       | 997,029 |   |
| Purchase of interest-bearing deposits in other banks                                            |       | (6,649,000                                        | )          | (749,000 | ) |
| Redemption of interest-bearing deposits with banks                                              |       | 5,557,000                                         |       | 1,689,000 |   |
| Purchase of stock investments, restricted                                                       |       | (44,500                                           | )          | (71,500 | ) |
| Loan purchases                                                                                  |       |                                              |       | (508,612 | ) |
| Loan participations sold                                                                        |       | 1,618,261                                         |       |   |   |
| Loan originations and principal collections, net                                                |       | (6,031,212                                        | )          | (1,844,330 | ) |
| Purchase of land for branch site                                                                |       |                                              |       | (639,150 | ) |
| Purchase of premise and equipment                                                               |       | (468,291                                          | )          | (111,999 | ) |
| Net cash provided by investment activities                                                      |       | (4,330,994                                        | )          | (3,078,570 | ) |
|                                                                                            |       |                                              |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                           |       |                                              |       |   |   |
| Net increase in deposits                                                                        |       | 1,326,810                                         |       | 22,962,528 |   |
| Proceeds from the exercise of stock options                                                     |       | 50,025                                            |       |   |   |
| Net cash provided by financing activities                                                       |       | 1,376,835                                         |       | 22,962,528 |   |
| Net increase in cash and cash equivalents                                                       |       | (2,325,082                                        | )          | 20,301,195 |   |
|                                                                                            |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                               |       | 16,698,842                                        |       | 13,299,688 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                                     |       | $                                                 | 14,373,760 |   | $ | 33,600,883 |   |
|                                                                                            |       |                                              |       |   |   |
| SUPPLEMENTARY INFORMATION                                                                       |       |                                              |       |   |   |
| Interest paid                                                                                   |       | $                                                 | 195,364    |   | $ | 95,540 |   |
| Income taxes  paid                                                                              |       | $                                                 | 517,000    |   | 394,300 |   |

 

See accompanying notes tothe financial statements.

6

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CHINO COMMERCIALBANK, N.A.

NOTES TO FINANCIAL STATEMENTS(UNAUDITED)

**1) OneBank Holding Company Reorganization**.

OnMarch 2, 2006, Chino Commercial Bancorp was incorporated for the purpose ofacquiring Chino Commercial Bank, N.A. (the “Bank”).    Effective June 30, 2006, Chino CommercialBancorp acquired all of the outstanding stock of the Bank pursuant to a Plan ofReorganization, dated March 16, 2006, between Chino Commercial Bancorp and theBank (the “Reorganization”).  Pursuant tothe Plan of Reorganization, the shares of the Bank’s common stock wereexchanged for shares of the common stock of Chino Commercial Bancorp, no parvalue, on a one-for-one basis.  As aresult, the Bank became a wholly owned subsidiary of Chino Commercial Bancorp,Chino Commercial Bancorp became the holding company for the Bank, and theshareholders of the Bank became the shareholders of Chino CommercialBancorp.   Prior to the Reorganization,Chino Commercial Bancorp did not engage in any business.  The financial statements presented herein aresolely for Chino Commercial Bank since the Reorganization was not effectiveuntil the end of the June 30, 2006 reporting period and since Chino CommercialBancorp conducted no operations prior thereto.

**(2)Summary of Accounting Policies**

*Basis of Presentation*:The accompanying unaudited balance sheets of Chino Commercial Bank, N.A. (the “Bank”)andthe related unaudited statements of operations, stockholders’ equity and cashflows for the three  and six months endedJune 30, 2006 and 2005 have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial statements.  They do 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 2005 Annual Report on Form 10-KSB for a summaryof 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 Bank does notanticipate any material impact to its financial condition or results ofoperations as a result of the adoption of this guidance.

In May 2005, theFASB issued SFAS No. 154, Accounting Changes and Error Corrections - A Replacementof APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 replaces APB Opinion20, 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 

7

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voluntary changes in anaccounting principle, unless it is impracticable to do so. SFAS 154 did notchange the guidance for reporting corrections of errors, changes in estimatesor for justification of a change in accounting principle on the basis ofpreferability. The Bank does not anticipate any material impact to itsfinancial condition or results of operations as a result of the adoption ofSFAS No. 154.

In June 2006, the FASBissued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes(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 potentialimpact of this interpretation.

EffectiveJanuary 1, 2006, the Bank began recording compensation expense associated withstock-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 $8,148 for the three andsix months ended June 30, 2006. The Bank 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 Bank.

Thefair value of each option granted is estimated on the date of grant using theBlack-Scholes option-pricing model.  TheBank uses the following input variables as of the grant date, to arrive at thefair 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 Bank’s stock)

7)                                      Riskfree interest rate on grant date

8)                                      Expectedterm

9)                                      Expectedforfeiture rate

Priorto January 1, 2006, the Bank 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 Bank had anexercise price equal to, or greater than, the market value of the underlyingcommon stock on the date of grant.
| ** **                                                             | ** ** | **Three months  ended  June 30, 2005** | ** ** | **Six months  ended  June 30, 2005** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Reported net  earnings                                                 |       | $                                                     | 195,630    |                                                | $          | 372,697 |   |
| Stock-based  employee compensation expense, net of related tax effects |       | 2,903                                                 |       | 5,806                                               |       |
| Pro forma net  earnings                                                |       | $                                                     | 192,727    |                                                | $          | 366,891 |   |
| Reported basic  net earnings per share                                 |       | $                                                     | 0.24       |                                                | $          | 0.46 |   |
| Reported diluted  net earnings per share                               |       | $                                                     | 0.24       |                                                | $          | 0.45 |   |
| Pro forma basic  net earnings per share                                |       | $                                                     | 0.22       |                                                | $          | 0.42 |   |
| Pro forma diluted net  earnings per share                              |       | $                                                     | 0.22       |                                                | $          | 0.42 |   |

 

8

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**(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.
| ** **                              | ** ** | **Earnings per share Calculation  For the Three Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                                                                             | ** ** | **2005** | ** ** |
| ** **                              | ** ** | ** **                                                                                                           | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Net**                                                                                                              | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                              | ** ** | **Income**                                                                                                           | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                    |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Basic earnings  per share               |       | $                                                                                                                    | 277,642    |   | 823,453 |   | $ | 0.34 |   | $ | 195,630 |   | 818,453 |   | $ | 0.24 |   |
|                                    |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
|                                    |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares:             |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| assumed exercise of outstanding options |       | —                                                                                                               |       | 65,706 |   | $ | (0.03 | ) | — |   | 65,580 |   | $ | (0.02 | ) |
|                                    |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings per  share             |       | $                                                                                                                    | 277,642    |   | 889,159 |   | $ | 0.31 |   | $ | 195,630 |   | 884,033 |   | $ | 0.22 |   |

 
| ** **                              | ** ** | **Earnings per share Calculation  For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                                                                           | ** ** | **2005** | ** ** |
| ** **                              | ** ** | ** **                                                                                                         | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Net**                                                                                                            | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                              | ** ** | **Income**                                                                                                         | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                    |       |                                                                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Basic earnings  per share               |       | $                                                                                                                  | 542,173    |   | 820,953 |   | $ | 0.66 |   | $ | 372,697 |   | 818,453 |   | $ | 0.46 |   |
|                                    |       |                                                                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares:             |       |                                                                                                               |       |   |   |   |   |   |   |   |   |   |   |
| assumed exercise of outstanding options |       | —                                                                                                             |       | 67,058 |   | $ | (0.05 | ) | — |   | 64,997 |   | $ | (0.04 | ) |
|                                    |       |                                                                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings per  share             |       | $                                                                                                                  | 264,531    |   | 888,011 |   | $ | 0.61 |   | $ | 372,697 |   | 883,450 |   | $ | 0.42 |   |

 

**(4)Stock Option Plan**

Under the Bank’sstock option plan, the Bank may grant incentive stock options and non-qualifiedstock options to its directors, officers and employees. Incentive options beginvesting after one year from the date of grant at a rate of 33% per year.Non-qualified options vest as follows: 25% on the date of grant, and 25% peryear beginning on the first anniversary of the date of grant. All optionsexpire 10 years after date of grant.

There were no options granted during the sixmonths ending June 30, 2006 and 2005.

9

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

The Bank 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 Bank’s exposure to credit loss is represented bythe contractual amount of these commitments. The Bank uses the same creditpolicies in making commitments as it does for on-balance-sheet instruments. AtJune 30, 2006 and December 31, 2005, the Bank had $7.9 million and $8.8million, respectively, of off-balance sheet commitments to extend credit.  These commitments represent a credit risk tothe Bank.  At June 30, 2006 and December31, 2005, the Bank had unadvanced lines of credit of $315,300.

