##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-KSB/A



---



Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934



For the
fiscal year ended December 31, 2003



Commission file
number: 000-29105



---



1STCENTENNIAL BANCORP

(Name of Small Business Issuer as specified in its charter)



---



|                                           |  |                                        
|------------------------------------------ |  | ---------------------------------------
|California                                 |  | 91-1995265                             
|(State of Incorporation)                   |  | (I.R.S. Employer Identification Number)
|                                           | 
|218 East State Street Redlands, California |  | 92373                                  
|(Address of Principal Executive Offices)   |  | (Zip Code)                             



Issuers
telephone number, including area code: (909) 798-3611



---



Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act: Common Stock,
No Par Value



---



Indicate by check mark whether the registrant (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.    Yes  x    No ̈



Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is contained herein, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB ̈



The
registrants revenues for its most recent fiscal year were $19,709,000.



As of March 16, 2004, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $37.5 million (as quoted by Yahoo! at $32.75 per share).



The number of shares of Common Stock of the registrant outstanding as of March 16, 2004 was
1,510,873.



Documents Incorporated by Reference: Portions of the
definitive proxy statement for the 2004 Annual Meeting of Shareholders to be filed with the United States Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference in Part III, Items 9-12 and Item 14.



---



---

##### Table of Contents

TABLE OF CONTENTS



|         |  |                                                                                                                 |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                 |  | PAGE
|PART I   |  |                                                                                                                 |  |     
|ITEM 1   |  | Business                                                                                                        |  | 3   
|ITEM 2   |  | Properties                                                                                                      |  | 15  
|ITEM 3   |  | Legal Proceedings                                                                                               |  | 15  
|ITEM 4   |  | Submission of Matters to a Vote of Security Holders                                                             |  | 15  
|         |  |                                                                                                                
|PART II  |  |                                                                                                                 |  |     
|ITEM 5   |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 16  
|ITEM 6   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 18  
|ITEM 7   |  | Financial Statements                                                                                            |  | 42  
|ITEM 8   |  | Changes in and Disagreements with Accountants and Financial Disclosure                                          |  | 43  
|ITEM 8A  |  | Controls and Procedures                                                                                         |  | 43  
|         |  |                                                                                                                
|PART III |  |                                                                                                                 |  |     
|ITEM 9   |  | Directors, Executive Officers, Promoters and Control Persons: Compliance with Section 16(a) of the Exchange Act |  | 43  
|ITEM 10  |  | Executive Compensation                                                                                          |  | 44  
|ITEM 11  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 44  
|ITEM 12  |  | Certain Relationships and Related Transactions                                                                  |  | 44  
|ITEM 13  |  | Exhibits and Reports on Form 8-K                                                                                |  | 45  
|ITEM 14  |  | Principal Accountant Fees and Services                                                                          |  | 47  
|         |  | Signatures                                                                                                      |  | 48  



2



---

##### Table of Contents

PART I



ITEM 1. BUSINESS



General



1stCentennial Bancorp



1stCentennial Bancorp (formerly Centennial First Financial Services) is a California corporation
registered as a bank holding company under the Bank Holding Company Act of 1956, and is headquartered in Redlands, California. We were incorporated in August 1999 and acquired 100% of the outstanding shares of 1stCentennial Bank (formerly Redlands Centennial Bank) in December 1999. Our principal offices are located at 218 East State Street, Redlands,
California. Our telephone number is (909) 798-3611, and our website address is www.1stcent.com. In August 2001, we acquired Palomar Community Bank in Escondido, California. Palomar Community Bank was formerly a savings and loan association, which
converted to a state-chartered commercial bank in November 1999. In May 2002, Palomar Community Bank was merged into 1stCentennial Bank, so that our principal subsidiary is now 1stCentennial Bank. Our only other
subsidiaries are Centennial Capital Trust I, and Centennial Capital Trust II, which were formed in July 2002 and January 2004, respectively, solely to facilitate the issuance of capital trust pass-through securities. The Company exists primarily for
the purpose of holding the stock of 1stCentennial Bank and of such other subsidiaries as it may acquire or
establish.



Our assets increased from $198.0 million at December 31, 2001, to
$207.9 million at December 31, 2002, and to $254.4 million at December 31, 2003. Our August 2001 our acquisition of Palomar Community Bank increased our assets by $79.0 million. The increase in our assets in 2002 and 2003 was due to internally
generated growth.



1stCentennial Bank



1stCentennial Bank is an independent
California state-chartered bank, which commenced operations in 1990. In addition to our main office and corporate headquarters in Redlands, in San Bernardino County, California, we operate three full-service branch offices in Southern California,
one in Escondido, in San Diego County, one in Palm Desert, in Riverside County, and one in Brea, in Orange County. We also operate a Real Estate & Construction Loan Division in Redlands, and a Small Business Administration / Commercial Loans
Conduit Group loan production office, located in Brea, Orange County, California. In addition, we intend to open an additional full service branch office in Irwindale in Los Angeles County, California in the 3rd quarter of 2004. Although an
application to open this new branch has not been approved, a location has been identified for this new branch. There can be no assurance that we will in fact open a branch in Irwindale, or if we do open a branch, that it will be opened in the time
frame which we currently anticipate.



Our lending activity is concentrated
primarily in real estate loans (including construction, and mortgage loans), which constituted 73.8% of our loan portfolio as of December 31, 2003, and commercial loans, which constituted 21.9% of our loan portfolio as of December 31, 2003.



Our deposit accounts are insured under the Federal Deposit Insurance Act up to
applicable limits, and subject to regulations by that federal agency and to periodic examinations of its operations and compliance by the FDIC and the California Department of Financial Institutions. Like most state-chartered banks of our size in
California, we are not a member of the Federal Reserve System. We are a member of the Federal Home Loan Bank. See   Regulation and Supervision.



We are a community-oriented bank, offering our customers a wide variety of personal, consumer and commercial services expected of a locally
managed, independently operated bank. Our full-service offices are all located in business areas adjacent to developed and/or developing retail and consumer customer marketplaces. While our primary focus is on commercial lending and residential
construction in and around the areas we serve, we also offer a wide range of loan and deposit banking products and services to local consumers. We provide a broad range of deposit instruments and general banking services, including checking,
savings, and money market accounts; time certificates of deposit for both business and personal accounts; telebanking (banking by phone); courier services; and internet banking, including account management, inter-bank and intra-bank transfer, and
bill payment services. We also provide a wide variety of lending products for both businesses and consumers. Commercial loan products include lines of credit, letters of credit, term loans and equipment loans, commercial real estate loans, SBA
loans, accounts



3



---

##### Table of Contents

receivable financing, factoring, equipment leasing and other working capital financing. Financing products for
individuals include auto, home equity and home improvement lines of credit, personal lines of credit, and VISA credit cards. Real estate loan products include construction loans, lot loans, residential real estate brokerage, commercial real estate
conduit sales, mini-perm commercial real estate loans, and home mortgages. We are a Preferred Lender under the Small Business Administration in the counties of Orange, Riverside, San Bernardino, Los Angeles, Ventura and Santa Barbara.



We also offer numerous specialized services designed for the needs of our business customers.
These services include a credit card program for merchants, commercial and standby letters of credit, cash management services, balance reporting, check reconciliation service, electronic funds transfer services, lock box, and courier services. We
also provide certain international banking services indirectly through our correspondent banks.



In addition, we offer a wide range of non-deposit and investment products through 1stCentennial Wealth Strategies Group, a division of the Bank. These products include financial and estate planning, stocks and bonds, mutual funds and variable annuities, and various retirement plans. Products offered through this
division are not insured by the FDIC, are not deposits or obligations of the Bank, and are not guaranteed by the Bank.



Recent Developments



Centennial Capital Trust II



On January 15, 2004, Centennial Capital Trust II, a newly formed Delaware statutory business trust and a wholly owned subsidiary of the Company (the Trust), issued an
aggregate of $7.0 million of principal amount of Floating Rate TRUPS® (Capital Trust Pass-through Securities of the Trust) (the Trust Preferred Securities). Bear Stearns & Co., Inc. acted as placement agent in connection with the offering of the Trust Preferred Securities. The
securities issued by the Trust are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. The entire proceeds to the Trust from the sale of the Trust Preferred Securities were
used by the Trust in order to purchase $7.0 million in principal amount of the Floating Rate Junior Subordinated Deferrable Interest Debentures due 2034 issued by the Company (the Subordinated Debt Securities).



The Subordinated Debt Securities bear a variable interest rate equal to LIBOR plus 2.85%.
Total broker and legal costs of $87,500 associated with the issuance are being amortized over a 5-year period.



25% Stock dividend



On February 20, 2004, the Company announced that the Board of Directors approved a 25% stock dividend to shareholders of record on April 1, 2004, and payable May 1, 2004.
The dividend will be accounted for as a 5-for-4 stock split. The action was approved at the regularly scheduled Board Meeting on February 20, 2004. The effect will result in an additional 375,570 shares of common stock outstanding.



Employees



As of December 31, 2003 we had 109 full time equivalent employees.



Competition



The banking business in California generally, and specifically in our market areas in Riverside, San Bernardino, Orange and San Diego counties in Southern California, is
highly competitive with respect to virtually all products and services and has become increasingly more so in recent years. The industry continues to consolidate, and strong, unregulated competitors have entered banking markets with focused products
targeted at highly profitable customer segments. Many competitors are able to compete across geographic boundaries and provide customers access to alternatives to banking services and nearly all significant products. These competitive trends are
likely to continue.



With respect to commercial bank competitors, the business
is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area, which have, among other advantages, the ability to finance wide-ranging and effective advertising campaigns and to allocate
investment resources to regions of highest yield and demand. Many of the major banks operating in the area offer certain services directly that we may offer indirectly through correspondent institutions. By virtue of their greater total
capitalization, such banks also have substantially higher lending limits than we do.



4



---

##### Table of Contents

In addition to other banks, competitors include savings institutions, credit unions, and numerous non-banking
institutions such as finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer
wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance software. Strong competition for deposit and loan products affects the rates of those products as well as the terms on which
they are offered to customers. Mergers between financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues to remain competitive. Competition has also
intensified due to recently enacted federal and state interstate banking laws, which permit banking organizations to expand geographically, and the California market has been particularly attractive to out-of-state institutions. The Financial
Modernization Act, effective March 11, 2000, has made it possible for full affiliations to occur between banks and securities firms, insurance companies, and other financial companies, and has intensified competitive conditions.



Technological innovation has also resulted in increased competition in financial services
markets. Such innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously have been considered traditional banking products. In addition, many customers now
expect a choice of several delivery systems and channels, including telephone, mail, home computer, ATMs, self-service branches, and/or in-store branches. In addition to other banks, the sources of competition for such products include savings
associations, credit unions, brokerage firms, money market and other mutual funds, asset management groups, finance and insurance companies, internet-only financial intermediaries, and mortgage banking firms.



In order to compete with the other financial services providers, we principally rely upon
local promotional activities, personal relationships established by our officers, directors, and employees with our customers, and specialized services tailored to meet the needs of the communities we serve. In those instances where we are unable to
accommodate a customers needs, we may arrange for those services to be provided by our correspondent banks. We also have preferred lender or PLP status with the Small Business Administration, which enables us to approve
SBA loans faster than many of our competitors. In order to compete on the technological front, we maintain an Internet website with account management, inter-bank and intra-bank transfer, and bill payment services.



The larger financial institutions, including banks, brokerage houses, insurance companies,
etc., are actively acquiring broker/dealer capabilities in order to capitalize on the emerging affluent population as the baby boomer generation begins to enter retirement age. These services include state-of-the-art financial planning
and investment strategies tailored to specific needs, and funded with open-architecture (best product available vs. proprietary) products and services. To effectively meet these competitive pressures, 1stCentennial has aligned itself with a nationwide broker/dealer (Linsco Private Ledger or LPL) whereby it can
provide the same type of sophistication and product and service enhancements as larger financial institutions, while still maintaining a closer, more community-oriented customer service profile. We provide these services through the 1stCentennial Wealth Strategies Group, which is a division of the Bank.



Regulation and Supervision



1stCentennial Bancorp and 1stCentennial Bank are subject to
significant regulation by federal and state regulatory agencies. The following discussion of statutes and regulations is only a brief summary and does not purport to be complete. This discussion is qualified in its entirety by reference to such
statutes and regulations. No assurance can be given that such statutes or regulations will not change in the future.



1stCentennial Bancorp



1stCentennial Bancorp is subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, which requires us to file annual,
quarterly and other current reports with the SEC. We are also subject to additional regulations including, but not limited to, the proxy and tender offer rules promulgated by the SEC under Sections 13 and 14 of the Exchange Act; the reporting
requirements of directors, executive officers and principal shareholders regarding transactions in our common stock and short-swing profits rules promulgated by the SEC under Section 16 of the Exchange Act; and certain additional reporting
requirements by principal shareholders of the Company promulgated by the SEC under Section 13 of the Exchange Act.



5



---

##### Table of Contents

1stCentennial Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956 and is registered as such with the Federal Reserve Board. A bank holding company is required to file with the Federal Reserve
Board annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval before acquiring,
directly or indirectly, ownership or control of any voting shares of any bank if, after such acquisition, it would directly or indirectly own or control more than 5% of the voting stock of that bank, unless it already owns a majority of the voting
stock of that bank.



The Federal Reserve Board has by regulation determined
certain activities in which a bank holding company may or may not conduct business. A bank holding company must engage, with certain exceptions, in the business of banking or managing or controlling banks or furnishing services to or performing
services for its subsidiary banks. The permissible activities and affiliations of certain bank holding companies have recently been expanded. See Financial Modernization Act below.



1st Centennial Bancorp and 1stCentennial Bank are deemed to be affiliates of each other within the meaning set forth in the Federal Reserve Act and are subject to Sections 23A and 23B of
the Federal Reserve Act. This means, for example, that there are limitations on loans by the subsidiary banks to affiliates, and that all affiliate transactions must satisfy certain limitations and otherwise be on terms and conditions at least as
favorable to the subsidiary banks as would be available for non-affiliates.



The Federal Reserve Board has a policy that bank holding companies must serve as a source of financial and managerial strength to their subsidiary banks. It is the Federal Reserve Boards position that bank holding companies should
stand ready to use their available resources to provide adequate capital to their subsidiary banks during periods of financial stress or adversity. Bank holding companies should also maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting their subsidiary banks.



The Federal
Reserve Board also has the authority to regulate bank holding company debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Federal Reserve Board may require the
Company to file written notice and obtain its approval prior to purchasing or redeeming the Companys equity securities.



1stCentennial Bank



As a California state-chartered bank whose accounts are insured by
the FDIC up to a maximum of $100,000 per depositor, we are subject to regulation, supervision and regular examination by the California Department Of Financial Institutions and the FDIC. In addition, while we are not a member of the Federal Reserve
System, we are subject to certain regulations of the Federal Reserve Board. The regulations of these agencies govern most aspects of our business, including the making of periodic reports, and our activities relating to dividends, investments,
loans, borrowings, capital requirements, certain check-clearing activities, branching, mergers and acquisitions, reserves against deposits and numerous other areas. Supervision, legal action and examination of the Bank by the FDIC are generally
intended to protect depositors and are not intended for the protection of shareholders.



The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or spread between the yield on its interest-earning assets and the rate paid on its deposits and other
interest-bearing liabilities. As a result, our performance is influenced by general economic conditions, both domestic and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies, particularly
the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (such as seeking to curb inflation and combat recession) by its open-market operations in U.S. Government securities, by adjusting the required level of
reserves for financial institutions subject to its reserve requirements and by varying the discount rate applicable to borrowings by banks which are members of the Federal Reserve System. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and deposits. The nature and impact of any future changes in monetary policies cannot be predicted.



6



---

##### Table of Contents

Capital Adequacy Requirements



1stCentennial Bank and 1stCentennial Bancorp are subject to the regulations of the FDIC and the Federal Reserve Board,
respectively, governing capital adequacy. Those regulations incorporate both risk-based and leverage capital requirements. Each of the federal regulators has established risk-based and leverage capital guidelines for the banks or bank holding
companies it regulates, which set total capital requirements and define capital in terms of core capital elements, or Tier 1 capital; and supplemental capital elements, or Tier 2 capital. Tier 1 capital is generally defined
as the sum of the core capital elements less goodwill and certain other deductions, notably the unrealized net gains or losses (after tax adjustments) on available for sale investment securities carried at fair market value. The following items are
defined as core capital elements: (i) common stockholders equity; (ii) qualifying noncumulative perpetual preferred stock and related surplus; and (iii) minority interests in the equity accounts of consolidated subsidiaries. Of the
Companys Tier 1 capital at December 31, 2003, $6.0 million, or approximately 23.2%, consisted of Trust Preferred Securities. However, no assurance can be given that the Trust Preferred Securities will continue to be treated as Tier 1 capital
in the future. Supplementary capital elements include: (i) allowance for loan and lease losses (but not more than 1.25% of an institutions risk-weighted assets); (ii) perpetual preferred stock and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and mandatory convertible debt instruments; and (iv) term subordinated debt and intermediate-term preferred stock and related surplus. Supplemental capital elements, or Tier II capital is
generally defined as the sum of the allowance for loan losses (limited to 1.25% of total risk based assets), and trust preferred securities in excess of those qualifying as Tier 1 capital. The maximum amount of supplemental capital elements, which
qualifies as Tier 2 capital, is limited to 100% of Tier 1 capital, net of goodwill.



The minimum required ratio of qualifying total capital to total risk-weighted assets is 8.0% (Total Risk-Based Capital Ratio), at least one-half of which must be in the form of Tier 1 capital, and the minimum required ratio of
Tier 1 capital to total risk-weighted assets is 4.0% (Tier 1 Risk-Based Capital Ratio). Risk-based capital ratios are calculated to provide a measure of capital that reflects the degree of risk associated with a banking
organizations operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under the risk-based capital
guidelines, the nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S.
Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. As of December 31, 2003, the Banks Total Risk-Based Capital Ratio was 12.67% and its Tier 1 Risk-Based Capital Ratio was 11.53%. As of December
31, 2003, the Companys Total Risk-Based Capital was 13.63% and its Tier 1 Risk Based Capital Ratio was 12.48%. Tier 1 Capital for these purposes includes trust preferred securities up to twenty-five percent of the Companys core capital.



The risk-based capital requirements also take into account concentrations of
credit (i.e., relatively large proportions of loans involving one borrower, industry, location, collateral or loan type) and the risks of non-traditional activities (those that have not customarily been part of the banking business). The
regulations require institutions with high or inordinate levels of risk to operate with higher minimum capital standards, and authorize the regulators to review an institutions management of such risks in assessing an institutions
capital adequacy.



The risk-based capital regulations also include exposure to
interest rate risk as a factor that the regulators will consider in evaluating a banks capital adequacy. Interest rate risk is the exposure of a banks current and future earnings and equity capital arising from adverse movements in
interest rates. While interest risk is inherent in a banks role as financial intermediary, it introduces volatility to bank earnings and to the economic value of the bank.



The FDIC and the Federal Reserve Board also require the maintenance of a leverage capital ratio designed to supplement the risk-based
capital guidelines. Banks and bank holding companies that have received the highest rating of the five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1
capital (net of all intangibles) to adjusted total assets (Leverage Capital Ratio) of at least 3%. All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum
of 4% to 5%. Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans, and federal regulators may, however, set higher
capital requirements when a banks particular circumstances warrant. As of December 31, 2003, the Banks Leverage Capital Ratio was 9.97%, and the Companys leverage capital ratio was 10.79%, both exceeding regulatory minimums. See
Item 6, Managements Discussion and Analysis of Financial Condition and Results of Operations  Capital Resources.



7



---

##### Table of Contents

Prompt Corrective Action Provisions



Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured financial institutions,
including but not limited to those that fall below one or more prescribed minimum capital ratios. The federal banking agencies have by regulation defined the following five capital categories: well capitalized (Total Risk-Based Capital
Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%); adequately capitalized (Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4%) (or 3% if the institution
receives the highest rating from its primary regulator); undercapitalized (Total Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or Leverage Ratio of less than 4%) (or 3% if the institution
receives the highest rating from its primary regulator); significantly undercapitalized (Total Risk-Based Capital Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or Leverage Ratio less than 3%); and
critically undercapitalized (tangible equity to total assets less than 2%). As of December 31, 2003 and 2002, the Bank was deemed well capitalized for regulatory capital purposes. A bank may be treated as though it were in
the next lower capital category if after notice and the opportunity for a hearing, the appropriate federal agency finds an unsafe or unsound condition or practice so warrants, but no bank may be treated as critically undercapitalized
unless its actual capital ratio warrants such treatment.



At each successively
lower capital category, an insured bank is subject to increased restrictions on its operations. For example, a bank is generally prohibited from paying management fees to any controlling persons or from making capital distributions if to do so would
make the bank undercapitalized. Asset growth and branching restrictions apply to undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements (including a guarantee by the parent
holding company, if any). Significantly undercapitalized banks are subject to broad regulatory authority, including among other things, capital directives, forced mergers, restrictions on the rates of interest they may pay on deposits,
restrictions on asset growth and activities, and prohibitions on paying certain bonuses without FDIC approval. Even more severe restrictions apply to critically undercapitalized banks. Most importantly, except under limited circumstances, not later
than 90 days after an insured bank becomes critically undercapitalized, the appropriate federal banking agency is required to appoint a conservator or receiver for the bank.



In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential actions by the
federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may
include the issuance of cease and desist orders, termination of insurance of deposits (in the case of a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and
prohibition orders against institution-affiliated parties.



Safety and Soundness Standards



The federal banking agencies
have also adopted guidelines establishing safety and soundness standards for all insured depository institutions. Those guidelines relate to internal controls, information systems, internal audit systems, loan underwriting and documentation,
compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails
to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan and institute enforcement proceedings if an acceptable compliance plan is not submitted.



Premiums for Deposit Insurance



The FDIC regulations also implement a risk-based premium system, whereby insured depository
institutions are required to pay insurance premiums depending on their risk classification. Under this system, insured banks are categorized into one of three capital categories (well capitalized, adequately capitalized, and undercapitalized) and
one of three supervisory categories based on federal regulatory evaluations. The three supervisory categories are: financially sound with only a few minor weaknesses (Group A), demonstrates weaknesses that could result in significant deterioration
(Group B), and poses a substantial probability of loss (Group C). The capital ratios used by the FDIC to define well capitalized, adequately capitalized and undercapitalized are the same in the FDICs prompt corrective action regulations. The
current base assessment rates (expressed as cents per $100 of deposits) are summarized as follows:



8



---

##### Table of Contents

|                       |  |         |  |         |  |        
|---------------------- |  | ------- |  | ------- |  | -------
|                       |  | Group A |  | Group B |  | Group C
|Well Capitalized       |  | 0       |  | 3       |  | 17     
|Adequately Capitalized |  | 3       |  | 10      |  | 24     
|Undercapitalized       |  | 10      |  | 24      |  | 27     



In addition, banks must pay an amount,
which fluctuates but is currently 1.54 cents per $100 of insured deposits, towards the retirement of the Financing Corporation bonds issued in the 1980s to assist in the recovery of the savings and loan industry.



Community Reinvestment Act



The Bank is subject to certain requirements and reporting obligations involving Community
Reinvestment Act activities. The Community Reinvestment Act generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income
neighborhoods. The Community Reinvestment Act further requires the agencies to take a financial institutions record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches,
consummating mergers or acquisitions, or holding company formations. In measuring a banks compliance with its Community Reinvestment Act obligations, the regulators utilize a performance-based evaluation system which bases Community
Reinvestment Act ratings on the banks actual lending service and investment performance, rather than on the extent to which the institution conducts needs assessments, documents community outreach activities or complies with other procedural
requirements. In connection with its assessment of Community Reinvestment Act performance, the FDIC assigns a rating of outstanding, satisfactory, needs to improve or substantial noncompliance. The
Bank was last examined for Community Reinvestment Act compliance in September 2003, and received a satisfactory Community Reinvestment Act Assessment Rating.



Other Consumer Protection Laws and Regulations



The bank regulatory agencies are increasingly focusing attention on compliance with consumer protection laws and regulations. Examination
and enforcement has become intense, and banks have been advised to carefully monitor compliance with various consumer protection laws and their implementing regulations. The federal Interagency Task Force on Fair Lending issued a policy statement on
discrimination in home mortgage lending describing three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact. In addition to Community
Reinvestment Act and fair lending requirements, the Bank is subject to numerous other federal consumer protection statutes and regulations. Due to heightened regulatory concern related to compliance with consumer protection laws and regulations
generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in the local communities it serves.



Interstate Banking and Branching



The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Banking Act) regulates the interstate activities of banks and bank
holding companies and establishes a framework for nationwide interstate banking and branching. Since June 1, 1997, a bank in one state has generally been permitted to merge with a bank in another state without the need for explicit state law
authorization. However, states were given the ability to prohibit interstate mergers with banks in their own state by opting-out (enacting state legislation applying equality to all out-of-state banks prohibiting such mergers) prior to
June 1, 1997.



Since 1995, adequately capitalized and managed bank holding
companies have been permitted to acquire banks located in any state, subject to two exceptions: first, any state may still prohibit bank holding companies from acquiring a bank which is less than five years old; and second, no interstate acquisition
can be consummated by a bank holding company if the acquiror would control more than 10% of the deposits held by insured depository institutions nationwide or 30% or more of the deposits held by insured depository institutions in any state in which
the target bank has branches.



9



---

##### Table of Contents

A bank may establish and operate de novo branches in any state in which the bank does not maintain a branch if that state
has enacted legislation to expressly permit all out-of-state banks to establish branches in that state.



In 1995, California enacted legislation to implement important provisions of the Interstate Banking Act discussed above and to repeal Californias previous interstate banking laws, which were largely preempted by
the Interstate Banking Act.



The changes effected by the Interstate Banking Act
and California laws have increased competition in the environment in which the Bank operates to the extent that out-of-state financial institutions directly or indirectly enter the Banks market areas. It appears that the Interstate Banking Act
has contributed to the accelerated consolidation of the banking industry. While many large out-of-state banks have already entered the California market as a result of this legislation, it is not possible to predict the precise impact of this
legislation on the Bank and 1stCentennial Bancorp and the competitive environment in which they operate.



Financial Modernization Act



Effective March 11, 2000, the Gramm-Leach-Bliley Act eliminated most barriers to
affiliations among banks and securities firms, insurance companies, and other financial service providers, and enabled full affiliations to occur between such entities. This legislation permits bank holding companies to become financial
holding companies and thereby acquire securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well
capitalized under the prompt corrective action provisions discussed above, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration that the bank holding company wishes to become a
financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that
are financial in nature, as determined by the Federal Reserve Board. 1stCentennial Bancorp has no current intention
of becoming a financial holding company, but may do so at some point in the future if deemed appropriate in view of opportunities or circumstances at the time.



The Gramm-Leach-Bliley Act defines financial in nature to include securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank (and therefore, a state bank as well) may also
engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary
of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a
financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of
satisfactory or better.



The Gramm-Leach-Bliley Act also imposes significant
requirements on financial institutions with respect to the privacy of customer information, and modifies other existing laws, including those related to community reinvestment.



USA Patriot Act of 2001



On October 26, 2001, President Bush signed the USA Patriot Act of 2001. Enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on
September 11, 2001, the USA Patriot Act is intended to strengthen U.S. law enforcements and the intelligence communities ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act
on financial institutions of all kinds is significant and wide ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations applicable to financial institutions, including:



| |  | due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



10



---

##### Table of Contents

| |  | standards for verifying customer identification at account opening; and
| | - | -----------------------------------------------------------------------



| |  | rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



1stCentennial implemented the requirements under the USA Patriot Act during 2001 and 2002. Compliance with such requirements has all been accomplished with
existing staff, so the financial impact on 1stCentennial has been negligible.



Sarbanes-Oxley Act of 2002



The Sarbanes-Oxley Act of 2002 (SOA) was enacted to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The
SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports under the Securities Exchange Act of 1934, including the Company.



The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of specified issues by the Securities and Exchange Commission and the Comptroller General. The SOA represents significant
federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession and to state corporate law, such as the relationship between a board of directors and management and between a board
of directors and its committees. The SOA contains provisions, which became effective upon enactment on July 30, 2002 and provisions, which became effective from within 30 days to one year from enactment. The Securities and Exchange Commission has
promulgated regulations to implement various provisions of the SOA, including additional disclosure requirements in periodic filings under the Exchange Act. The Company has revised its internal policies and Exchange Act disclosures to comply with
these new requirements.



Other Pending and Proposed Legislation



Other legislative and regulatory initiatives which could affect
1stCentennial Bancorp, 1stCentennial Bank and the banking industry in general are pending, and additional initiatives may be proposed or introduced, before the U.S. Congress, the California legislature and other governmental
bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject 1stCentennial Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and
regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of 1stCentennial Bancorp or 1stCentennial Bank would be affected thereby.



RISK FACTORS



Statements and financial discussion and analysis by management contained
throughout this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number risks and
uncertainties. The important factors that could cause actual results to differ materially from the forward-looking statements herein include, without limitation, the factors set forth below. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to use or that management currently believes are immaterial also may impair our business. If any of the events described in the following risk factors occur, our business,
results of operations and financial condition could be materially adversely affected. In addition, the trading price of our common stock could decline due to any of the events described in these risks.



Poor economic conditions in our market areas may cause us to suffer higher default rates
on our loans.



A substantial majority of our loans are generated in the
greater San Bernardino, Orange, Riverside and San Diego County areas in Southern California. As a result, poor economic conditions in these areas may cause us to incur losses



11



---

##### Table of Contents

associated with higher default rates and decreased collateral values in our loan portfolio. Much of the U.S. economy has
been in a recession since early- to mid- 2001, and certain areas of California (particularly Northern California) have been negatively impacted due to the financial downturn in certain high-tech industries. While our market areas have not
experienced the same degree of recessionary declines, no assurance can be given that this will continue to be the case.



Concentrations of real estate loans could subject us to increased risks in the event of a real estate recession or natural disaster.



Our loan portfolio is heavily concentrated in real estate loans, both construction and
mortgage. At December 31, 2003, 73.8% of our loan portfolio was concentrated in real estate loans. During 2003, real estate prices in Southern California rose sharply, and construction in our area has been thriving. Between December 31, 2001 and
December 31, 2003 our real estate construction loans increased from 29.8% to 36.9% of our loan portfolio and our commercial and multi family real estate loans increased from 24.5% to 33.6% of our loan portfolio. However, our residential loans
decreased from 14.0% to 3.2%. In addition, many of our commercial loans are to businesses in the construction and real estate industry. In the early 1990s, the entire state of California experienced an economic recession, particularly impacting real
estate values, that resulted in increases in the level of delinquencies and losses for many of the states financial institutions. If any similar real estate recession affecting our market areas should occur in the future, the security for many
of our loans could be reduced and the ability of many of our borrowers to pay could decline. In addition, in the event of a real estate recession affecting our market area, the amount of loans we make to businesses in the construction and real
estate industry could decrease significantly, which could negatively impact our results of operations. Similarly, the occurrence of a natural disaster like those California has experienced in the past, including earthquakes, wild fires, and flooding
could impair the value of the collateral we hold for real estate secured loans and negatively impact our results of operations. The Company incurred no losses resulting from the recent wild fires in Southern California of October and November 2003.



We may have difficulty managing our growth.



We consummated our acquisition of Palomar Community Bank on August 17, 2001. This
acquisition increased our total assets by approximately 73.9%. We also intend to investigate future opportunities to acquire or combine with additional financial institutions and to expand our branch and loan office networks. Future growth is
expected to occur both internally by establishing new branch offices and loan production offices, and externally through selective acquisitions of other financial institutions or branch offices from such other institutions in Southern California. No
assurance can be provided that we will be able to identify additional suitable acquisition targets or consummate any such acquisition in the future or that we will be able to add additional locations.



