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, 2010



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 Number14345 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). ̈YesþNo On April 27, 2010, there were 696,461 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..
     14Item 3. Qualitative & Quantitative Disclosures about Market Risk...........................................
     31Item 4. Controls and Procedures............................................................................................
     31Part II  Other Information.............................................................................................................
     32Item 1.  Legal Proceedings..................................................................................................
     32Item 1A.  Risk Factors........................................................................................................
     32Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds.....................................
     32Item 3.  Defaults upon Senior Securities...............................................................................
     32Item 4.  (Removed and Reserved).......................................................................................
     32Item 5.  Other Information..................................................................................................
     32Item 6.  Exhibits.................................................................................................................
     32Signatures.....................................................................................................................................
     34




### 

2


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### PART 1  FINANCIAL INFORMATION

Item 1

CHINO COMMERCIAL BANCORP

CONSOLIDATED BALANCE SHEETS



March 31, 2010
     
     
     
     December 31, 2009(unaudited)
     
     
     
     (audited)ASSETS:Cash and due from banks
     $
     10,355,204
     
     
     $
     3,089,300Interest-bearing deposits in other banks
     
     26,672,252
     
     
     
     25,433,602Investment securities available for sale
     
     5,237,643
     
     
     
     5,567,855Investment securities held to maturity (fair value approximates$2,142,000 at March 31, 2010 and $2,332,000 at December 31, 2009)
     
     2,091,784
     
     
     
     2,291,962Total investments
     
     34,001,679
     
     
     
     33,293,419LoansReal estate
     
     50,339,110
     
     
     
     50,931,354Commercial
     
     9,312,613
     
     
     
     9,621,310Installment
     
     815,799
     
     
     
     855,564Gross loans
     
     60,467,522
     
     
     
     61,408,228Unearned fees and discounts
     
     (18,866
     )
     
     
     (17,887
     )Loans net of unearned fees and discount
     
     60,448,656
     
     
     
     61,390,341Allowance for loan losses
     
     (1,394,095
     )
     
     
     (1,277,526
     )Net loans
     
     59,054,561
     
     
     
     60,112,815Accrued interest receivable
     
     314,916
     
     
     
     326,206Restricted stock
     
     677,650
     
     
     
     677,650Fixed assets, net
     
     3,374,367
     
     
     
     3,100,183Other real estate owned
     
     0
     
     
     
     24,861Prepaid & other assets
     
     3,020,132
     
     
     
     2,956,242Total assets
     $
     110,798,509
     
     
     $
     103,580,676LIABILITIES:DepositsNon-interest bearing
     $
     37,405,737
     
     
     $
     35,872,495Interest BearingNOW and money market
     
     34,751,517
     
     
     
     31,148,654Savings
     
     1,178,593
     
     
     
     1,003,290Time deposits less than $100,000
     
     7,503,819
     
     
     
     6,722,558Time deposits of $100,000 or greater
     
     19,600,618
     
     
     
     17,541,461Total deposits
     
     100,440,284
     
     
     
     92,288,458Accrued interest payable
     
     147,392
     
     
     
     125,823Borrowings from Federal Home Loan Bank (FHLB)
     
     0
     
     
     
     994,000Accrued expenses & other payables
     
     649,009
     
     
     
     612,667Subordinated notes payable to subsidiary trust
     
     3,093,000
     
     
     
     3,093,000Total liabilities
     
     104,329,685
     
     
     
     97,113,948STOCKHOLDERS' EQUITYCommon stock, authorized 10,000,000 shares with no par value, issuedand outstanding 697,961 shares and 699,061 shares at March 31,2010 and December 31, 2009, respectively.
     
     2,466,649
     
     
     
     2,498,664Retained earnings
     
     3,926,192
     
     
     
     3,884,907Accumulated other comprehensive income
     
     75,983
     
     
     
     83,157Total stockholders' equity
     
     6,468,824
     
     
     
     6,466,728Total liabilities & stockholders' equity
     $
     110,798,509
     
     
     $
     103,580,676The 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 31,2010
     
     
     2009Interest incomeInvestment securities and due from banks
     $
     168,592
     
     $
     217,282Interest on Federal funds sold
     
     0
     
     
     34Interest and fee income on loans
     
     1,076,447
     
     
     891,357Total interest income
     
     1,245,039
     
     
     1,108,673Interest expenseDeposits
     
     241,283
     
     
     235,008Interest on Federal funds purchased
     
     0
     
     
     113Interest on FHLB borrowings
     
     30
     
     
     290Other borrowings
     
     50,963
     
     
     50,963Total interest expense
     
     292,276
     
     
     286,374Net interest income
     
     952,763
     
     
     822,299Provision for loan losses
     
     263,685
     
     
     16,151Net interest income afterprovision for loan losses
     
     689,078
     
     
     806,148Non-interest incomeService charges on deposit accounts
     
     267,641
     
     
     212,961Other miscellaneous income
     
     6,083
     
     
     9,601Dividend income from restricted stock
     
     3,137
     
     
     8,160Income from bank-owned life insurance
     
     16,974
     
     
     16,730Total non-interest income
     
     293,835
     
     
     247,452General and administrative expensesSalaries and employee benefits
     
     524,022
     
     
     488,695Occupancy and equipment
     
     85,848
     
     
     77,612Data and item processing
     
     80,040
     
     
     73,481Advertising and marketing
     
     13,818
     
     
     15,874Legal and professional fees
     
     45,016
     
     
     45,065Regulatory Assessments
     
     52,193
     
     
     28,028Insurance
     
     8,941
     
     
     7,784Directors' fees and expenses
     
     17,323
     
     
     18,207Other expenses
     
     101,725
     
     
     115,828Total general & administrative expenses
     
     928,926
     
     
     870,574Income before income tax expense
     
     53,987
     
     
     183,026Income tax expense
     
     12,702
     
     
     63,757Net income
     $
     41,285
     
     $
     119,269Basic earnings per share
     $
     0.06
     
     $
     0.17Diluted earnings per share
     $
     0.06
     
     $
     0.16The 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, 2008 (audited)
     708,420
     
     
     $
     2,617,542
     
     
     $
     3,534,236
     
     $
     28,975
     
     
     $
     6,180,753Comprehensive income:Net income
     
     
     
     
     
     
     
     
     350,671
     
     
     
     
     
     
     350,671Change in unrealized gain in securitiesavailable for sale, net of tax
     
     
     
     
     
     
     
     
     
     
     
     54,182
     
     
     
     54,182Total comprehensive income
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     404,853Exercise of stock options, includingtax benefit
     7,426
     
     
     
     59,622
     
     
     
     
     
     
     
     
     
     
     59,622Stock repurchased and retired
     (16,785
     )
     