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 Bank evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary bythe Bank upon extension of credit, is based on management’s credit evaluationof the customer. Collateral held varies but may include accounts receivable,inventory, equipment, income-producing commercial properties, residentialproperties, 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 June 30, 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 the end of the June 30, 2006 reporting period, and sinceChino Commercial Bancorp conducted no operations prior thereto, this discussionpresents Management’s analysis of the results of operations of the Bank onlyfor the three and six months ended June 30, 2006 and 2005, and the financialcondition of the Bank as of June 30, 2006 and December 31, 2005.   The discussion should be read in conjunctionwith the financial statements of the Bank and the notes related theretopresented elsewhere herein.

### **ForwardLooking Information**

Certain mattersdiscussed in this report contain forward-looking statements within the meaningof Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”),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 certain of suchforward-looking statements.  Actualresults of Chino Commercial Bank could differ materially from suchforward-looking statements contained herein. Factors that could cause future results to vary from currentexpectations include, but are not limited to, the following: changes ineconomic conditions (both generally and more specifically in the markets inwhich the Bank operates); changes in interest rates, deposit flows, loandemand, real estate values and competition; changes in accounting principles,policies or guidelines and in government legislation and regulation (whichchange from time to time and over which the Bank has no control); other factorsaffecting the Bank’s operations, markets, products and services; and otherrisks detailed in this Form 10-QSB and in the Bank’s other reports filed withthe Comptroller of the Currency pursuant to the rules and regulations of theSecurities and Exchange Commission. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof.  The Bank undertakes noobligation to publicly revise these forward-looking statements to reflectevents or circumstances that arise after the date thereof.

10

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**CriticalAccounting 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 Bank’s financial statements and accompanying notes.  Management believes that the judgments,estimates and assumptions used in preparation of the Bank’s financialstatements are appropriate given the factual circumstances as of June 30, 2006.

Variouselements of the Bank’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 Bank’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 Bank’sfinancial statements to those judgments, estimates and assumptions, arecritical to an understanding of the Bank’s financial statements.  This policy relates to the methodology thatdetermines the allowance for loan losses. Management has discussed the development and selection of this criticalaccounting policy with the Audit Committee of the Board of Directors.  Although Management believes the level of theallowance at June 30, 2006 is adequate to absorb losses inherent in the loanportfolio, a decline in the regional economy may result in increasing lossesthat cannot reasonably be predicted at this time.   For further information regarding theallowance for loan losses see “Comparison of Financial Condition at June 30,2006 and December 31, 2005-Allowance for Loan Losses” included elsewhereherein.

**Overviewof the Results of Operations**

For the threemonths ended June 30, 2006, the Bank posted net income of $277,542 or $0.31 perdiluted share as compared to a net income of $195,630 or $0.22 per dilutedshare for the three months ended June 30, 2005. For the six months ended June30, 2006, the Bank posted net income of $542,173 or $0.61 per diluted share ascompared to a net income of $372,697 or $0.42 per diluted share for the sixmonths ended June 30, 2005.  The Bank’snet income improved by 41.93% in the second quarter of 2006 as compared to thesame period in 2005 and improved by 45.47% for the six months ended June 30,2006 as compared to the same period in 2005. The annualized return on average equity was 15.53% and the annualizedreturn on average assets was 1.22% for the quarter ended June 30, 2006 comparedto a 12.66% return on average equity and a 0.96% return on average assets forthe quarter ended June 30, 2005.   The annualizedreturn on average equity was 15.46% and the annualized return on average assetswas 1.22% for the six months ended June 30, 2006 compared to a 12.20% return onaverage equity and a 0.93% return on average assets for the six months endedJune 30, 2005.  The increase in thereturn on average assets is attributable to the increase on the yield on theearning assets along with the growth in average loan balances for the periodending June 30, 2006.

The Bank’scontinued growth is reflected in average interest-earning assets increasing by$7.8 million or 10.4% to $82.9 million with average interest-bearingliabilities increasing by $8.3 million or 50.0% to $25.0 million yielding a netinterest margin of 5.61% or a 29 basis point increase for the three monthsended June 30, 2006.  For the six monthsended June 30, 2006, average interest-earning assets increased $6.8 million or9.2% to $80.5 million with average interest-bearing liabilities increasing by$7.7 million or 48.2% to $23.6 million yielding a net interest margin of 5.62%or a 52 basis point increase.

The Provision forLoan Losses was $19,500 for the three months ended June 30, 2006 as compared to$36,350 for the three months ended June 30, 2005. The Provision for Loan Lossesdecreased by $25,168 to $28,250 for the six months ended June 30, 2006 ascompared to $53,418 for the six months ended June 30, 2005***. ***The decline is indicative of a seasoned loan portfolioand a migration analysis of the loan portfolio reflecting no loan losses sinceinception.

 

11

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Total non-interestincome increased by $15,761 or 11.1% for the three months ended June 30, 2006as compared to the three months ended June 30, 2005. Total non-interest incomeincreased by $29,853 or 10.9% for the six months ended June 30, 2006 as comparedto the six months ended June 30, 2005.  The increase in both periods is primarily due to an overall increase inthe number of deposit accounts with analysis charges as well as other servicecharges causing an increase in service charges on deposit accounts of $23,326or 20.9% for the three months ended June 30, 2006 and $43,339 or 19.7% for thesix months ended June 30, 2006.  Thisincrease was partially offset by mortgage banking fee income which declined by$9,739 during the comparable three month period and by $15,957 during thecomparable six month period due to a decline in the number of mortgage loansrefinanced.

Non-interestexpenses increased by $59,750 or 7.6% for the three months ended June 30, 2006and increased by $155,961 or 10.4% for the six months ended June 30, 2006 dueprimarily to additional staff for the new Ontario branch as well as occupancyand equipment charges increasing for the new Ontario branch.  This branch was opened on January 5, 2006.

**EarningsPerformance**

**NetInterest Income and Net Interest Margin**

Interest incomeincreased $219,595 or 20.7% and $471,236 or 23.7% to $1,278,140 and $2,460,067,respectively, for the three and six months ended June 30, 2006 as compared with$1,058,545 and $1,988,831, respectively, for the three and six months endedJune 30, 2005.   As reflected in therate/volume analysis on page 15 and 16, the primarily reason for the increasein earnings continues to be volume driven. Volume (or the increase in average balances) created $152,000 and$262,000 of income for the three and six months ended June 30, 2006,respectively, as compared to the same periods ended June 30, 2005.

The largestincrease in interest income was due to the increase in interest income on totalloans. Average interest-earning assets increased $7.8 million or 10.4% to $82.9million for the three months ended June 30, 2006 as compared to $75.1 millionfor the three months ended June 30, 2005. The yield on average earning assets increased by 53 basis points to6.17% for the three months ended June 30, 2006 from 5.64% for the three monthsended June 30, 2005 as investment security yields increased to 4.27% from 3.46%and Fed funds rates increased to 4.95% from 2.98%.  The increase in average interest-bearingassets is primarily due to  the continuedgrowth of average net loans, which increased by $7.6 million or 20.1% in thethree months ended June 30, 2006 as compared to the three months ended June 30,2005.

Averageinterest-earning assets increased $6.8 million or 9.2% to $80.5 million for thesix months ended June 30, 2006 as compared to $73.8 million for the six monthsended June 30, 2005.  The yield onaverage earning assets increased by 72 basis points to 6.11% for the six monthsended June 30, 2006 from 5.39% for the six months ended June 30, 2005 as loanyields increased to 7.61% from 7.56% and Fed funds rates rose to 4.65% from2.69% and investment security yields rose 10 basis points to 4.19% from3.40%.  The increase in averageinterest-bearing assets reflects the continued growth of the Bank as theaverage net loans increased by $7.0 million or 18.9% in the six months endedJune 30, 2006 as compared to the six months ended June 30, 2005. The aggregateaverage balance of securities increased by $1.8 million and the average balanceof Federal funds sold decreased by $2.0 million.

The average yieldon loans increased to 7.61% for the six months ended June 30, 2006 as comparedto 7.56% for the six months ended June 30, 2005.  The increase was primarily the result of theimpact of the interest rate environment. The average yield on loans decreased to 7.60% for the three months endedJune 30, 2006 from 7.92% for the three months ended June 30, 2005.   The decrease of 32 basis points for thethree months ended June 30, 2006 as compared to June 30, 2005 reflects theimpact of the loan prepayment fee income of $33,400 recorded in the secondquarter of 2005.  The growth in theaverage loan balances is reflective of the strength of the economy in the Bank’smarket area and the overall continued growth of the Bank.

