Chino Commercial Bancorp - Quarter Report: 2012 June (Form 10-Q)

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, 2012

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
		Identification Number

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 ¨ 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). þ Yes ¨No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨

Smaller Reporting Company þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨Yes

þ No

On August 8, 2012, there were 829,602 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 Comprehensive Income		3
Consolidated Statements of Changes in Shareholders’ Equity		4
Consolidated Statements of Cash Flows		5
Notes to the Consolidated Financial Statements		6

Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations		22
Forward Looking Information		22
Recent Developments		22
Overview of the Results of Operations and Financial Condition		23
Earnings Performance		25
Net Interest Income and Net Interest Margin		26
Provision for Loan Losses		30
Non-Interest Income and Non-Interest Margin		31
Provision for Income Taxes		33
Financial Condition		33
Loan Portfolio		33
Off-Balance Sheet Arrangements		34
Non-performing Assets		34
Allowance for Loan Losses		36
Investment Portfolio		37
Deposits		38
Borrowings		39
Shareholders Equity		39
Liquidity		39
Capital Resources		39

Item 3. Qualitative & Quantitative Disclosures about Market Risk		43

Item 4. Controls and Procedures		43

Part II – Other Information		44
Item 1 – Legal Proceedings		44
Item 1A. – Risk Factors		44
Item 2 – Unregistered Sale of Equity Securities and Use of Proceeds		44
Item 3 – Defaults upon Senior Securities		44
Item 4 – (Removed and Reserved)		44
Item 5 – Other Information		44
Item 6 – Exhibits		44
Signatures		45

PART 1 – FINANCIAL INFORMATION

Item 1

CHINO COMMERCIAL BANCORP

CONSOLIDATED BALANCE SHEETS

	June 30, 2012			December 31, 2011
	(unaudited)			(audited)
ASSETS:
Cash and due from banks	$	4,063,293		$	3,358,177
Federal funds sold		16,566,626			14,165,877
Total cash and cash equivalents		20,629,919			17,524,054

Interest-bearing deposits in other banks		14,579,252			13,339,252
Investment securities available for sale		2,590,575			2,972,420
Investment securities held to maturity (fair value approximates
$6,068,000 at June 30, 2012 and $9,861,000 at December 31, 2011)		5,870,239			9,652,630
Total investments		23,040,066			25,964,302
Loans
Real estate		45,344,094			46,184,898
Commercial		11,828,432			9,974,353
Installment		358,708			643,660
Gross loans		57,531,234			56,802,911
Unearned fees and discounts		(150,414	)		(29,107	)
Loans net of unearned fees and discount		57,380,820			56,773,804
Allowance for loan losses		(1,469,487	)		(1,537,963	)
Net loans		55,911,333			55,235,841

Accrued interest receivable		252,474			275,976
Restricted stock		645,400			667,700
Fixed assets, net		6,353,647			6,443,753
Foreclosed assets		0			439,317
Prepaid & other assets		2,730,833			3,154,650
Total assets	$	109,563,672		$	109,705,593

LIABILITIES:
Deposits
Non-interest bearing	$	47,354,353		$	47,188,644
Interest bearing
NOW and money market		31,554,261			32,241,986
Savings		2,142,784			1,809,536
Time deposits less than $100,000		4,505,578			4,700,126
Time deposits of $100,000 or greater		11,562,679			12,163,266
Total deposits		97,119,655			98,103,558

Accrued interest payable		185,938			139,646
Accrued expenses & other payables		683,340			897,363
Subordinated notes payable to subsidiary trust		3,093,000			3,093,000
Total liabilities		101,081,933			102,233,567
SHAREHOLDERS' EQUITY
Common stock, authorized 10,000,000 shares with no par value, issued and outstanding 829,402 shares and 749,540 shares at June 30, 2012 and December 31, 2011, respectively.		3,441,723			2,760,813
Retained earnings		4,959,763			4,631,609
Accumulated other comprehensive income		80,253			79,604
Total shareholders' equity		8,481,739			7,472,026
Total liabilities & shareholders' equity	$	109,563,672		$	109,705,593

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					For the six months ended
	June 30					June 30
	2012		2011			2012		2011
Interest income
Investment securities and due from banks	$	87,527	$	152,879		$	195,062	$	322,727
Interest on Federal funds sold		11,974		1,431			19,822		4,036
Interest and fee income on loans		877,133		902,996			1,760,312		1,915,774
Total interest income		976,634		1,057,306			1,975,196		2,242,537
Interest expense
Deposits		80,733		98,829			165,602		213,726
Other interest expense		0		75			0		75
Other borrowings		17,265		50,963			35,468		101,925
Total interest expense		97,998		149,867			201,070		315,726
Net interest income		878,636		907,439			1,774,126		1,926,811
Provision for loan losses		1,972		273,917			1,972		279,439
Net interest income after
provision for loan losses		876,664		633,522			1,772,154		1,647,372
Non-interest income
Service charges on deposit accounts		279,348		289,420			590,841		594,076
Gain on sale of foreclosed assets		0		0			93,871		61,151
Other miscellaneous income		7,815		8,257			57,749		15,506
Dividend income from restricted stock		6,535		2,789			9,963		5,559
Income from bank-owned life insurance		17,259		17,596			34,351		34,821
Total non-interest income		310,957		318,062			786,775		711,113
Non-interest expenses
Salaries and employee benefits		546,560		520,894			1,119,842		1,108,294
Occupancy and equipment		100,967		112,221			207,065		226,802
Data and item processing		83,831		94,213			172,844		191,185
Advertising and marketing		11,850		11,083			24,906		27,236
Legal and professional fees		67,650		131,989			136,759		202,223
Regulatory assessments		55,460		75,920			111,324		151,367
Insurance		11,968		9,224			24,435		19,649
Directors' fees and expenses		27,495		21,175			53,040		36,776
Other expenses		88,845		79,427			190,387		173,742
Total non-interest expenses		994,626		1,056,146			2,040,602		2,137,274
Income (loss) before income tax expense		192,995		(104,562	)		518,327		221,211
Income tax expense (benefit)		68,799		(54,617	)		190,173		67,851
Net income (loss)	$	124,196	$	(49,945	)	$	328,154	$	153,360
Basic earnings per share	$	0.15	$	(0.07	)	$	0.41	$	0.20
Diluted earnings (loss) per share	$	0.15	$	(0.07	)	$	0.41	$	0.20

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

CHINO COMMERCIAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	For the three months ended					For the six months ended
	June 30					June 30
	2012		2011			2012		2011


Net income (loss)	$	124,196	$	(49,945	)	$	328,154	$	153,360

Other comprehensive income (loss), net of tax effects
Net unrealized holding gains (losses) on securities
available for sale during the period (tax effects of
($2,482) and $452 for three and six months ended June 30,
2012, respectively and $5,215 and ($3,741) for three and
six months ended June 30, 2011, respectively.		4,077		(1,850	)		649		5,351

Total comprehensive income	$	128,273	$	(51,795	)	$	328,803	$	158,711

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

CHINO COMMERICAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

							Accumulated
							Other
							Compre-
	Number of		Common		Retained		hensive
	Shares		Stock		Earnings		Income		Total
Balance at December 31, 2010 (audited)		748,314	$	2,750,285	$	4,190,208	$	75,764	$	7,016,257

Net income						441,401				441,401

Change in unrealized gain on securities
available for sale, net of tax								3,840		3,840

Exercise of stock options, including
tax benefit		1,226		10,528						10,528
Balance at December 31, 2011 (audited)		749,540		2,760,813		4,631,609		79,604		7,472,026

Net income						328,154				328,154

Change in unrealized gain on securities
available for sale, net of tax								649		649

Secondary stock offering		79,862		680,910						680,910
Balance at June 30, 2012 (unaudited)		829,402	$	3,441,723	$	4,959,763	$	80,253	$	8,481,739

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,
	2012			2011
Cash Flows from Operating Activities
Net income	$	328,154		$	153,360
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses		1,972			279,439
Depreciation and amortization		112,773			111,360
Net amortization of investment securities		33,679			32,771
Amortization of deferred loan (fees) costs		121,307			992
Loss on disposition of equipment		348			314
Gain on sale of foreclosed assets		(93,871	)		(61,151	)
Deferred income tax expense (benefit)		23,722			(124,082	)
Net changes in:
Accrued interest receivable		23,502			98,761
Other assets		399,644			249,852
Accrued interest payable		46,292			(28,632	)
Other liabilities		(214,023	)		(22,340	)
Net cash provided by operating activities		783,499			690,644

Cash Flows from Investing Activities
Net change in interest-bearing deposits in other banks		(1,240,000	)		6,792,000
Activity in investment securities available for sale
Repayments and calls		383,457			1,214,376
Activity in investment securities held to maturity
Repayments and calls		3,748,200			1,020,405
Redemption of stock investments, restricted		22,300			(41,450	)
Loan originations and principal collections, net		(798,771	)		1,327,816
Proceeds from sale of foreclosed assets		533,188			577,685
Purchase of premises and equipment		(23,015	)		(308,845	)
Net cash provided by investing activities		2,625,359			10,581,987

Cash Flows from Financing Activities
Net change in deposits		(983,903	)		(9,409,444	)
Proceeds from stock offering, net of capital raising costs		680,910			0
Net cash used by financing activities		(302,993	)		(9,409,444	)
Net increase in cash and cash equivalents		3,105,865			1,863,187

Cash and Cash Equivalents at Beginning of Period		17,524,054			7,701,641
Cash and Cash Equivalents at End of Period	$	20,629,919		$	9,564,828

Supplemental Information
Interest paid	$	154,778		$	344,358
Income taxes paid	$	133,000		$	77,000
Supplemental Disclosures of Noncash Investing and Financing Activities
Loans transferred to other real estate owned	$	-		$	439,317
Loans to facilitate the sale of foreclosed assets	$	427,500		$	-

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

CHINO COMMERCIAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

Note 1 – The Business of Chino Commercial Bancorp

Chino Commercial Bancorp (the “Company”) is a California corporation headquartered in Chino, California, and is a registered bank holding company under federal banking laws. The Company was formed to serve as the holding company for Chino Commercial Bank, N.A. (the “Bank”), and has been the Bank’s sole shareholder since July 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 in 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 (ASC) 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. In January 2006 the Bank opened its Ontario branch located at 1551 South Grove Avenue, Ontario, California and in April 2010 the Bank opened its Rancho Cucamonga branch located at 8229 Rochester Avenue, Rancho Cucamonga, California. In July 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, 2012 and 2011 have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.GAAP) for interim financial statements. They do not, however, include all of the information and footnotes required by such accounting principles for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole. Certain prior period amounts have been reclassified to conform to current period classification. The interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission.