     
     (178,500
     )
     
     
     
     
     
     
     
     
     
     (178,500
     )Balance at December 31, 2009 (audited)
     699,061
     
     
     
     2,498,664
     
     
     
     3,884,907
     
     
     83,157
     
     
     
     6,466,728Comprehensive income:Net income
     
     
     
     
     
     
     
     
     41,285
     
     
     
     
     
     
     41,285Change in unrealized income (loss) onsecurities available for sale, net of tax
     
     
     
     
     
     
     
     
     
     
     
     (7,174
     )
     
     
     (7,174
     )Total comprehensive income
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     34,111Exercise of stock options, includingtax benefit
     4,500
     
     
     
     50,236
     
     
     
     
     
     
     
     
     
     
     50,236Stock repurchased and retired
     (5,600
     )
     
     
     (82,250
     )
     
     
     
     
     
     
     
     
     
     (82,250
     )Balance at March 31, 2010 (unaudited)
     697,961
     
     
     $
     2,466,650
     
     
     $
     3,926,192
     
     $
     75,983
     
     
     $
     6,468,825The 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 31,2010
     
     
     
     2009Cash Flows from Operating ActivitiesNet income
     $
     41,285
     
     
     $
     119,269Adjustments to reconcile net income to net cash providedby operating activities:Provision for loan losses
     
     263,685
     
     
     
     16,151Depreciation and amortization
     
     34,343
     
     
     
     39,273Net amortization of securities
     
     (931
     )
     
     
     (4,648
     )Amortization of deferred loan (fees) costs
     
     979
     
     
     
     (9,060
     )Gain on sale of other real estate owned
     
     (149
     )
     
     
     0Deferred income tax
     
     (3,322
     )
     
     
     46Net changes in:Accrued interest receivable
     
     11,290
     
     
     
     (33,401
     )Other assets
     
     (57,017
     )
     
     
     983Accrued interest payable
     
     21,569
     
     
     
     37,654Other liabilities
     
     36,342
     
     
     
     103,879Net cash provided by operating activities
     
     348,074
     
     
     
     270,146Cash Flows from Investing ActivitiesNet change in interest-bearing deposits in other banks
     
     (1,238,650
     )
     
     
     (4,962,729
     )Activity in available for sale investment securities:Purchases
     
     0
     
     
     
     (1,414,675
     )Repayments and calls
     
     322,739
     
     
     
     1,617,840Activity in held to maturity investment securities:Repayments and calls
     
     205,498
     
     
     
     156,494Loan originations and principal collections, net
     
     793,590
     
     
     
     732,705Proceeds from sale of other real estate owned
     
     25,010
     
     
     
     64,924Purchase of premises and equipment
     
     (308,527
     )
     
     
     0Net cash provided (used) by investing activities
     
     (200,340
     )
     
     
     (3,805,441
     )Cash Flows from Financing ActivitiesNet increase in deposits
     
     8,151,826
     
     
     
     7,642,731Net decrease in FHLB borrowings
     
     (994,000
     )
     
     
     (2,400,000
     )Proceeds from the exercise of stock options
     
     42,594
     
     
     
     51,981Payments for stock repurchases
     
     (82,250
     )
     
     
     (118,018
     )Net cash provided (used) by financing activities
     
     7,118,170
     
     
     
     5,176,694Net increase in cash and cash equivalents
     
     7,265,904
     
     
     
     1,641,399Cash and Cash Equivalents at Beginning of Period
     
     3,089,300
     
     
     
     3,877,897Cash and Cash Equivalents at End of Period
     $
     10,355,204
     
     
     $
     5,519,296Supplemental InformationInterest paid
     $
     270,707
     
     
     $
     248,720Income 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, 2010



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 14345 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 two full-service banking offices. The Banks main branch office and administrative offices are located at 14345 Pipeline Avenue, Chino, California. On January 5, 2006 the Bank opened its Ontario branch located at 1551 South Grove Avenue, Ontario, 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.



Note 2  Basis of Presentation and Consolidation



The accompanying unaudited consolidated financial statements for the three months ended March 31, 2010 and 2009 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, 2009 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.  Management believes that the judgments, estimates and assumptions used in preparation of the Companys financial statements are appropriate given the factual circumstances as of March 31, 2010.

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. In particular, management has identified one accounting policy that is critical to an

understanding of the Companys financial statements due to judgments, estimates and assumptions inherent in this policy, and the sensitivity of the Companys financial statements to those judgments, estimates and assumptions. This policy relates to the methodology that determines the Companys allowance for loan losses.  Management has discussed the development and selection of this critical accounting policy with the CompanysAudit Committee of the Board of Directors. Although Management believes the level of the allowance at March 31, 2010 is adequate to absorb losses inherent in the loan portfolio, a further decline in the regional economy may result in increasing losses that cannot reasonably be predicted at this time. For further information regarding the allowance for loan losses and related methodology see Comparison of Financial Condition at March 31, 2010 and December 31, 2009  Allowance for Loan Losses included elsewhere herein.

7


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Note 4  Recent Accounting Pronouncements:



In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-05,Fair Value Measurements and Disclosures (Topic 820)  Measuring Liabilities at Fair Value.This ASU provides amendments for fair value measurements of liabilities.  It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques.  ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  ASU 2009-05 is effective for the periods beginning after October 1, 2009.  The adoption of ASU 2009-05 did not have a material impact on the Companys consolidated financial statements.



In January 2010, the 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 will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net 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 is effective for fiscal years beginning after December 15, 2010.  There was no significant effect to the Companys financial statement disclosure upon adoption of this ASU.



In June 2009, the FASB issued ASU 2009-16 (formerlyStatement of Financial Accounting Standards (SFAS) No. 166),Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.  ASU 2009-16 amends the de-recognition accounting and disclosure guidance relating to SFAS No. 140.  ASU 2009-16 eliminates the exemption from consolidation for qualifying special purpose entities (QSPEs), and requires a transferor to evaluate all existing QSPEs to determine whether they must be consolidated in accordance with ASU 2009-16.  It also amends the sale recognition rules for sales of participating interests in loans. ASU 2009-16 is effective as of the beginning of the first annual reporting period that begins after November 15, 2009.  The adoption of ASU 2009-16 on January 1, 2010 did not have a significant impact on the Companys financial condition, results of operations, or disclosures.



In June 2009, the FASB issued ASU 2009-17 (formerly SFAS No. 167),Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.This Statement amends ASC Topic 810,Consolidationto require an enterprise to perform an analysis and ongoing reassessments to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity, and amends certain guidance for determining whether an entity is a variable interest entity. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprises involvement in a variable interest entity. This Statement, which became effective for the Company on January 1, 2010, did not have an impact on its consolidated financial statements as the Company has no interests in any variable interest entities.



