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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

Commission file number: 000-29105

1STCENTENNIAL BANCORP

(Exact name of
registrant 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                             

(909) 798-3611

Registrants telephone number, including area code:

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. ̈Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ̈Yes    x  No

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.    x  Yes ̈No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this form 10-K. ̈

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



|                         |  |                        |  |                       
|------------------------ |  | ---------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer    x |  | Non-accelerated filer ̈

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

As of June 30, 2006, the last business day of Registrants most recently completed second fiscal quarter, the aggregate market value of the
voting stock held by non-affiliates of the Registrant was approximately $90.2 million, based on the closing price reported to the Registrant on that date of $35.00 per share. The number of shares of Common Stock of the registrant outstanding as of
March 08, 2007 was 3,219,696.

Documents Incorporated by Reference: Portions of the definitive proxy statement for the 2007
Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference in Part III, Items 10-14.



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TABLE OF CONTENTS



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  | Item                                                                                                         |  | Page
|PART I   |  |                                                                                                             
|ITEM 1   |  | Business                                                                                                     |  | 3   
|ITEM 1A. |  | Risk Factors                                                                                                 |  | 13  
|ITEM 1B. |  | Unresolved Staff Comments                                                                                    |  | 16  
|ITEM 2   |  | Properties                                                                                                   |  | 16  
|ITEM 3   |  | Legal Proceedings                                                                                            |  | 17  
|ITEM 4   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 17  
|         | 
|PART II  |  |                                                                                                             
|ITEM 5   |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 18  
|ITEM 6   |  | Selected Financial Data                                                                                      |  | 21  
|ITEM 7   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 23  
|ITEM 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 51  
|ITEM 8   |  | Consolidated Financial Statements and Supplementary Data                                                     |  | 52  
|ITEM 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 85  
|ITEM 9A. |  | Controls and Procedures                                                                                      |  | 85  
|ITEM 9B. |  | Other information                                                                                            |  | 86  
|         | 
|PART III |  |                                                                                                             
|ITEM 10  |  | Directors, Executive Officers and Corporate Governance                                                       |  | 86  
|ITEM 11  |  | Executive Compensation                                                                                       |  | 86  
|ITEM 12  |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters               |  | 86  
|ITEM 13  |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 87  
|ITEM 14  |  | Principal Accounting Fees and Services                                                                       |  | 87  
|         | 
|PART IV  |  |                                                                                                             
|ITEM 15  |  | Exhibits and Financial Statement Schedules                                                                   |  | 88  
|         |  | Signatures                                                                                                   |  | 90  



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PART I



|ITEM 1. | BUSINESS
|------- | --------

General

The Company

1stCentennial Bancorp (the Company) 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 (the
Bank) in December 1999. In February 2003 the Company changed its name from Centennial First Financial Services to 1stCentennial Bancorp and the Bank changed its name from Redlands Centennial Bank to 1stCentennial Bank. 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, Centennial Capital Trust II and Centennial Capital Trust III, which were formed
in July 2002, January 2004 and September 2005, respectively, solely to facilitate the issuance of capital trust pass-through securities. This additional regulatory capital is intended to allow us to stay on track with current expansion plans
without any impairment of risk-based capital ratios. See Note 9 to Notes to Consolidated Financial Statements. We determined that raising capital through trust preferred securities was more economical than traditional stock offerings. The issuance
of these trust preferred securities totaling $18 million has increased our overall funding costs. Pursuant to Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities (VIEs)
(FIN 46), these trusts are not reflected on a consolidated basis in our financial statements.

Our principal source of income is
currently dividends from the Bank, but we intend to explore supplemental sources of income in the future. Our expenditures, including but not limited to the payment of dividends to shareholders, if and when declared by the Board of Directors, and
the cost of servicing debt, will generally be paid from such payments made to us by the Bank.

As of December 31, 2006, the Company
had total consolidated assets of $551.1 million, total consolidated net loans of $426.2 million, total consolidated deposits of $456.5 million and total consolidated Shareholders equity of $42.2 million. Our liabilities include $18.3 million
in subordinated notes payable to subsidiary trusts due our trust subsidiaries. The liability is related to capital trust pass-through securities issued by those entities

The Bank

The 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, we operate five full-service branch offices in Southern California, one in Brea, in Orange County, one in Escondido, in San Diego
County, one in Palm Desert, in Riverside County, one in Irwindale, in Los Angeles County, and one in Temecula, in Riverside County. We also operate a Real Estate & Construction Loan Division in Redlands, a Small Business Administration /
Commercial Loans Conduit Group loan production office and a Religious Lending Group, located in Brea, in Orange County, and a Home Owners Association Group in Escondido, in San Diego County.

Our lending activity is concentrated primarily in real estate loans (including construction and development, residential, and commercial and multi-family
loans), which constituted 59% of our loan portfolio as of December 31, 2006, and commercial loans, which constituted 38% of our loan portfolio as of December 31, 2006.



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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 Item 1, Regulation and Supervision.

We are a community 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, commercial and consumer 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. 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. Commercial loan products include lines of credit,
letters of credit, term loans and equipment loans, commercial real estate loans, SBA loans, 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. 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, online business management services and electronic deposit processing. 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 KWB Wealth Managers Group, a Linsco Private Ledger firm. These products
include financial and estate planning, stocks and bonds, mutual funds and variable annuities, and various retirement plans. Products offered through this firm are not insured by the FDIC, are not deposits or obligations of the Bank, and are not
guaranteed by the Bank.

Recent accounting pronouncements

Information on recent accounting pronouncements is contained in Footnote 1 to the Consolidated Financial Statements.

Competition

The banking business in California generally, and specifically in our market areas in San Bernardino, Orange,
San Diego, Riverside, and Los Angeles counties in Southern California, is highly competitive with respect to virtually all products and services and has become increasingly 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



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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.

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 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, which became effective in March 2000, has made it possible for full affiliations to occur between banks and securities firms, insurance companies, and other financial companies, and has also intensified competitive conditions. See
Financial Modernization Act.

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, 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 (SBA), 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, the Company 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 KWB Wealth Managers Group, a Linsco Private Ledger firm.

Employees

As of December 31, 2006 the Company had 125 full-time and 13 part-time employees. On a full time equivalent basis, the Companys staffing stood
at 132 at December 31, 2006 and 2005. Staff was maintained during 2006 to provide resources in order to maintain satisfactory customer service in growth areas, and to enhance business development activities in certain markets.



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Regulation and Supervision

The Company and the 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.

The Company

The Company is
subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934 (the Exchange Act), which requires us to file annual, quarterly and other current reports with the Securities and Exchange
Commission (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.

The Company 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 were expanded in 2000 by the Financial Modernization Act. See Financial Modernization Act.

The Company and the 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.

The Bank

As a California state-chartered bank whose accounts are insured by the FDIC up to
the maximum limits thereof, we are subject to regulation, supervision and regular examination by the California Department of



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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.

Capital Adequacy Requirements

The Company and the Bank are subject to the regulations of the Federal Reserve Board and the FDIC, respectively, governing capital adequacy. 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 shareholders equity; (ii) qualifying non-cumulative perpetual preferred stock
and related surplus (not to exceed 25% of tier 1 capital); and (iii) minority interests in the equity accounts of consolidated subsidiaries. At December 31, 2006, 25% of the Companys Tier 1 capital consisted of trust preferred
securities; however, no assurance can be given that trust preferred securities will continue to be treated as Tier 1 capital in the future. Tier 2 capital can 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 (but not more than 50% of Tier 1 capital). The maximum amount of Tier 2 capital that may be recognized for risk-based capital purposes 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 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 unsecured loans. As of December 31, 2006 and 2005, the Banks Total
Risk-Based Capital Ratios were 12.47% and 12.49%, respectively, and its Tier 1 Risk-Based Capital Ratios were 11.22% and 11.24%, respectively. As of December 31, 2006 and 2005, the consolidated Companys Total Risk-Based Capital Ratios
were 12.92% and 12.86%, respectively, and its Tier 1 Risk-Based Capital Ratios were 10.83% and 9.92%, respectively.



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The risk-based capital requirements also take into account concentrations of credit involving 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.

Additionally, the regulatory Statements of Policy on risk-based capital include exposure to interest rate risk as a factor that the regulators will consider in evaluating an institutions capital adequacy,
although interest rate risk does not impact the calculation of the risk-based capital ratios. Interest rate risk is the exposure of a banks current and future earnings and equity capital to adverse movements in interest rates. While interest
risk is inherent in a banks role as a financial intermediary, it introduces volatility to earnings and to the economic value of the bank.