Note 3 – Critical Accounting Policies:

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Company’s financial statements and accompanying notes. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Critical accounting policies are those that involve the most complex and subjective decisions and assessments and have the greatest potential impact on the Company’s results of operation. There were no significant changes to the Company’s critical accounting policies discussed in the Form 10-K for the year ended December 31, 2011.

Note 4 – Recent Accounting Pronouncements:

In December 2011, the FASB issued new guidance ASU No. 2011-11. “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This new guidance requires expanded information about financial instruments or derivatives that are either presented on a net basis in the balance sheet or subject to an enforceable master netting arrangement or similar arrangement. The new guidance does not change existing offsetting criteria in U.S. GAAP or the permitted balance sheet presentation for items meeting the criteria. The new disclosure requirements in the ASU are intended to enhance comparability between financial statements prepared using U.S. GAAP and those prepared using IFRS. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

Note 5 – Investment Securities

The amortized cost and fair value of investment securities at June 30, 2012 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Securities available for sale:
Municipal bonds	$	743,460	$	55,109	$	-	$	798,569
Mortgage-backed securities		1,710,747		81,259		-		1,792,006
	$	2,454,207	$	136,368	$	-	$	2,590,575

Securities held to maturity:
Municipal bonds	$	430,263	$	1,019	$	-	$	431,282
Mortgage-backed securities		5,409,579		196,710		-		5,606,289
Corporate		30,397		295		-		30,692
	$	5,870,239	$	198,024	$	-	$	6,068,263

The amortized cost and fair value of investment securities at December 31, 2011 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Securities available for sale:
Municipal bonds	$	743,407	$	52,691	$	-	$	796,098
Mortgage-backed securities		2,093,745		82,664		87		2,176,322
	$	2,837,152	$	135,355	$	87	$	2,972,420

Securities held to maturity:
Municipal bonds	$	431,986	$	3,705	$	-	$	435,691
Federal agency		2,500,000		14,528		-		2,514,528
Mortgage-backed securities		6,690,284		188,956		-		6,879,240
Corporate		30,360		715		-		31,075
	$	9,652,630	$	207,904	$	-	$	9,860,534

The amortized cost and fair value of investment securities as of June 30, 2012 by contractual maturity are shown below:

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Within 1 year	$	-	$	-	$	130,477	$	131,160
After 1 year through 5 years		-		-		-		-
After 5 years through 10 years		-		-		330,183		330,814
After 10 years through 17 years		743,460		798,569		-		-
Mortgage-backed securities		1,710,747		1,792,006		5,409,579		5,606,289
	$	2,454,207	$	2,590,575	$	5,870,239	$	6,068,263

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.

In the recent past, unrealized losses were related to mortgage-backed securities issued by federally sponsored agencies, which are fully secured by conforming residential loans. Since the Company had the ability to hold these securities until estimated maturity, no declines were deemed to be other than temporary. There are no securities with gross unrealized losses at June 30, 2012.

Note 6 – Loans and Allowance for Loan Losses

At December 31, 2011, the Company had 11 impaired loans totaling $3,605,142, all of which were on non-accrual status. Only one of those loans was past due over 30 days. At June 30, 2012, there were 10 impaired loans totaling $2,407,384 all of which were on a non-accrual status. Only one of those loans was past due over 30 days.

Changes in the allowance for loan losses are summarized as follows for three months ended June 30, 2012:

	One to								Commercial
	Four			Residential		Commercial			and
	Residential			Income		Real Estate			Industrial			Consumer			Installment			Other			Total

Beginning balance
April 1, 2012	$	38,599		$	40,110	$	1,231,608		$	213,747		$	944		$	9,900		$	335		$	1,535,243
Provision for loan
losses		(2,407	)		35,233		(77,523	)		47,589			(340	)		(530	)		(50	)		1,972

Loans charged off		-			-		-			(67,828	)		-			-			-			(67,828	)

Recoveries		-			-		-			-			100			-			-			100

Ending Balance
June 30, 2012	$	36,192		$	75,343	$	1,154,085		$	193,508		$	704		$	9,370		$	285		$	1,469,487

Changes in the allowance for loan losses are summarized as follows for six months ended June 30, 2012:

	One to								Commercial
	Four			Residential		Commercial			and
	Residential			Income		Real Estate			Industrial			Consumer			Installment			Other			Total

Beginning balance
January 1, 2011		44,586			40,438		1,201,839			238,448			976			11,289			387			1,537,963
Provision for loan
losses		(8,394	)		34,905		(47,754	)		22,888			2,348			(1,919	)		(102	)		1,972

Loans charged off		-			-		-			(67,828	)		(2,720	)		-			-			(70,548	)

Recoveries		-			-		-			-			100			-			-			100

Ending Balance
June 30, 2012	$	36,192		$	75,343	$	1,154,085		$	193,508		$	704		$	9,370		$	285		$	1,469,487

The following tables present loans and the allowance for loan losses by segment as of June 30, 2012 and December 31, 2011:

Loans and Allowance for Loan Losses (by loan segment)

As of June 30, 2012

	One to Four		Residential		Commercial		Commercial and
	Residential		Income		Real Estate		Industrial		Consumer		Installment		Other		Total

Loans:

Balance	$	2,364,378	$	3,743,795	$	42,979,716	$	8,076,603	$	28,383	$	330,325	$	8,034	$	57,531,234

Individually evaluated
for impairment		178,053		-		1,069,911		1,159,420		-		-		-		2,407,384

Collectively evaluated
for impairment		2,186,325		3,743,795		41,909,805		6,917,183		28,383		330,325		8,034		55,123,850

Allowance for loan losses:

Balance		36,192		75,343		1,154,085		193,508		704		9,370		285		1,469,487

Individually evaluated
for impairment		4,968		-		30,537		23,235		-		-		-		58,740

Collectively evaluated
for impairment		31,224		75,343		1,123,548		170,273		704		9,370		285		1,410,747

Loans and Allowance for Loan Losses (by loan segment)

As of December 31, 2011

	One to Four		Residential		Commercial		Commercial and
	Residential		Income		Real Estate		Industrial		Consumer		Installment		Other		Total

Loans:

Balance	$	2,368,205	$	1,880,824	$	43,816,693	$	8,082,845	$	30,737	$	612,923	$	10,684	$	56,802,911

Individually evaluated
for impairment		656,275		-		1,716,028		1,232,839		-		-		-		3,605,142

Collectively evaluated
for impairment		1,711,930		1,880,824		42,100,665		6,850,006		30,737		612,923		10,684		53,197,769

Allowance for loan losses:

Balance		44,586		40,438		1,201,839		238,448		976		11,289		387		1,537,963

Individually evaluated
for impairment		18,835		-		49,250		40,661		-		-		-		108,746

Collectively evaluated
for impairment		25,751		40,438		1,152,589		197,787		976		11,289		387		1,429,217

Management divides the loan portfolio into portfolio segments for purposes of developing and documenting a systematic method for determining its allowance for loan losses. The portfolio is 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 divided 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 since May 2011 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.

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, 2012 and December 31, 2011 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, 2012

	Grade
	Pass		Special Mention		Substandard		Doubtful		Total

One to four residential:
Closed-end	$	2,186,325	$	--	$	178,053	$	--	$	2,364,378

Residential income		3,668,815		--		74,980		--		3,743,795

Commercial real estate:
Owner occupied		20,880,858		--		1,172,927		--		22,053,785
Non-owner occupied		18,720,578		287,270		1,918,083		--		20,925,931

Commercial and industrial:
Secured		3,578,278		--		1,353,318		--		4,931,596
Unsecured		3,037,099		--		107,908		--		3,145,007

Consumer		28,383		--		--		--		28,383

Installment		330,325		--		--		--		330,325

Other		8,034		--		--		--		8,034

Total	$	52,438,695	$	287,270	$	4,805,269	$	-	$	57,531,234

Credit Quality Indicators (by loan class)

As of December 31, 2011

	Grade
	Pass		Special Mention		Substandard		Doubtful		Total

One to four residential:
Closed-end	$	1,711,932	$	--	$	656,273	$	--	$	2,368,205

Residential income		1,880,824		--		--		--		1,880,824

Commercial real estate:
Owner occupied		17,642,198		-		2,345,010		--		19,987,208
Non-owner occupied		21,044,610		290,358		2,494,517		--		23,829,485

Commercial and industrial:
Secured		2,840,543		-		1,142,687		--		3,983,230
Unsecured		3,200,770		223,798		675,047		--		4,099,615

Consumer		30,737		--		--		--		30,737

Installment		612,923		--		--		--		612,923

Other		10,684		--		--		--		10,684

Total	$	48,975,221	$	514,156	$	7,313,534	$	--	$	56,802,911

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 their continuance as assets is not warranted. Assets that do not expose the Company 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. Assets classified as loss are charged off. 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. Management regularly reviews its asset portfolio to determine whether any assets require reclassification in accordance with applicable regulations.