12

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The average yieldon the aggregate average balance of securities (U. S. Government agencies,mortgage-backed securities and other securities) increased to 4.27% and 4.19%,respectively, for the three and six months ended June 30, 2006 and from 3.46%and 3.40%, respectively, for the three and six months ended June 30, 2005.  The increase in the second quarter of 2006 onyields on investment securities reflects short-term interest rate rise, the repricingof certain adjustable rate mortgage backed securities and the reinvesting ofmatured agency securities at higher yielding interest rates.   The average interest-earning aggregatebalance of securities increased to $28.4 million and $28.5 million, respectively,for the three and six months ended June 30, 2006 from $27.0 million and $26.7million, respectively, for the three and six months ended June 30, 2005.

The average yieldon Federal funds sold increased to 4.95% and 4.65%, respectively, for the threeand six months ended June 30, 2006 from 2.98% and 2.69%, respectively, for thethree and six months ended June 30, 2005. The increase in the rates was attributable primarily to the rise inFederal funds rates.  The averageinterest-earning balance of Federal funds sold decreased to $8.9 million and$8.0 million for the three and six months ended June 30, 2006 from $10.1million and $10.0 million for the three and six months ended June 30,2005.  This decrease in Federal fundssold resulted from the growth in the loan and investment portfolios.

Interest expenseincreased $56,450 or 94.8% and $86,508 or 79.3% to $115,978 and $196,184 forthe three and six months ended June 30, 2006 from $59,528 and $109,076 for thethree and six months ended June 30, 2005. Average interest-bearing liabilities increased to $25.0 million and$23.6 million for the three and six months ended June 30, 2006 from $16.7million and $15.9 million for the three and six months ended June 30, 2005. Theincrease in average interest-bearing liabilities was coupled with an increaseof 42 basis points and 30 basis points for the three and six months ended June30, 2006 as compared to the three and six months ended June 30, 2005,respectively.  The increase in interestrates was due to the rise in the short-term interest rates.  To offset this rise, the Bank continues tomaintain a high ratio of average non-interest bearing deposits in comparison toaverage total deposits with a ratio of 70.1% and 71.1% for the three and sixmonths ended June 30, 2006 as compared to 77.8% and 78.4% for the three and sixmonths ended June 30, 2005.  Averagenon-interest bearing deposits increased slightly by $204,000 and $307,000 forthe three and six months ended June 30, 2006 as compared to the same periodsfor 2005.

The Bank’s netinterest margin was 5.61% and 5.32% for the three and six months ended June 30,2006 as compared to 5.32% and 5.10% for the three and six months ended June 30,2005.  The increase was primarily due tothe rise on the yield earned on the loan portfolio as loans re-price in arising interest rate environment.  Theincrease in average loan portfolio balances generated a positive impact on thenet interest margin*.*

The tables belowset forth certain information relating to the Bank for the three and six monthsended June 30, 2006 and 2005. The yields and costs are derived by dividingincome 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 table reflects the Bank’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**($ in thousands)

| ** **                                                        | ** ** | **For the three months ended** | ** ** | **For the three months ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                        | ** ** | **June 30, 2006**                        | ** ** | **June 30, 2005**                        | ** ** |
| ** **                                                        | ** ** | **Average**                                        | ** ** | **Income/**                                        | ** ** | **Average** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Average** | ** ** |
| ** **                                                        | ** ** | **balance**                                        | ** ** | **Expense**                                        | ** ** | **Yield/Rate (4)** | ** ** | **balance** | ** ** | **Expense** | ** ** | **Yield/Rate (4)** | ** ** |
| Assets                                                            |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest-earnings  assets                                         |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Loans, net (1)                                                    |       | $                                                  | 45,535     |                                               | $          | 865 |   | 7.60 | % | $ | 37,926 |   | $ | 751 |   | 7.92 | % |
| Securities of U.S. government agencies                            |       | 7,514                                              |       | 63                                                 |       | 3.35 | % | 6,390 |   | 43 |   | 2.69 | % |
| Mortgage-backed securities                                        |       | 12,465                                             |       | 138                                                |       | 4.43 | % | 13,711 |   | 129 |   | 3.76 | % |
| Other securities                                                  |       | 8,438                                              |       | 103                                                |       | 4.88 | % | 6,855 |   | 61 |   | 3.56 | % |
| Federal funds sold                                                |       | 8,939                                              |       | 109                                                |       | 4.89 | % | 10,191 |   | 75 |   | 2.98 | % |
| Total interest-earning assets                                     |       | 82,891                                             |       | 1,278                                              |       | 6.17 | % | 75,073 |   | 1,059 |   | 5.64 | % |
| Non-interest  earning assets                                      |       | 8,327                                              |       |                                               |       |   |   | 6,560 |   |   |   |   |   |
| Total assets                                                      |       | $                                                  | 91,218     |                                               |       |   |   |   | $ | 81,633 |   |   |   |   |   |
|                                                              |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Liabilities and  Stockholders’ Equity                        |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                                     |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Money market deposits                                             |       | $                                                  | 20,535     |                                               | 92         |   | 1.80 | % | $ | 11,966 |   | 40 |   | 1.34 | % |
| Savings                                                           |       | 1,123                                              |       | 1                                                  |       | 0.36 | % | 897 |   |   |   | 0.00 | % |
| Time deposits < $100,000                                       |       | 1,484                                              |       | 10                                                 |       | 2.70 | % | 1,740 |   | 9 |   | 2.07 | % |
| Time deposits equal to or > $100,000                           |       | 1,866                                              |       | 13                                                 |       | 2.79 | % | 2,064 |   | 11 |   | 2.14 | % |
| Total interest-bearing liabilities                                |       | 25,008                                             |       | 116                                                |       | 1.86 | % | 16,667 |   | 60 |   | 1.44 | % |
| Non-interest  bearing deposits                                    |       | 58,509                                             |       |                                               |       |   |   | 58,305 |   |   |   |   |   |
| Non-interest  bearing liabilities                                 |       | 554                                                |       |                                               |       |   |   | 478 |   |   |   |   |   |
| Stockholders’  equity                                        |       | 7,147                                              |       |                                               |       |   |   | 6,183 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |       | $                                                  | 91,218     |                                               |       |   |   |   | $ | 81,633 |   |   |   |   |   |
|                                                              |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net interest  income                                              |       |                                               |       | $                                                  | 1,162      |   |   |   |   |   | $ | 999 |   |   |   |
|                                                              |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net interest  spread (2)                                          |       |                                               |       |                                               |       | 4.31 | % |   |   |   |   | 4.20 | % |
| Net interest  margin (3)                                          |       |                                               |       |                                               |       | 5.61 | % |   |   |   |   | 5.32 | % |
| Ratio of  interest-earning assets to interest-bearing liabilities |       |                                               |       |                                               |       | 331.46 | % |   |   |   |   | 450.43 | % |

 

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(1) Amortization of loanfees have been included in the calculation of interest income. Loan fees wereapproximately $19,596 for the three months ended June 30, 2006 as compared to$71,086 for the three months ended June 30, 2005.   Loans are net of the allowance for loanlosses, deferred fees and related direct costs.

(2)  Represents the average rate earned oninterest-earning assets less the average rate paid on interest-bearingliabilities.

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

(4)  Average Yield/Rate is based upon actualdollars and actual number of days annualized.

