Chino Commercial Bancorp - Quarter Report: 2011 June (Form 10-Q)

Unassociated Document

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 June 30, 2011

Commission file number: 000-52098

CHINO COMMERCIAL BANCORP

(Exact name of registrant as specified in its charter)

California	20-4797048
State of incorporation	I.R.S. Employer

14245 Pipeline Avenue
Chino, California	91710
Address 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. þ Yes o 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). oYes o 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 o Accelerated filer o Non-accelerated filer o

Smaller Reporting Company þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). oYes þ No

On August 10, 2010, there were 748,314 shares of Chino Commercial Bancorp Common Stock outstanding.

TABLE OF CONTENTS

		Page
Part I – Financial Information		1
Item 1. Financial Statements		1
Consolidated Balance Sheets		1
Consolidated Statements of Income		2
Consolidated Statements of Changes in Stockholders’ Equity		3
Consolidated Statements of Cash Flows		4
Notes to the Consolidated Financial Statements		5

Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations		19
Item 3. Qualitative & Quantitative Disclosures about Market Risk		39
Item 4. Controls and Procedures		39

Part II – Other Information		40
Item 1 – Legal Proceedings		40
Item 1A. – Risk Factors		40
Item 2 – Unregistered Sale of Equity Securities and Use of Proceeds		40
Item 3 – Defaults upon Senior Securities		40
Item 4 – (Removed and Reserved)		40
Item 5 – Other Information		40
Item 6 – Exhibits		40

Signatures		41

PART 1 – FINANCIAL INFORMATION

Item 1

CHINO COMMERCIAL BANCORP

CONSOLIDATED BALANCE SHEETS

	June 30, 2011			December 31, 2010
	(unaudited)			(audited)
ASSETS:
Cash and due from banks	$	4,268,706		$	3,041,114
Federal funds sold		5,296,122			4,660,527
Total cash and cash equivalents		9,564,828			7,701,641

Interest-bearing deposits in other banks		12,586,252			19,378,252
Investment securities available for sale		3,500,663			4,706,994
Investment securities held to maturity (fair value approximates $11,366,000 at June 30, 2011 and $12,302,000 at December 31, 2010)		11,101,785			12,153,915
Total investments		27,188,700			36,239,161
Loans
Real estate		49,471,601			51,459,881
Commercial		8,328,064			8,411,117
Installment		694,199			649,455
Gross loans		58,493,864			60,520,453
Unearned fees and discounts		(28,196	)		(27,204	)
Loans net of unearned fees and discount		58,465,668			60,493,249
Allowance for loan losses		(1,462,136	)		(1,442,153	)
Net loans		57,003,532			59,051,096

Accrued interest receivable		284,183			382,943
Restricted stock		667,700			626,250
Fixed assets, net		6,539,840			6,342,670
Foreclosed assets		439,317			516,534
Prepaid & other assets		2,924,020			3,053,531
Total assets	$	104,612,120		$	113,913,826

LIABILITIES:
Deposits
Non-interest bearing	$	42,460,394		$	41,909,584
Interest bearing
NOW and money market		30,835,817			36,241,586
Savings		1,853,762			2,085,092
Time deposits less than $100,000		5,357,048			6,377,430
Time deposits of $100,000 or greater		13,083,091			16,385,864
Total deposits		93,590,112			102,999,556

Accrued interest payable		76,335			104,967
Accrued expenses & other payables		677,705			700,046
Subordinated notes payable to subsidiary trust		3,093,000			3,093,000
Total liabilities		97,437,152			106,897,569
STOCKHOLDERS' EQUITY
Common stock, authorized 10,000,000 shares with no par value, issued and outstanding 748,314 shares at June 30, 2011 and at December 31, 2010.		2,750,285			2,750,285
Retained earnings		4,343,568			4,190,208
Accumulated other comprehensive income		81,115			75,764
Total stockholders' equity		7,174,968			7,016,257
Total liabilities & stockholders' equity	$	104,612,120		$	113,913,826

The accompanying notes are an integral part of these consolidated financial statements.

CHINO COMMERCIAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	For the three months ended June 30,						For the six months ended June 30,
	2011			2010			2011		2010
Interest income
Investment securities and due from banks	$	152,879		$	231,798		$	322,727	$	400,390
Interest on Federal funds sold		1,431			0			4,036		0
Interest and fee income on loans		902,996			1,038,996			1,915,774		2,115,443
Total interest income		1,057,306			1,270,794			2,242,537		2,515,833
Interest expense
Deposits		98,829			241,982			213,726		483,265
Other interest expense		75			540			75		569
Other borrowings		50,963			50,963			101,925		101,925
Total interest expense		149,867			293,485			315,726		585,759
Net interest income		907,439			977,309			1,926,811		1,930,074
Provision for loan losses		273,917			250,667			279,439		514,352
Net interest income after
provision for loan losses		633,522			726,642			1,647,372		1,415,722
Non-interest income
Service charges on deposit accounts		289,420			294,500			594,076		562,140
Gain on sale of foreclosed assets		0			0			61,151		149
Other miscellaneous income		8,257			8,742			15,506		14,675
Dividend income from restricted stock		2,789			(1,679	)		5,559		1,457
Income from bank-owned life insurance		17,596			17,366			34,821		34,341
Total non-interest income		318,062			318,929			711,113		612,762
General and administrative expenses
Salaries and employee benefits		520,894			570,428			1,108,294		1,094,450
Occupancy and equipment		112,221			105,622			226,802		191,470
Data and item processing		94,213			91,800			191,185		171,840
Advertising and marketing		11,083			15,063			27,236		28,881
Legal and professional fees		131,989			39,428			202,223		84,444
Regulatory assessments		75,920			53,557			151,367		105,750
Insurance		9,224			9,050			19,649		17,992
Directors' fees and expenses		21,175			17,095			36,776		34,418
Other expenses		79,427			143,074			173,742		244,798
Total general & administrative expenses		1,056,146			1,045,117			2,137,274		1,974,043
Income (loss) before income tax expense (benefit)		(104,562	)		454			221,211		54,441
Income tax expense (benefit)		(54,617	)		(13,738	)		67,851		(1,037	)
Net income (loss)	$	(49,945	)	$	14,192		$	153,360	$	55,478
Basic earnings (loss) per share	$	(0.07	)	$	0.02		$	0.20	$	0.08
Diluted earnings (loss) per share	$	(0.07	)	$	0.02		$	0.20	$	0.08

The accompanying notes are an integral part of these consolidated financial statements.

CHINO COMMERICAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

	Number of Shares			Common Stock			Retained Earnings		Accumulated Other Comprehensive Income			Total
Balance at December 31, 2009 (audited)		699,061		$	2,498,664		$	3,884,907	$	83,157		$	6,466,728
Comprehensive income:
Net income								305,301					305,301
Change in unrealized gain on securities available for sale, net of tax										(7,393	)		(7,393	)
Total comprehensive income													297,908

Exercise of stock options, including tax benefit		82,541			714,043								714,043
Stock repurchased and retired		(33,288	)		(462,422	)							(462,422	)
Balance at December 31, 2010 (audited)		748,314			2,750,285			4,190,208		75,764			7,016,257
Comprehensive income:
Net income								153,360					153,360
Change in unrealized gain on securities available for sale, net of tax										5,351			5,351
Total comprehensive income													158,711

Balance at June 30, 2011 (unaudited)		748,314		$	2,750,285		$	4,343,568	$	81,115		$	7,174,968

The accompanying notes are an integral part of these consolidated financial statements.

CHINO COMMERCIAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended June 30,
	2011			2010
Cash Flows from Operating Activities
Net income	$	153,360		$	55,478
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		279,439			514,352
Depreciation and amortization		111,360			84,737
Net amortization of securities		32,771			6,272
Amortization of deferred loan (fees) costs		992			(6,604	)
Loss on disposition of equipment		314			0
Gain on sale of foreclosed assets		(61,151	)		(149	)
Deferred income taxes (benefit)		(124,082	)		(302,963	)
Net changes in:
Accrued interest receivable		98,761			(26,106	)
Other assets		249,852			(345,648	)
Accrued interest payable		(28,632	)		33,033
Other liabilities		(22,340	)		69,317
Net cash provided by operating activities		690,644			81,719

Cash Flows from Investing Activities
Net change in interest-bearing deposits in other banks		6,792,000			6,945,350
Activity in investment securities available for sale
Purchases		0			0
Repayments and calls		1,214,376			515,421
Activity in investment securities held to maturity
Repayments and calls		1,020,405			(12,048,803	)
Purchase of stock investments, restricted		(41,450	)		17,200
Loans purchased		0			0
Loan originations and principal collections, net		1,327,816			205,788
Proceeds from sale of foreclosed assets		577,685			25,010
Purchase of premises and equipment		(308,844	)		(755,547	)
Net cash provided (used) by investing activities		10,581,987			(5,095,581	)

Cash Flows from Financing Activities
Net increase in deposits		(9,409,444	)		10,483,457
Net decrease in borrowings		0			(994,000	)
Proceeds from the exercise of stock options		0			560,268
Payments for stock repurchases		0			(431,037	)
Net cash provided (used) by financing activities		(9,409,444	)		9,618,688
Net increase in cash and cash equivalents		1,863,187			4,604,826

Cash and Cash Equivalents at Beginning of Period		7,701,641			3,089,300
Cash and Cash Equivalents at End of Period	$	9,564,828		$	7,694,126

Supplemental Information
Interest paid	$	344,358		$	552,726
Income taxes paid	$	77,000		$	129,000
Loans transferred to other real estate owned	$	439,317		$	572,734

The accompanying notes are an integral part of these consolidated financial statements.

CHINO COMMERCIAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

Note 1 – The Business of Chino Commercial Bancorp

Chino Commercial Bancorp (the “Company”) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in Chino, California. The Company was incorporated in March 2006 and acquired 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 it may acquire or establish. The Company’s principal source of income is dividends and tax equalization payments 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 the Accounting Standards codification 810, Consolidation, Chino Statutory Trust I is not reflected on a consolidated basis in the consolidated financial statements of the Company.

The Company’s Administrative Offices are located at 14245 Pipeline Avenue, Chino, California and the telephone number is (909) 393-8880. References herein to the “Company” include Chino Commercial Bancorp and its consolidated subsidiary, unless the context indicates otherwise.

The Bank is a national bank which was organized under the laws of the United States in December 1999 and commenced operations on September 1, 2000. The Bank operates three full-service banking offices. The Bank’s main branch office and administrative offices are located at 14245 Pipeline Avenue, Chino, California. On January 5, 2006 the Bank opened its Ontario branch located at 1551 South Grove Avenue, Ontario, California and on April 5, 2010 the Bank opened its Rancho Cucamonga branch located at 8229 Rochester Avenue, Rancho Cucamonga, California. On July 2, 2010, the Company acquired property at 14245 Pipeline Avenue, Chino, California, which became the main branch and administrative headquarters in January 2011.