The following tables set forth certain information with respect to delinquencies in the Company’s portfolio by loan class and amount as of June 30, 2012 and December 31, 2011:

Age Analysis of Past Due Loans (by loan class)

As of June 30, 2012

													Recorded
					Greater								Investment
	30-59 Days		60-89 Days		Than		Total				Total		90 Days or more
	Past Due		Past Due		90 Days		Past Due		Current		Loans		and Accruing

One to four residential:
Closed-end	$	--	$	--	$	--	$	--	$	2,364,378	$	2,364,378	$	--

Residential income		--		--		--		--		3,743,795		3,743,795		--

Commercial real estate:
Owner occupied		159,334		--		--		159,334		21,894,451		22,053,785		--
Non-owner occupied		--		--		--		--		20,925,931		20,925,931		--

Commercial and industrial:
Secured		--		--		--		--		4,931,596		4,931,596		--
Unsecured		--		--		--		--		3,145,007		3,145,007		--

Consumer		--		--		--		--		28,383		28,383		--

Installment		10,173		--		--		10,173		320,152		330,325		--

Other		--		--		--		--		8,034		8,034		--

Total	$	169,507	$	--	$	--	$	169,507	$	57,361,727	$	57,531,234	$	--

Age Analysis of Past Due Loans (by loan class)

As of December 31, 2011

													Recorded
					Greater								Investment
	30-59 Days		60-89 Days		Than		Total				Total		90 Days or more
	Past Due		Past Due		90 Days		Past Due		Current		Loans		and Accruing

One to four residential:
Closed-end	$	--	$	--	$	--	$	--	$	2,368,205	$	2,368,205	$	--

Residential income		--		--		--		--		1,880,824	$	1,880,824		--

Commercial real estate:
Owner occupied		171,434		--		--		171,434		19,815,774		19,987,208		--
Non-owner occupied		--		--		--		--		23,829,485		23,829,485		--

Commercial and industrial:
Secured		--		--		--		--		3,983,230		3,983,230		--
Unsecured		--		--		--		--		4,099,615		4,099,615		--

Consumer		--		--		--		--		30,737		30,737		--

Installment		--		--		--		--		612,923		612,923		--

Other		--		--		--		--		10,684		10,684		--

Total	$	171,434	$	--	$	--	$	171,434	$	56,631,477	$	56,802,911	$	--

The following tables summarize impaired loans by loan class as of and for the period ended June 30, 2012 and December 31, 2011:

Impaired Loans (by loan class)

As of and For the Three and Six Months Ended June 30, 2012

			Unpaid				Average Recorded Investment				Interest
	Recorded		Principal		Related		for Three		for Six		Income
	Investment		Balance		Allowance		Months		Months		Recognized
One to four residential:
Closed-end	$	178,053	$	178,053	$	4,968	$	180,347	$	382,465	$	--

Commercial real estate:
Owner occupied		159,334		159,334		4,445		162,309		473,026		--
Non-owner occupied		910,577		910,577		30,537		919,131		875,687		--

Commercial and industrial:
Secured		1,159,420		1,159,420		32,348		1,178,399		1,197,404		--

Total:
One to four residential	$	178,053	$	178,053	$	4,968	$	180,347	$	382,465	$	--
Commercial real estate	$	1,069,911	$	1,069,911	$	34,982	$	1,081,440	$	1,348,713	$	--
Commercial and industrial	$	1,159,420	$	1,159,420	$	32,348	$	1,178,399	$	1,197,404	$	--

Impaired Loans (by loan class)

As of and For the Year Ended December 31, 2011

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

With an allowance recorded:
One to four residential:
Closed-end	$	656,275	$	656,275	$	18,835	$	805,914	$	--

Commercial real estate:
Owner occupied		893,259		893,259		25,637		1,201,115		--
Non-owner occupied		822,769		822,769		23,613		851,886		--

Commercial and industrial:
Secured		1,232,839		1,232,839		40,661		1,238,994		--

Total:
One to four residential	$	656,275	$	656,275	$	18,835	$	805,914	$	--
Commercial real estate	$	1,716,028	$	1,716,028	$	49,250	$	2,053,001	$	--
Commercial and industrial	$	1,232,839	$	1,232,839	$	40,661	$	1,238,994	$	--

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

Loans on Nonaccrual Status (by loan class)

	June 30, 2012		December 31, 2011
One to four residential:
Closed-end	$	178,053	$	656,275

Commercial real estate:
Owner occupied		159,334		893,259
Non-owner occupied		910,577		822,769

Commercial and industrial:
Secured		1,159,420		1,232,839

Total	$	2,407,384	$	3,605,142

A summary of troubled debt restructurings that occurred in the reporting period is as follows:

Modifications (by loan class)

For the three and six month periods ended June 30, 2012

					Post-
			Pre-Modification		Modification		Recorded
	Number		Outstanding		Outstanding		Investment
	of		Recorded		Recorded		at
	Loans		Investment		Investment		06/30/12
Troubled Debt Restructurings
Non-owner occupied		1	$	120,424	$	120,424	$	117,526

Commercial and industrial:
Secured		1		451,897		451,897		436,965
Unsecured		1		54,472		54,472		44,808

The Company had three loans that were modified in troubled debt restructurings during the three and six month periods ended June 30, 2012. These modifications were made during the first quarter of 2012 and are classified as troubled debt restructurings because they were renewed at below-market interest rates due to the borrowers’ financial difficulties at the time of the restructuring. The loans are collateralized dependent and have zero impairment, thus no specific allowance has been established for these loans.

All loans modified in a trouble debt restructurings performed as agreed subsequent to the restructuring. The Company had no troubled debt restructurings in the three-month period ended June 30, 2011.

Loans serviced for others are portions of loans participated out to other banks. Loan balances are net of these participated balances. The unpaid principal balance of loans serviced for others was $1,634,629 and $1,654,001 at June 30, 2012 and December 31, 2011, respectively.

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. 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 bore interest at 6.795% for the first five years from October 27, 2006 to December 15, 2011. On December 15, 2011 the interest rate became a variable interest rate equal to LIBOR (adjusted quarterly) plus 1.68%. LIBOR at December 15, 2011 was 0.54625% resulting in an interest rate of 2.22625% from December 15, 2011 to March 14, 2012. LIBOR at March 15, 2012 was 0.473650% resulting in an interest rate of 2.15365% from March 15 to June 14, 2012. LIBOR at June 15, 2012 was 0.467850% resulting in an interest rate of 2.14785% from June 15 to September 14, 2012.

As of June 30, 2012 and 2011, accrued interest payable to the Trust amounted to $140,379 and $8,494, respectively. Interest for Trust Preferred Securities amounted to $17,265 and $50,963, respectively, for the quarters ended June 30, 2012 and 2011. Interest for the Trust Preferred Securities amounted to $35,468 and $101,925, respectively, for each of the half years ended June 30, 2012 and 2011. The Company relies on dividends from the Bank in order to make such payments and the Bank is restricted from making dividend payments to the Company without prior supervisory non-objection from the Office of the Comptroller of the Currency (the “OCC). In addition, the Company must obtain the approval of the Federal Reserve Bank of San Francisco (the “FRB”) prior to making interest payments on the Trust Preferred Securities. Prior to the commencement of the Company’s secondary stock offering in November 2011, the Company elected to begin deferring such interest payments pending the conclusion of the offering, commencing with the September 15, 2011 payment. The offering has since been completed and the Company received approval from the FRB to bring all payments on the Trust Preferred Securities current together with the June 15, 2012 payment. However, such approval was not received in time to enable payment on that date, and the approval was therefore extended to the next payment due date. As a result, all such payments are to be brought current instead on September 15, 2012.

Note 8 – Stock Based Compensation

The Company’s stock option plan expired on July 13, 2010. The plan allowed the board to grant incentive stock options to officers and employees and non-qualified stock options to the directors, officers and employees. At June 30, 2012 and 2011, options to purchase 12,402 and 13,628 shares, respectively, were outstanding. All outstanding options are fully vested.

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, 2012 and 2011.

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,
	2012						2011
			Weighted							Weighted
	Net		Average		Per Share		Net			Average		Per Share
	Income		Shares		Amount		Income			Shares		Amount

Basic earnings	$	124,196		829,402	$	0.15	$	(49,945	)		748,314	$	(0.07	)

Effect of dilutive shares:
assumed exercise of
outstanding options				0		0.00					0		0.00

Diluted earnings	$	124,196		829,402	$	0.15	$	(49,945	)		748,314	$	(0.07	)

	Earnings per share Calculation
	For the six months ended June 30,
	2012						2011
			Weighted						Weighted
	Net		Average		Per Share		Net		Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount

Basic earnings	$	328,154		799,623	$	0.41	$	153,360		748,314	$	0.20

Effect of dilutive shares:
assumed exercise of
outstanding options				488		0.00				0		0.00

Diluted earnings per share	$	328,154		800,111	$	0.41	$	153,360		748,314	$	0.20

Note 10 - Off-Balance-Sheet Commitments

The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to grant loans, unadvanced lines of credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance 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, 2012 and December 31, 2011, the Company had $4.4 million and $3.6 million, respectively, of off-balance sheet commitments to extend credit. These commitments represent a credit risk to the Company. The Company had two unadvanced standby letters of credit at June 30, 2012, for $197,804 and one unadvanced standby letter of credit at December 31, 2011, for $82,804.

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, 2012 and December 31, 2011, 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, 2012 and December 31, 2011.

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, 2012 and December 31, 2011.

			Quoted Prices		Significant
			in Active		Other
			Markets for		Observable		Significant
			Identical Assets		Inputs		Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Securities Available for Sale
at June 30, 2012
Municipal bonds	$	798,569	$	-	$	798,569	$	-
Mortgage-backed securities		1,792,006		-		1,792,006		-
Total	$	2,590,575	$	-	$	2,590,575	$	-

at December 31, 2011
Municipal bonds	$	796,098	$	-	$	796,098	$	-
Mortgage-backed securities		2,176,322		-		2,176,322		-
Total	$	2,972,420	$	-	$	2,972,420	$	-

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with U.S. 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.

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.

The following presents impaired loans measured at fair value on a non-recurring basis as of June 30, 2012 and December 31, 2011.

			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Impaired loans net of ALLL
at June 30, 2012	$	2,335,086	$	-	$	1,203,888	$	1,131,198
at December 31, 2011	$	3,496,396	$	-	$	1,142,547	$	2,353,849

For Level 3 impaired loans, the fair value of collateral is based on appraisals that are greater than six months old. Management has not made adjustments for the age of the appraisals based on their estimate that the values of the properties have no changed materially since the appraisal date. These estimates are based on qualitative judgments made by management on a case-by-case basis.

Other Real Estate Owned

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

The following table summarizes the Company’s OREO that was measured at fair value on a nonrecurring basis as of June 30, 2012 and December 31, 2011:

			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Other real estate owned net
of valuation allowance
at June 30, 2012	$	-	$	-	$	-	$	-
at December 31, 2011	$	439,317	$	-	$	439,317	$	-

Disclosure of fair value information about financial instruments is required, 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. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of financial instruments for which it is practicable to estimate that value. 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 non-interest bearing demand deposits is the amount payable on demand at the reporting date. 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 tables below.