The FDIC and the Federal Reserve Board also require financial institutions to maintain 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 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 set higher capital requirements when a banks particular circumstances warrant. The Banks Leverage Capital Ratios were 9.82% and 10.21% on December 31, 2006 and 2005,
respectively. As of December 31, 2006 and 2005, the consolidated Companys Leverage Capital Ratios were 9.46% and 9.02%, respectively. All of the above ratios exceeded regulatory minimums.

For more information on the Companys capital, see Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of OperationCapital Resources. Risk-based capital ratio requirements are discussed in greater detail in the following section.

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:
(1) well capitalized (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%); (2) 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); (3) 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); (4) 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 (5) critically undercapitalized (tangible equity to total assets less than 2%). As of December 31, 2006 and 2005, 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).



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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 bonuses or increasing compensation to senior executive officers 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 a memorandum of understanding, 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.

Insurance of Deposit Accounts

The Banks deposit accounts are insured by the FDIC and are therefore subject to
FDIC deposit insurance assessments. The FDIC Reform Act of 2005, which was enacted in February 2006, merged the Bank Insurance Fund and the Savings Association Insurance Fund into one fund (the Deposit Insurance Fund); increased
insurance coverage for retirement accounts to $250,000; indexed the deposit insurance levels for inflation every five years; changed the designated reserve ratio for the Deposit Insurance Fund to a range of between 1.15% and 1.50% of estimated
insured deposits; and required the FDIC to provide cash rebates to insured institutions under certain circumstances.

Effective
January 1, 2007, the FDIC adopted final regulations pursuant to the above legislation to more closely tie each financial institutions deposit insurance premiums to the risk it poses to the Deposit Insurance Fund. Under the new
regulations, the FDIC evaluates the risk of each financial institution based on its supervisory rating, financial ratios, and long-term debt issuer rating. The current rates under the new regulations for nearly all insured financial institutions
vary between five and seven cents per $100 of assessable deposits. The FDIC allows the use of credits for certain assessments previously paid, and the Bank believes that it has credits that will offset certain assessments.

In addition, banks must continue to pay an amount toward the retirement of the Financing Corporation bonds issued in the 1980s to assist in the
recovery of the savings and loan industry. This amount fluctuates but for the first quarter of 2007 is 1.22 cents per $100 of insured deposits. These assessments will continue until the Financing Corporation bonds mature in 2017 through 2019.

Community Reinvestment Act

The
Bank is subject to certain requirements and reporting obligations under the Community Reinvestment Act (CRA). The CRA generally requires the federal banking agencies to evaluate the record of a financial



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institution in meeting the credit needs of its local communities, including low and moderate-income neighborhoods. The CRA further requires the agencies to
consider a financial institutions record of meeting its community credit needs 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 CRA obligations, the regulators utilize a performance-based evaluation system which bases CRA 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 CRA performance, the FDIC assigns a rating of outstanding,
satisfactory, needs to improve or substantial noncompliance. The Bank was last examined for CRA compliance in July 2006, and received a satisfactory CRA 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 CRA 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 acquirer 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.

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.



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Financial Modernization Act

Effective March 11, 2000, the Gramm-Leach-Bliley Act, also known as the Financial Modernization Act, enabled full affiliations to occur 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 and well managed under applicable definition, and
has at least a satisfactory rating under the CRA 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. The Company 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 Financial Modernization 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 CRA 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 financial 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 CRA rating of satisfactory or better.

The Financial
Modernization 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

The USA Patriot Act
of 2001 (The Patriot Act) was enacted in October 2001 in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Patriot Act was 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 impact of the Patriot Act on financial institutions of all kinds has been significant and wide ranging. The Patriot Act substantially
enhanced existing anti-money laundering and financial transparency laws, and required appropriate regulatory authorities to adopt rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering. Under the Patriot Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships, as well as enhanced due diligence and
know your customer standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take
reasonable steps to:



| |  |  | conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transactions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and
report any suspicious transactions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the
ownership interest of each such owner; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence
information.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Patriot Act also requires all financial institutions to establish anti-money laundering programs, which
must include, at minimum:



| |  |  | the development of internal policies, procedures, and controls;
| | - |  | ---------------------------------------------------------------



| |  |  | the designation of a compliance officer;
| | - |  | ----------------------------------------



| |  |  | an ongoing employee training program; and
| | - |  | -----------------------------------------



| |  |  | an independent audit function to test the programs.
| | - |  | ---------------------------------------------------

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

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) was enacted to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and protect investors by
improving the accuracy and reliability of disclosures pursuant to the securities laws. Sarbanes-Oxley includes important new requirements for public companies in the areas of financial disclosure, corporate governance, and the independence,
composition and responsibilities of audit committees. Among other things, Sarbanes-Oxley mandates chief executive and chief financial officer certifications of periodic financial reports, additional financial disclosures concerning
off-balance sheet items, and speedier transaction reporting requirements for executive officers, directors and 10% shareholders. In addition, penalties for non-compliance with the Exchange Act were heightened. SEC rules promulgated pursuant to
Sarbanes-Oxley impose obligations and restrictions on auditors and audit committees intended to enhance their independence from management, and include extensive additional disclosure, corporate governance and other related rules. Sarbanes-Oxley
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.

We have not experienced any significant difficulties in complying with
Sarbanes-Oxley. However, we have incurred, and expect to continue to incur, significant costs in connection with compliance with Section 404 of Sarbanes-Oxley, which requires management to undertake an assessment of the adequacy and
effectiveness of our internal controls over financial reporting and requires our auditors to attest to, and report on, managements assessment and the operating effectiveness of these controls. The Company expensed approximately $81,000 in 2006
and $70,000 in 2005, on compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Other Pending and Proposed Legislation

Other legislative and regulatory initiatives which could affect the Company, the 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 the 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 the Company or the Bank would be affected thereby.



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|ITEM 1A. | 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 risks we face. Additional risks and uncertainties not presently known to us 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 adversely affected materially. In addition, the trading price of our common stock could decline due to any of the events described in these risks.

Changes in economic conditions in our market areas could hurt our business materially.

A substantial majority of our loans are generated in the greater San Bernardino, Orange, Riverside, San Diego and Los Angeles County areas in Southern
California. Our business is directly affected by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation,
all of which are beyond our control. The State of California continues to face challenges upon which the long-term impact on the States economy cannot be predicted. A deterioration in economic conditions in Southern California, whether caused
by national concerns or local concerns, may result in higher than expected loan delinquencies or problem assets, a decline in the values of the collateral that we take to secure our loan portfolio, a decrease in demand for our products and services,
or lack of growth or a decrease in low cost or noninterest bearing deposits; any of which may materially hurt our business. While our market areas have not experienced the same degree of challenges, 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 consisting of construction and development, residential and commercial
and multi-family. At December 31, 2006, 59% of our loan portfolio was concentrated in real estate loans. During 2006, real estate prices in Southern California continued to rise, and construction in our area has been thriving. Between
December 31, 2005 and December 31, 2006 our real estate loans increased $28.8 million or 13% from $225.5 million to $254.3 million. A deterioration in the real estate market in the areas we serve could have an adverse effect on the
collateral value for many of our loans and effect the repayment ability of many of our borrowers. In addition, deterioration in the real estate market we serve would affect the amount of loans we make to businesses in the construction and real
estate industry, which could negatively impact our results of operations. Similarly, the occurrence of a natural or manmade disaster in California could impair the value of the collateral we hold for real estate secured loans and negatively impact
our results of operations.

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

At December 31, 2006, construction and development loans represented 40%, residential, commercial and multi-family loans represented 19% and
commercial loans represented 38% 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



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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 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. We have adopted underwriting and credit monitoring procedures and
credit policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our
credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on our results of operations. 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, 2006, our allowance for loan losses was approximately $5.7 million, which represented 1.33% of outstanding loans, net of unearned
income. Although management believes that our 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 7, Managements Discussion and Analysis of Financial Condition and Results of
OperationsAllowance for Loan Losses.

We may have difficulty managing our growth.