14

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** **

| ** **                                                        | ** ** | **For the six months ended  June 30, 2006** | ** ** | **For the six months ended  June 30, 2005** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **Average**                                                               | ** ** | **Income/**                                                               | ** ** | **Average** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Average** | ** ** |
| ** **                                                        | ** ** | **balance**                                                               | ** ** | **Expense**                                                               | ** ** | **Yield/Rate (4)** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Yield/Rate (4)** | ** ** |
| Assets                                                            |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Interest-earnings  assets                                         |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Loans, net (1)                                                    |       | $                                                                         | 44,026     |                                                                      | $          | 1,676 |   | 7.61 | % | $ | 37,041 |   | $ | 1,400 |   | 7.56 | % |
| Securities of U.S. government agencies                            |       | 7,596                                                                     |       | 125                                                                       |       | 3.29 | % | 6,196 |   | 83 |   | 2.68 | % |
| Mortgage-backed securities                                        |       | 12,839                                                                    |       | 279                                                                       |       | 4.35 | % | 13,225 |   | 248 |   | 3.75 | % |
| Other securities                                                  |       | 8,040                                                                     |       | 193                                                                       |       | 4.80 | % | 7,270 |   | 123 |   | 3.38 | % |
| Federal funds sold                                                |       | 8,042                                                                     |       | 187                                                                       |       | 4.65 | % | 10,027 |   | 135 |   | 2.69 | % |
| Total interest-earning assets                                     |       | 80,543                                                                    |       | 2,460                                                                     |       | 6.11 | % | 73,759 |   | 1,989 |   | 5.39 | % |
| Non-interest  earning assets                                      |       | 8,562                                                                     |       |                                                                      |       |   |   | 6,401 |   |   |   |   |   |
| Total assets                                                      |       | $                                                                         | 89,105     |                                                                      |       |   |   |   | $ | 80,160 |   |   |   |   |   |
|                                                              |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Liabilities and  Stockholders’ Equity                        |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                                     |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Money market deposits                                             |       | $                                                                         | 19,222     |                                                                      | 153        |   | 1.61 | % | $ | 11,345 |   | 73 |   | 1.30 | % |
| Savings                                                           |       | 1,009                                                                     |       | 2                                                                         |       | 0.40 | % | 894 |   | 1 |   | 0.23 | % |
| Time deposits < $100,000                                       |       | 1,474                                                                     |       | 17                                                                        |       | 2.33 | % | 1,695 |   | 15 |   | 1.78 | % |
| Time deposits equal to or > $100,000                           |       | 1,880                                                                     |       | 24                                                                        |       | 2.57 | % | 1,977 |   | 20 |   | 2.04 | % |
| Total interest-bearing liabilities                                |       | 23,585                                                                    |       | 196                                                                       |       | 1.68 | % | 15,911 |   | 109 |   | 1.38 | % |
| Non-interest  bearing deposits                                    |       | 57,990                                                                    |       |                                                                      |       |   |   | 57,683 |   |   |   |   |   |
| Non-interest  bearing liabilities                                 |       | 516                                                                       |       |                                                                      |       |   |   | 456 |   |   |   |   |   |
| Stockholders’  equity                                        |       | 7,014                                                                     |       |                                                                      |       |   |   | 6,110 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |       | $                                                                         | 89,105     |                                                                      |       |   |   |   | $ | 80,160 |   |   |   |   |   |
|                                                              |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Net interest  income                                              |       |                                                                      |       | $                                                                         | 2,264      |   |   |   |   |   | $ | 1,880 |   |   |   |
|                                                              |       |                                                                      |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Net interest  spread (2)                                          |       |                                                                      |       |                                                                      |       | 4.43 | % |   |   |   |   | 4.01 | % |
| Net interest margin  (3)                                          |       |                                                                      |       |                                                                      |       | 5.62 | % |   |   |   |   | 5.10 | % |
| Ratio of  interest-earning assets to interest-bearing liabilities |       |                                                                      |       |                                                                      |       | 341.50 | % |   |   |   |   | 463.57 | % |

 

----

(1) Amortization of loan fees have been included inthe calculation of interest income. Loan fee income was $56,152 for the six monthsended June 30, 2006 as compared to $86,955 for the six months ended June 30,2005.   Loans are net of the allowancefor loan losses, deferred fees and related direct costs.

(2)  Represents the average rate earned oninterest-earning assets less the average rate paid on interest-bearingliabilities.

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

(4)  Average Yield/Rate is based upon actualdollars and actual number of days annualized.

15

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**Rate/VolumeAnalysis**

Thefollowing table presents the extent to which changes in interest rates andchanges in the volume of interest-earning assets and interest-bearingliabilities have affected the Bank’s interest income and expense during theperiods indicated.  The variances attributableto both the volume and rate changes have been allocated to volume and ratechanges in proportion to the relationship of the absolute dollar amount of thechanges in each:

**Rate/Volume Analysis of NetInterest Income**

| ** **                             | ** ** | **For the Three Months Ended June 30,  2006 vs. 2005** | ** ** | **For the Six Months Ended June 30,  2006 vs. 2005** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Increases (Decreases) Due to Change In**                            | ** ** | **Increases (Decreases) Due to Change In**                          | ** ** |
| ** **                             | ** ** | **Volume**                                                                                     | ** ** | **Rate**                                                                                     | ** ** | **Rate/  Volume** | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Total** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)**                                                           | ** ** |
| **Interest-earning  Assets:**          |       |                                                                                           |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loans, net of deferred fees        |       | $                                                                                              | 151        |                                                                                         | $          | (31 | ) | $ | (6 | ) | $ | 114 |   | $ | 264 |   | $ | 10 |   | $ | 2 |   | $ | 276 |   |
| Securities of U.S. Government agencies |       | 8                                                                                              |       | 11                                                                                           |       | 1 |   | 20 |   | 18 |   | 19 |   | 4 |   | 41 |   |
| Mortgage-backed securities             |       | (12                                                                                            | )          | 21                                                                                           |       | (2 | ) | 7 |   | (7 | ) | 39 |   | (1 | ) | 31 |   |
| Other securities                       |       | 14                                                                                             |       | 23                                                                                           |       | 5 |   | 42 |   | 14 |   | 52 |   | 5 |   | 71 |   |
| Federal funds sold                     |       | (9                                                                                             | )          | 51                                                                                           |       | (5 | ) | 36 |   | (27 | ) | 97 |   | (18 | ) | 52 |   |
| Total interest-earning assets          |       | $                                                                                              | 152        |                                                                                         | $          | 75 |   | $ | (7 | ) | $ | 220 |   | $ | 262 |   | $ | 217 |   | $ | (8 | ) | $ | 471 |   |
|                                   |       |                                                                                           |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**     |       |                                                                                           |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market and NOW                   |       | $                                                                                              | 29         |                                                                                         | $          | 14 |   | $ | 10 |   | $ | 53 |   | $ | 51 |   | $ | 17 |   | $ | 12 |   | $ | 80 |   |
| Savings deposits                       |       | —                                                                                         |       | 1                                                                                            |       | — |   | 1 |   | — |   | 1 |   | — |   | 1 |   |
| Time deposits less than $100,000       |       | (1                                                                                             | )          | 2                                                                                            |       | — |   | 1 |   | (2 | ) | 5 |   | (1 | ) | 2 |   |
| Time deposits $100,000 or greater      |       | (1                                                                                             | )          | 3                                                                                            |       | — |   | 2 |   | (1 | ) | 5 |   | — |   | 4 |   |
| Total interest-bearing liabilities     |       | $                                                                                              | 27         |                                                                                         | $          | 20 |   | $ | 10 |   | $ | 57 |   | $ | 48 |   | $ | 28 |   | $ | 11 |   | $ | 87 |   |
|                                   |       |                                                                                           |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total change in net  interest income   |       | $                                                                                              | 125        |                                                                                         | $          | 55 |   | $ | (17 | ) | $ | 163 |   | $ | 214 |   | $ | 189 |   | $ | (19 | ) | $ | 384 |   |

 

**Provision for Loan Losses**

The Provision forloan losses was $19,500 and $28,250 for the three and six months ended June 30,2006 as compared to $36,360 and $53,418 for the three and six months ended June30, 2005.   All downgraded credits werecurrent as of June 30, 2006 and no principal losses have been recorded and nocredits were on nonaccrual.  Theallowance for loan losses was $572,390 or 1.22% of gross loans receivable atJune 30, 2006 as compared to $544,140 or 1.28% of gross loans receivable atDecember 31, 2005 and $460,465 or 1.23% of gross loans receivable at June 30,2005.  The decline is indicative of aseasoned loan portfolio and a migration analysis of the loan portfolioreflecting no loan losses 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” on page 20.

16

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**Non-Interest Income**

Non-interest income was$156,963 and $303,720 for the three and six months ended June 30, 2006 ascompared to $141,202 and $273,867 for the three and six months ended June 30,2005.  The increase of $15,761 or 11.2%for the comparable three month periods and $29,853 or 10.9% for the comparablesix month periods resulted from the increase in the service charge income ondeposit accounts.  This increase wasoffset by decreases in income from mortgage banking of $9,739 and $15,957 forthe respective periods, respectively.