The carrying values and estimated fair values of financial instruments at June 30, 2012 and December 31, 2011 are as follows:

	Fair Value Measurements at June 30, 2012 using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs		Fair
	Value		(Level 1)		(Level 2)		(Level 3)		Value
Financial assets:
Cash and cash equivalents	$	20,629,919	$	20,629,919	$	-	$	-	$	20,629,919
Interest-bearing deposits with other banks		14,579,252		-		-		-		14,578,995
Investment securities available for sale		2,590,575		-		2,590,575		-		2,590,575
Investment securities held to maturity		5,870,239		-		6,068,263		-		6,068,263
Stock investments		645,400		-		-		645,400		645,400
Loans, net		55,911,333		-		1,203,888		55,034,583		56,238,471
Accrued interest receivable		252,474		-		252,474		-		252,474
Bank owned life insurance		1,853,543		-		1,853,543		-		1,853,543
Trups common securities		93,000		-		93,000		-		93,000

Financial liabilities:
Deposits
Non-interest bearing demand deposits	$	47,354,353	$	47,354,353	$	-	$	-	$	47,354,353
Interest-bearing deposits		49,765,302		-		49,773,901		-		49,773,901
Accrued interest payable		185,938		-		185,938		-		185,938
Subordinated Debentures		3,093,000		-		3,093,000		-		3,093,000

	Fair Value Measurements at December 31, 2011 using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs		Fair
	Value		(Level 1)		(Level 2)		(Level 3)		Value
Financial assets:
Cash and cash equivalents	$	17,524,054	$	17,524,054	$	-	$	-	$	17,524,054
Interest-bearing deposits with other banks		13,339,252		-		13,345,914		-		13,345,914
Investment securities available for sale		2,972,420		-		2,972,420		-		2,972,420
Investment securities held to maturity		9,652,630		-		9,860,534		-		9,860,534
Stock investments		667,700		-		-		667,700		667,700
Loans, net		55,235,841		-		1,142,547		54,130,648		55,273,195
Accrued interest receivable		275,976		-		275,976		-		275,976
Bank owned life insurance		1,819,191		-		1,819,191		-		1,819,191
Trups common securities		93,000		-		93,000		-		93,000

Financial liabilities:		98,103,558
Deposits
Non-interest bearing demand deposits	$	47,188,644	$	47,188,644	$	-	$	-	$	47,188,644
Interest-bearing deposits		50,914,914		-		50,926,890		-		50,926,890
Accrued interest payable		139,646		-		139,646		-		139,646
Subordinated Debentures		3,093,000		-		3,093,000		-		3,093,000

Note 12 – Regulatory Agreements

On April 12, 2011, the Bank entered into a formal written agreement (the “Formal Agreement”) with the Office of the Comptroller of the Currency, the Bank’s primary regulator. (See “Item 2 – Recent Developments – Regulatory Agreements.”) The Bank has also agreed to the OCC establishing higher minimum capital ratios for the Bank. The Bank must maintain a Leverage Capital Ratio of not less than 9.0% and a Total Risk-Based Capital Ratio of not less than 12.0%. As of June 30, 2012 the Bank’s Leverage Capital Ratio was 10.08% and its Total Risk-Based Capital Ratio was 17.11%. The Bank achieved a Leverage Capital Ratio of at least 9.0% by May 31, 2011, and continued to maintain or exceed the required ratio through June 30, 2012, by reducing higher-rate CD and money market deposits, thereby reducing average assets and to a lesser extent, in the first half of 2012, by increasing capital through retained earnings. It is anticipated that a portion of the proceeds from the secondary stock offering will be downstreamed to the Bank to further enhance capital levels

On July 21, 2011, Chino Commercial Bancorp entered into a memorandum of understanding (“MOU”) with the Federal Reserve Bank of San Francisco (the “FRB”). (See “Item 2 – Recent Developments – Regulatory Agreements.”)

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 and six months ended June 30, 2012 and 2011, and the consolidated financial condition of the Company as of June 30, 2012 and December 31, 2011.

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 Annual Report on Form 10-K for the year ended December 31, 2011.

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, for the year ended December 31, 2011, as supplemented by the information contained in this report.

Recent Developments

Regulatory Matters. 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 “Formal Agreement”) with the Office of the Comptroller of the Currency (the “OCC”), the Bank’s primary regulator. The Formal 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 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 achieved the required capital ratios by May 31, 2011, and has maintained the ratio above the required minimums, thereafter. As of June 30, 2012 the Bank’s Leverage Capital Ratio was 10.08% and its Total Risk-Based Capital Ratio was 17.11%.

The Formal Agreement requires the Bank 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 Formal Agreement.

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 Formal Agreement; (ii) refrain from paying cash dividends, receiving cash dividends from the Bank, increasing or guaranteeing debt, making any capital distributions or payments on trust preferred securities, 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.

The Boards of Directors and management of the Bank and the Company are in the process of taking all necessary actions to comply with the various provisions of the Formal Agreement and the MOU.

Capital Raise. On September 16, 2011, the Company filed a registration statement on Form S-1 with the SEC in connection with a rights offering to existing shareholders which commenced in the fourth quarter of 2011. Pricing for the offering was set at $10.50 per share plus certain bonus shares to be issued to holders of subscription rights for no additional consideration. The rights offering to existing shareholders expired on February 22, 2012 and the public offering was extended to and expired on July 15, 2012. The Company has generated $799,063 in capital from the offering, representing gross proceeds from shareholder rights subscriptions totaling $435,068, and subscriptions from investors in the public offering totaling $384,090. Net proceeds of $680,910 after deduction of offering expenses was booked to capital. It is anticipated that a portion of the proceeds of the offering will be downstreamed to the Bank to further enhance its capital levels and enable future growth while still complying with the capital requirements to which the Bank has agreed with the OCC. See "Regulatory Matters" immediately above.

Overview of the Results of Operations and Financial Condition

Results of Operations Summary

Second quarter 2012 compared to second quarter 2011

Net income for the quarter ended June 30, 2012 was $124,196 compared with net loss of $49,945 for the quarter ended June 30, 2011, an increase of 348.7%. Basic and diluted earnings per share for the second quarter of 2012 was $0.15, compared to loss per share of $0.07 for the second quarter of 2011. The Company’s annualized return on average equity was 5.92% and annualized return on average assets was 0.46% for the quarter ended June 30, 2012, compared to a return on average equity of (2.85%) and a return on average assets of (0.19%) for same quarter in 2011. The primary factors affecting net income during the first quarter of 2012 are as follows:

The provision for loan losses decreased to $1,972 during the second quarter of 2012, a decrease of $271,945 or 99.3%, as compared to $273,917 for the three months ended June 30, 2010. Net loan charge-offs were $67,728 for the second quarter of 2012 and $259,456 for the second quarter of 2011. The decrease in the provision was due to a combination of the lower level of charge-offs in the second quarter of 2012 versus 2011, and the decrease in the level of nonperforming loans from $4.4 million at June 30, 2011 to $2.4 million at June 30, 2012.

The Company posted net interest income of $878,636 for the quarter ended June 30, 2012 as compared to $907,439 for the quarter ended June 30, 2011. The decrease was caused by a decline in yields on earning assets. Average interest-earning assets were $96.0 million with average interest-bearing liabilities of $52.8 million, yielding a net interest margin of 3.68% for the second quarter of 2012; as compared to the average interest-earning assets of $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. The replacement of higher-yielding loans and mortgage backed securities with fed funds sold significantly reduced the yield on earning assets from 4.66% in the second quarter of 2011 to 4.09% in the second quarter of 2012.

Non-interest income decreased to $310,957 for the three months ended June 30, 2012, compared to $318,062 for the three months ended June 30, 2011, a 2.2% decrease. Service charges on deposits decreased by $10,072 or 3.5% for the second quarter of 2012 compared to the second quarter of 2011, due to a slight decrease in volume subject to analysis charges and returned item charges. Dividend income from restricted stock increased $3,746, or 134.3%, in the second quarter and increased $4,404, or 79.2%, in the first half of 2012 in comparison to the same periods in 2011, resulting from an increase in dividends received from Pacific Coast Bankers’ Bank (PCBB). No dividends were received from PCBB in 2011.

Non-interest expenses were $994,626 for the three months ended June 30, 2012 as compared to $1,056,146 for the three months ended June 30, 2011, a 5.8% decrease. The largest component of non-interest expense was salaries and benefits expense of $546,560 for the second quarter of 2012 compared to $520,894 for the same period in 2011, representing a 4.9% increase. The increase in salary expense was due to an increase in credit administration staff.

Other components of non-interest expense were regulatory assessments, which decreased in the second quarter of 2012 to $55,460, compared to $75,920 in the second quarter of 2011 due to changes in the calculation of regulatory assessments. Legal and other professional fees which decreased 48.7% or $64,339 in the three months ended June 30, 2012 compared to the same period in 2011. Occupancy expense also decrease $11,254 to $100,967 due to costs expensed in 2011 related to moving the main branch and administrative offices to its new location. Data and item processing expenses decreased 11.0% in the second quarter of 2012 to $83,831. These were partially offset by directors’ fees and other expenses. Directors’ fees and expenses increased $6,320 to $27,495 due to an appointment of additional director and an increase in directors’ fees that was effective January 1, 2012. Other expenses increased by $9,418 for the comparable three-month period due mainly to expenses paid for accounts on analysis.

First half of 2012 compared to the first half of 2011

Net income for the six months ended June 30, 2012 was $328,154 compared to $153,360 for the first six months of 2011, an increase of 114.0%. Basic and diluted earnings per share for the six months ended June 30, 2012 were $0.41 compared to $0.20 for the same period in 2011. Annualized return on average equity was 8.15% and a return on assets of 0.61%, compared to a return on equity of 4.35% and a return on assets of 0.28% for the same period in 2011. The primary reasons for the change in net income during the first half of 2012 are as follows:

The Company provided $1,972 to the allowance for loan losses during the first half of 2012, a 99.3% decrease from the same period in 2011. Net loan charge-offs were $70,448 for the first half of 2012 and $259,456 for the first half of 2011. The decrease in the provision was due to a combination of the lower level of charge-offs in the first half of 2012 versus 2011, and the decrease in the level of nonperforming loans from $4.4 million at June 30, 2011 to $2.4 million at June 30, 2012.

The Company posted net interest income of $1,774,126 for the six months ended June 30, 2012 as compared to $1,926,811 for the same period in 2011, a decrease of 7.9%. Average interest-earning assets were $94.9 million with average interest-bearing liabilities of $53.2 million, yielding a net interest margin of 3.76% for the first half of 2012; as compared to the average interest-earning assets of $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. The replacement of higher-yielding loans and mortgage backed securities with fed funds sold significantly reduced the yield on earning assets from 4.77% in the first half of 2011 to 4.18% in the first half of 2012.