Our total assets have increased to $551.1 million as of December 31, 2006, from $456.2 million and $356.7 million as of December 31, 2005
and 2004, respectively. The Company operates its main office and construction/real estate loan production offices in downtown Redlands, California, a full-service branch, its Religious Lending Group and SBA/Commercial Lending Group in Brea,
California, and its Homeowners Association and full branch in Escondido, California. The Company also operates full-service branches in Palm Desert, Irwindale, and Temecula, California that opened in March 2003, February 2005 and August
2005, respectively.

Management intends to grow the Company internally by further establishing our existing branch offices and loan
production offices. We intend to investigate future opportunities to acquire or combine with additional financial institutions, however, no assurance can be provided that we will be able to identify additional suitable acquisition targets or
consummate any such acquisition in the future.

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



| |  |  | monitor and manage expanded operations;
| | - |  | ---------------------------------------



| |  |  | control funding costs and operating expenses;
| | - |  | ---------------------------------------------



| |  |  | maintain positive customer relations; and
| | - |  | -----------------------------------------



| |  |  | attract, assimilate and retain qualified personnel.
| | - |  | ---------------------------------------------------



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If we fail to achieve these objectives in an efficient and timely manner we may experience disruptions in
our business plans, and our financial condition and results of operations could be adversely affected.

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 subsidiary.
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 the Bank. Dividends payable to us by the Bank are restricted
under California and federal laws and regulations. See Item 5, Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesDividends.

There is a limited public market for our stock, so you may not be able to sell your shares at the times and in the amounts you want.

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 a more active trading market will develop in the foreseeable future. As a result, while our common stock is
not subject to any specific restrictions on transfer, you may have difficulty selling your shares of common stock at the times and in the amounts you may desire.

We operate in a competitive market dominated by banks and other financial services providers, many of which have lower cost structures and offer more services and our efforts to compete may not be successful.

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.

Interest rate fluctuations and
other economic conditions which are beyond our control could negatively impact our profitability.

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



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interest-bearing liabilities, and the level of nonperforming assets. Many of these factors are beyond our control. Fluctuations in interest rates affect the
demand 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 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsMarket
Rate Risk/Interest Rate Risk Management.

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 March 2002 as Executive Vice President and Chief Credit Officer and was promoted to his current position in October 2004; our Executive Vice President and Chief Credit Officer joined us in April 2005; our
Executive Vice President and Chief Financial Officer has served in that capacity since the Company was formed in 1999. She has been Chief Financial Officer of the Bank since its inception in 1990, initially as Vice President until 1993, then as
Senior Vice President until she was promoted to Executive Vice President in 1997. 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.

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 Chief Financial Officer and our Chief Operating Officer each have employment agreements that have
3-year terms beginning in December 2004 and expire in December 2007, with a 1-year renewal. The employment agreements provide for severance payments if their respective employment arrangements are actually or constructively terminated or in
connection with a change in control of the Company or its subsidiary. These same two individuals, as well as three other officers of the Bank, including our Chief Executive Officer and our Chief Credit Officer also have salary continuation
agreements, which provide for accelerated vesting of all or a portion 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.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

Not applicable.



|ITEM 2. | PROPERTIES
|------- | ----------

The
Companys administrative headquarters is located at 218 East State Street, Redlands, California. The property is unencumbered and owned by the Company. It consists of approximately 8,500 square feet in a two-story building. Management believes
that the Companys existing back office facilities are adequate to accommodate the Companys operations for the immediately foreseeable future, although administrative office expansion is planned.



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The Company leases from unrelated parties, its Construction/Real Estate Loan production offices in
downtown Redlands, California, its Religious Lending Group and its SBA/Commercial Lending Group and a full-service branch in Brea, California, its Homeowners Association department and a full-service branch in Escondido, California and
full-service branches in Palm Desert, Irwindale and Temecula, California.



|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.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

(a) Market Information

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.

The information in the following table indicates the high and low quotations and approximate volume of trading for our common stock for each quarterly
period since January 1, 2005, and is based upon information provided by public sources. The high and low prices and trading volume have been adjusted to give effect to all stock dividends and distributions, including the 50% stock distribution
paid on April 3, 2006 to shareholders of record as of March 3, 2006.

In addition, the prices indicated reflect inter-dealer
prices and trades, without retail mark-up, mark-down or commission and may not represent actual transactions.



|                       |  |      |       |     |   |        |  |        
|---------------------- |  | ---- | ----- | --- | - | ------ |  | -------
|Calendar Quarter Ended |  | High |       | Low |   | Volume
|March 31, 2005         |  | $    | 25.33 |     | $ | 22.46  |  | 197,100
|June 30, 2005          |  | $    | 24.50 |     | $ | 22.67  |  | 71,400 
|September 30, 2005     |  | $    | 24.67 |     | $ | 22.67  |  | 54,450 
|December 31, 2005      |  | $    | 23.13 |     | $ | 21.33  |  | 86,700 
|March 31, 2006         |  | $    | 26.67 |     | $ | 21.47  |  | 520,800
|June 30, 2006          |  | $    | 26.67 |     | $ | 27.40  |  | 90,100 
|September 30, 2006     |  | $    | 35.00 |     | $ | 32.25  |  | 85,700 
|December 31, 2006      |  | $    | 33.75 |     | $ | 32.25  |  | 88,600 

(b) Holders

As of December 31, 2006, there were approximately 482 shareholders of record of our common stock.

(c) Dividends

As a bank holding company, which currently has no significant assets other than our equity interest in the Bank, our ability to pay
dividends depends primarily 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.

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 Shareholders 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.

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



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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 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 1997 we have paid eight stock dividends or distributions to our shareholders, including a 50% stock distribution in April 2006.

The table below sets forth information concerning all dividends paid since 1997. Dividends paid in 2000 through 2006 were paid by the Company, and
dividends paid prior to 2000 were paid by the Bank.



|     |  |                              |  |               |  |      |  |                              |  |               |  
|---- |  | ---------------------------- |  | ------------- |  | ---- |  | ---------------------------- |  | ------------- | -
|Year |  | StockDividends/Distributions |  | CashDividends |  | Year |  | StockDividends/Distributions |  | CashDividends |  
|2006 |  | 50%                          |  |              |  | 2001 |  |                             |  | 5             | ¢
|2005 |  | 7%                           |  |              |  | 2000 |  | 5%                           |  | 10            | ¢
|2004 |  | 25%                          |  |              |  | 1999 |  |                             |  |              |  
|2003 |  | 5%                           |  |              |  | 1998 |  | 25%                          |  |              |  
|2002 |  | 5%                           |  |              |  | 1997 |  | 7%                           |  |              |  

During any period in which the Company 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 7, Managements Discussion and Analysis of Financial Condition and Results of Operations  Capital
Resources.

Securities Authorized For Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2006, with respect to options outstanding and available under our 2001 Stock Incentive
Plan, as amended and restated March 19, 2004, 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 Options1 |  | Weighted-AverageExercise Price- ofOutstanding Options |       | Number of SecuritiesRemaining Available for Future Issuance
|Equity compensation plans approved by security holders |  | 602,224                                                                |  | $                                                     | 15.66 |                                                             | 109,805

---

|1 | As adjusted to reflect the 50% stock distribution paid on April 3, 2006 to shareholders of record as of March 3, 2006.
|- | ----------------------------------------------------------------------------------------------------------------------

(d) Stock Repurchases

There were no stock
repurchases during 2006; however, the Company did retire 578 shares of common stock due to the forfeiture of unvested restricted stock awards.



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Performance Graph

The following graph compares the yearly percentage change in the cumulative total shareholders return on the Companys stock with the cumulative total return of (i) the Nasdaq market index;
(ii) an index comprised of banks and bank holding companies located throughout the United States with total assets of between $500 million $1.0 billion; (SNL Bank $500M$1B) and (iii) all banks and bank holding
companies listed on Nasdaq (SNL Bank Index). The latter two indexes were compiled by SNL Financial of Charlottesville, Virginia. The graph assumes an initial investment of $100 and reinvestment of dividends.

The graph is not necessarily indicative of future price performance.