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

The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements. They do not, however, include all of the information and footnotes required by such accounting principles for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole. Certain prior period amounts have been reclassified to conform to current period classification. The interim financial information, which is unaudited, should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2010 as filed with the Securities and Exchange Commission (SEC).

Note 3 – Critical Accounting Policies:

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Company’s financial statements and accompanying notes. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Critical accounting policies are those that involve the most complex and subjective decisions and assessments and have the greatest potential impact on the Company’s results of operation. There were no significant changes to the Company’s critical accounting policies discussed in the Form 10-K, as amended, for the year ended December 31, 2010.

Note 4 – Recent Accounting Pronouncements:

In April 2011, the Financial Accounting Standard Board (“FASB”) amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring (“TDR”). The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. The disclosures about TDRs will be required as of the period of adoption of the new TDR guidance. The Company has not determined the impact, if any, upon the adoption of the standard.

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and international accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that comprehensive income (consisting of net income plus other comprehensive income) be presented either in a single continuous statement or in two separate consecutive statements. The adoption of this amendment will change the presentation of the components of comprehensive income for the Company. This amendment is effective for fiscal and interim periods beginning after December 15, 2011.

Note 5 – Investment Securities

The amortized cost and fair value of investment securities at June 30, 2011 are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available for sale:
Municipal bonds	$	743,354	$	31,415	$	-	$	774,769
Mortgage-backed securities		2,619,476		106,418		-		2,725,894
	$	3,362,830	$	137,833	$	-	$	3,500,663

Securities held to maturity:
Municipal bonds	$	433,585	$	2,732	$	-	$	436,317
Federal agency		2,500,000		36,587		-		2,536,587
Mortgage-backed securities		8,086,183		223,876		-		8,310,059
Corporate		82,017		1,341		-		83,358
	$	11,101,785	$	264,536	$	-	$	11,366,321

The amortized cost and fair value of investment securities as of June 30, 2011 by contractual maturity are shown below:

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Within 1 year	$	-	$	-	$	-	$	-
After 1 year through 5 years		-		-		82,017		83,358
After 5 years through 10 years		-		-		2,933,585		2,972,904
After 10 years through 17 years		743,354		774,769		-		-
Mortgage-backed securities		2,619,476		2,725,894		8,086,183		8,310,059
	$	3,362,830	$	3,500,663	$	11,101,785	$	11,366,321

Information pertaining to securities with gross unrealized losses at June 30, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less than 12 Months		Over 12 Months
	Gross		Gross
	Unrealized	Fair	Unrealized	Fair
	Losses	Value	Losses	Value
Securities available for sale
Mortgage-backed securities
	0	0	0	0

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2011, no securities have unrealized losses.

Note 6 – Loans and Allowance for Loan Losses

At December 31, 2010, the Company had 11 impaired loans totaling $4,167,572, all of which were on non-accrual status. Only one of those loans was past due over 90 days.

At June 30, 2011, there were 14 impaired loans totaling $4,416,122 all of which were on a non-accrual status. Only one of those loans was past due over 90 days. There were no accruing loans past due over 60 days. As of June 30, 2011, there were three overdraft past due over 30 days.

Changes in the allowance for loan losses are summarized as follows for three months ended June 30, 2011:

	One to Four			Residential		Commercial			Commercial
	Residential			Income		Real Estate			& Industrial			Consumer		Installment		Other			Total
Beginning balance	$	48,237		$	9,506	$	1,136,404		$	242,898		$	421	$	9,391	$	818		$	1,447,675
April 1. 2011
Provision for loan losses		1,298			8,370		157,247			106,533			319		379		(229	)		273,917
Loans charged-off		(2,213	)		-		(113,336	)		(143,907	)		-		-		-			(259,456	)
Recoveries		-			-		-			-			-		-		-			-

Ending Balance	$	47,322		$	17,876	$	1,180,315		$	205,524		$	740	$	9,770	$	589		$	1,462,136

Changes in the allowance for loan losses are summarized as follows for six months ended June 30, 2011:

	One to Four			Residential		Commercial Real			Commercial &
	Residential			Income		Estate			Industrial			Consumer			Installment		Other			Total
Beginning balance	$	46,335		$	2,876	$	1,140,786		$	241,243		$	746		$	9,178	$	989		$	1,442,153
January 1. 2011
Provision for loan losses		3,200			15,000		152,865			108,188			(6	)		592		(400	)		279,439
Loans charged-off		(2,213	)		-		(113,336	)		(143,907	)		-			-		-			(259,456	)
Recoveries		-			-		-			-			-			-		-			-

Ending Balance	$	47,322		$	17,876	$	1,180,315		$	205,524		$	740		$	9,770	$	589		$	1,462,136

Loans serviced for others are portions of loans participated out to other banks. Loan balances reported herein are net of these participated balances. The unpaid principal balance of loans serviced for others was $1,673,128 and $1,692,555 at June 30, 2011 and December 31, 2010, respectively.

The following tables present loans and the allowance for loan losses by segment as of June 30, 2011 and December 31, 2010:

Loans and Allowance for Loan Losses (by loan segment)

As of June 30, 2011

	One to Four		Residential		Commercial Real		Commercial and
	Residential		Income		Estate		Industrial		Consumer		Installment		Other		Total
Loans:
Balance	$	2,693,857	$	961,101	$	46,777,744	$	7,348,590	$	31,302	$	662,897	$	18,373	$	58,493,864
Individually evaluated for impairment		938,048		-		1,796,696		1,681,378		-		-		-		4,416,122
Collectively evaluated for impairment		1,755,809		961,101		44,981,048		5,667,212		31,302		662,897		18,373		54,077,742
Allowance for loan losses:
Balance		47,322		17,876		1,180,315		205,524		740		9,770		589		1,462,136
Individually evaluated for impairment		26,359		-		50,487		47,390		-		-		-		124,236
Collectively evaluated for impairment	$	20,963	$	17,876	$	1,129,828	$	158,134	$	740	$	9,770	$	589	$	1,337,900

Loans and Allowance for Loan Losses (by loan segment)

As of December 31, 2010

	One to Four		Residential		Commercial		Commercial and
	Residential		Income		Real Estate		Industrial		Consumer		Installment		Other		Total
Loans:
Balance	$	2,771,247	$	479,303	$	48,209,331	$	8,380,407	$	28,034	$	621,420	$	30,711	$	60,520,453
Individually evaluated for impairment		723,115		-		2,372,879		1,071,578		-		-		-		4,167,572
Collectively evaluated for impairment		2,048,132		479,303		45,836,452		7,308,829		28,034		621,420		30,711		56,352,881
Allowance for loan losses:
Balance		46,335		2,876		1,140,786		241,243		746		9,178		989		1,442,153
Individually evaluated for impairment		17,066		-		56,000		25,329		-		-		-		98,395
Collectively evaluated for impairment	$	29,269	$	2,876	$	1,084,786	$	215,914	$	746	$	9,178	$	989	$	1,343,758

Management segregates the loan portfolio into portfolio segments for purposes of developing and documenting a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.

The Company’s loan portfolio is segregated into the following portfolio segments.

One to Four Family Residential. This portfolio segment consists of the origination of first mortgage loans and home equity second mortgage loans secured by one-to four-family owner occupied residential properties located in the Company’s market area. The Company has experienced no foreclosures on its owner occupied loan portfolio during recent periods and believes this is due mainly to its conservative lending strategies including its non-participation in “interest only”, “Option ARM,” “sub-prime” or “Alt-A” loans.

One to Four Family Income. This portfolio segment consists of the origination of first mortgage loans secured by one-to four-family non-owner occupied residential properties in its market area. Such lending involves additional risks arising from the use of the properties by non-owners.

Commercial Real Estate Loans. This portfolio segment includes loans secured by commercial real estate, including multi-family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than one-to four-family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans. The Company has experienced only two foreclosures on its owner occupied commercial real estate loan portfolio during recent periods and believes this minimal foreclosure activity is due mainly to its conservative lending strategies.

Commercial and Industrial Loans. This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than one- to four-family residential loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

Consumer Loans. This portfolio segment includes loans to individuals for overdraft protection and personal lines of credit.

Installment Loans. This portfolio segment includes loans to individuals for personal purposes, including but not limited to automobile loans.

The following tables summarize the loan portfolio at June 30, 2011 and December 31, 2010 by credit risk profiles based on internally assigned grades. Information has been updated for each credit quality indicator as of those dates.

Credit Quality Indicators (by loan class)

As of June 30, 2011

			Special		Grade
	Pass		Mention		Substandard		Doubtful		Total
One to four residential:
Closed-end	$	1,755,809	$	—	$	938,048	$	—	$	2,693,857
Revolvers				—		—		—		—

Residential income		961,101		—		—		—		961,101

Commercial real estate:
Owner occupied		19,369,918		179,107		2,512,879		—		22,061,904
Non-owner occupied		21,091,408		1,085,767		2,538,665		—		24,715,840

Commercial and industrial:
Secured		2,541,164		-		2,234,443		—		4,775,607
Unsecured		2,199,931		228,378		144,674		—		2,572,983

Consumer		31,302		—		—		—		31,302

Installment		662,897		—		—		—		662,897

Other		18,373		—		—		—		18,373

Total	$	48,631,903	$	1,493,252	$	8,368,709	$	—	$	58,493,864

Credit Quality Indicators (by loan class)

As of December 31, 2010

			Special		Grade
	Pass		Mention		Substandard		Doubtful		Total
One to four residential:
Closed-end	$	1,795,797	$	—	$	975,450	$	—	$	2,771,247
Revolvers		—		—		—		—		—

Residential income		479,303		—		—		—	$	479,303

Commercial real estate:
Owner occupied		20,259,055		313,041		3,081,037		—		23,653,133
Non-owner occupied		22,206,112		802,731		1,547,355		—		24,556,198

Commercial and industrial:
Secured		2,470,494		150,000		1,732,331		—		4,352,825
Unsecured		3,485,320		231,852		310,410		—		4,027,582

Consumer		28,034		—		—		—		28,034

Installment		621,420		—		—		—		621,420

Other		30,711		—		—		—		30,711

Total	$	51,376,246	$	1,497,624	$	7,646,583	$	—	$	60,520,453

The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that there continuance as assets is not warranted. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

When assets are classified as special mention, substandard or doubtful, the Company allocates a portion of the related general loss allowances to such assets as the Company deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by regulatory agencies, which can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following tables set forth certain information with respect to the Bank’s portfolio delinquencies by loan class and amount as of June 30, 2011 and December 31, 2010:

Age Analysis of Past Due Loans (by class)

As of June 30, 2011

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days or more and Accruing
One to four residential:
Closed-end	$	—	$	—	$	—	$	—	$	2,693,857	$	2,693,857	$	—
Residential income		—		—		—		—		961,101		961,101		—
Commercial real estate:
Owner occupied		277,012		184,057		—		461,069		21,600,835		22,061,904		—
Non-owner occupied		—		—		—		—		24,715,840		24,715,840		—
Commercial and industrial:
Secured		—		—		240,741		240,741		4,534,866		4,775,607		—
Unsecured		—		—		—		—		2,572,983		2,572,983		—

