UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.  20549 __________________  FORM 10-Q __________________  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended March 31, 2011  Commission file number:  000-52098 __________________  CHINO COMMERCIAL BANCORP (Exact name of registrant as specified in its charter) _____________________________  California
     
     20-4797048State of incorporation
     
     I.R.S. EmployerIdentification Number14245 Pipeline AvenueChino, California
     
     91710Address of Principal Executive Offices
     
     Zip Code
  (909) 393-8880 Registrants telephone number, including area code ____________________________  Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.þYes ̈No  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ̈Yes ̈No  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer ̈Smaller Reporting Companyþ (Do not check if a smaller reporting company)  Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). ̈Yes þNo  On April 29, 2011, there were 748,314 shares of Chino Commercial Bancorp Common Stock outstanding.


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TABLE OF CONTENTS   PagePart I  Financial Information..........................................................................................................
     3Item 1. Financial Statements .................................................................................................
     3Consolidated Balance Sheets.....................................................................................
     3Consolidated Statements of Income...........................................................................
     4Consolidated Statements of Changes in Stockholders Equity.......................................
     5Consolidated Statements of Cash Flows.....................................................................
     6Notes to the Consolidated Financial Statements..........................................................
     7Item 2. Managements Discussion & Analysis of Financial Condition & Results of Operations..
     22Item 3. Qualitative & Quantitative Disclosures about Market Risk...........................................
     40Item 4. Controls and Procedures............................................................................................
     40Part II  Other Information.............................................................................................................
     41Item 1.  Legal Proceedings..................................................................................................
     41Item 1A.  Risk Factors........................................................................................................
     41Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds.....................................
     41Item 3.  Defaults upon Senior Securities...............................................................................
     41Item 4.  (Removed and Reserved).......................................................................................
     41Item 5.  Other Information..................................................................................................
     41Item 6.  Exhibits.................................................................................................................
     41Signatures.....................................................................................................................................
     42
      2


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PART 1  FINANCIAL INFORMATION Item 1 CHINO COMMERCIAL BANCORP CONSOLIDATED BALANCE SHEETS  March 31, 2011
     
     
     
     December 31, 2010(unaudited)
     
     
     
     (audited)ASSETS:Cash and due from banks
     $
     5,701,774
     
     
     $
     3,041,114Federal Funds Sold
     
     9,054,487
     
     
     
     4,660,527Total cash and cash equivalents
     
     14,756,261
     
     
     
     7,701,641Interest-bearing deposits in other banks
     
     15,661,252
     
     
     
     19,378,252Investment securities available for sale
     
     4,564,141
     
     
     
     4,706,994Investment securities held to maturity (fair value approximates$11,645,000 at March 31, 2011 and $12,302,000 at December 31, 2010)
     
     11,506,166
     
     
     
     12,153,915Total investments
     
     31,731,559
     
     
     
     36,239,161LoansReal estate
     
     51,053,743
     
     
     
     51,459,881Commercial
     
     7,700,304
     
     
     
     8,411,117Installment
     
     678,413
     
     
     
     649,455Gross loans
     
     59,432,460
     
     
     
     60,520,453Unearned fees and discounts
     
     (31,918
     )
     
     
     (27,204
     )Loans net of unearned fees and discount
     
     59,400,542
     
     
     
     60,493,249Allowance for loan losses
     
     (1,447,675
     )
     
     
     (1,442,153
     )Net loans
     
     57,952,867
     
     
     
     59,051,096Accrued interest receivable
     
     426,626
     
     
     
     382,943Restricted stock
     
     609,950
     
     
     
     626,250Fixed assets, net
     
     6,488,770
     
     
     
     6,342,670Foreclosed assets
     
     0
     
     
     
     516,534Prepaid & other assets
     
     2,875,098
     
     
     
     3,053,531Total assets
     $
     114,841,131
     
     
     $
     113,913,826LIABILITIES:DepositsNon-interest bearing
     $
     50,314,030
     
     
     $
     41,909,584Interest BearingNOW and money market
     
     31,958,312
     
     
     
     36,241,586Savings
     
     2,088,028
     
     
     
     2,085,092Time deposits less than $100,000
     
     5,553,271
     
     
     
     6,377,430Time deposits of $100,000 or greater
     
     13,840,493
     
     
     
     16,385,864Total deposits
     
     103,754,134
     
     
     
     102,999,556Accrued interest payable
     
     77,683
     
     
     
     104,967Accrued expenses & other payables
     
     689,551
     
     
     
     700,046Subordinated notes payable to subsidiary trust
     
     3,093,000
     
     
     
     3,093,000Total liabilities
     
     107,614,368
     
     
     
     106,897,569STOCKHOLDERS' EQUITYCommon stock, authorized 10,000,000 shares with no par value, issuedand outstanding 748,314 shares at March 31, 2011 and at December31, 2010.
     
     2,750,285
     
     
     
     2,750,285Retained earnings
     
     4,393,513
     
     
     
     4,190,208Accumulated other comprehensive income
     
     82,965
     
     
     
     75,764Total stockholders' equity
     
     7,226,763
     
     
     
     7,016,257Total liabilities & stockholders' equity
     $
     114,841,131
     
     
     $
     113,913,826The accompanying notes are an integral part of these consolidated financial statements.
  3


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CHINO COMMERCIAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (unaudited)  For the three months endedMarch 31,2011
     
     
     
     2010Interest incomeInvestment securities and due from banks
     $
     169,848
     
     
     $
     168,592Interest on Federal funds sold
     
     2,605
     
     
     
     0Interest and fee income on loans
     
     1,012,779
     
     
     
     1,076,447Total interest income
     
     1,185,232
     
     
     
     1,245,039Interest expenseDeposits
     
     114,898
     
     
     
     241,283Interest on FHLB borrowings
     
     0
     
     
     
     30Other borrowings
     
     50,963
     
     
     
     50,963Total interest expense
     
     165,861
     
     
     
     292,276Net interest income
     
     1,019,371
     
     
     
     952,763Provision for loan losses
     
     5,522
     
     
     
     263,685Net interest income afterprovision for loan losses
     
     1,013,849
     
     
     
     689,078Non-interest incomeService charges on deposit accounts
     
     304,657
     
     
     
     267,641Gain on sale of foreclosed assets
     
     61,151
     
     
     
     149Other miscellaneous income
     
     7,250
     
     
     
     5,934Dividend income from restricted stock
     
     2,770
     
     
     
     3,137Income from bank-owned life insurance
     
     17,225
     
     
     
     16,974Total non-interest income
     
     393,053
     
     
     
     293,835General and administrative expensesSalaries and employee benefits
     
     587,399
     
     
     
     524,022Occupancy and equipment
     
     114,581
     
     
     
     85,848Data and item processing
     
     96,972
     
     
     
     80,040Advertising and marketing
     
     16,153
     
     
     
     13,818Legal and professional fees
     
     70,233
     
     
     
     45,016Regulatory assessments
     
     75,447
     
     
     
     52,193Insurance
     
     10,425
     
     
     
     8,941Directors' fees and expenses
     
     15,601
     
     
     
     17,323Other expenses
     
     94,318
     
     
     
     101,725Total general & administrative expenses
     
     1,081,129
     
     
     
     928,926Income before income tax expense
     
     325,773
     
     
     
     53,987Income tax expense
     
     122,468
     
     
     
     12,702Net income
     $
     203,305
     
     
     $
     41,285Basic earnings per share
     $
     0.27
     
     
     $
     0.06Diluted earnings per share
     $
     0.27
     
     
     $
     0.06The accompanying notes are an integral part of these consolidated financial statements.
  4


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CHINO COMMERICAL BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY  AccumulatedOtherCompre-Number of
     
     
     
     Common
     
     
     
     Retained
     
     
     
     hensiveShares
     
     
     
     Stock
     
     
     
     Earnings
     
     
     
     Income
     
     
     
     TotalBalance at December 31, 2009 (audited)
     
     699,061
     
     
     $
     2,498,664
     
     
     $
     3,884,907
     
     
     $
     83,157
     
     
     $
     6,466,728Comprehensive income:Net income
     
     
     
     
     
     
     
     
     
     305,301
     
     
     
     
     
     
     
     305,301Change in unrealized gain on securitiesavailable for sale, net of tax
     
     
     
     
     
     
     
     
     
     
     
     
     
     (7,393
     )
     
     
     (7,393
     )Total comprehensive income
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     297,908Exercise of stock options, includingtax benefit
     
     82,541
     
     
     
     714,043
     
     
     
     
     
     
     
     
     
     
     
     714,043Stock repurchased and retired
     
     (33,288
     )
     
     
     (462,422
     )
     
     
     
     
     
     
     
     
     
     
     (462,422
     )Balance at December 31, 2010 (audited)
     
     748,314
     
     
     
     2,750,285
     
     
     
     4,190,208
     
     
     
     75,764
     
     
     
     7,016,257Comprehensive income:Net income
     
     
     
     
     
     
     
     
     
     203,305
     
     
     
     
     
     
     
     203,305Change in unrealized gain onsecurities available for sale, net of tax
     
     
     
     
     
     
     
     
     
     
     
     
     
     7,201
     
     
     
     7,201Total comprehensive income
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     210,506Balance at March 31, 2011 (unaudited)
     
     748,314
     
     
     $
     2,750,285
     
     
     $
     4,393,513
     
     
     $
     82,965
     
     
     $
     7,226,763The accompanying notes are an integral part of these consolidated financial statements.
   5


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CHINO COMMERCIAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)  Three Months Ended March 31,2011
     
     
     
     2010Cash Flows from Operating ActivitiesNet income
     $
     203,305
     
     
     $
     41,285Adjustments to reconcile net income to net cash providedby operating activities:Provision for loan losses
     
     5,522
     
     
     
     263,685Depreciation and amortization
     
     53,843
     
     
     
     34,343Net amortization (accretion) of securities
     
     18,229
     
     
     
     (931
     )Amortization of deferred loan (fees) costs
     
     4,714
     
     
     
     979Gain on sale of foreclosed assets
     
     (61,151
     )
     
     
     (149
     )Deferred income taxes (benefit)
     
     (30,286
     )
     
     
     (3,322
     )Net changes in:Accrued interest receivable
     
     (43,683
     )
     
     
     11,290Other assets
     
     203,684
     
     
     
     (57,017
     )Accrued interest payable
     
     (27,284
     )
     
     
     21,569Other liabilities
     
     (10,495
     )
     
     
     36,342Net cash provided by operating activities
     
     316,712
     
     
     
     348,074Cash Flows from Investing ActivitiesNet change in interest-bearing deposits in other banks
     
     3,717,000
     
     
     
     (1,238,650
     )Activity in investment securities available for saleRepayments and calls
     
     155,230
     
     
     
     322,739Activity in  investment securities:held to maturityRepayments and calls
     
     629,379
     
     
     
     205,498Loan originations and principal collections, net
     
     1,087,993
     
     
     
     793,590Proceeds from sale of foreclosed assets
     
     577,685
     
     
     
     25,010Purchase of premises and equipment
     
     (200,257
     )
     
     
     (308,527
     )Net cash provided (used) by investing activities
     
     5,983,330
     
     
     
     (200,340
     )Cash Flows from Financing ActivitiesNet increase in deposits
     
     754,578
     
     
     
     8,151,826Net decrease in borrowings
     
     0
     
     
     
     (994,000
     )Proceeds from the exercise of stock options
     
     0
     
     
     
     42,594Payments for stock repurchases
     
     0
     
     
     
     (82,250
     )Net cash provided (used) by financing activities
     
     754,578
     
     
     
     7,118,170Net increase in cash and cash equivalents
     
     7,054,620
     
     
     
     7,265,904Cash and Cash Equivalents at Beginning of Period
     
     7,701,641
     
     
     
     3,089,300Cash and Cash Equivalents at End of Period
     $
     14,756,261
     
     
     $
     10,355,204Supplemental InformationInterest paid
     $
     193,145
     
     
     $
     270,707Income taxes paid
     $
     -
     
     
     $
     -The accompanying notes are an integral part of these consolidated financial statements.
  6