Our ability to manage our growth will depend primarily on our ability to:



| |  | attract, assimilate and retain additional qualified personnel;
| | - | --------------------------------------------------------------



| |  | monitor operations;
| | - | -------------------



| |  | maintain increased earnings levels;
| | - | -----------------------------------



| |  | control costs; and
| | - | ------------------



| |  | maintain positive customer relations.
| | - | -------------------------------------



If we fail to achieve these objectives in an efficient and timely manner, we may experience interruptions and dislocation in our business. Any such problems could
adversely affect our existing operations, as well as our ability to retain the customers of any financial institutions which we acquire, or to operate such acquired financial institutions profitably. In addition, such concerns could cause our
federal and state banking regulators to require us to delay or forego any proposed acquisition until such problems have been addressed to the satisfaction of those regulators.



12



---

##### Table of Contents

We depend on our executive officers and key personnel to implement our business strategy and could be harmed by the
loss of their services.



We believe that our growth and future success
will depend in large part upon the skills of our management team. The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel or an inability to continue to attract, retain or motivate key
personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or to attract additional qualified personnel. Our President and Chief Executive Officer joined us in June 2000 and was
promoted to his current position in November 2001; our Executive Vice President and Chief Credit Officer joined us in March 2002; our Executive Vice President and Chief Operating Officer joined us on a full-time basis in January 2001 and was
promoted to her current position in December 2002; and our Executive Vice President and Branch Administrator joined us in August 2001, initially as President of Palomar Community Bank. While our President, our Chief Financial Officer, and our Branch
Administrator all have 3-year employment agreements with year terms beginning in 2001, plus 1-year renewals, their employment may be terminated by them or by us at any time.



Because of certain change in control provisions in employment and salary continuation agreements, a change in control of our company or
our management could be delayed or prevented.



Our President, our Chief
Financial Officer, and our Branch Administrator have each entered into employment agreements that have 3-year terms beginning in 2001, with 1-year renewals. The employment agreements provide for severance payments if their respective employment
arrangements are terminated or materially changed in connection with a change in control of 1stCentennial or its
subsidiaries. These same three individuals, as well as several other officers of 1stCentennial, also have salary
continuation agreements, which provide for lump sum payments of their annual retirement benefits under similar circumstances. These provisions may make it more expensive for another company to acquire us, which could reduce the market price of our
common stock and the price that you receive if you sell your shares in the future.



We may experience loan losses in excess of our allowance for loan losses.



The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan, and in the case of a
collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses based upon a percentage of the
outstanding balances and for specific loans when their ultimate collectibility is considered questionable.



As of December 31, 2003, our allowance for loan losses was approximately $2.1 million, which represented 1.11% of outstanding loans, net of unearned income. Although management believes that its allowance for loan
losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses. Further, although management uses the best information available to make determinations with respect to the allowance for loan
losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to the non-performing or performing loans. If managements assumptions and judgments
prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase our allowance for loan losses as a part of their examination process, our earnings and
potentially even our capital could be significantly and adversely affected. See Item 6, Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies and Allowance for Loan
Losses.



Our earnings are subject to interest rate risk, especially if
rates fall.



Banking companies earnings depend largely on the
relationship between the cost of funds, primarily deposits and borrowings, and the yield on earning assets, such as loans and investment securities. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by
the monetary policies of the Federal Reserve Board, the international interest rate environment, as well as by economic, regulatory and competitive factors which influence interest rates, the volume and mix of interest-earning assets and
interest-bearing liabilities, and the level of nonperforming assets. Many of these factors are beyond our control. Fluctuations in interest rates affect the demand



13



---

##### Table of Contents

of customers for our products and services. We are subject to interest rate risk to the degree that our interest-bearing
liabilities reprice or mature more slowly or more rapidly or on a different basis than our interest-earning assets. Given our current volume and mix of interest-bearing liabilities and interest-earning assets, our interest rate spread could be
expected to increase during times of rising interest rates and, conversely, to decline during times of falling interest rates. Therefore, significant fluctuations in interest rates may have an adverse or a positive effect on our results of
operations. See Item 6, Managements Discussion and Analysis of Financial Condition and Results of Operations  Asset-Liability Management and Interest Rate Sensitivity.



In addition, a significant portion of our income is derived from construction lending,
predominantly residential real estate centered in the affordable housing arena. Continued low interest rates have allowed an increasing number of first-time buyers or first-time move-up buyers to afford residential real estate loans. An increase in
interest rates would likely result in a reduced number of qualified buyers, with a resultant impact on absorption and the amount of construction lending that could comfortably be sustained, with a resultant negative impact on our earnings.



All of our lending involves underwriting risks, especially in a competitive
lending market.



At December 31, 2003, construction loans represented
36.9%, residential, commercial and multi-family loans represented 36.8% and commercial loans represented 21.9% of our total loan portfolio.



Commercial lending, even when secured by the assets of a business, involves considerable risk of loss in the event of failure of the business. To reduce such risk, we
typically take additional security interests in other collateral, such as real property, certificates of deposit or life insurance, and/or obtain personal guarantees.



Construction lending differs from other types of real estate lending because of uncertainties inherent in estimating construction costs, the
length of the construction period and the market for the project upon completion. Commercial mortgage lending entails risks of delays in leasing and excessive vacancy rates. All real estate secured lending involves risks that real estate values in
general will fall and that the value of the particular real estate security for a loan will fall. We seek to reduce our risk of loss through our underwriting and monitoring procedures.



We operate in a competitive market dominated by banks and other financial services
providers that offer a broader range of services than we provide, many of which have lower cost structures.



In California generally, and in our primary service area specifically, branches of major banks dominate the commercial banking industry. By virtue of their larger
capital, such institutions have substantially greater lending limits than we have, and perform certain functions for their customers, including trust services and international banking, which we are not equipped to offer directly (but some of which
we offer indirectly through correspondent relationships). Many of these banks also operate with economies of scale that result in lower operating costs than ours on a per loan or per asset basis.



We also compete with other financial institutions such as savings and loan associations,
credit unions, thrift and loan companies, mortgage companies, securities brokerage companies and insurance companies located within and without our service area and with quasi-financial institutions such as money market funds for deposits and loans.
Financial services like ours are increasingly offered over the Internet on a national and international basis, and we compete with providers of these services as well. Ultimately, competition can drive down our interest margins and reduce our
profitability. It also can make it more difficult for us to continue to increase the size of our loan portfolio and deposit base. See Item 1, Business  Competition.



We do not expect to pay significant cash dividends in the future.



We believe the most effective use of our capital and earnings is to finance our growth and operations. For this reason, we expect to retain
all or the vast majority of our earnings rather than distribute them to shareholders in the form of dividends. However, we may consider cash distributions in the form of cash dividends to shareholders in the future, although we do not currently
expect any such dividends to be significant.



We are a legal entity
separate and distinct from our subsidiaries. Substantially all of our revenue and cash flow, including funds available for the payment of dividends and other operating expenses, is dependent upon the payment of dividends to us by our subsidiaries.
Dividends payable to us by the Bank are restricted under California and federal laws and regulation. See Item 5, Market for Common Equity and Related Stockholder Matters  Dividends.



14



---

##### Table of Contents

Trading in our common stock has not been extensive and you may have difficulty selling your shares in the future.



Our common stock is not listed on any exchange or on Nasdaq. Our common
stock is quoted on the OTC Bulletin Board, and there are a few securities brokers who are involved in trading our common stock; however, trading in our common stock has not been extensive and there can be no assurance that you will be able to sell
your shares of common stock at any time or that a more active trading market will develop in the foreseeable future.



ITEM 2. PROPERTIES



We own our headquarters, which
includes our administrative and main branch offices, at 218 East State Street, Redlands, California. The property consists of a two-story building of 8,500 square feet.



We lease all of our other offices. A description of our leases is set forth in the table below.



|                              |  |                                                            |  |               |  |                 |  |               |       
|----------------------------- |  | ---------------------------------------------------------- |  | ------------- |  | --------------- |  | ------------- | ------
|Division/Branch               |  | Location                                                   |  | SquareFootage |  | LeaseExpiration |  | MonthlyRental
|Real Estate                   |  | 101 E. Redlands Blvd. Redlands,
California                 |  | 6,526         |  | 1/31/07         |  | $             | 9,658 
|Brea Branch                   |  | 10 Pointe Drive Brea, California                           |  | 5,061         |  | 12/31/05        |  | $             | 12,069
|Brea-Commercial Lending Group |  | 3 Pointe Drive Brea, California                            |  | 1,464         |  | 12/31/05        |  | $             | 2,826 
|                              |  | 1200 N. Main Street Ste 900 Santa Ana,
California          |  | 1,100         |  | 04/30/04        |  | $             | 2,223 
|Escondido Branch              |  | 355 W. Grand Avenue Escondido,
California                  |  | 10,000        |  | 04/01/07        |  | $             | 23,667
|Palm Desert Branch            |  | 77-900 Fred Waring Drive Suite 100 Palm Desert, California |  | 5,128         |  | 06/30/08        |  | $             | 9,487 



ITEM 3. LEGAL PROCEEDINGS



We are a party from
time to time to claims and legal proceedings arising in the ordinary course of business. After taking into consideration the factors underlying these claims and information provided by our litigation counsel as to the current status of these claims
or proceedings to which we are a party, we are of the opinion that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on our financial condition or results of operations.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Not applicable.



15



---

##### Table of Contents

PART II



ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Trading History



Our common stock is
traded on the OTC Bulletin Board under the symbol FCEN. Trading in the stock has not been extensive and such trades cannot be characterized as amounting to an active trading market. We are aware of the following securities dealers which
are involved in the trading of our common stock: Western Financial Corporation, Wedbush Morgan Securities, Hoefer & Arnett, Seidler Companies, Baird Patrick, GVR Company, Hill Tompson, Monroe Securities, Nite Securities, Ryan Beck & Company,
and Charles Schwab & Co.



The information in the following table indicates
the high and low bid and asked quotations and approximate volume of trading for our common stock for each quarterly period since January 1, 2002, and is based upon information provided by Western Financial Corporation. The
high and low prices have been adjusted to give effect to all stock dividends and splits. In addition, the prices indicated reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.



|                       |  |      |       |     |   |        |  |        
|---------------------- |  | ---- | ----- | --- | - | ------ |  | -------
|Calendar Quarter Ended |  | High |       | Low |   | Volume
|March 31, 2002         |  | $    | 18.25 |     | $ | 16.50  |  | 63,000 
|June 30, 2002          |  | $    | 17.10 |     | $ | 16.00  |  | 128,100
|September 30, 2002     |  | $    | 19.00 |     | $ | 16.50  |  | 43,200 
|December 31, 2002      |  | $    | 29.00 |     | $ | 18.00  |  | 28,800 
|March 31, 2003         |  | $    | 27.00 |     | $ | 21.00  |  | 18,000 
|June 30, 2003          |  | $    | 24.50 |     | $ | 22.50  |  | 41,000 
|September 30, 2003     |  | $    | 26.00 |     | $ | 20.50  |  | 48,100 
|December 31, 2003      |  | $    | 30.00 |     | $ | 25.00  |  | 52,800 



The bid and
asked quotations on March 16, 2004 were $32.75 and $33.00, respectively.



As of December 31, 2003, there were approximately 526 shareholders of record of our common stock.



Dividends



As a banking holding company
which currently has no significant assets other than our equity interest in the Bank, our ability to pay dividends primarily depends upon the dividends we receive from the Bank. The dividend practice of the Bank, like our dividend practice, will
depend upon its earnings, financial position, current and anticipated cash requirements and other factors deemed relevant by the Banks board of directors at that time. In addition, during any period in which 1stCentennial has deferred payment of interest otherwise due and payable on its subordinated debt securities, we may not make any
dividends or distributions with respect to our capital stock. See Item 1, Business  Recent Developments and Managements Discussion and Analysis of Financial Condition and Results of Operations  Capital
Resources.



The Banks ability to pay cash dividends to us is also
subject to certain legal limitations. Under California law, banks may declare a cash dividend out of their net profits up to the lesser of retained earnings or the net income for the last three fiscal years (less any distributions made to
stockholders during such period), or with the prior written approval of the Commissioner of Financial Institutions, in an amount not exceeding the greatest of (i) the retained earnings of the bank, (ii) the net income of the bank for its last fiscal
year, or (iii) the net income of the bank for its current fiscal year. In addition, under federal law, banks are prohibited from paying any dividends if after making such payment they would fail to meet any of the minimum regulatory capital
requirements. The federal regulators also have the authority to prohibit banks from engaging in any business practices which are considered to be unsafe or unsound, and in some circumstances the regulators might prohibit the payment of dividends on
that basis even though such payments would otherwise be permissible.



16



---

##### Table of Contents

Our ability to pay dividends is also limited by state corporation law. The California General Corporation Law allows us
to pay dividends to our shareholders if our retained earnings equal at least the amount of the proposed dividend. If we do not have sufficient retained earnings available for the proposed dividend, we may still pay a dividend to our shareholders if
we meet two conditions after giving effect to the dividend. Those conditions are generally are as follows: (i) our assets (exclusive of goodwill and deferred charges) would equal at least 11/4times our liabilities; and (ii) our current assets would equal at least our current liabilities or, if the average of our earnings before taxes on income
and before interest expense for two preceding fiscal years was less than the average of our interest expense for such fiscal years, then our current assets must equal at least 11/4times our current liabilities.



Shareholders are entitled to receive dividends only when and if declared by our board of directors. Although we paid cash dividends in 2000 and 2001, we have no intention
to pay cash dividends in the foreseeable future. Instead, we intend to retain our earnings for the purpose of supporting our future growth. However, since 1994 we have paid nine stock dividends to our shareholders. The table below sets forth
information concerning all dividends paid since the Bank opened in 1990. Dividends paid in 2000 through 2003 were paid by the Company, and dividends paid prior to 2000 were paid by the Bank.



|     |  |                |   |  |               |   |  |      |  |                |   |  |              
|---- |  | -------------- | - |  | ------------- | - |  | ---- |  | -------------- | - |  | -------------
|Year |  | StockDividends |   |  | CashDividends |   |  | Year |  | StockDividends |   |  | CashDividends
|2003 |  | 5              | % |  |              |   |  | 1998 |  | 25             | % |  |             
|2002 |  | 5              | % |  |              |   |  | 1997 |  | 7              | % |  |             
|2001 |  |               |   |  | 5             | ¢ |  | 1996 |  | 8              | % |  |             
|2000 |  | 5              | % |  | 10            | ¢ |  | 1995 |  | 5              | % |  |             
|1999 |  |               |   |  |              |   |  | 1994 |  | 5              | % |  |             



On February 20, 2004, the Board of
Directors of 1stCentennial declared a 25% stock dividend to shareholders of record April 1, 2004, to be paid on or
about May 1, 2004. Cash will be paid in lieu of fractional shares.



In
addition, the practice of our board of directors is to review periodically the advisability of paying cash dividends based on our earnings, financial position, current and anticipated cash requirements and other factors deemed relevant by our board
of directors at that time. In making any such assessment, the board of directors would consider among other things our capital requirements as well as the capital requirements of the Bank and other factors concerning both 1stCentennial Bancorp and 1stCentennial Bank, including the maintenance of an adequate allowance for loan losses of the Bank.



Recent Sales of Unregistered Securities



The following information relates to securities of the Company or its subsidiaries issued or sold within the past three years, which were not registered under the
Securities Act of 1933, as amended (the Securities Act):



The
Company issued an aggregate of 12,960 shares of its common stock in a private placement to the former president of the Bank, Mr. Spencer, in connection with the settlement of certain proceedings brought by Mr. Spencer against the Bank and certain of
its officers and employees. The shares were sold by the Company on April 3, 2003 for a cash purchase price of $10.01 per share or an aggregate of $129,729. The per share price paid by Mr. Spencer is equivalent to the average exercise price of stock
options which were cancelled when Mr. Spencer was terminated by the Bank. No underwriter was used in connection with the sale of shares to Mr. Spencer. The shares of common stock sold to Mr. Spencer were not registered under the Securities Act of
1933, as amended, in reliance on the exemption set forth in Section 4(2) thereof. See Note 13 to Notes to Consolidated Financial Statements.



Stock Repurchases



There were no stock repurchases during the fourth quarter of 2003.



17



---

##### Table of Contents

ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



This discussion presents Managements analysis of the financial condition and results of operations of 1stCentennial1as of and for
each of the years in the three-year period ended December 31, 2003 and includes the statistical disclosures required by SEC Guide 3 (Statistical Disclosure by Company Holding Companies). The discussion should be read in conjunction with
the financial statements of 1stCentennial and the notes related thereto which appear elsewhere in this Form 10-KSB
Annual Report (see Item 7 below).



Statements contained in this report that are
not purely historical are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, including our expectations, intentions, beliefs, or strategies regarding the future. All forward-looking
statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the date noted, and we assume no obligation to update any such forward-looking
statements. It is important to note that our actual results could materially differ from those in such forward-looking statements. Factors that could cause actual results to differ materially from those in such forward-looking statements are
fluctuations in interest rates, inflation, government regulations, economic conditions, customer disintermediation and competitive product and pricing pressures in the geographic and business areas in which we conduct our operation



Selected Financial Data



You should read the selected financial data presented below in conjunction with our audited consolidated financial statements, including the
related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations, included in this Annual Report. The selected financial data as of December 31, 2003 and 2002 and for each of the years in the
three year period ended December 31, 2003 is derived from our audited consolidated financial statements and related notes, which are included in this Annual Report. The selected financial data for prior years is derived from our audited consolidated
financial statements, which are not included in this Annual Report. All per share information has been adjusted for stock splits and dividends declared from time to time.



|                                                     |  |                                               |           |       |   |           |  |       |           |       |   |         |  |   |        
|---------------------------------------------------- |  | --------------------------------------------- | --------- | ----- | - | --------- |  | ----- | --------- | ----- | - | ------- |  | - | -------
|                                                     |  | As of and For the Years Ended December 31,   
|                                                     |  | 20032                                         |           | 20022 |   | 20012     |  | 20002 |           | 19992
|                                                     |  | (Dollars in Thousands, except per share data)
|Income Statement:                                    |  |                                               |           |       |   |           |  |       |           |       |   |         |  |   |        
|Interest income                                      |  | $                                             | 16,687    |       | $ | 14,494    |  | $     | 10,804    |       | $ | 7,989   |  | $ | 5,976  
|Interest expense                                     |  |                                               | 2,106     |       |   | 2,377     |  |       | 2,694     |       |   | 2,331   |  |   | 1,586  
|Net interest income before provision for loan losses |  |                                               | 14,581    |       |   | 12,117    |  |       | 8,110     |       |   | 5,658   |  |   | 4,390  
|Provision for loan losses                            |  |                                               | 360       |       |   | 477       |  |       | 411       |       |   | 630     |  |   | 225    
|Noninterest income                                   |  |                                               | 3,022     |       |   | 2,424     |  |       | 1,993     |       |   | 2,041   |  |   | 1,035  
|Noninterest expense                                  |  |                                               | 14,014    |       |   | 11,556    |  |       | 8,070     |       |   | 5,690   |  |   | 4,152  
|Income before income tax expenses                    |  |                                               | 3,229     |       |   | 2,508     |  |       | 1,622     |       |   | 1,379   |  |   | 1,048  
|Income tax expense                                   |  |                                               | 1,141     |       |   | 802       |  |       | 575       |       |   | 472     |  |   | 319    
|Net income                                           |  |                                               | 2,088     |       |   | 1,706     |  |       | 1,047     |       |   | 907     |  |   | 729    
|Share Data:                                          |  |                                               |           |       |   |           |  |       |           |       |   |         |  |   |        
|Earnings per share:                                  |  |                                               |           |       |   |           |  |       |           |       |   |         |  |   |        
|Basic                                                |  | $                                             | 1.48      |       | $ | 1.35      |  | $     | 1.05      |       | $ | 1.14    |  | $ | 0.89   
|Diluted                                              |  |                                               | 1.37      |       |   | 1.34      |  |       | 1.04      |       |   | 1.08    |  |   | 0.83   
|Weighted average common shares outstanding3          |  |                                               |           |       |   |           |  |       |           |       |   |         |  |   |        
|Basic                                                |  |                                               | 1,411,066 |       |   | 1,259,161 |  |       | 993,014   |       |   | 794,800 |  |   | 819,704
|Diluted                                              |  |                                               | 1,523,042 |       |   | 1,270,456 |  |       | 1,004,149 |       |   | 841,638 |  |   | 873,209

---

|1 | As used throughout this Annual Report, the term includes, as appropriate, both 1stCentennial Bancorp and 1stCentennial Bank.
|- | ----------------------------------------------------------------------------------------------------------------------------

|2 | Data prior to December 23, 1999 (the effective date of the holding company reorganization) is for 1st Centennial Bank only and thereafter is for 1st Centennial and
subsidiaries on a consolidated basis; data beginning August 17, 2001 includes the operations of Palomar Community Bank (merged into 1st Centennial Bank effective May 24, 2002).
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | As adjusted to give retroactive effect to stock splits and dividends.
|- | ---------------------------------------------------------------------



18



---

##### Table of Contents

|                                                                  |  |                                               |         |   |       |   |         |       |  |   |         |   |  |       |        |   |  |   |        |  
|----------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | ----- | - | ------- | ----- |  | - | ------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                                                  |  | As of and For the Years Ended December 31,    |        
|                                                                  |  | 20032                                         |         |   | 20022 |   |         | 20012 |  |   | 20002   |   |  | 19992 |       
|                                                                  |  | (Dollars in Thousands, except per share data) |        
|Balance Sheets:                                                   |  |                                               |         |   |       |   |         |       |  |   |         |   |  |       |        |   |  |   |        |  
|Total assets                                                      |  | $                                             | 254,383 |   |       | $ | 207,858 |       |  | $ | 198,026 |   |  | $     | 94,111 |   |  | $ | 76,007 |  
|Securities                                                        |  |                                               | 36,026  |   |       |   | 32,822  |       |  |   | 34,014  |   |  |       | 9,481  |   |  |   | 8,003  |  
|Net loans4                                                        |  |                                               | 188,222 |   |       |   | 141,112 |       |  |   | 125,695 |   |  |       | 58,774 |   |  |   | 52,382 |  
|Total deposits                                                    |  |                                               | 212,773 |   |       |   | 183,188 |       |  |   | 174,328 |   |  |       | 86,381 |   |  |   | 69,140 |  
|Total stockholders equity                                        |  |                                               | 24,400  |   |       |   | 17,193  |       |  |   | 15,272  |   |  |       | 6,870  |   |  |   | 6,328  |  
|Performance Ratios:                                               |  |                                               |         |   |       |   |         |       |  |   |         |   |  |       |        |   |  |   |        |  
|Return on average equity5                                         |  |                                               | 9.83    | % |       |   | 10.47   | %     |  |   | 10.20   | % |  |       | 13.74  | % |  |   | 12.01  | %
|Return on average assets6                                         |  |                                               | 0.91    | % |       |   | 0.83    | %     |  |   | 0.77    | % |  |       | 1.07   | % |  |   | 1.10   | %
|Net interest margin7                                              |  |                                               | 7.08    | % |       |   | 6.75    | %     |  |   | 6.84    | % |  |       | 7.57   | % |  |   | 6.96   | %
|Efficiency ratio8                                                 |  |                                               | 79.61   | % |       |   | 79.47   | %     |  |   | 79.88   | % |  |       | 73.91  | % |  |   | 76.39  | %
|Net loans to total deposits at period end                         |  |                                               | 88.46   | % |       |   | 77.03   | %     |  |   | 72.10   | % |  |       | 68.04  | % |  |   | 75.76  | %
|Dividend payout ratio9                                            |  |                                               |        |   |       |   |        |       |  |   | 4.76    | % |  |       | 8.77   | % |  |   |       |  
|Capital Ratios:                                                   |  |                                               |         |   |       |   |         |       |  |   |         |   |  |       |        |   |  |   |        |  
|Average stockholders equity to average total assets              |  |                                               | 9.21    | % |       |   | 7.99    | %     |  |   | 5.35    | % |  |       | 7.34   | % |  |   | 8.34   | %
|Tier 1 capital to average assets                                  |  |                                               | 10.79   | % |       |   | 8.28    | %     |  |   | 5.69    | % |  |       | 8.12   | % |  |   | 8.44   | %
|Tier 1 capital to total risk-weighted assets                      |  |                                               | 12.48   | % |       |   | 10.87   | %     |  |   | 8.30    | % |  |       | 10.24  | % |  |   | 10.30  | %
|Total capital to total risk-weighted assets                       |  |                                               | 13.63   | % |       |   | 13.27   | %     |  |   | 11.07   | % |  |       | 11.49  | % |  |   | 11.22  | %
|Asset Quality Ratios:                                             |  |                                               |         |   |       |   |         |       |  |   |         |   |  |       |        |   |  |   |        |  
|Nonperforming loans to total gross loans10                        |  |                                               | 0.33    | % |       |   | 0.41    | %     |  |   | 0.19    | % |  |       | 0.19   | % |  |   | 0.11   | %
|Nonperforming assets to total loans and other real estate owned11 |  |                                               | 0.33    | % |       |   | 0.41    | %     |  |   | 0.19    | % |  |       | 0.19   | % |  |   | 0.11   | %
|Net loan charge-offs to average total loans                       |  |                                               | 0.01    | % |       |   | 0.12    | %     |  |   | 0.25    | % |  |       | 0.61   | % |  |   | 0.16   | %
|Allowance for loan losses to total gross loans at period end      |  |                                               | 1.11    | % |       |   | 1.24    | %     |  |   | 1.15    | % |  |       | 1.45   | % |  |   | 1.09   | %
|Allowance for loan losses to nonperforming loans                  |  |                                               | 339.45  | % |       |   | 304.99  | %     |  |   | 605.80  | % |  |       | 775.00 | % |  |   | 952.46 | %



Critical Accounting Policies



1stCentennials financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial
information contained within these statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve
the most complex and subjective decisions and assessments, Management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Companys allowance for loan loss methodologies incorporate a
variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that Management believes is appropriate at each reporting date.



Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers sensitivity to interest rate movements and borrowers sensitivity to quantifiable external factors including
commodity and finished good prices as well as acts of nature (earthquakes, floods, fires, etc.) that occur in a particular period.



Qualitative factors include the general economic environment in our markets, including economic conditions in Southern California and in particular, the state of certain
industries. Size and complexity of individual credits in relation to lending officers background and experience levels, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative
factors that are considered in our methodologies.

---

|4 | Loans are net of the allowance for loan losses and deferred fees.
|- | -----------------------------------------------------------------

|5 | Net income divided by average stockholders equity.
|- | ---------------------------------------------------

|6 | Net income divided by average total assets.
|- | -------------------------------------------

|7 | Net interest income as a percentage of average interest-earning assets.
|- | -----------------------------------------------------------------------

|8 | Ratio of noninterest expense to the sum of net interest income before provision for loan losses and total noninterest income excluding securities gains and losses.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9 | Dividends declared per share divided by basic earnings per share.
|- | -----------------------------------------------------------------

|10 | Nonperforming loans consist of nonaccrual loans, loans past due 90 days or more and restructured loans.
|-- | -------------------------------------------------------------------------------------------------------

|11 | Nonperforming assets consist of nonperforming loans and other assets, including other real estate owned.
|-- | --------------------------------------------------------------------------------------------------------



19



---

##### Table of Contents

As 1stCentennial adds new products, it increases the complexity of its loan portfolio, and expands its geographic coverage, it will enhance its methodologies to keep pace with the size and complexity of the loan portfolio.
Management might report a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses if its assessment of the above factors were different. This discussion and analysis should
be read in conjunction with 1stCentennials financial statements and the accompanying notes presented
elsewhere herein, as well as the portion of this Managements Discussion and Analysis section entitled  Financial Condition  Allowance for Loan Losses. Although Management believes the level of the allowance as of
December 31, 2003 is adequate to absorb losses inherent in the loan portfolio, a decline in the regional economy may result in increasing losses that cannot reasonably be predicted at this time.



Results of Operations

General



1stCentennial reported net earnings of $2,088,000 for the year ended December 31,
2003, which represents an increase of $382,000 or 22.4%, over net earnings of $1,706,000 for the year ended December 31, 2002. Net earnings for 2002 increased $659,000 or 62.9%, over net earnings of $1,047,000 for the year ended December 31, 2001.
The increase in net income from 2002 to 2003 is due to the Companys focus on steady, controlled asset growth while at the same time emphasizing increased income from interest and fee sources. The increase in net income from 2001 to 2002 was
from a full year of income from Palomar Community Bank (first as a separate subsidiary and later as a division of 1stCentennial Bank) in 2002 versus only 41/2months in 2001, as well as interest and fees
generated by strong loan demand, coupled with a decline in the cost of funds.



Basic earnings per share, as adjusted to give effect to stock dividends, were $1.48, $1.35 and $1.05 for the years ending December 31, 2003, 2002 and 2001, respectively. Diluted earnings per share, adjusted for the effects of the exercise
of stock options and stock dividends were $1.37, $1.34, and $1.04 for the years ending December 31, 2003, 2002, and 2001, respectively. The increase in basic and diluted earnings per share from 2002 to 2003 can be attributed to the increase in net
earnings in 2003 over 2002. The increase in basic and diluted earnings per share from 2001 to 2002 can be attributed to the increase in net earnings in 2002 over 2001 without a substantial increase in the number of average shares outstanding during
2002.



Return on average assets was 0.91% for 2003, compared to 0.83% for 2002
and 0.77% for 2001. Return on average stockholders equity was 9.83% for 2003, compared to 10.47% for 2002 and 10.20% for 2001. The increase from 2002 to 2003 in the return on average assets was a result of average interest-earning assets for 2003
increasing $26.4 million or 14.7%, and net income increasing $382,000 or 22.4% compared to this same period in 2002. The decrease in return on average equity is due in part, to more equity in 2003 than in 2002 as a result of the sale and issuance of
225,000 shares in a public stock offering completed in May of 2003. The increase from 2001 to 2002 was a result of increased earnings, primarily interest and fees on loans, as volume increased, and a decrease in the cost of funds.



Net Interest Income and Net Interest Margin



Net interest income is the difference between interest earned on loans and investments and
interest paid on deposits and other borrowings. Net interest income totaled $14.6 million for the year ended December 31, 2003, up 20.3% from $12.1 million for the year ended December 31, 2002. Which in turn was up 49.4% from $8.1 million in 2001.
The increase in net interest income from 2002 to 2003 was primarily the result of a $27.0 million increase in average total loans from 2002 to 2003. Average total loans increased from $134.2 million at December 31, 2002 to $161.2 million at December
31, 2003. The primary factor contributing to the growth of net interest income during 2002 as compared to 2001 was the presence of Palomar Community Bank (first as a separate subsidiary and later as a division of 1stCentennial Bank) for the entire year as compared to only 41/2months in 2001.



Average earning assets increased $26.4 million, or 14.7% to $205.8 million in 2003, compared to an increase of $14.9 million or 9.0% to $179.4 million from 2001 to 2002. The increase in average earning assets from 2002 to 2003 was due to a
20.2% increase in average loans and the increase in average earning assets in from 2001 to 2002 was due to a 13.3% increase in average loans.



The net interest margin measures net interest income as a percentage of average earning assets. The net interest margin can be affected by changes in the yield on earning
assets and the cost of interest-bearing liabilities, as well as changes in the level of interest-bearing liabilities in proportion to earning assets. The net interest margin can also be affected by changes in the mix of earning assets as well as the
mix of interest-bearing liabilities.



20



---

##### Table of Contents

The net interest margin was 7.08%, 6.75%, and 6.84% for the years ended December 31, 2003, 2002 and 2001, respectively.
The reason for the increase in the net interest margin in from 2002 to 2003 was an increase in the volume of earning assets and a small increase in the yield coupled with a decline in rates on interest-bearing liabilities and an increase in loan
fees. The Companys reference rate averaged 4.12% in 2003, compared to 4.68% in 2002. The primary reason for the decrease in the net interest margin in 2002 from 2001 was due to the low interest rate environment for earning assets, coupled with
an increase in the cost of funds of other borrowings and redeemable preferred securities issued by 1stCentennial in
2002.