Consumer		—		—		—		—		31,302		31,302		—

Installment		—		—		—		—		662,897		662,897		—

Other		1,585		—		—		1,585		16,788		18,373		—
Total	$	278,597	$	184,057	$	240,741	$	703,395	$	57,790,469	$	58,493,864	$	—

Age Analysis of Past Due Loans (by class)

As of December 31, 2010

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days or more and Accruing
One to four residential:
Closed-end	$	—	$	—	$	—	$	—	$	2,771,247	$	2,771,247	$	—
Residential income		—		—		—		—		479,303		479,303		—
Commercial real estate:
Owner occupied		—		—		440,723		440,723		23,212,410		23,653,133		—
Non-owner occupied		—		—		—		—		24,556,198		24,556,198		—
Commercial and industrial:
Secured		—		—		—		—		4,352,825		4,352,825		—
Unsecured		—		—		—		—		4,027,582		4,027,582		—
Consumer		—		—		—		—		28,034		28,034		—
Installment		—		—		—		—		621,420		621,420		—
Other		—		—		—		—		30,711		30,711		—
Total	$	—	$	—	$	440,723	$	440,723	$	60,079,730	$	60,520,453	$	—

The following tables summarize impaired loans by loan class as of June 30, 2011 and December 31, 2010:

Impaired Loans (by loan class)

As of and For the Three and Six Months Ended June 30, 2011

			Unpaid				Average Recorded Investment				Interest
	Recorded		Principal		Related		for three		for six		Income
	Investment		Balance		Allowance		Months		Months		Recognized
With an allowance recorded:
One to four residential:
Closed-end	$	938,048	$	938,048	$	26,359	$	760,237	$	748,014	$	—

Commercial real estate:
Owner occupied		944,369		944,369		26,537		1,280,181		1,367,508		—
Non-owner occupied		852,327		852,327		23,950		859,332		866,298		—

Commercial and industrial:
Secured		1,681,378		1,681,378		47,390		1,231,318		1,160,316		—

Total:
One to four residential	$	938,048	$	938,048	$	26,359	$	760,237	$	748,014	$	—
Commercial real estate	$	1,796,696	$	1,796,696	$	50,487	$	2,139,514	$	2,233,806	$	—
Commercial and industrial	$	1,681,378	$	1,681,378	$	47,390	$	1,231,318	$	1,160,316	$	—

Impaired Loans (by loan class)

As of and For the Year Ended December 31, 2010

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With an allowance recorded:
One to four residential:
Closed-end	$	723,115	$	723,115	$	17,066	$	346,484	$	—

Commercial real estate:
Owner occupied		1,492,530		1,492,530		35,224		685,117		—
Non-owner occupied		880,349		880,349		20,776		473,639		—

Commercial and industrial:
Secured		1,071,578		1,071,578		25,329		302,791		—

Total:
One to four residential	$	723,115	$	723,115	$	17,066	$	346,484	$	—
Commercial real estate	$	2,372,879	$	2,372,879	$	56,000	$	1,158,756	$	—
Commercial and industrial	$	1,071,578	$	1,071,578	$	25,329	$	302,791	$	—

A summary of nonaccrual loans by loan class is as follows:

Loans on Nonaccrual Status (by loan class)

	June 30, 2011		December 31, 2010
One to four residential:
Closed-end	$	938,048	$	723,115

Commercial real estate:
Owner occupied		944,369		1,492,530
Non-owner occupied		852,327		880,349

Commercial and industrial:
Secured		1,681,378		1,071,578

Total	$	4,416,122	$	4,167,572

Note 7 – Subordinated Notes Payable to Subsidiary Trust

On October 25, 2006, Chino Statutory Trust I (the Trust), a newly formed Connecticut statutory 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 the rate of 6.795% for the first five years from October 27, 2006 to December 15, 2011 and at a variable interest rate to be adjusted quarterly equal to LIBOR (1.435% at December 16, 2011) 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 June 30, 2011 and 2010, accrued interest payable to the Trust amounted to $8,494. Interest expense for Trust Preferred Securities amounted to $50,963 for each of the quarters ended June 30, 2011 and 2010 and $101,925 for each of the half years ended June 30, 2011 and 2010. As the Company has no other source of income other than dividends from the Bank, payment of the interest relating to the Trust Preferred Securities depends on the Bank’s continuing ability to pay sufficient dividends to cover such payments. The Bank is currently required by the Formal Agreement with the OCC to obtain the approval of the OCC prior to paying any dividends to the Company, and the Company is required to obtain the approval of the FRB prior to receiving any dividends from the Bank or paying interest on the trust preferred securities. See “Recent Developments” in Item 2 below.

Note 8 – Stock Based Compensation

Under the Company’s stock option plan, the Company granted incentive stock options to officers and employees, and non-qualified stock options to its directors, officers and employees. The Plan terminated on July 13, 2010, and no options can be granted under the Plan thereafter, but such termination did not affect any Options previously granted. Therefore, at June 30, 2011, no shares were available for the grant of options compared to 108,405 shares at June 30, 2010. At June 30, 2011 and 2010, options covering 13,628 and 14,853 shares, respectively, were outstanding. The Plan provides that the exercise price of these options shall not be less than the market price of the common stock on the date granted. Incentive options began vesting after one year from date of grant at a rate of 33% per year. Non-qualified options vested as follows: 25% on the date of the grant, and 25% per year thereafter. All options expire 10 years after the date of grant. Compensation cost relating to share-based payment transactions is recognized in the financial statements over the vesting period of the options.

The most recent grant of options occurred in 2003. Thus, there was no stock-based compensation expense for the three and six months ended June 30, 2011 and 2010.

Note 9 - Earnings per share (EPS)

Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings.

The weighted-average number of shares used in computing basic and diluted earnings per share is as follows:

Earnings per share Calculation

For the three months ended June 30,

	2011									2010
				Weighted								Weighted
	Net			Average			Per Share			Net		Average		Per Share
	Income			Shares			Amount			Income		Shares		Amount
Basic earnings (loss)	$	(49,945	)		748,314		$	(0.07	)	$	14,192		701,894	$	0.02

Effect of dilutive shares:
assumed exercise of outstanding options					(1,969	)		0.00					3,740		0.00

Diluted earnings (loaa)	$	(49,945	)		746,345		$	(0.07	)	$	14,192		705,634	$	0.02

Earnings per share Calculation

For the six months ended June 30,

	2011							2010
			Weighted							Weighted
	Net		Average			Per Share		Net		Average		Per Share
	Income		Shares			Amount		Income		Shares		Amount
Basic earnings	$	153,360		748,314		$	0.20	$	55,478		700,257	$	0.08

Effect of dilutive shares:
assumed exercise of outstanding options				(198	)		0.00				3,616		0.00

Diluted earnings per share	$	153,360		748,116		$	0.20	$	55,478		703,873	$	0.08

Note 10 - Off-Balance-Sheet Commitments

The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to grant loans, unadvanced lines of credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

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 June 30, 2011 and December 31, 2010, the Company had $4.5 million and $5.6 million, respectively, of off-balance sheet commitments to extend credit. These commitments represent a credit risk to the Company. At June 30, 2011 and December 31, 2010, the Company had no unadvanced standby letters of credit.

Commitments to grant loans are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, equipment, income-producing commercial properties, residential properties, and properties under construction.

Note 11 – Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The tables below present information about the Company’s assets measured at fair value on a recurring and non-recurring basis as of June 30, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. No liabilities were measured at fair value at June 30, 2011 and December 31, 2010.

The fair value hierarchy is as follows:

·	Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

·	Level 2 Inputs - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·	Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following section describes the valuation methodologies used for assets measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Financial assets measured at fair value on a recurring basis include the following:

Securities Available for Sale. The securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The following table presents the balances of securities available for sale as of June 30, 2011 and December 31, 2010.

Description	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities Available for Sale
at June 30, 2011
Municipal bonds	$	774,769	$	-	$	774,769	$	-
Mortgage-backed securities		2,725,894		-		2,725,894		-
Total	$	3,500,663	$	-	$	3,500,663	$	-

at December 31, 2010
Municipal bonds	$	753,616	$	-	$	753,616	$	-
Mortgage-backed securities		3,953,378		-		3,953,378		-
Total	$	4,706,994	$	-	$	4,706,994	$	-

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

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 June 30, 2011 and December 31, 2010, there were no loans held for sale.

Impaired loans

Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2.

Impaired loans that are not collateral dependent are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate. Troubled debt restructurings are also carried at the present value of expected future cash flows. However, expected cash flows for troubled debt restructurings are discounted using the loan’s original effective interest rate rather than the modified interest rate. Since fair value of these loans is based on management’s own projection of future cash flows, the fair value measurements are categorized as Level 3 measurements.

The following presents impaired loans measured at fair value on a non-recurring basis as of June 30, 2011 and December 31, 2010.

Description	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans net of ALLL
at June 30, 2011	$	4,291,886	$	-	$	1,778,619	$	2,513,267
at December 31, 2010	$	4,069,177	$	-	$	1,108,110	$	2,961,067

Other Real Estate Owned

Real estate acquired through foreclosure or other proceedings (other real estate owned) is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed, and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. The fair values of real properties initially are determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market or in the collateral. Subsequent valuations of the real properties are based on management estimates or on updated appraisals. Other real estate owned is categorized under Level 3 when significant adjustments are made by management to appraised values based on unobservable inputs. Otherwise, Other real estate owned is categorized under Level 2 if their values are based solely on current appraisals.

The following table summarizes the Company’s OREO that was measured at fair value on a nonrecurring basis as of June 30, 2011 and December 31, 2010:

Description	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other real estate owned net of valuation allowance
at June 30, 2011	$	439,317	$	-	$	439,317	$	-
at December 31, 2010	$	516,534	$	-	$	516,534	$	-

ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not the financial instruments are recognized in the balance sheet at fair value or historical cost. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may 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

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	9,564,828	$	9,564,828	$	7,701,641	$	7,701,641
Interest-bearing deposits with other banks		12,586,252		12,602,606		19,378,252		19,407,125
Investment securities available for sale		3,500,663		3,500,663		4,706,994		4,706,994
Investment securities held to maturity		11,101,785		11,366,321		12,153,915		12,301,643
Stock investments		667,700		667,700		626,250		626,250
Loans, net		57,003,532		57,076,919		59,051,096		59,014,061
Trups common securities		93,000		95,263		93,000		97,475
Accrued interest receivable		284,183		284,183		382,943		382,943

Financial liabilities:
Deposits		93,590,112		93,607,421		102,999,556		103,053,843
Subordinated Debentures		3,093,000		3,168,271		3,093,000		3,241,835
Accrued interest payable		76,335		76,335		104,967		104,967

Note 12 – Regulatory Agreements

On April 12, 2011, the Bank entered into a formal written agreement (“the Agreement”) with the Office of the Comptroller of the Currency, the Bank’s primary regulator. See “Recent Developments” in Item 2 below for a discussion of the terms of the Agreement. As of June 30, 2011 the Bank’s Leverage Capital Ratio was 9.67% and its Total Risk-Based Capital Ratio was 15.28%. The Bank achieved a Leverage Capital Ratio of at least 9.0% by May 31, 2011, and continued to maintain the required ratio as of June 30, 2011, by reducing higher-rate CD and money market deposits, thereby reducing average assets.