LOGO



|                       |  |               |  |          |  |          |  |          |  |          |  |         
|---------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                       |  | Period Ending
|Index                  |  | 12/31/01      |  | 12/31/02 |  | 12/31/03 |  | 12/31/04 |  | 12/31/05 |  | 12/31/06
|1st Centennial Bancorp |  | 100.00        |  | 155.34   |  | 175.19   |  | 271.85   |  | 262.60   |  | 409.05  
|NASDAQ Composite       |  | 100.00        |  | 68.76    |  | 103.67   |  | 113.16   |  | 115.57   |  | 127.58  
|SNL Bank $500M-$1B     |  | 100.00        |  | 127.67   |  | 184.09   |  | 208.62   |  | 217.57   |  | 247.44  
|SNL Bank Index         |  | 100.00        |  | 91.69    |  | 123.69   |  | 138.61   |  | 140.50   |  | 164.35  

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|* | Source: SNL Financial, Charlottsville, Virginia.
|- | ------------------------------------------------



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##### Table of Contents

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

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 elsewhere herein. The selected financial data as of December 31, 2006 and 2005 and for each of the
years in the three-year period ended December 31, 2006 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,    |          
|                                                     |  | 2006                                          |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|                                                     |  | (Dollars in Thousands, except per share data) |          
|Income Statement Summary:                            |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income                                      |  | $                                             | 40,743    |   |      | $ | 33,196    |      |  | $ | 23,718    |   |  | $    | 16,655    |   |  | $ | 14,486    |  
|Interest expense                                     |  |                                               | 12,424    |   |      |   | 7,056     |      |  |   | 3,335     |   |  |      | 2,106     |   |  |   | 2,377     |  
|Net interest income before provision for loan losses |  |                                               | 28,319    |   |      |   | 26,140    |      |  |   | 20,383    |   |  |      | 14,549    |   |  |   | 12,109    |  
|Provision for loan losses                            |  |                                               | 1,320     |   |      |   | 2,140     |      |  |   | 2,098     |   |  |      | 360       |   |  |   | 477       |  
|Noninterest income                                   |  |                                               | 3,024     |   |      |   | 4,456     |      |  |   | 2,608     |   |  |      | 3,031     |   |  |   | 2,424     |  
|Noninterest expense                                  |  |                                               | 17,760    |   |      |   | 20,113    |      |  |   | 16,080    |   |  |      | 13,991    |   |  |   | 11,548    |  
|Income before income tax expenses                    |  |                                               | 12,263    |   |      |   | 8,343     |      |  |   | 4,813     |   |  |      | 3,229     |   |  |   | 2,508     |  
|Income tax expense                                   |  |                                               | 4,836     |   |      |   | 3,260     |      |  |   | 1,793     |   |  |      | 1,141     |   |  |   | 802       |  
|Net income                                           |  | $                                             | 7,427     |   |      | $ | 5,083     |      |  | $ | 3,020     |   |  | $    | 2,088     |   |  | $ | 1,706     |  
|Balance Sheet Summary:                               |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                         |  | $                                             | 551,127   |   |      | $ | 456,192   |      |  | $ | 356,678   |   |  | $    | 254,383   |   |  | $ | 207,858   |  
|Cash and due from banks                              |  |                                               | 18,385    |   |      |   | 16,862    |      |  |   | 5,695     |   |  |      | 9,948     |   |  |   | 12,010    |  
|Federal funds sold                                   |  |                                               | 2,900     |   |      |   | 21,505    |      |  |   |          |   |  |      |          |   |  |   | 2,010     |  
|Securities                                           |  |                                               | 72,649    |   |      |   | 12,208    |      |  |   | 20,096    |   |  |      | 35,539    |   |  |   | 32,335    |  
|Net loans2                                           |  |                                               | 426,200   |   |      |   | 381,153   |      |  |   | 308,030   |   |  |      | 188,222   |   |  |   | 141,112   |  
|Total deposits                                       |  |                                               | 456,463   |   |      |   | 401,275   |      |  |   | 291,802   |   |  |      | 212,773   |   |  |   | 183,188   |  
|Borrowings from Federal Home Loan Bank               |  |                                               |          |   |      |   |          |      |  |   | 21,000    |   |  |      | 7,600     |   |  |   |          |  
|Subordinated debentures                              |  |                                               | 18,306    |   |      |   | 18,306    |      |  |   | 13,151    |   |  |      | 6,006     |   |  |   | 6,006     |  
|Total liabilities                                    |  |                                               | 508,930   |   |      |   | 422,771   |      |  |   | 328,677   |   |  |      | 229,983   |   |  |   | 190,665   |  
|Total shareholders equity                           |  |                                               | 42,197    |   |      |   | 33,421    |      |  |   | 28,001    |   |  |      | 24,400    |   |  |   | 17,193    |  
|Per Share Data:                                      |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Earnings per share:3                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                                |  | $                                             | 2.33      |   |      | $ | 1.62      |      |  | $ | 0.98      |   |  | $    | 0.71      |   |  | $ | 0.67      |  
|Diluted                                              |  |                                               | 2.12      |   |      |   | 1.51      |      |  |   | 0.91      |   |  |      | 0.66      |   |  |   | 0.61      |  
|Weighted average common shares outstanding basic     |  |                                               | 3,186,668 |   |      |   | 3,128,809 |      |  |   | 3,068,549 |   |  |      | 2,922,736 |   |  |   | 2,532,547 |  
|Weighted average common shares outstanding diluted   |  |                                               | 3,511,324 |   |      |   | 3,369,527 |      |  |   | 3,322,197 |   |  |      | 3,147,415 |   |  |   | 2,790,279 |  
|Book value                                           |  | $                                             | 13.14     |   |      | $ | 10.61     |      |  | $ | 8.99      |   |  | $    | 8.10      |   |  | $ | 6.79      |  
|Performance Ratios:                                  |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average equity4                            |  |                                               | 19.54     | % |      |   | 16.77     | %    |  |   | 11.75     | % |  |      | 9.83      | % |  |   | 10.47     | %
|Return on average assets5                            |  |                                               | 1.49      | % |      |   | 1.22      | %    |  |   | 0.94      | % |  |      | 0.91      | % |  |   | 0.83      | %
|Net interest margin6                                 |  |                                               | 6.07      | % |      |   | 6.69      | %    |  |   | 6.91      | % |  |      | 7.07      | % |  |   | 6.75      | %
|Average shareholders equity to average total assets |  |                                               | 7.63      | % |      |   | 7.26      | %    |  |   | 8.03      | % |  |      | 9.21      | % |  |   | 7.99      | %
|Efficiency ratio7                                    |  |                                               | 56.66     | % |      |   | 65.74     | %    |  |   | 69.94     | % |  |      | 79.58     | % |  |   | 79.47     | %
|Net loans to total deposits at period end            |  |                                               | 93.37     | % |      |   | 94.99     | %    |  |   | 105.56    | % |  |      | 88.46     | % |  |   | 77.03     | %



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|                                                                 |  |                                               |   |  |        |   |  |          |   |  |        |   |  |        |  
|---------------------------------------------------------------- |  | --------------------------------------------- | - |  | ------ | - |  | -------- | - |  | ------ | - |  | ------ | -
|                                                                 |  | As of and For the Years Ended December 31,    |  
|                                                                 |  | 2006                                          |   |  | 2005   |   |  | 2004     |   |  | 2003   |   |  | 2002   |  
|                                                                 |  | (Dollars in Thousands, except per share data) |  
|Asset Quality Ratios:                                            |  |                                               |   |  |        |   |  |          |   |  |        |   |  |        |  
|Nonperforming loans to total loans8                              |  | 0.89                                          | % |  | 0.26   | % |  | 0.04     | % |  | 0.33   | % |  | 0.41   | %
|Nonperforming assets to total loans and other real estate owned9 |  | 0.89                                          | % |  | 0.26   | % |  | 0.04     | % |  | 0.33   | % |  | 0.41   | %
|Net loan charge-offs to average loans                            |  | 0.23                                          | % |  | 0.25   | % |  | 0.03     | % |  | 0.01   | % |  | 0.12   | %
|Allowance for loan losses to total loans at end of period10      |  | 1.33                                          | % |  | 1.39   | % |  | 1.33     | % |  | 1.11   | % |  | 1.24   | %
|Allowance for loan losses to nonperforming loans                 |  | 148.81                                        | % |  | 540.85 | % |  | 3,309.60 | % |  | 339.45 | % |  | 304.99 | %
|Capital Ratios:                                                  |  |                                               |   |  |        |   |  |          |   |  |        |   |  |        |  
|Tier 1 capital to average assets                                 |  | 9.46                                          | % |  | 9.02   | % |  | 9.25     | % |  | 10.79  | % |  | 8.28   | %
|Tier 1 capital to total risk-weighted assets                     |  | 10.83                                         | % |  | 9.92   | % |  | 9.89     | % |  | 12.48  | % |  | 10.87  | %
|Total capital to total risk-weighted assets                      |  | 12.92                                         | % |  | 12.86  | % |  | 12.26    | % |  | 13.63  | % |  | 13.27  | %