In February 2010, the FASB issued ASU 2010-09,Subsequent Events (Topic 855):  Amendments to Certain Recognition and Disclosure Requirements.  The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated, as this requirement would have potentially conflicted with SEC reporting requirements.  Removal of the disclosure requirement did not have an affect on the nature or timing of subsequent events evaluations performed by the Company.  ASU 2010-09 became effective upon issuance.



8


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Note 5  Investment Securities



The amortized cost and fair value of investment securities at March 31, 2010 are as follows:



Gross
     
     
     GrossAmortized
     
     
     Unrealized
     
     
     Unrealized
     
     
     
     FairCost
     
     
     Gains
     
     
     Losses
     
     
     
     ValueSecurities available for sale:Municipal bonds
     $
     743,227
     
     $
     17,417
     
     $
     -
     
     
     $
     760,644Mortgage-backed securities
     
     4,356,556
     
     
     122,105
     
     
     (1,662
     )
     
     
     4,476,999$
     5,099,783
     
     $
     139,522
     
     $
     (1,662
     )
     
     $
     5,237,643Securities held to maturity:Municipal bonds
     $
     436,523
     
     $
     3,009
     
     $
     -
     
     
     $
     439,532Mortgage-backed securities
     
     1,525,076
     
     
     44,185
     
     
     0
     
     
     
     1,569,261Corporate
     
     130,185
     
     
     2,871
     
     
     0
     
     
     
     133,056$
     2,091,784
     
     $
     50,065
     
     $
     -
     
     
     $
     2,141,849




The amortized cost and fair value of investment securities as of March 31, 2010 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
     
     0
     
     
     0
     
     
     130,185
     
     
     133,056After 5 years through 10 years
     
     0
     
     
     0
     
     
     101,087
     
     
     102,407After 10 years through 17 years
     
     743,227
     
     
     760,644
     
     
     335,436
     
     
     337,125Mortgage-backed securities
     
     4,356,556
     
     
     4,476,999
     
     
     1,525,076
     
     
     1,569,261$
     5,099,783
     
     $
     5,237,643
     
     $
     2,091,784
     
     $
     2,141,849




Information pertaining to securities with gross unrealized losses at March 31, 2010, 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
     968
     
     177,882
     
     695
     
     92,721






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, 2010, six securities have unrealized losses with aggregate depreciation of 0.6% 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  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. Cohen & Company acted as placement agent in connection with the offering of the Trust Preferred 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 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, 2009) 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, 2010 and 2009, accrued interest payable to the Trust amounted to $7,927 and $8,494, respectively. Interest expense for Trust Preferred Securities amounted to $50,963 for each of the quarters ended March 31, 2010 and 2009.





Note 7  Stock Based Compensation



Under the Companys stock option plan, the Company may grant incentive stock options to officers and employees, and non-qualified stock options to its directors, officers and employees. At March 31, 2010 and 2009, 108,405 shares were available for the grant of options. At March 31, 2010 and 2009, options covering 92,894 and 97,394 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 begin vesting after one year from date of grant at a rate of 33% per year. Non-qualified options vest 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.



The most recent grant of options occurred in 2003.Thus, there was no stock-based compensation expense for the three months ended March 31, 2010 and 2009.



Note 8 - 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 31,2010
     
     
     2009Weighted
     
     
     
     
     
     
     
     WeightedNet
     
     Average
     
     
     Per Share
     
     
     Net
     
     Average
     
     
     Per ShareIncome
     
     Shares
     
     
     Amount
     
     
     Income
     
     Shares
     
     
     AmountBasic earnings
     
     $
     41,285
     
     698,621
     
     $
     0.06
     
     $
     119,269
     
     707,741
     
     $
     0.17Effect of dilutive shares:assumed exercise ofoutstanding options
     
     
     
     
     38,575
     
     
     0.00
     
     
     
     
     16,261
     
     
     (0.01
     )Diluted earnings per share
     
     $
     41,285
     
     737,196
     
     $
     0.06
     
     $
     119,269
     
     724,002
     
     $
     0.16


10


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Note 9 - 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, 2010 and December 31, 2009, the Company had $5.9 million and $3.8 million, respectively, of off-balance sheet commitments to extend credit. These commitments represent a credit risk to the Company. At March 31, 2010 and December 31, 2009, 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 10  Fair Value Measurement



Accounting Standards Codification 820,Fair Value Measurements(ASC 820), defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

·Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.



·Level 2 - 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 to the valuation methodology are unobservable and significant to the fair value measurement.



Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:



11


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Securities available for sale

Where quoted prices are available for identical assets in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 of the valuation hierarchy and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Companys securities available for sale are considered to be Level 2 securities.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2010.



Quoted Prices
     
     
     Significantin Active
     
     
     OtherBalance as of
     
     
     Markets for
     
     
     Observable
     
     
     SignificantMarch 31,
     
     
     Identical Assets
     
     
     Inputs
     
     
     Unobservable InputsDescription
     
     
     2010
     
     
     (Level 1)
     
     
     (Level 2)
     
     
     (Level 3)Assets:Available-for-sale securities
     
     $
     5,237,643
     
     $
     -
     
     $
     5,237,643
     
     $
     -






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.



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, 2010, there were no loans held for sale.



Impaired loans



ASC 820 applies to loans measured for impairment using the practical expedients permitted by ASC 310-10-35, including impaired loans measured at an observable market price (if available), or at the fair value of the loans collateral (if the loan is collateral dependent), or at the present value of expected cash flows. Fair value of the loans collateral, when the loan is dependent on collateral, is determined by appraisal or independent valuation which is then adjusted for the cost related to liquidation of the collateral.



The following presents impaired loans measured at fair value on a non-recurring basis as of March 31, 2010.



Quoted Prices
     
     
     Significantin Active
     
     
     OtherBalance as of
     
     
     Markets for
     
     
     Observable
     
     
     SignificantMarch 31,
     
     
     Identical Assets
     
     
     Inputs
     
     
     Unobservable InputsDescription
     
     
     2010
     
     
     (Level 1)
     
     
     (Level 2)
     
     
     (Level 3)Assets:Impaired loans
     
     $
     1,414,884
     
     $
     -
     
     $
     -
     
     $
     1,414,884




12


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Other Real Estate Owned



Other real estate owned (OREO) is measured at fair value less cost to sell on a nonrecurring basis. The Company had no OREO at March 31, 2010.

### 



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.