On July 21, 2011, Chino Commercial Bancorp entered into a memorandum of understanding (“MOU”) with the Federal Reserve Bank of San Francisco (the “FRB”). The MOU is an informal administrative agreement pursuant to which Chino Commercial Bancorp has agreed, among other things, to (i) take steps to ensure that the Bank complies with the Bank’s Agreement; (ii) refrain from paying cash dividends, receiving cash dividends from the Bank, increasing or guaranteeing debt, making any capital distributions, redeeming or repurchasing its stock, or issuing any additional trust preferred securities, without prior FRB approval; (iii) obtain non-objection from the FRB before adding any individual to the Board or employing any senior executive officer and (iv) submit written quarterly progress reports to the FRB detailing compliance with the MOU.

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 and six months ended June 30, 2011 and 2010, and the financial condition of the Company as of June 30, 2011 and December 31, 2010.

Management’s discussion and analysis is written to provide greater insight into the results of operations and the financial condition of the Company and its subsidiary. For a more complete understanding of the Company and its operations, reference should be made to the consolidated financial statements included in this report and in the Company's 2010 Annual Report on Form 10-K, as amended.

This Form 10-Q includes forward-looking statements that may constitute forward-looking statements under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are forward looking statements. Words such as “expects”, “anticipates”, “believes”, “projects”, and “estimates” or variations of such words and similar expressions are intended to identify such statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, forecast in, or implied by such forward-looking statements, and readers are cautioned not to unduly rely on such statements. Risks and uncertainties include, but are not limited to, the health of the national and California economies; the Company’s ability to attract and retain skilled employees; competition in the financial services market for both deposits and loans; the Company’s ability to increase its customer base; customers' service expectations; the Company's ability to successfully deploy new technology and gain efficiencies therefrom; the success of branch expansion; changes in interest rates; loan portfolio performance; the Company’s ability to enhance its earnings capacity; the economic and regulatory effects of the continuing war on terrorism and other events of war, including the wars in Iraq and Afghanistan; the effect of natural disasters, including earthquakes, fires and hurricanes; and regulatory risks associated with the variety of current and future regulations to which the Company is subject. All of these risks could have a material adverse impact on the Company’s financial condition, results of operations or prospects, and these risks should be considered in evaluating the Company. For additional information concerning these factors, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Form 10-K, as amended, for the year ended December 31, 2010, as supplemented by the information contained in this report.

Recent Developments

On April 12, 2011, Chino Commercial Bank, N.A. (the “Bank”), the Company’s wholly-owned banking subsidiary, entered into a formal written agreement (the “Agreement”) with the Office of the Comptroller of the Currency (the “OCC”), the Bank’s primary regulator. The Agreement will remain in effect and enforceable until it is modified, waived or terminated in writing by the OCC. Entry into the Formal Agreement does not change the Bank’s “well-capitalized” status. The Bank’s Board of Directors (the “Bank Board”) and its management have already successfully implemented initiatives and strategies to address and resolve a number of the issues noted in the Agreement. The Bank continues to work in cooperation with its regulators to bring its policies and procedures into conformity with directives.

The Bank is required to take the following actions: (i) adopt, implement and adhere to a rolling three year strategic plan and capital program, including objectives, projections and implementation strategies for the Bank’s overall risk profile, earnings performance, and various balance sheet items, as well as intended product line development and market segments; (ii) refrain from paying dividends without prior OCC non-objection; (iii) add a new independent director with banking experience, or similar accounting or regulatory experience, to the Bank Board; (iv) obtain non-objection from the OCC before adding any individual to the Bank Board or employing any senior executive officer; (v) obtain a review of insider lending compliance by an independent outside audit firm acceptable to the OCC; (vi) revise, in a manner acceptable to the OCC, the Bank’s policies or programs concerning overdrafts, insider lending compliance, credit risk management, credit risk accounting, nonaccrual recognition and concentration risk management; and thereafter implement and adhere to such policies; (vii) protect the Bank’s interest in assets criticized by the OCC and take certain actions to reduce the level of criticized assets; (viii) continue to review the adequacy of the Bank’s allowance for loan losses and maintain a program acceptable to the OCC to ensure an adequate allowance; (ix) correct each violation of law, rule or regulation cited in the most recent regulatory examination report and implement procedures to avoid future violations; and (x) submit quarterly progress reports to the OCC regarding various aspects of the foregoing actions. The Bank Board has appointed a compliance committee to submit such reports and monitor and coordinate the Bank’s performance under the Agreement.

The Bank also has agreed to the OCC establishing higher minimum capital ratios for the Bank. Specifically, the Bank was required to achieve by May 31, 2011, and is required thereafter to maintain, a Leverage Capital Ratio of not less than 9.0% and a Total Risk-Based Capital Ratio of not less than 12.0%. The Bank met achieved the required capital ratios for May 31, 2011. As of June 30, 2011 the Bank’s Leverage Capital Ratio was 9.67% and its Total Risk-Based Capital Ratio was 15.28%.

Overview of the Results of Operations and Financial Condition

Results of Operations Summary

Second quarter 2011 compared to second quarter 2010

Net loss for the quarter ended June 30, 2011 was $49,945 compared with net income of $14,193 for the quarter ended June 30, 2010, a decline of 71.6%. Basic and diluted loss per share for the second quarter of 2011 was $0.07, compared to earnings per share of $0.02 for the second quarter of 2010. The Company’s annualized return on average equity was (2.85%) and annualized return on average assets was (0.19%) for the quarter ended June 30, 2011, compared to a return on average equity of 0.88% and a return on average assets of 0.05% for same quarter in 2010. The primary reasons for the change in net income during the second quarter of 2011 are as follows:

The provision for loan losses increased to $273,917 during the second quarter of 2011, an increase of $23,250 or 9.3%, as compared to $250,667 for the three months ended June 30, 2010. Net loan charge-offs decreased $72,333 for the relative periods. The increase in the provision was related to an increase in nonperforming loans from $2.3 million at June 30, 2010 to $4.4 million at June 30, 2011.

Non-interest income totaled $318,062 for the second quarter of 2011, a decrease of $867, or 0.3%, compared to $318,929 in the second quarter of 2010. Included were service charges on deposits which decreased by $5,080 or 1.7% for the second quarter of 2011 compared to the second quarter of 2010, due to decreased analysis charges and reduced returned items causing returned items charges to decline.

The Company posted net interest income of $907,439 for the quarter ended June 30, 2011 as compared to $977,310 for the quarter ended June 30, 2010. The decrease was caused by a decline in average balances and yields on earning assets. Average interest-earning assets were $91.1 million with average interest-bearing liabilities of $55.7 million, yielding a net interest margin of 4.00% for the second quarter of 2011; as compared to the average interest-earning assets of $101.0 million with average interest-bearing liabilities of $67.0 million, yielding a net interest margin of 3.88% for the second quarter of 2010.

Non-interest expenses were $1,056,146 for the three months ended June 30, 2011 as compared to $1,045,117 for the three months ended June 30, 2010, a 1.1% increase. The largest component of non-interest expense was salaries and benefits expense of $520,894 for the second quarter of 2011 compared to $570,428 for the same period in 2010, representing an 8.7% decrease. The reduction in salary expense was due to a reduction in staff accomplished through attrition. Included in non-interest expenses are legal and other professional fees which increased 234.8% or $92,561 in the three months ended June 30, 2011 compared to the same period in 2010 as a result of increased loan collection activity, regulatory matters, and complexity of SEC related filings. Also included were other expenses which decreased $63,647 to $79,427 in the second quarter of 2011 due primarily to decreases in other lending expenses and expenses paid for deposit accounts with analysis charge arrangements.

First half of 2011 compared to the first half of 2010

Net income for the six months ended June 30, 2011 was $153,360 compared to $55,478 for the first six months of 2010, an increase of 176.4%. Basic and diluted earnings per share for the six months ended June 30, 2011 were $0.20 compared to $0.08 for the same period in 2010. Annualized return on average equity was 4.35% and a return on assets of 0.28%, compared to a return on equity of 1.73% and a return on assets of 0.10% for the same period in 2010. The primary reasons for the change in net income during the first half of 2011 are as follows:

The provision for loan losses decreased to $279,439 during the first half of 2011, a reduction of $234,913 or 45.7%, as compared to $514,352 for the six months ended June 30, 2010. The decrease in the provision was related to an decrease in charged-off loans by $219,450 from $478,906 at June 30, 2010 to $259,602 at June 30, 2011

Non-interest income totaled $711,113 for the first half of 2011, an increase of $98,351, or 16.1%, compared to $612,762 in the first half of 2010. Included in this increase was a $61,151 gain on sale of foreclosed assets in the first half of 2011 compared to $149 gain recognized in the first half of 2010. Also included were service charges on deposits which increased by $31,936 or 5.7% for the first half of 2011 compared to the first half of 2010. This is consistent with the 9.5% growth in average non-interest bearing deposits in the first half of 2011 over the first half of 2010.

The Company posted net interest income of $1,926,811 for the six months ended June 30, 2011 as compared to $1,930,074 for the same period in 2010. Average interest-earning assets were $94.9 million with average interest-bearing liabilities of $58.0 million, yielding a net interest margin of 4.09% for the first half of 2011; as compared to the average interest-earning assets of $98.8 million with average interest-bearing liabilities of $65.3 million, yielding a net interest margin of 3.94% for the first half of 2010.

Non-interest expenses increased $163,231 to $2,137,274 for the first half of 2011 compared to the same period in 2010. The largest component of non-interest expense was salaries and benefits expense of $1,108,294 for the first half of 2011 compared to $1,094,450 for the same periods in 2010, representing an a 1.3% increase. Included in non-interest expenses is legal and other professional fees which increased 139.5% or $117,779 in the six months ended June 30, 2011 compared to the same period in 2010 as a result of increased loan collection activity, regulatory matters, and complexity of SEC related filings. Also included were other expenses which decreased $71,056 to $173,742 in the first half of 2011 due primarily decreases in other lending expenses and expenses paid for deposit accounts with analysis charge arrangements.

Financial Condition Summary

The Company’s total assets were $104.6 million at June 30, 2011, a decrease of $9.3 million, or 8.2% as compared to total assets of $113.9 million at December 31, 2010. The most significant changes in the Company’s balance sheet during the six months ended June 30, 2011 are outlined below:

Total deposits decreased from $103.0 million at December 31, 2010 to $93.6 million at June 30, 2011, a 9.1% decrease. Noninterest-bearing deposits increased to $42.5 million at June 30, 2011, an increase of $550,810 or 1.3% from December 31, 2010. Total interest-bearing deposits decreased from $61.1 million at December 31, 2010 to $51.1 million at June 30, 2011, a 16.3% decrease in the first half of 2011. This was done by design to eliminate higher yielding deposits. The ratio of non-interest bearing deposits to total deposits increased from 40.7% at December 31, 2010 to 45.4% at June 30, 2011.