**Non-InterestIncome**

| ** **                                 | ** ** | **For the Three Months Ended June 30,  2006 vs. 2005** | ** ** | **For the Six Months Ended June 30,  2006 vs. 2005** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                                                       | ** ** | **2005**                                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **Amount**                                                                                     | ** ** | **% of Total**                                                                     | ** ** | **Amount** | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **%of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| ** **                                 | ** ** | **(Dollars in Thousands)**                                                           | ** ** |
| Service Charges  on deposit accounts       |       | $                                                                                              | 135        |                                                                                         | 86.0       | % | $ | 112 |   | 79.4 | % | $ | 264 |   | 86.8 | % | $ | 221 |   | 80.7 | % |
|  Other miscellaneous fee income       |       | 5                                                                                              |       | 3.2                                                                                          | %          | 2 |   | 1.4 | % | 8 |   | 2.6 | % | 4 |   | 1.4 | % |
| Income from  Mortgage banking              |       | 2                                                                                              |       | 1.3                                                                                          | %          | 11 |   | 7.8 | % | 2 |   | 0.7 | % | 18 |   | 6.6 | % |
| Income from Bank  Owned Life Insurance     |       | 15                                                                                             |       | 9.5                                                                                          | %          | 16 |   | 11.4 | % | 30 |   | 9.9 | % | 31 |   | 11.3 | % |
| Total non-interest income                  |       | $                                                                                              | 157        |                                                                                         | 100.0      | % | $ | 141 |   | 100.0 | % | $ | 304 |   | 100.0 | % | $ | 274 |   | 100.0 | % |
| As a percentage of  average earning assets |       |                                                                                           |       | 0.75                                                                                         | %          |   |   | 0.68 | % |   |   | 0.75 | % |   |   | 0.68 | % |

 

Totalannualized non-interest income as a percentage of average assets increased to0.75% from 0.68% for the three months ended June 30, 2006 as compared to thethree months ended June 30, 2005 and to 0.75% from 0.68% for the six monthsended June 30, 2006 as compared to the six months ended June 30, 2005.  The increase was due primarily to theadditional fee income from service charges on deposit accounts as the depositbase continues to grow.

Theservice charges on deposit accounts, customer fees and miscellaneous income arecomprised primarily of fees charged to deposit accounts and depository relatedservices.  Fees generated from depositaccounts consist of periodic service fees and fees that relate to specificactions, such as the return or payment of checks presented against accountswith insufficient funds.  Depositoryrelated services include fees for money orders and cashier’s checks, placingstop payments on checks, check-printing fees, wire transfer fees, fees for safedeposit boxes and fees for returned items or checks that were previouslydeposited.  Service charges increased$23,326 or 20.9% to $134,926 for the three months ended June 30, 2006 andincreased $43,339 or 19.7% to $263,874 for the six months ended June 30, 2006as compared to $111,600 and $220,535, respectively, for the three and sixmonths ended June 30, 2005.  The increasewas primarily attributable to activity on a higher number of deposit accountsduring 2006. The Bank periodically reviews service charges to maximize servicecharge 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.

Forthe three and six months ending June 30, 2005, the Bank received broker feestotaling $11,479 and $17,697, respectively as compared to the three and sixmonths ending June 30, 2006 when the Bank received $1,740 for broker fees.  As market conditions allow, the Bankanticipates continuing to receive broker fees for referring single-familymortgage loans to third party conduits.

17

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**Non-Interest Expense**

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

**Non-Interest Expense**

| ** **                                              | ** ** | **For the Three Months Ended June 30,  2006 vs. 2005** | ** ** | **For the Six Months Ended June 30,  2006 vs. 2005** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                                                                       | ** ** | **2005**                                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | **Amount**                                                                                     | ** ** | **% of Total**                                                                     | ** ** | **Amount** | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **%of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| ** **                                              | ** ** | **(Dollars in Thousands)**                                                           | ** ** |
| Salaries and  employee benefits                         |       | $                                                                                              | 433        |                                                                                         | 51.3       | % | $ | 383 |   | 48.9 | % | $ | 842 |   | 51.1 | % | $ | 717 |   | 48.1 | % |
|  Occupancy and equipment                           |       | 97                                                                                             |       | 11.5                                                                                         | %          | 64 |   | 8.2 | % | 202 |   | 12.3 | % | 127 |   | 8.5 | % |
| Data processing                                         |       | 62                                                                                             |       | 7.3                                                                                          | %          | 54 |   | 6.9 | % | 123 |   | 7.5 | % | 105 |   | 7.0 | % |
| Deposit products  and services                          |       | 90                                                                                             |       | 10.7                                                                                         | %          | 93 |   | 11.9 | % | 161 |   | 9.8 | % | 173 |   | 11.6 | % |
| Professional                                            |       | 46                                                                                             |       | 5.5                                                                                          | %          | 45 |   | 5.7 | % | 89 |   | 5.4 | % | 95 |   | 6.4 | % |
| Advertising and  marketing                              |       | 26                                                                                             |       | 3.1                                                                                          | %          | 34 |   | 4.3 | % | 40 |   | 2.4 | % | 60 |   | 4.0 | % |
| Directors’ fees  and expenses                      |       | 22                                                                                             |       | 2.6                                                                                          | %          | 19 |   | 2.4 | % | 44 |   | 2.7 | % | 38 |   | 2.6 | % |
| Printing and  supplies                                  |       | 14                                                                                             |       | 1.6                                                                                          | %          | 13 |   | 1.7 | % | 29 |   | 1.8 | % | 23 |   | 1.6 | % |
| Telephone                                               |       | 9                                                                                              |       | 1.1                                                                                          | %          | 4 |   | 0.5 | % | 17 |   | 1.0 | % | 9 |   | 0.6 | % |
| Insurance                                               |       | 6                                                                                              |       | 0.7                                                                                          | %          | 6 |   | 0.8 | % | 12 |   | 0.7 | % | 12 |   | 0.8 | % |
| Reserve for  undisbursed lines of credit                |       | (15                                                                                            | )          | (1.8                                                                                         | )%         | 13 |   | 1.6 | % | (15 | ) | (0.9 | )% | 33 |   | 2.2 | % |
| Other expenses                                          |       | 54                                                                                             |       | 6.4                                                                                          | %          | 56 |   | 7.1 | % | 102 |   | 6.2 | % | 99 |   | 6.6 | % |
| Total non-interest expenses                             |       | $                                                                                              | 844        |                                                                                         | 100.0      | % | $ | 784 |   | 100.0 | % | $ | 1,647 |   | 100.0 | % | $ | 1,491 |   | 100.0 | % |
| Non-interest  expense as a percentage of average assets |       |                                                                                           |       | 3.70                                                                                         | %          |   |   | 3.84 | % |   |   | 3.70 | % |   |   | 3.72 | % |
| Efficiency ratio                                        |       |                                                                                           |       | 64.00                                                                                        | %          |   |   | 68.77 | % |   |   | 64.14 | % |   |   | 69.19 | % |

 

Total annualized non-interest expenses as a percentage of averageassets decreased to 3.70% from 3.84% for the three months ended June 30, 2006as compared to three months ended June 30, 2005 and to 3.70% from 3.72% for thesix months ended June 30, 2006 as compared to the six months ended June 30,2005 due to the Bank stabilizing costs as a percentage of asset growth.  The efficiency ratio continued to decline asreflected in the 64.00% and 64.14% ratios for the three and six months endedJune 30, 2006 as compared to 68.77% and 69.19% for the three and six monthsended June 30, 2005.

Non-interest expenses were $844,139 and $1,647,377 for the three andsix months ended June 30, 2006 as compared to $784,389 and $1,491,416 for thethree and six months ended June 30, 2005. Expenses, which denoted unusually high dollar fluctuations, wereSalaries and employee benefits, Occupancy and equipment.  Salaries and employee benefits expenseincreased to $433,195 and $842,373 for the three and six months ended June 30,2006 as compared to $383,045 and $717,541 for the three and six months endedJune 30, 2005 due to higher average full-time equivalent staff primarily due tothe opening of the Ontario branch on January 5, 2006. Occupancy and equipmentexpenses increased to $97,314 and $201,953, respectively, for the three and sixmonths ended June 30, 2006 as compared to $64,093 and $127,112, respectively,for the three and six months ended June 30, 2005 due primarily to the openingof the Ontario branch and the expenses incurred with two (Chino and Ontario)locations. Reserve for undisbursed lines of credit decreased to $(15,000) and$(15,000), respectively, for the three and six months ended June 30, 2006 ascompared to $13,000 and $32,932 for the comparable periods ended June 30,2005.  The decrease in undisbursed linesof credit reflects the decline in the amount of outstanding commitmentsunfunded by the Bank***.***  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**

Duringthe three and six months ended June 30, 2006, the Bank had current income taxexpenses of $177,844 and $349,803, respectively, at effective tax rates of39.0% and 39.2% for the three and six months ended June 30, 2006,respectively.   During the three and sixmonths ended June 30, 2005, the income tax expenses incurred were $123,850 and$236,091, respectively at effective tax rates for both periods of 38.7%.