The cost of average interest-bearing liabilities decreased to 1.43% for
2003, compared to 1.71% in 2002 and 2.85% in 2001. The decrease is mostly attributed to a lower interest rate environment, reflective of the Federal Reserve Boards interest rate policy.



Total interest income increased to $16.7 million in 2003, up from $14.5 million in 2002 and
$10.8 million in 2001. The increase in total interest income for 2003 compared to 2002 was primarily due to an increase of approximately $2.6 million in interest and fees on loans and is attributable to an increase in the average balance of total
loans outstanding for 2003, compared to 2002. The increase in interest income in 2002 compared to 2001 is primarily due to continued strong loan demand in the regions the Company serves, as well as the presence of Palomar Community Bank (first as a
separate subsidiary and later as a division of 1stCentennial Bank) for all of 2002, compared to only 41/2months in 2001.



Interest expense totaled $2.1 million in 2003, a decrease of $271,000 or 11.4% from $2.4 million in 2002. Interest expense decreased by $316,000 or 11.7% to $2.4 million
in 2002, compared to $2.7 million in 2001. The decrease in interest expense in 2003 from 2002 was primarily the result of the higher rate certificates of deposit maturing and renewed at lower interest rates that reflect the current market. The
decrease in the cost of average interest-bearing liabilities, including borrowed funds, was influenced by a decrease in the cost of borrowed funds, primarily due to the replacement of higher interest borrowings with lower interest borrowings through
the issuance of trust preferred securities. Interest expense in 2002 from 2001 decreased, despite the presence of Palomar (first as a separate subsidiary and later as a division of 1stCentennial Bank) for an entire year in 2002 compared to only 41/2months in 2001. Interest expense decreased primarily as a result of the continued historical low interest rate environment coupled with, a shift in the deposit mix, which caused a 30.1% increase in
non-interest bearing demand deposits.



21



---

##### Table of Contents

The following table shows the Companys average balances of earning assets, and interest-bearing liabilities; the
amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest income and the net interest margin for the periods indicated:



Distribution, Rate and Yield Analysis of Net Interest Income



|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ---------------------- | ---- | ----------------- |  | ---- | -------------- |  | ---------------------- | ------- | ----------------- | - | ------ | -------------- | ---- | ---------------------- |  | -------------------- | ------- |  | - | ------ |  | ----- | -
|                                                                                                  |  | For the Years Ended December 31, |        
|                                                                                                  |  | 2003                             |         |                        | 2002 |                   |  | 2001 |               
|                                                                                                  |  | AverageBalance                   |         | InterestIncome/Expense |      | AverageRate/Yield |  |      | AverageBalance |  | InterestIncome/Expense |         | AverageRate/Yield |   |        | AverageBalance |      | InterestIncome/Expense |  | Average12 Rate/Yield |        
|                                                                                                  |  | (Dollars in Thousands)           |        
|Interest-earning Assets:                                                                          |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Federal funds sold                                                                                |  | $                                | 8,624   |                        | $    | 90                |  | 1.04 | %              |  | $                      | 9,465   |                   | $ | 152    |                | 1.61 | %                      |  | $                    | 20,093  |  | $ | 385    |  | 3.28  | %
|Interest-bearing deposits in financial institutions                                               |  |                                  | 5,006   |                        |      | 233               |  | 4.65 | %              |  |                        | 4,746   |                   |   | 220    |                | 4.64 | %                      |  |                      | 6,570   |  |   | 298    |  | 5.78  | %
|Investment securities:                                                                            |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Taxable13                                                                                         |  |                                  | 27,044  |                        |      | 1,016             |  | 3.76 | %              |  |                        | 26,904  |                   |   | 1,350  |                | 5.02 | %                      |  |                      | 15,817  |  |   | 762    |  | 6.67  | %
|Non-taxable                                                                                       |  |                                  | 3,929   |                        |      | 174               |  | 4.43 | %              |  |                        | 4,140   |                   |   | 186    |                | 4.49 | %                      |  |                      | 3,662   |  |   | 158    |  | 4.31  | %
|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Total investments                                                                                 |  |                                  | 44,603  |                        |      | 1,513             |  | 3.39 | %              |  |                        | 45,255  |                   |   | 1,908  |                | 4.22 | %                      |  |                      | 46,142  |  |   | 1,603  |  | 5.01  | %
|Loans14                                                                                           |  |                                  | 161,207 |                        |      | 15,174            |  | 9.41 | %              |  |                        | 134,169 |                   |   | 12,586 |                | 9.38 | %                      |  |                      | 118,428 |  |   | 9,201  |  | 10.63 | %
|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Total interest-earning assets                                                                     |  | $                                | 205,810 |                        | $    | 16,687            |  | 8.11 | %              |  | $                      | 179,424 |                   | $ | 14,494 |                | 8.08 | %                      |  | $                    | 164,570 |  | $ | 10,804 |  | 9.11  | %
|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Interest-bearing Liabilities:                                                                     |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Interest-bearing deposits                                                                         |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Interest-bearing demand deposits                                                                  |  | $                                | 17,851  |                        | $    | 43                |  | 0.24 | %              |  | $                      | 19,209  |                   | $ | 41     |                | 0.21 | %                      |  | $                    | 17,455  |  | $ | 54     |  | 0.45  | %
|Money market deposits                                                                             |  |                                  | 36,666  |                        |      | 354               |  | 0.97 | %              |  |                        | 33,793  |                   |   | 299    |                | 0.88 | %                      |  |                      | 37,429  |  |   | 622    |  | 2.00  | %
|Savings deposits                                                                                  |  |                                  | 18,266  |                        |      | 115               |  | 0.63 | %              |  |                        | 18,145  |                   |   | 98     |                | 0.54 | %                      |  |                      | 14,554  |  |   | 153    |  | 1.41  | %
|Time deposits $100,000 or greater                                                                 |  |                                  | 37,834  |                        |      | 850               |  | 2.25 | %              |  |                        | 30,260  |                   |   | 936    |                | 3.09 | %                      |  |                      | 25,211  |  |   | 999    |  | 3.96  | %
|Other time deposits                                                                               |  |                                  | 27,804  |                        |      | 397               |  | 1.43 | %              |  |                        | 30,667  |                   |   | 673    |                | 2.19 | %                      |  |                      | 36,489  |  |   | 787    |  | 2.17  | %
|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Total interest-bearing deposits                                                                   |  | $                                | 138,421 |                        | $    | 1,759             |  | 1.27 | %              |  | $                      | 132,074 |                   | $ | 2,047  |                | 1.55 | %                      |  | $                    | 131,138 |  | $ | 2,615  |  | 2.11  | %
|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|FHLB borrowings and long-term debt                                                                |  |                                  | 2,679   |                        |      | 33                |  | 1.23 | %              |  |                        | 4,133   |                   |   | 156    |                | 3.77 | %                      |  |                      | 1,392   |  |   | 79     |  | 5.68  | %
|Federal funds purchased                                                                           |  |                                  | 404     |                        |      | 7                 |  | 1.73 | %              |  |                        | 24      |                   |   | 1      |                | 4.17 | %                      |  |                      |        |  |   |       |  |       |  
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                                  | 6,000   |                        |      | 307               |  | 5.12 | %              |  |                        | 2,859   |                   |   | 173    |                | 6.05 | %                      |  |                      |        |  |   |       |  |      |  
|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Total interest-bearing liabilities                                                                |  | $                                | 147,504 |                        | $    | 2,106             |  | 1.43 | %              |  | $                      | 139,090 |                   | $ | 2,377  |                | 1.71 | %                      |  | $                    | 132,530 |  | $ | 2,694  |  | 2.85  | %
|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Net interest income                                                                               |  |                                  |         |                        | $    | 14,581            |  |      |                |  |                        |         |                   | $ | 12,117 |                |      |                        |  |                      |         |  | $ | 8,110  |  |       |  
|                                                                                                  |  |                                  |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |                |      |                        |  |                      |         |  |   |        |  |       |  
|Net interest margin15                                                                             |  |                                  |         |                        |      |                   |  | 7.08 | %              |  |                        |         |                   |   |        |                | 6.75 | %                      |  |                      |         |  |   |        |  | 6.84  | %

---

|12 | Average rates/yields for 2001 have been adjusted to reflect the ownership of Palomar Community Bank (reporting as a subsidiary and later as a division of
1stCentennial Bank) for 41/2months in 2001.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13 | Yields on income have been computed on a tax equivalent basis, except for municipal securities, because the amounts are minimal.
|-- | --------------------------------------------------------------------------------------------------------------------------------

|14 | Loans are gross, which excludes the allowance for loan losses, and net of deferred fees. Nonaccrual loans are included in the table for computation purposes, but the
foregone interest of such loans is excluded. Loan fees were approximately $2,716,000, $1,901,000 and $1,194,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15 | Net interest income as a percentage of average interest-earning assets.
|-- | -----------------------------------------------------------------------



22



---

##### Table of Contents

The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for
interest-earning assets and interest-bearing liabilities, the amount of change attributable to changes in average daily balances (volume), changes in interest rates (rate), and changes attributable to both the volume and rate (rate/volume):



Rate/Volume Analysis of Net Interest Income



|                                                                                                  |  |                                        |       |   |                                        |   |      |             |  |   |       |   |  |        |       |   |      |   |       |             |  |   |        |   |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ----- | - | -------------------------------------- | - | ---- | ----------- |  | - | ----- | - |  | ------ | ----- | - | ---- | - | ----- | ----------- |  | - | ------ | - |  | - | ----- | - |  | - | ----- | -
|                                                                                                  |  | Year Ended December 31, 2003 vs. 2002  |       |   | Year Ended December 31, 2002 vs. 2001  |  
|                                                                                                  |  | Increases (Decreases) Due to Change In |       |   | Increases (Decreases) Due to Change In |  
|                                                                                                  |  | Volume                                 |       |   | Rate                                   |   |      | Rate/Volume |  |   | Total |   |  | Volume |       |   | Rate |   |       | Rate/Volume |  |   | Total  |  
|                                                                                                  |  | (Dollars in Thousands)                 |      
|Increase (Decrease) in Interest Income:                                                           |  |                                        |       |   |                                        |   |      |             |  |   |       |   |  |        |       |   |      |   |       |             |  |   |        |   |  |   |       |   |  |   |       |  
|Federal funds sold                                                                                |  | $                                      | (14   | ) |                                        | $ | (53  | )           |  | $ | 5     |   |  | $      | (62   | ) |      | $ | (349  | )           |  | $ | (336   | ) |  | $ | 452   |   |  | $ | (233  | )
|Interest-bearing deposits in financial institutions                                               |  |                                        | 12    |   |                                        |   | 1    |             |  |   |      |   |  |        | 13    |   |      |   | (105  | )           |  |   | (75    | ) |  |   | 102   |   |  |   | (78   | )
|Investment securities16                                                                           |  |                                        | (2    | ) |                                        |   | (342 | )           |  |   | (2    | ) |  |        | (346  | ) |      |   | 761   |             |  |   | (254   | ) |  |   | 109   |   |  |   | 616   |  
|Loans17                                                                                           |  |                                        | 2,536 |   |                                        |   | 43   |             |  |   | 9     |   |  |        | 2,588 |   |      |   | 1,673 |             |  |   | (1,480 | ) |  |   | 3,192 |   |  |   | 3,385 |  
|                                                                                                  |  |                                        |       |   |                                        |   |      |             |  |   |       |   |  |        |       |   |      |   |       |             |  |   |        |   |  |   |       |   |  |   |       |  
|Total                                                                                             |  | $                                      | 2,532 |   |                                        | $ | (351 | )           |  | $ | 12    |   |  | $      | 2,193 |   |      | $ | 1,980 |             |  | $ | (2,145 | ) |  | $ | 3,855 |   |  | $ | 3,690 |  
|                                                                                                  |  |                                        |       |   |                                        |   |      |             |  |   |       |   |  |        |       |   |      |   |       |             |  |   |        |   |  |   |       |   |  |   |       |  
|Increase (Decrease) in Interest Expense:                                                          |  |                                        |       |   |                                        |   |      |             |  |   |       |   |  |        |       |   |      |   |       |             |  |   |        |   |  |   |       |   |  |   |       |  
|Interest-bearing demand deposits                                                                  |  | $                                      | (3    | ) |                                        | $ | 5    |             |  | $ |      |   |  | $      | 2     |   |      | $ | 8     |             |  | $ | (42    | ) |  | $ | 21    |   |  | $ | (13   | )
|Money market deposits                                                                             |  |                                        | 25    |   |                                        |   | 27   |             |  |   | 3     |   |  |        | 55    |   |      |   | (73   | )           |  |   | (419   | ) |  |   | 170   |   |  |   | (322  | )
|Savings deposits                                                                                  |  |                                        | 1     |   |                                        |   | 16   |             |  |   |      |   |  |        | 17    |   |      |   | 51    |             |  |   | (127   | ) |  |   | 20    |   |  |   | (56   | )
|Time deposits $100,000 or greater                                                                 |  |                                        | 234   |   |                                        |   | (256 | )           |  |   | (64   | ) |  |        | (86   | ) |      |   | 200   |             |  |   | (219   | ) |  |   | (44   | ) |  |   | (63   | )
|Other time deposits                                                                               |  |                                        | (63   | ) |                                        |   | (235 | )           |  |   | 22    |   |  |        | (276  | ) |      |   | (126  | )           |  |   | 14     |   |  |   | (2    | ) |  |   | (114  | )
|FHLB borrowings and long-term debt                                                                |  |                                        | (55   | ) |                                        |   | (105 | )           |  |   | 37    |   |  |        | (123  | ) |      |   | 156   |             |  |   | (27    | ) |  |   | (52   | ) |  |   | 77    |  
|Federal funds purchased                                                                           |  |                                        | 16    |   |                                        |   | (1   | )           |  |   | (9    | ) |  |        | 6     |   |      |   |      |             |  |   |       |   |  |   | 1     |   |  |   | 1     |  
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                                        | 190   |   |                                        |   | (27  | )           |  |   | (29   | ) |  |        | 134   |   |      |   |      |             |  |   |       |   |  |   | 173   |   |  |   | 173   |  
|                                                                                                  |  |                                        |       |   |                                        |   |      |             |  |   |       |   |  |        |       |   |      |   |       |             |  |   |        |   |  |   |       |   |  |   |       |  
|Total                                                                                             |  | $                                      | 345   |   |                                        | $ | (576 | )           |  | $ | (40   | ) |  | $      | (271  | ) |      | $ | 216   |             |  | $ | (820   | ) |  | $ | 287   |   |  | $ | (317  | )
|                                                                                                  |  |                                        |       |   |                                        |   |      |             |  |   |       |   |  |        |       |   |      |   |       |             |  |   |        |   |  |   |       |   |  |   |       |  
|Total change in net interest income                                                               |  | $                                      | 2,187 |   |                                        | $ | 225  |             |  | $ | 52    |   |  | $      | 2,464 |   |      | $ | 1,764 |             |  | $ | (1,325 | ) |  | $ | 3,568 |   |  | $ | 4,007 |  
|                                                                                                  |  |                                        |       |   |                                        |   |      |             |  |   |       |   |  |        |       |   |      |   |       |             |  |   |        |   |  |   |       |   |  |   |       |  



Provision for Loan Losses



Calculating the allowance for loan losses is divided into two primary
allocation groups: (1) allocations are assigned to adversely graded loans, (2) all other passing grade loans. For adversely graded loans, the Company has determined an allowance amount to set aside which it believes is sufficient to cover any
potential collateral shortfall. Problem loans are identified by the Loan Officer, Chief Credit Officer, Loan Review or by the Examiners. Those loans identified as problem loans are assigned a risk grade. Loans graded special mention are multiplied
by an inherent loss factor of 4% to determine the amount to be included in the allowance. Loans graded substandard are generally multiplied by a loss factor of 10 to 20%, loans graded doubtful are generally multiplied by a loss factor of 50% and
loans graded loss are multiplied by a loss factor of 100%. All other loans, graded pass are multiplied by an historical experience factor to determine the appropriate level of the allowance for loan losses. In addition to historical experience
factors, the Company also provides for losses due to economic factors, concentration of credit and portfolio composition changes.



For the year ended December 31, 2003, the provision for loan losses was $360,000, compared to $477,000 and $411,000 for 2002 and 2001, respectively. The decrease in the
provision from 2002 to 2003 is attributed to the quality of our loan portfolio. Net loan charge-offs to average loans decreased during the year ended December 31, 2003 to .01% from .12% for 2002 due to early identification of problem credits and
thorough workout strategies. The increase in the provision from 2001 to 2002 was the result of managements continued review and methodology in determining adequate levels to the overall allowance and for growth in the loan portfolio. One of
the procedures used for monitoring the loan portfolio is migration analysis. Based on the results of this program, in addition to managements

---

|16 | Yields on income have not been computed on a tax equivalent basis, because tax-exempt investments are minimal.
|-- | --------------------------------------------------------------------------------------------------------------

|17 | Loans are gross, which excludes the allowance for loan losses, and net of deferred fees. Nonaccrual loans are included in the table for computation purposes, but the
foregone interest of such loans is excluded. Loan fees were approximately $2,716,000, $1,901,000 and $1,194,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



---

##### Table of Contents

determination, the provision is increased or decreased. The procedures for monitoring the adequacy of the Allowance, as
well as detailed information concerning the allowance itself, are included in the Allowance for Loan Losses section.



Noninterest Income



Noninterest Income for 1stCentennial includes customer service fees, net gains and
commissions from sale of loans, increases in the cash surrender value of life insurance policies, broker fee income and other miscellaneous income.



Total noninterest income increased $598,000 or 24.7% to $3,022,000 for the year ended December 31, 2003, compared to $2,424,000 for the same period of 2002. The increase
was primarily the result of the increases of $243,000 and $449,000 in customer service fees and gains and commissions from sale of loans, respectively. Customer service fees increased as a result of the increased collection of analysis service
charges on homeowner association accounts, as well as increased service charges on deposit accounts due to growth from 2002 to 2003. The increase in gain from sale of loans was the result of more loans originated and sold through our conduit for
loan sales. For the year ended December 31, 2003 compared to 2002, noninterest income as a percentage of average earning assets increased to 1.47% from 1.35%.



Total noninterest income increased $431,000 or 21.6% to $2,424,000 for the year ended December 31, 2002, compared to $1,993,000 for the same period of 2001. The
increase was primarily the result of the increases of $134,000, $119,000 and $131,000 in gains and commissions from sale of loans, increase in the cash surrender value of life insurance and broker fee income, respectively. The increase in gains and
commissions from the sale of loans was due to an increase in volume of loans sold. The increase in cash surrender value of life insurance was due to the addition of one life insurance policy in 2002. The increase in broker fee income is a result of
serviced participation loans at 1stCentennials Escondido Branch (formerly Palomar Community Bank), and due to
the increased volume of loans participated to others in 2002. For the year ended December 31, 2002 compared to 2001, noninterest income as a percentage of average earning assets increased to 1.35% from 1.21%.



The following table sets forth the various components of the Companys noninterest
income for the periods indicated:



Noninterest Income





|                                                   |  |                                  |       |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  
|-------------------------------------------------- |  | -------------------------------- | ----- | --------------- | ------ | - | ------ | ---- | --------------- |  | ------ | ------ |  | --------------- | ----- |  | ------ | -
|                                                   |  | For the Years Ended December 31, |      
|                                                   |  | 2003                             |       |                 | 2002   |   |        | 2001 |                
|                                                   |  | Amount                           |       | Percentof Total |        |   | Amount |      | Percentof Total |  |        | Amount |  | Percentof Total |      
|                                                   |  | (Dollars in Thousands)           |      
|Customer service fees                              |  | $                                | 1,348 |                 | 44.61  | % |        | $    | 1,105           |  | 45.59  | %      |  | $               | 1,137 |  | 57.05  | %
|Gains and commissions from sale of loans           |  |                                  | 996   |                 | 32.96  | % |        |      | 547             |  | 22.57  | %      |  |                 | 413   |  | 20.72  | %
|Increase in cash surrender value of life insurance |  |                                  | 301   |                 | 9.96   | % |        |      | 209             |  | 8.62   | %      |  |                 | 90    |  | 4.52   | %
|Broker fee income                                  |  |                                  | 337   |                 | 11.15  | % |        |      | 316             |  | 13.04  | %      |  |                 | 185   |  | 9.28   | %
|Other income                                       |  |                                  | 40    |                 | 1.32   | % |        |      | 247             |  | 10.18  | %      |  |                 | 168   |  | 8.43   | %
|                                                   |  |                                  |       |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  
|Total noninterest income                           |  | $                                | 3,022 |                 | 100.00 | % |        | $    | 2,424           |  | 100.00 | %      |  | $               | 1,993 |  | 100.00 | %
|                                                   |  |                                  |       |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  
|As a percentage of average earning assets          |  |                                  |       |                 | 1.47   | % |        |      |                 |  | 1.35   | %      |  |                 |       |  | 1.21   | %
|                                                   |  |                                  |       |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  



Noninterest Expense



Noninterest expense for the Company includes salaries and employee benefits, net
occupancy and equipment, professional services, and other operating expenses.



Noninterest expense totaled $14,014,000 for the year ended December 31, 2003. This represented an increase of $2,458,000 when compared to $11,556,000 for the same period of 2002. The increase in noninterest expense was due to the $2,378,000
increase in salaries, wages and employee benefits and the $311,000 increase in marketing expense, offset by a reduction of $555,000 in professional expense. The increase in salaries, wages and employee benefits was a result of additional staffing,
salary increases, and the opening of a de novo branch in Palm Desert in March of 2003. The dollar increase in this category caused salaries, wages and employee benefits as a percentage of total noninterest



24



---

##### Table of Contents

expense to increase from 52.4% to 60.2% for the year ended December 31, 2002 and December 31, 2003, respectively. The
increase in marketing expense of $311,000 was due to the expense related to the continued success of our business development efforts in growing assets, loans and deposits. A portion of the increase in noninterest expense was offset by $555,000 or a
46.8% reduction in professional fees mainly as a result of decreased litigation expenses in 2003. For the year ended December 31, 2003 as compared to 2002, noninterest expense as an annualized percentage of average earning assets increased to 6.81%
from 6.44%.



Noninterest expense totaled $11,556,000 for the year ended
December 31, 2002. This represented an increase of $3,486,000 as compared to $8,070,000 for the same period of 2001. The increase in noninterest expense was due to a $1,689,000 increase in salaries, wages and employee benefits, the $294,000 increase
in occupancy expense, the $552,000 increase in professional expense and the $554,000 increase in other expense. The increase in salaries, wages and employee benefits was due to the addition of Palomar Community Bank (first as a separate subsidiary
and later as a division of 1stCentennial Bank) for an entire year, and for added staffing to support growth. The
increase in occupancy expense of $294,000 was due to the need for increased office space and equipment for 1stCentennials growth. The increase in professional expense of $552,000 was anticipated as 1stCentennial
expanded its service area and products, as well as enhancing its computer network systems and upgrading its data processing vendor. The increase also resulted in part from increased professional fees due to the merger of Palomar Community Bank into
1stCentennial Bank in 2002. The increase in other expenses of $554,000 was primarily a result of the addition of
Palomar Community Bank (first as a separate subsidiary and later as a division of 1stCentennial Bank) for an entire
year in 2002, as compared to only 41/2month in 2001. In addition, we added staff to expand our Real
Estate/Construction Loan Division and to support our asset growth. For the year ended December 31, 2003 compared to 2002, noninterest expense as an annualized percentage of average earning assets increased to 6.44% from 4.90%.



Efficiency Ratio - Note: defined on page 19, footnote 8.



The Companys efficiency ratio, which is the ratio of noninterest expense to the sum of
net interest income before the loan loss provision, and total noninterest income, excluding securities gains and losses, rose to 79.6% for the period ending December 31, 2003 from 79.5% for the period ending December 31, 2002. The 2.4 million
increase in the Companys salaries, wages and employee benefits during 2003 contributed to this small percentage increase.



The following table sets forth the breakdown of noninterest expense for the periods indicated:



Noninterest Expense



|                                          |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  
|----------------------------------------- |  | -------------------------------- | ------ | --------------- | ------ | - | ------ | ---- | --------------- |  | ------ | ------ |  | --------------- | ----- |  | ------ | -
|                                          |  | For the Years Ended December 31, |       
|                                          |  | 2003                             |        |                 | 2002   |   |        | 2001 |                
|                                          |  | Amount                           |        | Percentof Total |        |   | Amount |      | Percentof Total |  |        | Amount |  | Percentof Total |      
|                                          |  | (Dollars in Thousands)           |       
|Salaries, wages and employee benefits     |  | $                                | 8,432  |                 | 60.17  | % |        | $    | 6,054           |  | 52.39  | %      |  | $               | 4,365 |  | 54.09  | %
|Net occupancy expense                     |  |                                  | 1,510  |                 | 10.77  | % |        |      | 1,394           |  | 12.06  | %      |  |                 | 1,100 |  | 13.63  | %
|Marketing                                 |  |                                  | 548    |                 | 3.91   | % |        |      | 237             |  | 2.05   | %      |  |                 | 265   |  | 3.28   | %
|Data processing fees                      |  |                                  | 768    |                 | 5.48   | % |        |      | 760             |  | 6.58   | %      |  |                 | 462   |  | 5.72   | %
|Professional fees                         |  |                                  | 630    |                 | 4.50   | % |        |      | 1,185           |  | 10.25  | %      |  |                 | 633   |  | 7.84   | %
|Postage, telephone, supplies              |  |                                  | 612    |                 | 4.37   | % |        |      | 494             |  | 4.27   | %      |  |                 | 389   |  | 4.82   | %
|Directors fees                           |  |                                  | 177    |                 | 1.26   | % |        |      | 151             |  | 1.31   | %      |  |                 | 129   |  | 1.60   | %
|Other operating expense                   |  |                                  | 1,337  |                 | 9.54   | % |        |      | 1,281           |  | 11.09  | %      |  |                 | 727   |  | 9.02   | %
|                                          |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  
|Total other expenses                      |  | $                                | 14,014 |                 | 100.00 | % |        | $    | 11,556          |  | 100.00 | %      |  | $               | 8,070 |  | 100.00 | %
|                                          |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  
|As a percentage of average earning assets |  |                                  |        |                 | 6.81   | % |        |      |                 |  | 6.44   | %      |  |                 |       |  | 4.90   | %
|                                          |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  
|Efficiency ratio                          |  |                                  |        |                 | 79.61  | % |        |      |                 |  | 79.47  | %      |  |                 |       |  | 79.88  | %
|                                          |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |       |  |        |  



25



---

##### Table of Contents

Provision for Income Taxes



The provision for income taxes was $1,141,000 in 2003, compared to $802,000 in 2002 and $575,000 in 2001. For the year ended December 31,
2003, the effective tax rate was 35.3%, compared to an effective tax rate of 32.0% in 2002 and 35.5% in 2001. These rates are below the standard combined Federal and state statutory rates as a result of the following book to tax adjustments to
income for each period: investment income on municipal bonds (federal tax exempt) and income on life insurance policies (tax exempt). These book to tax adjustments and income variances from tax exempt assets cause fluctuations in the effective tax
rates. The decrease in the effective rate from 2001 to 2002 resulted from a higher volume of tax exempt income from life insurance policies.



Financial Condition



Summary



1stCentennials total assets were $254.4 million at December 31, 2003,
compared to $207.9 million and $198.0 million at December 31, 2002 and 2001, respectively. This represented increases of 22.4% and 5.0% in 2003 and 2002, respectively. The increases in total assets in 2003 and 2002 was due to internally generated
growth, most significantly in the loan portfolio. Total loans were $191.3 million at December 31, 2003, compared to $143.5 million and $127.6 million at December 31, 2002 and 2001, respectively, representing increases of 33.3% and 12.5% in 2003 and
2002, respectively. Total deposits were $212.8 million at December 31, 2003, compared to $183.2 million and $174.3 million at December 31, 2002 and 2001, respectively, representing increases of 16.2% and 5.1% in 2003 and 2002, respectively.



Noninterest bearing demand deposits increased $12.7 million, or 23.6% to $66.6
million at December 31, 2003 as compared to December 31, 2002. The demand deposit year-to-date average balance of $60.5 million was 43.7% of total average deposits during 2003. Its year-to-date average was $13.7 million higher at December 31,
2003 as compared to December 31, 2002. Compared to December 31, 2002, interest bearing demand and money market accounts were $11.1 million dollars more on December 31, 2003. The 2003 increase in these deposit categorys average balances is one
contributing factor to the Banks 2003 favorable 7.08% net interest margin.



In 2002 the Company had reductions in certain high-cost time deposits at Palomar Community Bank. These reductions were expected due to the fact that Palomar Community Bank was previously a savings and loan association until 1999, and
therefore paid generally higher rates on time deposits than commercial banks. Many of these time deposits matured in 2001 following our acquisition of Palomar Community Bank in August 2001. The runoff continued to some extent into 2002 with the
continued maturation of the remainder of these high-cost time deposits. However, we have since successfully replaced those time deposits with Home Owners Association deposits which generally are carried as low cost transaction accounts.



Total stockholders equity was $24.4 million at December 31, 2003, representing an
increase of 41.9%, or $7.2 million over December 31, 2002 stockholders equity of $17.2 million. Stockholders equity at December 31, 2002 increased by 12.6%, or $1.9 million over December 31, 2001 amounts. The increase of $7.2 million or
41.9% as of December 31, 2003 was primarily due to $4,871,000 in net proceeds from the sale of 225,000 shares of common stock in a public offering concluded, in the second quarter of 2003, and $2,088,000 in year-to-date net income. The increase from
2001 to 2002 was primarily due to earnings from 1stCentennial.



Loan Portfolio



Total gross loans were $191.3 million at December 31, 2003, compared to $143.5 million and $127.6 million at December 31, 2002 and 2001,
respectively. Total gross loans represented 75.2% of total assets at December 31, 2003, compared to 69.0% and 64.4% of total assets at December 31, 2002 and 2001, respectively. The loan development and acquisition efforts of the Banks loan
officers/branch managers and commercial lending group caused the loan growth and the change in commercial and multi-family loans to increase to 33.6% of the total loan portfolio at December 31, 2003 from 23.9% at December 31, 2002. The growth in the
real estate commercial and multi-family and construction loan categories reduced the commercial loan percentage of total gross loans to 21.9% at December 31, 2003 from 26.7% at December 31, 2002. This percentage reduction occurred inspite of the
$3.7 million or 9.7% increase in commercial loans to $42.0 million on December 31, 2003 compared to $38.3 million on December 31, 2002. Total loans increased by $47.8 million or 33.3% in 2003 and by $15.9 million or 12.5% in 2002. The other factors
that increased total gross loans in 2003 and 2002 was the continued strong loan demand in our market areas, and Bank lending officers efforts.