Non-interest income totaled $786,775 for the first half of 2012, an increase of $75,662, or 10.6%, compared to $711,113 in the first half of 2011. Substantial increases were seen in gain on sale of foreclosed assets and other miscellaneous income. Gain on sale of foreclosed assets increased to $93,871 in the six months ended June 30, 2012, compared to a $61,151 gain recognized in the same period of 2011. Other miscellaneous income increased to $57,749 for the six months ended June 30, 2012, compared to $15,506 in the first half of 2011 due to reimbursement of legal expenses incurred in 2011.

Non-interest expenses decreased $96,672 to $2,040,602 for the first half of 2012 compared to the same period in 2011. The largest component of non-interest expense was salaries and benefits expense of $1,119,842 for the first half of 2012 compared to $1,108,294 for the same periods in 2011, representing an a 1.0% increase. Included in non-interest expenses is legal and other professional fees which decreased 32.4% or $65,464 in the six months ended June 30, 2012 compared to the same period in 2011 as a result of certain legal fees related to regulatory maters in 2011 which did not recur in 2012.

Another component of non-interest expense was regulatory assessments, which decreased in the six months ended June 30, 2012 to $111,324, compared to $151,367 in the first half of 2011. In early 2011, we increased regulatory assessments accrued expenses in anticipation of an increase in rates. This increase did not materialize and the accrual was reversed in late 2011. These expense decreases were partially offset by Directors’ fees and other expenses. Directors’ fees and expenses increased $16,264 to $53,040 due to an appointment of additional director and an increase in directors’ fees that was effective January 1, 2012. Other expenses increased by $16,645 for the comparable six-month period due mainly to expenses paid for accounts on analysis.

Financial Condition Summary

The Company’s total assets were $109.6 million at June 30, 2012, a decrease of $141,921, or 0.1% as compared to total assets of $109.7 million at December 31, 2011. The most significant changes in the Company’s consolidated balance sheet during the six months ended June 30, 2012 are outlined below:

Total deposits decreased $983,903 or 1.0% to $97.1 million at June 30, 2012 from $98.1 million at December 31, 2011. Interest-bearing deposits decreased $1.1 million or 2.3% to $49.8 million at June 30, 2012 from $50.9 million at December 31, 2011 due to the Bank’s reduction of interest rates offered on interest-bearing accounts. Demand deposits increased $165,709 million or 0.4% to $47.4 million at June 30, 2012 from $47.2 million at December 31, 2011. The ratio of non-interest bearing deposits to total deposits was 48.8% at June 30, 2012 and 48.1% at December 31, 2011.

The Company experienced a slight increase in interest-earning assets of 0.2% to $97.1 million in the first half of 2012, primarily in Federal funds sold which increased to $16.6 million at June 30, 2012, compared to $14.2 million at December 31, 2011. Gross loans increased 1.3% to $57.5 million at June 30, 2012, compared to $56.8 million at December 31, 2011.

In the first half of 2012, the Company reduced its nonperforming assets to $2.4 million at June 30, 2012, from $4.0 million at December 31, 2011. The December 31, 2011 nonperforming assets included $439,317 in OREO, which was sold in the first quarter of 2012. All nonperforming loans were current and paying as agreed, except one for one non-accrual loan, which was more than 30 days past due on June 30, 2012. The Company has six TDRs, five on non-accrual status. One TDR previously on non-accrual status was upgraded to accrual status at June 30, 2012.

Total shareholders’ equity increased $1.0 million to $8.5 million at June 30, 2012 from $7.5 million at December 31, 2011, due primarily to $328,154 in increased retained earnings, $680,910 in net proceeds from the Company’s stock offering (see “Recent Developments - Capital Raise” above), and a $649 increase in comprehensive income.

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 of 2012, net interest income decreased $28,803, or 3.2%, to $878,636 in 2012 from $907,439 in 2011. For the six months ended June 30, 2012, net interest income decreased $152,685, or 7.9%, to $1,774,126 in 2012 from $1,926,811 in 2011. The level of net interest income depends on several factors in combination, including growth in earning assets, yields on earning assets, the cost of interest-bearing liabilities, the relative volumes of earning assets and interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Occasionally, net interest income is also impacted by the recovery of interest on loans that have been on non-accrual and are either sold or returned to accrual status, or by the reversal of accrued but unpaid interest for loans placed on non-accrual status. The Company’s net interest income, net interest margin and interest spread are sensitive to general business and economic conditions, including short-term and long-term interest rates, inflation, monetary supply, and the strength of the economy, and the local economics in which the Company conducts business. When net interest income is expressed as a percentage of average earning assets, the results is the net interest margin.

The following tables set forth certain information relating to the Company for the three and six months ended June 30, 2012 and 2011. 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							For the three months ended
	June 30, 2012							June 30, 2011
	Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Yield/Rate ⁴			Balance		Expense		Yield/Rate ⁴
	($ in thousands)
Assets
Interest-earnings assets
Loans¹	$	54,603	$	877		6.46	%	$	59,336	$	903		6.10	%
U.S. government agencies securities		714		5		2.54	%		2,500		15		2.51	%
Mortgage-backed securities		7,544		51		2.72	%		11,489		91		3.15	%
Other securities		1,205		12		4.11	%		1,259		13		4.27	%
Due from Banks time		13,135		20		0.60	%		14,238		34		0.95	%
Federal funds sold		18,824		12		0.26	%		2,253		1		0.25	%
Total interest-earning assets		96,025	$	977		4.09	%		91,075	$	1,057		4.66	%
Non-interest earning assets		12,340							13,578
Total assets	$	108,365						$	104,653

Liabilities and Stockholders' Equity
Interest-bearing liabilities
Money market and NOW deposits	$	31,626	$	54		0.68	%	$	31,461	$	59		0.75	%
Savings		2,205		1		0.25	%		1,969		1		0.25	%
Time deposits < $100,000		4,653		7		0.57	%		5,326		10		0.76	%
Time deposits equal to or > $100,000		11,242		19		0.69	%		13,435		29		0.86	%
Other borrowings		0		0		0.00	%		404		0		0.07	%
Subordinated debenture		3,093		17		2.25	%		3,093		51		6.61	%
Total interest-bearing liabilities		52,819	$	98		0.75	%		55,688	$	150		1.08	%
Non-interest bearing deposits		46,209							40,918
Other liabilities		940							1,040
Stockholders' equity		8,397							7,007
Total liabilities & stockholders' equity	$	108,365						$	104,653

Net interest income			$	879						$	907

Net interest spread ²						3.34	%						3.58	%
Net interest margin ³						3.68	%						4.00	%

¹Amortization of loan fees (costs) has been included in the calculation of interest income. Loan fees were approximately $15,300 for the three months ended June 30, 2012 as compared to $1,900 for the three months ended June 30, 2011.

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

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

⁴ Average Yield/Rate is annualized.

Distribution, Yield and Rate Analysis of Net Interest Income

(dollars in thousands)

(unaudited)

	For the six months ended							For the six months ended
	June 30, 2012							June 30, 2011
	Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Yield/Rate ⁴			Balance		Expense		Yield/Rate ⁴
	($ in thousands)
Assets
Interest-earnings assets
Loans¹	$	55,351	$	1,760		6.40	%	$	59,804	$	1,916		6.46	%
U.S. government agencies securities		1,607		20		2.52	%		2,500		31		2.52	%
Mortgage-backed securities		7,964		109		2.77	%		12,031		188		3.15	%
Other securities		1,205		25		4.10	%		1,259		27		4.29	%
Due from Banks time		13,176		41		0.62	%		16,100		77		0.96	%
Federal funds sold		15,616		20		0.26	%		3,197		4		0.25	%
Total interest-earning assets		94,919	$	1,975		4.18	%		94,891	$	2,243		4.77	%
Non-interest earning assets		12,833							14,014
Total assets	$	107,752						$	108,905

Liabilities and Stockholders' Equity
Interest-bearing liabilities
Money market and NOW deposits	$	31,769	$	110		0.69	%	$	32,828	$	121		0.74	%
Savings		2,066		3		0.25	%		2,019		3		0.26	%
Time deposits < $100,000		4,743		13		0.57	%		5,670		24		0.84	%
Time deposits equal to or > $100,000		11,577		40		0.70	%		14,229		66		0.94	%
Other borrowings		0		0		0.00	%		203		0		0.07	%
Subordinated debenture		3,093		35		2.31	%		3,093		102		6.65	%
Total interest-bearing liabilities		53,248	$	201		0.76	%		58,042	$	316		1.10	%
Non-interest bearing deposits		45,391							42,851
Non-interest bearing liabilities		1,055							965
Stockholders' equity		8,058							7,047
Total liabilities & stockholders' equity	$	107,752						$	108,905

Net interest income			$	1,774						$	1,927

Net interest spread ²						3.42	%						3.67	%
Net interest margin ³						3.76	%						4.09	%

¹Amortization of loan fees (costs) has been included in the calculation of interest income. Loan fees were approximately $20,600 for the six months ended June 30, 2012 as compared to $2,100 for the six months ended June 30, 2011. 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.

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

⁴ Average Yield/Rate is annualized.

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									For the six months ended
	June 30									June 30
	2012 vs. 2011									2012 vs. 2011
	Increase (Decrease) Due to									Increase (Decrease) Due to
	($ in thousands)									($ in thousands)
		Volume			Rate			Net			Volume			Rate			Net

Interest-earnings assets
Loans¹	$	(73	)	$	47		$	(26	)	$	(146	)	$	(10	)	$	(156	)
Securities of U.S. government agencies		(12	)		2			(10	)		(11	)		0			(11	)
Mortgage-backed securities		(27	)		(13	)		(40	)		(58	)		(21	)		(79	)
Other securities		(2	)		1			(1	)		(1	)		(1	)		(2	)
Due from Banks time		(3	)		(11	)		(14	)		(12	)		(24	)		(36	)
Federal funds sold		9			2			11			16			0			16
Total interest-earning assets		(108	)		28			(80	)		(212	)		(56	)		(268	)

Interest-bearing liabilities
Money market & NOW		0			(5	)		(5	)		(4	)		(7	)		(11	)
Time deposits < $100,000		(1	)		(2	)		(3	)		(4	)		(7	)		(11	)
Time deposits equal to or > $100,000		(5	)		(5	)		(10	)		(11	)		(15	)		(26	)
Subordinated debenture		0			(34	)		(34	)		0			(67	)		(67	)
Total interest-bearing liabilities		(6	)		(46	)		(52	)		(19	)		(96	)		(115	)
Change in net interest income	$	(102	)	$	74		$	(28	)	$	(193	)	$	40		$	(153	)

As shown above, the pure volume variance negatively impacted net interest income by $102,000 in the second quarter of 2012 relative to the same period of 2011, while the rate variance positively impacted net interest income by $74,000 for the same comparative period.