18

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Theincome tax rate used in determining the Bank’s income tax provision or benefit,if any, is 34% for federal income tax purposes and 7.15% for state incometaxes, net of federal tax benefit. Generally, the current tax expense is the result of applying the currenttax rate to taxable income.  The deferredportion is intended to account for the fact that income on which taxes are paiddiffers from financial statement pre-tax income because some items of incomeand expense are recognized in different years for income tax purposes than inthe financial statements.  These recognitionanomalies cause “temporary differences”; eventually, all taxes are paid.

**FinancialCondition**

**Comparison of Financial Conditionat June 30, 2006 and December 31, 2005**

**General**

Totalassets increased $2.0 million or 2.2% to $93.3 million at June 30, 2006 from$91.3 million at December 31, 2005 primarily due to the growth in Loans.

**Loan Portfolio**

During the six monthsended June 30, 2006, the Bank’s loan portfolio increased by $4.4 million to$46.2 million at June 30, 2006 as compared to $41.8 million at December 31,2005.  Net loans increased due to a $3.5million increase in real estate loans and a $667,000 increase in commercialloans which were partially offset by a $320,000 decrease in installmentloans.  The largest loan category at June30, 2006 was real estate loans, which consist of commercial and consumer realestate loans excluding construction loans, which constitute 72.4% of grossloans.  In anticipation of possibledeterioration in economic conditions, though Management believes these creditsto be properly underwritten, the Bank has elected to take real estatecollateral as an abundance of caution on a number of commercial loans.  Though the result of this strategy may be toreflect a concentration of assets into real estate secured credits, Managementbelieves the underlying collateral will support overall credit quality andminimize principal risk of the portfolio. The next largest loan concentration at June 30, 2006 was commercialloans constituting 19.1% of gross loans. The composition of the Bank’s loan portfolio at June 30, 2006 andDecember 31, 2005 is set forth below:

 

|                  | ** ** | **At June 30, 2006** | ** ** | **At December 31, 2005** | ** ** |
|------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| ** **       | ** ** | **Amount**                          | ** ** | **Percentage**                          | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **($ in thousands)**      | ** ** |
|             |       |                                |       |                                    |       |   |   |   |   |
| Construction     |       | $                                   | 3,370      |                                    | 7.2        | % | $ | 2,791 |   | 6.6 | % |
| Real estate      |       | 33,939                              |       | 72.4                                    | %          | 30,444 |   | 71.6 | % |
| Commercial       |       | 8,962                               |       | 19.1                                    | %          | 8,295 |   | 19.5 | % |
| Farm/Agriculture |       | 323                                 |       | 0.7                                     | %          | 331 |   | 0.8 | % |
| Installment      |       | 314                                 |       | 0.6                                     | %          | 634 |   | 1.5 | % |
| Gross loans      |       | $                                   | 46,908     |                                    | 100.0      | % | $ | 42,495 |   | 100.0 | % |

 

Theweighted average yield on the loan portfolio as of June 30, 2006 was 7.61% andthe weighted average contractual term of the loan portfolio is approximately6.1 years.  Individual loan interestrates may require interest rate changes more frequently than at maturity due toadjustable interest rate terms incorporated into certain loans.  At June 30, 2006**,**48.3% of loans were variable rate loans tied to adjustablerate indices such as Prime Rate.

19

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**Off-Balance Sheet Arrangements**

Duringthe ordinary course of business, the Bank will provide various forms of creditlines to meet the financing needs of its customers.  These commitments to provide credit representan obligation of the Bank to its customers, which is not represented in anyform within the balance sheets of the Bank. At June 30, 2006 and December 31, 2005, the Bank had $7.9 million and$8.8 million, respectively, of off-balance sheet commitments to extendcredit.  These commitments are the resultof existing unused lines of credit and unfunded loan commitments.  These commitments represent a credit risk tothe Bank.  At June 30, 2006 and December31, 2005, the Bank had unadvanced lines of credit of $315,300.  These lines of credit are sometimes unsecuredand may not necessarily be drawn upon to the total extent to which the Bank iscommitted.

Theeffect on the Bank’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.

**Non-performing Assets**

Non-performingassets are comprised of loans on non-accrual status, loans 90 days or more pastdue and still accruing interest, loans restructured where the terms ofrepayment have been renegotiated resulting in a reduction or deferral ofinterest or principal, and other real estate owned (“OREO”).  Loans are generally placed on non-accrualstatus when they become 90 days past due unless Management believes the loan isadequately collateralized and in the process of collection.  Loans may be restructured by Management whena borrower has experienced some change in financial status, causing aninability to meet the original repayment terms, and where the Bank believes theborrower will eventually overcome those circumstances and repay the loan infull.  OREO consists of propertiesacquired by foreclosure or similar means that Management intends to offer forsale.

Management’sclassification of a loan as non-accrual is an indication that there is areasonable doubt as to the full collectibility of principal and/or interest onthe loan; at this point, the Bank stops recognizing income from the interest onthe loan and may reserve any uncollected interest that had been accrued butunpaid if it is determined uncollectible or the collateral is inadequate tosupport such accrued interest amount. These loans may or may not be collateralized, but collection efforts arecontinuously pursued.

AtJune 30, 2006 and December 31, 2005, the Bank had no non-performing assets,loans on non-accrual status, restructured loans, or OREO.  At June 30, 2006 and December 31, 2005, theBank had criticized loans totaling $2.9 million or 6.68% of average loans and$1.3 million or 3.01% of average loans, respectively.  All criticized loans were current as of June 30,2006 and December 31, 2005.  Critizedloans increased due to two borrowers: one due to construction delays and theother due to lower revenues in 2005. Management has little or no expectation for principal loss arising fromthese classified assets.  Though the Bankhad no non-performing assets at June 30, 2006, in the future, Managementanticipates a certain level of problem assets and adversely classified loans asthey are an inherent part of the lending process.  Accordingly, the Bank has established andmaintains an allowance for loan losses which amounted to $572,390 at June 30,2006 and $544,140 at December 31, 2005.

**Allowance for Loan Losses**

TheBank maintains an allowance for loan losses at a level Management considersadequate to cover the inherent risk of loss associated with its loan portfoliounder prevailing and anticipated economic conditions.  In determining the adequacy of the allowancefor loan losses, Management takes into consideration growth trends in theportfolio, examination by financial institution supervisory authorities, priorloan 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.

TheBank formally assesses the adequacy of the allowance on a quarterly basis.  This assessment is comprised of: (i)reviewing the adversely classified, delinquent or otherwise problematic loans;(ii) generating an estimate of the loss potential in each loan; (iii) adding arisk factor for industry, economic or other external factors; and (iv)evaluating the present status of each loan and the impact of potential futureevents.

 

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Allowance factorsare utilized in the analysis of the allowance for loan losses.  Allowance factors ranging from 0.65% to 2.00%are applied to disbursed loans that are unclassified and uncriticized.  Allowance factors averaging approximately0.50% are applied to undisbursed loans. Allowance factors are not applied to loans secured by bank deposits norto loans held for sale, which are recorded at the lower of cost or market.

Theprocess of providing for loan losses involves judgmental discretion, and eventuallylosses may therefore differ from even the most recent estimates.  Due to these limitations, the Bank assumesthat there are losses inherent in the current loan portfolio but which have notyet been identified.  The Bank thereforeattempts to maintain the allowance at an amount sufficient to cover suchunknown but inherent losses.

AtJune 30, 2006 and December 31, 2005, the allowance for loan losses was $572,390and $544,140, respectively.  The ratiosof the allowance for loan losses to total loans held for investment at June 30,2006 and December 31, 2005 were 1.22% and 1.28%, respectively.

Therecan be no assurances that future economic or other factors will not adverselyaffect the Bank’s borrowers, or that the Bank’s asset quality may notdeteriorate through rapid growth, failure to identify and monitor potentialproblem loans or for other reasons, thereby causing loan losses to exceed thecurrent allowance.

Thetable on the following page summarizes, for the three months ended as of June30, 2006 and 2005 and for the year ended and as of December 31, 2005, the loanbalances at the end of the period and the daily average loan balances duringthe period; changes in the allowance for loan losses arising from loancharge-offs, recoveries on loans previously charged-off, and additions to theallowance which have been charged against earnings, and certain ratios relatedto the allowance for loan losses.