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CHINO COMMERCIAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2011  Note 1  The Business of Chino Commercial Bancorp  Chino Commercial Bancorp (the Company) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in Chino, California. The Company was incorporated in March 2006 andacquired all of the outstanding shares of Chino Commercial Bank, N.A. (the Bank) effective July 1, 2006. The Companys principal subsidiary is the Bank, and the Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries as it may acquire or establish. The Companys principal source of income is dividends from the Bank, although supplemental sources of income may be explored in the future. The expenditures of the Company, including (but not limited to) the payment of dividends to shareholders, if and when declared by the Board of Directors, the cost of servicing debt, legal fees, audit fees, and shareholder costs, will generally be paid from dividends paid to the Company by the Bank.  The Companys only other direct subsidiary is Chino Statutory Trust I, which was formed on October 25, 2006 solely to facilitate the issuance of capital trust pass-through securities. This additional regulatory capital enhances the Companys ability to maintain favorable risk-based capital ratios. Pursuant to Accounting Standards Codification 810,Consolidation, Chino Statutory Trust I is not reflected on a consolidated basis in the consolidated financial statements of the Company. The Companys Administrative Offices are located at 14245 Pipeline Avenue, Chino, California 91710 and the telephone number is (909) 393-8880. References herein to the Company include the Company and its consolidated subsidiary, unless the context indicates otherwise.  The Bank is a national bank which was organized under the laws of the United States in December 1999 and commenced operations on September 1, 2000.  The Bank operates three full-service banking offices. The Banks main branch office and administrative offices are located at 14245 Pipeline Avenue, Chino, California. In January 2006 the Bank opened its Ontario branch located at 1551 South Grove Avenue, Ontario, California. In April 2010, the Bank opened its Rancho Cucamonga branch located at 8229 Rochester Avenue, Rancho Cucamonga, California. As a community-oriented bank, the Bank offers a wide array of commercial and consumer services which would generally be offered by a locally-managed, independently-operated bank.  On July 2, 2010, the Company the acquired property at 14245 Pipeline Avenue, Chino, California which became the main branch and administrative headquarters in January 2011.  Note 2  Basis of Presentation and Consolidation  The accompanying unaudited consolidated financial statements for the three months ended March 31, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements. They do not, however, include all of the information and footnotes required by such accounting principles for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals considered necessary for a fair presentation have been included.  Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole. Certain prior period amounts have been reclassified to conform to current period classification. The interim financial information should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission.  Note 3  Critical Accounting Policies  The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Companys financial statements and accompanying notes.  Various elements of the Companys accounting policies, by their nature, are inherently subject to estimation


techniques, valuation assumptions and other subjective assessments. Critical accounting policies are those that involve the most complex and subjective decisions and assessments and have the greatest potential impact on the Companys results of operation. There were no significant changes to the Companys critical accounting policies discussed in the Form 10-K for the year ended December 31, 2010.  7


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Note 4  Recent Accounting Pronouncements:  In January 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements.  ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others.  It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers.  It also requires the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis, for assets measured at fair value on a recurring basis.  The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements.   These new disclosure requirements became effective on January 1, 2010, except for the requirement concerning gross presentation of Level 3 activity, which became effective on January 1, 2011.  There was no significant effect to the Companys financial statement disclosure upon adoption of this ASU.  In July 2010, the FASB issued ASU No. 2010-20,Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, requiring significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, entities are required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators.  Both new and existing disclosures must be disaggregated by portfolio segment or class.  The disaggregation of information is based on how an entity develops its allowance for credit losses and how it manages its credit exposure. This ASU is effective for interim and annual reporting periods ending after December 15, 2010. The Company has included these disclosures in Note 6, Loans and Allowance for Loan Losses.  In January 2011, the FASB issued ASU No. 2011-01,Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310):A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, which clarifies whether a restructuring constitutes a troubled debt restructuring. The update clarifies the guidance on a creditor's evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. In addition, under this ASU a creditor is precluded from using the effective interest rate test when evaluating whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. Management is assessing the impact of this ASU on the companys financial statements and disclosures.  8


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Note 5  Investment Securities  The amortized cost and fair value of investment securities at March 31, 2011 are as follows:  Gross
     
     GrossAmortized
     
     Unrealized
     
     Unrealized
     
     FairCost
     
     Gains
     
     Losses
     
     ValueSecurities available for sale:Municipal bonds
     $      743,328
     
     $        15,509
     
     $                  -
     
     $      758,837Mortgage-backed securities
     3,679,836
     
     125,985
     
     (517)
     
     3,805,304$   4,423,164
     
     $      141,494
     
     $           (517)
     
     $   4,564,141Securities held to maturity:Municipal bonds
     $      434,175
     
     $          1,208
     
     $                  -
     
     $      435,383Federal agency
     2,500,000
     
     39,850
     
     -
     
     2,539,850Mortgage-backed securities
     8,490,018
     
     96,230
     
     -
     
     8,586,248Corporate
     81,973
     
     1,545
     
     -
     
     83,518$ 11,506,166
     
     $      138,833
     
     $                 -
     
     $ 11,644,999
  The amortized cost and fair value of investment securities as of March 31, 2011 by contractual maturity are shown below:  Available for Sale
     
     Held to MaturityAmortized
     
     Fair
     
     Amortized
     
     FairCost
     
     Value
     
     Cost
     
     ValueWithin 1 year
     $                  -
     
     $                 -
     
     $                 -
     
     $                 -After 1 year through 5 years
     -
     
     -
     
     81,973
     
     83,518After 5 years through 10 years
     -
     
     -
     
     2,934,175
     
     2,975,233After 10 years through 17 years
     743,328
     
     758,837
     
     -
     
     -Mortgage-backed securities
     3,679,836
     
     3,805,304
     
     8,490,018
     
     8,586,248$   4,423,164
     
     $   4,564,141
     
     $ 11,506,166
     
     $ 11,644,999
  Information pertaining to securities with gross unrealized losses at March 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:  Less than 12 Months
     
     Over 12 MonthsGross
     
     
     
     GrossUnrealized
     
     Fair
     
     Unrealized
     
     FairLosses
     
     Value
     
     Losses
     
     ValueSecurities available for saleMortgage-backed securities
     517
     
     56,143
     
     0
     
     0
   Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.   9


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At March 31, 2011, two securities have unrealized losses with aggregate depreciation of 0.9% from the Companys amortized cost basis. These unrealized losses relate to mortgage-backed securities issued by federally sponsored agencies, which are fully secured by conforming residential loans. Since the Company has the ability to hold these securities until estimated maturity, no declines are deemed to be other than temporary.  Note 6  Loans and Allowance for Loan Losses  At December 31, 2010, the Company had 11 impaired loans totaling $4,167,572, all of which were on a non-accrual basis. Only one of those loans was past due over 90 days. At March 31, 2011, the same 11 impaired loans totaling $4,087,364 were on a non-accrual basis. Only one of those loans was past due over 90 days. There were no accruing loans past due over 30 days. As of March 31, 2011, there was one overdraft overdue 30 days. Changes in the allowance for loan losses are summarized as follows:  Balance January 1. 2011
     
     $
     1,442,153Loans charged off
     
     
     -Loan recoveries
     
     
     -Provision (credit) charged to expenseOne to four residential
     
     
     1,902Residential Income
     
     
     6,630Commercial real estate
     
     
     (4,382
     )Commercial and industrial
     
     
     1,655Consumer
     
     
     (325
     )Installement
     
     
     213Other
     
     
     (171
     )Provision charged to expense
     
     5,522Balance March 31, 2011
     
     $
     1,447,675
   Loans serviced for others are portions of loans participated out to other banks. Loan balances are net of these participated balances. The unpaid principal balance of loans serviced for others was $1,693,650 and $1,692,555 at March 31, 2011 and December 31, 2010, respectively.   10


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The following tables present loans and the allowance for loan losses by segment as of March 31, 2011 and December 31, 2010:  Loans and Allowance for Loan Losses (by loan segment)As of March 31, 2011One to Four
     
     Residential
     
     Commercial
     
     Commercial andResidential
     
     Income
     
     Real Estate
     
     Industrial
     
     Consumer
     
     Installment
     
     Other
     
     TotalLoans:Balance
     $ 2,734,627
     
     $  475,321
     
     $ 48,319,117
     
     $      7,211,869
     
     $   30,457
     
     $ 647,956
     
     $ 13,113
     
     $ 59,432,460Individually evaluatedfor impairment
     707,486
     
     -
     
     2,333,070
     
     1,046,808
     
     -
     
     -
     
     -
     
     4,087,364Collectively evaluatedfor impairment
     2,027,141
     
     475,321
     
     45,986,047
     
     6,165,061
     
     30,457
     
     647,956
     
     13,113
     
     55,345,096Allowance for loan losses:Balance
     48,237
     
     9,506
     
     1,136,404
     
     242,898
     
     421
     
     9,391
     
     818
     
     1,447,675Individually evaluatedfor impairment
     16,697
     
     -
     
     55,060
     
     24,742
     
     -
     
     -
     
     -
     
     96,499Collectively evaluatedfor impairment
     $      31,540
     
     $      9,506
     
     $   1,081,344
     
     $         218,156
     
     $        421
     
     $     9,391
     
     $      818
     
     $   1,351,176
  Loans and Allowance for Loan Losses (by loan segment)As of December 31, 2010One to Four
     
     Residential
     
     Commercial
     
     Commercial andResidential
     
     Income
     
     Real Estate
     
     Industrial
     
     Consumer
     
     Installment
     
     Other
     
     TotalLoans:Balance
     $ 2,771,247
     
     $  479,303
     
     $ 48,209,331
     
     $      8,380,407
     
     $   28,034
     
     $ 621,420
     
     $ 30,711
     
     $ 60,520,453Individually evaluatedfor impairment
     723,115
     
     -
     
     2,372,879
     
     1,071,578
     
     -
     
     -
     
     -
     
     4,167,572Collectively evaluatedfor impairment
     2,048,132
     
     479,303
     
     45,836,452
     
     7,308,829
     
     28,034
     
     621,420
     
     30,711
     
     56,352,881Allowance for loan losses:Balance
     46,335
     
     2,876
     
     1,140,786
     
     241,243
     
     746
     
     9,178
     
     989
     
     1,442,153Individually evaluatedfor impairment
     17,066
     
     -
     
     56,000
     
     25,329
     
     -
     
     -
     
     -
     
     98,395Collectively evaluatedfor impairment
     $      29,269
     
     $      2,876
     
     $   1,084,786
     
     $         215,914
     
     $        746
     
     $     9,178
     
     $      989
     
     $   1,343,758
  Management segregates the loan portfolio into portfolio segments for purposes of developing and documenting a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.  The Companys loan portfolio is segregated into the following portfolio segments.  One to Four Family Residential.This portfolio segment consists of the origination of first mortgage loans and home equity second mortgage loans secured by one-to four-family owner occupied residential properties located in the Companys market area. The Company has experienced no foreclosures on its owner occupied loan portfolio during recent periods and believes this is due mainly to its conservative lending strategies including its non-participation in interest only, Option ARM, sub-prime or Alt-A loans.  11


---



One to Four Family Income.Thisportfolio segment consists of the origination of first mortgage loans secured by one-to four-family non-owner occupied residential properties in its market area. Such lending involves additional risks arising from the use of the properties by non-owners.  Commercial Real Estate Loans.This portfolio segment includes loans secured by commercial real estate, including multi-family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than one-to four-family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrowers ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.  Commercial and Industrial Loans.This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than one- to four-family residential loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrowers business.  Consumer Loans.This portfolio segment includes loans to individuals for overdraft protection and personal lines of credit.  Installment Loans.This portfolio segment includes loans to individuals for personal purposes, including but not limited to automobile loans. The following tables summarize the loan portfolio at March 31, 2011 and December 31, 2010 by credit risk profiles based on internally assigned grades.Information has been updated for each credit quality indicator as of those dates.  Credit Quality Indicators (by loan class) As of March 31, 2011  GradePass
     
     
     
     Special Mention
     
     
     
     Substandard
     
     
     
     Doubtful
     
     TotalOne to four residential:Closed-end
     $
     1,775,234
     
     
     
     $                       --
     
     
     $
     959,393
     
     
     $
     --
     $
     2,734,627Revolvers
     
     
     
     
     
     --
     
     
     
     --
     
     
     
     --
     
     --Residential income
     
     475,321
     
     
     
     --
     
     
     
     --
     
     
     
     --
     $
     475,321Commercial real estate:Owner occupied
     
     19,618,938
     
     
     
     423,247
     
     
     
     3,549,401
     
     
     
     --
     
     23,591,586Non-owner occupied
     
     22,397,957
     
     
     
     798,184
     
     
     
     1,531,390
     
     
     
     --
     
     24,727,531Commercial and industrial:Secured
     
     1,989,780
     
     
     
     -
     
     
     
     1,645,652
     
     
     
     --
     
     3,635,432Unsecured
     
     3,107,572
     
     
     
     230,025
     
     
     
     238,840
     
     
     
     --
     
     3,576,437Consumer
     
     30,457
     
     
     