26



---

##### Table of Contents

The following table sets forth the composition of the Companys loan portfolio as of the dates indicated:



Loan Portfolio Composition



|                             |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |        |  |   |                 |   |  |        |   |  |                 |        |   |        |        |   |                 |   |        |   |  |        |  
|---------------------------- |  | ---------------------- | ------- | - | --------------- | ------ | - | ------ | - | ------- | --------------- |  | ------ | ------ |  | - | --------------- | - |  | ------ | - |  | --------------- | ------ | - | ------ | ------ | - | --------------- | - | ------ | - |  | ------ | -
|                             |  | As of December 31,     |        
|                             |  | 2003                   |         |   | 2002            |        |   | 2001   |   |         | 2000            |  |        | 1999   | 
|                             |  | Amount                 |         |   | Percentof Total |        |   | Amount |   |         | Percentof Total |  |        | Amount |  |   | Percentof Total |   |  | Amount |   |  | Percentof Total |        |   | Amount |        |   | Percentof Total |  
|                             |  | (Dollars in Thousands) |        
|Real estate loans:           |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |        |  |   |                 |   |  |        |   |  |                 |        |   |        |        |   |                 |   |        |   |  |        |  
|Construction and development |  | $                      | 70,654  |   |                 | 36.94  | % |        | $ | 53,246  |                 |  | 37.12  | %      |  | $ | 37,950          |   |  | 29.76  | % |  | $               | 14,358 |   |        | 23.92  | % |                 | $ | 15,248 |   |  | 28.66  | %
|Residential loans            |  |                        | 6,169   |   |                 | 3.23   | % |        |   | 9,975   |                 |  | 6.95   | %      |  |   | 17,909          |   |  | 14.04  | % |  |                 | 4,490  |   |        | 7.48   | % |                 |   | 1,648  |   |  | 3.10   | %
|Commercial and multi-family  |  |                        | 64,260  |   |                 | 33.60  | % |        |   | 34,297  |                 |  | 23.91  | %      |  |   | 31,218          |   |  | 24.47  | % |  |                 | 11,782 |   |        | 19.63  | % |                 |   | 10,885 |   |  | 20.47  | %
|Commercial loans             |  |                        | 42,009  |   |                 | 21.94  | % |        |   | 38,305  |                 |  | 26.70  | %      |  |   | 30,581          |   |  | 23.97  | % |  |                 | 21,583 |   |        | 35.96  | % |                 |   | 18,686 |   |  | 35.13  | %
|Consumer loans               |  |                        | 598     |   |                 | 0.31   | % |        |   | 1,583   |                 |  | 1.11   | %      |  |   | 2,982           |   |  | 2.34   | % |  |                 | 4,099  |   |        | 6.83   | % |                 |   | 4,313  |   |  | 8.11   | %
|Equity lines of credit       |  |                        | 4,088   |   |                 | 2.14   | % |        |   | 4,697   |                 |  | 3.27   | %      |  |   | 4,759           |   |  | 3.73   | % |  |                 | 1,887  |   |        | 3.14   | % |                 |   | 876    |   |  | 1.65   | %
|Credit card and other loans  |  |                        | 3,500   |   |                 | 1.84   | % |        |   | 1,351   |                 |  | 0.94   | %      |  |   | 2,161           |   |  | 1.69   | % |  |                 | 1,827  |   |        | 3.04   | % |                 |   | 1,531  |   |  | 2.88   | %
|                             |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |        |  |   |                 |   |  |        |   |  |                 |        |   |        |        |   |                 |   |        |   |  |        |  
|Total gross loans            |  | $                      | 191,278 |   |                 | 100.00 | % |        | $ | 143,454 |                 |  | 100.00 | %      |  |   | 127,560         |   |  | 100.00 | % |  |                 | 60,026 |   |        | 100.00 | % |                 |   | 53,187 |   |  | 100.00 | %
|                             |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |        |  |   |                 |   |  |        |   |  |                 |        |   |        |        |   |                 |   |        |   |  |        |  
|Less:                        |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |        |  |   |                 |   |  |        |   |  |                 |        |   |        |        |   |                 |   |        |   |  |        |  
|Unearned income              |  |                        | (948    | ) |                 |        |   |        |   | (570    | )               |  |        |        |  |   | (405            | ) |  |        |   |  |                 | (384   | ) |        |        |   |                 |   | (224   | ) |  |        |  
|Allowance for loan losses    |  |                        | (2,108  | ) |                 |        |   |        |   | (1,772  | )               |  |        |        |  |   | (1,460          | ) |  |        |   |  |                 | (868   | ) |        |        |   |                 |   | (581   | ) |  |        |  
|                             |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |        |  |   |                 |   |  |        |   |  |                 |        |   |        |        |   |                 |   |        |   |  |        |  
|Total net loans              |  | $                      | 188,222 |   |                 |        |   |        | $ | 141,112 |                 |  |        |        |  | $ | 125,695         |   |  |        |   |  | $               | 58,774 |   |        |        |   |                 | $ | 52,382 |   |  |        |  
|                             |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |        |  |   |                 |   |  |        |   |  |                 |        |   |        |        |   |                 |   |        |   |  |        |  



Real Estate  Construction and
Development



1stCentennial makes loans to finance the construction of residential and commercial properties and to finance land acquisition and development. Construction and
development loans are obtained principally through solicitations by 1stCentennial and through continued business
from builders and developers who have previously borrowed from 1stCentennial. When the total amount of a loan would
otherwise exceed 1stCentennials legal lending limit, 1stCentennial sells participation interests to other financial institutions to facilitate the extension of credit.



1stCentennials owner-occupied single-family construction loans typically have a maturity of twelve months. Construction-to-permanent loans are secured by a deed of trust and usually do not exceed
90% of the appraised value of the home to be built with a minimum of 10% equity. Construction only loans normally do not exceed 80% of the appraised value of the home to be built with a minimum of 10% equity. All owner-occupied single-family
construction borrowers have been pre-qualified for long-term loans using Fannie Mae underwriting guidelines. All underwriting on tracts and commercial construction where a portion or all of the property will be leased to a third party is done in
conformity with a discounted cash flow analysis.



In connection with land
acquisition loans to developers, we require the subject property to have a tentative map and be free of adverse environmental issues. Further, these loans are only made to experienced and financially sound developers in areas where demand and
acceptable absorption can be adequately demonstrated to us. The land loans have a floating rate, which is tied to the prime rate. The loan to value on raw land does not exceed 50% of the appraised value and 65% of the appraised value when offsite
improvements are financed. The loans are secured by a first deed of trust and require the principal to personally guarantee repayment of the loan. Loan commitment and origination fees of 1.5% to 2% are usually charged.



Construction loans for the purpose of acquiring unimproved land and developing such land into
improved residential lots typically have a maturity of 12 to 18 months and are tied to a floating rate with the prime rate as the index. These loans do not exceed 65% of the appraised value and are secured by a first deed of trust. The principal or
principals are required to personally guarantee repayment of the loan. To further reduce risk inherent in construction lending, 1stCentennial limits the number of properties which can be constructed on a speculative or unsold basis contingent upon absorption rates detailed by an approved appraiser and subject to final review and, if the loan amount
is in excess of approved lending authority, approval by 1stCentennials Loan Committee.



27



---

##### Table of Contents

1stCentennials underwriting criteria is designed to evaluate and minimize the risk of each construction loan. A wide variety of factors are carefully considered before originating a construction loan, including the availability
of permanent financing to the borrower (which may be provided by 1stCentennial at prevailing market rates); the
reputation of the borrower and the contractor; independent valuations and reviews of cost estimates; pre-construction sale information, and cash flow projections of the borrower. At the time of 1stCentennials origination of a construction loan to a builder, the builder often has a signed contract with a purchaser for the sale of the
to-be-constructed house, thereby providing reasonable assurance of a repayment source and mitigation of 1stCentennials underwriting risks. To further reduce risk inherent in construction lending, 1stCentennial limits the number of properties, which can be constructed on a speculative or unsold basis contingent upon absorption rates detailed by an approved appraiser and subject to final review and approval by 1stCentennials Real Estate Department Manager. Moreover, 1stCentennial controls certain risks associated with construction lending via a fund disbursement/voucher-control system requiring builders to submit itemized
bills to 1stCentennial (along with appropriate lien releases), and by paying the subcontractors directly. For a
contractor meeting specific criteria, loan funds may be disbursed under a draw system, directly to the contractor.



Commercial construction loans are underwritten using the actual or estimated cash flow the secured real property would provide to an investor (Income
Approach) in the event of a default by the borrower. A debt coverage ratio of 1.25:1 and a maximum loan-to-value of 75% are required in most cases.



Residential Loans



As an accommodation, we occasionally offer 1sttrust deed mortgages for
single-family residences on either a fixed or variable rate basis; however, the majority of new mortgage loan originations are sold to a third party.



The Bank places mortgage loans through its loan agents to traditional mortgage lenders. Prior to placement, we perform a full underwriting process which includes
customary disclosures to the borrower, such as broker notification and good faith estimate; obtaining credit reports, opening title and escrow; ordering the appraisal; verifying employment and account information, etc. These loans are underwritten
to Fannie Mae and Freddie Mac guidelines. On occasion, as an accommodation, we will make loans secured by a first trust deed on a primary or secondary residence, with maturities of 5 to 10 years. In those instances, the required disclosures are
made, a credit report obtained, financial information analyzed, appraisal obtained, flood hazard certificate obtained, and appropriate fire and casualty insurance coverage placed. Loan to value ratios on these loans typically do not exceed 80% and
the borrower must demonstrate historic cash flow to service the payments.



Real Estate  Commercial and Multi-Family



In order to
accommodate existing customers and to solicit new commercial loan and deposit relationships, 1stCentennial
originates permanent loans secured by owner-occupied commercial real estate (investor-owned real estate is only considered on an exception basis as an accommodation to substantial existing customers). 1stCentennials commercial real estate portfolio primarily includes loans secured by small office buildings and commercial/industrial real properties.
Commercial real estate loans may be secured by a combination of both commercial and single-family properties. At December 31, 2003, commercial real estate loans secured by multi-family (5 or more) residential properties were not a significant
portion of 1stCentennials commercial real estate loan portfolio. These loans totaled approximately $1.6
million or 2.5% of the commercial real estate loan portfolio category and .8% of total gross loans.



In addition to the strength and experience of the borrower, location is one of the most important factors in commercial real estate lending. Typically, we will lend up to 75% of an independently appraised value (or
evaluation of value for loans under $250,000) and require that the borrower have historical cash flow sufficient to demonstrate a 1.25 times debt coverage ratio. It is also important that the subject property be free from environmental contamination
issues. We require the borrower to complete an environmental assessment to ensure that the property is free of contamination.



In connection with our commercial real estate loans, we check a variety of credit sources to ensure that the borrower has a satisfactory credit history, and require at
least three years of annual financial statement information and a current interim financial statements for analysis to determine if the borrower has the financial strength to sustain unforeseen adverse events and sufficient capacity to service its
obligations in a timely manner. We secure these loans with either a first or second deed of trust on the subject property and requires sufficient insurance with 1stCentennial named as loss payee. For investor properties, we require that borrowers provide to us annual rent rolls to enable us to analyze the income generated from the property as well as annual
financial information for the borrower to monitor the financial health on a going forward basis.



28



---

##### Table of Contents

Commercial Loans



1stCentennials commercial
loans consist of (i) loans secured by commercial real estate and (ii) business loans, which are not secured by real estate, or if secured by real estate, the principal source of repayment is expected to be from business income, operating cash flows,
etc. For a discussion of 1stCentennials loans secured by commercial real estate lending see  Real
Estate  Commercial. Business loans include revolving lines of credit, working capital loans, equipment financing, letters of credit and inventory financing. Loans to businesses are underwritten using the three Cs of
creditcharacter, capacity, and credit. It is important to know your borrower. In that regard we check a variety of credit sources to verify that the borrower has a history of satisfactorily discharging its obligations according to terms; we
require at least three years of annual financial statements and a current interim statement for analysis. It is important to demonstrate that historical cash flows are sufficient to service not only the subject loan, but also all other obligations
of the borrower. We typically require a debt coverage ratio of 1.25 for term loans. On loans where accounts receivable and/or inventory are financed, periodic accounts receivable and accounts payable agings are required in order to monitor the
integrity of the loan vis-à-vis the collateral. Under certain limited circumstances unsecured loans may be made, but even when we make unsecured loans we protect ourselves by ensuring that appropriate insurance is in place naming us as loss
payee, and we require periodic financial information be provided to us in order to monitor the loan during the term of the arrangement. Term loans may be made to support asset growth. Independent sources are used to establish collateral values.
Typically, advances represent up to 80% of the asset financed.



Typically,
business loans are floating rate obligations and are made for terms of 5 years or less, depending on the purpose of the loan and the collateral. No single business customer accounted for more than 3% of total loans at December 31, 2003.



Consumer and Other Loans



The consumer loans originated by 1stCentennial include automobile loans and miscellaneous other consumer loans, including unsecured loans, home lines of credit and credit card accounts. At
December 31, 2003, consumer loans totaled $8.2 million, or 4.3% of the Companys loan portfolio.



We underwrite these loans based on a satisfactory credit history, verifiable, stable income, with maximum debt ratios of 50%, and satisfactory financial information. When personal property collateral is taken, we take
a first position security interest in the collateral, obtain an independent evaluation of value of the collateral, and ensure that appropriate insurance is in place with us named as beneficiary. If real estate is taken as collateral, then we are
typically in either a first or second trust deed position, appropriately margined, requiring the borrower to have reasonable equity in the asset being financed. We are also named as loss payee on the insurance, and an appraisal or evaluation of
value is made to establish an independent value of the real property being financed. If required, an environmental questionnaire is completed by the borrower and/or an environmental report is obtained from an authorized environmental firm to ensure
that the subject property if free of hazardous or other environmental concerns. Loans are monitored through various reports generated by the loan system.



29



---

##### Table of Contents

Loan Maturities and Sensitivity to Changes in Interest Rates. The following table shows the maturity distribution
and repricing intervals of 1stCentennials outstanding loans as of December 31, 2003. In addition, the table
shows the distribution of such loans between those with variable or floating interest rates and those with fixed or predetermined interest rates. The table includes nonaccrual loans of $621,000. Loan amounts are shown before deferred loan fees and
before the allowance for loan losses.



Loan Maturities and
Repricing Schedule



|                                                |  |                         |        |                               |   |                 |  |       |        |  |   |         |   
|----------------------------------------------- |  | ----------------------- | ------ | ----------------------------- | - | --------------- |  | ----- | ------ |  | - | ------- | --
|                                                |  | As of December 31, 2003 |       
|                                                |  | Within OneYear          |        | After OneBut WithinFive Years |   | After FiveYears |  | Total |       
|                                                |  | (Dollars in Thousands)  |       
|Real estate loans:                              |  |                         |        |                               |   |                 |  |       |        |  |   |         |   
|Construction and development                    |  | $                       | 63,052 |                               | $ | 7,526           |  | $     | 76     |  | $ | 70,654  |   
|Residential loans                               |  |                         | 551    |                               |   | 199             |  |       | 5,419  |  |   | 6,169   |   
|Commercial and multi-family                     |  |                         | 2,984  |                               |   | 12,350          |  |       | 48,926 |  |   | 64,260  |   
|Commercial loans                                |  |                         | 22,725 |                               |   | 13,898          |  |       | 5,386  |  |   | 42,009  |   
|Consumer loans                                  |  |                         | 81     |                               |   | 504             |  |       | 13     |  |   | 598     |   
|Equity lines of credit                          |  |                         | 4      |                               |   | 55              |  |       | 4,029  |  |   | 4,088   |   
|Credit card and other loans                     |  |                         | 1,158  |                               |   | 1,694           |  |       | 648    |  |   | 3,500   |   
|                                                |  |                         |        |                               |   |                 |  |       |        |  |   |         |   
|Total loans                                     |  | $                       | 90,555 |                               | $ | 36,226          |  | $     | 64,497 |  | $ | 191,278 |   
|                                                |  |                         |        |                               |   |                 |  |       |        |  |   |         |   
|Loans with variable (floating ) interest rates  |  | $                       | 25,424 |                               | $ | 3,387           |  | $     |       |  | $ | 28,811  |   
|                                                |  |                         |        |                               |   |                 |  |       |        |  |   |         |   
|Loans with predetermined (fixed) interest rates |  | $                       | 86,520 |                               | $ | 30,551          |  | $     | 45,396 |  | $ | 162,467 | 18
|                                                |  |                         |        |                               |   |                 |  |       |        |  |   |         |   



Approximately 85.0% or $162.5 million
of 1stCentennials loan portfolio at December 31, 2003 was classified as being at fixed rates, compared to
76.0% or $109.1 million, at December 31, 2002. Loans with variable rates at December 31, 2003 were $28.8 million compared to $34.4 million at December 31, 2002. However, 72.4% or $138.5 million of 1stCentennials loan portfolio is written as variable rate loans. Of this $138.5 million in variable rate loans, $109.7 million, or approximately 79.2%, are
written with established floors, which have been reached due to the continuing low interest rate environment. These loans are, therefore, temporarily classified as fixed rate loans until the variable rate index rises above the floors. Approximately
$52.8 million of the loans in the Companys portfolio are truly fixed rate loans.



Off-Balance Sheet Arrangements



During
the ordinary course of business, 1stCentennial will provide various forms of credit lines to meet the financing
needs of its customers. These commitments to provide credit represent an obligation of 1stCentennial to its
customers, which is not represented in any form within the consolidated balance sheets of 1stCentennial. These
commitments represent a credit risk to 1stCentennial. Total unused commitments to extend credit were $108.5 million
at December 31, 2003 and $69.0 million at December 31, 2002, representing 56.7% of and 48.1% of outstanding gross loans at December 31, 2003 and 2002, respectively. The Companys standby letters of credit were $2.9 million and $130,000 at
December 31, 2003 and 2002, respectively.



The effects on 1stCentennials revenues, expenses, cash flows and liquidity from the unused portions of the commitments to provide credit
cannot be reasonably predicted, because there is no guarantee that the lines of credit will ever be used.



For more information regarding 1stCentennials off-balance sheet arrangements,
see Note 13 on page F-28 of the financial statements contained herein.



---

|18 | Includes $109.7 million in variable rate loans with established floors, which have been reached, and in essence, become fixed rate loans until the variable rate
index rises above the floors.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



---

##### Table of Contents

Nonperforming Assets



1stCentennials policy is to
recognize interest income on an accrual basis unless the full collectibility of principal and interest is uncertain. Loans that are delinquent 90 days or more, unless well secured and in the process of collection, are placed on nonaccrual status on
a cash basis, and previously accrued but uncollected interest is reversed against income. Thereafter, income is recognized only as it is collected in cash. Collectibility is determined by considering the borrowers financial condition, cash
flow, quality of management, the existence of collateral or guarantees and the state of the local economy.



Nonperforming assets include loans for which interest is no longer accruing, loans 90 or more days past due and still accruing, restructured loans and other real estate owned. Nonperforming assets at December 31, 2003
were $621,000 compared to $581,000 at December 31, 2002, representing 0.33% and 0.41% of gross loans, respectively. Non performing assets as of December 31, 2003 included one construction loan totaling $69,000, two commercial and multi-family loans
totaling $353,000, five commercial loans totaling $175,000, two consumer loans totaling $8,000 and one credit card and other loan totaling $16,000. The Company had no other real estate owned at December 31, 2003. There were no loans 90 days or more
past due and still accruing at December 31, 2003. In 2002, one residential loan represented more than 50% of the $394,000 of total nonaccrual loans. Loans 90 days or more past due and still accruing increased from zero to $187,000 from 2001 to 2002,
consisting of one commercial loan for $137,000 and one residential loan secured under a line of credit for $50,000.



During the fourth quarter of 2003, the Bank foreclosed on a real estate loan and owned real property as Other Real Estate Owned. This property was subsequently sold and
the Bank provided a loan to facilitate this transaction before the end of 2003.



31



---

##### Table of Contents

The following table provides information with respect to the components of the Companys nonperforming assets as of
the dates indicated:



Nonperforming Assets



|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                                |  | As of December 31,     |       
|                                                                                |  | 2003                   |        |   | 2002 |   |        | 2001 |  |   | 2000   |   |  | 1999 |       
|                                                                                |  | (Dollars in Thousands) |       
|Nonaccrual loans:19                                                             |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Real estate loans:                                                              |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Construction and development                                                    |  | $                      | 69     |   |      | $ |       |      |  | $ |       |   |  | $    |       |   |  | $ |       |  
|Residential loans                                                               |  |                        |       |   |      |   | 221    |      |  |   | 200    |   |  |      |       |   |  |   |       |  
|Commercial and multi-family                                                     |  |                        | 353    |   |      |   | 173    |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial loans                                                                |  |                        | 175    |   |      |   |       |      |  |   | 28     |   |  |      | 30     |   |  |   | 18     |  
|Consumer loans                                                                  |  |                        | 8      |   |      |   |       |      |  |   | 13     |   |  |      |       |   |  |   |       |  
|Equity lines of credit                                                          |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Credit card and other loans                                                     |  |                        | 16     |   |      |   |       |      |  |   |       |   |  |      | 7      |   |  |   | 43     |  
|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonaccrual loans                                                          |  |                        | 621    |   |      |   | 394    |      |  |   | 241    |   |  |      | 37     |   |  |   | 61     |  
|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans 90 days or more past due (as to principal orinterest) and still accruing: |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Real estate loans:                                                              |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Construction and development                                                    |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Residential loans                                                               |  |                        |       |   |      |   | 50     |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial and multi-family                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial loans                                                                |  |                        |       |   |      |   | 137    |      |  |   |       |   |  |      | 75     |   |  |   |       |  
|Consumer loans                                                                  |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Equity lines of credit                                                          |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Credit card and other loans                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total loans 90 days or more past due And still accruing                         |  |                        |       |   |      |   | 187    |      |  |   |       |   |  |      | 75     |   |  |   |       |  
|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Restructured loans20                                                            |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming loans                                                       |  |                        | 621    |   |      |   | 581    |      |  |   | 241    |   |  |      | 112    |   |  |   | 61     |  
|Other real estate owned                                                         |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                                      |  | $                      | 621    |   |      | $ | 581    |      |  | $ | 241    |   |  | $    | 112    |   |  | $ | 61     |  
|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Nonperforming loans as a percentage of total gross loans21                      |  |                        | 0.33   | % |      |   | 0.41   | %    |  |   | 0.19   | % |  |      | 0.19   | % |  |   | 0.11   | %
|Nonperforming assets as a percentage of total loans and other real estate owned |  |                        | 0.33   | % |      |   | 0.41   | %    |  |   | 0.19   | % |  |      | 0.19   | % |  |   | 0.11   | %
|Allowance for loan losses to nonperforming loans                                |  |                        | 339.45 | % |      |   | 304.99 | %    |  |   | 605.80 | % |  |      | 775.00 | % |  |   | 952.46 | %
|Allowance for loan losses                                                       |  | $                      | 2,108  |   |      | $ | 1,772  |      |  | $ | 1,460  |   |  | $    | 868    |   |  | $ | 581    |  
|                                                                                |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  

---

|19 | During the year ended December 31, 2003, no income related to these loans was included in net income. Additional interest income of approximately $24,000, would have
been recorded for the year ended December 31, 2003 if these loans had been paid in accordance with their original terms and had been outstanding throughout the applicable period then ended or, if not outstanding throughout the applicable period then
ended, since origination.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20 | A restructured loan is one the terms of which were negotiated to provide a reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21 | Total loans are gross of the allowance for loan losses and net of deferred fees.
|-- | --------------------------------------------------------------------------------



32



---

##### Table of Contents

Allowance For Loan Losses



In originating loans, the Company recognizes that credit losses will be experienced and that the risk of loss will vary with the type of
loan being made and the creditworthiness of the borrower over the term of the loan. It is managements policy to maintain an adequate allowance for loan losses based on managements loan loss experience, evaluation of economic conditions,
and regular reviews of delinquencies and loan portfolio quality.



The Company
establishes an Allowance for Loan Losses through charges to earnings based on managements evaluation of known and inherent risk in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses and decreased by
charge-offs, less recoveries. The adequacy of the allowance for loan losses is measured in the context of several key ratios and factors including: (1) the ratio of the allowance to total outstanding loans; (2) the ratio of total nonperforming loans
to total loans; and, (3) the ratio of net charge-offs (recoveries) to average loans outstanding. Additional factors considered in establishing an appropriate allowance include a careful assessment of the financial condition of the borrower; a
realistic determination of the value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; comprehensive analysis of the levels and trends of loan categories; and a
review of delinquent and classified loans.



Calculating the allowance for loan
losses is divided into two primary allocation groups: (1) allocations are assigned to adversely graded loans, (2) all other passing grade loans. For adversely graded loans, the Company has determined an allowance amount to set aside which it
believes is sufficient to cover any potential collateral shortfall. Problem loans are identified by the Loan Officer, Chief Credit Officer, Loan Review or by the Examiners. Those loans identified as problem loans are assigned a risk grade. Loans
graded special mention are multiplied by an inherent loss factor of 4% to determine the amount to be included in the allowance. Loans graded substandard are generally multiplied by a loss factor of 10 to 20%, loans graded doubtful are generally
multiplied by a loss factor of 50% and loans graded loss are multiplied by a loss factor of 100%. All other loans, graded pass are multiplied by an historical experience factor to determine the appropriate level of the allowance for loan losses. In
addition to historical experience factors, the Company also provides for losses due to economic factors, concentration of credit and portfolio composition changes.



The Company continues to actively monitor asset quality and to charge-off loans against the allowance for loan losses when appropriate or to
provide specific loss allowances when necessary. Although we believe we use the best information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if economic conditions differ from
the economic conditions in the assumptions used in making the initial determinations.



The allowance for loan losses as a percentage of total loans outstanding as of December 31, 2003 was 1.11%, as compared to 1.24% for 2002 and 1.15% in 2001. The allowance for loan losses as a percentage of total non-performing assets was
339.45%, 304.99% and 605.80% at December 31, 2003, 2002 and 2001, respectively. The percentage of the allowance for loan losses to total non-performing assets is managed by strict compliance with enhanced loan policies of the Company in identifying
potential non-performing assets. One of the procedures used for monitoring the loan portfolio is migration analysis. Based on the results of this program, in addition to managements determination, the amount of the allowance is increased or
decreased. Net loan charge-offs during 2003 approximated $24,000 or only 0.01% of average total loans, compared to $165,000 or 0.12% during 2002 and $293,000 or 0.25% in 2001. During the first quarter of 2003 there was one commercial loan for
$137,000 that was charged to the allowance for loan losses. This loan represented 63.1% of the $217,000 in total commercial loans charged-off in 2003. Later in 2003 the Bank started to recover the previously charged-off loan balance. The amount
recovered through December 31, 2003 on this loan was $103,000 or 73.6% of the $140,000 in total commercial loans recovered in 2003. The loan loss provision decline was caused by the small net charge-offs during 2003, and the ratio of the allowance
for loan losses to average total loans was determined by management to be adequate. Also, the loan portfolios growth was in real estate secured loans. If there is a foreclosure on real estate related loans, then the Bank owns the property and the
loan allowance is not likely to be impacted as long as the loan to value meet the Banks loan policy.



33



---

##### Table of Contents

The following table summarizes the activity in the Companys allowance for loan losses for the periods indicated:



Allowance for Loan Losses



|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                   |  | Years Ended December 31, |        
|                                                                   |  | 2003                     |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |       
|                                                                   |  | (Dollars in Thousands)   |        
|Balances:                                                          |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Average total loans outstanding during period                      |  | $                        | 161,207 |   |      | $ | 134,169 |      |  | $ | 118,428 |   |  | $    | 55,822 |   |  | $ | 46,978 |  
|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total loans outstanding at end of period, net of unearned income   |  | $                        | 190,330 |   |      | $ | 142,884 |      |  | $ | 127,155 |   |  | $    | 59,642 |   |  | $ | 52,963 |  
|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Allowance for Loan Losses:                                         |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Balance at beginning of period                                     |  | $                        | 1,772   |   |      | $ | 1,460   |      |  | $ | 868     |   |  | $    | 581    |   |  | $ | 433    |  
|Acquisition of allowance for loan losses, Palomar Community Bank   |  |                          |        |   |      |   |        |      |  |   | 603     |   |  |      |       |   |  |   |       |  
|Charge-offs:                                                       |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Real estate loans:                                                 |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Construction and development                                       |  |                          |        |   |      |   |        |      |  |   | 64      |   |  |      | 7      |   |  |   |       |  
|Residential loans                                                  |  |                          |        |   |      |   | 49      |      |  |   |        |   |  |      |       |   |  |   |       |  
|Commercial and multi-family                                        |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Commercial loans                                                   |  |                          | 217     |   |      |   | 71      |      |  |   | 163     |   |  |      | 345    |   |  |   | 13     |  
|Consumer loans                                                     |  |                          | 2       |   |      |   | 65      |      |  |   |        |   |  |      |       |   |  |   |       |  
|Equity lines of credit                                             |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Credit card and other loans                                        |  |                          | 2       |   |      |   | 9       |      |  |   | 79      |   |  |      | 11     |   |  |   | 83     |  
|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total charge-offs                                                  |  |                          | 221     |   |      |   | 194     |      |  |   | 306     |   |  |      | 363    |   |  |   | 96     |  
|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Recoveries:                                                        |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Real estate loans:                                                 |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Construction and development                                       |  |                          |        |   |      |   | 3       |      |  |   | 2       |   |  |      |       |   |  |   |       |  
|Residential loans                                                  |  |                          | 23      |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Commercial and multi-family                                        |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Commercial loans                                                   |  |                          | 140     |   |      |   | 15      |      |  |   | 5       |   |  |      | 8      |   |  |   | 14     |  
|Consumer loans                                                     |  |                          | 34      |   |      |   | 11      |      |  |   |        |   |  |      |       |   |  |   |       |  
|Equity lines of credit                                             |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |       |  
|Credit card and other loans                                        |  |                          |        |   |      |   |        |      |  |   | 6       |   |  |      | 12     |   |  |   | 5      |  
|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total recoveries                                                   |  |                          | 197     |   |      |   | 29      |      |  |   | 13      |   |  |      | 20     |   |  |   | 19     |  
|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net charge-offs                                                    |  |                          | (24     | ) |      |   | (165    | )    |  |   | (293    | ) |  |      | (343   | ) |  |   | (77    | )
|Provision charged to operations                                    |  |                          | 360     |   |      |   | 477     |      |  |   | 411     |   |  |      | 630    |   |  |   | 225    |  
|Reclassification for off-balance sheet commitments                 |  |                          |        |   |      |   |        |      |  |   | (129    | ) |  |      |       |   |  |   |       |  
|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Allowance for loan losses balance, end of period                   |  | $                        | 2,108   |   |      | $ | 1,772   |      |  | $ | 1,460   |   |  | $    | 868    |   |  | $ | 581    |  
|                                                                   |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Ratios:                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net loan charge-offs to average total loans                        |  |                          | 0.01    | % |      |   | 0.12    | %    |  |   | 0.25    | % |  |      | 0.61   | % |  |   | 0.16   | %
|Allowance for loan losses to average total loans                   |  |                          | 1.31    | % |      |   | 1.32    | %    |  |   | 1.23    | % |  |      | 1.55   | % |  |   | 1.24   | %
|Allowance for loan losses to total loans at end of period          |  |                          | 1.11    | % |      |   | 1.24    | %    |  |   | 1.15    | % |  |      | 1.46   | % |  |   | 1.10   | %
|Allowance for loan losses to total nonperforming loans             |  |                          | 339.45  | % |      |   | 304.99  | %    |  |   | 605.80  | % |  |      | 775.00 | % |  |   | 952.46 | %
|Net loan charge-offs to allowance for loan losses at end of period |  |                          | 1.14    | % |      |   | 9.31    | %    |  |   | 20.07   | % |  |      | 39.52  | % |  |   | 13.25  | %
|Net loan charge-offs to provision for loan losses                  |  |                          | 6.67    | % |      |   | 34.59   | %    |  |   | 71.29   | % |  |      | 54.44  | % |  |   | 34.22  | %



34



---

##### Table of Contents

Allocation of Allowance for Loan Losses



The following table provides a breakdown of the allowance for loan losses by category as of the dates indicated. The allocation presented
should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amounts available
for charge-offs that may occur within these categories. The unallocated portion of the allowance for loan losses and the total allowance is applicable to the entire loan portfolio.