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Allowance for Loan Losses
| ** **                                                                  | ** ** | **As of or For the  Period Ended  June 30,** | ** ** | **As of or For the  Year Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                                                   | ** ** | **2005**                                                                     | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | **($ in thousands)**                                             | ** ** |
| **Balances:**                                                               |       |                                                                       |       |                                                                         |       |   |   |
| Average total  loans outstanding during period                              |       | $                                                                          | 44,026     |                                                                         | $          | 37,041 |   | $ | 38,154 |   |
| Total loans  outstanding at the end of the period                           |       | $                                                                          | 46,908     |                                                                         | $          | 37,277 |   | $ | 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                                                  |       | 28                                                                         |       | 53                                                                           |       | 137 |   |
| Balance at the  end of the period                                           |       | $                                                                          | 572        |                                                                         | $          | 460 |   | $ | 544 |   |
|                                                                        |       |                                                                       |       |                                                                         |       |   |   |
| **Ratios:**                                                                 |       |                                                                       |       |                                                                         |       |   |   |
| Net loan  charge-offs to average total loans                                |       | N/A                                                                        |       | N/A                                                                          |       | N/A |   |
| Provision for  loan losses to average total loans                           |       | 0.06                                                                       | %          | 0.14                                                                         | %          | 0.36 | % |
| Allowance for  loan losses to total loans at the end of the period          |       | 1.22                                                                       | %          | 1.23                                                                         | %          | 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 |   |

 

WhileManagement believes that the amount of the allowance at June 30, 2006 was adequate,there can be no assurances that future economic or other factors will notadversely affect the Bank’s borrowers, or that the Bank’s asset quality may notdeteriorate through rapid growth, failure to identify and monitor potentialproblem loans or for other reasons, thereby causing loan losses to exceed thecurrent allowance.

**InvestmentPortfolio**

Themarket value of the Bank’s investment portfolio at June 30, 2006 was $21.9million having a yield of 4.06%.  Thiscompares to an investment portfolio of $22.2 million at December 31, 2005having a 3.54% yield.  The primarycategory of investment in the portfolio at June 30, 2006 was mortgage-backedsecurities.  At June 30, 2006, 23.8% ofthe mortgage-backed securities were tied to adjustable rate indices such asLIBOR or CMT.

22

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Thetable below summarizes the book value and market value and distribution of theBank’s investment securities at June 30, 2006 and December 31, 2005:

|                            | ** ** | **June 30, 2006**    | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Carrying**                   | ** ** | **Fair**                        | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                 | ** ** | **Value**                      | ** ** | **Value**                       | ** ** | **Value** | ** ** | **Value** | ** ** |
| ** **                 | ** ** | **($ in thousands)** | ** ** |
| Held to  maturity:         |       |                           |       |                            |       |   |   |   |   |
| Mortgage-backed securities |       | $                              | 4,642      |                            | $          | 4,445 |   | $ | 5,123 |   | $ | 5,017 |   |
| Corporate bonds            |       | 285                            |       | 294                             |       | 285 |   | 295 |   |
| Municipal                  |       | 442                            |       | 441                             |       | 443 |   | 452 |   |
| Total held to maturity     |       | 5,369                          |       | 5,180                           |       | 5,851 |   | 5,764 |   |
|                       |       |                           |       |                            |       |   |   |   |   |
| Available for  sale:       |       |                           |       |                            |       |   |   |   |   |
| Municipal                  |       | 743                            |       | 743                             |       | 343 |   | 343 |   |
| Federal agency             |       | 7,371                          |       | 7,371                           |       | 7,677 |   | 7,677 |   |
| Mortgage-backed            |       | 7,371                          |       | 7,371                           |       | 8,291 |   | 8,291 |   |
| Total available for sale   |       | 15,485                         |       | 15,485                          |       | 16,311 |   | 16,311 |   |
| Total                      |       | $                              | 20,854     |                            | $          | 20,665 |   | $ | 22,162 |   | $ | 22,075 |   |

 

Therewere no material changes since December 31, 2005 in the maturities or repricingof the investment securities.

**Deposits**

Totaldeposits increased $1.3 million or 1.57% to $85,348,753 at June 30, 2006 from$84,021,943 at December 31, 2005 primarily due to the increase in interestbearing deposits primarily money market accounts, which increased $4.5 millionor 20.7% to $25.9 million at June 30, 2006 from $21.4 million at December 31,2005.  This increase was offset by adecline in non-interest bearing deposit balances which decreased by $3.1million to $59.5 million at June 30, 2006 from $62.6 million at December 31,2005.  As interest rates rise, depositorstend to adjust balances into higher yielding account balances.  The deposit mix of non-interest bearing fundsto total deposits was 69.6% at June 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 June 30, 2006 and 2005 is contained in the “Distribution,Yield and Rate Analysis of Net Income” tables appearing on page 12 above in thesection entitled “Net Interest Income and Net Interest Margin.”  At June 30, 2006 and December 31, 2005, theBank had deposits from related parties of $10.8 million and $11.4 million,respectively.  Further, at June 30, 2006and December 31, 2005, deposits from escrow companies represented 41% and 47%of the Bank’s total deposits, respectively. There are some escrow company deposits which are also classified asdeposits from related parties.

**Borrowings**

At June 30, 2006 and December 31, 2005, the Bank had no FHLB advancesor overnight borrowings outstanding.   OnDecember 21, 2005, the Bank entered into a stand by letter of credit with theFHLB for $800,000.  This stand-by letterof credit, which remains outstanding as of June 30, 2006, was issued ascollateral for local agency deposits that the Bank is maintaining.

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**Stockholders’Equity**

Totalstockholders’ equity was $7.2 million at June 30, 2006 and $6.7 million atDecember 31, 2005.  There was an overallincrease of $549,348 comprised of:  netincome of $542,173; an increase in common stock and additional paid in capitalof $50,025 from the exercise of 7,500 stock options; and an increase inadditional paid-in capital of $8,148 attributable to the stock optioncompensation expense; offset by an increase of $50,998 in unrealized losses onsecurities available for sale.

**Liquidity**

Maintenanceof adequate liquidity requires that sufficient resources be available at alltimes to meet the Bank’s cash flow requirements.  Liquidity in a banking institution isrequired primarily to provide for deposit withdrawals and the credit needs ofits customers and to take advantage of investment opportunities as theyarise.  Liquidity management involves theBank’s ability to convert assets into cash or cash equivalents withoutsignificant 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 June 30, 2006, the Bank’s liquid assets totaled approximately $42.0million and its liquidity level, measured as the percentage of liquid assets tototal assets, was 45.0%.  At December 31,2005, the Bank’s liquid assets totaled approximately $39.0 million and itsliquidity level, measured as the percentage of liquid assets to total assets,was 42.7%.  Management anticipates thatliquid assets and the liquidity level will decline as the Bank becomes moreleveraged in the future.

Althoughthe Bank’s primary sources of liquidity include liquid assets and a stabledeposit base, the Bank has Fed funds lines of credit of $3 million and $2million with Union Bank of California and Pacific Coast Bankers’ Bank,respectively.  The Bank is a member ofthe Federal Home Loan Bank (“FHLB”).  As amember of the FHLB, the Bank may borrow funds collateralized by the Bank’ssecurities or qualified loans up to 25% of its total asset base.

**CapitalResources**

TheBank is subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can trigger mandatory and possibly additionaldiscretionary actions by the regulators that, if undertaken, could have amaterial effect on the Bank’s financial statements and operations.  Under capital adequacy guidelines andregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance sheet items as calculated under regulatoryaccepted accounting practices.  The Bank’scapital amounts and classification are also subject to qualitative judgments bythe regulators about 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 two components:  Tier 1 (common shareholders equity,qualifying perpetual preferred stock to certain limits, minority interests inequity accounts of consolidated subsidiary and trust preferred securities tocertain limits, less goodwill and other intangibles) and Tier 2 (supplementarycapital including allowance for possible credit losses to certain limits,certain preferred stock, eligible subordinated debt, and other qualifyinginstruments).

TheBank had Total Risk-Based and Tier I Risk-Based capital ratios of 13.12% and12.12%, respectively at June 30, 2006, as compared to 13.21% and 12.14%,respectively at December 31, 2005.  AtJune 30, 2006 and December 31, 2005, the Bank’s Leverage Capital Ratio were8.13% and 7.54%, respectively.  As ofJune 30, 2006 and December 31, 2005, the Bank was “well-capitalized.”  To be categorized as well-capitalized theBank must maintain Total Risk-Based, Tier I Risk-Based, and Tier I LeverageRatios of at least 10%, 6% and 5%, respectively.

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**InterestRate Risk Management**

Theprincipal objective of interest rate risk management (often referred to as “asset/liabilitymanagement”) is to manage the financial components of the Bank’s assets andliabilities so as to optimize the risk/reward equation for earnings and capitalin relation to changing interest rates. In order to identify areas of potential exposure to rate changes, theBank calculates its repricing gap on a quarterly basis.   It also performs an earnings simulationanalysis and market value of portfolio equity calculation on a quarterly basisto identify more dynamic interest rate exposures than those apparent instandard repricing gap analysis.