The net interest income for the second quarter of 2012 was $878,636 compared to $907,439 in the second quarter of 2011, a decrease of $28,803, or 3.2%. The net interest margin decreased to 3.68% for the three months ended June 30, 2012 as compared to 4.00% for the same period in 2011 due principally to a drop in the interest rates on interest bearing deposits and a reduction in average loans.

Average loans decreased $4.7 million or 8.0% for the second quarter of 2012 compared with the same period of 2011. Interest and fee income on loans decreased $25,863. The decrease in average loans resulted in approximately $73,000 in decreased interest income from loans, while the increase in interest rate resulted in approximately $47,000 in increased income. The average yield on loans increased from 6.10% for the quarter ended June 30, 2011 to 6.46% for the quarter ended June 30, 2012.

Income from investment securities and time deposits due from banks for the quarter ended June 30, 2012 decreased by $65,352, or 42.7% in comparison to the quarter ended June 30, 2011. The primary reason for the decreased interest income was the decrease in the average balance of investment securities and due from banks of approximately $6.9 million or 23.4%. The decline in average investment securities and due from banks time balances caused a decrease of interest income of approximately $44,000, while the rate decrease caused a decline in interest income of approximately $21,000 from investment securities and due from banks time for the second quarter of 2012 as compared to the same quarter in 2011. The average yield for investment securities and due from banks time declined from 2.09% for the three months ended June 30, 2011 to 1.56% for the same period in 2012.

Average interest-bearing liabilities decreased $2.9 million or 5.2% in the second quarter of 2012 as compared to the second quarter of 2011. The decrease in average interest-bearing deposits resulted in approximately a $6,000 decrease in interest expense while interest rate reductions resulted in a decrease of approximately $12,000 in the second quarter of 2012 as compared to the second quarter of 2011. While there was no change in the average balance of subordinated debentures, the rate decrease resulted in a decrease of approximately $34,000.

Pure volume variances negatively impacted net interest income by approximately $193,000 for the six-month period ended June 30, 2012 relative to the same period of 2011, while the rate variance positively impacted net interest income by approximately $40,000 in the same comparative periods.

Interest income decreased $267,341 or 11.9% in the six month period ended June 30, 2012 compared to the same period of 2011, while interest expense decreased $114,656 or 36.3%. Interest and fee income from loans decreased during the six months ended June 30, 2012 by $155,462, or 8.1% to $1,760,312 compared to same period in 2011, due to a decrease in average loan balances.

The average balance of investment securities and due from banks time deposits decreased due a decision to not reinvest in view of the decrease in average deposits. Average deposits declined due to the Bank’s reduction of interest rates offered on interest-bearing accounts. The most significant decrease was in due from banks time deposits, which experienced a negative volume variance of approximately $12,000 and a negative rate variance of $24,000 for the six months ended June 30, 2012 compared to the same period in 2011. Interest income from investment securities and due from banks time decreased $127,665 or 39.6% to $195,062 for the six months ended June 30, 2012 compared to the same period of 2011 due to a decline in yields.

Interest expense on deposits decreased $48,124, or 22.5% to $165,602 for the six months ended June 30, 2012 compared to the same period of 2011. Average interest bearing deposits to average total deposits decreased from 56.1% for the six months ended June 30, 2011 to 52.5% for the same period in 2012. While there was no change in the average balance of subordinated debentures, the rate decrease resulted in a decrease of approximately $67,000.

The Company’s net interest margin declined from 4.09% to 3.76% for the six months ended June 30, 2012 versus 2011 due principally to a drop in interest rates.

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-impaired loans, and specific allowances for the impaired loans as needed. 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 $1,972 to the allowance for loan losses during the first half of 2012, a 99.3% decrease from the same period in 2011. The lower provision for the first half of 2012 was due to a lower level of charge-offs during the period as compared to the first half of 2011 as well as a decrease in nonperforming assets. Net charge offs were $70,448 for the six months ended June 30, 2012 compared to $259,456 for the first half of 2011.

The Company has not originated, and has no exposure to, sub-prime mortgage loans, or option ARM mortgages.

Non-Interest Income

Non-interest income was $310,957 for the three months ended June 30, 2012 as compared to $318,062 for the three months ended June 30, 2011, a 2.2% decrease. For the first half of 2012, non-interest income increased 10.6% to $786,775 compared to $711,113 for the same period in 2011. Total annualized non-interest income as a percentage of average earning assets increased to 1.3% and 1.7% for the three and six months ended June 30, 2012, respectively, compared to 1.4% and 1.5% for the three and six months ended June 30, 2011, respectively.

	Non-Interest Income for the three months ended June 30,											Non-Interest Income for the six months ended June 30,
	2012					2011						2012					2011
	Amount		% of Total				Amount		% of Total			Amount		% of Total			Amount		% of Total
	(Dollars in thousands)											(Dollars in thousands)

Service charges on deposit accounts	$	279		89.8	%		$	289		91.0	%	$	591		75.1	%	$	593		83.5	%
Gain on sale of foreclosed assets		0		0.0	%			0		0.0	%		94		11.9	%		61		8.6	%
Other miscellaneous income		8		2.5	%			8		2.6	%		58		7.3	%		16		2.2	%
Dividend income from restricted stock		7		2.1	%			3		0.9	%		10		1.3	%		6		0.8	%
Income from bank owned life insurance		17		5.6	%			18		5.5	%		34		4.4	%		35		4.9	%
Total non-interest income	$	311		100.0	%		$	318		100.0	%	$	787		100.0	%	$	711		100.0	%
As an annualized percentage of
average earning assets				1.3	%					1.4	%				1.7	%				1.5	%

Service charges on deposit accounts, customer fees and miscellaneous income are comprised primarily of fees charged to deposit accounts and depository related services. Fees generated from deposit accounts consist of periodic service fees and fees that relate to specific actions, such as the return or payment of checks presented against accounts with insufficient funds. Depository related services include fees for money orders and cashier’s checks, placing stop payments on checks, check-printing fees, wire transfer fees, fees for safe deposit boxes and fees for returned items or checks that were previously deposited. Service charges on deposits decreased by $10,072 or 3.5% for the second quarter of 2012 compared to the second quarter of 2011, due to a slight decrease in volume subject to analysis charges and returned item charges. The Company periodically reviews service charges to maximize service charge income while still maintaining competitive pricing. Service charge income on deposit accounts increases with the increased number of accounts and to the extent fees are not waived.

Gain on sale of foreclosed assets increased to $93,871 in the first half of 2012, compared to a $61,151 gain recognized in the first half of 2011. The property sold in the first quarter of 2012 was foreclosed in May 2012 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 2012 and totaled over $32,000.

Other miscellaneous income increased to $57,749 for the six months ended June 30, 2012, compared to $15,506 in the first half of 2011 due to reimbursement of certain legal expenses incurred in 2011.

Dividend income from restricted stock increased $3,746, or 134.3%, in the second quarter and increased $4,404, or 79.2%, in the first half of 2012 in comparison to the same periods in 2011, resulting from an increase in dividends received from Pacific Coast Bankers’ Bank (PCBB). No dividends were received from PCBB in 2011.

Non-Interest Expense

The following table sets forth the non-interest expense for the three and six months ended June 30, 2012 and 2011:

	Non-Interest Expense for the quarter ended											Non-Interest Expense for the six months
	June 30											June 30
	2012						2011					2012					2011
	Amount			% of Total			Amount		% of Total			Amount		% of Total			Amount			% of Total
	(Dollars in thousands)											(Dollars in thousands)

Salaries and employee benefits	$	547			55.1	%	$	521		49.3	%	$	1,120		55.0	%	$	1,108			51.9	%
Occupancy and equipment		101			10.2	%		112		10.6	%		207		10.1	%		227			10.6	%
Data and item processing		84			8.4	%		94		8.9	%		173		8.5	%		191			8.9	%
Deposit products and services		17			1.7	%		6		0.6	%		33		1.6	%		18			0.8	%
Legal and other professional fees		68			6.8	%		132		12.5	%		137		6.7	%		202			9.5	%
Regulatory assessments		55			5.5	%		76		7.2	%		111		5.4	%		151			7.1	%
Advertising and marketing		12			1.2	%		11		1.0	%		25		1.2	%		27			1.3	%
Directors’ fees and expenses		27			2.7	%		21		2.0	%		53		2.6	%		37			1.7	%
Printing and supplies		12			1.2	%		10		0.9	%		25		1.2	%		22			1.0	%
Telephone		9			0.9	%		9		0.9	%		18		0.9	%		19			0.9	%
Insurance		12			1.2	%		9		0.9	%		24		1.2	%		20			0.9	%
Reserve for undisbursed lines of credit		(2	)		-0.2	%		2		0.2	%		2		0.1	%		(3	)		-0.1	%
Other expenses		53			5.3	%		53		5.0	%		113		5.5	%		118			5.5	%
Total non-interest expenses	$	995			100.0	%	$	1,056		100.0	%	$	2,041		100.0	%	$	2,137			100.0	%
Non-interest expense as an annualized
percentage of average earning assets					4.1	%				4.6	%				4.3	%					4.5	%
Core efficiency ratio					83.6	%				86.2	%				82.7	%					82.9	%

Total annualized non-interest expense as a percentage of average earning assets increased to 4.1% for the three months ended June 30, 2012 as compared to 4.6% for the three months ended June 30, 2011. For the six months ended June 30, 2012 and 2011, these percentages were 4.3% and 4.5%, respectively. Total annualized non-interest expense as a percentage of average assets decreased due to the increase in average earning assets.

The core efficiency ratio represents total operating expense divided by the sum of net interest and non-interest income, with the provision for loan losses, investment gains/losses, and other extraordinary gains/losses excluded from the equation. Because of the slight decline in net interest plus other income and the decrease in total non-interest expense, the Company’s overhead efficiency ratio decreased to 83.6% for the second quarter of 2012 from 86.2% for the second quarter of 2011. The efficiency ratio decreased slightly in the most recent six month period to 82.7%, compared to 82.9% for the same period in 2011.

Non-interest expenses were $994,626 for the three months ended June 30, 2012, compared to $1,056,146 for the three months ended June 30, 2011, a 5.8% decrease. Non-interest expenses decreased $96,672 to $2,040,602 for the first half of 2012 compared to the same period in 2011. The largest component of general and administrative expenses was salary and employee benefits expense of $546,560 for the second quarter and $1,119,842 for the first half of 2012 compared to $520,894 and $1,108,294 for the same periods in 2011, representing 4.9% and 1.0% increases, respectively.