The Company experienced a decrease in interest-earning assets of 11.4% to $85.7 million in the first half of 2011, primarily in total investments which decreased to $27.2 million at June 30, 2011, compared to $36.2 million at December 31, 2010. This was caused by the liquidation of lower-yielding interest earning deposits in other banks to pay off higher-yielding interest bearing deposits. The reduction in assets was in response to the request that the Bank maintain its tier 1 leverage capital ratio at or above 9.0%. (See Recent Developments, above)

Nonperforming assets were comprised of 14 loans and one foreclosed property totaling $4.9 million at June 30, 2011, compared to 11 loans and one foreclosed property totaling $4.7 million at December 31, 2010. All but two of the loans classified as nonperforming as of June 30, 2011, totaling $424,797, are current and paying as agreed.

Earnings Performance

The Company earns income from two primary sources: The first is net interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities; the second is non-interest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as bank-owned life insurance. The majority of the Company’s non-interest expenses are operating costs that relate to providing a full range of banking services to the Bank’s customers.

Net Interest Income and Net Interest Margin

For the second quarter, net interest income decreased $69,871, or 7.1%, to $907,439 in 2011 from $977,310 in 2010. For the six months ended June 30, 2011, net interest income decreased $3,263, or 0.2%, to $1,926,811 in 2011 from $1,930,074 in 2010. The level of net interest income depends on several factors in combination, including change in earning assets and interest-bearing liabilities, 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. 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. Net interest income decreased even though the margin increased, due to declines in average balances.

The following tables set forth certain information relating to the Company for the three and six months ended June 30, 2011 and 2010. The yields and costs are derived by dividing income or expense by the corresponding average balances of assets or liabilities for the periods shown below. Average balances are derived from average daily balances. Yields include fees that are considered adjustments to yields.

Distribution, Yield and Rate Analysis of Net Interest Income

(dollars in thousands)

(unaudited)

	For the three months ended June 30, 2011							For the three months ended June 30, 2010
	Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Yield/Rate 4			Balance		Expense		Yield/Rate 4
	($ in thousands)
Assets
Interest-earnings assets
Loans1	$	59,336	$	903		6.10	%	$	60,816	$	1,039		6.85	%
U.S. government agencies securities		2,500		15		2.51	%		1,786		11		2.50	%
Mortgage-backed securities		11,489		91		3.15	%		13,581		121		3.56	%
Other securities & Due from banks time		15,497		47		1.22	%		24,793		100		1.62	%
Federal funds sold		2,253		1		0.25	%		0		0		0.00	%
Total interest-earning assets		91,075	$	1,057		4.66	%		100,976	$	1,271		5.05	%
Non-interest earning assets		13,578							12,865
Total assets	$	104,653						$	113,841

Liabilities and Stockholders' Equity
Interest-bearing liabilities
Money market and NOW deposits	$	31,461	$	59		0.75	%	$	35,653	$	142		1.60	%
Savings		1,969		1		0.25	%		1,275		1		0.31	%
Time deposits < $100,000		5,326		10		0.76	%		7,437		28		1.49	%
Time deposits equal to or > $100,000		13,435		29		0.86	%		18,763		70		1.52	%
Other borrowings		404		0		0.07	%		802		1		0.27	%
Subordinated debenture		3,093		51		6.61	%		3,093		51		6.61	%
Total interest-bearing liabilities		55,688	$	150		1.08	%		67,023	$	293		1.76	%
Non-interest bearing deposits		40,918							39,364
Other liabilities		1,040							1,002
Stockholders' equity		7,007							6,452
Total liabilities & stockholders' equity	$	104,653						$	113,841

Net interest income			$	907						$	978

Net interest spread 2						3.58	%						3.29	%
Net interest margin 3						4.00	%						3.88	%

1 Amortization of loan fees (costs) has been included in the calculation of interest income. Loan fees were approximately $1,900 for the three months ended June 30, 2011 as compared to ($4,400) for the three months ended June 30, 2010.

2 Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

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

4 Average Yield/Rate is based upon actual days based on 365- and 366-day years.

Distribution, Yield and Rate Analysis of Net Interest Income

(dollars in thousands)

(unaudited)

	For the six months ended June 30, 2011							For the six months ended June 30, 2010
	Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Yield/Rate 4			Balance		Expense		Yield/Rate 4
	($ in thousands)
Assets
Interest-earnings assets
Loans1	$	59,804	$	1,916		6.46	%	$	61,149	$	2,115		6.98	%
U.S. government agencies securities		2,500		31		2.52	%		1,786		11		1.25	%
Mortgage-backed securities		12,031		188		3.15	%		9,887		181		3.68	%
Other securities & Due from banks time		17,359		104		1.21	%		25,519		209		1.65	%
Federal funds sold		3,197		4		0.25	%		411		0		0.00	%
Total interest-earning assets		94,891	$	2,243		4.77	%		98,752	$	2,516		5.14	%
Non-interest earning assets		14,014							13,679
Total assets	$	108,905						$	112,431

Liabilities and Stockholders' Equity
Interest-bearing liabilities
Money market and NOW deposits	$	32,828	$	121		0.74	%	$	34,469	$	274		1.62	%
Savings		2,019		3		0.26	%		1,160		2		0.29	%
Time deposits < $100,000		5,670		24		0.84	%		7,274		58		1.60	%
Time deposits equal to or > $100,000		14,229		66		0.94	%		18,859		149		1.58	%
Other borrowings		203		0		0.07	%		454		1		0.25	%
Subordinated debenture		3,093		102		6.65	%		3,093		102		6.65	%
Total interest-bearing liabilities		58,042	$	316		1.10	%		65,309	$	586		1.81	%
Non-interest bearing deposits		42,851							39,141
Non-interest bearing liabilities		965							1,551
Stockholders' equity		7,047							6,430
Total liabilities & stockholders' equity	$	108,905						$	112,431

Net interest income			$	1,927						$	1,930

Net interest spread2						3.67	%						3.33	%
Net interest margin3						4.09	%						3.94	%

1Amortization of loan fees (costs) has been included in the calculation of interest income. Loan fees were approximately $2,100 for the six months ended June 30, 2011 as compared to ($6,200) for the six months ended June 30, 2010. Loans are net of deferred fees and related direct costs.

2 Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

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

4 Average Yield/Rate is based upon actual days based on 365- and 366-day years.

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 rate and volume variance.:

	For the quarter ended June 30 2011 vs. 2010									For the six months ended June 30 2011 vs. 2010
	Increase (Decrease) Due to									Increase (Decrease) Due to
	($ in thousands)									($ in thousands)
	Volume			Rate			Net			Volume			Rate			Net
Interest-earnings assets
Loans	$	(24	)	$	(112	)	$	(136	)	$	(47	)	$	(152	)	$	(199	)
Securities of U.S. government agencies		4			0			4			5			15			20
Mortgage-backed securities		(18	)		(12	)		(30	)		35			(28	)		7
Other securities & Due from banks time		(33	)		(20	)		(53	)		(57	)		(48	)		(105	)
Federal funds sold		1			0			1			0			4			4
Total interest-earning assets		(70	)		(144	)		(214	)		(64	)		(209	)		(273	)

Interest-bearing liabilities
Money market & NOW		(16	)		(67	)		(83	)		(13	)		(140	)		(153	)
Savings		2			(2	)		0			1			0			1
Time deposits < $100,000		(7	)		(11	)		(18	)		(11	)		(23	)		(34	)
Time deposits equal to or > $100,000		(17	)		(24	)		(41	)		(30	)		(53	)		(83	)
Other borrowed funds		(1	)		0			(1	)		(1	)		0			(1	)
Subordinated debenture		0			0			0			0			0			0
Total interest-bearing liabilities		(39	)		(104	)		(143	)		(54	)		(216	)		(270	)
Change in net interest income	$	(31	)	$	(40	)	$	(71	)	$	(10	)	$	7		$	(3	)

As shown above, the pure volume variance negatively impacted net interest income by $31,000 in the second quarter of 2011 relative to the same period of 2010, while the rate variance negatively impacted net interest income by $40,000 in the same comparative periods.

The Company’s net interest income for the second quarter of 2011 was $907,439 compared to $977,310 in the second quarter of 2010, a decrease of $69,871, or 7.1%. The net interest margin increased to 4.00% for the three months ended June 30, 2011 as compared to 3.88% for the same period in 2010 due principally to a drop in the interest rates and a decrease in the ratio of interest bearing deposits to total deposits.

Average loans decreased $1.5 million or 2.4% for the second quarter of 2011 compared with the same period of 2010. Interest and fee income on loans decreased $136,000. The decrease in average loans resulted in approximately $24,000 decrease in interest income from loans, while the decrease in interest rate resulted in approximately $112,000 decrease in income. The average yield on loans declined from 6.85% for the quarter ended June 30, 2010 to 6.10% for the quarter ended June 30, 2011.

Income from investment securities and due from banks for the quarter ended June 30, 2011 decreased by $78,919 in comparison to the quarter ended June 30, 2010. The primary reason for the decreased interest income was due to the decrease in the average balance of investment securities and due from banks of approximately $11.0 million or 26.6%. The decline in average investment securities and due from banks time balances caused a decrease of interest income of approximately $47,000, while the rate decrease caused a decline in interest income of approximately $32,000 from investment securities and due from banks time for the second quarter of 2011 as compared to the same quarter in 2010. The average yield for investment securities and due from banks time declined from 2.32% for the three months ended June 30, 2010 to 2.08% for the same period in 2011.

Average interest-bearing liabilities decreased $11.3 million in the second quarter of 2011 as compared to the second quarter of 2010. The decrease in average interest-bearing deposits resulted in approximately a $39,000 decrease in interest expense while interest rate reductions resulted in a decrease of approximately $104,000 in the second quarter of 2011 as compared to the second quarter of 2010.

Pure volume variances negatively impacted net interest income by approximately $10,000 for the six-month period ended June 30, 2011 relative to the same period of 2010, while the rate variance positively impacted net interest income by approximately $7,000 in the same comparative periods.

Interest income decreased $273,296 or 10.9% in the six month period ended June 30, 2011 compared to the same period of 2010, while interest expense decreased $270,033 or 46.1%. Interest and fee income from loans decreased during the six months ended June 30, 2011 by $199,669, or 9.4% from $2,115,443 for the same period in 2010 due to a decrease in average loan balances.

The average balance of investment securities and due from banks time deposits decreased due to a decline in average deposits. The most significant decrease was in due from banks time deposits, which experienced a negative volume variance of approximately $57,000 and a negative rate variance of $48,000 for the six months ended June 30, 2011 compared to the same period in 2010. Interest income from investment securities and due from banks time decreased $77,663 or 19.4% to $322,727 for the six months ended June 30, 2011 compared to the same period of 2010 due to a decline in yields.