     --
     
     
     
     --
     
     
     
     --
     
     30,457Installment
     
     647,956
     
     
     
     --
     
     
     
     --
     
     
     
     --
     
     647,956Other
     
     13,113
     
     
     
     --
     
     
     
     --
     
     
     
     --
     
     13,113Total
     $
     50,056,327
     
     
     $
     1,451,457
     
     
     $
     7,924,676
     
     
     $
     --
     $
     59,432,460
     12


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Credit Quality Indicators (by loan class) As of December 31, 2010  GradePass
     
     
     
     Special Mention
     
     
     
     Substandard
     
     
     
     Doubtful
     
     TotalOne to four residential:Closed-end
     $
     1,795,797
     
     
     
     $                       --
     
     
     $
     975,450
     
     
     $
     --
     $
     2,771,247Revolvers
     
     --
     
     
     
     --
     
     
     
     --
     
     
     
     --
     
     --Residential income
     
     479,303
     
     
     
     --
     
     
     
     --
     
     
     
     --
     $
     479,303Commercial real estate:Owner occupied
     
     20,259,055
     
     
     
     313,041
     
     
     
     3,081,037
     
     
     
     --
     
     23,653,133Non-owner occupied
     
     22,206,112
     
     
     
     802,731
     
     
     
     1,547,355
     
     
     
     --
     
     24,556,198Commercial and industrial:Secured
     
     2,470,494
     
     
     
     150,000
     
     
     
     1,732,331
     
     
     
     --
     
     4,352,825Unsecured
     
     3,485,320
     
     
     
     231,852
     
     
     
     310,410
     
     
     
     --
     
     4,027,582Consumer
     
     28,034
     
     
     
     --
     
     
     
     --
     
     
     
     --
     
     28,034Installment
     
     621,420
     
     
     
     --
     
     
     
     --
     
     
     
     --
     
     621,420Other
     
     30,711
     
     
     
     --
     
     
     
     --
     
     
     
     --
     
     30,711Total
     $
     51,376,246
     
     
     $
     1,497,624
     
     
     $
     7,646,583
     
     
     $
     --
     $
     60,520,453
  The Companys policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that there continuance as assets is not warranted. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.  When assets are classified as special mention, substandard or doubtful, the Company allocates a portion of the related general loss allowances to such assets as the Company deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by regulatory agencies, which can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.    13


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The following tables set forth certain information with respect to the Banks portfolio delinquencies by loan class and amount as of March 31, 2011 and December 31, 2010:  Age Analysis of Past Due Loans (by class) As of March 31, 2011 RecordedGreater
     
     
     
     
     
     
     
     Investment30-59 Days
     
     60-89 Days
     
     Than
     
     Total
     
     
     
     Total
     
     90 Days or morePast Due
     
     Past Due
     
     90 Days
     
     Past Due
     
     Current
     
     Loans
     
     and AccruingOne to four residential:Closed-end
     $                 --
     
     $                 --
     
     $                 --
     
     $                 --
     
     $    2,734,627
     
     $    2,734,627
     
     $                     --Residential income
     --
     
     --
     
     --
     
     --
     
     475,321
     
     475,321
     
     --Commercial real estate:Owner occupied
     --
     
     --
     
     440,723
     
     440,723
     
     23,150,863
     
     23,591,586
     
     --Non-owner occupied
     --
     
     --
     
     --
     
     --
     
     24,727,531
     
     24,727,531
     
     --Commercial and industrial:Secured
     --
     
     --
     
     --
     
     --
     
     3,635,432
     
     3,635,432
     
     --Unsecured
     --
     
     --
     
     --
     
     --
     
     3,576,437
     
     3,576,437
     
     ----
     
     
     
     -Consumer
     --
     
     --
     
     --
     
     --
     
     30,457
     
     30,457
     
     ----
     
     
     
     -Installment
     --
     
     --
     
     --
     
     --
     
     647,956
     
     647,956
     
     ----
     
     
     
     -Other
     --
     
     --
     
     --
     
     --
     
     13,113
     
     13,113
     
     --Total
     $                 --
     
     $                 --
     
     $       440,723
     
     $       440,723
     
     $  58,991,737
     
     $  59,432,460
     
     $                     --
   Age Analysis of Past Due Loans (by class) As of December 31, 2010 RecordedGreater
     
     
     
     
     
     
     
     Investment30-59 Days
     
     60-89 Days
     
     Than
     
     Total
     
     
     
     Total
     
     90 Days or morePast Due
     
     Past Due
     
     90 Days
     
     Past Due
     
     Current
     
     Loans
     
     and AccruingOne to four residential:Closed-end
     $                 --
     
     $                 --
     
     $                 --
     
     $                 --
     
     $    2,771,247
     
     $    2,771,247
     
     $                     --Residential income
     --
     
     --
     
     --
     
     --
     
     479,303
     
     479,303
     
     --Commercial real estate:Owner occupied
     --
     
     --
     
     440,723
     
     440,723
     
     23,212,410
     
     23,653,133
     
     --Non-owner occupied
     --
     
     --
     
     --
     
     --
     
     24,556,198
     
     24,556,198
     
     --Commercial and industrial:Secured
     --
     
     --
     
     --
     
     --
     
     4,352,825
     
     4,352,825
     
     --Unsecured
     --
     
     --
     
     --
     
     --
     
     4,027,582
     
     4,027,582
     
     --Consumer
     --
     
     --
     
     --
     
     --
     
     28,034
     
     28,034
     
     --Installment
     --
     
     --
     
     --
     
     --
     
     621,420
     
     621,420
     
     --Other
     --
     
     --
     
     --
     
     --
     
     30,711
     
     30,711
     
     --Total
     $                 --
     
     $                 --
     
     $       440,723
     
     $       440,723
     
     $  60,079,730
     
     $  60,520,453
     
     $                     --
    14


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The following tables summarize impaired loans by loan class as of March 31, 2011 and December 31, 2010:  Impaired Loans (by loan class) As of and For the Three Months Ended March 31, 2011  Unpaid
     
     
     
     Average
     
     InterestRecorded
     
     Principal
     
     Related
     
     Recorded
     
     IncomeInvestment
     
     Balance
     
     Allowance
     
     Investment
     
     RecognizedWith an allowance recorded:One to four residential:Closed-end
     $              707,486
     
     $           707,486
     
     $             16,697
     
     $       725,660
     
     $                --Commercial real estate:Owner occupied
     1,466,531
     
     1,466,531
     
     34,610
     
     1,479,591
     
     --Non-owner occupied
     866,540
     
     866,540
     
     20,450
     
     873,323
     
     --Commercial and industrial:Secured
     1,046,807
     
     1,046,807
     
     24,742
     
     1,060,937
     
     --Total:One to four residential
     $              707,486
     
     $           707,486
     
     $             16,697
     
     $       725,660
     
     $                --Commercial real estate
     $           2,333,071
     
     $        2,333,071
     
     $             55,060
     
     $    2,352,914
     
     $                --Commercial and industrial
     $           1,046,807
     
     $        1,046,807
     
     $             24,742
     
     $    1,060,937
     
     $                --
    Impaired Loans (by loan class) As of and For the Year Ended December 31, 2010  Unpaid
     
     
     
     Average
     
     InterestRecorded
     
     Principal
     
     Related
     
     Recorded
     
     IncomeInvestment
     
     Balance
     
     Allowance
     
     Investment
     
     RecognizedWith an allowance recorded:One to four residential:Closed-end
     $              723,115
     
     $           723,115
     
     $             17,066
     
     $       346,484
     
     -Commercial real estate:Owner occupied
     1,492,530
     
     1,492,530
     
     35,224
     
     685,117
     
     -Non-owner occupied
     880,349
     
     880,349
     
     20,776
     
     473,639
     
     -Commercial and industrial:Secured
     1,071,578
     
     1,071,578
     
     25,329
     
     302,791
     
     -Total:One to four residential
     $              723,115
     
     $           723,115
     
     $             17,066
     
     $       346,484
     
     $                -Commercial real estate
     $           2,372,879
     
     $        2,372,879
     
     $             56,000
     
     $    1,158,756
     
     $                -Commercial and industrial
     $           1,071,578
     
     $        1,071,578
     
     $             25,329
     
     $       302,791
     
     $                -
   15


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A summary of nonaccrual loans by loan class is as follows:  Loans on Nonaccrual Status (by loan class)  March 31, 2011
     
     December 31, 2010One to four residential:Closed-end
     $                707,486
     
     $                723,115Commercial real estate:Owner occupied
     1,466,531
     
     1,492,530Non-owner occupied
     866,540
     
     880,349Commercial and industrial:Secured
     1,046,807
     
     1,071,578Total
     $             4,087,364
     
     $             4,167,572
    Note 7  Subordinated Notes Payable to Subsidiary Trust  On October 25, 2006, Chino Statutory Trust I (the Trust), a newly formed Connecticutstatutory business trust and a wholly-owned subsidiary of the Company, issued an aggregate of $3.0 million of principal amount of Capital Securities (the Trust Preferred Securities) and $93,000 in Common Securities. The securities issued by the Trust are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. The entire proceeds to the Trust from the sale of the Trust Preferred Securities were used by the Trust to purchase $3,000,000 in principal amount of the Junior Subordinated Deferrable Interest Debentures due December 15, 2036 issued by the Company (the Subordinated Debt Securities). The Company issued an additional $93,000 in principal amount of the Junior Subordinated Deferrable Interest Debentures due December 15, 2036, in exchange for its investment in the Trusts Common Securities. The Subordinated Debt Securities bear interest at the rate of 6.795% for the first five years from October 27, 2006 to December 15, 2011 and at a variable interest rate to be adjusted quarterly equal to LIBOR (1.435% at December 31, 2010) plus 1.68% thereafter.  During 2006 and 2007 the Company used approximately $522,000 and $2,478,000, respectively, from the proceeds of $3.0 million to repurchase and retire Company stock. There was no cost to the Trust associated with the issuance.  As of March 31, 2011 and 2010, accrued interest payable to the Trust amounted to $8,494. Interest expense for Trust Preferred Securities amounted to $50,963 for each of the quarters ended March 31, 2011 and 2010. As the Company has no other source of income other than dividends from the Bank, payment of the interest relating to the Trust Preferred Securities depends on the Banks continuing ability to pay sufficient dividends to cover such payments.  The Bank is currently required by the Formal Agreement with the OCC to obtain the prior approval of the OCC prior to paying any dividends to the Company.  See Recent Developments in Item 2 below.  Note 8  Stock Based Compensation  Under the Companys stock option plan, the Company granted incentive stock options to officers and employees, and non-qualified stock options to its directors, officers and employees. The Plan terminated on July 13, 2010, and no options can be granted under the Plan thereafter, but such termination did not affect any Options previously granted. Therefore, at March 31, 2011, no shares were available for the grant of options compared to 108,405 shares at March 31, 2010. At March 31, 2011 and 2010, options covering 13,628 and 92,894 shares, respectively, were outstanding. The Plan provides that the exercise price of these options shall not be less than the market price of the common stock on the date granted. Incentive options began vesting after one year from date of grant at a rate of 33% per year. Non-qualified options vested as follows: 25% on the date of the grant, and 25% per year thereafter. All options expire 10 years after the date of grant. Compensation cost relating to share-based payment transactions is recognized in the financial statements over the vesting period of the options.  16


---



The most recent grant of options occurred in 2003.Thus, there was no stock-based compensation expense for the three months ended March 31, 2011 and 2010.  Note 9 - Earnings per share (EPS)  Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings.  The weighted-average number of shares used in computing basic and diluted earnings per share is as follows:  Earnings per share CalculationFor the three months ended March 31,2011
     
     2010Weighted
     
     
     
     
     
     WeightedNet
     
     Average
     
     Per Share
     
     Net
     
     Average
     
     Per ShareIncome
     
     Shares
     
     Amount
     
     Income
     
     Shares
     
     AmountBasic earnings
     
     $       203,305
     
     748,314
     
     $        0.27
     
     $      41,285
     
     698,621
     
     $        0.06Effect of dilutive shares:assumed exercise ofoutstanding options
     
     
     
     1,151
     
     0.00
     
     
     
     38,575
     
     0.00Diluted earnings per share
     
     $       203,305
     
     749,465
     
     $        0.27
     
     $      41,285
     
     737,196
     
     $        0.06
    Note 10 - Off-Balance-Sheet Commitments  The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to grant loans, unadvanced lines of credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  The Companys exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. At March 31, 2011 and December 31, 2010, the Company had $3.8 million and $5.6 million, respectively, of off-balance sheet commitments to extend credit. These commitments represent a credit risk to the Company. At March 31, 2011 and December 31, 2010, the Company had no unadvanced standby letters of credit.  Commitments to grant loans are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluateseach customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, equipment, income-producing commercial properties, residential properties, and properties under construction.  Note 11  Fair Value Measurement  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The tables below present information about the Companys


assets measured at fair value on a recurring and non-recurring basis as of March 31, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. No liabilities were measured at fair value at March 31, 2011 and December 31, 2010.  17