Legal and other professional fees decreased 48.7% and 32.4% or $64,339 and $65,464, respectively, during the three and six months ended June 30, 2012 compared to the same periods in 2011 as a result of certain legal fees related to regulatory maters in 2011 which did not recur in 2012.

Regulatory assessments expense decreased $20,460 or 26.9% in the second quarter of 2012 versus 2011 and $40,043 or 26.5% in the first half of 2012 versus 2011 due to decreased assessment rates.

Other components of non-interest expense that affected the decrease were occupancy and equipment expenses which decreased $11,254 and $19,737, respectively, for the three and six month periods ended June 30, 2012 compared to the same periods in 2011, due to the relocation and moving expenses of the main office charged to expense in 2011. Data and item processing expenses also decreased in 2011 by $10,382, or 11.0% for the comparable three month and $18,341, or 9.6% for the comparable six month periods due to one-time licensing and moving costs amortized in 2011 and not repeated in 2012.

Directors’ fees and expenses increased $6,320 or 29.8% in the second quarter and $16,264 or 44.2% in the six months ended June 30, 2012 compared to the same periods of 2011 due to the addition of one additional director, an increase in the number of meetings, and increases in directors’ fees compensation effective January 1, 2012.

Other expenses increased $9,418 to $88,845 in the second quarter of 2012, and increased $16,645 to $190,387 in the first half of 2012 due primarily to increases in expenses paid for accounts on analysis.

Provision for Income Taxes

Income tax expenses of $68,799 and $190,173 were recorded for the second quarter and the six months ended June 30, 2012, respectively, representing approximately 35.6% of pre-tax income and 36.7% of pre-tax income for the second quarter and six months ended June 30, 2012, respectively. In comparison, 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 for the second quarter and six months ended June 30, 2011, respectively. The amount of the tax provision is determined by applying the Company’s statutory income tax rates to pre-tax book income, adjusted for permanent differences between pre-tax book income and actual taxable income. Such permanent differences include but are not limited to tax-exempt interest income; increases in the cash surrender value of bank-owned life insurance, compensation expense associated with stock options and certain other expenses that are not allowed as tax deductions, and tax credits.

Financial Condition

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

General

Total assets decreased by 0.1% from $109.7 million to $109.6 million between December 31, 2011 and June 30, 2012. The Company experienced a slight increase in interest-earning assets of 0.2% to $97.1 million in the first half of 2012, primarily in Federal funds sold which increased to $16.6 million at June 30, 2012, compared to $14.2 million at December 31, 2011. Gross loans increased 1.3% to $57.5 million at June 30, 2012, compared to $56.8 million at December 31, 2011. Total deposits decreased slightly from $98.1 million on December 31, 2011 to $97.1 million on June 30, 2012, a 1.0% decrease. Noninterest-bearing deposits increased to $47.4 million at June 30, 2012, an increase of $165,709 or 0.4% from December 31, 2011. Total interest-bearing deposits decreased from $50.9 million at December 31, 2011 to $49.8 million at June 30, 2012, a 2.3% decrease in the first half of 2012. The ratio of non-interest bearing deposits to total deposits increased from 48.1% at December 31, 2011 to 48.8% at June 30, 2012.

Loan Portfolio

During the six months ended June 30, 2012, the Company’s loan portfolio, net of unearned loan fees, decreased by $0.6 million to $57.4 million at June 30, 2012, compared to $56.8 million at December 31, 2011. The Company experienced moderate declines in balances of real estate secured and installment loans. The largest loan category at June 30, 2012 was real estate loans, which consist of commercial and consumer real estate loans, and represent 78.8% 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, 2012 was commercial loans, constituting 20.6% of the loan portfolio.

The composition of the Company’s loan portfolio at June 30, 2012 and December 31, 2011 is set forth below:

	June 30, 2012					December 31, 2011
	Amount		Percentage			Amount		Percentage

Real estate	$	45,344		78.8	%	$	46,185		81.3	%
Commercial		11,828		20.6	%		9,974		17.6	%
Installment		359		0.6	%		644		1.1	%
Gross loans	$	57,531		100.0	%	$	56,803		100.0	%

The average yield on the loan portfolio as of June 30, 2012 was 6.62% 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, 2012, approximately 69.0% 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, 2012 and December 31, 2011, the Company had $4.6 million and $3.6 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, 2012 and December 31, 2011, the Company had $197,807 and $82,807 standby letters of credit, respectively.

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, and other real estate owned (“OREO” also referred to herein as “foreclosed assets”). Loans are generally placed on non-accrual status when they become 90 days past due unless Management believes the loan is adequately collateralized and in the process of collection. Loans may be restructured by Management when a borrower has experienced some change in financial status, causing an inability to meet the original repayment terms, and where the Company believes the borrower will eventually overcome those circumstances and repay the loan in full. Such loans are classified as "troubled debt restructurings" (TDRs) and are further classified as either performing or nonperforming depending on their accrual status. As of June 30, 2012, all but one 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 and performing TDRs:

Nonperforming Assets and Performing TDRs

	June 30			December 31			June 30
	2012			2011			2011
	($ in thousands)
Non-accrual loans: ¹
Real estate	$	1,248		$	2,372		$	2,735
Commercial		1,159			1,233			1,681
Installment		0			0			0

Total non-accrual loans²		2,407			3,605			4,416

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		2,407			3,605			4,416
OREO		0			439			439

Total nonperforming assets	$	2,407		$	4,044		$	4,855
Performing loans classified as troubled debt restructurings (TDRs) ³	$	520		$	-		$	-
Nonperforming loans as a percentage of total loans ⁴		4.18	%		6.35	%		7.55	%
Nonperforming assets as a percentage of total loans and OREO		4.18	%		7.07	%		8.24	%

¹Additional interest income of approximately $95,600, $276,300, and $249,200 respectively, would have been recorded for the periods

ended June 30, 2012, December 31, 2011, and June 30, 2011, if the loans had been on accrual status.

²Included in non-accrual loans are TDRs on non-accrual status. TDRs are loans where the terms are renegotiated to provide a

reduction or deferral of interest or principal due to deterioration in the financial position of the borrower. TDRs also include loans

that are renewed at below-market rates due to the borrower's current financial difficulties.

³ Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate the ratios disclosed in this table

⁴Total loans are gross loans, which excludes the allowance for loan losses, and net of unearned loan fees.

At June 30, 2012, the Company had five nonperforming restructured loans totaling $1,817,500, one of which was partially charged off and the remaining balance of $1,486,436 is on non-accrual status. These loans are reported in the non-accrual classification of this report. Five additional loans totaling $920,948 are on non-accrual status. As of June 30, 2012, 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, only one such loans was over 30 days past due; all other such loans were paying as agreed. At June 30, 2012, the Company had no foreclosed property (OREO). The reduction in nonperforming loan balances were the result of $257,405 in paydowns, $615,113 from three paid off loans, and the upgrade and return to accrual status of two loans for $1.3 million. While five loans were eliminated from nonperforming loans, only one was added for $117,526.

As shown in the table, the Company also has one restructured loan for $559,769 with a remaining book balance of $520,261 classified as performing TDRs for which we were accruing interest at June 30, 2012.

At December 31, 2011, the Company had one foreclosed property in the amount of $439,317 and 11 loans on non-accrual status totaling $3,605,142. At December 31, 2011, the Company had two nonperforming restructured loans totaling $1,665,444, which were partially charged off and the remaining balance of $1,294,871 is on non-accrual status. These loans are reported in the non-accrual classification of this report. The Company’s nonperforming assets at December 31, 2011 were 7.07% of the total loans and OREO.

Allowance for Loan Losses

The Company maintains an allowance for loan losses at a level Management considers adequate to cover the inherent risk of loss associated with its loan portfolio under prevailing and anticipated economic conditions. In determining the adequacy of the allowance for loan losses, Management takes into consideration growth trends in the portfolio, examination by financial institution supervisory authorities, prior loan loss experience of the Company’s Management, concentrations of credit risk, delinquency trends, general economic conditions, the interest rate environment, and internal and external credit reviews.

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. In establishing the allowance for loan losses, management considers significant factors that affect the collectability of the Company’s loan portfolio. While historical loss experience provides a reasonable starting point for the analysis, such experience by itself does not form a sufficient basis to determine the appropriate level of the allowance for loan losses. Management also considers qualitative (or environmental) factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including:

Changes in lending policies and procedures, including changes in underwriting standards and collection;

Changes in national, regional and local economic and business conditions and developments that affect the collectability of the portfolio;

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;

Changes in the value of underlying collateral for collateral-dependent loans;

The effect of credit concentrations; and

The rate of defaults on loans modified as troubled debt restructurings within the previous twelve months.

Allowance factors ranging from 0.0% to 4.0% are applied to disbursed loans that are unclassified and uncriticized. Allowance factors averaging approximately 0.27% are applied to undisbursed loans. Allowance factors are not applied to loans secured by bank deposits or to loans held for sale, which are recorded at the lower of cost or market.

The process of providing for loan losses involves judgmental discretion, and ultimate losses may therefore differ from even the most recent estimates. Due to these limitations, the Company assumes that there are losses inherent in the current loan portfolio but which have not yet been identified. The Company therefore attempts to maintain the allowance at an amount sufficient to cover such unknown but inherent losses.

Management looks at a number of economic events occurring in and around the real estate industry and analyzes each credit for associated risks. Accordingly, the Company has established and maintains an allowance for loan losses which amounted to $1,469,487 at June 30, 2012, $1,537,963 at December 31, 2011, and $1,462,136 at June 30, 2011. The ratios of the allowance for loan losses to total loans at June 30, 2012, December 31, 2011, and June 30, 2011 were 2.55%, 2.71%, and 2.50% respectively.