Interest expense on deposits decreased $269,539, or 55.8% to $213,726 for the six months ended June 30, 2011 compared to the same period of 2010. Average interest bearing deposits to average total deposits decreased from 61.2% for the six months ended June 30, 2010 to 56.1% for the same period in 2011.

The Company’s net interest margin increased from 3.94% to 4.09%, for the six months ended June 30, 2011 versus 2010 due principally to a drop in interest rates and an increase in the average balance of interest bearing time deposits.

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 Company provided $279,439 to the allowance for loan losses during the first half of 2011, a 45.7% decrease from the same period in 2010. The lower provision for the first half of 2011 was due to a lower level of charge-offs during the period as compared to the first half of 2010 as well as a modest decrease in total loans. Although the Company did not have the volume of charge-offs in the first half of 2011 as it did in the same period in 2010, the Company made the provision to the allowance for loan losses during the first half of 2011 due to an increase in nonperforming loans from $4.2 at December 31, 2010 to $4.4 million at June 30, 2011, and in recognition of further deterioration in qualitative economic factors affecting the Bank’s general market area. Net charge offs were $259,456 for the six months ended June 30, 2011.

The Company continues to pursue recovery of the loans charged off during preceding years. The Company has not originated and does not hold sub-prime mortgage loans, or option ARM mortgages.

Non-Interest Income

Non-interest income was $318,062 for the three months ended June 30, 2011 as compared to $318,929 for the three months ended June 30, 2010, a 0.3% decrease. For the first half of 2011, non-interest income increased 16.1% to $711,113 compared to $612,762 for the same period in 2010. The increase in the six months ended June 30, 2011 was due to a gain on sale of foreclosed property and an increase was service charge income which was caused by an increase in the volume of deposit transactions subject to analysis charges and returned item charges. Total annualized non-interest income as a percentage of average earning assets increased to 1.4% and 1.5% for the three and six months ended June 30, 2011, respectively, compared to 1.3% and 1.2% for the three and six months ended June 30, 2010, respectively.

	Non-Interest Income for the three months ended June 30,											Non-Interest Income for the six months ended June 30,
	2011					2010						2011					2010
	Amount		% of Total			Amount			% of Total			Amount		% of Total			Amount		% of Total
	(Dollars in thousands)											(Dollars in thousands)
Service charges ondeposit accounts	$	289		91.0	%	$	295			92.4	%	$	593		83.5	%	$	563		91.8	%
Gain on sale of foreclosed assets		0		0.0	%		0			0.0	%		61		8.6	%		0		0.0	%
Other miscellaneous income		8		2.6	%		9			2.7	%		16		2.2	%		15		2.4	%
Dividend income from restricted stock		3		0.9	%		(2	)		-0.5	%		6		0.8	%		1		0.2	%
Income from bank owned life insurance		18		5.5	%		17			5.4	%		35		4.9	%		34		5.6	%
Total non-interest income	$	318		100.0	%	$	319			100.0	%	$	711		100.0	%	$	613		100.0	%
As a percentage of average earning assets				1.4	%					1.3	%				1.5	%				1.2	%

Gain on sale of foreclosed assets increased to $61,151 in the first half of 2011, compared to a $149 gain recognized in the first half of 2010. The property sold in the first quarter of 2011 was foreclosed in May 2010 and required clean-up and repairs to get ready for sale. A majority of the expenses incurred to maintain and ready the property for sale were charged to non-interest expenses in 2010 and totaled over $100,000.

Dividend income from restricted stock increased $4,468, or (266.1%), in the second quarter and increased $4,102, or 281.5%, in the first half of 2011 in comparison to the same periods in 2010, resulting from an accrual reversal of $8,500 for stock dividends receivable from the FHLB in 2010 and a reversal in stock dividends receivable of $3,720 from Pacific Coast Bankers’ Bank in the second quarter of 2010.

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 on deposit accounts consist of periodic service charges 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 decreased $5,080 or 1.7% to $289,420 for the three months ended June 30, 2011 and increased $31,936 or 5.7% to $594,076 for the six months period ended June 30, 2011. The decrease in the quarter was attributable to a decrease in returned items during the quarter, therefore, decreasing the related charges, while the year-to-date increase was primarily attributable to increased 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. Therefore, as the number of accounts increases, the nominal service charge income is expected to increase.

Non-Interest Expense

The following table sets forth the non-interest expense for the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2010:

	Non-Interest Expense for the quarter ended June 30											Non-Interest Expense for the six months June 30
	2011					2010						2011						2010
	Amount		% of Total			Amount			% of Total			Amount			% of Total			Amount		% of Total
	(Dollars in thousands)											(Dollars in thousands)
Salaries and employee benefits	$	521		49.3	%	$	570			54.6	%	$	1,108			51.9	%	$	1,094		55.3	%
Occupancy and equipment		112		10.6	%		106			10.1	%		227			10.6	%		191		9.7	%
Data and item processing		94		8.9	%		92			8.8	%		191			8.9	%		172		8.7	%
Deposit products and services		6		0.6	%		28			2.7	%		18			0.8	%		51		2.6	%
Legal and other professional fees		132		12.5	%		39			3.7	%		202			9.5	%		84		4.3	%
Regulatory assessments		76		7.2	%		54			5.2	%		151			7.1	%		106		5.4	%
Advertising and marketing		11		1.0	%		15			1.4	%		27			1.3	%		29		1.5	%
Directors’ fees and expenses		21		2.0	%		17			1.6	%		37			1.7	%		34		1.7	%
Printing and supplies		10		0.9	%		20			1.9	%		22			1.0	%		35		1.8	%
Telephone		9		0.9	%		9			0.9	%		19			0.9	%		18		0.9	%
Insurance		9		0.9	%		9			0.9	%		20			0.9	%		18		0.9	%
Reserve for undisbursed lines of credit		2		0.2	%		(1	)		-0.1	%		(3	)		-0.1	%		6		0.3	%
Other expenses		53		5.0	%		87			8.3	%		118			5.5	%		136		6.9	%
Total non-interest expenses	$	1,056		100.0	%	$	1,045			100.0	%	$	2,137			100.0	%	$	1,974		100.0	%
Non-interest expense as a percentage of average earning assets				4.6	%					4.1	%					4.5	%				4.0	%
Efficiency ratio				86.2	%					80.6	%					82.9	%				77.6	%

Total annualized non-interest expense as a percentage of average earning assets increased to 4.6% from 4.1% for the three months ended June 30, 2011 as compared to three months ended June 30, 2010. For the six months ended June 30, 2011 and 2010, these percentages were 4.5% and 4.0%, respectively. Total annualized non-interest expense as a percentage of average assets increased due to the decrease in average earning assets.

The overhead efficiency ratio represents total operating expense divided by the sum of net interest and non-interest income, with the provision for loan losses, investment gains/losses, and other unusual gains/losses excluded from the equation. Because of the decline in net interest plus other income and the increase in total non-interest expense, the Company’s overhead efficiency ratio increased to 86.2% for the second quarter of 2011 from 80.6% for the second quarter of 2010. The efficiency ratio increased in the most recent six month period to 82.9%, compared to 77.6% for the same period in 2010.

Non-interest expenses were $1,056,146 for the three months ended June 30, 2011 as compared to $1,045,117 for the three months ended June 30, 2010, a 1.1% increase. Non-interest expenses increased $163,231 to $2,137,274 for the first half of 2011 compared to the same period in 2010. The largest component of non-interest expense was salaries and benefits expense of $520,894 for the second quarter and $1,108,294 for the first half of 2011 compared to $570,428 and $1,094,450 for the same periods in 2010, representing an 8.7% decrease and a 1.3% increase, respectively.

Legal and other professional fees increased 234.8% and 139.5% or $92,561 and $117,779, respectively, during the three and six months ended June 30, 2011 compared to the same periods in 2010 as a result of increased loan collection activity, regulatory matters, and complexity of SEC related filings.

Regulatory assessments expense increased $22,363 or 41.8% in the second quarter of 2011 versus 2010 and $45,617 or 43.1% in the first half of 2011 versus 2010 due to increased assessment rates.

Other components of non-interest expense that affected the increase were occupancy and equipment expenses which increased $6,599 and $35,332, respectively, for the three and six month periods ended June 30, 2011 compared to the same periods in 2010, due in the opening of the Rancho Cucamonga Branch in April 2010. Data and item processing expenses also increased due to the additional branch by $2,413, or 2.6% for the comparable three month and $19,345, or11.3% for the comparable six month periods.

Other expenses decreased $63,647 to $79,427 in the second quarter of 2011, and decreased $71,056 to $173,742 in the first half of 2011 due primarily to decreases in expenses paid for accounts on analysis and other lending expenses.

Provision for Income Taxes

An income tax benefit of $54,617 and an income tax expense of $67,851 were recorded for the second quarter and the six months ended June 30, 2011, respectively, representing approximately 52.2% of pre-tax loss and 30.7% of pre-tax income (loss) for the second quarter and six months ended June 30, 2011, respectively. In comparison, income tax benefits of $13,738 and $1,037 were recorded for the second quarter and the six months ended June 30, 2010, respectively, representing approximately (3,019.3%) and (1.9%) of pre-tax income. 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, and certain other expenses that are not allowed as tax deductions, and tax credits.

Financial Condition

Comparison of Financial Condition at June 30, 2011 and December 31, 2010

General

Total assets decreased by 8.2% from $113.9 million to $104.6 million between December 31, 2010 and June 30, 2011. The decrease in total assets was caused by a decline in loans as well as the liquidation of interest-bearing deposits in banks to pay off higher-interest CD deposits and money market accounts. The Company experienced a decrease in interest-earning assets of 11.4% to $85.7 million in the first half of 2011, primarily in investment securities and due from banks time which decreased to $27.2 million at June 30, 2011, compared to $36.2 million at December 31, 2010. In an effort to enhance the Company’s leverage capital ratios, the Bank reduced the level of interest bearing deposits and related assets. Total deposits decreased from $103.0 million on December 31, 2010 to $93.6 million on June 30, 2011, a 9.1% decrease. Noninterest-bearing deposits increased to $42.5 million at June 30, 2011, an increase of $0.6 million or 1.3% from December 31, 2010. Total interest-bearing deposits decreased from $61.1 million at December 31, 2010 to $51.1 million at June 30, 2011, a 16.3% decrease in the first half of 2011. The ratio of non-interest bearing deposits to total deposits increased from 40.7% at December 31, 2010 to 45.4% at June 30, 2011.