Allocation of Allowance for Loan Losses



|                                     |  |                        |         |                                   |        |   |        |      |                                   |  |        |        |  |                                   |         |  |        |   |                                   |   |        |        |        |                                   |  |   |        |  |        |  
|------------------------------------ |  | ---------------------- | ------- | --------------------------------- | ------ | - | ------ | ---- | --------------------------------- |  | ------ | ------ |  | --------------------------------- | ------- |  | ------ | - | --------------------------------- | - | ------ | ------ | ------ | --------------------------------- |  | - | ------ |  | ------ | -
|                                     |  | As of December 31,     |        
|                                     |  | 2003                   |         |                                   | 2002   |   |        | 2001 |                                   |  | 2000   |        |  | 1999                              |        
|Balance at Endof PeriodApplicable to |  | Amount                 |         | % ofLoans inCategoryto TotalLoans |        |   | Amount |      | % ofLoans inCategoryto TotalLoans |  |        | Amount |  | % ofLoans inCategoryto TotalLoans |         |  | Amount |   | % ofLoans inCategoryto TotalLoans |   |        | Amount |        | % ofLoans inCategoryto TotalLoans | 
|                                     |  | (Dollars in Thousands) |        
|Real estate loans:                   |  |                        |         |                                   |        |   |        |      |                                   |  |        |        |  |                                   |         |  |        |   |                                   |   |        |        |        |                                   |  |   |        |  |        |  
|Construction and development         |  | $                      | 534     |                                   | 36.94  | % |        | $    | 671                               |  | 37.12  | %      |  | $                                 | 200     |  | 29.76  | % |                                   | $ | 182    |        | 23.92  | %                                 |  | $ | 167    |  | 28.66  | %
|Residential loans                    |  |                        | 114     |                                   | 3.23   | % |        |      | 80                                |  | 6.95   | %      |  |                                   | 157     |  | 14.04  | % |                                   |   | 35     |        | 7.48   | %                                 |  |   | 18     |  | 3.10   | %
|Commercial and multi-family          |  |                        | 392     |                                   | 33.60  | % |        |      | 277                               |  | 23.91  | %      |  |                                   | 273     |  | 24.47  | % |                                   |   | 93     |        | 19.63  | %                                 |  |   | 119    |  | 20.47  | %
|Commercial loans                     |  |                        | 975     |                                   | 21.94  | % |        |      | 596                               |  | 26.70  | %      |  |                                   | 571     |  | 23.97  | % |                                   |   | 334    |        | 35.96  | %                                 |  |   | 204    |  | 35.13  | %
|Consumer loans                       |  |                        |        |                                   | 0.31   | % |        |      |                                  |  | 1.11   | %      |  |                                   | 69      |  | 2.34   | % |                                   |   | 22     |        | 6.83   | %                                 |  |   | 47     |  | 8.11   | %
|Equity lines of credit               |  |                        | 46      |                                   | 2.14   | % |        |      | 70                                |  | 3.27   | %      |  |                                   | 25      |  | 3.73   | % |                                   |   | 9      |        | 3.14   | %                                 |  |   | 9      |  | 1.65   | %
|Credit card and other loans          |  |                        | 47      |                                   | 1.84   | % |        |      | 78                                |  | 0.94   | %      |  |                                   | 45      |  | 1.69   | % |                                   |   | 13     |        | 3.04   | %                                 |  |   | 17     |  | 2.88   | %
|Not allocated                        |  |                        |        |                                   |       |   |        |      |                                  |  |       |        |  |                                   | 120     |  |       |   |                                   |   | 180    |        |       |                                   |  |   |       |  |       |  
|                                     |  |                        |         |                                   |        |   |        |      |                                   |  |        |        |  |                                   |         |  |        |   |                                   |   |        |        |        |                                   |  |   |        |  |        |  
|Total allowance for loan loss        |  | $                      | 2,108   |                                   | 100.00 | % |        | $    | 1,772                             |  | 100.00 | %      |  | $                                 | 1,460   |  | 100.00 | % |                                   | $ | 868    |        | 100.00 | %                                 |  | $ | 581    |  | 100.00 | %
|                                     |  |                        |         |                                   |        |   |        |      |                                   |  |        |        |  |                                   |         |  |        |   |                                   |   |        |        |        |                                   |  |   |        |  |        |  
|Total loans net of unearned income   |  | $                      | 190,330 |                                   |        |   |        | $    | 142,884                           |  |        |        |  | $                                 | 127,155 |  |        |   |                                   | $ | 59,642 |        |        |                                   |  | $ | 52,963 |  |        |  



The changes in the not
allocated category for the years reported were due to changes in the method of allocation based on changes in the portfolio. The non-allocated allowance generally recognizes the estimation risks associated with the allocated allowances, and
managements evaluation of various conditions, the effects of which are not directly measured in determining the allocated allowance. For 2003 management determined it was not necessary to separately evaluate these conditions, as they were all
taken into account in determining the amounts of the allocated allowances.



Investment Securities



1stCentennials investment portfolio provides income to 1stCentennial and also serves as a source of liquidity. Total yield, maturity and risk are among the factors considered in building the investment portfolio. Under FDIC guidelines for risk-based capital,
certain loans and investments may affect the level of capital required to support risk-weighted assets. For example, U.S. Treasury Securities have a 0% risk weighting, whereas U.S. agency pools have a 20% risk weighting, while 1-4 family real estate
loans carry a 50% risk weighting. In addition, pursuant to FASB 115, securities must be classified as held to maturity, available for sale, or trading securities. Those securities held in the available for
sale category must be carried on 1stCentennials books at fair market value. At December 31,
2003, 1stCentennials available-for-sale investment portfolio at fair value consisted of $718,000
in U.S. treasury and agency securities, $30.5 million in federal agency mortgage-backed securities, $4.3 million in obligations of states and local government securities and $487,000 in marketable equity securities compared to $2.0 million, $25.8
million, $4.5 million and $487,000, respectively in 2002. At December 31, 2003, 2002, and 2001, 1stCentennial did
not carry any investments classified as held to maturity or trading. In 2003, the Companys investments increased $3.2 million. The $3.2 million or 9.8% increase was primarily in federal agency mortgage-backed
securities, which provides liquidity through principal paydowns. In 2002, there was a slight decrease in the total value of the Companys investments. This was due to the Company declining to renew investments as they matured during the year
and using the proceeds to support strong loan demand.



Interest-bearing
deposits and short-term time certificates at other financial institutions totaled $4.8 million at year-end 2003 versus $5.2 million in 2002 and $5.9 million in 2001. Overnight federal funds sold totaled zero at year-end 2003, $2.0 million in 2002,
and $7.5 million in 2001. The decrease in federal funds sold at year-end 2003, compared to 2002 resulted from the Companys strong loan demand. Total gross loans were $191.3 million at December 31, 2003, compared to $143.5 million at December
31, 2002.



35



---

##### Table of Contents

The following table summarizes the amortized cost, unrealized gains and losses, fair value and distribution of the
Companys investment securities as of the dates indicated:



Investment Portfolio



|                                                      |  |                        |        |                  |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |               |   |                  |   |                   |   |        |            |   |        |  |   |     |  |   |     |   |  |   |       
|----------------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ----------------- |  | - | ---------- | - | ------------- | - | ---------------- |  | ----------------- | ------ |  | ---------- | --- | ------------- | - | ---------------- | - | ----------------- | - | ------ | ---------- | - | ------ |  | - | --- |  | - | --- | - |  | - | ------
|                                                      |  | As of December 31,    
|                                                      |  | 2003                   |        | 2002             |   | 2001             
|                                                      |  | AmortizedCost          |        | Unrealized Gains |   | Unrealized Losses |  |   | Fair Value |   | AmortizedCost |   | Unrealized Gains |  | Unrealized Losses |        |  | Fair Value |     | AmortizedCost |   | Unrealized Gains |   | Unrealized Losses |   |        | Fair Value
|                                                      |  | (Dollars in Thousands)
|Available for Sale:                                   |  |                        |        |                  |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |               |   |                  |   |                   |   |        |            |   |        |  |   |     |  |   |     |   |  |   |       
|U.S. treasury and government agency securities        |  | $                      | 705    |                  | $ | 13                |  | $ |           |   |               | $ | 718              |  | $                 | 2,012  |  | $          | 29  |               | $ |                 |   |                   | $ | 2,041  |            | $ | 520    |  | $ | 9   |  | $ |    |   |  | $ | 529   
|Federal agency mortgage- backed Securities            |  |                        | 30,302 |                  |   | 285               |  |   | (63        | ) |               |   | 30,524           |  |                   | 25,396 |  |            | 460 |               |   | (53              | ) |                   |   | 25,803 |            |   | 28,176 |  |   | 266 |  |   |    |   |  |   | 28,442
|Obligations of states and local government securities |  |                        | 4,084  |                  |   | 213               |  |   |           |   |               |   | 4,297            |  |                   | 4,357  |  |            | 134 |               |   |                 |   |                   |   | 4,491  |            |   | 4,624  |  |   | 3   |  |   | (71 | ) |  |   | 4,556 
|Marketable equity securities                          |  |                        | 487    |                  |   |                  |  |   |           |   |               |   | 487              |  |                   | 487    |  |            |    |               |   |                 |   |                   |   | 487    |            |   | 487    |  |   |    |  |   |    |   |  |   | 487   
|                                                      |  |                        |        |                  |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |               |   |                  |   |                   |   |        |            |   |        |  |   |     |  |   |     |   |  |   |       
|Total                                                 |  | $                      | 35,578 |                  | $ | 511               |  | $ | (63        | ) |               | $ | 36,026           |  | $                 | 32,252 |  | $          | 623 |               | $ | (53              | ) |                   | $ | 32,822 |            | $ | 33,807 |  | $ | 278 |  | $ | (71 | ) |  | $ | 34,014
|                                                      |  |                        |        |                  |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |               |   |                  |   |                   |   |        |            |   |        |  |   |     |  |   |     |   |  |   |       



The following table summarizes, as of
December 31, 2003, the maturity characteristics of the investment portfolio, by investment category. Expected remaining maturities may differ from remaining contractual maturities because obligors may have the right to prepay certain obligations
with or without penalties.



Investment Maturities and
Repricing Schedule



|                                                      |  |                         |        |       |                                |   |        |                                |        |  |                 |        |  |       |       |  |        |   |       |   |       |        |      |       |  |   |        |  |      |  
|----------------------------------------------------- |  | ----------------------- | ------ | ----- | ------------------------------ | - | ------ | ------------------------------ | ------ |  | --------------- | ------ |  | ----- | ----- |  | ------ | - | ----- | - | ----- | ------ | ---- | ----- |  | - | ------ |  | ---- | -
|                                                      |  | As of December 31, 2003 |       
|                                                      |  | Within One Year         |        |       | After One ButWithin Five Years |   |        | After Five ButWithin Ten Years |        |  | After Ten Years |        |  | Total |      
|                                                      |  | Amount                  |        | Yield |                                |   | Amount |                                | Yield  |  |                 | Amount |  | Yield |       |  | Amount |   | Yield |   |       | Amount |      | Yield | 
|                                                      |  | (Dollars in Thousands)  |       
|Available for Sale:                                   |  |                         |        |       |                                |   |        |                                |        |  |                 |        |  |       |       |  |        |   |       |   |       |        |      |       |  |   |        |  |      |  
|U.S. treasury and government agency securities        |  | $                       | 517    |       | 4.55                           | % |        | $                              |       |  |                |        |  | $     | 201   |  | 5.47   | % |       | $ |      |        |     |       |  | $ | 718    |  | 4.81 | %
|Federal agency mortgage-backed Securities             |  |                         | 16,694 |       | 2.18                           | % |        |                                | 9,594  |  | 4.24            | %      |  |       | 334   |  | 3.91   | % |       |   | 3,902 |        | 5.65 | %     |  |   | 30,524 |  | 3.29 | %
|Obligations of states and local government securities |  |                         | 103    |       | 4.00                           | % |        |                                | 2,277  |  | 4.35            | %      |  |       | 1,917 |  | 5.31   | % |       |   |      |        |     |       |  |   | 4,297  |  | 4.77 | %
|Marketable equity securities                          |  |                         |       |       |                               |   |        |                                |       |  |                |        |  |       |      |  |       |   |       |   |      |        |     |       |  |   | 487    |  |     |  
|                                                      |  |                         |        |       |                                |   |        |                                |        |  |                 |        |  |       |       |  |        |   |       |   |       |        |      |       |  |   |        |  |      |  
|Total                                                 |  | $                       | 17,314 |       | 2.26                           | % |        | $                              | 11,871 |  | 4.26            | %      |  | $     | 2,452 |  | 5.13   | % |       | $ | 3,902 |        | 5.65 | %     |  | $ | 36,026 |  | 3.50 | %
|                                                      |  |                         |        |       |                                |   |        |                                |        |  |                 |        |  |       |       |  |        |   |       |   |       |        |      |       |  |   |        |  |      |  



Deposits



Total deposits were $212.8 million at December 31, 2003, compared to $183.2 million and
$174.3 million at December 31, 2002 and 2001, respectively, representing increases of 16.2% and 5.1% in 2003 and 2002, respectively. The majority of the deposit increase in 2003 occurred in noninterest bearing accounts, which increased $12.7 million
or 23.6%, to $66.6 million at December 31, 2003 as compared to December 31, 2002. In addition, interest-bearing and money market deposits increased $11.1 million or 22.8%, to $60.1 million and time deposits $100,000 or greater increased $4.6 million
or 13.4%, to $39.2 million from December 31, 2002.



Deposits increased a
relatively modest 5.1% in 2002 due primarily to reductions in certain high-cost time deposits at Palomar Community Bank. These reductions were expected due to the fact that Palomar Community Bank was previously a savings and loan association until
1999, and therefore paid generally higher rates on time deposits than commercial banks. Many of these time deposits matured in 2001 following our acquisition of Palomar Community Bank in August 2001. The runoff continued to some extent into 2002
with the continued maturation of the remainder of these high-cost time deposits. However, we have since successfully replaced those time deposits with Home Owners Association deposits carried generally as low cost transaction accounts.



36



---

##### Table of Contents

There was a shift in the deposit mix from 2002 to 2003 in other time deposits, noninterest-bearing, interest bearing and
money market deposits. Other time deposits decreased 3.06% from 15.32% of total deposits at December 31, 2002 to 12.25% of total deposits at December 31, 2003. Noninterest-bearing deposits increased 1.90% from 29.42% of total deposits at December
31, 2002 to 31.32% of total deposits at December 31, 2003. Interest bearing and money market deposits increased 1.52% from 26.74% of total deposits at December 31, 2002 to 28.26% of total deposits at December 31, 2003.



The shift from other time deposits to noninterest-bearing deposits was due to the continued
lower interest rates paid during the year. Information concerning deposit balances by category as of December 31, 2003 and 2002 is contained in the Consolidated Statements of Condition included in the financial statements, which appear elsewhere
herein.



1stCentennials cost of funds is the result of total interest expense on total deposits and other interest-bearing liabilities as a percent of average total
deposits and average other interest-bearing liabilities. For 2003, cost of funds was 1.01% compared to 1.28% for 2002 and 2.15% for 2001. Cost of funds for 2003 and 2002 has decreased, primarily due to the continued low interest rates in 2003 and
2002.



The following table summarizes the distribution of average daily
deposits and the average daily rates paid for the periods indicated:



Average Deposits and Other Borrowings



|                                                                                                  |  |                                  |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                                                                                  |  | For the Years Ended December 31, |        
|                                                                                                  |  | 2003                             |         |             | 2002 |   |                | 2001 |            
|                                                                                                  |  | AverageBalance                   |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|                                                                                                  |  | (Dollars in Thousands)           |        
|Demand deposits, noninterest bearing                                                              |  | $                                | 60,543  |             | 0.00 | % |                | $    | 46,483      |  | 0.00 | %              |  | $           | 36,050  |  | 0.00 | %
|                                                                                                  |  |                                  |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Interest-bearing deposits:                                                                        |  |                                  |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Interest-bearing demand deposits                                                                  |  |                                  | 17,851  |             | 0.24 | % |                |      | 19,209      |  | 0.21 | %              |  |             | 17,455  |  | 0.45 | %
|Money market deposits                                                                             |  |                                  | 36,666  |             | 0.97 | % |                |      | 33,793      |  | 0.88 | %              |  |             | 37,429  |  | 2.00 | %
|Savings deposits                                                                                  |  |                                  | 18,266  |             | 0.63 | % |                |      | 18,145      |  | 0.55 | %              |  |             | 14,554  |  | 1.41 | %
|Time deposits $100,000 or greater                                                                 |  |                                  | 37,834  |             | 2.25 | % |                |      | 30,260      |  | 3.09 | %              |  |             | 25,211  |  | 4.94 | %
|Other time deposits                                                                               |  |                                  | 27,804  |             | 1.43 | % |                |      | 30,667      |  | 2.19 | %              |  |             | 36,489  |  | 4.11 | %
|                                                                                                  |  |                                  |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total interest-bearing deposits                                                                   |  | $                                | 138,421 |             | 1.27 | % |                | $    | 132,074     |  | 1.55 | %              |  | $           | 131,138 |  | 2.11 | %
|                                                                                                  |  |                                  |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|FHLB borrowings and long-term debt                                                                |  |                                  | 2,679   |             | 1.23 | % |                |      | 4,133       |  | 3.77 | %              |  |             | 1,392   |  | 5.68 | %
|Federal funds purchased                                                                           |  |                                  | 404     |             | 1.73 | % |                |      | 24          |  | 4.17 | %              |  |             |        |  |     |  
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                                  | 6,000   |             | 5.12 | % |                |      | 2,859       |  | 6.05 | %              |  |             |        |  |     |  
|                                                                                                  |  |                                  |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total deposits and other borrowings                                                               |  | $                                | 208,047 |             | 1.01 | % |                | $    | 185,573     |  | 1.28 | %              |  | $           | 168,580 |  | 2.15 | %
|                                                                                                  |  |                                  |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Average rate excluding demand deposits                                                            |  |                                  |         |             | 1.43 | % |                |      |             |  | 1.71 | %              |  |             |         |  | 2.85 | %



37



---

##### Table of Contents

The following table sets forth the scheduled maturities of the Companys time deposits in denominations of $100,000
or greater at December 31, 2003:



Maturities of Time Deposits
of

$100,000 or More

(Dollars in Thousands)



|                                      |  |   |       
|------------------------------------- |  | - | ------
|Three months or less                  |  | $ | 12,421
|Over three months through six months  |  |   | 13,293
|Over six months through twelve months |  |   | 9,599 
|Over twelve months                    |  |   | 3,877 
|                                      |  |   |       
|Total                                 |  | $ | 39,190
|                                      |  |   |       



Capital Resources



1stCentennial conducts ongoing assessments of its capital needs and requirements to ensure that it stays in compliance with increases in assets and levels of risk. Total stockholders equity was
$24.4 million at December 31, 2003, compared to $17.2 million and $15.3 million at December 31, 2002 and 2001, respectively. The increase of $7.2 million or 30.3% in 2003 was primarily due to $4,871,000 in net proceeds from the sale of 225,000
shares of common stock in a public offering concluded, in the second quarter of 2003, and $2,088,000 in net income. The increase from 2001 to 2002 was primarily from earnings from 1stCentennial. In addition, the Company issued $6 million in Trust Preferred Securities in 2002 through its wholly-owned subsidiary, Centennial Capital Trust I.
The proceeds of this issuance are considered to be Tier 1 capital for regulatory purposes but long-term debt in accordance with generally accepted accounting principles. However, no assurance can be given that the Trust Preferred Securities will
continue to be treated as Tier 1 capital in the future.



Bank regulators have
established minimum capital adequacy guidelines requiring that qualifying capital be at least 8.0% of risk-based assets, of which at least 4.0% must be Tier 1 capital (primarily stockholders equity). These ratios represent minimum capital
standards. Under Prompt Corrective Action rules, certain levels of capital adequacy have been established for financial institutions. Depending on an institutions capital ratios, the established levels can result in restrictions or limits on
permissible activities. In addition to the aforementioned requirements, 1stCentennial Bancorp and 1stCentennial Bank must also meet minimum leverage ratio standards. The leverage ratio is calculated as Tier 1 capital divided by
the most recent quarters average total assets.



The highest level for
capital adequacy under Prompt Corrective Action is Well-Capitalized. To qualify for this level of capital adequacy an institution must maintain a total risk-based capital ratio of at least 10.00% and a Tier 1 risk-based capital ratio of
at least 6.00%.



At December 31, 2003, and 2002, 1stCentennial Bancorp and 1stCentennial Bank exceeded all of the minimum capital ratios required to be considered well-capitalized. As of December 31, 2003, the Companys Total Risk-Based and Tier 1 Risk Based Capital Ratios
were 13.63% and 12.48%, compared to 13.27% and 10.87% at December 31, 2002. Tier 1 Capital for these purposes includes trust preferred securities up to twenty-five percent of the Companys core capital. See Item 1, Business  Recent
Developments and Note 9 to the audited financial statements appearing elsewhere herein. As of December 31, 2003, the Banks Total Risk-Based and Tier 1 Risk Based Capital Ratios were 12.67% and 11.53%, compared to 11.84% and 10.58% at
December 31, 2002. At December 31, 2003, the Companys leverage ratio was 10.79%, compared to 8.28% at December 31, 2002. As of December 31, 2003, the Banks Leverage Capital Ratio was 9.97%, compared to 8.09% at December 31, 2002.
Detailed information concerning the capital amounts and ratios for both 1stCentennial Bancorp and 1stCentennial Bank is contained in Note 17 to the financial statements appearing elsewhere herein. Management anticipates
that continued growth of the Company may require the Company to raise additional funds in the next two years through sales of the Companys common stock or otherwise in order to meet regulatory capital requirements. No assurance can be given
that at such time as the Company determines to increase its capital through a stock offering or otherwise that it will be able to do so, or that it will be able to do so on terms the Company deems favorable.



For purposes of calculating capital ratios, bank regulators have excluded adjustments to
stockholders equity that result from mark-to-market adjustments of available-for-sale investment securities. At December 31, 2003, the Company had accumulated other comprehensive income resulting from unrealized gains on investment securities
net of taxes of $252,000, compared to an unrealized gain net of taxes of $323,000 at December 31, 2002.



38



---

##### Table of Contents

Liquidity



1stCentennials liquidity is
primarily a reflection of 1stCentennials ability to acquire funds to meet loan demand and deposit withdrawals
and to service other liabilities as they come due. 1stCentennial has adopted policies to maintain a relatively
liquid position to enable it to respond to changes in the financial environment and ensure sufficient funds are available to meet those needs. Generally, 1stCentennials major sources of liquidity are customer deposits, sales, paydowns and maturities of investment securities, the use of federal funds markets, borrowings from the FHLB and net cash
provided by operating activities. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments, which are influenced by general interest rate levels, interest rates available on other
investments, competition, economic conditions, and other factors, are not. Liquid asset balances include cash, amounts due from other banks, federal funds sold, and securities available-for-sale. To augment liquidity, the Bank has a Federal Funds
borrowing arrangements with two correspondent banks totaling $6 million, and a secured line of credit with the FHLB.



1stCentennials liquidity
ratio, which is a measure of liquid assets to deposits and short-term liabilities, showed some level of deterioration during 2003 due to an increase in deposits and an increase in pledged securities. The liquidity ratio was 26.4% at the end of
December 2002, but had dropped to 17.4% by the end of 2003. Although Managements policy is to maintain a ratio of liquidity to assets of 20% or greater, we expect this ratio to drop further during 2004. To mitigate liquidity risk, Management
has taken steps to increase the Companys Federal Funds borrowing limits to $10 million, increase the Companys FHLB line and has received Board approval to attract brokered deposits to a limit of 10% of total deposits. Management is of
the opinion that these standby funding sources it has arranged are sufficient to meet 1stCentennials current
and anticipated short-term liquidity needs.



The dependency ratio is a measure
of net volatile liabilities to net earning assets. At December 31, 2003, 1stCentennials net non-core
dependency ratio was 3.38%. Under applicable regulatory guidelines, which assumes all brokered deposits and all certificates of deposit over $100,000 (Jumbo CDs) as volatile sources of funds. At December 31, 2002 the net non-core
dependency ratio was 14.32%. 1stCentennial had $886,000 in brokered deposits as of December 31, 2003 and $ 391,000
in brokered deposits as of December 31, 2002. 1stCentennial targets a net non-core dependency ratio of less than
10%.



Asset/Liability Management and Interest Rate Sensitivity



The fundamental objective of 1stCentennials management of its assets and liabilities is to maximize the economic value of 1stCentennial while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable
degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. 1stCentennials profitability is dependent to a large extent upon its net interest income, which is the difference between
its interest income on interest-earning assets, such as loans and securities and its interest expense on interest-bearing liabilities, such as deposits and borrowings. 1stCentennial, like other financial institutions, is subject to interest rate risk to the degree that their interest-earning assets reprice differently than
their interest-bearing liabilities, and not at the same time, or to the same magnitude. 1stCentennial manages its
mix of assets and liabilities with the goal of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds. Interest income and interest expense are affected by general economic conditions
and by competition in the marketplace. 1stCentennials interest and pricing strategies are driven by its
asset-liability management analyses and by local market conditions.



1stCentennial seeks to control its interest rate risk exposure in a manner that will allow for adequate
levels of earnings and capital over a range of possible interest rate environments. 1stCentennial has adopted
formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort, 1stCentennial measures interest rate risk utilizing both a modeling program from an outside vendor, as well as third party sources reports, which can be compared and analyzed together, enabling management to better manage economic risk and interest
rate risk.



39



---

##### Table of Contents

The following table sets forth the interest rate sensitivity of the Companys interest-earning assets and
interest-bearing liabilities as of December 31, 2003 using the interest rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or matures
within its contractual terms. Actual payment patterns may differ from contractual payment patterns.



Interest Rate Sensitivity Analysis



|                                                                                                  |  |                                                            |         |   |             |   |         |           |  |               |        |              |   |        |       |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ------- | - | ----------- | - | ------- | --------- |  | ------------- | ------ | ------------ | - | ------ | ----- | - | ------- | - |  | - | ------- | -
|                                                                                                  |  | As of December 31, 2003Amounts Subject to Repricing Within |        
|                                                                                                  |  | 0-3 Months                                                 |         |   | 3-12 Months |   |         | 1-5 Years |  | After 5 Years |        | NonSensitive |   |        | Total |  
|                                                                                                  |  | (Dollars in Thousands)                                     |        
|                                                                                                  |  |                                                            |         |   |             |  
|Assets                                                                                            |  |                                                            |         |   |             |   |         |           |  |               |        |              |   |        |       |   |         |   |  |   |         |  
|Loans, net of deferred fees                                                                       |  | $                                                          | 39,191  |   |             | $ | 71,787  |           |  | $             | 33,351 |              | $ | 45,380 |       | $ | 621     |   |  | $ | 190,330 |  
|Allowance for loan losses                                                                         |  |                                                            |        |   |             |   |        |           |  |               |       |              |   |       |       |   | (2,108  | ) |  |   | (2,108  | )
|Investment securities                                                                             |  |                                                            | 916     |   |             |   | 1,271   |           |  |               | 20,247 |              |   | 13,592 |       |   |        |   |  |   | 36,026  |  
|Federal funds sold                                                                                |  |                                                            |        |   |             |   |        |           |  |               |       |              |   |       |       |   |        |   |  |   |        |  
|FHLB stock                                                                                        |  |                                                            |        |   |             |   |        |           |  |               | 380    |              |   |       |       |   |        |   |  |   | 380     |  
|Interest-bearing deposits with banks                                                              |  |                                                            | 99      |   |             |   | 813     |           |  |               | 3,356  |              |   | 538    |       |   |        |   |  |   | 4,806   |  
|Noninterest-earning assets                                                                        |  |                                                            |        |   |             |   |        |           |  |               |       |              |   |       |       |   | 18,743  |   |  |   | 18,743  |  
|Life insurance                                                                                    |  |                                                            |        |   |             |   |        |           |  |               | 6,206  |              |   |       |       |   |        |   |  |   | 6,206   |  
|                                                                                                  |  |                                                            |         |   |             |   |         |           |  |               |        |              |   |        |       |   |         |   |  |   |         |  
|Total assets                                                                                      |  | $                                                          | 40,206  |   |             | $ | 73,871  |           |  | $             | 63,540 |              | $ | 59,510 |       | $ | 17,256  |   |  | $ | 254,383 |  
|                                                                                                  |  |                                                            |         |   |             |   |         |           |  |               |        |              |   |        |       |   |         |   |  |   |         |  
|Liabilities                                                                                       |  |                                                            |         |   |             |   |         |           |  |               |        |              |   |        |       |   |         |   |  |   |         |  
|Noninterest-bearing deposits                                                                      |  | $                                                          |        |   |             | $ |        |           |  | $             |       |              | $ |       |       | $ | 66,636  |   |  | $ | 66,636  |  
|Interest-bearing deposits                                                                         |  |                                                            | 102,517 |   |             |   | 36,880  |           |  |               | 6,682  |              |   | 58     |       |   |        |   |  |   | 146,137 |  
|Federal funds purchased                                                                           |  |                                                            | 1,850   |   |             |   |        |           |  |               |       |              |   |       |       |   |        |   |  |   | 1,850   |  
|Borrowings from federal home loan bank                                                            |  |                                                            | 7,600   |   |             |   |        |           |  |               |       |              |   |       |       |   |        |   |  |   | 7,600   |  
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                                                            | 6,000   |   |             |   |        |           |  |               |       |              |   |       |       |   |        |   |  |   | 6,000   |  
|Other liabilities                                                                                 |  |                                                            |        |   |             |   |        |           |  |               |       |              |   |       |       |   | 1,760   |   |  |   | 1,760   |  
|Stockholders equity                                                                              |  |                                                            |        |   |             |   |        |           |  |               |       |              |   |       |       |   | 24,400  |   |  |   | 24,400  |  
|                                                                                                  |  |                                                            |         |   |             |   |         |           |  |               |        |              |   |        |       |   |         |   |  |   |         |  
|Total liabilities and stockholders equity                                                        |  | $                                                          | 117,967 |   |             | $ | 36,880  |           |  | $             | 6,682  |              | $ | 58     |       | $ | 92,796  |   |  | $ | 254,383 |  
|                                                                                                  |  |                                                            |         |   |             |   |         |           |  |               |        |              |   |        |       |   |         |   |  |   |         |  
|Interest rate sensitivity gap                                                                     |  | $                                                          | (77,761 | ) |             | $ | 36,991  |           |  | $             | 56,858 |              | $ | 59,452 |       | $ | (75,540 | ) |  |   |         |  
|Cumulative interest rate sensitivity gap                                                          |  | $                                                          | (77,761 | ) |             | $ | (40,770 | )         |  | $             | 16,088 |              | $ | 75,540 |       |   |        |   |  |   |         |  



The opportunity to reprice assets in
the same dollar amounts and at the same time, as liabilities would minimize interest rate risk in any interest rate environment. The difference between the amounts of assets and liabilities repriced at the same time, or gap, represents
the risk, or opportunity, in repricing. In general, if more assets than liabilities are repriced at a given time in a rising rate environment net interest income would improve while in a declining rate environment net interest income would decline.
If more liabilities than assets were repriced under the same conditions the opposite would result. 1stCentennial is
liability sensitive in the immediate to three-month period, cumulatively liability sensitive through one year, and asset sensitive at 1-5 years. Most of our loans are tied to Prime, and can therefore be repriced immediately, although $109.7 million
or 79.2% of these variable rate loans are written with



40



---

##### Table of Contents

established floors, which have been reached due to the continuing low interest rate environment. For purposes of the
above schedule, these loans are temporarily posted at their final maturity, rather than in time periods of 0-3 months. In a rising interest rate environment, these loans would revert to variable rate loans once the rate index exceeds their floor
rate. For purposes of this schedule, under those circumstances these loans would be shown in the 0-3 month time period and the result would be a cumulative positive sensitivity gap until one year. As a result, even though we are shown as liability
sensitive for 0-12 months in the table, which would normally mean that if interest rates were to rise in the short term, our net interest income would decline, we are effectively asset sensitive for this period, so that in fact if interest rates
were to rise in the short term, our net interest income would improve.