---



The fair value hierarchy is as follows:  ·Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. ·Level 2 Inputs - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. ·Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entitys own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.  The following section describes the valuation methodologies used for assets measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.  Financial assets measured at fair value on a recurring basis include the following:  Securities Available for Sale. The securities classified as available for sale, are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds terms and conditions, among other things. The following table presents the balances of securities available for sale as of March 31, 2011 and December 31, 2010.  Quoted Prices
     
     Significantin Active
     
     OtherMarkets for
     
     Observable
     
     SignificantIdentical Assets
     
     Inputs
     
     Unobservable InputsDescription
     
     Balance
     
     (Level 1)
     
     (Level 2)
     
     (Level 3)Securities Available for Saleat March 31, 2011Municipal bonds
     
     $         758,837
     
     $                     -
     
     $         758,837
     
     $                     -Mortgage-backed securities
     
     3,805,304
     
     -
     
     3,805,304
     
     -Total
     
     $      4,564,141
     
     $                     -
     
     $      4,564,141
     
     $                     -at December 31, 2010Municipal bonds
     
     $         753,616
     
     $                     -
     
     $         753,616
     
     $                     -Mortgage-backed securities
     
     3,953,378
     
     -
     
     3,953,378
     
     -Total
     
     $      4,706,994
     
     $                     -
     
     $      4,706,994
     
     $                     -
   Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.   18


---



Loans held for sale  Loans held for sale are required to be measured at the lower of cost or fair value. In order to determine fair value, management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. At March 31, 2011 and December 31, 2010, there were no loans held for sale.  Impaired loans  Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2.  Impaired loans that are not collateral dependent are carried at the present value of expected future cash flows discounted at the loans effective interest rate. Troubled debt restructurings are also carried at the present value of expected future cash flows. However, expected cash flows for troubled debt restructurings are discounted using the loans original effective interest rate rather than the modified interest rate. Since fair value of these loans is based on managements own projection of future cash flows, the fair value measurements are categorized as Level 3 measurements.  The following presents impaired loans measured at fair value on a non-recurring basis as of March 31, 2011 and December 31, 2010.  Quoted Prices
     
     Significantin Active
     
     OtherMarkets for
     
     Observable
     
     SignificantIdentical Assets
     
     Inputs
     
     Unobservable InputsDescription
     
     Balance
     
     (Level 1)
     
     (Level 2)
     
     (Level 3)Impaired loans net of ALLLat March 31, 2011
     
     $      3,990,865
     
     $                     -
     
     $      1,078,250
     
     $      2,912,615at December 31, 2010
     
     $      4,069,177
     
     $                     -
     
     $      1,108,110
     
     $      2,961,067
  Other Real Estate Owned  Real estate acquired through foreclosure or other proceedings (other real estate owned) is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed, and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal.The fair values of real properties initially are determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market or in the collateral. Subsequent valuations of the real properties are based on management estimates or on updated appraisals. Other real estate owned is categorized under Level 3 when significant adjustments are made by management to appraised values based on unobservable inputs. Otherwise, Other real estate owned is categorized under Level 2 if their values are based solely on appraisals.   19


---



The following table summarizes the Companys OREO that was measured at fair value on a nonrecurring basis as of March 31, 2011 and December 31, 2010:   Quoted Prices
     
     Significantin Active
     
     OtherMarkets for
     
     Observable
     
     SignificantIdentical Assets
     
     Inputs
     
     Unobservable InputsDescription
     
     Balance
     
     (Level 1)
     
     (Level 2)
     
     (Level 3)Other real estate owned netof valuation allowanceat March 31, 2011
     
     $                     -
     
     $                     -
     
     $                     -
     
     $                     -at December 31, 2010
     
     $         516,534
     
     $                     -
     
     $         516,534
     
     $                     -
  ASC 825,Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not the financial instruments are recognized in the balance sheet at fair value or historical cost. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.  The following methods and assumptions were used to estimate the fair value of financial instruments. For cash and cash equivalents, Federal Home Loan Bank stock, loans held for sale, variable-rate loans, accrued interest receivable and payable, demand deposits and savings, and short-term borrowings, the carrying amount is estimated to be fair value. For securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based in quoted market prices of comparable instruments. The fair values for fixed-rate loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms. The fair value of life insurance is based on the cash surrender value, as determined by the insurer. Fair values for deposit liabilities with a stated maturity date (time deposits) and for certificates of deposit in other banks are estimated using a discounted cash flow calculation that applies interest rates currently being offered on these accounts to a schedule of aggregated expected monthly maturities on time deposits. The fair value of long-term debt is determined utilizing the current market for like-kind instruments of a similar maturity and structure. The fair value of financial instruments with off-balance sheet risk is not considered to be material, so they are not included in the following table:   20


---



Fair Value of Financial Instruments   March 31, 2011
     
     December 31, 2010Carrying
     
     Fair
     
     Carrying
     
     FairAmount
     
     Value
     
     Amount
     
     ValueFinancial assets:Cash and cash equivalents
     $   14,756,261
     
     $   14,756,261
     
     $     7,701,641
     
     $     7,701,641Interest-bearing deposits with other banks
     15,661,252
     
     15,685,411
     
     19,378,252
     
     19,407,125Investment securities available for sale
     4,564,141
     
     4,564,141
     
     4,706,994
     
     4,706,994Investment securities held to maturity
     11,506,166
     
     11,644,999
     
     12,153,915
     
     12,301,643Stock investments
     609,950
     
     609,950
     
     626,250
     
     626,250Loans, net
     57,952,867
     
     57,938,940
     
     59,051,096
     
     59,014,061Trups common securities
     93,000
     
     96,353
     
     93,000
     
     97,475Accrued interest receivable
     426,626
     
     426,626
     
     382,943
     
     382,943Financial liabilities:Deposits
     103,754,134
     
     103,780,546
     
     102,999,556
     
     103,053,843Subordinated Debentures
     3,093,000
     
     3,204,051
     
     3,093,000
     
     3,241,835Accrued interest payable
     77,683
     
     77,683
     
     104,967
     
     104,967
  Note 12  Formal Written Agreement  On April 12, 2011, the Bank entered into a formal written agreement (the Agreement) with the Office of the Comptroller of the Currency, the Banks primary regulator. See Recent Developments in Item 2 below for a discussion of the terms of the Agreement. The Bank also has agreed to adhere to higher minimum capital ratios. Specifically, the Bank must achieve by May 31, 2011, and thereafter maintain, a Leverage Capital Ratio of not less than 9.0% and a Total Risk-Based Capital Ratio of not less than 12.0%.  As of March 31, 2011 the Banks Leverage Capital Ratio was 8.95% and its Total Risk-Based Capital Ratio was 15.11%. In order to achieve a Leverage Capital Ratio of at least 9.0% by May 31, 2011, management intends to take steps to reduce higher-rate CD deposits, thereby reducing average assets.      21


---



Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Forward Looking Information  This discussion focuses primarily on the results of operations of the Company and its consolidated subsidiary on a consolidated basis for the three months ended March 31, 2011 and 2010, and the consolidated financial condition of the Company as of March 31, 2011 and December 31, 2010.  Managements discussion and analysis is written to provide greater insight into the results of operations and the financial condition of the Company and its subsidiary.  For a more complete understanding of the Company and its operations, reference should be made to the consolidated financial statements included in this report and in the Company's 2010 Annual Report on Form 10-K.  This Form 10-Q includes forward-looking statements that may constitute forward-looking statements under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  All statements other than statements of historical fact are forward looking statements. Words such as expects, anticipates, believes, projects, and estimates or variations of such words and similar expressions are intended to identify such statements.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.  Therefore, actual outcomes and results may differ materially from what is expressed, forecast in, or implied by such forward-looking statements, and readers are cautioned not to unduly rely on such statements. Risks and uncertainties include, but are not limited to, the health of the national and California economies; the Companys ability to attract and retain skilled employees; competition in the financial services market for both deposits and loans; the Companys ability to increase its customer base; customers' service expectations; the Company's ability to successfully de­ploy new technology and gain efficiencies therefrom; the success of branch expansion; changes in interest rates; loan portfolio performance; the Companys ability to enhance its earnings capacity; the economic and regulatory effects of the continuing war on terrorism and other events of war, including the wars in Iraq and Afghanistan; the effect of natural disasters, including earthquakes, fires and hurricanes; and regulatory risks associated with the variety of current and future regulations to which the Company is subject. All of these risks could have a material adverse impact on the Companys financial condition, results of operations or prospects, and these risks should be considered in evaluating the Company. For additional information concerning these factors, see Risk Factors; and Managements Discussion and Analysis of Financial Condition and Results of Operations section of our Form 10-K, as amended, for the year ended December 31, 2010, as supplemented by the information contained in this report.  Recent Developments  On April 12, 2011, Chino Commercial Bank, N.A. (the Bank), the Companys wholly-owned banking subsidiary, entered into a formal written agreement (the Agreement) with the Office of the Comptroller of the Currency (the OCC), the Banks primary regulator.  The Agreement will remain in effect and enforceable until it is modified, waived or terminated in writing by the OCC.  Entry into the Formal Agreement does not change the Banks well-capitalized status.  The Banks Board of Directors (the Bank Board) and its management have already successfully implemented initiatives and strategies to address and resolve a number of the issues noted in the Agreement.  The Bank continues to work in cooperation with its regulators to bring its policies and procedures into conformity with directives. The Bank is required to take the following actions: (i) adopt, implement and adhere to a rolling three year strategic plan and capital program, including objectives, projections and implementation strategies for the Banks overall risk profile, earnings performance, and various balance sheet items, as well as intended product line development and market segments; (ii) refrain from paying dividends without prior OCC non-objection; (iii) add a new independent director with banking experience, or similar accounting or regulatory experience, to the Bank Board; (iv) obtain non‐objection from the OCC before adding any individual to the Bank Board or employing any senior executive officer; (v) obtain a review of insider lending compliance by an independent outside audit firm acceptable to the


OCC; (vi) revise, in a manner acceptable to the OCC, the Banks policies or programs concerning overdrafts, insider lending compliance, credit risk management, credit risk accounting, nonaccrual recognition and concentration risk management; and thereafter implement and adhere to such policies; (vii) protect the Banks interest in assets criticized by the OCC and take certain actions to reduce the level of criticized assets; (viii) continue to review the adequacy of the Banks allowance for loan losses and maintain a program acceptable to the OCC to ensure an adequate allowance; (ix) correct each violation of law, rule or regulation cited in the most recent regulatory examination report and implement procedures to avoid future violations; and (x) submit quarterly progress reports to the OCC regarding various aspects of the foregoing actions.  The Bank Board has appointed a compliance committee to submit such reports and monitor and coordinate the Banks performance under the Agreement.  22