The table below summarizes, as of and for the three and six months ended June 30, 2012 and 2011 and the year ended December 31, 2011, 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						As of and for the
	Quarter Ended						Six months Ended						Year Ended
	June 30						June 30						December 31,
	2012			2011			2012			2011			2011
Balances:	($ in thousands)
Average total loans
outstanding during period	$	54,603		$	59,336		$	55,351		$	59,804		$	58,793
Total loans outstanding
at end of the period	$	57,531		$	58,494		$	57,531		$	58,494		$	56,803
Allowance for loan losses:
Balance at the beginning of period	$	1,535		$	1,448		$	1,538		$	1,442		$	1,442
Provision charged to expense		2			274			2			280			282
Charge-offs
Commercial loans		68			144			68			144			142
Commercial real estate loans		0			116			0			116			58
Installment loans		0			0			3			0			1
Total		68			260			71			260			201
Recoveries
Commercial loans		0			0			0			0			15
Commercial real estate loans		0			0			0			0			0
Installment loans		0			0			0			0			0
Total		0			0			0			0			15
Net loan chage-offs
(recoveries)		68			260			71			260			186
Balance	$	1,469		$	1,462		$	1,469		$	1,462		$	1,538

Ratios:
Net loan charge-offs to average total loans		0.12	%		0.44	%		0.13	%		0.43	%		0.32	%
Provision for loan losses to average total loans		0.00	%		0.46	%		0.00	%		0.47	%		0.48	%
Allowance for loan losses to total loans at the end of the period		2.55	%		2.50	%		2.55	%		2.50	%		2.71	%
Allowance for loan losses to non-performing loans		61.04	%		33.11	%		61.04	%		33.11	%		42.66	%
Net loan charge-offs (recoveries) to allowance
for loan losses at the end of the period		4.62	%		17.75	%		4.80	%		17.75	%		12.09	%
Net loan charge-offs (recoveries) to provision for loan losses		3439.54	%		94.72	%		3577.50	%		92.85	%		65.99	%

While Management believes that the amount of the allowance at June 30, 2012 was adequate, there can be no assurances that future economic or other factors will not adversely affect the Company’s borrowers, or that the Company’s asset quality may not deteriorate through rapid growth, failure to identify and monitor potential problem loans or for other reasons, thereby causing loan losses to exceed the current allowance.

Investment Portfolio

The market value of the Company’s investment portfolio at June 30, 2012 was $8.7 million having a tax equivalent yield of 3.20%. This compares to an investment portfolio of $12.8 million at December 31, 2011 having a 3.03% tax equivalent yield. The primary category of investment in the portfolio at June 30, 2012 was mortgage-backed securities. At June 30, 2012, approximately 13% of the mortgage-backed securities were tied to adjustable rate indices such as LIBOR or CMT. As loan demand has declined, Management anticipates purchasing additional short-term investment securities and interest-bearing deposits in other banks until loan demand increases.

The following table summarizes the carrying value and market value and distribution of the Company’s investment securities at June 30, 2012 and December 31, 2011:

	June 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	($ in thousands)
Held to maturity:
Municipal	$	430	$	431	$	432	$	436
Federal agency		0		0		2,500		2,515
Mortgage-backed securities		5,410		5,606		6,690		6,879
Corporate bonds		30		31		31		31
Total held to maturity		5,870		6,068		9,653		9,861

Available for sale:
Municipal		799		799		796		796
Mortgage-backed securities		1,792		1,792		2,176		2,176
Total available for sale		2,591		2,591		2,972		2,972
Total	$	8,461	$	8,659	$	12,625	$	12,833

There were no material changes since December 31, 2011 in the maturities or repricing of the investment securities.

Deposits

Total deposits decreased $983,903 or 1.0% to $97.1 million at June 30, 2012 from $98.1 million at December 31, 2011. Interest-bearing deposits decreased $1.1 million or 2.3% to $49.8 million at June 30, 2012 from $50.9 million at December 31, 2011 due to the Bank’s reduction of interest rates offered on interest-bearing accounts. Demand deposits increased $165,709 or 0.4% to $47.4 million at June 30, 2012 from $47.2 million at December 31, 2011. The ratio of non-interest bearing deposits to total deposits was 48.8% at June 30, 2012 and 48.1% at December 31, 2011.

A comparative distribution of the Company’s deposits at June 30, 2012 and December 31, 2011, by outstanding balance as well as by percentage of total deposits, is presented in the following table:

	June 30, 2012					December 31, 2011
	Amount		Percentage			Amount		Percentage
	($ in thousands)

Demand	$	47,354		48.8	%	$	47,189		48.1	%
NOW		1,474		1.5	%		1,835		1.9	%
Savings		2,143		2.2	%		1,810		1.8	%
Money market		30,080		31.0	%		30,407		31.0	%
Time deposits < $100,000		4,506		4.6	%		4,700		4.8	%
Time deposits ≥ $100,000		11,563		11.9	%		12,163		12.4	%
Total deposits	$	97,120		100.0	%	$	98,104		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 and six months ended June 30, 2012 and 2011 is contained in the “Distribution, Yield and Rate Analysis of Net Interest Income” table appearing in a previous section entitled “Net Interest Income and Net Interest Margin.” At June 30, 2012 and December 31, 2011, the Company had deposits from related parties representing 7.9% and 5.9% of total deposits of the Company, respectively. Further, at June, 2012 and December 31, 2011, deposits from escrow companies represented 13.5% and 10.1% 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, 2012 and December 31, 2011 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.

Shareholders’ Equity

Total shareholders’ equity was $8.5 million at June 30, 2012 and $7.5 million at December 31, 2011. There was an overall increase of $1.0 million due to the following: net income increased retained earnings by $328,154, net proceeds from the Company’s stock offering increased equity by $680,910 (See “Recent Development – Capital Raise”) above, and the change in the unrealized loss on investment securities available for sale increased equity by $649.

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, 2012, the Company’s liquid assets totaled approximately $37.8 million and its liquidity level, measured as the percentage of liquid assets to total assets, was 34.5%. At December 31, 2011, the Company’s liquid assets totaled approximately $33.8 million and its liquidity level, measured as the percentage of liquid assets to total assets, was 30.8%. 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 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 $27.0 million at June 30, 2012.

Capital Resources

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can trigger mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material effect on the Bank’s financial statements and operations. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accepted accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain the following minimum ratios: Total risk-based capital ratio of at least 8%, Tier 1 Risk-based capital ratio of at least 4%, and a leverage ratio of at least 4%. Total capital is classified into two components: Tier 1 (common shareholders equity, qualifying perpetual preferred stock to certain limits, minority interests in equity accounts of consolidated subsidiary and trust preferred securities to certain limits, less goodwill and other intangibles) and Tier 2 (supplementary capital including allowance for possible credit losses to certain limits, certain preferred stock, eligible subordinated debt, and other qualifying instruments).

The Company’s subordinated note represents a $3.1 million borrowing from its unconsolidated subsidiary. This subordinated note currently qualifies for inclusion as Tier 1 capital for regulatory purposes to the extent that it does not exceed 25% of total Tier 1 capital, but is classified as long-term debt in accordance with generally accepted accounting principles. In March 2005, the Federal Reserve Board adopted a final rule allowing bank holding companies to continue to include the subordinated debt related to trust preferred securities in their Tier 1 capital. The amount that can be included is limited to 25% of core capital elements, net of goodwill less any associated deferred tax liability. Excess amounts are generally included in Tier 2 capital. As of June 30, 2012, TRUPS related debt made up 25% of the Company’s Tier 1 capital. In addition, since the Company had less than $15 billion in assets at December 31, 2009, under the Dodd-Frank Act the Company can continue to include this debt in Tier 1 capital to the extent permitted by FRB guidelines. Generally, the amount of junior subordinated debentures in excess of the 25% Tier 1 limitation is included in Tier 2 capital.

The Bank has agreed to the OCC establishing higher minimum capital ratios for the Bank, specifically that the Bank will achieve by May 31, 2011, and thereafter maintain, a Leverage Capital Ratio of not less than 9.0% and a Total Risk-Based Capital Ratio of not less than 12.0%. The Bank had Total Risk-Based and Tier 1 Risk-Based capital ratios of 17.11% and 15.84%, respectively at June 30, 2012, compared to 16.51% and 15.24%, respectively at December 31, 2011. At June 30, 2012 and December 31, 2011, the Bank’s Leverage Capital Ratios were 10.08% and 9.81%, respectively.

Under the Federal Reserve Bank’s guidelines, Chino Commercial Bancorp is a “small bank holding company,” and thus qualifies for an exemption from the consolidated risk-based and leverage capital adequacy guidelines applicable to bank holding companies with assets of $500 million or more. However, while not required to do so under the Federal Reserve Bank’s capital adequacy guidelines, the Company still maintains levels of capital on a consolidated basis which qualify it as “well capitalized.” As of June 30, 2012, the Company’s Total Risk-Based and Tier 1 Risk-Based Capital ratios were 17.91% and 16.23%, respectively, and its Leverage Capital ratio was 10.34%.

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

Risk Based Ratios
	(unaudited)
							Minimum Requirement
	June 30, 2012			December 31, 2011			to be Well Capitalized
Chino Commercial Bancorp
Total capital to total risk-weighted assets		17.91	%		16.44	%		10.00	%
Tier 1 capital to total risk-weighted assets		16.23	%		14.26	%		6.00	%
Tier 1 leverage ratio		10.34	%		9.19	%		5.00	%

Chino Commercial Bank
Total capital to total risk-weighted assets		17.11	%		16.51	%		10.00	%
Tier 1 capital to total risk-weighted assets		15.84	%		15.24	%		6.00	%
Tier 1 leverage ratio		10.08	%		9.81	%		5.00	%

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

Interest Rate Risk Management

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

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

The Company is generally asset sensitive, meaning that, in most cases, net interest income tends to rise as interest rates rise and decline as interest rates fall. However, as explained further on, declines in interest rates would cause a slight increase in net interest income because over 81% of the Company’s variable rate loans are at their floor with a weighted average yield of 6.90%. At June 30, 2012, approximately 70.8% 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 31.2% of all fixed rate loans at June 30, 2012 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, 2012, 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)	$	(143	)	$	(111	)	$	(75	)	$	597		$	1,177		$	1,741
% Change		-3.71	%		-2.88	%		-1.95	%		15.48	%		30.52	%		45.15	%

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 to 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 81% of the Company’s variable rate loans are at their floor with a weighted average yield of 6.90%. 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, 2012, 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)	$	3,082		$	2,014		$	1,022		$	(60	)	$	(115	)	$	(228	)
% Change		27.2	%		17.8	%		9.0	%		-0.5	%		-1.0	%		-2.0	%

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 2012 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 Earnings 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 August 13, 2012.

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 Computation of earnings per share is incorporated by reference to Note 9 of the Financial Statements included herein.

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.

Dated: August 14, 2012	CHINO COMMERCIAL BANCORP

	By:	/s/ Dann H. Bowman
		Dann H. Bowman President and Chief Executive Officer
		(Principal Executive Officer)

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