---

|2 | Loans are gross, which excludes the allowance for loan losses, and net of deferred fees.
|- | ----------------------------------------------------------------------------------------

|3 | Adjusted to give retroactive effect to stock dividends and distributions.
|- | -------------------------------------------------------------------------

|4 | Net income divided by average shareholders equity.
|- | ---------------------------------------------------

|5 | Net income divided by average total assets.
|- | -------------------------------------------

|6 | Net interest income as a percentage of average interest-earning assets.
|- | -----------------------------------------------------------------------

|7 | 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.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8 | Nonperforming loans consist of nonaccrual loans, loans past due 90 days or more and still accruing and
restructured loans.
|- | --------------------------------------------------------------------------------------------------------------------------

|9 | Nonperforming assets consist of nonperforming loans and nonperforming other assets, including other real
estate owned.
|- | ----------------------------------------------------------------------------------------------------------------------

|10 | Total loans are gross loans less unearned income.
|-- | -------------------------------------------------



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##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This discussion presents Managements analysis of the results of operations of the Company for the years ended December 31, 2004, 2005 and 2006
and the financial condition of the Company as of December 31, 2005 and 2006. This discussion also 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 the Company and the notes related thereto which appear elsewhere in this Form 10-K Annual Report (see Item 8 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, local, regional and national economic
conditions, customer disintermediation and competitive product and pricing pressures in the geographic and business areas in which we conduct our operations.

Critical Accounting Policies

The Company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.

This discussion and analysis should be read in conjunction with the Company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,
2006 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.



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Summary of Performance

Results of operations summary

The Company achieved record earnings in 2006. In fact, net income has increased each year since the Company incorporated in 1999. Net income in 2006 was $7.427 million, an increase of $2.344 million, or 46%, over the
$5.083 million in net earnings recognized in 2005. Net income in 2005 of $5.083 million represented an increase of $2.063 million, or 68%, over the $3.020 million in net earnings recognized in 2004.

Net income per basic share was $2.33 for 2006, as compared to $1.62 for 2005 and $0.98 for 2004. On a diluted net income per share basis, net income was
$2.12, $1.51 and $0.91 for the years ended December 31, 2006, 2005 and 2004, respectively. Earnings per share calculations were adjusted to give retroactive effect to stock splits and dividends. Return on average assets was 1.49% for 2006,
compared to 1.22% for 2005 and 0.94% for 2004. Return on average shareholders equity was 19.54% for 2006, compared to 16.77% for 2005 and 11.75% for 2004.

The following are other noteworthy factors relevant to the Companys results of operations for the most recent three years:



| |  |  | Net interest income was a significant contributor to the increase in net income in 2006. Net interest income grew by $2.2 million, or 8%, in 2006 relative to
2005. Average loans grew by $49.2 million, or 14%, primarily due to the continued success of our business development efforts in and around the marketplaces we serve. In 2005 net interest income grew by $5.8 million, or 28%, primarily as a result of
the Banks loan growth.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The provision for loan losses decreased 38%.For the year ended December 31, 2006, the provision for loan losses was $1.320 million, compared to $2.140
million and $2.098 million for 2005 and 2004, respectively. The allowance for loan losses as of December 31, 2006, 2005 and 2004 was 1.33%, 1.39% and 1.33%, respectively, of total gross loans net of unearned income. Our analysis of the
allowance for loan losses showed these amounts to be adequate given the risk of the loan portfolio.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest income decreased by 32% in 2006,The decrease in noninterest income was attributable to the decrease in gains from the sale of SBA loans of
$1.021 million as a result of unanticipated personnel changes in the SBA department, which resulted in a temporary decrease in SBA loans sold during 2006 as compared to the same period in 2005. It is the Companys intention to increase
noninterest income by increasing the volume of SBA loan sales in the future; however, it is uncertain whether such an increase will occur. The decrease of $288,000 in conduit loan referral income was primarily the result of less income associated
with loan referral activity during 2006 as compared to the same period in 2005. In 2005, noninterest income increased 71%, primarily due to a vast increase in gains from the sale of loans of $1,099,000, which helped the Companys liquidity
position. Conduit loan sale income increased of $574,000, as a result of more activity in loan sales during 2005 as compared to 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest expense decreased by 12% in 2006. During the first quarter of 2006, the Company updated and redesigned its Loan Production Commissions and
Incentives Policy. As a result, commissions and incentives expense decreased $1.284 million. Also, during the first quarter of 2006, the Company changed its internal credit policy relating to loan origination costs. As a result, in 2006 the company
recorded $2.2 million in deferred loan costs reducing salary expense. These decreases were offset by increases in base salaries of $895,000 and stock option compensation cost of $533,000 due to the adoption of FASB 123R. In 2005 noninterest expense
increased by 25%. Additional staffing for the Irwindale and Temecula branches, coupled with salary increases for the Company contributed to the increase in salaries and employee benefits of $1.532 million. Marketing expense increased $852,000 as a
result of expenses related to ongoing business development efforts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The provision for income taxes in 2006 increased $1.6 million or 48% and in 2005 increased by $1.5 million or 82%. As a direct result of record earnings
in 2006 and 2005, the provision for income taxes increased accordingly.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial condition
summary

The Companys total assets were $551.1 million at December 31, 2006, an increase of $94.9 million, or 21%,
compared to total assets of $456.2 million at December 31, 2005. The following are important factors in understanding our financial condition:



| |  |  | Investment securities available for sale increased by $60.4 million or 495%.In 2006 the Companys investment portfolio increased $60.4 million or 495%
to $72.68 million. During the third quarter of 2006, the Company entered into a $30 million repurchase agreement that included an interest rate floor to mitigate interest rate risk in a declining rate environment. The repurchase agreement is
collateralized by the purchase of a $30 million FNMA U.S. agency security. In addition, the Company added approximately $16.0 million in federal agency mortgage-backed securities, however such securities had a net increase of $11.6 million due to
principal paydowns. Obligations of states and local government securities increased $18.7 million as the Company took advantage of relative value in that sector.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net loans increased by $45.0 million or 12% from December 31, 2005.Strong loan demand in the Companys market areas contributed to the increase in
net loans.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest-bearing demand deposits increased by $5.0 million or 5% from December 31, 2005.During the third quarter of 2006 the Bank launched a
noninterest-bearing deposit sales campaign. As of December 31, 2006 the Bank was able to attract approximately $5.1 million in new noninterest-bearing deposits, based on average balance in 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest-bearing deposits increased by $50.2 million or 17% from December 31, 2005. The increase in interest-bearing deposits was primarily the result
of the Companys continued emphasis on attracting new customers, coupled with additional brokered certificates of deposit acquired to support our loan growth.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Nonaccrual loans increased by $2.9 million or 288% from December 31, 2005. The increase was primarily attributable to the addition of five commercial
loans totaling $3.469 million, of which $2.459 million was attributed to one commercial loan. There was also an addition of one residential real estate loan totaling $18,000. The additions were partially offset by the payoff of three commercial
loans totaling $330,000. There were two commercial loans charged-off totaling $119,000 and three commercial loans with principal paydowns totaling $174,000.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

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

Net Interest Income and Net Interest Margin

The
principal component of the Companys earnings is net interest income, which is the difference between the interest and fees earned on loans and investments, and the interest paid on deposits and borrowed funds. When net interest income is
expressed as a percentage of average earning assets, the result is the net interest margin. The net interest spread is the yield on average earning assets minus the average cost of interest-bearing deposits and borrowed funds. The Companys net
interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term



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##### Table of Contents

interest rates, inflation, monetary supply, and the strength of the economy, and the local economies in which the Company conducts business.

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.

2006 compared to 2005 analysis. The Companys net interest margin
as of December 31, 2006 was 6.07% compared to 6.69% for the same period in 2005. The increase in rates paid for money market deposits, time deposits and the addition of our repurchase agreement, coupled with the increase in the average balance
on these liabilities, were the major contributors toward compressing our net interest margin. Loan fee income decreased in 2006 a result of the change in the Companys internal credit policy relating to loan origination cost. The decrease in
loan fees also contributed to the reduction in the net interest margin. The reduction in loan fees was offset by a reduction in salary expense. See Noninterest Expense below. From December 31, 2005 to December 31, 2006 the
percentage of total average deposits represented by money market deposits increased to 37% from 29%. The shift in this average deposit mix also contributed to the reduction of the net interest margin in 2006 versus 2005.