---



The Bank has also agreed to the OCC establishing higher minimum capital ratios for the Bank, specifically that the Bank will achieve by May 31, 2011, and thereafter maintain, a Leverage Capital Ratio of not less than 9.0% and a Total Risk-Based Capital Ratio of not less than 12.0%.  As of March 31, 2011 the Banks Leverage Capital Ratio was 8.95% and its Total Risk-Based Capital Ratio was 15.11%.  Overview of the Results of Operations and Financial Condition  Results of Operations Summary Net income for the quarter ended March 31, 2011 was $203,305 compared with $41,285 for the quarter ended March 31, 2010, an increase of 392.4%. Basic and diluted earnings per share for the first quarter of 2011 were $0.27, compared to $0.06 for the first quarter of 2010. The Companys annualized return on average equity was 11.48% and annualized return on average assets was 0.72% for the quarter ended March 31, 2011, compared to a return on equity of 2.56% and a return on assets of 0.15% for the quarter ended March 31, 2010. The primary reasons for the change in net income during the first quarter of 2011 are as follows:  ·The provision for loan losses was $5,522 for the first quarter of 2011, a decrease of $258,163, compared to $263,685 for the three months ended March 31, 2010. The reduction in the provision was based upon a moderate improvement in asset quality, and a general reduction in total loans, coupled with no loans charged off in the first quarter of 2011. ·Non-interest income totaled $393,053 for the first quarter of 2011, an increase of $99,218, or 33.8%, compared to $293,835 in the first quarter of 2010. Included in this increase was a $61,000 gain on sale of foreclosed assets in the first quarter of 2011 compared to $149 gain recognized in the first quarter of 2010. Also included were service charges on deposits which increased by $37,016 or 13.8% for the first quarter of 2011 compared to the first quarter of 2010, due to increased analysis charges and returned item charges. This is consistent with the 16.4% growth in average non-interest bearing deposits in the first quarter of 2011 over the first quarter of 2010. ·The Company posted net interest income of $1,019,371 for the quarter ended March 31, 2011 as compared to $952,763 for the quarter ended March 31, 2010, due to decreased average balances in time deposits of $100.000 or more. Average interest-earning assets were $98.8 million with average interest-bearing liabilities of $60.4 million, yielding a net interest margin of 4.19% for the first quarter of 2011; as compared to the average interest-earning assets of $93.6 million with average interest-bearing liabilities of $62.3 million, yielding a net interest margin of 4.13% for the first quarter of 2010. ·Salaries and employee benefits expense increased by 12.1% or $63,377 during the three months ended March 31, 2011 compared to the same period in 2010, due to increased staff required for the Rancho Cucamonga office which opened in April 2010. ·Regulatory assessments increased by $23,254 to $75,447 for the first quarter of 2011 compared to $52,193 for the first quarter of 2010, due to increased deposits and increased assessment rates.  Financial Condition Summary The Companys total assets were $114.8 million at March 31, 2011, an increase of $0.9 million, or 0.8%, compared to total assets of $113.9 million at December 31, 2010. The most significant changes in the Companys consolidated balance sheet during the first quarter of 2011 are outlined below:  Total deposits increased from $103.0 million on December 31, 2010 to $103.8 million on March 31, 2011, a 0.7% increase. Noninterest-bearing deposits increased to $50.3 million at March 31, 2011, an increase of $8.4 million or 20.1% from December 31, 2010. The ratio of non-interest bearing deposits to total deposits increased from 40.7% at December 31, 2010 to 48.5% at March 31, 2011.Total interest-bearing deposits decreased from $61.1 million at December 31, 2010 to $53.4 million at March 31, 2011, a 12.5% decrease in the first quarter.  23


---



·The Company experienced a slight decrease in interest-earning assets of 1.2% to $100.2 million in the first quarter of 2011, primarily in gross loans which decreased to $59.4 million at March 31, 2011, compared to $60.5 million at December 31, 2010. ·Nonperforming assets were comprised of 11 loans totaling $4.1 million at March 31, 2011, compared to 11 loans and one foreclosed property totaling $4.7 million at December 31, 2010. All but one of the loans classified as nonperforming are current and paying as agreed.  Earnings Performance  The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities. The second is non-interest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as bank-owned life insurance. The majority of the Companys non-interest expenses are operating costs that relate to providing a full range of banking services to the Banks customers.  Net Interest Income and Net Interest Margin  For the quarter ended March 31, 2011, net interest income increased to $1,019,371, an increase of 7.0% over the comparable quarter in 2010. The level of net interest income depends on several factors in combination, including growth in earning assets, yields on earning assets, the cost of interest-bearing liabilities, the relative volumes of earning assets and interest-bearing liabilities, and the mix of products which comprise the Companys earning assets, deposits, and other interest-bearing liabilities. Occasionally, net interest income is also impacted by the recovery of interest on loans that have been on non-accrual and are either sold or returned to accrual status, or by the reversal of accrued but unpaid interest for loans placed on non-accrual status. The Companys net interest income, net interest margin, and interest spread are sensitive to general business and economic conditions, including short-term and long-term interest rates, inflation, monetary supply, and the strength of the economy, and the local economics in which the Company conducts business. When net interest income is expressed as a percentage of average earning assets, the results is the net interest margin.  The following tables set forth certain information relating to the Company for the three months ended March 31, 2011 and 2010. The yields and costs are derived by dividing income or expense by the corresponding average balances of assets or liabilities for the periods shown below. Average balances are derived from average daily balances. Yields include fees that are considered adjustments to yields.   24


---



Distribution, Yield and Rate Analysis of Net Interest Income (unaudited)  For the three months ended
     
     For the three months endedMarch 31, 2011
     
     March 31, 2010Average
     
     Income/
     
     Average
     
     Average
     
     Income/
     
     AverageBalance
     
     Expense
     
     Yield/Rate 4
     
     Balance
     
     Expense
     
     Yield/Rate 4($ in thousands)AssetsInterest-earnings assetsLoans1
     $        60,277
     
     $     1,012
     
     6.81%
     
     $         61,213
     
     $     1,076
     
     7.13%U.S. government agencies securities
     2,500
     
     15
     
     2.53%
     
     0
     
     0
     
     0.00%Mortgage-backed securities
     12,580
     
     98
     
     3.14%
     
     6,152
     
     60
     
     3.96%Other securities & Due from banks time
     19,242
     
     57
     
     1.20%
     
     26,252
     
     109
     
     1.68%Federal funds sold
     4,152
     
     3
     
     0.25%
     
     0
     
     0
     
     0.00%Total interest-earning assets
     98,751
     
     $     1,185
     
     4.87%
     
     93,617
     
     $     1,245
     
     5.39%Non-interest earning assets
     14,455
     
     
     
     
     
     14,413Total assets
     $      113,206
     
     
     
     
     
     $       108,030Liabilities and Stockholders' EquityInterest-bearing liabilitiesMoney market and NOW deposits
     $        34,210
     
     $          63
     
     0.74%
     
     $         32,450
     
     $        134
     
     1.67%Savings
     2,070
     
     1
     
     0.27%
     
     1,041
     
     1
     
     0.26%Time deposits < $100,000
     6,019
     
     13
     
     0.91%
     
     7,109
     
     30
     
     1.72%Time deposits equal to or > $100,000
     15,031
     
     38
     
     1.01%
     
     18,457
     
     76
     
     1.68%Other borrowings
     0
     
     0
     
     0.00%
     
     103
     
     0
     
     0.12%Subordinated debenture
     3,093
     
     51
     
     6.68%
     
     3,093
     
     51
     
     6.68%Total interest-bearing liabilities
     60,423
     
     $        166
     
     1.11%
     
     62,253
     
     $        292
     
     1.90%Non-interest bearing deposits
     44,806
     
     
     
     
     
     38,507Other liabilities
     891
     
     
     
     
     
     810Stockholders' equity
     7,086
     
     
     
     
     
     6,460Total liabilities & stockholders' equity
     $      113,206
     
     
     
     
     
     $       108,030Net interest income
     
     
     $     1,019
     
     
     
     
     
     $        953Net interest spread 2
     
     
     
     
     3.76%
     
     
     
     
     
     3.49%Net interest margin 3
     
     
     
     
     4.19%
     
     
     
     
     
     4.13%
  1Net amortization of loan fees (costs) are included in the calculation of interest income. Loan fees (costs) were approximately ($6,915) for the three months ended March 31, 2011, compared to ($7,770) for the three months ended March 31, 2010. Loans are net of deferred fees and related direct costs. Nonperforming loans have been included in the table for computation purposes, but the foregone interest on such loans is excluded. Foregone interest for the quarters ended March 31, 2011 and 2010 was approximately $80.200 and $11,080, respectively. 2Represents the average rate earned on interest‐earning assets less the average rate paid on interest-bearing liabilities. 3Represents net interest income as a percentage of average interest‐earning assets. 4Average Yield/Rate is the pre-tax yield (as the tax equivalent yield is immaterial) and have been annualized and are based upon actual days in reporting period and based on actual days in the reporting year.   Rate/Volume Analysis  The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in average balance multiplied by prior period rates, and rate variances are equal to the increase or decrease in average rate times prior period average balances. Variances attributable to both rate and volume changes are calculated by multiplying the change in rate by the change in average balance, and are allocated to the volume variance and the rate variance.   25


---



Volume and Rate Variances  For the quarter endedMarch 312011 vs. 2010Increase (Decrease) Due to($ in thousands)Volume
     
     
     
     Rate2
     
     
     
     NetInterest-earnings assetsLoans1
     $
     (15
     )
     
     $
     (49
     )
     
     $
     (64
     )Securities of U.S. government agencies
     
     15
     
     
     
     0
     
     
     
     15Mortgage-backed securities
     
     52
     
     
     
     (14
     )
     
     
     38Other securities & Due from banks time
     
     (25
     )
     
     
     (27
     )
     
     
     (52
     )Federal funds sold
     
     3
     
     
     
     0
     
     
     
     3Total interest-earning assets
     
     30
     
     
     
     (90
     )
     
     
     (60
     )Interest-bearing liabilitiesMoney market & NOW
     
     7
     
     
     
     (78
     )
     
     
     (71
     )Savings
     
     2
     
     
     
     (2
     )
     
     
     0Time deposits < $100,000
     
     (4
     )
     
     
     (13
     )
     
     
     (17
     )Time deposits equal to or > $100,000
     
     (12
     )
     
     
     (26
     )
     
     
     (38
     )Total interest-bearing liabilities
     
     (7
     )
     
     
     (119
     )
     
     
     (126
     )Change in net interest income
     $
     37
     
     
     $
     29
     
     
     $
     66
  1Loans are net of deferred fees and related direct costs. Nonperforming loans have been included in the table for computation purposes, but the foregone interest on such loans is excluded. Foregone interest for the quarters ended March 31, 2011 and 2010 was approximately $80.200 and $11,080, respectively. 2Average Yield/Rate is the pre-tax yield (as the tax equivalent yield is immaterial) and have been annualized and are based upon actual days in reporting period and based on actual days in the reporting year.   As shown above, the pure volume variance positively impacted net interest income by $37,000 in the first quarter of 2011 relative to the same period of 2010, and the rate variance positively impacted net interest income by $29,000 for the same comparative period.  The net interest margin was 4.19% for the three months ended March 31, 2011, compared to 4.13% for the same period in 2010 due principally to a drop in the interest rates and a decrease in the ratio of interest bearing deposits to total deposits.  Average loans decreased $0.9 million or 1.5% for the first quarter of 2011 compared with the same period of 2010. Interest and fee income on loans decreased $63,668. The decrease in average loans resulted in approximately $15,000 decrease in interest income from loans, while the decrease in interest rate resulted in approximately $49,000 decrease in income. The average yield on loans declined from 7.13% for the quarter ended March 31, 2010 to 6.81% for the quarter ended March 31, 2011, due to a lack of posted interest income from loans on nonaccrual status of approximately $80,200.  Income from investment securities and time deposits due from banks for the quarter ended March 31, 2011 increased slightly by $1,256, or 0.7% in comparison to the quarter ended March 31, 2010. Although the volume increased income by approximately $43,000, the decreased rate negatively impacted income by approximately $42,000. The primary contributing factor to this decrease was the decrease in the interest rate on due from banks time of 0.48%.  Average interest bearing liabilities decreased $1.8 million or 2.9% in the first quarter of 2011, compared to the first quarter of 2010. The Company experienced a reduction in time certificates due to reduced interest rates offered to its


customers. The decrease in average interest bearing deposits resulted in approximately a $7,000 decrease in interest expense and a decline in rates resulted in an approximate $119,000 decrease in interest expense in the first quarter of 2011, compared to the first quarter of 2010.  26


---



Provision for Loan Losses  Provisions to the allowance for loan losses are made monthly if needed, in anticipation of future potential loan losses. The monthly provision is calculated on a predetermined formula to ensure adequacy as the portfolio grows.  The formula is composed of various components. Allowance factors are utilized in estimating the adequacy of the allowance for loan losses. The allowance is determined by assigning general reserves to non-classified loans, and specific allowances for all classified loans. As higher allowance levels become necessary as a result of this analysis, the allowance for loan losses will be increased through the provision for loan losses. The procedures for monitoring the adequacy of the allowance, and detailed information on the allowance, are included below under Allowance for Loan Losses.  The provision for loan losses was $5,522 for the three months ended March 31, 2011, compared to $263,685 for the three months ended March 31, 2010.The reduction in the provision was based upon a moderate improvement in asset quality, and a general reduction in total loans, coupled with no loan charge-offs in the first quarter of 2011 compared to $147,910 in the first quarter of 2010. The allowance for loan losses was $1,447,675 or 2.44% of gross loans receivable at March 31, 2011, compared to $1,442,153 or 2.38% at December 31, 2010 and $1,394,095 or 2.31% at March 31, 2010. At March 31, 2011, the Company had 11 nonperforming loans totaling $4,087,364, or 6.88% of total loans, compared to 11 nonperforming loans totaling $4,167,573, or 6.89% of total loans at December 31, 2010. Ten of the nonperforming loans are current and paying as agreed. At March 31, 2010, the Company had four nonperforming loans totaling $1.4 million, or 2.34% of total loans.  The Company has not originated, and has no exposure to, sub-prime mortgage loans, or option ARM mortgages.   Non-Interest Income  Non-interest income was $393,053 for the three months ended March 31, 2011, compared to $293,835 for the three months ended March 31, 2010. Total annualized non-interest income as a percentage of average earning assets was 1.6% and 1.3% for the three months ended March 31, 2011 and 2010, respectively.  The following table sets forth the Companys non-interest income for the three months ended March 31, 2011 and 2010:  Non-Interest Income for the three monthsended March 31,2011
     