In
addition, 1stCentennial studies the net change in interest income and net interest margin given immediate and
parallel interest rate shocks over a 12-month horizon. 1stCentennials goal is to manage the effect of these
changes within Board-established parameters for up/down 100 and 200 basis points.



|                        |  |                                         |        |                              |   |        |                                |  |        |                    |  |      |  
|----------------------- |  | --------------------------------------- | ------ | ---------------------------- | - | ------ | ------------------------------ |  | ------ | ------------------ |  | ---- | -
|Change(in Basis Points) |  | Net Interest Income(next twelve months) |        | Change in NetInterest Income |   |        | % Change in NetInterest Income |  |        | Net InterestMargin | 
|(Dollars in Thousands)  | 
|+ 200                   |  | $                                       | 15,390 |                              | $ | 1,931  |                                |  | 14.35  | %                  |  | 6.68 | %
|+ 100                   |  |                                         | 14,432 |                              |   | 973    |                                |  | 7.23   | %                  |  | 6.27 | %
|0                       |  |                                         | 13,459 |                              |   |       |                                |  |       |                    |  | 5.85 | %
| 100                   |  |                                         | 12,488 |                              |   | (971   | )                              |  | (7.21  | )%                 |  | 5.43 | %
| 200                   |  |                                         | 11,489 |                              |   | (1,970 | )                              |  | (14.64 | )%                 |  | 5.00 | %



The table above indicates the effect
of immediate rate changes, and does not consider the yield from reinvesting in short-term versus long-term instruments. The table further shows values in a sudden, significant downward movement, which is highly unlikely, or impossible due to the
historically low rates at 1stCentennial at December 31, 2003. However, the results indicated in the table above are
considered acceptable by management.



Impact of Inflation



The primary impact of inflation on 1stCentennial is its effect on interest rates. 1stCentennials primary source of income is net interest income, which is affected by changes in interest rates. 1stCentennial attempts to limit the impact of inflation on its net interest margin through management of rate-sensitive assets and liabilities and the analysis of interest rate sensitivity. The effect of
inflation on premises and equipment as well as non-interest expenses has not been significant for the periods covered in this Annual Report.



41



---

##### Table of Contents

ITEM 7. FINANCIAL STATEMENTS



The following
consolidated financial statements of 1stCentennial Bancorp and Subsidiaries at December 31, 2003 and 2002 and for
the years ended December 31, 2003, 2002 and 2001 are included in this filing at the pages indicated.



|                                                |  |     
|----------------------------------------------- |  | ----
|                                                |  | Page
|Independent Auditors Report                     |  | F-1 
|Consolidated Statements of Condition            |  | F-2 
|Consolidated Statements of Earnings             |  | F-3 
|Consolidated Statements of Stockholders Equity |  | F-4 
|Consolidated Statements of Cash Flows           |  | F-5 
|Notes to Consolidated Financial Statements      |  | F-7 



42



---

##### Table of Contents

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE



Not applicable



ITEM 8A. CONTROLS AND PROCEDURES



|(a) | Evaluation of Disclosure Controls and Procedures
|--- | ------------------------------------------------



1st Centennials Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of 1st Centennials disclosure controls and
procedures (as defined in Exchange Act Rules 13a  15(c) promulgated under the Exchange Act as of the end of the period covered by this annual report (the Evaluation Date) have concluded that as of the Evaluation Date, 1st
Centennials disclosure controls and procedures were adequate and effective to ensure that material information relating to 1st Centennial and its consolidated subsidiaries would be made known to them by others within those entities,
particularly during the period in which this annual 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 recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports
that we file 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.



|(b) | Changes in Internal Controls
|--- | ----------------------------



There were no significant changes in 1st Centennials internal controls over financial reporting or in other factors in the fourth quarter of 2003 that has
materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



PART III



ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS



Code of Ethics



The Company has adopted
a code of ethics applicable to all of its officers, directors and employees, including its principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The text of this code of
ethics may be found on the Companys web site at www.1stcent.com. The Company intends to post notice of any waiver from, or amendment to, any provision of our code of ethics on this web site.



Other Information Concerning Directors and Executive Officers



The remainder of the information required by Item 9 will be contained in the Companys
definitive Proxy Statement for the Companys 2004 Annual Meeting of Shareholders which the Company will file with the SEC within 120 days after the close of the Companys 2003 fiscal year in accordance with SEC Regulation 14A under the
Securities Exchange Act of 1934. Such information is incorporated herein by this reference.



43



---

##### Table of Contents

ITEM 10. EXECUTIVE COMPENSATION



The information
required by Item 10 will be contained in the Companys definitive Proxy Statement for the Companys 2004 Annual Meeting of Shareholders which the Company intends to file with the SEC within 120 days after the close of the Companys
2003 fiscal year in accordance with SEC Regulation 14A under the Securities Exchange Act of 1934. Such information is incorporated herein by this reference.



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



Securities Authorized For Issuance Under Equity Compensation Plans



The following table provides information as of December 31, 2003, with respect to options outstanding and available under our 2001 Stock Option Plan, as amended, which is
our only equity compensation plan other than an employee benefit plan meeting the qualification requirements of Section 401(a) of the Internal Revenue Code:



|                                                       |  |                                                                       |  |                                                       |  |                                                            
|------------------------------------------------------ |  | --------------------------------------------------------------------- |  | ----------------------------------------------------- |  | -----------------------------------------------------------
|Plan Category                                          |  | Number of Securities to be Issued Upon Exercise ofOutstanding Options |  | Weighted-AverageExercise Price of Outstanding Options |  | Number of SecuritiesRemaining Available for Future Issuance
|Equity compensation plans approved by security holders |  | 285,082                                                               |  | $17.31                                                |  | 93,441                                                     



Other Information Concerning
Security Ownership of Certain Beneficial Owners and Management



The
remainder of the information required by Item 11 will be contained in the Companys definitive Proxy Statement for the Companys 2004 Annual Meeting of Shareholders which the Company will file with the SEC within 120 days after the close
of the Companys 2003 fiscal year in accordance with SEC Regulation 14A under the Securities Exchange Act of 1934. Such information is incorporated herein by this reference.



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by Item 12 will be contained in the Companys definitive Proxy Statement for the Companys 2004 Annual Meeting of Shareholders which the Company intends to file with the SEC within 120 days after the close
of the Companys 2003 fiscal year in accordance with SEC Regulation 14A under the Securities Exchange Act of 1934. Such information is incorporated herein by this reference.



44



---

##### Table of Contents

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(10) EXHIBITS



|               |  |                                                                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                             
|               | 
|3.1            |  | Articles of Incorporation of Centennial First Financial Services. (Incorporated by reference from Exhibit to the Companys Registration Statement on Form S-4 filed on October 20,
1999.)           
|               | 
|3.2            |  | Amendment to Articles of Incorporation of Centennial First Financial Services filed May 5, 2000 (Incorporated by reference to Exhibit to Companys Form 10-QSB for the quarter ended June
30, 2002.)
|               | 
|3.3            |  | Amendment to Articles of Incorporation of Centennial First Financial Services filed February 18, 2003 (Incorporated by reference to Exhibit to Companys Form SB-2 filed on March 13,
2003.         
|               | 
|3.4            |  | Restated By-Laws of Centennial First Financial Services (Incorporated by reference from Exhibit to the Companys Form 10-QSB for the quarter ended June 30, 2002.)                                  
|               | 
|10.1           |  | Brea Branch Lease, dated September 20, 2000 (Incorporated by reference from Exhibit to the Companys Registration Statement on Form SB-2 filed on March 21, 2001.)                                  
|               | 
|10.2           |  | Form of Indemnification Agreement (Incorporated by reference from Exhibit to the Companys Registration Statement on Form SB-2 filed on March 21, 2001.)                                            
|               | 
|10.3           |  | Employment Agreement of Richard Sanborn, dated December 1, 2000 (Incorporated by reference from Exhibit to the Companys Form 10-KSB for the fiscal year ended December 31,
2001.)                  
|               | 
|10.4           |  | Salary Continuation plan of Timothy P. Walbridge, dated August 1, 2001 (Incorporated by reference from Exhibit to the Companys Form 10-KSB for the fiscal year ended December 31,
2001.)           
|               | 
|10.5           |  | Salary Continuation plan for Beth Sanders, dated October 1, 2001 (Incorporated by reference from Exhibit to the Companys Form 10-KSB for the fiscal year ended December 31,
2001.)                 
|               | 
|10.6           |  | Salary Continuation plan of Richard Sanborn, dated October 1, 2001 (Incorporated by reference from Exhibit to the Companys Form 10-KSB for the fiscal year ended December 31,
2001.)               



45



---

##### Table of Contents

|      |  |                                                                                                                                                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.7  |  | Employment Agreement of Timothy P. Walbridge, dated December 1, 2001 (Incorporated by reference from Exhibit to the Companys Form 10-KSB for the fiscal year ended December 31,
2001.)                 
|      | 
|10.8  |  | Employment Agreement of Beth Sanders, dated December 1, 2001 (Incorporated by reference from Exhibit to the Companys Form 10-KSB for the fiscal year ended December 31,
2001.)                         
|      | 
|10.9  |  | Amendment to Salary Continuation plan of Timothy P. Walbridge, dated December 1, 2001 (Incorporated by reference from Exhibit to the Companys Form 10-KSB for the fiscal year ended
December 31, 2001.)
|      | 
|10.10 |  | Amendment to Salary Continuation plan of Richard Sanborn, dated December 1, 2001 (Incorporated by reference from Exhibit to the Companys Form 10-KSB for the fiscal year ended December
31, 2001.)     
|      | 
|10.11 |  | Redlands Centennial Bank Employee Stock Ownership Plan, dated February 1, 2000 (Incorporated by reference from Exhibit to Form 10-QSB for the fiscal quarter ended March 31,
2000.)                     
|      | 
|10.12 |  | Centennial First Financial Services 2001 Stock Option Plan, as Amended, dated February 20, 2002 (Incorporated by reference from Exhibit to Form 10-QSB for the fiscal quarter ended September
30, 2002.)
|      | 
|10.13 |  | Palomar Community Bank lease dated April 15, 1987 (Incorporated by reference from Exhibit to Form 10-QSB for the fiscal quarter ended March 31, 2002.)                                                  
|      | 
|10.14 |  | Indenture for Trust Preferred Securities dated July 11, 2002 (Incorporated by reference from Exhibit to Form 10-QSB for the fiscal quarter ended September 30, 2002.)                                   
|      | 
|10.15 |  | Amended and Restated Declaration of Trust for trust preferred securities dated July 11, 2002 (Incorporated by reference from Exhibit to Form 10-QSB for the fiscal quarter ended September 30,
2002.)   
|      | 
|10.16 |  | Guarantee Agreement for Trust Preferred Securities dated July 11, 2002 (Incorporated by reference from Exhibit to Form 10-QSB for the fiscal quarter ended September 30,
2002.)                         
|      | 
|10.17 |  | Salary Continuation Agreement of Suzanne Dondanville, dated December 17, 2002 (Incorporated by reference from Exhibit to Form SB-2 dated March 13, 2003.)                                               
|      | 
|10.18 |  | Salary Continuation Agreement of Clifford Schoonover, dated December 17, 2002 (Incorporated by reference from Exhibit to Form SB-2 dated March 13, 2003.)                                               



46



---

##### Table of Contents

|      |  |                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.19 |  | Salary Continuation Agreement of John Drake, dated August 1, 2002 (Incorporated by reference from Exhibit to Form SB-2 dated March 13, 2003.)         
|      | 
|10.20 |  | Amendment to construction department lease dated August 28, 2002 (Incorporated by reference from Exhibit to Form SB-2 dated March 13, 2003.)          
|      | 
|10.21 |  | Commercial Lending Group Lease, dated December 23, 2002 (Incorporated by reference from Exhibit to Form SB-2 dated March 13, 2003.)                   
|      | 
|10.22 |  | Palm Desert Branch lease, dated November 13, 2002. (Incorporated by reference from Exhibit to Form 10-KSB for the year ended December 31, 2002.)      
|      | 
|10.23 |  | Amendment to Escondido Branch lease, dated June 6, 2001. (Incorporated by reference from Exhibit to Form 10-KSB for the year ended December 31, 2002.)
|      | 
|10.24 |  | Amendment to Salary Continuation Agreement of Suzanne Dondanville, dated December 17, 2002                                                            
|      | 
|10.25 |  | Amendment to Salary Continuation Agreement of Anne Elizabeth Sanders, dated December 01, 2001                                                         
|      | 
|10.26 |  | Amendment to Salary Continuation Agreement of Clifford Schoonover, dated December 17, 2002                                                            
|      | 
|11.1  |  | Computation of Earnings Per Share (included in Note 1 to audited financial statements included herein)                                                
|      | 
|21.1  |  | Subsidiaries of 1st Centennial Bancorp. (Incorporated by reference from Exhibit to Form 10-KSB for the year ended December 31, 2002.)                 
|      | 
|23.1  |  | Consent of Hutchinson & Bloodgood, LLP                                                                                                                
|      | 
|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)                                                                                



(B) REPORTS ON FORM
8-K



On October 22, 2003, the Company filed a Current Report on Form 8-K
including a press release announcing the earnings for the third quarter of 2003.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by Item 14 will be contained in the Companys definitive Proxy Statement for the Companys 2004 Annual Meeting of Shareholders which the Company intends to file with the SEC within 120 days after the close
of the Companys 2003 fiscal year in accordance with SEC Regulation 14A under the Securities Exchange Act of 1934. Such information is incorporated herein by this reference.



47



---

##### Table of Contents

Signatures



Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24thday of March, 2004.



/s/ Timothy P. WalbridgeTimothy P. WalbridgePresident and Chief Executive Officer/s/ Beth SandersBeth SandersExecutive Vice President andChief Financial Officer




Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 24thday of March, 2004.



|                       |  |  |  |                                                            
|---------------------- |  |  |  | -----------------------------------------------------------
|/s/ James R. Appleton  |  |  |  | /s/ William A. McCalmon                                    
|James R. Appleton      |  |  |  | William A. McCalmon                                        
|Director               |  |  |  | Director                                                   
|                       |  | 
|/s/ Bruce J. Bartells  |  |  |  | /s/ Patrick J. Meyer                                       
|Bruce J. Bartells      |  |  |  | Patrick J. Meyer                                           
|Director               |  |  |  | Chairman of the Board                                      
|                       |  | 
|/s/ Carole H. Beswick  |  |  |  | /s/ Richard M. Sanborn                                     
|Carole H. Beswick      |  |  |  | Richard M. Sanborn                                         
|Director               |  |  |  | Executive Vice President, Branch Administrator and Director
|                       |  | 
|/s/ Irving M. Feldkamp |  |  |  | /s/ Timothy P. Walbridge                                   
|Irving M. Feldkamp     |  |  |  | Timothy P. Walbridge                                       
|Director               |  |  |  | President, Chief Executive Officer                         
|                       |  |  |  | and Director                                               
|                       |  | 
|/s/ Larry Jacinto      |  |  |  | /s/ Stanley C. Weisser                                     
|Larry Jacinto          |  |  |  | Stanley C. Weisser                                         
|Director               |  |  |  | Director                                                   
|                       |  | 
|/s/ Ronald J. Jeffrey  |  |  |  | /s/ Douglas F. Welebir                                     
|Ronald J. Jeffrey      |  |  |  | Douglas F. Welebir                                         
|Director               |  |  |  | Director                                                   



48



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



To the Board of
Directors and Stockholders of

1st Centennial Bancorp



We have audited the accompanying consolidated statements of condition of 1st Centennial Bancorp and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of earnings, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of 1st Centennial Bancorp and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of America.





/s/ HUTCHINSON AND BLOODGOOD LLP



Glendale, California

February 13, 2004 (except for Note 23, which is as of February 20, 2004)



F-1



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CONDITION

December 31, 2003 and 2002

(Dollars In Thousands)



|                                                                                                                                                            |  |      |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                            |  | 2003 |         | 2002
|ASSETS                                                                                                                                                      |  |      |         |      |   |        
|Cash and due from banks                                                                                                                                     |  | $    | 9,948   |      | $ | 12,010 
|Federal funds sold                                                                                                                                          |  |      |        |      |   | 2,010  
|                                                                                                                                                            |  |      |         |      |   |        
|Total cash and cash equivalents                                                                                                                             |  |      | 9,948   |      |   | 14,020 
|                                                                                                                                                            |  |     
|Interest-bearing deposits in financial institutions                                                                                                         |  |      | 4,806   |      |   | 5,151  
|Investment securities, available for sale                                                                                                                   |  |      | 36,026  |      |   | 32,822 
|Federal Home Loan Bank stock                                                                                                                                |  |      | 380     |      |   | 329    
|Loans, net                                                                                                                                                  |  |      | 188,222 |      |   | 141,112
|Accrued interest receivable                                                                                                                                 |  |      | 710     |      |   | 673    
|Premises and equipment, net                                                                                                                                 |  |      | 2,468   |      |   | 2,626  
|Goodwill                                                                                                                                                    |  |      | 4,180   |      |   | 4,180  
|Cash surrender value of life insurance                                                                                                                      |  |      | 6,206   |      |   | 5,926  
|Other assets                                                                                                                                                |  |      | 1,437   |      |   | 1,019  
|                                                                                                                                                            |  |      |         |      |   |        
|Total assets                                                                                                                                                |  | $    | 254,383 |      | $ | 207,858
|                                                                                                                                                            |  |      |         |      |   |        
|LIABILITIES                                                                                                                                                 |  |      |         |      |   |        
|Deposits:                                                                                                                                                   |  |      |         |      |   |        
|Noninterest-bearing                                                                                                                                         |  | $    | 66,636  |      | $ | 53,896 
|Interest-bearing demand and money market accounts                                                                                                           |  |      | 60,129  |      |   | 48,985 
|Savings                                                                                                                                                     |  |      | 20,745  |      |   | 17,676 
|Time deposits $100,000 or greater                                                                                                                           |  |      | 39,190  |      |   | 34,575 
|Other time deposits                                                                                                                                         |  |      | 26,073  |      |   | 28,056 
|                                                                                                                                                            |  |      |         |      |   |        
|Total deposits                                                                                                                                              |  |      | 212,773 |      |   | 183,188
|                                                                                                                                                            |  |     
|Accrued interest payable                                                                                                                                    |  |      | 224     |      |   | 264    
|Federal funds purchased                                                                                                                                     |  |      | 1,850   |      |   |       
|Borrowings from Federal Home Loan Bank                                                                                                                      |  |      | 7,600   |      |   |       
|Other liabilities                                                                                                                                           |  |      | 1,536   |      |   | 1,213  
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures                                                           |  |      | 6,000   |      |   | 6,000  
|                                                                                                                                                            |  |      |         |      |   |        
|Total liabilities                                                                                                                                           |  |      | 229,983 |      |   | 190,665
|                                                                                                                                                            |  |      |         |      |   |        
|STOCKHOLDERS EQUITY                                                                                                                                        |  |      |         |      |   |        
|Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 1,502,281 and 1,202,517 shares at December 31, 2003 and 2002,
respectively |  |      | 20,456  |      |   | 13,913 
|Retained earnings                                                                                                                                           |  |      | 3,692   |      |   | 2,957  
|Accumulated other comprehensive income                                                                                                                      |  |      | 252     |      |   | 323    
|                                                                                                                                                            |  |      |         |      |   |        
|Total stockholders equity                                                                                                                                  |  |      | 24,400  |      |   | 17,193 
|                                                                                                                                                            |  |      |         |      |   |        
|Total liabilities and stockholders equity                                                                                                                  |  | $    | 254,383 |      | $ | 207,858
|                                                                                                                                                            |  |      |         |      |   |        



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



F-2



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF EARNINGS

Years Ended December 31, 2003, 2002 and 2001

(Dollars In Thousands, Except Per Share Data)



|                                                    |  |      |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | 2003 |        | 2002 |   | 2001  
|Interest income:                                    |  |      |        |      |   |        |  |   |       
|Interest and fees on loans                          |  | $    | 15,174 |      | $ | 12,586 |  | $ | 9,201 
|Deposits in financial institutions                  |  |      | 233    |      |   | 220    |  |   | 298   
|Federal funds sold                                  |  |      | 90     |      |   | 152    |  |   | 385   
|Investments                                         |  |      | 1,190  |      |   | 1,536  |  |   | 920   
|                                                    |  |      |        |      |   |        |  |   |       
|Total interest income                               |  |      | 16,687 |      |   | 14,494 |  |   | 10,804
|                                                    |  |      |        |      |   |        |  |   |       
|Interest expense:                                   |  |      |        |      |   |        |  |   |       
|Interest bearing demand and savings deposits        |  |      | 512    |      |   | 438    |  |   | 829   
|Time deposits $100,000 or greater                   |  |      | 850    |      |   | 936    |  |   | 999   
|Other time deposits                                 |  |      | 397    |      |   | 673    |  |   | 787   
|Interest on borrowed funds                          |  |      | 347    |      |   | 330    |  |   | 79    
|                                                    |  |      |        |      |   |        |  |   |       
|Total interest expense                              |  |      | 2,106  |      |   | 2,377  |  |   | 2,694 
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income                                 |  |      | 14,581 |      |   | 12,117 |  |   | 8,110 
|                                                    |  |      |       
|Provision for loan losses                           |  |      | 360    |      |   | 477    |  |   | 411   
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income after provision for loan losses |  |      | 14,221 |      |   | 11,640 |  |   | 7,699 
|                                                    |  |      |        |      |   |        |  |   |       
|Noninterest income:                                 |  |      |        |      |   |        |  |   |       
|Customer service fees                               |  |      | 1,348  |      |   | 1,105  |  |   | 1,137 
|Gains and commissions from sale of loans            |  |      | 996    |      |   | 547    |  |   | 413   
|Other income                                        |  |      | 678    |      |   | 772    |  |   | 443   
|                                                    |  |      |        |      |   |        |  |   |       
|Total noninterest income                            |  |      | 3,022  |      |   | 2,424  |  |   | 1,993 
|                                                    |  |      |        |      |   |        |  |   |       
|Noninterest expense:                                |  |      |        |      |   |        |  |   |       
|Salaries and employee benefits                      |  |      | 8,432  |      |   | 6,054  |  |   | 4,365 
|Net occupancy expense                               |  |      | 1,510  |      |   | 1,394  |  |   | 1,100 
|Other operating expense                             |  |      | 4,072  |      |   | 4,108  |  |   | 2,605 
|                                                    |  |      |        |      |   |        |  |   |       
|Total noninterest expense                           |  |      | 14,014 |      |   | 11,556 |  |   | 8,070 
|                                                    |  |      |        |      |   |        |  |   |       
|Income before provision for income taxes            |  |      | 3,229  |      |   | 2,508  |  |   | 1,622 
|                                                    |  |      |       
|Provision for income taxes                          |  |      | 1,141  |      |   | 802    |  |   | 575   
|                                                    |  |      |        |      |   |        |  |   |       
|Net income                                          |  | $    | 2,088  |      | $ | 1,706  |  | $ | 1,047 
|                                                    |  |      |        |      |   |        |  |   |       
|Basic earnings per share                            |  | $    | 1.48   |      | $ | 1.35   |  | $ | 1.05  
|                                                    |  |      |        |      |   |        |  |   |       
|Diluted earnings per share                          |  | $    | 1.37   |      | $ | 1.34   |  | $ | 1.04  
|                                                    |  |      |        |      |   |        |  |   |       



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



F-3



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Years Ended December 31, 2003, 2002 and 2001

(Dollars In Thousands, Except Share Data)



|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | --------- |  | ------------ | ------ | ----------------- | - | ------ | -------------------------------------------- |  | - | ----- | - |  | - | ------ | -
|                                                                                             |  | Shares    |  | Common Stock |        | Retained Earnings |   |        | AccumulatedOther Comprehensive Income (Loss) |  |   | Total |  
|BALANCE, DECEMBER 31, 2000                                                                   |  | 692,269   |  | $            | 5,728  |                   | $ | 1,184  |                                              |  | $ | (42   | ) |  | $ | 6,870  |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |  |              |       |                   |   | 1,047  |                                              |  |   |      |   |  |   | 1,047  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |  |              |       |                   |   |       |                                              |  |   | 154   |   |  |   | 154    |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   | 1,201  |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Cash dividends                                                                               |  |          |  |              |       |                   |   | (35    | )                                            |  |   |      |   |  |   | (35    | )
|                                                                                             |  |           |  |              |       
|Exercise of stock options, including tax benefit                                             |  | 28,642    |  |              | 183    |                   |   |       |                                              |  |   |      |   |  |   | 183    |  
|                                                                                             |  |           |  |              |       
|Proceeds from issuance of common stock                                                       |  | 423,529   |  |              | 7,053  |                   |   |       |                                              |  |   |      |   |  |   | 7,053  |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|BALANCE, DECEMBER 31, 2001                                                                   |  | 1,144,440 |  |              | 12,964 |                   |   | 2,196  |                                              |  |   | 112   |   |  |   | 15,272 |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |  |              |       |                   |   | 1,706  |                                              |  |   |      |   |  |   | 1,706  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |  |              |       |                   |   |       |                                              |  |   | 211   |   |  |   | 211    |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   | 1,917  |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Stock dividend                                                                               |  | 57,032    |  |              | 942    |                   |   | (942   | )                                            |  |   |      |   |  |   |       |  
|                                                                                             |  |           |  |              |       
|Cash paid in lieu of fractional shares                                                       |  |          |  |              |       |                   |   | (3     | )                                            |  |   |      |   |  |   | (3     | )
|                                                                                             |  |           |  |              |       
|Exercise of stock options, including tax benefit                                             |  | 1,045     |  |              | 7      |                   |   |       |                                              |  |   |      |   |  |   | 7      |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|BALANCE, DECEMBER 31, 2002                                                                   |  | 1,202,517 |  |              | 13,913 |                   |   | 2,957  |                                              |  |   | 323   |   |  |   | 17,193 |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |  |              |       |                   |   | 2,088  |                                              |  |   |      |   |  |   | 2,088  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |  |              |       |                   |   |       |                                              |  |   | (71   | ) |  |   | (71    | )
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   | 2,017  |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|Stock dividend                                                                               |  | 59,888    |  |              | 1,347  |                   |   | (1,347 | )                                            |  |   |      |   |  |   |       |  
|                                                                                             |  |           |  |              |       
|Cash paid in lieu of fractional shares                                                       |  |          |  |              |       |                   |   | (6     | )                                            |  |   |      |   |  |   | (6     | )
|                                                                                             |  |           |  |              |       
|Issuance of common stock, net                                                                |  | 225,000   |  |              | 4,871  |                   |   |       |                                              |  |   |      |   |  |   | 4,871  |  
|                                                                                             |  |           |  |              |       
|Issuance of restricted stock for legal settlement                                            |  | 12,960    |  |              | 295    |                   |   |       |                                              |  |   |      |   |  |   | 295    |  
|                                                                                             |  |           |  |              |       
|Exercise of stock options, including tax benefit                                             |  | 1,916     |  |              | 30     |                   |   |       |                                              |  |   |      |   |  |   | 30     |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  
|BALANCE, DECEMBER 31, 2003                                                                   |  | 1,502,281 |  | $            | 20,456 |                   | $ | 3,692  |                                              |  | $ | 252   |   |  | $ | 24,400 |  
|                                                                                             |  |           |  |              |        |                   |   |        |                                              |  |   |       |   |  |   |        |  



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





F-4



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2003, 2002 and 2001

(Dollars In Thousands)



|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | 2003 |         |   | 2002 |   |         | 2001 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $    | 2,088   |   |      | $ | 1,706   |      |  | $ | 1,047   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                     |  |      | 631     |   |      |   | 658     |      |  |   | 521     |  
|Loss on sale of fixed asset                                                       |  |      | 29      |   |      |   |        |      |  |   |        |  
|Provision for loan losses                                                         |  |      | 360     |   |      |   | 477     |      |  |   | 411     |  
|Loss (Gain) from sale of investments                                              |  |      | 7       |   |      |   |        |      |  |   | (16     | )
|Loss on sale of other real estate owned                                           |  |      | 9       |   |      |   |        |      |  |   |        |  
|Gain from sale of loans                                                           |  |      | (389    | ) |      |   | (309    | )    |  |   | (352    | )
|Amortization of deferred loan fees                                                |  |      | (895    | ) |      |   | (559    | )    |  |   | (585    | )
|Amortization of excess purchase value of deposits                                 |  |      | (105    | ) |      |   | (177    | )    |  |   | (71     | )
|Deferred income tax provision (benefit)                                           |  |      | 274     |   |      |   | (219    | )    |  |   | 302     |  
|Amortization of premiums on investment securities available for sale              |  |      | 539     |   |      |   | 248     |      |  |   | 127     |  
|Increase in cash surrender value of life insurance                                |  |      | (280    | ) |      |   | (198    | )    |  |   | (79     | )
|Decrease (increase) in assets:                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Accrued interest receivable                                                       |  |      | (37     | ) |      |   | 259     |      |  |   | (199    | )
|Other assets                                                                      |  |      | (927    | ) |      |   | 2,652   |      |  |   | (2,995  | )
|Increase (decrease) in liabilities:                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Accrued interest payable                                                          |  |      | (40     | ) |      |   | 41      |      |  |   | (275    | )
|Other liabilities                                                                 |  |      | 323     |   |      |   | (3,490  | )    |  |   | 3,231   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  |      | 1,587   |   |      |   | 1,089   |      |  |   | 1,067   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net decrease (increase) in interest-bearing deposits in financial institutions    |  |      | 345     |   |      |   | 803     |      |  |   | (1,174  | )
|Activity in available for sale securities:                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Net sales, maturities and (purchases)                                             |  |      | (3,821  | ) |      |   | 1,155   |      |  |   | (21,314 | )
|Acquisition of Palomar Community Bank                                             |  |      |        |   |      |   |        |      |  |   | 15,278  |  
|(Purchases) Redemption of Federal Home Loan Bank stock                            |  |      | (51     | ) |      |   | 67      |      |  |   | (20     | )
|Net (increase) in loans                                                           |  |      | (45,765 | ) |      |   | (15,026 | )    |  |   | (21,631 | )
|Proceeds from sales of other real estate owned                                    |  |      | 75      |   |      |   |        |      |  |   | 24      |  
|Additions to bank premises and equipment                                          |  |      | (502    | ) |      |   | (637    | )    |  |   | (618    | )
|Purchases of life insurance, net of redemptions                                   |  |      |        |   |      |   | (2,515  | )    |  |   | (1,304  | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                             |  |      | (49,719 | ) |      |   | (16,153 | )    |  |   | (30,759 | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  



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



F-5



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2003, 2002 and 2001

(Dollars In Thousands)



|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                      |  | 2003 |        |   | 2002 |   |        | 2001 | 
|CASH FLOWS FROM FINANCING ACTIVITIES                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Net increase in noninterest bearing deposits                          |  | $    | 12,740 |   |      | $ | 12,483 |      |  | $ | 7,796  |  
|Net increase (decrease) in interest bearing and money market deposits |  |      | 11,144 |   |      |   | (3,247 | )    |  |   | 6,081  |  
|Net increase in savings deposits                                      |  |      | 3,069  |   |      |   | 336    |      |  |   | 1,639  |  
|Net increase in time deposits $100,000 or greater                     |  |      | 4,615  |   |      |   | 5,140  |      |  |   | 6,769  |  
|Net decrease in other time deposits                                   |  |      | (1,983 | ) |      |   | (5,675 | )    |  |   | (1,460 | )
|Cash dividends paid                                                   |  |      |       |   |      |   |       |      |  |   | (35    | )
|Proceeds from federal funds purchased                                 |  |      | 1,850  |   |      |   |       |      |  |   |       |  
|Proceeds from Federal Home Loan Bank borrowings                       |  |      | 7,600  |   |      |   |       |      |  |   |       |  
|Proceeds from issuance of long-term debt                              |  |      |       |   |      |   |       |      |  |   | 3,500  |  
|Proceeds from issuance of trust preferred securities                  |  |      |       |   |      |   | 6,000  |      |  |   |       |  
|Repayment of long-term debt                                           |  |      |       |   |      |   | (3,500 | )    |  |   |       |  
|Net proceeds from issuance of common stock                            |  |      | 4,871  |   |      |   |       |      |  |   | 7,053  |  
|Proceeds from issuance of restricted stock                            |  |      | 130    |   |      |   |       |      |  |   |       |  
|Cash dividends paid in lieu of fractional shares                      |  |      | (6     | ) |      |   | (3     | )    |  |   |       |  
|Proceeds from exercise of stock options                               |  |      | 30     |   |      |   | 7      |      |  |   | 183    |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash provided by financing activities                             |  |      | 44,060 |   |      |   | 11,541 |      |  |   | 31,526 |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                  |  |      | (4,072 | ) |      |   | (3,523 | )    |  |   | 1,834  |  
|                                                                      |  |      |       
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                          |  |      | 14,020 |   |      |   | 17,543 |      |  |   | 15,709 |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                |  | $    | 9,948  |   |      | $ | 14,020 |      |  | $ | 17,543 |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|SUPPLEMENTARY INFORMATION                                             |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                      |  |      |       
|Interest paid                                                         |  | $    | 2,146  |   |      | $ | 2,336  |      |  | $ | 2,968  |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Income taxes paid                                                     |  | $    | 1,354  |   |      | $ | 945    |      |  | $ | 468    |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                      |  |      |       
|Loan made to facilitate sale of other real estate owned               |  | $    | 580    |   |      | $ |       |      |  | $ |       |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Issuance of restricted stock for legal settlement                     |  | $    | 165    |   |      | $ |       |      |  | $ |       |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |        |  



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



F-6



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|------- | ------------------------------------------



The accounting and reporting policies of 1st Centennial Bancorp, and its wholly-owned subsidiaries, 1st Centennial Bank (the Bank) and Centennial Capital
Trust I (the Trust), herein referred to as (the Company), are in accordance with accounting principles generally accepted in the United States of America and general practices within the financial services industry.