For the year ended 2006, total interest-earning assets averaged $466.3 million, which represented an increase of $75.8 million or 19%, as compared to
$390.5 million for the same period in 2005. This increase is primarily attributable to the increase in loans as a result of our strong business climate and loan demand, coupled with an increase in federal funds sold as a result of the Companys
improved liquidity position. Total interest-bearing deposits and other interest-bearing liabilities averaged $348.3 million, which represented an increase of $69.4 million or 25%, as compared to $278.9 million for the same period in 2005. This
increase is primarily attributable to the increase in money market deposit and time deposit accounts. There were no Federal Home Loan Bank borrowings outstanding during 2006 compared to an average of $22.3 million for the year ended
December 31, 2005.

The Company reported total interest income of $40.7 million for the year ended December 31, 2006, which
represented an increase of $7.5 million or 23%, over total interest income of $33.2 million for the same period in 2005. The increase is primarily the result of increases in interest and fees on loans of approximately $6.0 million that resulted from
an increase of $49.2 million in average loans as of December 31, 2006, as compared to the same period in 2005.

The Company reported
total interest expense of $12.4 million for the year ended December 31, 2006, which represented an increase of $5.4 million or 76%, over total interest expense of $7.0 million for the same period in 2005. This increase is primarily attributable
to an increase in the average balance of money market deposit and time deposit accounts.

For the year ended December 31, 2006, net
interest income before provision for loan losses was $28.3 million, which represented an increase of $2.2 million or 8%, over net interest income before provision for loan losses of $26.1 million for the same period in 2005. The increase in net
interest income for the year ended December 31, 2006 as compared to 2005 was primarily due to the increase in average total loans.

2005 compared to 2004 analysis.The Companys net interest margin as of December 31, 2005 was 6.69% compared to 6.91% for the same period in 2004. The increase on rates paid for money market, Time deposits of $100,000 or
more and Federal Home Loan Bank borrowings, coupled with the increase in volume on these liabilities compressed our net interest margin. For the year ended December 31, 2005, total interest earning assets averaged $390.5 million, which
represented an increase of $95.6 million or 32%, as compared to $294.9 million for the same period in 2004. This increase is primarily attributable to the increase in loans as a result of our strong business climate and loan demand. The increase in
loan volume and the decrease in securities volume



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created a shift in the mix as a percentage of total interest earning assets. Average loans changed to 93% from 87% and average investments changed to 4% from
9%. Total interest bearing deposits and other interest-bearing liabilities averaged $278.9 million, which represented an increase of $67.6 million or 32%, as compared to $211.3 million for the same period in 2004. This increase is primarily
attributable to the increase in money market accounts due to a promotional money market account offered to businesses and consumers during 2005. There was also an increase of $19.4 million in average time deposit accounts of $100,000 or more due to
the addition of brokered deposits, coupled with an increase in average FHLB borrowings of $9.7 million in order to fund our loan demand.

The Company reported total interest income of $33.2 million for the year ended December 31, 2005, which represented an increase of $9.5 million or 40%, over total interest income of $23.7 million for the same period in 2004. The
increase in total interest income was primarily due to an increase of approximately $9.7 million in interest and fees on loans resulting from an increase of approximately $105.2 million in average loans as of December 31 2005, as compared to
the same period in 2004.

The Company reported total interest expense of $7.0 million for the year ended December 31, 2005, which
represented an increase of $3.7 million or 112% over total interest expense of $3.3 million for the same period in 2004. The increase was due to greater interest paid on money market accounts, time deposit accounts of $100,000 or more and FHLB
borrowings.

For the year ended December 31, 2005, net interest income before provision for loan losses was $26.1 million, which
represented an increase of $5.8 million, or 28%, over net interest income before provision for loan losses of $20.3 million for the same period in 2004. The increase in net interest income for the year ended December 31, 2005 as compared to
2004 was primarily due to the increase in average total loans.



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##### 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, |        
|                                                    |  | 2006                             |         |                          | 2005 |                   |  | 2004 |                
|                                                    |  | Average Balance                  |         | Interest Income/ Expense |      | AverageRate/Yield |  |      | Average Balance |  | Interest Income/ Expense |         | AverageRate/Yield |   |        | Average Balance |      | Interest Income/ Expense |  | Average Rate/Yield |        
|                                                    |  | (Dollars in Thousands)           |        
|Interest-earning Assets:                            |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Federal funds sold                                  |  | $                                | 20,579  |                          | $    | 1,010             |  | 4.91 | %               |  | $                        | 9,659   |                   | $ | 350    |                 | 3.62 | %                        |  | $                  | 5,182   |  | $ | 66     |  | 1.27 | %
|Interest-bearing deposits in financial institutions |  |                                  | 2,578   |                          |      | 125               |  | 4.85 | %               |  |                          | 2,893   |                   |   | 134    |                 | 4.63 | %                        |  |                    | 4,600   |  |   | 200    |  | 4.35 | %
|Investment securities:                              |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Taxable11                                           |  |                                  | 22,264  |                          |      | 1,148             |  | 5.16 | %               |  |                          | 11,853  |                   |   | 450    |                 | 3.80 | %                        |  |                    | 24,148  |  |   | 841    |  | 3.48 | %
|Non-taxable                                         |  |                                  | 9,429   |                          |      | 395               |  | 4.19 | %               |  |                          | 3,859   |                   |   | 165    |                 | 4.28 | %                        |  |                    | 3,998   |  |   | 169    |  | 4.23 | %
|                                                    |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Total investments                                   |  |                                  | 54,850  |                          |      | 2,678             |  | 4.88 | %               |  |                          | 28,264  |                   |   | 1,099  |                 | 3.89 | %                        |  |                    | 37,928  |  |   | 1,276  |  | 3.36 | %
|Loans12                                             |  |                                  | 411,415 |                          |      | 38,065            |  | 9.25 | %               |  |                          | 362,231 |                   |   | 32,097 |                 | 8.86 | %                        |  |                    | 257,005 |  |   | 22,442 |  | 8.73 | %
|                                                    |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Total interest-earning assets                       |  | $                                | 466,265 |                          | $    | 40,743            |  | 8.74 | %               |  | $                        | 390,495 |                   | $ | 33,196 |                 | 8.50 | %                        |  | $                  | 294,933 |  | $ | 23,718 |  | 8.04 | %
|                                                    |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Interest-bearing Liabilities:                       |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Interest-bearing deposits                           |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Interest-bearing demand deposits                    |  | $                                | 26,468  |                          | $    | 94                |  | 0.36 | %               |  | $                        | 21,400  |                   | $ | 56     |                 | 0.26 | %                        |  | $                  | 20,255  |  | $ | 40     |  | 0.20 | %
|Money market deposits                               |  |                                  | 158,763 |                          |      | 5,451             |  | 3.43 | %               |  |                          | 99,052  |                   |   | 2,228  |                 | 2.25 | %                        |  |                    | 67,188  |  |   | 878    |  | 1.31 | %
|Savings deposits                                    |  |                                  | 21,196  |                          |      | 223               |  | 1.05 | %               |  |                          | 24,655  |                   |   | 188    |                 | 0.76 | %                        |  |                    | 25,752  |  |   | 167    |  | 0.65 | %
|Time deposits $100,000 or greater                   |  |                                  | 75,377  |                          |      | 3,217             |  | 4.27 | %               |  |                          | 58,537  |                   |   | 1,852  |                 | 3.16 | %                        |  |                    | 39,144  |  |   | 788    |  | 2.01 | %
|Other time deposits                                 |  |                                  | 38,993  |                          |      | 1,450             |  | 3.72 | %               |  |                          | 37,787  |                   |   | 1,089  |                 | 2.88 | %                        |  |                    | 32,811  |  |   | 634    |  | 1.93 | %
|                                                    |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Total interest-bearing deposits                     |  |                                  | 320,797 |                          |      | 10,435            |  | 3.25 | %               |  |                          | 241,431 |                   |   | 5,413  |                 | 2.24 | %                        |  |                    | 185,150 |  |   | 2,507  |  | 1.35 | %
|FHLB borrowings                                     |  |                                  |        |                          |      |                  |  | 0.00 | %               |  |                          | 22,255  |                   |   | 649    |                 | 2.92 | %                        |  |                    | 12,571  |  |   | 187    |  | 1.49 | %
|Federal funds purchased                             |  |                                  | 9       |                          |      |                  |  | 0.00 | %               |  |                          | 708     |                   |   | 19     |                 | 2.68 | %                        |  |                    | 723     |  |   | 13     |  | 1.80 | %
|Repurchase agreement                                |  |                                  | 9,205   |                          |      | 546               |  | 5.93 | %               |  |                          |        |                   |   |       |                 | 0.00 | %                        |  |                    |        |  |   |       |  | 0.00 | %
|Subordinated notes payable to subsidiary Trust      |  |                                  | 18,306  |                          |      | 1,443             |  | 7.88 | %               |  |                          | 14,492  |                   |   | 975    |                 | 6.73 | %                        |  |                    | 12,877  |  |   | 628    |  | 4.88 | %
|Total interest-bearing liabilities                  |  | $                                | 348,317 |                          | $    | 12,424            |  | 3.57 | %               |  | $                        | 278,886 |                   | $ | 7,056  |                 | 2.53 | %                        |  | $                  | 211,321 |  | $ | 3,335  |  | 1.58 | %
|                                                    |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Net interest income                                 |  |                                  |         |                          | $    | 28,319            |  |      |                 |  |                          |         |                   | $ | 26,140 |                 |      |                          |  |                    |         |  | $ | 20,383 |  |      |  
|                                                    |  |                                  |         |                          |      |                   |  |      |                 |  |                          |         |                   |   |        |                 |      |                          |  |                    |         |  |   |        |  |      |  
|Net interest margin13                               |  |                                  |         |                          |      |                   |  | 6.07 | %               |  |                          |         |                   |   |        |                 | 6.69 | %                        |  |                    |         |  |   |        |  | 6.91 | %