     2010Amount
     
     % of Total
     
     Amount
     
     % of Total(Dollars in thousands)Service charges on deposit accounts
     $     305
     
     77.5%
     
     $     268
     
     91.1%Gain on sale of foreclosed assets
     61
     
     15.6%
     
     0
     
     0.0%Other miscellaneous income
     7
     
     1.8%
     
     6
     
     2.0%Dividend income from restricted stock
     3
     
     0.7%
     
     3
     
     1.1%Income from bank owned life insurance
     17
     
     4.4%
     
     17
     
     5.8%Total non-interest income
     $     393
     
     100.0%
     
     $     294
     
     100.0%As a percentage ofaverage earning assets
     
     
     1.6%
     
     
     
     1.3%
  Gain on sale of foreclosed assets increased to $61,151 in the first quarter of 2011, compared to a $149 gain recognized in the first quarter of 2010. The property sold in the first quarter of 2011 was foreclosed in May 2010


and required clean-up and repairs to get ready for sale. A majority of the expenses incurred to maintain and ready the property for sale were charged to non-interest expenses in 2010 and totaled over $100,000.  27


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Service charges on deposit accounts, customer fees and miscellaneous income are comprised primarily of fees charged to deposit accounts and depository related services. Fees generated from deposit accounts consist of periodic service fees and fees that relate to specific actions, such as the return or payment of checks presented against accounts with insufficient funds. Depository related services include fees for money orders and cashiers checks, placing stop payments on checks, check-printing fees, wire transfer fees, fees for safe deposit boxes and fees for returned items or checks that were previously deposited. Service charges on deposits increased by $37,016 or 13.8% for the first quarter of 2011 compared to the first quarter of 2010, due to increases in volume subject to analysis charges and returned item charges. The Company periodically reviews service charges to maximize service charge income while still maintaining competitive pricing. Service charge income on deposit accounts increases with the increased number of accounts and to the extent fees are not waived.  Non-Interest Expense  The following table sets forth the non-interest expense for the three months ended March 31, 2011 and 2010:  Non-Interest Expense for the quarter endedMarch 312011
     
     2010Amount
     
     % of Total
     
     Amount
     
     % of Total(Dollars in thousands)Salaries and employee benefits
     $          587
     
     54.4%
     
     $    524
     
     56.4%Occupancy and equipment
     115
     
     10.6%
     
     86
     
     9.3%Data and item processing
     97
     
     9.0%
     
     80
     
     8.6%Deposit products and services
     12
     
     1.1%
     
     22
     
     2.4%Legal and other professional fees
     70
     
     6.5%
     
     45
     
     4.8%Regulatory assessments
     75
     
     6.9%
     
     52
     
     5.6%Advertising and marketing
     16
     
     1.5%
     
     14
     
     1.5%Directors fees and expenses
     16
     
     1.5%
     
     17
     
     1.8%Printing and supplies
     12
     
     1.1%
     
     15
     
     1.6%Telephone
     10
     
     0.9%
     
     9
     
     1.0%Insurance
     10
     
     0.9%
     
     9
     
     1.0%Reserve for undisbursed lines of credit
     (6)
     
     -0.6%
     
     6
     
     0.6%Other expenses
     67
     
     6.2%
     
     50
     
     5.4%Total non-interest expenses
     $       1,081
     
     100.0%
     
     $    929
     
     100.0%Non-interest expense as apercentage of average earning assets
     
     
     4.4%
     
     
     
     4.0%Efficiency ratio
     
     
     80.0%
     
     
     74.5%
  Total annualized non-interest expense as a percentage of average earning assets increased to 4.4% for the three months ended March 31, 2011 as compared to 4.0% for the three months ended March 31, 2010. Average earning assets were $98.8 million and $74.9 million for the quarters ended March 31, 2011 and 2010, respectively. Although average assets increased 5.5%, total non interest expenses increased 16.4% resulting in an increase in non-interest expense as a percentage of average assets. The overhead efficiency ratio represents total operating expense divided by the sum of net interest and non-interest income, with the provision for loan losses, investment gains/losses, and other extraordinary gains/losses excluded from the equation. Because the percentage increase in net interest income plus other income was smaller than the increase in total non-interest expense, the Companys overhead efficiency ratio increased to 80.0% for the first quarter of 2011 from 74.5% for the second quarter of 2010.  28


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Non-interest expenses were$1,081,129for the three months ended March 31, 2011, compared to $928,926for the three months ended March 31, 2010. The largest component of general and administrative expenses was salary and employee benefits expenseof $587,399 forthe first quarter of 2011, compared to $524,022for the three months ended March 31, 2010. The increase in salaries and benefits expenses was reflective of increased staff due to the opening of the Banks third branch in Rancho Cucamonga which opened in April 2010.  Other components of non-interest expense that affected the increase were occupancy and equipment expenses which increased $28,733 for the three month period ended March 31, 2011 compared to the same period in 2010, due to the opening of the Rancho Cucamonga branch in April 2010. Data and item processing expenses also increased due to the additional branch by $16,932, or 21.2% for the comparable three month period.  Legal and professional fees expenses increased 56.0% to $70,233 in the first quarter of in 2011 compared to $45,016 in the same period in 2010 as a result of increased loan collection activity, regulatory matters, and complexity of SEC related filings.  Regulatory assessments increased by $23,254 to $75,447 for the first quarter of 2011 compared to $52,193 for the first quarter of 2010, due to increased deposits and increased assessment rates.    Provision for Income Taxes  The tax provision was $122,468 for the quarter ended March 31, 2011, representing approximately 37.6% of pre-tax income for the first quarter. The amount of the tax provision is determined by applying the Companys statutory income tax rates to pre-tax book income, adjusted for permanent differences between pre-tax book income and taxable income. Such permanent differences include but are not limited to tax-exempt interest income; increases in the cash surrender value of bank-owned life insurance, compensation expense associated with stock options and certain other expenses that are not allowed as tax deductions, and tax credits. The tax provision was $12,702 for the quarter ended March 31, 2010, representing approximately 23.5% of pre-tax income for the first quarter. Of the $53,987 in pre-tax income in the first quarter ended March 31, 2010, approximately $29,000 was tax exempt. Tax exempt income consisted of approximately $17,000 from Bank owned life insurance and $12,000 from municipal bond income.  Financial Condition  Comparison of Financial Condition at March 31, 2011 and December 31, 2010  General  Total assets increased by 0.8% from $113.9 million to $114.8 million between December 31, 2010 and March 31, 2011, due to an increase in deposit balances which in turn increased cash and due from banks. The Company experienced a slight decrease in interest-earning assets of 1.2% to $100.2 million in the first quarter of 2011, primarily in gross loans which decreased to $59.4 million at March 31, 2011, compared to $60.5 million at December 31, 2010. Total deposits increased from $103.0 million on December 31, 2010 to $103.8 million on March 31, 2011, a 0.7% increase. Noninterest-bearing deposits increased to $50.3 million at March 31, 2011, an increase of $8.4 million or 20.1% from December 31, 2010. Total interest-bearing deposits decreased from $61.1 million at December 31, 2010 to $53.4 million at March 31, 2011, a 12.5% decrease in the first quarter. The ratio of non-interest bearing deposits to total deposits increased from 40.7% at December 31, 2010 to 48.5% at March 31, 2011.  Loan Portfolio  During the three months ended March 31, 2011, the Companys loan portfolio, net of unearned loan fees, decreased by $1.1 million to $59.4 million at March 31, 2011, compared to $60.5 million at December 31, 2010. The Company experienced moderate declines in balances of real estate secured and commercial loans.The largest loan category at March 31, 2011 was real estate loans, which consist of commercial and consumer real estate loans, and represent 85.9% of the loan portfolio. In anticipation of possible further deterioration in economic conditions, though


Management believes these credits to be properly underwritten, the Company has elected to take real estate collateral in an abundance of caution on a number of commercial loans. Though the result of this strategy may be to reflect a concentration of assets into real estate secured credits, Management believes the underlying collateral will support overall credit quality and minimize principal risk of the portfolio. The next largest loan concentration at March 31, 2011 was commercial loans, constituting 13.0% of the loan portfolio. The composition of the Companys loan portfolio at March 31, 2011 and December 31, 2010 is set forth below:  29


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March 31, 2011
     
     December 31, 2010Amount
     
     Percentage
     
     Amount
     
     PercentageReal estate
     $      51,054
     
     85.9%
     
     $      51,460
     
     85.0%Commercial
     7,700
     
     13.0%
     
     8,411
     
     13.9%Installment
     678
     
     1.1%
     
     649
     
     1.1%Gross loans
     $      59,432
     
     100.0%
     
     $      60,520
     
     100.0%
  The average yield on the loan portfolio as of March 31, 2011 was 6.813% and the weighted average contractual term of the loan portfolio is approximately seven years. Individual loan interest rates may require interest rate changes more frequently than at maturity due to adjustable interest rate terms incorporated into certain loans.  At March 31, 2011,approximately 69.1% of loans were variable rate loans tied to adjustable rate indices such as Prime Rate.  Off-Balance Sheet Arrangements  During the ordinary course of business, the Company provides various forms of credit lines to meet the financing needs of its customers.  These commitments to provide credit represent an obligation of the Company to its customers, which is not represented in any form within the balance sheets of the Company. At March 31, 2011 and December 31, 2010, the Company had $5.9 million and $3.8million, respectively, of off-balance sheet commitments to extend credit. These commitments are the result of existing unused lines of credit and unfunded loan commitments. These commitments represent a credit risk to the Company.  At March 31, 2011 and December 31, 2010, the Company had no unadvanced standby letters of credit.  The effect on the Companys revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used.  Non-performing Assets  Non-performing assets are comprised of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans restructured where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (OREO; also referred to herein as foreclosed assets). Loans are generally placed on non-accrual status when they become 90 days past due unless Management believes the loan is adequately collateralized and in the process of collection. Loans may be restructured by Management when a borrower has experienced some change in financial status, causing an inability to meet the original repayment terms, and where the Company believes the borrower will eventually overcome those circumstances and repay the loan in full. Such loans are classified as "troubled debt restructurings" (TDRs) and are further classified as either performing or nonperforming depending on their accrual status.  As of March 31, 2011, all of the Company's TDRs were on non-accrual status. OREO consists of properties acquired by foreclosure or similar means that Management intends to offer for sale.  Managements classification of a loan as non-accrual is an indication that there is a reasonable doubt as to the full collectibility of principal and/or interest on the loan; at this point, the Company stops recognizing income from the interest on the loan and may reverse any uncollected interest that had been accrued but unpaid if it is determined uncollectible or the collateral is inadequate to support such accrued interest amount. These loans may or may not be collateralized, but collection efforts are continuously pursued.   30


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On occasion, a well collateralized loan will be downgraded to nonaccrual status or classified as nonperforming because of the borrowers apparent inability to continue to make payments as called for, based upon tax returns or financial statements.  These downgrades can be made despite the fact that the borrower continues to make all payments as agreed. The following table presents comparative data for the Companys nonperforming assets:  Nonperforming Assets March 31
     
     
     December 31
     
     
     March 312011
     
     
     2010
     
     
     2010($ in thousands)NON-ACCRUAL LOANS:1Real estate
     $            3,040
     
     
     $            3,096
     
     
     $            1,284Commercial
     1,047
     
     
     1,071
     
     
     131Installment
     0
     
     
     0
     
     
     0TOTAL NON-ACCRUAL LOANS
     4,087
     
     
     4,167
     
     
     1,415LOANS 90 DAYS OR MORE PAST DUE & STILL ACCRUING:Real estate
     0
     
     
     0
     
     
     0Commercial
     0
     
     
     0
     
     
     0Installment
     0
     
     
     0
     
     
     0TOTAL LOANS 90 DAYS OR MORE PAST DUE & STILL ACCRUING
     0
     
     
     0
     
     
     0Restructured loans 2
     0
     
     
     0
     
     
     0TOTAL NONPERFORMING LOANS
     4,087
     
     
     4,167
     
     
     1,415OREO
     0
     
     
     517
     
     
     0TOTAL NONPERFORMING ASSETS
     $            4,087
     
     
     $            4,684
     
     
     $            1,415Nonperforming loans as a percentage of total loans 3
     6.88%
     