Fair Value of Financial Instruments





March 31, 2010Carrying
     
     
     FairFinancial assets:
     
     
     Amount
     
     
     ValueCash and due from banks
     
     $
     10,355,204
     
     $
     10,355,204Interest-bearing deposits in other banks
     
     
     26,672,252
     
     
     26,751,317Stock investments
     
     
     677,650
     
     
     677,650Investment securities AFS
     
     
     5,237,643
     
     
     5,237,643Investment securities HTM
     
     
     2,091,784
     
     
     2,141,849Loans, net
     
     
     59,054,561
     
     
     59,538,824Accrued interest receivable
     
     
     314,916
     
     
     314,916Other Real Estate Owned
     
     
     -
     
     
     -Bank owned life insurance**
     
     
     1,696,846
     
     
     1,696,846Trups common securities **
     
     
     93,000
     
     
     101,176** included in Prepaid & other assetsFinancial liabilities:Deposits
     
     
     100,440,284
     
     
     100,518,815Subordinated note payable to subsidiary trust
     
     3,093,000
     
     
     3,364,911Accrued interest payable
     
     
     147,392
     
     
     147,392




### 

13


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### 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, 2010 and 2009, and the consolidated financial condition of the Company as of March 31, 2010 and December 31, 2009.



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 2009 Annual Report on Form 10-K.



Certain matters discussed in this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words anticipate, believe, estimate, may, intend, expect, and similar expressions identify certain of such forward-looking statements. Actual results could differ materially from such forward-looking statements contained herein. Factors that could cause future results to vary from current expectations include, but are not limited to, the following: changes in economic conditions (both generally and more specifically in the markets in which the Company operates); changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which the Company has no control); other factors affecting the Companys operations, markets, products and services; and other risks detailed in this Form 10-Q and in the Companys other reports filed with the Securities and Exchange Commission (the SEC) pursuant to the SECs rules and regulations. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date thereof.



Overview of the Results of Operations and Financial Condition



Results of Operations Summary

Net income for the quarter ended March 31, 2010 was $41,285 compared with $119,269 for the quarter ended March 31, 2009, a decrease of 65.4%. Basic and diluted earnings per share for the first quarter of 2010 were $0.06 and $0.06, compared to $0.17 and $0.16 for the first quarter of 2009. The Companys annualized return on average equity was 2.56% and annualized return on average assets was 0.15% for the quarter ended March 31, 2010, compared to a return on equity of 7.66% and a return on assets of 0.57% for the quarter ended March 31, 2009. The primary reasons for the change in net income during the first quarter of 2010 are as follows:



·The provision for loan losses was $263,685 for the first quarter of 2010, an increase of $247,534, compared to $16,151 for the three months ended March 31, 2009, in part due to the increase in nonperforming loans. The Company increased its loan loss provision during the first quarter of 2010 due to credit quality concerns stemming from deteriorated economic conditions, continued weakness in the real estate sector, and the increase in charged-off loans (see below).

·The net interest margin declined from 4.45% to 4.13%, due principally to a drop in the interest rates on interest earning assets, and an increase in the ratio of interest bearing deposits to total deposits. As a result of a 25.0% increase in average earning assets, net interest income increased 15.9% or $130,464 to $952,763 for the first quarter of 2010 compared to $822,299 for the first quarter of 2009.

·Service charges on deposits increased by $54,680 or 25.7% for the first quarter of 2010 compared to the first quarter of 2009, due to increased analysis charges and returned item charges.

·Salaries and employee benefits expense increased by 7.2% or $35,327 during the three months ended March 31, 2010 compared to the same period in 2009, due to increased staff in anticipation of opening the Rancho Cucamonga office in April 2010.

·Regulatory assessments increased by $24,165 to $52,193 for the first quarter of 2010 compared to $28,028 for the first quarter of 2009, due to increased deposits and increased assessment rates.



14


---








Financial Condition Summary

The Companys total assets were $110.8 million at March 31, 2010, an increase of $7.2 million, or 7.0%, compared to total assets of $103.6 million at December 31, 2009. The most significant changes in the Companys consolidated balance sheet during the first quarter of 2010 are outlined below:



- Total deposits increased from $92.3 million on December 31, 2009 to $100.4 million on March 31, 2010, an 8.8% increase. Interest-bearing deposits increased to $63.0 million at March 31, 2010, an increase of $6.6 million or 11.7% from December 31, 2009.
- Total non-interest bearing deposits increased from $35.9 million at December 31, 2009 to $37.4 million at March 31, 2010, a 4.3% increase in the first quarter. The ratio of non-interest bearing deposits to total deposits declined from 38.9% at December 31, 2009 to 37.2% at March 31, 2010 as the Company continues to focus on attracting new customers through competitive rates on interest-bearing deposit accounts.
- The Company experienced a slight decrease in interest-earning assets of 0.2% to $94.5 million in the first quarter of 2010, primarily in gross loans which decreased to $60.4 million at March 31, 2010, compared to $61.4 million at December 31, 2009.
- Nonperforming assets were comprised of four loans totaling $1.4 million at March 31, 2010, compared to five loans totaling $1.5 million at December 31, 2009.



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, 2010, net interest income increased to $952,763, an increase of 15.9% over the comparable quarter in 2009. 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, 2010 and 2009. 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.



15


---






Distribution, Yield and Rate Analysis of Net Interest Income

(unaudited)



For the three months ended
     
     
     
     For the three months endedMarch 31, 2010
     
     
     
     March 31, 2009Average
     
     
     Income/
     
     Average
     
     
     
     Average
     
     
     Income/
     
     AverageBalance
     
     
     Expense
     
     Yield/Rate 4
     
     
     
     Balance
     
     
     Expense
     
     Yield/Rate 4($ in thousands)AssetsInterest-earnings assetsLoans1
     $
     61,213
     
     $
     1,076
     
     7.13
     %
     
     $
     48,886
     
     $
     891
     
     7.39
     %U.S. government agencies securities
     
     0
     
     
     0
     
     0.00
     %
     
     
     1,167
     
     
     11
     
     3.77
     %Mortgage-backed securities
     
     6,152
     
     
     60
     
     3.96
     %
     
     
     7,784
     
     
     85
     
     4.44
     %Other securities & Due from banks time
     
     26,252
     
     
     109
     
     1.68
     %
     
     
     17,004
     
     
     121
     
     2.89
     %Federal funds sold
     
     0
     
     
     0
     
     0.00
     %
     
     
     64
     
     
     0
     
     0.21
     %Total interest-earning assets
     
     93,617
     
     $
     1,245
     
     5.39
     %
     
     
     74,905
     
     $
     1,108
     
     6.00
     %Non-interest earning assets
     
     14,413
     
     
     
     
     
     
     
     
     9,252Total assets
     $
     108,030
     
     
     
     
     
     
     
     $
     84,157Liabilities and Stockholders' EquityInterest-bearing liabilitiesMoney market and NOW deposits
     $
     32,450
     