The Company, through its wholly-owned subsidiary, the Bank, provides banking
services to individuals and business customers in Redlands, Escondido, North Orange County and surrounding communities.



The Bank formed Centennial Financial Services (CFS) as a wholly-owned subsidiary. CFS began operations during March, 2000 and sells investment and
insurance products to the Banks customers. On March 4, 2003 (CFS) changed its name to 1stCentennial Wealth
Strategies Group.



On August 17, 2001, the Company acquired
the stock of Palomar Community Bank in Escondido California for $10.5 million cash (see Note 2). Palomar Community Bank was a California state chartered bank, providing banking services to individuals and business customers in Escondido and
surrounding communities. On May 24, 2002, Palomar Community Bank surrendered its charter and was merged into the Bank.



On July 10, 2002, the Company formed and acquired a 100% interest in Centennial Capital Trust I. The Trust was formed in order to facilitate the issuance
of $6 million in Redeemable Preferred Securities (see Note 9).



Basis of Presentation and Consolidation



The consolidated financial statements include the accounts of 1st Centennial Bancorp and its wholly-owned subsidiaries, the Bank and Centennial Capital Trust I. The consolidated financial statements of the Bank include the accounts of the
Bank and its wholly-owned subsidiary, 1stCentennial Wealth Strategies Group. All significant intercompany balances
and transactions have been eliminated in consolidation.



F-7



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Use of Estimates



In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, the valuation of deferred tax
assets, and other-than-temporary impairment losses.



Reclassification



Certain amounts have
been reclassified in the 2002 and 2001 financial statements to conform to the 2003 financial statement presentation.



Interest-Bearing Deposits in Financial Institutions



Interest-bearing deposits in financial institutions mature within ten years and are carried at fair market value, which
approximates cost.



Investment Securities



Debt securities that management has the positive
intent and ability to hold to maturity are classified as held to maturity and recorded at cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified
as available for sale and recorded at fair value, with unrealized gains or losses excluded from earnings and reported in other comprehensive income.



Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the
securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary, are reflected in earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (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. Gains and losses on the sale of securities are recorded on the trade date, and are determined using the specific identification method.



F-8



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Federal Home Loan Bank Stock



Federal Home Loan Bank stock is carried at cost, and is evaluated for impairment based on an estimate of the ultimate recoverability of par value.



Loans



The Company grants construction, real estate, commercial and consumer loans
to customers. A substantial portion of the loan portfolio is represented by construction and real estate loans throughout Southern California. The ability of the Companys debtors to honor their contracts is dependent upon the real estate and
general economic conditions in this area.



Loans that
management has the intent and ability to hold for the foreseeable future or until maturity or pay-off, generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred
fees or costs on originated loans.



Interest on loans is
accrued daily as earned, except when serious doubt concerning collectibility arises, at which time such loans are placed on a nonaccrual basis, and all accrued and uncollected interest income is reversed against current period operations. Interest
income on nonaccrual loans is recognized only to the extent of interest payments received.



Unearned income on installment loans is recognized as income over the term of the loans using a method that approximates the interest method.



Loan origination fees and costs are deferred and amortized as an adjustment of the loans yield over the life of the
loan using the interest method, which results in a constant rate of return.



F-9



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Loans Held for Sale



Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Fair value is
based on commitments on hand from investors or prevailing market prices. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.



Allowance for Loan Losses



The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.



The allowance for loan losses is evaluated on a regular basis by management
and is based upon managements periodic review of the collectibility 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.



A loan is considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payment when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future
cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent.



F-10



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Allowance for Loan Losses (continued)



The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than that of the carrying
value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect managements
estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.



Loan Servicing



Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into other income in proportion to, and over the period of, the estimated future net servicing income of the underlying
financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms.
Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for the stratum.



Goodwill and Other Intangible Assets



Goodwill is carried as an asset on the Companys balance sheet, and is evaluated at least once per year for impairment. If the carrying value of the goodwill is determined to be impaired, the Company will
write-down the amount of goodwill to its estimated value. The amount of goodwill written-off will be expensed in the year impairment is determined.



Other intangible assets consist of one-time loan and deposit fair value adjustments. These fair value adjustments are amortized on a straight-line basis
with remaining lives of up to 4 years.



F-11



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Premises, Equipment and Depreciation



Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis, which range from three to thirty-nine years.



Foreclosed Real Estate



Foreclosed real estate is held for sale and carried at the lower of cost or fair value less estimated costs to sell and an allowance for losses. Troubled
loans are transferred to foreclosed real estate upon completion of formal foreclosure proceedings.



Costs relating to development and improvement of foreclosed real estate are capitalized, whereas costs relating to holding property are expensed. The
portion of interest costs relating to development of real estate is capitalized.



Valuations are periodically performed by management, and an allowance for losses is established through a charge to operations if the carrying value of a property exceeds its fair value, less estimated costs to sell.



Transfers of Financial Assets



Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage
of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.



Income Taxes



Deferred income taxes are recognized for estimated future tax effects
attributable to temporary differences between income tax and financial reporting purposes and carry forwards. Valuation allowances are established when necessary to reduce the deferred tax asset to the amount expected to be realized. Deferred tax
assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted accordingly through the provision for income taxes.



F-12



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Stock Compensation Plans



Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting
for Stock Based Compensation  Transition and Disclosure, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee or
a director must pay to acquire the stock. Stock options issued under the Companys stock option plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. Under the Companys stock
option plan, compensation cost is recognized to the extent that the quoted market price of the stock on the date of grant exceeds the amount that the employee is required to pay.



As discussed above, the Company applies APB 25 and related interpretations in accounting for the Plan. Accordingly, no
compensation cost has been recognized for the stock option plan. Had compensation cost for the Companys stock option plan been determined based on the fair value at the grant date for awards under the Plan consistent with the method prescribed
by SFAS No. 123 as amended by SFAS 148, the Companys net income and earnings per share would have been reduced by the compensation cost net of taxes to the pro forma amounts indicated below:



|                                |  |                          |       |      |   |       |  |   |      
|------------------------------- |  | ------------------------ | ----- | ---- | - | ----- |  | - | -----
|                                |  | Years Ended December 31,
|                                |  | 2003                     |       | 2002 |   | 2001 
|Net income:                     |  |                          |       |      |   |       |  |   |      
|As reported                     |  | $                        | 2,088 |      | $ | 1,706 |  | $ | 1,047
|Pro forma                       |  |                          | 1,848 |      |   | 1,364 |  |   | 746  
|                                |  |                          |      
|Compensation cost, net of taxes |  | $                        | 240   |      | $ | 342   |  | $ | 301  
|                                |  |                          |      
|Basic earnings per share:       |  |                          |       |      |   |       |  |   |      
|As reported                     |  | $                        | 1.48  |      | $ | 1.35  |  | $ | 1.05 
|Pro forma                       |  |                          | 1.31  |      |   | 1.08  |  |   | 0.75 
|                                |  |                          |      
|Diluted earnings per share:     |  |                          |       |      |   |       |  |   |      
|As reported                     |  | $                        | 1.37  |      | $ | 1.34  |  | $ | 1.04 
|Pro forma                       |  |                          | 1.21  |      |   | 1.07  |  |   | 0.74 



F-13



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Stock Compensation Plans (continued)



The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted
assumptions used for option grants in 2003 and 2002; no dividend yield; expected volatility of 19.90% and 20.08% in 2003 and 2002, respectively; risk-free interest rates of 4.27% and 4.05% for 2003 and 2002, respectively, and expected lives of 10
years for both years. There were no options granted in 2001.



Employee Stock Ownership Plan (ESOP)



Compensation expense is recognized based on cash contributions paid or committed to be paid to the ESOP. All shares held by the ESOP are deemed outstanding for purposes of earnings per share calculations. Dividends declared on all shares
held by the ESOP are charged to the Companys retained earnings.



Earnings Per Share



Basic earnings per
share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using
the treasury stock method.



The weighted average number of
shares used in the computation of basic earnings per share was 1,411,066 for 2003, 1,259,161 for 2002 and 993,014 for 2001. The weighted average number of shares used in the computation of diluted earnings per share was 1,523,042 for 2003, 1,270,456
for 2002 and 1,004,149 for 2001.



Statement of Cash Flows



For the purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, and federal funds sold.



F-14



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Comprehensive Income



Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.



The components of other comprehensive income are as follows:



|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                   |  | 2003 |      |   | 2002 |   |      | 2001 | 
|Unrealized holding gains (losses) on available for sale securities |  | $    | (126 | ) |      | $ | 364  |      |  | $ | 273  |  
|Reclassification adjustment for losses (gains) realized in income  |  |      | 7    |   |      |   |     |      |  |   | (16  | )
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|Net unrealized gains (losses)                                      |  |      | (119 | ) |      |   | 364  |      |  |   | 257  |  
|Tax effect                                                         |  |      | 48   |   |      |   | (153 | )    |  |   | (103 | )
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|Net-of-tax amount                                                  |  | $    | (71  | ) |      | $ | 211  |      |  | $ | 154  |  
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  



Recent
Accounting Pronouncements



In January 2003, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46), which establishes guidance for determining when an entity should consolidate another entity that meets the
definition of a variable interest entity. FIN 46 requires a variable interest entity to be consolidated by a company if that company will absorb a majority of the expected losses, will receive a majority of the expected residual returns, or both.
Transferors to qualified special-purpose entities (QSPEs) and certain other interest in a QSPE are not subject to the requirements of FIN 46. On December 17, 2003, the FASB deferred the effective date of FIN 46 to no later than the end
of the first reporting period that ends after March 15, 2004. However, for special purpose entities the Company would be required to apply FIN 46 as of December 31, 2003. The Interpretation had no effect on the Companys consolidated financial
statements.



F-15



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|------- | ------------------------------------------------------



Recent Accounting Pronouncements (continued)



In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. The Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. This Statement is effective for contracts entered into or modified after June 30, 2003. This Statement had no effect on the Companys consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This Statement provides new rules on the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. Such financial
instruments include mandatory redeemable shares, instruments that require the issuer to buy back some of its shares in exchange for cash or other assets, or obligations that can be settled with shares, the monetary value of which is fixed. Most of
the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 30, 2003. This Statement had no effect on
the Companys consolidated financial statements.



|Note 2. | ACQUISITION OF PALOMAR COMMUNITY BANK
|------- | -------------------------------------



On August 17, 2001, the Company acquired Palomar Community Bank from Community West Bancshares for $10.5 million in cash. The total purchase price was
allocated as follows:



|                                     |  |   |         |  
|------------------------------------ |  | - | ------- | -
|Cash and cash equivalents            |  | $ | 25,966  |  
|Investment securities                |  |   | 3,447   |  
|Net loans                            |  |   | 44,764  |  
|Equipment and leasehold improvements |  |   | 241     |  
|Other assets                         |  |   | 336     |  
|Goodwill                             |  |   | 4,180   |  
|Intangible asset                     |  |   | 68      |  
|Deposits                             |  |   | (67,191 | )
|Other liabilities                    |  |   | (1,123  | )
|Closing costs                        |  |   | (188    | )
|                                     |  |   |         |  
|                                     |  | $ | 10,500  |  
|                                     |  |   |         |  



F-16



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 2. | ACQUISITION OF PALOMAR COMMUNITY BANK (Continued)
|------- | -------------------------------------------------



In accordance with SFAS 142, the goodwill in connection with this transaction has been recorded but is not being amortized. Other intangible assets
represent a core deposit premium and is being amortized over the average life of the corresponding deposits using the straight-line method.



|Note 3. | RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
|------- | -----------------------------------------------



The Company is required to maintain an average account balance with the Federal Reserve Bank. At December 31, 2003 and 2002, the balance met the
requirements and amounted to $3,274,000 and $841,000, respectively.



|Note 4. | INVESTMENT SECURITIES
|------- | ---------------------



The following is a comparison of amortized cost and fair value of investment securities at December 31, 2003 and 2002:



|                                                      |  |               |        |                       |   |                        |  |   |           |   |  |   |       
|----------------------------------------------------- |  | ------------- | ------ | --------------------- | - | ---------------------- |  | - | --------- | - |  | - | ------
|                                                      |  | 2003         
|                                                      |  | AmortizedCost |        | Gross UnrealizedGains |   | Gross UnrealizedLosses |  |   | FairValue
|Available for sale:                                   |  |               |        |                       |   |                        |  |   |           |   |  |   |       
|U.S. treasury and agency securities                   |  | $             | 705    |                       | $ | 13                     |  | $ |          |   |  | $ | 718   
|Federal agency mortgage-backed securities             |  |               | 30,302 |                       |   | 285                    |  |   | (63       | ) |  |   | 30,524
|Obligations of states and local government securities |  |               | 4,084  |                       |   | 213                    |  |   |          |   |  |   | 4,297 
|Marketable equity securities                          |  |               | 487    |                       |   |                       |  |   |          |   |  |   | 487   
|                                                      |  |               |        |                       |   |                        |  |   |           |   |  |   |       
|                                                      |  | $             | 35,578 |                       | $ | 511                    |  | $ | (63       | ) |  | $ | 36,026
|                                                      |  |               |        |                       |   |                        |  |   |           |   |  |   |       



F-17



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 4. | INVESTMENT SECURITIES (Continued)
|------- | ---------------------------------



|                                                      |  |               |        |                       |   |                        |  |   |           |   |  |   |       
|----------------------------------------------------- |  | ------------- | ------ | --------------------- | - | ---------------------- |  | - | --------- | - |  | - | ------
|                                                      |  | 2002         
|                                                      |  | AmortizedCost |        | Gross UnrealizedGains |   | Gross UnrealizedLosses |  |   | FairValue
|Available for sale:                                   |  |               |        |                       |   |                        |  |   |           |   |  |   |       
|U.S. treasury and agency securities                   |  | $             | 2,012  |                       | $ | 29                     |  | $ |          |   |  | $ | 2,041 
|Federal agency mortgage-backed securities             |  |               | 25,396 |                       |   | 460                    |  |   | (53       | ) |  |   | 25,803
|Obligations of states and local government securities |  |               | 4,357  |                       |   | 134                    |  |   |          |   |  |   | 4,491 
|Marketable equity securities                          |  |               | 487    |                       |   |                       |  |   |          |   |  |   | 487   
|                                                      |  |               |        |                       |   |                        |  |   |           |   |  |   |       
|                                                      |  | $             | 32,252 |                       | $ | 623                    |  | $ | (53       | ) |  | $ | 32,822
|                                                      |  |               |        |                       |   |                        |  |   |           |   |  |   |       



The amortized cost
and fair value of investment securities available for sale at December 31, 2003, by contractual maturity, are shown below. Expected maturities for mortgage-backed securities may differ from contractual maturities because borrowers may have the right
to call or retire obligations with or without call or prepayment penalties.



|                               |  |               |        |           |   |       
|------------------------------ |  | ------------- | ------ | --------- | - | ------
|                               |  | AmortizedCost |        | FairValue
|Within one year                |  | $             | 605    |           | $ | 620   
|Over 1 year to 5years          |  |               | 2,148  |           |   | 2,277 
|Over 5 years to 10 years       |  |               | 2,036  |           |   | 2,118 
|Over 10 years                  |  |               |       |           |   |      
|                               |  |               |        |           |   |       
|                               |  |               | 4,789  |           |   | 5,015 
|Federal agency mortgage-backed |  |               |        |           |   |       
|Securities                     |  |               | 30,302 |           |   | 30,524
|Marketable equity securities   |  |               | 487    |           |   | 487   
|                               |  |               |        |           |   |       
|                               |  | $             | 35,578 |           | $ | 36,026
|                               |  |               |        |           |   |       



As of December 31,
2003 and 2002, U.S. treasury and agency securities, obligations of states and local government securities and federal agency mortgage-backed securities with amortized cost of $13,194,000 and $5,557,000 and fair values of $13,423,000 and $5,818,000
respectively, were pledged as collateral as required or permitted by law.



F-18



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 4. | INVESTMENT SECURITIES (Continued)
|------- | ---------------------------------



For the years ended December 31, 2003, 2002 and 2001, proceeds from the sales of securities available for sale amounted to $1,516,000, $0 and $936,000,
respectively. Gross realized gains amounted to $1,000, $0 and $17,000, respectively. Gross realized losses amounted to $8,000, $0 and $1,000, respectively. The tax benefit (provision) applicable to these net realized gains and losses amounted to
$3,000, $0 and $(6,000), respectively.



Information pertaining
to securities with gross unrealized losses at December 31, 2003, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:



|                                          |  |                        |    |                |   |                       |  |           |   |  |   |      
|----------------------------------------- |  | ---------------------- | -- | -------------- | - | --------------------- |  | --------- | - |  | - | -----
|                                          |  | Less Than 12 Months    |    | Over 12 Months
|                                          |  | Gross UnrealizedLosses |    | FairValue      |   | GrossUnrealizedLosses |  | FairValue
|Available for sale:                       |  |                        |    |                |   |                       |  |           |   |  |   |      
|Federal agency mortgage-backed securities |  | $                      | 58 |                | $ | 10,648                |  | $         | 5 |  | $ | 1,090
|                                          |  |                        |    |                |   |                       |  |           |   |  |   |      



|Note 5. | LOANS
|------- | -----



The composition of the Companys loan portfolio at December 31, 2003 and 2002 is as follows:



|                               |  |      |         |   |      |   |         |  
|------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                               |  | 2003 |         |   | 2002 |  
|Real estate loans              |  |      |         |   |      |   |         |  
|Construction and development   |  | $    | 70,654  |   |      | $ | 53,246  |  
|Residential                    |  |      | 6,169   |   |      |   | 9,975   |  
|Commercial and multi-family    |  |      | 64,260  |   |      |   | 34,297  |  
|Commercial loans               |  |      | 42,009  |   |      |   | 38,305  |  
|Consumer loans                 |  |      | 598     |   |      |   | 1,583   |  
|Equity lines of credit         |  |      | 4,088   |   |      |   | 4,697   |  
|Credit card and other loans    |  |      | 3,500   |   |      |   | 1,351   |  
|                               |  |      |         |   |      |   |         |  
|Total loans                    |  |      | 191,278 |   |      |   | 143,454 |  
|Less unearned income           |  |      | (948    | ) |      |   | (570    | )
|Less allowance for loan losses |  |      | (2,108  | ) |      |   | (1,772  | )
|                               |  |      |         |   |      |   |         |  
|Net loans                      |  | $    | 188,222 |   |      | $ | 141,112 |  
|                               |  |      |         |   |      |   |         |  



F-19



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 5. | LOANS (Continued)
|------- | -----------------



Changes in the allowance for loan losses are summarized as follows:



|                                                   |  |      |       |   |      |   |       |      |  |   |       |  
|-------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                   |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Balance as of January 1                            |  | $    | 1,772 |   |      | $ | 1,460 |      |  | $ | 868   |  
|Allowance for loan losses, Palomar Community Bank  |  |      |      |   |      |   |      |      |  |   | 603   |  
|Provision charged to expense                       |  |      | 360   |   |      |   | 477   |      |  |   | 411   |  
|Loans charged-off                                  |  |      | (221  | ) |      |   | (194  | )    |  |   | (306  | )
|Reclassification for off-balance sheet commitments |  |      |      |   |      |   |      |      |  |   | (129  | )
|Recoveries of loans previously charged-off         |  |      | 197   |   |      |   | 29    |      |  |   | 13    |  
|                                                   |  |      |       |   |      |   |       |      |  |   |       |  
|Balance as of December 31                          |  | $    | 2,108 |   |      | $ | 1,772 |      |  | $ | 1,460 |  
|                                                   |  |      |       |   |      |   |       |      |  |   |       |  



Loans serviced for
others are not included in the accompanying statements of condition. The unpaid principal balances of loans serviced for others were $14,437,000 and $14,928,000 at December 31, 2003 and 2002, respectively.



The balance of capitalized loan servicing rights included in other assets
was $163,000 and $119,000 at December 31, 2003 and 2002, respectively.



The following table is a summary of information pertaining to impaired loans as of December 31, 2003 and 2002:



|                                                            |  |      |     |      |   |    
|----------------------------------------------------------- |  | ---- | --- | ---- | - | ---
|                                                            |  | 2003 |     | 2002
|Impaired loans without a valuation allowance                |  | $    | 74  |      | $ |   
|Impaired loans with a valuation allowance                   |  |      | 547 |      |   | 394
|                                                            |  |      |     |      |   |    
|Total impaired loans                                        |  | $    | 621 |      | $ | 394
|                                                            |  |      |     |      |   |    
|Valuation allowance related to impaired loans               |  | $    | 144 |      | $ | 85 
|                                                            |  |      |     |      |   |    
|Total non-accrual loans                                     |  | $    | 621 |      | $ | 394
|                                                            |  |      |     |      |   |    
|Total loans past-due ninety days or more and still accruing |  | $    |    |      | $ | 187
|                                                            |  |      |     |      |   |    



F-20



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 5. | LOANS (Continued)
|------- | -----------------



|                                                             |  |                          |     |      |   |      |  |   |    
|------------------------------------------------------------ |  | ------------------------ | --- | ---- | - | ---- |  | - | ---
|                                                             |  | Years Ended December 31,
|                                                             |  | 2003                     |     | 2002 |   | 2001
|Average investment in impaired loans                         |  | $                        | 584 |      | $ | 287  |  | $ | 283
|                                                             |  |                          |     |      |   |      |  |   |    
|Interest income recognized on impaired loans                 |  | $                        | 55  |      | $ | 27   |  | $ | 30 
|                                                             |  |                          |     |      |   |      |  |   |    
|Interest income recognized on a cash basis on impaired loans |  | $                        | 55  |      | $ | 27   |  | $ | 30 
|                                                             |  |                          |     |      |   |      |  |   |    



|Note 6. | PREMISES, EQUIPMENT AND ACCUMULATED DEPRECIATION
|------- | ------------------------------------------------



Premises, equipment and accumulated depreciation at December 31, 2003 and 2002 consist of the following:



|                                  |  |      |       |      |   |      
|--------------------------------- |  | ---- | ----- | ---- | - | -----
|                                  |  | 2003 |       | 2002
|Land                              |  | $    | 132   |      | $ | 132  
|Building                          |  |      | 1,116 |      |   | 1,116
|Equipment, furniture and fixtures |  |      | 3,987 |      |   | 3,627
|Construction in progress          |  |      | 2     |      |   | 59   
|                                  |  |      |       |      |   |      
|                                  |  |      | 5,237 |      |   | 4,934
|Less accumulated depreciation     |  |      | 2,769 |      |   | 2,308
|                                  |  |      |       |      |   |      
|                                  |  | $    | 2,468 |      | $ | 2,626
|                                  |  |      |       |      |   |      



Total depreciation
expense amounted to $631,000, $658,000 and $521,000 for the years ended December 31, 2003, 2002 and 2001, respectively.



F-21



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 6. | PREMISES, EQUIPMENT AND ACCUMULATED DEPRECIATION (Continued)
|------- | ------------------------------------------------------------



The Company leases space for branch and loan premises. The Company also subleases a portion of the building in which the Palomar branch is located.
Pursuant to the terms of the noncancelable operating lease agreements in effect at December 31, 2003, future minimum rent commitments under these leases are as follows:



|            |  |                       |       |                |   |                 |  |   |      
|----------- |  | --------------------- | ----- | -------------- | - | --------------- |  | - | -----
|            |  | OperatingLeaseExpense |       | SubleaseIncome |   | NetLeaseExpense
|2004        |  | $                     | 703   |                | $ | 25              |  | $ | 677  
|2005        |  |                       | 706   |                |   |                |  |   | 706  
|2006        |  |                       | 526   |                |   |                |  |   | 526  
|2007        |  |                       | 227   |                |   |                |  |   | 227  
|Beyond 2007 |  |                       | 62    |                |   |                |  |   | 62   
|            |  |                       |       |                |   |                 |  |   |      
|            |  | $                     | 2,224 |                | $ | 25              |  | $ | 2,198
|            |  |                       |       |                |   |                 |  |   |      



Total rent expense for
the years ended December 31, 2003, 2002 and 2001 amounted to $583,000, $491,000 and $303,000, respectively.



|Note 7. | DEPOSITS
|------- | --------



A summary of time deposits by maturity at December 31, 2003 and 2002 is as follows:



|                              |  |      |        |      |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------
|                              |  | 2003 |        | 2002
|Within 1 year                 |  | $    | 58,522 |      | $ | 58,513
|After 1 year through 3 years  |  |      | 3,327  |      |   | 1,762 
|After 3 years through 5 years |  |      | 3,355  |      |   | 2,299 
|After 5 years                 |  |      | 59     |      |   | 57    
|                              |  |      |        |      |   |       
|                              |  | $    | 65,263 |      | $ | 62,631
|                              |  |      |        |      |   |       



F-22



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 8. | LONG-TERM DEBT
|------- | --------------



The Company had a seven-year $2.0 million unsecured note payable to United Security Bank at an interest rate of prime plus 1.125%. The terms of the note
called for interest only payments though July, 2003. Principal and interest payments were to commence beginning August 2003. The note was paid off during July, 2002.



The Company also had a two year $2.0 million note payable to United Security Bank at an interest rate of prime plus 1.0%.
The note was secured by the stock of the Bank and Palomar Community Bank. The terms of the note called for interest only payments through July, 2003, at which point all unpaid principal and accrued interest amounts were due. The note was paid off
during July, 2002.



|Note 9. | ISSUANCE OF REDEEMABLE PREFERRED SECURITIES
|------- | -------------------------------------------



On July 11, 2002, Centennial Capital Trust I, a newly formed Delaware statutory business trust and a wholly owned subsidiary of the Company (the Trust),
issued an aggregate of $6.0 million of principal amount of Floating Rate TRUPS® (Capital Trust Pass-through Securities of the Trust) (the Trust Preferred Securities). Salomon Smith Barney, Inc. acted as placement agent in connection with the offering of the Trust Preferred Securities. The
securities issued by the Trust are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. The entire proceeds to the Trust from the sale of the Trust Preferred Securities were
used by the Trust in order to purchase $6.0 million in principal amount of the Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 issued by the Company (the Subordinated Debt Securities).



The Subordinated Debt Securities bear a variable interest rate equal to
LIBOR plus 3.65% (1.15% + 3.65% = 4.80% at December 31, 2003), with a maximum rate of 12.5% through the first call date in July, 2007. The Company used approximately $4 million of the approximately $5.8 million in net proceeds it received from the
Subordinated Debt Securities to retire existing long-tem debt. Total broker and legal costs associated with the issuance of $191,500 are being amortized over a 10-year period.



F-23



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 10. | RELATED PARTY TRANSACTIONS
|-------- | --------------------------



In the ordinary course of business, the Company has granted loans to certain directors, principal officers, their immediate families, and affiliated
companies in which they are principal stockholders. All loans were made under terms, which are consistent with the Companys normal lending policies.



Aggregate related party loan transactions were as follows:





|                            |  |      |       |   |      |   |      
|--------------------------- |  | ---- | ----- | - | ---- | - | -----
|                            |  | 2003 |       |   | 2002
|Balance as of January 1     |  | $    | 2,661 |   |      | $ | 2,197
|Net borrowings (repayments) |  |      | (53   | ) |      |   | 464  
|                            |  |      |       |   |      |   |      
|Balance as of December 31   |  | $    | 2,608 |   |      | $ | 2,661
|                            |  |      |       |   |      |   |      



Deposits from related
parties held by the Company at December 31, 2003 and 2002 totaled $2,819,000 and $863,000 respectively.



|Note 11. | STOCK OPTIONS
|-------- | -------------



The Company has a combined incentive and nonqualified stock option plan, which authorizes the issuance of stock options to full-time salaried employees
and non-employee directors. The incentive portion of the Plan is only available to employees of the Company, while the nonqualified portion is also available to directors of the Company.



The Companys Board of Directors is responsible for administrating the Plan. Option prices are determined by the
Companys directors and must be equal to or greater than the prevailing market price of the Companys common stock at the time the option is granted. Options are vested at a rate of 20% a year for five years and expire ten years from the
date the options are granted. The maximum number of shares reserved for issuance upon exercise of options under the Plan is 378,523 shares of the Companys capital stock. Options issued have an exercise price ranging from $4.84 to $28.00 per
share.