---

|11 | Yields on securities have not been adjusted to a tax equivalent basis because the impact is not material.
|-- | ---------------------------------------------------------------------------------------------------------

|12 | 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 $2.2 million; $4.1 million and $3.9 million for the years ended December 31, 2006, 2005 and 2004, respectively.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13 | Net interest income as a percentage of average interest-earning assets.
|-- | -----------------------------------------------------------------------



28



---

##### 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 31,2006 vs. 2005 |       |   | Year Ended December 31,2005 vs. 2004 |  
|                                                    |  | Increases (Decreases) Due to         |       |   | Increases (Decreases) Due to         |  
|                                                    |  | Volume                               |       |   | Rate                                 |   |        | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|                                                    |  | (Dollars in Thousands)               |      
|Increase (Decrease) in Interest Income:             |  |                                      |       |   |                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Federal funds sold                                  |  | $                                    | 396   |   |                                      | $ | 264    |       |  | $ | 660    |   |  | $    | 57    |   |       | $ | 227    |   |  | $ | 284   |  
|Interest-bearing deposits in financial institutions |  |                                      | (15   | ) |                                      |   | 6      |       |  |   | (9     | ) |  |      | (74   | ) |       |   | 8      |   |  |   | (66   | )
|Investment securities:14                            |  |                                      |       |   |                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Taxable                                             |  |                                      | 395   |   |                                      |   | 303    |       |  |   | 698    |   |  |      | (428  | ) |       |   | 37     |   |  |   | (391  | )
|Non-taxable                                         |  |                                      | 238   |   |                                      |   | (8     | )     |  |   | 230    |   |  |      | (6    | ) |       |   | 2      |   |  |   | (4    | )
|Loans15                                             |  |                                      | 4,358 |   |                                      |   | 1,610  |       |  |   | 5,968  |   |  |      | 9,188 |   |       |   | 467    |   |  |   | 9,655 |  
|                                                    |  |                                      |       |   |                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total                                               |  | $                                    | 5,372 |   |                                      | $ | 2,175  |       |  | $ | 7,547  |   |  | $    | 8,737 |   |       | $ | 741    |   |  | $ | 9,478 |  
|                                                    |  |                                      |       |   |                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Increase (Decrease) in Interest Expense:            |  |                                      |       |   |                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Interest-bearing demand deposits                    |  | $                                    | 13    |   |                                      | $ | 25     |       |  | $ | 38     |   |  | $    | 2     |   |       | $ | 14     |   |  | $ | 16    |  
|Money market deposits                               |  |                                      | 1,343 |   |                                      |   | 1,880  |       |  |   | 3,223  |   |  |      | 417   |   |       |   | 933    |   |  |   | 1,350 |  
|Savings deposits                                    |  |                                      | (26   | ) |                                      |   | 61     |       |  |   | 35     |   |  |      | (7    | ) |       |   | 28     |   |  |   | 21    |  
|Time deposits $100,000 or greater                   |  |                                      | 533   |   |                                      |   | 832    |       |  |   | 1,365  |   |  |      | 390   |   |       |   | 674    |   |  |   | 1,064 |  
|Other time deposits                                 |  |                                      | 35    |   |                                      |   | 326    |       |  |   | 361    |   |  |      | 96    |   |       |   | 359    |   |  |   | 455   |  
|FHLB borrowings                                     |  |                                      | (649  | ) |                                      |   |       |       |  |   | (649   | ) |  |      | 144   |   |       |   | 318    |   |  |   | 462   |  
|Federal funds purchased                             |  |                                      | (19   | ) |                                      |   |       |       |  |   | (19    | ) |  |      |      |   |       |   | 6      |   |  |   | 6     |  
|Repurchase agreement                                |  |                                      |      |   |                                      |   | 546    |       |  |   | 546    |   |  |      |      |   |       |   |       |   |  |   |      |  
|Subordinated notes payable to subsidiary trusts     |  |                                      | 257   |   |                                      |   | 211    |       |  |   | 468    |   |  |      | 79    |   |       |   | 268    |   |  |   | 347   |  
|                                                    |  |                                      |       |   |                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total                                               |  | $                                    | 1,487 |   |                                      | $ | 3,881  |       |  | $ | 5,368  |   |  | $    | 1,121 |   |       | $ | 2,600  |   |  | $ | 3,721 |  
|                                                    |  |                                      |       |   |                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total change in net interest income                 |  | $                                    | 3,885 |   |                                      | $ | (1,688 | )     |  | $ | 2,179  |   |  | $    | 7,616 |   |       | $ | (1,859 | ) |  | $ | 5,757 |  
|                                                    |  |                                      |       |   |                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  

---

|14 | Yields on securities have not been adjusted to a tax equivalent basis because the impact is not
material.
|-- | ---------------------------------------------------------------------------------------------------------

|15 | 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 on such loans is excluded.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provision for Loan
Losses

Credit risk is inherent in the business of making loans. The Company sets aside an allowance or reserve for loan losses through
charges to earnings, which are shown in the income statement as the provision for loan losses. Specifically identifiable and quantifiable losses are immediately charged off against the allowance. The loan loss provision is determined by conducting a
monthly evaluation of the adequacy of the Companys allowance for loan losses, and charging the shortfall, if any, to the current months expense. This has the effect of creating variability in the amount and frequency of charges to the
Companys earnings.

For the year ended December 31, 2006, the provision for loan losses was $1.320 million, compared to $2.140
million and $2.098 million for 2005 and 2004, respectively. The allowance for loan losses to total gross loans less unearned income as of December 31, 2006 was 1.33%. The provision for 2006 was in response to loan growth and the level of
nonaccrual loans. During 2006, nonaccrual loans increased $2.9 million or 288% when compared to $994,000 as of December 31, 2005. For a more detailed discussion on nonaccrual loans see



29



---

##### Table of Contents

Nonperforming Assets below. Despite higher loan charge-offs in 2005, when compared to 2004, the allowance for loan losses to total gross loans
less unearned income at December 31, 2005 was 1.39% as compared to 1.33% in 2004.

Our analysis of the allowance for loan losses
showed these amounts to be adequate given the risk of the loan portfolio. The procedures for monitoring the adequacy of the allowance, as well as detailed information concerning the allowance itself, are included below under Allowance for Loan
Losses.