     $
     134
     
     1.67
     %
     
     $
     28,838
     
     $
     163
     
     2.29
     %Savings
     
     1,041
     
     
     1
     
     0.26
     %
     
     
     992
     
     
     1
     
     0.24
     %Time deposits < $100,000
     
     7,109
     
     
     30
     
     1.72
     %
     
     
     4,110
     
     
     26
     
     2.53
     %Time deposits equal to or > $100,000
     
     18,457
     
     
     76
     
     1.68
     %
     
     
     6,757
     
     
     45
     
     2.77
     %Federal funds purchased
     
     0
     
     
     0
     
     4.06
     %
     
     
     36
     
     
     0
     
     1.28
     %Other borrowings
     
     103
     
     
     0
     
     0.12
     %
     
     
     575
     
     
     0
     
     0.20
     %Subordinated debenture
     
     3,093
     
     
     51
     
     6.68
     %
     
     
     3,093
     
     
     51
     
     6.68
     %Total interest-bearing liabilities
     
     62,253
     
     $
     292
     
     1.90
     %
     
     
     44,401
     
     $
     286
     
     2.62
     %Non-interest bearing deposits
     
     38,507
     
     
     
     
     
     
     
     
     32,651Non-interest bearing liabilities
     
     810
     
     
     
     
     
     
     
     
     880Stockholders' equity
     
     6,460
     
     
     
     
     
     
     
     
     6,225Total liabilities & stockholders' equity
     $
     108,030
     
     
     
     
     
     
     
     $
     84,157Net interest income
     
     
     
     $
     953
     
     
     
     
     
     
     
     $
     822Net interest spread 2
     
     
     
     
     
     
     3.49
     %
     
     
     
     
     
     
     
     3.38
     %Net interest margin 3
     
     
     
     
     
     
     4.13
     %
     
     
     
     
     
     
     
     4.45
     %




1Net amortization of loan fees (costs) are included in the calculation of interest income. Loan fees (costs) were approximately ($1,860) for the three months ended March 31, 2010, compared to $9,060 for the three months ended March 31, 2009. Loans are net of deferred fees and related direct costs.

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 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.

16


---










Volume and Rate Variances



For the quarter endedMarch 312010 vs. 2009Increase (Decrease) Due to($ in thousands)Volume
     
     
     Rate
     
     
     
     NetInterest-earnings assetsLoans
     $
     219
     
     
     ($34
     )
     
     $
     185Securities of U.S. government agencies
     
     (5
     )
     
     (6
     )
     
     
     (11
     )Mortgage-backed securities
     
     (17
     )
     
     (8
     )
     
     
     (25
     )Other securities & Due from banks time
     
     50
     
     
     (62
     )
     
     
     (12
     )Total interest-earning assets
     
     247
     
     
     (110
     )
     
     
     137Interest-bearing liabilitiesMoney market & NOW
     
     18
     
     
     (47
     )
     
     
     (29
     )Time deposits < $100,000
     
     15
     
     
     (11
     )
     
     
     4Time deposits equal to or > $100,000
     
     55
     
     
     (24
     )
     
     
     31Total interest-bearing liabilities
     
     88
     
     
     (82
     )
     
     
     6Change in net interest income
     $
     159
     
     
     ($28
     )
     
     $
     131




As shown above, the pure volume variance positively impacted net interest income by $159,000 in the first quarter of 2010 relative to the same period of 2009, while the rate variance negatively impacted net interest income by $28,000 for the same comparative period.



The net interest margin was 4.13% for the three months ended March 31, 2010, compared to 4.45% for the same period in 2009 due principally to a drop in the interest rates and an increase in the ratio of interest bearing deposits to total deposits.



Average loans increased $12.3 million or 25.2% for the first quarter of 2010 compared with the same period of 2009. Interest and fee income on loans increased $185,000. The increase in average loans resulted in approximately $219,000 increase in interest income from loans, while the decrease in interest rate resulted in approximately $34,000 decrease in income. The average yield on loans declined from 7.39% for the quarter ended March 31, 2009 to 7.13% for the quarter ended March 31, 2010.



Income from investment securities and time deposits due from banks for the quarter ended March 31, 2010 decreased by $48,690, or 22.4% in comparison to the quarter ended March 31, 2009. The primary contributing factor to this decrease was the decrease in the interest rate on due from banks time of 1.21%. The volume increase in investment securities and time deposits due from banks caused an increase in interest income of approximately $28,000, while the decreased rate negatively impacted income by approximately $76,000.



Average interest bearing liabilities increased $17.9 million or 40.2% in the first quarter of 2010, compared to the first quarter of 2009. The Company experienced continued migration of existing deposits to higher yielding accounts and higher yielding accounts opened by new customers, resulting in increases in money market and time account balances. The increase in average interest bearing deposits resulted in approximately a $88,000 increase in interest expense which was mostly offset by a decrease of approximately $82,000 resulting from a decline in rates in the first quarter of 2010, compared to the first quarter of 2009.



17


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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 $263,685 for the three months ended March 31, 2010, compared to $16,151 for the three months ended March 31, 2009. Principal losses resulted in the charge-off of three loans for a total of $147,910 in the first quarter of 2010. The Company received a recovery of $793 from a previously charged-off overdraft. The allowance for loan losses was $1,394,095 or 2.31% of gross loans receivable at March 31, 2010, compared to $1,277,526 or 2.08% at December 31, 2009 and $718,762 or 1.47% at March 31, 2009. The Company increased its loan loss provision during the first quarter of 2010 due to credit quality concerns stemming from deteriorated economic conditions, increased weakness in the real estate sector, and the increase in charged-off loans.At March 31, 2010, the Company had four nonperforming loans totaling $1.4 million, or 2.34% of total loans, compared to five nonperforming loans totaling $1.5 million, or 2.47% of total loans at December 31, 2009. At March 31, 2009, the Company had no nonperforming 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 $293,835 for the three months ended March 31, 2010, compared to $247,452 for the three months ended March 31, 2009. Total annualized non-interest income as a percentage of average earning assets remained at 1.3% for the three months ended March 31, 2010 and March 31, 2009. Although non-interest income increased in the first quarter of 2010, average earning assets also increased in the first quarter of 2010 compared to the same period of 2009.



The following table sets forth the Companys non-interest income for the three months ended March 31, 2010 and 2009:



Non-Interest Income for the three monthsended March 31,2010
     
     2009Amount
     
     % of Total
     
     Amount
     
     % of Total(Dollars in thousands)Service charges ondeposit accounts
     $     268
     
     91.0%
     
     $     212
     
     86.0%Other miscellaneousincome
     6
     
     2.1%
     
     10
     
     3.9%Dividend incomefrom restricted stock
     3
     
     1.1%
     
     8
     
     3.3%Income from bankowned life insurance
     17
     
     5.8%
     
     17
     
     6.8%Total non-interestincome
     $     294
     
     100.0%
     
     $     247
     
     100.0%As a percentage ofaverage earning assets
     
     
     1.3%
     
     
     
     1.3%




The 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 $54,680 or 25.7% for the first quarter of 2010 compared to the first quarter of 2009, 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.