     
     6.89%
     
     
     2.34%Nonperforming assets as a percentage of total loans and OREO
     6.88%
     
     
     7.67%
     
     
     2.34%1Additional interest income of approximately $80,200, $99,000, and $11,080 respectively, would have been recorded for the periods ended March 31, 2011, December 31, 2010, and March 31, 2010 if the loans had been paid or accrued in accordance with original terms.2Restructured loans are loans where the terms are renegotiated to provide a reduction or deferral of interest or principal due to deterioration in the financial position of the borrower. Restructured loans that are on nonaccrual status are included in the"Non-Accrual Loans" portion of the table above.3Total loans are gross loans, which excludes the allowance for loan losses, and net of unearned loan fees.
  At March 31, 2011, the Company had two restructured loans totaling $1,765,556 which were partially charged off and the remaining balance of $1,371,643 is on non-accrual status. These loans are reported in the non-accrual classification of this report. Nine additional loans totaling $2,715,721 are on non-accrual status. As of March 31, 2011, all of the Companys nonperforming loans, whether commercial loans or real estate loans, were substantially secured by real estate, with collateral values that Management believes are sufficient to cover the debts, although no assurance can be given that such collateral values may not decline in the future. As of that same date, all such loans, with the exception of one loan for $440,723, were current and paying as agreed. At March 31, 2011, the Company had no foreclosed property (OREO).  At December 31, 2010, the Company had one foreclosed property in the amount of $516,534 and the same 11 loans on non-accrual status.  The Companys nonperforming assets at December 31, 2010 were 7.67% of the total loans and OREO.  Allowance for Loan Losses  The Company maintains an allowance for loan losses at a level Management considers adequate to cover the inherent risk of loss associated with its loan portfolio under prevailing and anticipated economic conditions. In determining the adequacy of the allowance for loan losses, Management takes into consideration growth trends in


the portfolio, examination by financial institution supervisory authorities, prior loan loss experience of the Companys Management, concentrations of credit risk, delinquency trends, general economic conditions, the interest rate environment, and internal and external credit reviews.  31


---



The Company 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 a risk factor for industry, economic or other external factors; and (iv) evaluating the present status of each loan and the impact of potential future events.  Allowance factors are utilized in the analysis of the allowance for loan losses. Allowance factors ranging from 0.1% to 3.0% are applied to disbursed loans that are unclassified and uncriticized. Allowance factors averaging approximately 0.03% are applied to undisbursed loans. Allowance factors are not applied to loans secured by bank deposits or to loans held for sale, which are recorded at the lower of cost or market.  The process of providing for loan losses involves judgmental discretion, and ultimate losses may therefore differ from even the most recent estimates. Due to these limitations, the Company assumes that there are losses inherent in the current loan portfolio but which have not yet been identified. The Company therefore attempts to maintain the allowance at an amount sufficient to cover such unknown but inherent losses.  Management looks at a number of economic events occurring in and around the real estate industry and analyzes each credit for associated risks. Accordingly, the Company has established and maintains an allowance for loan losses which amounted to $1,447,675 at March 31, 2011, $1,442,153 at December 31, 2010, and $1,394,095 at March 31, 2010. The ratios of the allowance for loan losses to total loans at March 31, 2011, December 31, 2010, and March 31, 2010 were 2.44%, 2.38%, and 2.31% respectively.  The table below summarizes, as of and for the three months ended March 31, 2011 and 2010 and the year ended December 31, 2010, the loan balances at the end of the period and the daily average loan balances during the period; changes in the allowance for loan losses arising from loan charge-offs, recoveries on loans previously charged-off, and additions to the allowance which have been charged against earnings; and certain ratios related to the allowance for loan losses.   32


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Allowance for Loan Losses  As of and for theQuarter Ended
     
     Year EndedMarch 31,
     
     December 31,2011
     
     2010
     
     2010Balances:
     ($ in thousands)Average total loansoutstanding during period
     $         60,277
     
     $         61,213
     
     $         60,679Total loans outstandingat end of the period
     $         59,432
     
     $         60,468
     
     $         60,520Allowance for loan losses:Balance at the beginning of period
     $           1,442
     
     $           1,278
     
     $           1,278Provision charged to expense
     6
     
     264
     
     770Charge-offsConstruction loans
     0
     
     0
     
     0Commercial loans
     0
     
     148
     
     263Commercial real estate loans
     0
     
     0
     
     355Installment loans
     0
     
     0
     
     0Total
     0
     
     148
     
     618RecoveriesConstruction loans
     0
     
     0
     
     0Commercial loans
     0
     
     0
     
     12Commercial real estate loans
     0
     
     0
     
     0Installment loans
     0
     
     0
     
     0Total
     0
     
     0
     
     12Net loan chage-offs(recoveries)
     0
     
     148
     
     606Balance
     $           1,448
     
     $           1,394
     
     $           1,442Ratios:Net loan charge-offs to average total loans
     0.00%
     
     0.24%
     
     1.00%Provision for loan losses to average total loans
     0.01%
     
     0.43%
     
     1.27%Allowance for loan losses to total loans at the end of the period
     2.44%
     
     2.31%
     
     2.38%Allowance for loan losses to non-performing loans
     35.42%
     
     98.53%
     
     34.60%Net loan charge-offs (recoveries) to allowancefor loan losses at the end of the period
     0.00%
     
     10.55%
     
     42.03%Net loan charge-offs (recoveries) to Provision for loan losses
     0.00%
     
     55.79%
     
     78.77%
    While Management believes that the amount of the allowance at March 31, 2011 was adequate, there can be no assurances that future economic or other factors will not adversely affect the Companys borrowers, or that the Companys asset quality may not deteriorate through rapid growth, failure to identify and monitor potential problem loans or for other reasons, thereby causing loan losses to exceed the current allowance.   33


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Investment Portfolio  The market value of the Companys investment portfolio at March 31, 2011 was $16.2 million having a tax equivalent yield of 3.25%. This compares to an investment portfolio of $17.0 million at December 31, 2010 having a 3.14% tax equivalent yield. The primary category of investment in the portfolio at March 31, 2011 was mortgage-backed securities. At March 31, 2011, approximately 14% of the mortgage-backed securities were tied to adjustable rate indices such as LIBOR or CMT. As loan demand has declined, Management anticipates purchasing additional short-term investment securities and interest-bearing deposits in other banks until loan demand increases.  The following table summarizes the carrying value and market value and distribution of the Companys investment securities at March 31, 2011 and December 31, 2010:  March 31, 2011
     
     December 31, 2010Carrying
     
     Fair
     
     Carrying
     
     FairValue
     
     Value
     
     Value
     
     Value($ in thousands)Held to maturity:Municipal
     $          434
     
     $          435
     
     $          435
     
     $          437Federal agency
     2500
     
     2540
     
     2500
     
     2538Mortgage-backed securities
     8,490
     
     8,586
     
     9,137
     
     9,243Corporate bonds
     82
     
     84
     
     82
     
     84Total held to maturity
     11,506
     
     11,645
     
     12,154
     
     12,302Available for sale:Municipal
     759
     
     759
     
     754
     
     754Mortgage-backed securities
     3,805
     
     3,805
     
     3,953
     
     3,953Total available for sale
     4,564
     
     4,564
     
     4,707
     
     4,707Total
     $     16,070
     
     $     16,209
     
     $     16,861
     
     $     17,009
    There were no material changes since December 31, 2010 in the maturities or repricing of the investment securities.  Deposits  Total deposits increased $754,578 or 0.7% to $103.8 million at March 31, 2011 from $103.0 million at December 31, 2010 due to the increase in demand deposits. Interest-bearing deposits decreased $7.6 million or 12.5% to $53.4 million at March 31, 2011 from $61.1 million at December 31, 2010 due to the Banks reduction of interest rates offered on interest-bearing accounts. Demand deposits increased $8.4 million or 20.1% to $50.3 million at March 31, 2011 from $41.9 million at December 31, 2010. The ratio of non-interest bearing deposits to total deposits was 48.5% at March 31, 2011 and 40.7% at December 31, 2010. A comparative distribution of the Companys deposits at March 31, 2011 and December 31, 2010, by outstanding balance as well as by percentage of total deposits, is presented in the following table:   34


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Distribution of Deposits and Percentage CompositionMarch 31, 2011
     
     December 31, 2010Amount
     
     Percentage
     
     Amount
     
     Percentage($ in thousands)Demand
     $       50,314
     
     48.5%
     
     $       41,910
     
     40.8%NOW
     2,369
     
     2.3%
     
     1,697
     
     1.6%Savings
     2,088
     
     2.0%
     
     2,085
     
     2.0%Money Market
     29,589
     
     28.5%
     
     34,545
     
     33.5%Time Deposits < $100,000
     5,553
     
     5.4%
     
     6,377
     
     6.2%Time Deposits > $100,000
     13,841
     
     13.3%
     
     16,386
     
     15.9%$     103,754
     
     100.0%
     
     $     103,000
     
     100.0%
   Deposits are the Companys primary source of funds. As the Companys need for lendable funds grows, dependence on deposits increases. Information concerning the average balance and average rates paid on deposits by deposit type for the three months ended March 31, 2011 and 2010 is contained in the Distribution, Yield and Rate Analysis of Net Interest Income table appearing in a previous section entitled Net Interest Income and Net Interest Margin. At March 31, 2011 and December 31, 2010, the Company had deposits from related parties representing 10.8% and 5.5% of total deposits of the Company, respectively. Further, at March 31, 2011 and December 31, 2010, deposits from escrow companies represented 15.1% and 12.0% of the Companys total deposits, respectively. There are some escrow company deposits which are also classified as deposits from related parties.  Borrowings  At March 31, 2011 and December 31, 2010 the Company had no FHLB advances or overnight borrowings outstanding.On December 21, 2005, the Company entered into a stand-by letter of credit with the FHLB for $800,000, which matures and renews annually, as needed. This stand-by letter of credit was issued as collateral for local agency deposits that the Company is maintaining.  Stockholders Equity  Total stockholders equity was $7.2 million at March 31, 2011 and $7.0 million at December 31, 2010. There was an overall increase of $210,506 due to the following: net income increased retained earnings by $203,305, and the change in the unrealized loss on investment securities available for sale increased equity by $7,201.  Liquidity  Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet the Companys cash flow requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of its customers and to take advantage of investment opportunities as they arise. Liquidity management involves the Companys ability to convert assets into cash or cash equivalents without significant loss, and to raise cash or maintain funds without incurring excessive additional cost. The Company maintains a portion of its funds in cash, deposits in other banks, overnight investments, and securities held for sale. Liquid assets include cash and due from banks, less the federal reserve requirement; Federal funds sold; interest-bearing deposits in financial institutions, and unpledged investment securities available for sale. At March 31, 2011, the Companys liquid assets totaled approximately $35.0 million and its liquidity level, measured as the percentage of liquid assets to total assets, was 30.5%. At December 31, 2010, the Companys liquid assets totaled approximately $31.8 million and its liquidity level, measured as the percentage of liquid assets to total assets, was 27.9%. Management anticipates that liquid assets and the liquidity level will decline as the Company becomes more leveraged in the future. The Companys current policy is to maintain a minimum liquidity ratio of 8%.  Although the Companys primary sources of liquidity include liquid assets and a stable deposit base, the Company has Fed funds lines of credit of $3.5 million at Union Bank of California, $3.5 million at Pacific Coast Bankers


Bank, and $2.0 million at Zions First National Bank. In addition, as a member of the FHLB, the Bank may borrow funds collateralized by the Banks securities or qualified loans up to 25% of its eligible total asset base, or $27.7 million at March 31, 2011.  35