Loan Portfolio

During the six months ended June 30, 2011, the Company’s loan portfolio, net of unearned loan fees, decreased by $2.0 million to $58.5 million at June 30, 2011, compared to $60.5 million at December 31, 2010. The Company experienced moderate declines in balances of real estate secured and commercial loans. The largest loan category at June 30, 2011 was real estate loans, which consist of commercial and consumer real estate loans, and represent 84.6% of the loan portfolio. In anticipation of possible further deterioration in economic conditions, though Management believes these credits to be properly underwritten, the Company has elected to take real estate collateral in an abundance of caution on a number of commercial loans. Though the result of this strategy may be to reflect a concentration of assets into real estate secured credits, Management believes the underlying collateral will support overall credit quality and minimize principal risk of the portfolio. The next largest loan concentration at June 30, 2011 was commercial loans, constituting 14.2% of the loan portfolio. The composition of the Company’s loan portfolio at June 30, 2011 and December 31, 2010 is set forth below:

	June 30, 2011					December 31, 2010
	Amount		Percentage			Amount		Percentage
Real estate	$	49,472		84.6	%	$	51,460		85.0	%
Commercial		8,328		14.2	%		8,411		13.9	%
Installment		694		1.2	%		649		1.1	%
Gross loans	$	58,494		100.0	%	$	60,520		100.0	%

The average yield on the loan portfolio as of June 30, 2011 was 6.94% 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 June 30, 2011, approximately 66.2% of loans were variable rate loans tied to adjustable rate indices such as Prime Rate.

Off-Balance Sheet Arrangements

During the ordinary course of business, the Company provides various forms of credit lines to meet the financing needs of its customers. These commitments to provide credit represent an obligation of the Company to its customers, which is not represented in any form within the balance sheets of the Company. At June 30, 2011 and December 31, 2010, the Company had $4.5 million and $3.8 million, 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 June 30, 2011 and December 31, 2010, the Company had no unadvanced standby letters of credit.

The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used.

Non-performing Assets

Non-performing assets are comprised of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans restructured where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (“OREO” also referred to herein as “foreclosed assets”). Loans are generally placed on non-accrual status when they are deemed to be impaired, that is, when it is probable, based on current information and events, that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans may be restructured by Management when a borrower has experienced some change in financial status, causing an inability to meet the original repayment terms, and where the Company believes the borrower will eventually overcome those circumstances and repay the loan in full. Such loans are classified as "troubled debt restructurings" (TDRs) and are further classified as either performing or nonperforming depending on their accrual status. As of June 30, 2011, all of the Company's TDRs were on non-accrual status. OREO consists of properties acquired by foreclosure or similar means that Management intends to offer for sale.

Management’s classification of a loan as non-accrual is an indication that there is a reasonable doubt as to the full collectability 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.

On occasion, a well collateralized loan will be downgraded to nonaccrual status or classified as nonperforming because of the borrower’s apparent inability to continue to make payments as called for, based upon tax returns or financial statements. These downgrades may be made despite the fact that the borrower continues to make all payments as agreed.

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

Nonperforming Assets

	June 30			December 31			June 30
	2011			2010			2010
	($ in thousands)
NON-ACCRUAL LOANS: 1
Real estate	$	2,735		$	3,096		$	2,184
Commercial		1,681			1,071			99
Installment		0			0			0
TOTAL NON-ACCRUAL LOANS		4,416			4,167			2,283
LOANS 90 DAYS OR MORE PAST DUE& STILL ACCRUING:
Real estate		0			0			0
Commercial		0			0			0
Installment		0			0			0
TOTAL LOANS 90 DAYS OR MORE PAST DUE & STILL ACCRUING		0			0			0

TOTAL NONPERFORMING LOANS		4,416			4,167			2,283
OREO		439			517			573

TOTAL NONPERFORMING ASSETS	$	4,855		$	4,684		$	2,856
Nonperforming loans as a percentage of total loans2		7.55	%		6.89	%		3.80	%
Nonperforming assets as a percentage of total loans and OREO		8.24	%		7.67	%		4.70	%

1Additional interest income of approximately $249,200, $69,500, and $57,600 respectively, would have been recorded for the periods ended June 30, 2011, December 31, 2010, and June 30, 2010 if the loans had been paid or accrued in accordance with original

2Total loans are gross loans, which excludes the allowance for loan losses, and net of unearned loan fees.

At June 30, 2011, the Company had two restructured loans totaling $1,678,885 which were partially charged off and the remaining balance of $1,344,230 is on non-accrual status. Twelve additional loans totaling $3,071,892 are on non-accrual status. As of June 30, 2011, all of the Company’s nonperforming loans, whether commercial loans or real estate loans, were substantially secured by real estate, with collateral values that Management believes are sufficient to cover the debts, although no assurance can be given that such collateral values may not decline in the future. As of that same date, all such loans, with the exception of two loans totaling $424,797, were current. At June 30, 2011, the Company had one foreclosed property (OREO) at $439,317.

At December 31, 2010, the Company had one foreclosed property in the amount of $516,534 and 11 loans on non-accrual status. The Company’s nonperforming assets at December 31, 2010 were 7.67% of the total loans and OREO.

Allowance for Loan Losses

The Company maintains an allowance for loan losses at a level Management considers adequate to cover the inherent risk of loss associated with its loan portfolio under prevailing and anticipated economic conditions. In determining the adequacy of the allowance for loan losses also on nonaccrual status, 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.

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 0.0% to 3.7% are applied to disbursed loans that are unclassified and uncriticized. Allowance factors averaging approximately 0.28% 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 ratio of the ALLL to nonperforming assets declined at June 30, 2011 as compared with June 30, 2010, which was caused by a relatively large number of loans being reclassified as nonaccrual in the fourth quarter of 2010. Each of the reclassified loans has been examined under FAS 114 guidelines, to determine collateral sufficiency to insure full principal repayment. In certain circumstances, a portion of the loan has been charged off to a level where the underlying collateral would be sufficient to insure full repayment. After having taken the charge-off, or gained reasonable assurance of collateral sufficiency with no charge-off taken, no additional loss provision would be necessary.

The process of providing for loan losses involves judgmental discretion, and 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 $1,462,136 at June 30, 2011, $1,442,153 at December 31, 2010, and $1,312,972 at June 30, 2010. The ratios of the allowance for loan losses to total loans at June 30, 2011, December 31, 2010, and June 30, 2010 were 2.50%, 2.38%, and 2.18% respectively.

The table below summarizes, as of and for the three and six months ended June 30, 2011 and 2010 and the year ended December 31, 2010, the loan balances at the end of the period and the daily average loan balances during the period; changes in the allowance for loan losses arising from loan charge-offs, recoveries on loans previously charged-off, and additions to the allowance which have been charged against earnings, and certain ratios related to the allowance for loan losses.

Allowance for Loan Losses

	As of and for the Quarter Ended June 30						As of and for the Six-Month Period Ended June 30						Year Ended December 31,
	2011			2010			2011			2010			2010
	($ in thousands)
Balances:
Average total loans outstanding during period	$	29,336		$	60,816		$	59,804		$	61,149		$	60,679

Total loans outstanding at end of the period	$	58,494		$	60,151		$	58,494		$	60,151		$	60,520
Allowance for loan losses:
Balance at the beginning of period	$	1,448		$	1,394		$	1,442		$	1,278		$	1,278
Provision charged to expense		274			251			280			514			770
Charge-offs
Commercial loans		144			0			144			148			263
Commercial real estate loans		116			335			116			335			355
Installment loans		0			0			0			0			0
Total		260			335			260			483			618
Recoveries
Commercial loans		0			3			0			4			12
Commercial real estate loans		0			0			0			0			0
Installment loans		0			0			0			0			0
Total		0			3			0			4			12

Net loan chage-offs (recoveries)		260			332			260			479			606
Balance	$	1,462		$	1,313		$	1,462		$	1,313		$	1,442

Ratios:
Net loan charge-offs to average total loans		0.44	%		0.55	%		0.43	%		0.78	%		1.00	%
Provision for loan losses to average total loans		0.46	%		0.41	%		0.47	%		0.84	%		1.27	%
Allowance for loan losses to total loans at the end of the period		2.50	%		2.18	%		2.50	%		2.18	%		2.38	%
Allowance for loan losses to non-performing loans		33.11	%		57.50	%		33.11	%		57.50	%		34.60	%
Net loan charge-offs (recoveries) to allowance for loan losses at the end of the period		17.75	%		25.27	%		17.75	%		36.47	%		42.03	%
Net loan charge-offs (recoveries) to provision for loan losses		94.72	%		132.36	%		92.85	%		93.11	%		78.77	%

While Management believes that the amount of the allowance at June 30, 2011 was adequate, there can be no assurances that future economic or other factors will not adversely affect the Company’s borrowers, or that the Company’s asset quality may not deteriorate through failure to identify and monitor potential problem loans or for other reasons, thereby causing loan losses to exceed the current allowance.

Investment Portfolio

The market value of the Company’s investment portfolio at June 30, 2011 was $14.9 million having a tax equivalent yield of 3.35%. This compares to an investment portfolio of $17.0 million at December 31, 2010 having a 3.14% tax equivalent yield. The primary category of investment in the portfolio at June 30, 2011 was mortgage-backed securities. At June 30, 2011, approximately 10% of the mortgage-backed securities were tied to adjustable rate indices such as LIBOR or Constant Maturity Treasury (CMT). 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 June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	($ in thousands)
Held to maturity:
Municipal	$	434	$	436	$	435	$	437
Federal agency		2,500		2,537		2,500		2,538
Mortgage-backed securities		8,086		8,310		9,137		9,243
Corporate bonds		82		83		82		84
Total held to maturity		11,102		11,366		12,154		12,302

Available for sale:
Municipal		775		775		754		754
Mortgage-backed securities		2,726		2,726		3,953		3,953
Total available for sale		3,501		3,501		4,707		4,707
Total	$	14,603	$	14,867	$	16,861	$	17,009

There were no material changes since December 31, 2010 in the maturities or repricing of the investment securities.

Deposits

Total deposits decreased $9.4 million or 9.1% to $93.6 million at June 30, 2011 from $103.0 million at December 31, 2010 due to the decrease in interest-bearing deposit balances, partly offset by a modest increase in demand deposits. Interest-bearing deposits decreased $10.0 million or 16.3% to $51.1 million at June 30, 2011 from $61.1 million at December 31, 2010. This was done by design to eliminate higher yielding deposits. Demand deposits increased $0.6 million or 1.3% to $42.5 million at June 30, 2011 from $41.9 million at December 31, 2010. The ratio of non-interest bearing funds to total deposits was 45.4% at June 30, 2011 and 40.7% at December 31, 2010.

A comparative distribution of the Company’s deposits at June 30, 2011 and December 31, 2010, by outstanding balance as well as by percentage of total deposits, is presented in the following table:

Distribution of Deposits and Percentage Composition

	June 30, 2011					December 31, 2010
	Amount		Percentage			Amount		Percentage
	($ in thousands)

Demand	$	42,460		45.4	%	$	41,910		40.8	%
NOW		1,072		1.1	%		1,697		1.6	%
Savings		1,854		2.0	%		2,085		2.0	%
Money Market		29,764		31.8	%		34,545		33.5	%
Time Deposits < $100,000		5,357		5.7	%		6,377		6.2	%
Time Deposits $100,000		13,083		14.0	%		16,386		15.9	%
	$	93,590		100.0	%	$	103,000		100.0	%

Deposits are the Company’s primary source of funds. As the Company’s need for lendable funds grows, dependence on deposits increases. Information concerning the average balance and average rates paid on deposits by deposit type for the three months and six months ended June 30, 2011 and 2010 is contained in the “Distribution, Yield and Rate Analysis of Net Interest Income” tables appearing in a previous section titled “Net Interest Income and Net Interest Margin.” At June 30, 2011 and December 31, 2010, the Company had deposits from related parties representing 9.2% and 5.5% of total deposits of the Company, respectively. Further, at June 30, 2011 and December 31, 2010, deposits from escrow companies represented 13.4% 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 June 30, 2011 and December 31, 2010 the Company had no FHLB advances or overnight borrowings outstanding. On December 21, 2005, the Company entered into a stand-by letter of credit with the FHLB for $800,000, which matures and renews annually, as needed. This stand-by letter of credit was issued as collateral for local agency deposits that the Company is maintaining.