F-24



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 11. | STOCK OPTIONS (Continued)
|-------- | -------------------------



The following is a summary of the Companys stock option activity for 2003 and 2002:



|                                                           |  |         |   |      |                              |       |        |         |   |                              |   |      
|---------------------------------------------------------- |  | ------- | - | ---- | ---------------------------- | ----- | ------ | ------- | - | ---------------------------- | - | -----
|                                                           |  | 2003    |   | 2002
|                                                           |  | Shares  |   |      | WeightedAverageExercisePrice |       | Shares |         |   | WeightedAverageExercisePrice
|Options granted and outstanding at beginning of year       |  | 268,223 |   |      | $                            | 17.65 |        | 173,030 |   |                              | $ | 16.77
|Stock dividend                                             |  | 13,236  |   |      |                              |      |        | 7,853   |   |                              |   |     
|Options granted                                            |  | 19,000  |   |      |                              | 24.02 |        | 104,150 |   |                              |   | 20.40
|Options canceled                                           |  | (13,461 | ) |      |                              | 17.68 |        | (15,765 | ) |                              |   | 18.15
|Options exercised                                          |  | (1,916  | ) |      |                              | 16.17 |        | (1,045  | ) |                              |   | 6.66 
|                                                           |  |         |   |      |                              |       |        |         |   |                              |   |      
|Options granted and outstanding at end of year             |  | 285,082 |   |      | $                            | 17.31 |        | 268,223 |   |                              | $ | 17.65
|                                                           |  |         |   |      |                              |       |        |         |   |                              |   |      
|Options exercisable at year-end                            |  | 108,109 |   |      | $                            | 15.02 |        | 57,437  |   |                              | $ | 14.05
|Weighted average fair value of options granted during year |  |         |   |      | $                            | 8.85  |        |         |   |                              | $ | 7.53 



Information
pertaining to options outstanding at December 31, 2003 is as follows:



|                                   |  |                     |  |                                           |  |                               |       |                   |         |                              |   |      
|---------------------------------- |  | ------------------- |  | ----------------------------------------- |  | ----------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|                                   |  | Options Outstanding |  | Options Exercisable                      
|Range of Exercise Prices           |  | NumberOutstanding   |  | Weighted AverageRemaining ContractualLife |  | WeightedAverage ExercisePrice |       | NumberExercisable |         | WeightedAverageExercisePrice
|$ 4.84 to $13.30                   |  | 47,909              |  | 4.6 years                                 |  | $                             | 11.66 |                   | 43,625  |                              | $ | 11.51
|$15.71 to $28.00                   |  | 237,173             |  | 8.4 years                                 |  | $                             | 18.45 |                   | 64,484  |                              | $ | 17.39
|                                   |  |                     |  |                                           |  |                               |       |                   |         |                              |   |      
|Options outstanding at end of year |  | 285,082             |  | 7.7 years                                 |  | $                             | 17.31 |                   | 108,109 |                              | $ | 15.02
|                                   |  |                     |  |                                           |  |                               |       |                   |         |                              |   |      





F-25



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 12. | INCOME TAXES
|-------- | ------------



The components of the provision for income taxes at December 31 are as follows:



|                                  |  |      |       |   |      |   |       |      |  |   |    
|--------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---
|                                  |  | 2003 |       |   | 2002 |   |       | 2001
|Current tax provision:            |  |      |       |   |      |   |       |      |  |   |    
|Federal                           |  | $    | 999   |   |      | $ | 747   |      |  | $ | 175
|State                             |  |      | 383   |   |      |   | 274   |      |  |   | 98 
|                                  |  |      |       |   |      |   |       |      |  |   |    
|                                  |  |      | 1,382 |   |      |   | 1,021 |      |  |   | 273
|                                  |  |      |       |   |      |   |       |      |  |   |    
|Deferred tax provision (benefit): |  |      |       |   |      |   |       |      |  |   |    
|Federal                           |  |      | (250  | ) |      |   | (271  | )    |  |   | 250
|State                             |  |      | 9     |   |      |   | 52    |      |  |   | 52 
|                                  |  |      |       |   |      |   |       |      |  |   |    
|                                  |  |      | (241  | ) |      |   | (219  | )    |  |   | 302
|                                  |  |      |       |   |      |   |       |      |  |   |    
|                                  |  | $    | 1,141 |   |      | $ | 802   |      |  | $ | 575
|                                  |  |      |       |   |      |   |       |      |  |   |    



The reasons for the
differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:



|                                        |  |      |   |  |      |   |  |      |  
|--------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                        |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Statutory tax rate                      |  | 34.0 | % |  | 34.0 | % |  | 34.0 | %
|Increase (decrease) resulting from:     |  |      |   |  |      |   |  |      |  
|State taxes, net of federal tax benefit |  | 7.2  |   |  | 7.2  |   |  | 7.2  |  
|Municipal bond income                   |  | (2.1 | ) |  | (4.5 | ) |  | (3.5 | )
|Cash surrender value of life insurance  |  | (4.2 | ) |  | (5.5 | ) |  | (2.3 | )
|Other, net                              |  | 0.4  |   |  | 0.8  |   |  | 0.1  |  
|                                        |  |      |   |  |      |   |  |      |  
|Effective tax rates                     |  | 35.3 | % |  | 32.0 | % |  | 35.5 | %
|                                        |  |      |   |  |      |   |  |      |  



F-26



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 12. | INCOME TAXES (Continued)
|-------- | ------------------------



The tax effects of the temporary differences in income and expense items that give rise to deferred taxes at December 31 are as follows:



|                                                                |  |      |      |   |      |   |      |  
|--------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                                                |  | 2003 |      |   | 2002 |  
|Deferred tax assets:                                            |  |      |      |   |      |   |      |  
|Allowance for loan losses                                       |  | $    | 677  |   |      | $ | 594  |  
|Employee benefit plans                                          |  |      | 178  |   |      |   | 79   |  
|Organizational costs                                            |  |      | 3    |   |      |   | 3    |  
|State income taxes                                              |  |      | 130  |   |      |   | 93   |  
|                                                                |  |      |      |   |      |   |      |  
|                                                                |  |      | 988  |   |      |   | 769  |  
|                                                                |  |      |      |   |      |   |      |  
|Deferred tax liabilities:                                       |  |      |      |   |      |   |      |  
|Net unrealized gain on investment securities available for sale |  |      | (178 | ) |      |   | (227 | )
|Depreciation and amortization                                   |  |      | (18  | ) |      |   | (110 | )
|Goodwill                                                        |  |      | (203 | ) |      |   | (117 | )
|                                                                |  |      |      |   |      |   |      |  
|                                                                |  |      | (399 | ) |      |   | (454 | )
|                                                                |  |      |      |   |      |   |      |  
|Net deferred tax asset                                          |  | $    | 589  |   |      | $ | 315  |  
|                                                                |  |      |      |   |      |   |      |  



|Note 13. | COMMITMENTS AND CONTINGENCIES
|-------- | -----------------------------



Financial Instruments with Off-Balance-Sheet Risk



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 extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.



The
Companys exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.



F-27



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 13. | COMMITMENTS AND CONTINGENCIES (Continued)
|-------- | -----------------------------------------



Financial Instruments with Off-Balance-Sheet Risk (continued)



As of December 31, 2003 and 2002, the following financial instruments were outstanding whose contract amounts represent
credit risk:



|                                                 |  |      |         |      |   |       
|------------------------------------------------ |  | ---- | ------- | ---- | - | ------
|                                                 |  | 2003 |         | 2002
|Standby letters of credit                        |  | $    | 2,916   |      | $ | 130   
|Unadvanced funds on construction and development |  |      | 81,793  |      |   | 48,409
|Unadvanced funds on commercial loans             |  |      | 21,456  |      |   | 13,353
|Unadvanced funds on consumer loans               |  |      | 1,025   |      |   | 830   
|Unadvanced funds on equity lines of credit       |  |      | 2,563   |      |   | 3,348 
|Unadvanced funds on credit card and other        |  |      | 1,686   |      |   | 3,029 
|                                                 |  |      |         |      |   |       
|                                                 |  | $    | 111,439 |      | $ | 69,099
|                                                 |  |      |         |      |   |       



Commitments to extend
credit are agreements to lend to a customer 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. The
commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is
based on managements credit evaluation of the customer.



Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements, are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized
and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.



Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those
letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments if deemed necessary.



F-28



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 13. | COMMITMENTS AND CONTINGENCIES (Continued)
|-------- | -----------------------------------------



Financial Instruments with Off-Balance-Sheet Risk (continued)



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others, which requires a guarantor to recognize, at the inception of a guarantee, a liability equal to the fair value of the obligation undertaken in issuing the guarantee. As of January 1,
2003, newly issued or modified guarantees that are not derivative contracts have been recorded on the Companys balance sheet at their fair value at inception. The Company considers standby letters of credit to be guarantees under FIN 45. The
amount of the liability related to guarantees on December 31, 2003 was immaterial.



Legal Proceedings



Roberts Litigation



The Bank was a
defendant in a civil action filed by a former employee relating to employee matters. On July 10, 2002, the Company settled this lawsuit for $425,000, all of which has been expensed.



Spencer Litigation



In March of 2003 the Company entered into a settlement agreement as a result of mediation with respect to two actions brought by the former president
of the Bank against us and certain of our officers and employees. The actions, as described in the Companys March 2003 10QSB, filed May 15, 2003, have been settled. Both actions were settled by payment to plaintiff of a cash settlement of
$25,000 by us, plus an additional payment by our insurance company, and the agreement of the Bank to issue an aggregate of 12,960 shares of its common stock in a private placement to Mr. Spencer. Pursuant to the settlement agreement, Mr. Spencer
purchased these shares on April 3, 2003 at a cost of $10.01 per share, which is equivalent to the average exercise price of stock options, which were cancelled when Mr. Spencer was terminated by the Bank. The issuance of these shares to Mr. Spencer
resulted in an increase in the Companys contributed capital in the amount of $130,000. However, from an earnings standpoint, the transaction resulted in an earnings charge to the Company during the second quarter of 2003 in the amount of
$165,000 representing the difference between the aggregate purchase price of the shares paid to the Company and the fair market value of those shares at the time of the purchase.



F-29



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 13. | COMMITMENTS AND CONTINGENCIES (Continued)
|-------- | -----------------------------------------



Other Litigation



Various legal claims also arise from time to time in the normal course of business, which in the opinion of management will have no material effect on the
Companys financial statements.



Employment
Agreements and Special Termination Agreements



The
Company has entered into employment agreements with several of its key officers. The agreements provide for a specified minimum annual compensation and the continuation of benefits currently received. However, employment under the agreements may be
terminated for cause, as defined, without incurring any continuing obligations. The agreements also provide for the establishment of a salary continuation plan to provide benefits to various executive officers at the age of retirement. (See Note 16)



All of the employment agreements contain special termination
clauses which provide for certain lump sum severance payments within a specified period following a change in control, as defined in the agreements.



|Note 14. | EMPLOYEE BENEFIT PLANS
|-------- | ----------------------



401(k) Plan



The Company has a 401(k) savings and retirement plan that includes substantially all employees. The employees attain vesting in the Companys
contribution over six years. Employees may contribute up to 15% of their compensation, subject to certain limits based on federal tax laws. Under the terms of the Plan, the Company may make matching contributions at the discretion of the Board of
Directors. Contributions to the Plan by the Company amounted to $149,000, $92,000 and $56,000 for the years ended December 31, 2003, 2002 and 2001, respectively.



Employee Stock Ownership Plan



The Company has established an employee stock ownership plan covering substantially all employees of the Company. An
employee becomes eligible to participate in the Plan upon employment with the Company and becomes fully vested after five years of service. Contributions to the Plan, whether in cash or securities, are made at the discretion of the Companys
Board of Directors in an amount not to exceed the maximum allowable as an income tax deduction. No contributions were made to the Plan during the years ended December 31, 2003, 2002 and 2001.



F-30



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 15. | CONCENTRATION OF CREDIT RISK
|-------- | ----------------------------



The Company services customers in Redlands, Escondido, North Orange County and surrounding communities and has no concentration of deposits with any one
particular customer or industry. At December 31, 2003 and 2002, the Company had approximately $5,104,000 and $11,177,000, respectively, of Federal funds sold and noninterest-bearing deposits with its correspondent banks and one other financial
institution. At December 31, 2003 and 2002, approximately 74% and 68%, respectively of the Companys loan portfolio consisted of construction and real estate loans.



|Note 16. | SALARY CONTINUATION PLANS
|-------- | -------------------------



The Company has established salary continuation plans, which provide for payments to certain officers at the age of retirement. The Company also had a
retirement continuation plan for its directors. During May 2001, the retirement continuation plan for the directors was cancelled and the directors were each paid a settlement equal to the cash surrender value at that time. Included in other
liabilities at December 31, 2003 and 2002, respectively, is $433,000 and $191,000 of deferred compensation related to the continuation plans. The plans are funded through life insurance policies that generate a cash surrender value to fund the
future benefits.



|Note 17. | STOCKHOLDERS EQUITY
|-------- | --------------------



Minimum Regulatory Requirements



The Company (on a consolidated basis) and its subsidiaries are subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and its subsidiaries
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiaries 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 accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other
factors.



Quantitative measures established by the regulations
to ensure capital adequacy require the Company and its subsidiaries to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and
of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003 and 2002, that the Company and its subsidiaries met all capital adequacy requirements to which it is subject.





F-31



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 17. | STOCKHOLDERS EQUITY (Continued)
|-------- | --------------------------------



Minimum Regulatory Requirements (continued)



As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or
events since the notification that management believes have changed the Banks or the Companys category.



The Companys and the Banks actual capital amounts and ratios as of December 31, 2003 and 2002 are as follows:



|                                        |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|--------------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | --------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                        |  | Actual |        |       | Minimum Capital Requirement |   |        | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                        |  | Amount |        | Ratio |                             |   | Amount |                                                                       | Ratio  |  |      | Amount |  | Ratio |       
|As of December 31, 2003:                |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Total capital to risk-weighted assets:  |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  | $      | 28,286 |       | 13.63                       | % |        | $                                                                     | 16,602 |  | 8.00 | %      |  | $     | 20,753 |  | 10.00 | %
|1st Centennial                          |  |        | 26,280 |       | 12.67                       | % |        |                                                                       | 16,594 |  | 8.00 | %      |  |       | 20,742 |  | 10.00 | %
|                                        |  |        |        |       |                             |  
|Tier 1 capital to risk-weighted assets: |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |        | 25,916 |       | 12.48                       | % |        |                                                                       | 8,306  |  | 4.00 | %      |  |       | 12,460 |  | 6.00  | %
|1st Centennial                          |  |        | 23,910 |       | 11.53                       | % |        |                                                                       | 8,295  |  | 4.00 | %      |  |       | 12,442 |  | 6.00  | %
|                                        |  |        |        |       |                             |  
|Tier 1 capital to average assets:       |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |        | 25,916 |       | 10.79                       | % |        |                                                                       | 9,607  |  | 4.00 | %      |  |       | 12,009 |  | 5.00  | %
|1st Centennial                          |  |        | 23,910 |       | 9.97                        | % |        |                                                                       | 9,593  |  | 4.00 | %      |  |       | 11,991 |  | 5.00  | %
|                                        |  |        |        |       |                             |  
|As of December 31, 2002:                |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Total capital to risk-weighted assets:  |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  | $      | 20,561 |       | 13.27                       | % |        | $                                                                     | 12,394 |  | 8.00 | %      |  | $     | 15,492 |  | 10.00 | %
|1st Centennial                          |  |        | 18,289 |       | 11.84                       | % |        |                                                                       | 12,362 |  | 8.00 | %      |  |       | 15,452 |  | 10.00 | %
|                                        |  |        |        |       |                             |  
|Tier 1 capital to risk-weighted assets: |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |        | 16,845 |       | 10.87                       | % |        |                                                                       | 6,197  |  | 4.00 | %      |  |       | 9,295  |  | 6.00  | %
|1st Centennial                          |  |        | 16,356 |       | 10.58                       | % |        |                                                                       | 6,181  |  | 4.00 | %      |  |       | 9,271  |  | 6.00  | %
|                                        |  |        |        |       |                             |  
|Tier 1 capital to average assets:       |  |        |        |       |                             |   |        |                                                                       |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |        | 16,845 |       | 8.28                        | % |        |                                                                       | 8,142  |  | 4.00 | %      |  |       | 10,177 |  | 5.00  | %
|1st Centennial                          |  |        | 16,356 |       | 8.09                        | % |        |                                                                       | 8,087  |  | 4.00 | %      |  |       | 10,108 |  | 5.00  | %







F-32



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 18. | RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
|-------- | ---------------------------------------------



Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount
of dividends, which may be paid at any date, is generally limited to the retained earnings of the Bank, and loans or advances are limited to 25% of the Banks primary capital plus the allowance for loan losses on a secured basis and 15% on an
unsecured basis.



In addition, dividends paid by the Bank to
the Company would be prohibited if the effect thereof would cause the Banks capital to be reduced below applicable minimum capital requirements.



|Note 19. | DIVIDENDS PAID
|-------- | --------------



The Company did not pay a cash dividend in 2003 or 2002. During 2003, the Board of Directors approved a 5% stock dividend, which resulted in the issuance
of 59,888 shares. During 2002, the Company issued a 5% stock dividend, which resulted in the issuance of 57,032 shares. There were no stock dividends during 2001.



|Note 20. | CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
|-------- | ------------------------------------------------



Following is the parent company only financial information for 1st Centennial Bancorp:



STATEMENTS OF CONDITION

December 31, 2003 and 2002



|                                           |  |      |        |      |   |       
|------------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                           |  | 2003 |        | 2002
|ASSETS                                     |  |      |        |      |   |       
|                                           |  |     
|Cash                                       |  | $    | 1,202  |      | $ | 1,836 
|Investment in subsidiaries                 |  |      | 28,566 |      |   | 21,115
|Other assets                               |  |      | 709    |      |   | 439   
|                                           |  |      |        |      |   |       
|Total assets                               |  | $    | 30,477 |      | $ | 23,390
|                                           |  |      |        |      |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |      |        |      |   |       
|                                           |  |     
|Borrowings from subsidiary trust           |  | $    | 6,006  |      | $ | 6,006 
|Other liabilities                          |  |      | 71     |      |   | 191   
|                                           |  |      |        |      |   |       
|                                           |  |      | 6,077  |      |   | 6,197 
|                                           |  |      |        |      |   |       
|Stockholders equity                       |  |      |        |      |   |       
|Common stock                               |  |      | 20,456 |      |   | 13,913
|Retained earnings                          |  |      | 3,692  |      |   | 2,957 
|Accumulated other comprehensive income     |  |      | 252    |      |   | 323   
|                                           |  |      |        |      |   |       
|Total stockholders equity                 |  |      | 24,400 |      |   | 17,193
|                                           |  |      |        |      |   |       
|Total liabilities and stockholders equity |  | $    | 30,477 |      | $ | 23,390
|                                           |  |      |        |      |   |       



F-33



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 20. | CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)
|-------- | ------------------------------------------------------------



STATEMENTS OF EARNINGS

Years Ended
December 31, 2003, 2002 and 2001



|                                                               |  |      |       |   |      |   |       |      |  |   |       |  
|-------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                               |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Dividend received from 1st Centennial                          |  | $    |      |   |      | $ |      |      |  | $ | 125   |  
|Interest income on capital securities of subsidiary trust      |  |      | 10    |   |      |   | 3     |      |  |   |      |  
|Interest expense                                               |  |      | 307   |   |      |   | 164   |      |  |   | 79    |  
|Other expense                                                  |  |      | 446   |   |      |   | 477   |      |  |   | 224   |  
|                                                               |  |      |       |   |      |   |       |      |  |   |       |  
|Loss before equity in undistributed net income of subsidiaries |  |      | (743  | ) |      |   | (638  | )    |  |   | (178  | )
|Tax benefit                                                    |  |      | 345   |   |      |   | 259   |      |  |   | 118   |  
|                                                               |  |      |       |   |      |   |       |      |  |   |       |  
|                                                               |  |      | (398  | ) |      |   | (379  | )    |  |   | (60   | )
|Equity in undistributed net income of subsidiaries             |  |      | 2,486 |   |      |   | 2,085 |      |  |   | 1,107 |  
|                                                               |  |      |       |   |      |   |       |      |  |   |       |  
|Net income                                                     |  | $    | 2,088 |   |      | $ | 1,706 |      |  | $ | 1,047 |  
|                                                               |  |      |       |   |      |   |       |      |  |   |       |  



STATEMENTS OF CASH
FLOWS

Years Ended December 31, 2003, 2002 and 2001



|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                             |  | 2003 |        |   | 2002 |   |        | 2001 | 
|OPERATING ACTIVITIES                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                                                   |  | $    | 2,088  |   |      | $ | 1,706  |      |  | $ | 1,047  |  
|Adjustment to reconcile net income to net cash used in operating activities: |  |      |        |   |      |   |        |      |  |   |        |  
|Equity in undistributed income of subsidiaries                               |  |      | (2,486 | ) |      |   | (2,085 | )    |  |   | (1,107 | )
|Amortization                                                                 |  |      | 2      |   |      |   | 1      |      |  |   |       |  
|Decrease (increase) in other assets                                          |  |      | (350   | ) |      |   | (256   | )    |  |   | 16     |  
|Increase (decrease) in other liabilities                                     |  |      | (120   | ) |      |   | 191    |      |  |   |       |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash used in operating activities                                        |  |      | (866   | ) |      |   | (443   | )    |  |   | (44    | )
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  



F-34



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 20. | CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)
|-------- | ------------------------------------------------------------



STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2003, 2002 and 2001



|                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|--------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                      |  | 2003 |        |   | 2002 |   |        | 2001 | 
|INVESTING ACTIVITIES                                                  |  |      |        |   |      |   |        |      |  |   |         |  
|                                                                      |  |      |       
|Acquistion of Palomar Community Bank                                  |  | $    |       |   |      | $ |       |      |  | $ | (10,688 | )
|Legal costs associated with investment in subsidiary trust            |  |      |       |   |      |   | (12    | )    |  |   |        |  
|Payments for investments in and advances to subsidiaries              |  |      | (4,871 | ) |      |   |       |      |  |   |        |  
|Payments from (advances to) subsidiary trust                          |  |      | 78     |   |      |   | (83    | )    |  |   |        |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Net cash used in investing activities                                 |  |      | (4,793 | ) |      |   | (95    | )    |  |   | (10,688 | )
|                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|FINANCING ACTIVITIES                                                  |  |      |        |   |      |   |        |      |  |   |         |  
|                                                                      |  |      |       
|Proceeds from long-term debt                                          |  |      |       |   |      |   | 5,820  |      |  |   | 4,000   |  
|Repayment of long-term debt                                           |  |      |       |   |      |   | (3,500 | )    |  |   | (500    | )
|Net proceeds from issuance of common stock                            |  |      | 4,871  |   |      |   |       |      |  |   | 7,053   |  
|Cash dividends paid                                                   |  |      |       |   |      |   |       |      |  |   | (35     | )
|Cash dividends paid in lieu of fractional shares                      |  |      | (6     | ) |      |   | (3     | )    |  |   |        |  
|Proceeds from issuance of restricted stock                            |  |      | 130    |   |      |   |       |      |  |   |        |  
|Proceeds from exercise of stock options                               |  |      | 30     |   |      |   | 7      |      |  |   | 183     |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Net cash provided by financing activities                             |  |      | 5,025  |   |      |   | 2,324  |      |  |   | 10,701  |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                  |  |      | (634   | ) |      |   | 1,786  |      |  |   | (31     | )
|                                                                      |  |      |       
|Cash and cash equivalents, beginning of year                          |  |      | 1,836  |   |      |   | 50     |      |  |   | 81      |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Cash and cash equivalents, end of year                                |  | $    | 1,202  |   |      | $ | 1,836  |      |  | $ | 50      |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |         |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES |  |      |        |   |      |   |        |      |  |   |         |  
|                                                                      |  |      |       
|Issuance of restricted stock for legal settlement                     |  | $    | 165    |   |      | $ |       |      |  | $ |        |  
|                                                                      |  |      |        |   |      |   |        |      |  |   |         |  



F-35



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 21. | FEDERAL HOME LOAN BANK LINE OF CREDIT
|-------- | -------------------------------------



The Bank is a member of the Federal Home Loan Bank of San Francisco (FHLB). The Bank has an available line of credit with the FHLB at a fixed interest
rate, which is determined on the borrowing date. Borrowings under the line are limited to eligible collateral. All borrowings from the FHLB are secured by a securities-backed credit program on qualified collateral. The Company had outstanding
advances of $7.6 million at December 31, 2003. $5.5 million had an interest rate of 1.13% and matured on January 8, 2004, and $2.1 million had an interest rate of 1.11% and matured on January 29, 2004. There were no outstanding advances at December
31, 2002.



|Note 22. | FAIR VALUE OF FINANCIAL INSTRUMENTS
|-------- | -----------------------------------



SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosures of estimated fair values of all financial
instruments where it is practicable to estimate such values. In cases where quoted market prices are not available, fair values are based upon 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. Accordingly, 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 instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying
value of the Corporation.



The following methods and
assumptions were used by the Company in estimating fair value disclosures for financial instruments:



Cash and Cash Equivalents- The carrying amounts of cash and short-term instruments approximate fair values.



Interest-Bearing Deposits in Financial Institutions - The
carrying amounts of interest-bearing deposits, which mature within 10 days, approximate their fair values.



Investment Securities - Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The
carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.



Loans Held for Sale - Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices.



F-36



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 22. | FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
|-------- | -----------------------------------------------



Loans - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non- performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.



Accrued Interest Receivable - The carrying amounts of accrued
interest receivable approximate fair value.



Cash
Surrender Value of Life Insurance - The carrying amounts of life insurance approximate fair value.



Deposits - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.



Long-Term
Debt - The fair values of the Companys long-term debt is estimated using discounted cash flow analyses based on the Companys current incremental borrowing rates for similar types of borrowing arrangements.



Accrued Interest Payable - The carrying amounts of accrued
interest payable approximate fair value.



Off-Balance-Sheet Instruments - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties credit standing. The carrying amount of commitments to extend credit approximates fair value.



F-37



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 22. | FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
|-------- | -----------------------------------------------



The estimated fair value and related carrying or notional amounts of the Companys financial instruments are as follows:



|                                                                                                  |  |                |         |            |   |                |  |            |         |  |   |        
|------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                                                                                  |  | December 31,  
|                                                                                                  |  | 2003           |         | 2002      
|                                                                                                  |  | CarryingAmount |         | Fair Value |   | CarryingAmount |  | Fair Value
|Financial assets:                                                                                 |  |                |         |            |   |                |  |            |         |  |   |        
|Cash and cash equivalents                                                                         |  | $              | 9,948   |            | $ | 9,948          |  | $          | 14,020  |  | $ | 14,020 
|Interest bearing deposits in financial institutions                                               |  |                | 4,806   |            |   | 5,052          |  |            | 5,151   |  |   | 5,494  
|Investment securities, available for sale                                                         |  |                | 36,026  |            |   | 36,026         |  |            | 32,822  |  |   | 32,822 
|Federal Home Loan Bank stock                                                                      |  |                | 380     |            |   | 380            |  |            | 329     |  |   | 329    
|Loans, net                                                                                        |  |                | 188,222 |            |   | 184,373        |  |            | 141,112 |  |   | 141,641
|Accrued interest receivable                                                                       |  |                | 710     |            |   | 710            |  |            | 673     |  |   | 673    
|Cash surrender value of life insurance                                                            |  |                | 6,206   |            |   | 6,206          |  |            | 5,926   |  |   | 5,926  
|                                                                                                  |  |                |         |           
|Financial liabilities:                                                                            |  |                |         |            |   |                |  |            |         |  |   |        
|Deposits                                                                                          |  |                | 212,773 |            |   | 213,753        |  |            | 183,188 |  |   | 185,553
|Accrued interest payable                                                                          |  |                | 224     |            |   | 224            |  |            | 264     |  |   | 264    
|Federal funds purchased                                                                           |  |                | 1,850   |            |   | 1,850          |  |            |        |  |   |       
|Borrowings from Federal Home Loan Bank                                                            |  |                | 7,600   |            |   | 7,600          |  |            |        |  |   |       
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                | 6,000   |            |   | 6,000          |  |            | 6,000   |  |   | 6,000  
|                                                                                                  |  |                |         |           
|Off-balance sheet credit related to financial instruments:                                        |  |                |         |            |   |                |  |            |         |  |   |        
|Commitments to extend credit                                                                      |  | $              | 111,439 |            | $ | 111,439        |  | $          | 69,099  |  | $ | 69,099 



The fair value
estimates presented herein are based on pertinent information available to management as of December 31, 2003 and 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial statements since those dates, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.



F-38



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 23. | SUBSEQUENT EVENTS
|-------- | -----------------



Centennial Capital Trust II



On January 15, 2004, Centennial Capital Trust II, a newly formed Delaware statutory business trust and a wholly owned subsidiary of the Company (the
Trust), issued an aggregate of $7.0 million of principal amount of Floating Rate TRUPS® (Capital Trust Pass-through Securities of the Trust) (the Trust Preferred Securities). Bear Stearns & Co., Inc. acted as placement agent in connection with the offering of the Trust Preferred Securities.
The securities issued by the Trust are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. The entire proceeds to the Trust from the sale of the Trust Preferred Securities were
used by the Trust in order to purchase $7.0 million in principal amount of the Floating Rate Junior Subordinated Deferrable Interest Debentures due 2034 issued by the Company (the Subordinated Debt Securities).



The Subordinated Debt Securities bear a variable interest rate equal to
LIBOR plus 2.85%. Total broker and legal costs associated with the issuance of $87,500 are being amortized over a 5-year period.



25% Stock Dividend



On February 20, 2004, 1stCentennial Bancorp announced that the Board of Directors approved a 25% stock dividend to shareholders of record April 1, 2004, and payable May 1, 2004. The dividend will be accounted for as a 5-for-4 stock split. The action was
approved at the regularly scheduled Board Meeting on February 20, 2004. The effect will result in an additional 375,570 shares of common stock outstanding.



F-39



---

##### Table of Contents

1ST CENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|Note 24. | QUARTERLY DATA (UNAUDITED)
|-------- | --------------------------



|                                                    |  |                                               |       |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|--------------------------------------------------- |  | --------------------------------------------- | ----- | -------- | - | -------- |  | -------- | ----- | -------- | - | -------- |  | -------- | ----- | -------- | - | ----- |  | - | ----- |  | - | -----
|                                                    |  | Years Ended December 31,                     
|                                                    |  | 2003                                          |       | 2002    
|                                                    |  | (Dollars In Thousands, Except Per Share Data)
|                                                    |  | 4th Qtr.                                      |       | 3rd Qtr. |   | 2nd Qtr. |  | 1st Qtr. |       | 4th Qtr. |   | 3rd Qtr. |  | 2nd Qtr. |       | 1st Qtr.
|                                                    |  |                                               |       |          |   |          |  |         
|Interest income                                     |  | $                                             | 4,517 |          | $ | 4,186    |  | $        | 4,109 |          | $ | 3,875    |  | $        | 3,738 |          | $ | 3,699 |  | $ | 3,693 |  | $ | 3,344
|Interest expense                                    |  |                                               | 487   |          |   | 517      |  |          | 540   |          |   | 562      |  |          | 597   |          |   | 527   |  |   | 588   |  |   | 665  
|                                                    |  |                                               |       |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Net interest income                                 |  |                                               | 4,030 |          |   | 3,669    |  |          | 3,569 |          |   | 3,313    |  |          | 3,161 |          |   | 3,172 |  |   | 3,105 |  |   | 2,679
|Provision for loan losses                           |  |                                               |      |          |   | 150      |  |          | 120   |          |   | 90       |  |          | 170   |          |   | 146   |  |   | 80    |  |   | 81   
|                                                    |  |                                               |       |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Net interest income after provision for loan losses |  |                                               | 4,030 |          |   | 3,519    |  |          | 3,449 |          |   | 3,223    |  |          | 2,991 |          |   | 3,026 |  |   | 3,025 |  |   | 2,598
|Noninterest income                                  |  |                                               | 771   |          |   | 844      |  |          | 795   |          |   | 612      |  |          | 622   |          |   | 642   |  |   | 557   |  |   | 603  
|Noninterest expense                                 |  |                                               | 3,853 |          |   | 3,516    |  |          | 3,538 |          |   | 3,107    |  |          | 2,876 |          |   | 3,043 |  |   | 3,087 |  |   | 2,550
|                                                    |  |                                               |       |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Income before provision for income taxes            |  |                                               | 948   |          |   | 847      |  |          | 706   |          |   | 728      |  |          | 737   |          |   | 625   |  |   | 495   |  |   | 651  
|Provision for income taxes                          |  |                                               | 348   |          |   | 300      |  |          | 234   |          |   | 259      |  |          | 242   |          |   | 207   |  |   | 128   |  |   | 225  
|                                                    |  |                                               |       |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Net income                                          |  | $                                             | 600   |          | $ | 547      |  | $        | 472   |          | $ | 469      |  | $        | 495   |          | $ | 418   |  | $ | 367   |  | $ | 426  
|                                                    |  |                                               |       |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Earnings per share (basic)                          |  | $                                             | 0.40  |          | $ | 0.36     |  | $        | 0.34  |          | $ | 0.37     |  | $        | 0.39  |          | $ | 0.33  |  | $ | 0.29  |  | $ | 0.34 
|                                                    |  |                                               |       |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Earnings per share (diluted)                        |  | $                                             | 0.34  |          | $ | 0.35     |  | $        | 0.33  |          | $ | 0.35     |  | $        | 0.38  |          | $ | 0.33  |  | $ | 0.29  |  | $ | 0.34 
|                                                    |  |                                               |       |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      



F-40