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Non-Interest Expense



The following table sets forth the non-interest expense for the three months ended March 31, 2010 and 2009:



Non-Interest Expense for the quarter endedMarch 312010
     
     2009Amount
     
     % of Total
     
     Amount
     
     % of Total(Dollars in thousands)Salaries and employee benefits
     $     524
     
     56.4%
     
     $    489
     
     56.2%Occupancy and equipment
     86
     
     9.3%
     
     78
     
     9.0%Data and item processing
     80
     
     8.6%
     
     73
     
     8.4%Deposit products and services
     22
     
     2.4%
     
     23
     
     2.6%Legal and other professional fees
     45
     
     4.8%
     
     45
     
     5.2%Regulatory assessments
     52
     
     5.6%
     
     28
     
     3.2%Advertising and marketing
     14
     
     1.5%
     
     16
     
     1.8%Directors fees and expenses
     17
     
     1.8%
     
     18
     
     2.1%Printing and supplies
     15
     
     1.6%
     
     9
     
     1.0%Telephone
     9
     
     1.0%
     
     7
     
     0.8%Insurance
     9
     
     1.0%
     
     8
     
     0.9%Reserve for undisbursed lines of credit
     6
     
     0.6%
     
     2
     
     0.2%Other expenses
     50
     
     5.4%
     
     75
     
     8.6%Total non-interest expenses
     $     929
     
     100.0%
     
     $    871
     
     100.0%Non-interest expense as apercentage of average earning assets
     
     
     4.0%
     
     
     
     4.6%Efficiency ratio
     
     
     74.5%
     
     
     
     81.4%




Although non-interest expenses increased, total annualized non-interest expenses as a percentage of average assets decreased to 4.0% from 4.6% for the three months ended March 31, 2010, compared to three months ended March 31, 2009 due to the increase in average earning assets. Average earning assets were $93.6 million and $74.9 million the quarters ended March 31, 2010 and 2009, respectively. The efficiency ratio decreased in the most recent three-month period to 74.5%, compared to 81.4% for the same period in 2009 due to economies of scale arising from growth in earning assets.



Non-interest expenses were$928,926for the three months ended March 31, 2010, compared to $870,574for the three months ended March 31, 2009. The largest component of general and administrative expenses was salary and employee benefits expenseof $524,022 forthe first quarter of 2010, compared to $488,695for the three months ended March 31, 2009. The increase in salaries and benefits expenses was reflective of increased staff in anticipation of the opening of the Banks third branch in Rancho Cucamonga which opened in April 2010.



Regulatory assessments increased by $24,165 to $52,193 for the first quarter of 2010 compared to $28,028 for the first quarter of 2009, due to increased deposits and increased assessment rates.



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Another component of non-interest expense that affected the increase was occupancy expense which included property taxes and common area expenses of the Rancho Cucamonga office as it was readied for the April 2010 opening.



Provision for Income Taxes



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. 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 actual 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 $63,757 for the quarter ended March 31, 2009, representing approximately 34.8% 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, 2010 and December 31, 2009



General



Total assets increased by 7.0% from $103.6 million to $110.8 million between December 31, 2009 and March 31, 2010, due to an increase in deposit balances which in turn increased cash and due from banks. Although approximately 13% of the deposits are related to a number of the Companys customers that are engaged in real estate related activities, the vast majority of the Companys growth in deposits was from other companies and individuals unrelated to the real estate industry. The Company continues to actively seek to develop alternative and supplemental business relationships with other companies and individuals in an effort to offset any potential reductions related to the real estate market and more fully leverage the Companys capital.



Loan Portfolio



During the three months ended March 31, 2010, the Companys loan portfolio, net of unearned loan fees, decreased by $941,685 to $60.4 million at March 31, 2010, compared to $61.4 million at December 31, 2009. The Company experienced moderate declines in balances of real estate secured, commercial, and installment loans. The largest loan category at March 31, 2010 was real estate loans, which consist of commercial and consumer real estate loans, and represent 83.3% of the loan portfolio. In anticipation of 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, 2010 was commercial loans, constituting 15.4% of the loan portfolio. The composition of the Companys loan portfolio at March 31, 2010 and December 31, 2009 is set forth below:



March 31, 2010
     
     December 31, 2009Amount
     
     Percentage
     
     Amount
     
     PercentageReal estate
     $      50,339
     
     83.3%
     
     $      50,931
     
     82.9%Commercial
     9,313
     
     15.4%
     
     9,621
     
     15.7%Installment
     816
     
     1.3%
     
     856
     
     1.4%Gross loans
     $      60,468
     
     100.0%
     
     $      61,408
     
     100.0%






The average yield on the loan portfolio as of March 31, 2010 was 7.13% 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, 2010,approximately 69.1% of loans were variable rate loans tied to adjustable rate indices such as Prime Rate.



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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, 2010 and December 31, 2009, 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, 2010 and December 31, 2009, 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). 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. 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.



The following table presents comparative data for the Companys nonperforming assets:



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Nonperforming Assets



March 31
     
     
     December 31
     
     
     March 312010
     
     
     2009
     
     
     2009($ in thousands)NON-ACCRUAL LOANS:1Construction
     $                    -
     
     
     $                    -
     
     
     $                    -Real estate
     1,284
     
     
     1,285
     
     
     0Commercial
     131
     
     
     209
     
     
     0Installment
     0
     
     
     0
     
     
     0TOTAL NON-ACCRUAL LOANS
     1,415
     
     
     1,494
     
     
     0LOANS 90 DAYS OR MORE PAST DUE & STILL ACCRUING:Construction
     0
     
     
     0
     
     
     0Real 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
     1,415
     
     
     1,494
     
     
     0OREO
     0
     
     
     25
     
     
     588TOTAL NONPERFORMING ASSETS
     $            1,415
     
     
     $            1,519
     
     
     $               588Nonperforming loans as a percentage of total loans 3
     2.34%
     
     
     2.43%
     
     
     n/aNonperforming assets as a percentage of total loans and OREO
     2.34%
     
     
     2.47%
     
     
     1.19%Allowance for loan losses to nonperforming assets
     98.52%
     
     
     84.10%
     
     
     122.20%Allowance for loan losses
     $            1,394
     
     
     $            1,278
     
     
     $               7181Additional interest income of approximately $11,080, $16,800, and $0 respectively, would have been recorded for the periods ended March 31, 2010, December 31, 2009, and March 31, 2009 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, 2010, the Company had no foreclosed property (OREO) and four loans on non-accrual status, one of which was restructured and partially charged off. The Companys nonperforming assets at March 31, 2010 were 2.34% of the total loans and OREO. At December 31, 2009, the Company had one foreclosed property consisting of 1 remaining unit and five loans on non-accrual status, including the partially charged-off restructured loan. The Companys nonperforming assets at December 31, 2009 were 2.47% 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.