Stockholders’ Equity

Total stockholders’ equity was $7.2 million at June 30, 2011 and $7.0 million at December 31, 2010. There was an overall increase of $158,711 due to the following: net income increased retained earnings by $153,360, and the change in the unrealized loss on investment securities available for sale increased equity by $5,351.

Liquidity

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet the Company’s cash flow requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of its customers and to take advantage of investment opportunities as they arise. Liquidity management involves the Company’s ability to convert assets into cash or cash equivalents without significant loss, and to raise cash or maintain funds without incurring excessive additional cost. The Company maintains a portion of its funds in cash, deposits in other banks, overnight investments, and securities available 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 June 30, 2011, the Company’s liquid assets totaled approximately $25.7 million and its liquidity level, measured as the percentage of liquid assets to total assets, was 24.55%. At December 31, 2010, the Company’s liquid assets totaled approximately $31.8 million and its liquidity level, measured as the percentage of liquid assets to total assets, was 27.9%. Management anticipates that liquid assets and the liquidity level will decline as the Company becomes more leveraged in the future. The Company’s current policy is to maintain a minimum liquidity ratio of 8%.

Although the Company’s primary sources of liquidity include liquid assets and a stable deposit base, the Company has Fed funds lines of credit of $3.5 million at Union Bank of California, $3.5 million at Pacific Coast Bankers’ Bank and $2.0 million at Zions First National Bank. In addition, as a member of the FHLB, the Bank may borrow funds collateralized by the Bank’s securities or qualified loans up to 25% of its eligible total asset base, or $27.7 million at June 30, 2011.

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 the 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 subsidiaries and trust preferred securities to certain limits, less goodwill and other intangibles) and Tier 2 (supplementary capital including allowance for possible credit losses to certain limits, certain preferred stock, eligible subordinated debt, and other qualifying instruments).

As discussed in Note 7 to the consolidated financial statements herein, the Company’s subordinated note represents a $3.1 million borrowing from its unconsolidated subsidiary. This subordinated note currently qualifies for inclusion as Tier 1 capital for regulatory purposes to the extent that it does not exceed 25% of total Tier 1 capital, but is classified as long-term debt in accordance with generally accepted accounting principles. 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. $2.2 million of the Company’s subordinated note was included in Tier 1 capital at June 30, 2011 and the remainder was included in Tier 2 capital.

The Bank has agreed to the OCC establishing higher minimum capital ratios for the Bank, specifically that the Bank was required to achieve by May 31, 2011, and is required thereafter to maintain, a Leverage Capital Ratio of not less than 9.0% and a Total Risk-Based Capital Ratio of not less than 12.0%. The Bank had Total Risk-Based and Tier 1 Risk-Based capital ratios of 15.28% and 14.00% at June 30, 2011, compared to 14.48% and 13.22%, respectively at December 31, 2010. At June 30, 2011 and December 31, 2010, the Bank’s Leverage Capital Ratios were 9.67% and 8.80%, respectively

Under the Federal Reserve Board’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 June 30, 2011, the Company’s Total Risk-Based and Tier 1 Risk-Based Capital ratios were 15.35% and 13.08%, respectively, and its Leverage Capital ratio was 9.04%.

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

Risk Based Ratios

(unaudited)

	June 30, 2011			December 31, 2010			Minimum Requirement to be Well Capitalized
Chino Commercial Bancorp
Total capital to total risk-weighted assets		15.35	%		14.72	%		10.00	%
Tier 1 capital to total risk-weighted assets		13.08	%		12.43	%		6.00	%
Tier 1 leverage ratio		9.04	%		8.28	%		5.00	%

Chino Commercial Bank
Total capital to total risk-weighted assets		15.28	%		14.48	%		10.00	%
Tier 1 capital to total risk-weighted assets		14.00	%		13.22	%		6.00	%
Tier 1 leverage ratio		9.67	%		8.80	%		5.00	%

Presently, there are no outstanding commitments that would necessitate the use of material amounts of the Company’s capital.

Interest Rate Risk Management

The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of the Company’s balance sheet so as to optimize the risk/reward equation for earnings and capital in relation to changing interest rates. In order to identify areas of potential exposure to rate changes, the Company calculates its repricing gap on a quarterly basis. It also performs an earnings simulation analysis and market value of portfolio equity calculation on a quarterly basis to identify more dynamic interest rate exposures than those apparent in standard repricing gap analyses.

The Company manages the balance between rate-sensitive assets and rate-sensitive liabilities being repriced in any given period with the objective of stabilizing net interest income during periods of fluctuating interest rates. Rate-sensitive assets either contain a provision to adjust the interest rate periodically or mature within one year. Those assets include certain loans, certain investment securities and federal funds sold. Rate-sensitive liabilities allow for periodic interest rate changes and include time certificates, certain savings and interest-bearing demand deposits. The difference between the aggregate amount of assets and liabilities that are repricing at various time frames is called the interest rate sensitivity “gap.” Generally, if repricing assets exceed repricing liabilities in any given time period, the Company would be deemed to be “asset-sensitive” for that period, and if repricing liabilities exceed repricing assets in any given period the Company would be deemed to be “liability-sensitive” for that period. The Company seeks to maintain a balanced position over the period of one year in which it has no significant asset or liability sensitivity, to ensure net interest margin stability in times of volatile interest rates. This is accomplished by maintaining a significant level of loans and deposits available for repricing within one year.

The Company is generally asset sensitive, meaning that, in most cases, net interest income tends to rise as interest rates rise and decline as interest rates fall. However, declines in interest rates would cause a slight increase in net interest income because over 80% of the Company’s variable rate loans are at their floor with a weighted average yield of 7.2%. At June 30, 2011, approximately 64.2% 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 8.7% of all fixed rate loans at June 30, 2011 mature within twelve months.

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

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

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

The table below shows the estimated impact of changes in interest rates on our net interest income as of June 30, 2011, assuming a parallel shift of 100 to 300 basis points in both directions.

Immediate Change in Rate

		-300 bp			-200 bp			-100 bp			+100 bp			+200 bp			+300 bp
Change in net interest income (in $000’s)	$	134		$	181		$	146		$	122		$	221		$	310
% Change		3.53	%		4.77	%		3.85	%		3.21	%		5.82	%		8.17	%

The Company uses Risk Monitor software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company’s net interest margin. These simulations provide static information on the projected fair market value of the Company’s financial instruments under differing interest rate assumptions. The simulation program utilizes specific loan and deposit maturities, embedded options, rates and re-pricing characteristics to determine the effects of a given interest rate change on the Company’s interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Company’s investment, loan, deposit and borrowed funds portfolios. The rate projections can be shocked (an immediate and sustained change in rates, up or down). The Company typically uses standard interest rate scenarios in conducting the simulation of upward and downward shocks of 100 and 300 basis points (“bp”).

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 80% of the Company’s variable rate loans are at their floor with a weighted average yield of 7.2%. 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.

The table below shows estimated changes in the Company’s EVE as June 30, 2011, under different interest rate scenarios relative to a base case of current interest rates:

Immediate Change in Rate

		-300 bp			-200 bp			-100 bp			+100 bp			+200 bp			+300 bp
Changes in EVE (in $000's)	$	3,741		$	2,321		$	965		$	42		$	(710	)	$	(1,423	)
% Change		39.3	%		24.4	%		10.1	%		0.4	%		-7.5	%		-15.0	%

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.

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 second quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II

Item1: Legal Proceedings - None

Item 1A: Risk Factors - Not applicable

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds - None

Item 3: Default of Senior Securities - None

Item 4: (Removed and Reserved)

Item 5: Other Information - None

Item 6: Exhibits

Exhibit #		Description
3.1		Articles of Incorporation of Chino Commercial Bancorp1
3.2		Bylaws of Chino Commercial Bancorp1
10.1		2000 Stock Option Plan1
10.2		Chino Commercial Bank, N.A. Salary Continuation Plan1
10.3		Salary Continuation and Split Dollar Agreements for Dann H. Bowman1
10.4		Employment Agreement for Dann H. Bowman2
10.5		Salary Continuation and Split Dollar Agreements for Roger Caberto1
10.6		Item Processing Agreement between the Bank and InterCept Group1
10.7		Data Processing Agreement between the Bank and InterCept Group1
10.8		Indenture dated as of October 27, 2006 between U.S. Bank National Association, as Trustee and Chino Commercial Bancorp as Issuer3
10.9		Amended and Restated Declaration of Trust of Chino Statutory Trust I, dated as of October 27, 20063
10.10		Guarantee Agreement between Chino commercial Bancorp and U.S. Bank National Association dated as of October 27, 20063
10.11		Amendment to Salary Continuation Agreement for Dann H. Bowman4
10.12		Amendment to Salary Continuation Agreement for Roger Caberto4
11		Statement Regarding Computation of Net Income Per Share5
21		Subsidiaries of Registrant6
31.1		Certification of Chief Executive Officer (Section 302 Certification)
31.2		Certification of Chief Financial Officer (Section 302 Certification)
32		Certification of Periodic Financial Report (Section 906 Certification)

1 Filed as an exhibit of the same number to the Company’s Registration Statement on Form S-8 filed with the with the Securities and Exchange Commission on July 3, 2006.

2 Filed as Exhibit 10.1 to the Company’s Form 8-K Current Report filed with the Securities and Exchange Commission on November 13, 2009.

3 Filed as an exhibit of the same number to the Company’s Form 10-QSB for the quarter ended September 30, 2006.

4 Filed as an exhibit of the same number to the Company’s Form 10-K for the year ended December 31, 2009.

5 Filed as an exhibit is incorporated from Note 2 of the Company’s Financial Statements in the Company’s Form 10-K/A for the year ended December 31, 2010.

6 Filed as an exhibit of the same number to the Company’s Form 10-K/A for the year ended December 31, 2007.

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.

	CHINO COMMERCIAL BANCORP

Dated: August 12, 2011	By:	/s/ Dann H. Bowman
		Dann H. Bowman
		President and Chief Executive Officer
		(Principal Executive Officer)


	By:	/s/ Sandra F. Pender
		Sandra F. Pender
		Senior Vice President, Chief Financial Officer
		(Principal Financial and Accounting Officer)