TheBank manages the balance between rate-sensitive assets and rate-sensitiveliabilities being repriced in any given period with the objective ofstabilizing net interest income during periods of fluctuating interestrates.  Rate-sensitive assets eithercontain a provision to adjust the interest rate periodically or mature withinone year.  Those assets include certainloans, 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 assets exceedrepricing liabilities in any given time period the Bank would be deemed to be “asset-sensitive”for that period, and if repricing liabilities exceed repricing assets in anygiven period the Bank would be deemed to be “liability-sensitive” for thatperiod.  The Bank seeks to maintain abalanced position over the period of one year in which it has no significantasset or liability sensitivity, to ensure net interest margin stability intimes of volatile interest rates.  Thisis accomplished by maintaining a significant level of loans and depositsavailable for repricing within one year.

TheBank is generally asset sensitive, meaning that net interest income tends torise as interest rates rise and net interest income tends to decline asinterest rates fall. At June 30, 2006, approximately 48.3% of loans have termsthat incorporate variable interest rates. Most variable rate loans are indexed to the Bank’s prime rate andchanges occur as the prime rate changes. Approximately 7.9% of all fixed rate loans at June 30, 2006 maturewithin twelve months.

Regardingthe investment portfolio, a preponderance of the portfolio consists of fixedrate products with typical average lives of between three and five years.  The mortgage-backed security portfolioreceives monthly principal repayments which has the effect of reducing thesecurities average lives as principal repayments levels may exceed expectedlevels.  Additionally, agency securitiescontain options by the agency to call the security, which would cause repaymentprior to scheduled maturity.

AtDecember 31, 2005, approximately 44.3% or $36.6 million of interest-earningassets will mature or reprice within one year, and approximately 99.9% or $60.8million of interest-bearing liabilities will reprice or mature over the sameperiod.

Liabilitycosts are generally based upon, but not limited to, U.S. Treasury interestrates and movements and rates paid by local competitors for similar products.

Thechange in net interest income may not always follow the general expectations ofan “asset-sensitive” or “liability-sensitive” balance sheet during periods ofchanging interest rates.  Thispossibility results from interest rates earned or paid changing by differingincrements and at different time intervals for each type of interest-sensitiveasset and liability.  The interest rategaps reported arise when assets are funded with liabilities having differentrepricing intervals.  Since these gapsare actively managed and change daily as adjustments are made in interest rateviews and market outlook, positions at the end of any period may not reflectthe Bank’s interest rate sensitivity in subsequent periods.  The Bank attempts to balance longer-termeconomic views against prospects for short-term interest rate changes in allrepricing intervals.

TheBank uses Risk Monitor software for asset/liability management in order tosimulate the effects of potential interest rate changes on the Bank’s netinterest margin.  These simulationsprovide static information on the projected fair market value of the Bank’sfinancial instruments under differing interest rate assumptions.  The simulation program utilizes specific loanand deposit maturities, embedded options, rates and re-pricing characteristicsto determine the effects of a given interest rate change on the Bank’s interestincome and interest expense.  Ratescenarios consisting of key rate and yield curve projections are run againstthe Bank’s investment, loan, deposit and borrowed funds portfolios.  The rate projections can be shocked (animmediate 

25

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and sustained change inrates, 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 June 30, 2006, there has beenno material change in interest rate risk since December 31, 2005.

**RiskManagement**

Varioustypes of risk are inherent in the business of banking.  Federal regulators have adopted examinationguidelines that scrutinize not only the bank’s level of risk, but also itsability to manage and control that risk. Regulators evaluate risks that affect capital, liquidity, and complianceto determine their potential effect on the safety and soundness of theBank.  Certain risks may be covered byinsurance coverage, but management must establish a risk management approachthat addresses all areas of risk.

TheBank has in place acceptable limits for each of the risks identified by theregulatory environment.  The Bank hasdefined the types of risk, and has mechanisms in place to manage, monitor andreport these risks.  Specifically, theBank focuses on six risk categories within each area of the Bank.  Those include credit risk, interest raterisk, liquidity risk, market/strategic risk, transaction risk and compliancerisk.

**Item3: CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controls and Procedures**

TheBank’s Chief Executive Officer and its Chief Financial Officer, afterevaluating the effectiveness of the Bank’s disclosure controls and proceduresas defined in Exchange Act Rules 13a-15(e) promulgated under the Exchange Actas of the end of the period covered by this report (the “Evaluation Date”) haveconcluded that as of the Evaluation Date, the Bank’s disclosure controls andprocedures were adequate and effective to ensure that material informationrelating to the Bank would be made known to them by others within the Bank,particularly during the period in which this report was being prepared.  Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in thereports that 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.

**Changes in Internal Controls**

Therewere no significant changes in the Bank’s internal controls over financialreporting or in other factors in the second quarter of 2006 that has materiallyaffected, or is reasonably likely to materially affect, the Bank’s internalcontrols over financial reporting.

**PART II**

**Item1:  Legal Proceedings** - None**Item 2: Unregistered Sales of Equity Securities and Use of Proceeds** - None**Item 3: Default of Senior Securities** - None

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**Item 4:  Submission of Matters to Vote of SecurityHolders**

On June 15, 2006, theBank held its annual meeting of shareholders for the purpose of electing theBoard of Directors until the next Annual Meeting of Shareholders.  The number of votes cast at the meetingrelating to the election of the Directors was as follows:

|                           | ** ** | **Authority  Given** | ** ** | **Authority  Withheld** | ** ** |
|---------------------------|------------|----------------------|------------|-------------------------|------------|
| Dann H. Bowman            |       | 597,129              |       | 900                     |       |
| Linda M Cooper            |       | 597,129              |       | 900                     |       |
| Pollyanna Franks          |       | 597,129              |       | 900                     |       |
| Gregg C. Gibson           |       | 597,129              |       | 900                     |       |
| H. H. Kindsvater          |       | 597,129              |       | 900                     |       |
| Richard G.  Malooly       |       | 597,129              |       | 900                     |       |
| Richard J.  Vanderpool    |       | 597,129              |       | 900                     |       |
| Bernard  Wolfswinkel, Jr. |       | 597,129              |       | 900                     |       |
| Thomas A.  Woodbury, D.O. |       | 597,129              |       | 900                     |       |
| Jeanette L. Young         |       | 597,129              |       | 900                     |       |

 

Thenumber of votes cast at the meeting to approve the Plan of Reorganization datedMarch 16, 2006, pursuant to which the Bank became a wholly owned subsidiary ofChino Commercial Bancorp, a newly formed bank holding company, was as follows:

| For: |   | 591,632 |   | Against: |   | 3,450 | Abstain: |   | 2,997 |   |
|------|--------|---------|--------|----------|--------|-------|----------|--------|-------|--------|

 

**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 of Chino Commercial Bank,  N.A. assumed by Bancorp on June 30, 2006 (1) |
| 10.2 | Employment Agreement for Dann H. Bowman (1)                                                         |
| 10.3 | Salary Continuation and Split-Dollar Agreements for  Dann H. Bowman (1)                             |
| 10.4 | Salary Continuation and Split-Dollar Agreements for  Jo Anne Painter (1)                            |
| 10.5 | Salary Continuation and Split-Dollar Agreements for  Roger Caberto (1)                              |
| 10.6 | Lease between the Chino Commercial Bank and Majestic  Realty Co. (1)                                |
| 10.7 | Agreement between the Bank and InterCept Group (1)                                                  |
| 10.8 | Lease between Bank and Majestic Realty Co.  commencing July 1, 2005 (1)                             |
| 10.9 | Agreement between Bank and InterCept Group  commencing November 1, 2004 (1)                         |
| 10   | Statement Regarding Computation of Net Income Per  Share (2)                                        |
| 21   | Subsidiaries of Registrant                                                                          |
| 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 byreference from the Bancorp’s Registration Statement on Form S-8 as filed withthe Securities and Exchange Commission on July 5, 2006.

(2)          The information requiredby this exhibit is incorporated from Note 3 of the Bank’s Financial Statementsincluded herein.

27

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities and Exchange Actof 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 
| Dated: August 11, 2006 | **CHINO COMMERCIAL BANK** |
|------------------------|---------------------------|
|                   | ** **                |
|                   | ** **                |
|                   | By:                       | /s/ Dann H. Bowman |   |
|                   |                      | Dann H. Bowman |
|                   |                      | President and Chief Executive Officer |
|                   |                      |   |
|                   |                      |   |
|                   | By:                       | /s/ Jo Anne Painter |   |
|                   |                      | Jo Anne Painter |
|                   |                      | Executive Vice President and Chief Financial Officer |

 

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