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Capital Resources  The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can trigger mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material effect on the Banks financial statements and operations. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accepted accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.  Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain the following minimum ratios: Total risk-based capital ratio of at least 8%, Tier 1 Risk-based capital 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 in equity accounts of consolidated subsidiary and trust preferred securities to certain limits, less goodwill and other intangibles) and Tier 2 (supplementary capital including allowance for possible credit losses to certain limits, certain preferred stock, eligible subordinated debt, and other qualifying instruments).  As discussed in Note 7 to the consolidated financial statements herein, the Companys subordinated note represents a $3.1 million borrowing from its unconsolidated subsidiary. This subordinated note currently qualifies for inclusion as Tier 1 capital for regulatory purposes to the extent that it does not exceed 25% of total Tier 1 capital, but is classified as long-term debt in accordance with generally accepted accounting principles. In March 2005, the Federal Reserve Board adopted a final rule allowing bank holding companies to continue to include the subordinated debt related to trust preferred securities in their Tier 1 capital. The amount that can be included is limited to 25% of core capital elements, net of goodwill less any associated deferred tax liability.  Excess amounts are generally included in Tier 2 capital.  As of March 31, 2011, TRUPS related debt made up 25% of the Companys Tier 1 capital.  In addition, since the Company had less than $15 billion in assets at December 31, 2009, under the Dodd-Frank Act the Company can continue to include this debt in Tier 1 capital to the extent permitted by FRB guidelines. Generally, the amount of junior subordinated debentures in excess of the 25% Tier 1 limitation is included in Tier 2 capital.  The Bank has agreed to the OCC establishing higher minimum capital ratios for the Bank, specifically that the Bank will achieve by May 31, 2011, and thereafter maintain, a Leverage Capital Ratio of not less than 9.0% and a Total Risk-Based Capital Ratio of not less than 12.0%.  The Bank had Total Risk-Based and Tier 1 Risk-Based capital ratios of 15.11% and 13.85%, respectively at March 31, 2011, compared to 14.48% and 13.22%, respectively at December 31, 2010. At March 31, 2011 and December 31, 2010, the Banks Leverage Capital Ratios were 8.95% and 8.80%, respectively Under the Federal Reserve Banks guidelines, Chino Commercial Bancorp is a small bank holding company, and thus qualifies for an exemption from the consolidated risk-based and leverage capital adequacy guidelines applicable to bank holding companies with assets of $500 million or more. However, while not required to do so under the Federal Reserve Banks capital adequacy guidelines, the Company still maintains levels of capital on a consolidated basis which qualify it as well capitalized. As of March 31, 2011, the Companys Total Risk-Based and Tier 1 Risk-Based Capital ratios were 15.27% and 13.04%, respectively, and its Leverage Capital ratio was 8.43%.  The following table sets forth the Companys and the Banks regulatory capital ratios as of the dates indicated:   36


---



Risk Based Ratios(unaudited)Minimum RequirementMarch 31, 2011
     December 31, 2010
     to be Well CapitalizedChino Commercial BancorpTotal capital to total risk-weighted assets
     15.27%
     14.72%
     10.00%Tier 1 capital to total risk-weighted assets
     13.04%
     12.43%
     6.00%Tier 1 leverage ratio
     8.43%
     8.28%
     5.00%Chino Commercial BankTotal capital to total risk-weighted assets
     15.11%
     14.48%
     10.00%Tier 1 capital to total risk-weighted assets
     13.85%
     13.22%
     6.00%Tier 1 leverage ratio
     8.95%
     8.80%
     5.00%
  Presently, there are no outstanding commitments that would necessitate the use of material amounts of the Companys capital.  Interest Rate Risk Management  The principal objective of interest rate risk management (often referred to as asset/liability management) is to manage the financial components of the Companys balance sheet so as to optimize the risk/reward equation for earnings and capital in relation to changing interest rates. In order to identify areas of potential exposure to rate changes, the Company calculates its repricing gap on a quarterly basis. It also performs an earnings simulation analysis and market value of portfolio equity calculation on a quarterly basis to identify more dynamic interest rate exposures than those apparent in standard repricing gap analyses.  The Company manages the balance between rate-sensitive assets and rate-sensitive liabilities being repriced in any given period with the objective of stabilizing net interest income during periods of fluctuating interest rates. Rate-sensitive assets either contain a provision to adjust the interest rate periodically or mature within one year. Those assets include certain loans, certain investment securities and federal funds sold. Rate-sensitive liabilities allow for periodic interest rate changes and include time certificates, certain savings and interest-bearing demand deposits. The difference between the aggregate amount of assets and liabilities that are repricing at various time frames is called the interest rate sensitivity gap. Generally, if repricing assets exceed repricing liabilities in any given time period, the Company would be deemed to be asset-sensitive for that period, and if repricing liabilities exceed repricing assets in any given period the Company would be deemed to be liability-sensitive for that period. The Company seeks to maintain a balanced position over the period of one year in which it has no significant asset or liability sensitivity, to ensure net interest margin stability in times of volatile interest rates. This is accomplished by maintaining a significant level of loans and deposits available for repricing within one year.  The Company is generally asset sensitive, meaning that, in most cases, net interest income tends to rise as interest rates rise and decline as interest rates fall. However, as explained further on, declines in interest rates would cause a slight increase in net interest income because over 78% of the Companys variable rate loans are at their floor with a weighted average yield of 7.1%. At March 31, 2011, approximately 69.1% of loans have terms that incorporate variable interest rates. Most variable rate loans are indexed to the Banks prime rate and changes occur as the prime rate changes. Approximately 6.0% of all fixed rate loans at March 31, 2011 mature within twelve months.  Regarding the investment portfolio, a preponderance of the portfolio consists of fixed rate products with typical average lives of between three and five years. The mortgage-backed security portfolio receives monthly principal repayments which has the effect of reducing the securities average lives as principal repayment levels may exceed expected levels. Additionally, agency securities contain options by the agency to call the security, which would cause repayment prior to scheduled maturity.  Liability costs are generally based upon, but not limited to, U.S. Treasury interest rates and movements and rates paid by local competitors for similar products.  The change in net interest income may not always follow the general expectations of an asset-sensitive or liability-sensitive balance sheet during periods of changing interest rates. This possibility results from interest rates earned or paid changing by differing increments and at different time intervals for each type of interest-


sensitive asset and liability. The interest rate gaps reported arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not reflect the Companys interest rate sensitivity in subsequent periods. The Company attempts to balance longer-term economic views against prospects for short-term interest rate changes in all repricing intervals.  37


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The table below shows the estimated impact of changes in interest rates on our net interest income as of March 31, 2011, assuming a parallel shift of 100 to 300 basis points in both directions.    Immediate Change in Rate-300 bp
     
     -200 bp
     
     -100 bp
     
     +100 bp
     
     +200 bp
     
     +300 bpChange in net interest income (in $000s)
     $    (349)
     
     $   (181)
     
     $   (101)
     
     $     289
     
     $  1,279
     
     $  1,853% Change
     -3.95%
     
     -2.05%
     
     -1.14%
     
     3.27%
     
     14.47%
     
     20.97%
  The Company uses Risk Monitor software for asset/liability management in order to simulate the effects of potential interest rate changes on the Companys net interest margin. These simulations provide static information on the projected fair market value of the Companys financial instruments under differing interest rate assumptions. The simulation program utilizes specific loan and deposit maturities, embedded options, rates and re-pricing characteristics to determine the effects of a given interest rate change on the Companys interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Companys investment, loan, deposit and borrowed funds portfolios. The rate projections can be shocked (an immediate and sustained change in rates, up or down). The Company typically uses standard interest rate scenarios in conducting the simulation of upward and downward shocks of 100 and 300 basis points (bp). As of March 31, 2011, there has been no material change in interest rate risk since December 31, 2010.  If rates were at higher levels, we would likely see minimal fluctuations in either declining or rising rate scenarios. However, net interest income increases slightly as rates decline because over 50% of the Companys variable rate loans are at their floor with a weighted average yield of 7.3%. Rates will continue to slowly decrease in deposits while a majority of the loan portfolio will remain at its floor. Prepayments on fixed-rate loans tend to increase as rates decline, although our model assumptions for declining rate scenarios include a presumed floor for the Banks prime lending rate that partially offsets other negative pressures. The economic (or fair) value of financial instruments on the Companys balance sheet will also vary under the interest rate scenarios previously discussed. This is measured by simulating changes in the Companys economic value of equity (EVE), which is calculated by subtracting the estimated fair value of liabilities from the estimated fair value of assets. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at current replacement rates for each account type, while the fair value of non-financial accounts is assumed to equal book value and does not vary with interest rate fluctuations. An economic value simulation is a static measure for balance sheet accounts at a given point in time, but this measurement can change substantially over time as the characteristics of the Companys balance sheet evolve and as interest rate and yield curve assumptions are updated. The amount of change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including the stated interest rate or spread relative to current market rates or spreads, the likelihood of prepayment, whether the rate is fixed or floating, and the maturity date of the instrument. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on managements best estimates. We have found that model results are highly sensitive to changes in the assumed decay rate for non-maturity deposits, in particular. If a higher deposit decay rate is used the decline in EVE becomes more severe, while the slope of the EVE simulations conforms more closely to that of our net interest income simulations if non-maturity


deposits do not run off. This is because our net interest income simulations incorporate growth rather than runoff for aggregate non-maturity deposits.  38


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The table below shows estimated changes in the Companys EVE as March 31, 2011, under different interest rate scenarios relative to a base case of current interest rates:   Immediate Change in Rate-300 bp
     
     -200 bp
     
     -100 bp
     
     +100 bp
     
     +200 bp
     
     +300 bpChanges in EVE (in $000's)
     $  4,009
     
     $  2,576
     
     $  1,210
     
     $(1,025)
     
     $   (956)
     
     $(1,624)% Change
     40.2%
     
     25.9%
     
     12.1%
     
     -10.3%
     
     -9.6%
     
     -16.3%
  The table shows a substantial increase in EVE as interest rates decline, and a corresponding decline as interest rates increase. Changes in EVE under varying interest rate scenarios are substantially different than changes in the Companys net interest income simulations, due primarily to runoff assumptions in non-maturity deposits.    39


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Item 3.QUALITATIVE & QUANTITATIVE DISCLOSURES ABOUT MARKET RISK  Not applicable.   Item 4:CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Companys Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) promulgated under the Exchange Act as of the end of the period covered by this report (the "Evaluation Date"), have concluded that as of the Evaluation Date, the Companys disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this report was being prepared. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such informa­tion is recorded, processed, summarized, and reported within the time periods specified by the SEC.  Changes in Internal Controls There were no significant changes in the Company's internal controls over financial reporting or in other factors in the first quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.   40


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PART II  Item1:   Legal Proceedings- None  Item 1A:  Risk Factors-Not applicable  Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds- None  Item 3:  Default of Senior Securities- None  Item 4:  (Removed and Reserved)  Item 5:  Other Information- None  Item 6:  Exhibits  3.1
     Articles of Incorporation of Chino Commercial Bancorp13.2
     Bylaws of Chino Commercial Bancorp110.1
     2000 Stock Option Plan110.2
     Chino Commercial Bank, N.A. Salary Continuation Plan110.3
     Salary Continuation and Split Dollar Agreements for Dann H. Bowman110.4
     Employment Agreement for Dann H. Bowman210.5
     Salary Continuation and Split Dollar Agreements for Roger Caberto110.6
     Item Processing Agreement between the Bank and InterCept Group110.7
     Data Processing Agreement between the Bank and InterCept Group110.8
     Indenture dated as of October 27, 2006 between U.S. Bank National Association,
as Trustee and Chino Commercial Bancorp as Issuer310.9
     Amended and Restated Declaration of Trust of Chino Statutory Trust I, dated as of October 27, 2006310.10
     Guarantee Agreement between Chino commercial Bancorp and U.S. Bank National Association
dated as of October 27, 2006310.11
     Amendment to Salary Continuation Agreement for Dann H. Bowman410.12
     Amendment to Salary Continuation Agreement for Roger Caberto411
     Statement Regarding Computation of Net Income Per Share521
     Subsidiaries of Registrant623
     Consent of Hutchinson and Bloodgood, LLP531.1
     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)
   1 Filed as an exhibit of the same number to the Companys Registration Statement on Form S-8 filed with the with the Securities and Exchange Commission on July 3, 2006.
 2 Filed as Exhibit 10.1 to the Companys Form 8-K Current Report filed with the Securities and Exchange Commission on November 13, 2009.
 3 Filed as an exhibit of the same number to the Companys Form 10-QSB for the quarter ended September 30, 2006.
 4 Filed as an exhibit of the same number to the Companys Form 10-K for the year ended December 31, 2009.
 5 Filed as an exhibit of the same number to the Original Filing.
 6 Filed as an exhibit of the same number to the Companys Form 10-K/A for the year ended December 31, 2007.
  41


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SIGNATURES  Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.   Dated:  May 13, 2011CHINO COMMERCIAL BANCORP   By:/s/ Dann H. Bowman Dann H. Bowman President and Chief Executive Officer (Principal Executive Officer)  By:/s/ Sandra F. Pender Sandra F. Pender Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)     
  42


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