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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 $1,394,095 at March 31, 2010, $1,277,526 at December 31, 2009, and $718,762 at March 31, 2009. The ratios of the allowance for loan losses to total loans at March 31, 2010, December 31, 2009, and March 31, 2009 were 2.31%, 2.08%, and 1.47% respectively.



The table below summarizes, as of and for the three months ended March 31, 2010 and 2009 and the year ended December 31, 2009, 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.



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Allowance for Loan LossesAs of and for theQuarter Ended
     
     Year EndedMarch 31,
     
     December 31,2010
     
     2009
     
     2009Balances:
     ($ in thousands)Average total loansoutstanding during period
     $         61,213
     
     $         48,886
     
     $         56,450Total loans outstandingat end of the period
     $         60,468
     
     $         49,034
     
     $         61,408Allowance for loan losses:Balance at the beginning of period
     $           1,278
     
     $              702
     
     $              702Provision charged to expense
     264
     
     16
     
     779Charge-offsConstruction loans
     0
     
     0
     
     0Commercial loans
     148
     
     0
     
     203Commercial real estate loans
     0
     
     0
     
     0Installment loans
     0
     
     0
     
     2Total
     148
     
     0
     
     205RecoveriesConstruction loans
     0
     
     0
     
     0Commercial loans
     0
     
     0
     
     2Commercial real estate loans
     0
     
     0
     
     0Installment loans
     0
     
     0
     
     0Total
     0
     
     0
     
     2Net loan chage-offs(recoveries)
     148
     
     0
     
     203Balance
     $           1,394
     
     $              718
     
     $           1,278Ratios:Net loan charge-offs to average total loans
     0.24%
     
     0.00%
     
     0.36%Allowance for loan losses to total loans at the end of the period
     2.31%
     
     1.47%
     
     2.08%Net loan charge-offs (recoveries) to allowance for loan losses at the end of the period
     10.55%
     
     n/a
     
     15.96%Net loan charge-offs (recoveries) to Provision for loan losses
     55.79%
     
     n/a
     
     26.18%Allowance for loan losses to non-performing loans
     98.53%
     
     n/a
     
     85.52%






While Management believes that the amount of the allowance at March 31, 2010 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.



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Investment Portfolio



The market value of the Companys investment portfolio at March 31, 2010 was $7.4 million having a tax equivalent yield of 4.27%. This compares to an investment portfolio of $7.9 million at December 31, 2009 having a 4.32% tax equivalent yield. The primary category of investment in the portfolio at March 31, 2010 was mortgage-backed securities. At March 31, 2010, approximately 58% 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, 2010 and December 31, 2009:



March 31, 2010
     
     December 31, 2009Carrying
     
     Fair
     
     Carrying
     
     FairValue
     
     Value
     
     Value
     
     Value($ in thousands)Held to maturity:Municipal
     $          437
     
     $          440
     
     $          437
     
     $          439Mortgage-backed securities
     1,525
     
     1,569
     
     1,725
     
     1,760Corporate bonds
     130
     
     133
     
     130
     
     133Total held to maturity
     2,092
     
     2,142
     
     2,292
     
     2,332Available for sale:Federal agency
     0
     
     0
     
     0
     
     0Municipal
     761
     
     761
     
     754
     
     754Mortgage-backed securities
     4,477
     
     4,477
     
     4,814
     
     4,814Corporate bonds
     0
     
     0
     
     0
     
     0Total available for sale
     5,238
     
     5,238
     
     5,568
     
     5,568Total
     $       7,330
     
     $       7,380
     
     $       7,860
     
     $       7,900








There were no material changes since December 31, 2009 in the maturities or repricing of the investment securities.



Deposits



Total deposits increased $8.2 million or 8.8% to $100.4 million at March 31, 2010 from $92.3 million at December 31, 2009 due to the increase in interest-bearing deposit balances and demand deposits. Interest-bearing deposits increased $6.6 million or 11.7% to $63.0 million at March 31, 2010 from $56.4 million at December 31, 2009. Demand deposits increased $1.5 million or 4.3% to $37.4 million at March 31, 2010 from $35.9 million at December 31, 2009. The ratio of non-interest bearing funds to total deposits was 37.2% at March 31, 2010 and 38.9% at December 31, 2009.

A comparative distribution of the Companys deposits at March 31, 2010 and December 31, 2009, by outstanding balance as well as by percentage of total deposits, is presented in the following table:



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Distribution of Deposits and Percentage CompositionMarch 31, 2010
     
     December 31, 2009Amount
     
     Percentage
     
     Amount
     
     Percentage($ in thousands)Demand
     $       37,406
     
     37.2%
     
     $       35,872
     
     38.9%NOW
     1,454
     
     1.4%
     
     1,579
     
     1.7%Savings
     1,178
     
     1.2%
     
     1,003
     
     1.1%Money Market
     33,297
     
     33.2%
     
     29,570
     
     32.0%Time Deposits < $100,000
     7,504
     
     7.5%
     
     6,723
     
     7.3%Time Deposits > $100,000
     19,601
     
     19.5%
     
     17,541
     
     19.0%$     100,440
     
     100.0%
     
     $       92,288
     
     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, 2010 and 2009 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, 2010 and December 31, 2009, the Company had deposits from related parties representing 4.7% and 5.5% of total deposits of the Company, respectively. Further, at March 31, 2010 and December 31, 2009, deposits from escrow companies represented 13.1% 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, 2010 the Company had no FHLB advances or overnight borrowings outstanding, compared to $994,000 of FHLB borrowings outstanding at December 31, 2009.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 $6.5 million at March 31, 2010 and at December 31, 2009. There was an overall increase of $2,096 due to the following transactions. A decrease resulted from stock repurchases totaling $82,250 under the Companys stock repurchase program. The total shares repurchased during the first quarter of 2010 were 5,600. Options exercised increased stockholders equity by $50,236, while increasing outstanding stock by 4,500 shares. Net income increased retained earnings by $41,285. The change in the unrealized loss on investment securities decreased equity by $7,174 during the first quarter of 2010.



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 ofits 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, 2010, the Companys liquid assets totaled approximately $31.9 million and its liquidity level, measured as the percentage of liquid assets to total assets, was 28.8%. At December 31, 2009, the Companys liquid assets totaled approximately $34.1 million and its liquidity level, measured as the percentage of liquid assets to total assets, was 32.9%. 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%.



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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 and $3.5 million at Pacific Coast Bankers 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 $25.8 million at March 31, 2010.



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 6 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. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued inclusion of trust-preferred securities (and/or related subordinated debentures) in the Tier 1 capital of bank holding companies. Generally, the amount of junior subordinated debentures in excess of the 25% Tier 1 limitation is included in Tier 2 capital.



The Bank had Total Risk-Based and Tier 1 Risk-Based capital ratios of 13.75% and 12.49%, respectively at March 31, 2010, compared to 14.01% and 12.75%, respectively at December 31, 2009. At March 31, 2010 and December 31, 2009, the Banks Leverage Capital Ratios were 8.65% and 8.94%, respectively. As of March 31, 2010 and December 31, 2009, the Bank was well-capitalized. To be categorized as well-capitalized the Bank must maintain Total Risk-Based, Tier 1 Risk-Based, and Tier 1 Leverage Ratios of at least 10%, 6% and 5%, 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, 2010, the Companys Total Risk-Based and Tier 1 Risk-Based Capital ratios were 14.02% and 11.47%, respectively, and its Leverage Capital ratio was 7.89%.



The following table sets forth the Companys and the Banks regulatory capital ratios as of the dates indicated:



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Risk Based Ratios(unaudited)Minimum RequirementMarch 31, 2010
     December 31, 2009
     to be Well CapitalizedChino Commercial BancorpTotal capital to total risk-weighted assets
     14.02%
     14.32%
     10.00%Tier 1 capital to total risk-weighted assets
     11.47%
     11.73%
     6.00%Tier 1 leverage ratio
     7.89%
     8.23%
     5.00%Chino Commercial BankTotal capital to total risk-weighted assets
     13.75%
     14.01%
     10.00%Tier 1 capital to total risk-weighted assets
     12.49%
     12.75%
     6.00%Tier 1 leverage ratio
     8.65%
     8.94%
     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 50% of the Companys variable rate loans are at their floor with a weighted average yield of 7.3%. At March 31, 2010, 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 18.5% of all fixed rate loans at March 31, 2010 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.



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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. As of March 31, 2010, the Company had the following estimated net interest income sensitivity profile:





Immediate Change in Rate-200 bp
     
     -100 bp
     
     +100 bp
     
     +200 bpChange in net interest income (in $000s)
     $     147
     
     $       50
     
     $     275
     
     $     536% Change
     3.74%
     
     1.27%
     
     6.99%
     
     13.62%






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 200 basis points (bp). As of March 31, 2010, there has been no material change in interest rate risk since December 31, 2009.



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.



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The table below shows estimated changes in the Companys EVE as March 31, 2010, under different interest rate scenarios relative to a base case of current interest rates:





Immediate Change in Rate-200 bp
     
     -100 bp
     
     +100 bp
     
     +200 bpChanges in EVE (in $000's)
     $  2,834
     
     $  1,678
     
     $   (955)
     
     $(1,013)% Change
     25.3%
     
     15.0%
     
     -8.5%
     
     -9.0%




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.





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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 2010 that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



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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



Stock Repurchases



On January 18, 2010, the Board of Directors authorized an extension and expansion of its current stock repurchase program (the Repurchase Program).Under this expansion, a total of $200,000 in repurchases of the Companys common stock has been approved, and the expiration date of the Repurchase program has been extended from February 20, 2010 to February 18, 2011. This expansion was effective as of January 18, 2010.

The Repurchase Program is designed to improve the Company's return on equity and earnings per share, and to provide an additional outlet for shareholders interested in selling their shares. Repurchases pursuant to the program are made at the prevailing market prices from time to time in open market transactions or in privately negotiated transactions. The timing of the purchases and the number of shares to be repurchased at any given time will depend on market conditions and SEC regulations. The following table provides information concerning the Companys repurchases of its common stock during the first quarter of 2010:

January
     
     February
     
     MarchAverage per share price
     $         14.50
     
     $          15.50
     
     $               -Number of shares purchased as part of  publicly announced plan or program
     4,500
     
     1,100
     
     0Cumulative shares repurchased under program
     4,500
     
     5,600
     
     5,600Maximum number of shares (or approximate dollar value) remaining for purchase under a plan or program
     $     156,240
     
     $      139,190
     
     $      139,190






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 Bancorp (1)

3.2           Bylaws of Chino Commercial Bancorp (1)

10.12000 Stock Option Plan (filed herewith)

10.2Chino Commercial Bank, N.A. Salary Continuation Plan (1)

10.3Salary Continuation and Split Dollar Agreements for Dann H. Bowman (1)

10.4Employment Agreement for Dann H. Bowman (2)

10.5Salary Continuation and Split Dollar Agreements for Roger Caberto (1)

10.6Item Processing Agreement between the Bank and InterCept Group (1)

10.7Data Processing Agreement between the Bank and InterCept Group (1)

10.8Lease between Chino Commercial Bank, N.A. and Majestic Realty Co., as amended (3)

10.9Indenture dated as of October 27, 2006 between U.S. Bank National Association, as Trustee, and Chino Commercial Bancorp, as Issuer (3)

10.10Amended and Restated Declaration of Trust of Chino Statutory Trust I, dated as of October 27, 2006 (3)

10.11Guarantee Agreement between Chino Commercial Bancorp and U.S. Bank National Association dated as of October 27, 2006 (3)

10.12Amendment to Salary Continuation Agreement for Dann H. Bowman (4)

10.13Amendment to Salary Continuation Agreement for Roger Caberto (4)

11            Statement Regarding Computation of Net Income Per Share (5)



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31.1Certification of Chief Executive Officer (Section 302 Certification)

31.2Certification of Chief Financial Officer (Section 302 Certification)

32            Certification of Periodic Financial Report (Section 906 Certification)



(1)Incorporated by reference to the exhibit of the same number to the Companys Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on July 5, 2006.

(2)Incorporated by reference to exhibit 10.1 to the Companys Form 8-K Current Report filed with the Securities and Exchange Commission on November 13, 2009.

(3)Incorporated by reference to the exhibit of the same number to the Companys Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2006.

(4)Incorporated by reference to the exhibit of the same number to the Companys Form 10-K for the year ended December 31, 2008.

(5)The information required by this exhibit is incorporated from Note 7 of the Companys Consolidated Financial Statements included herein.





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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 14, 2010CHINO COMMERCIAL BACORP





By:/s/ Dann H. Bowman

Dann H. Bowman

President and Chief Executive Officer





By:/s/ Sandra F. Pender

Sandra F. Pender

Senior Vice President, Chief Financial Officer

and Chief Accounting Officer



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