Noninterest Income

Noninterest income for the Company includes customer service fees, gains from sale of loans, increases in the cash surrender value of life insurance policies, broker fee income, conduit loan referral income and other miscellaneous income.
The revenue from conduit loan referral income is referral or brokerage fee income. The loans are never recorded on the Companys books; therefore, the recognized income is not recorded as gain on the sale of loans. The loans are packaged and
referred to other lenders. The Company recognizes noninterest income as a result of the referral.

2006 compared to 2005 analysis.
Noninterest income totaled $3.024 million for the year ended December 31, 2006. This represented a decrease of $1.432 million, or 32% when compared to $4.456 million for the same period in 2005.

The decrease in noninterest income was attributable to the decrease in gains from the sale of SBA loans of $1.021 million as a result of unanticipated
personnel changes in the SBA department, which resulted in a temporary decrease in SBA loans sold during 2006 as compared to the same period in 2005. It is the Companys intention to increase noninterest income by increasing the volume of SBA
loan sales in the future, however, it is uncertain whether such an increase will occur. The decrease of $288,000 in conduit loan referral income was primarily the result of less income associated with loan referral volume during 2006 as compared to
the same period in 2005.

For the year ended December 31, 2006 as compared to 2005, noninterest income as a percentage of average
earning assets decreased to 0.65% from 1.14% primarily due to the decreases in gains from sale of loans and conduit loan referral income discussed above.

2005 compared to 2004 analysis. Noninterest income totaled $4.456 million for the year ended December 31, 2005. This represented an increase of $1.848 million or 71% when compared to $2.608 million for the
same period in 2004.

The increase in noninterest income was primarily the result of the increase in gains from the sale of loans of $1.099
million, which helped the Companys liquidity position as of December 31, 2005 as compared to the same period in 2004. Conduit loan sale income increased $574,000 as a result of more activity in loan sales during 2005 as compared to 2004.
Customer service fee income increased $155,000 due to the increase in volume in deposit accounts during 2005 as compared to 2004, however, as a percentage of total noninterest income decreased to 31% from 47%. The shift was the result of the
increase on gains from the sale of loans, which increased to 31% from 11%.

For the year ended December 31, 2005 as compared to 2004,
noninterest income as a percentage of average earning assets increased to 1.14% from 0.88% primarily due to the increases in gains from sale of loans and conduit loan referral income discussed above.



30



---

##### Table of Contents

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, |      
|                                                             |  | 2006                             |       |                 | 2005   |   |        | 2004 |                
|                                                             |  | Amount                           |       | Percentof Total |        |   | Amount |      | Percentof Total |  |        | Amount |  | Percent of Total |      
|                                                             |  | (Dollars in Thousands)           |      
|Customer service fees                                        |  | $                                | 1,344 |                 | 44.45  | % |        | $    | 1,376           |  | 30.88  | %      |  | $                | 1,221 |  | 46.81  | %
|Gains from sale of loans                                     |  |                                  | 373   |                 | 12.33  | % |        |      | 1,394           |  | 31.29  | %      |  |                  | 295   |  | 11.31  | %
|Increase in cash surrender value of life insurance           |  |                                  | 448   |                 | 14.81  | % |        |      | 269             |  | 6.04   | %      |  |                  | 303   |  | 11.62  | %
|Broker fee income                                            |  |                                  | 111   |                 | 3.67   | % |        |      | 226             |  | 5.07   | %      |  |                  | 196   |  | 7.52   | %
|Conduit loan referral income                                 |  |                                  | 684   |                 | 22.62  | % |        |      | 972             |  | 21.81  | %      |  |                  | 398   |  | 15.26  | %
|Other income                                                 |  |                                  | 64    |                 | 2.12   | % |        |      | 219             |  | 4.91   | %      |  |                  | 195   |  | 7.48   | %
|                                                             |  |                                  |       |                 |        |   |        |      |                 |  |        |        |  |                  |       |  |        |  
|Total noninterest income                                     |  | $                                | 3,024 |                 | 100.00 | % |        | $    | 4,456           |  | 100.00 | %      |  | $                | 2,608 |  | 100.00 | %
|                                                             |  |                                  |       |                 |        |   |        |      |                 |  |        |        |  |                  |       |  |        |  
|Noninterest income as a percentage of average earning assets |  |                                  |       |                 | 0.65   | % |        |      |                 |  | 1.14   | %      |  |                  |       |  | 0.88   | %
|                                                             |  |                                  |       |                 |        |   |        |      |                 |  |        |        |  |                  |       |  |        |  

Noninterest Expense

Noninterest expense for the Company includes salaries and employee benefits, net occupancy and equipment expense, marketing expense, data processing and professional fees, and other operating expenses.

2006 compared to 2005 analysis. Noninterest expense totaled $17.760 million for the year ended December 31, 2006. This represented a decrease
of $2.353 million, or 12% when compared to $20.113 million for the same period in 2005. The decrease in noninterest expense was primarily due to decreases of $1.748 million and $265,000 in salaries and employee benefits and marketing and
advertising, respectively.

During the first quarter of 2006, the Company updated and redesigned its Loan Production Commissions and
Incentives Policy. As a result, commissions and incentives expense decreased $1.284 million. This decline was expected due to this Policy change. Also, during the first quarter of 2006, the Company changed its internal credit policy relating to loan
origination cost. As a result, in 2006 the company recorded $2.2 million in deferred loan costs reducing salary expense. The decline was expected due to this Policy change. These decreases were offset by increases in base salaries of $895,000 and
stock option compensation cost of $533,000 due to the adoption of FASB 123R. In 2005, the Company launched a money market campaign by print advertising targeting our market areas. In 2006 advertising expenses related to this campaign decreased
significantly. This is the primary reason for the $265,000 decrease in marketing and advertising expense.

For the year ended
December 31, 2006 as compared to 2005, noninterest expense as a percentage of average earning assets decreased to 3.81% from 5.15%. This decrease is reflective of Managements continuing efforts to control overhead expenses.

2005 compared to 2004 analysis. Noninterest expense totaled $20.113 million for the year ended December 31, 2005. This represented an
increase of $4.033 million, or 25% when compared to $16.080 million for the same period in 2004. The increase in noninterest expense was primarily due to the increases of $1.532 million, $589,000, $863,000, $271,000 and $468,000 in salaries and
employee benefits, occupancy expense, marketing and advertising expense, professional fee expense and other operating expense, respectively.

Additional staffing for the Irwindale and Temecula branches, coupled with salary increases for the Company contributed to the increase in salaries and employee benefits of $1.532 million. The increase in occupancy



31



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##### Table of Contents

expense of $589,000 was attributable to the opening of our Irwindale and Temecula branches, coupled with the move into our new permanent location for our
Palm Desert office, in June 2004, for which twelve months of lease rental expense was included in 2005 as compared to six months in 2004. Marketing and advertising expense increased $863,000. Attracting and maintaining deposits has become more
difficult for banks, as sources of traditional deposits have developed sophisticated methods for tracking rates, and as we compete with non-traditional institutions such as credit unions, brokerage houses and insurance companies. To inform and
attract new customers, in 2005, the Company launched a money market campaign by print advertising that proved to be successful. We anticipate our ongoing business development efforts trend to continue. Professional fee expense increased $271,000 and
was attributed to costs incurred to comply with the Sarbanes Oxley Act of 2002 and expenses related to audits, exams, CPA fees and other professional expenses. As a result of the Companys sustained growth, other operating expense increased
$468,000 or 29% from $1.588 million to $2.056 million.

For the year ended December 31, 2005 as compared to 2004, noninterest
expense as a percentage of average earning assets decreased to 5.15% from 5.45%. This decrease is reflective of Managements continuing efforts to control overhead expenses.

While some level of expense increase is expected in the normal course of business, we are focused on controlling overhead expenses where possible.
Improvement is evident in the Companys efficiency ratio, which dropped to 56.66% in 2006 from 65.74% in 2005 and 69.94% for 2004.

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

Noninterest Expense



|                                                              |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |        |  |        |  
|------------------------------------------------------------- |  | -------------------------------- | ------ | --------------- | ------ | - | ------ | ---- | --------------- |  | ------ | ------ |  | --------------- | ------ |  | ------ | -
|                                                              |  | For the Years Ended December 31, |       
|                                                              |  | 2006                             |        |                 | 2005   |   |        | 2004 |                
|                                                              |  | Amount                           |        | Percentof Total |        |   | Amount |      | Percentof Total |  |        | Amount |  | Percentof Total |       
|                                                              |  | (Dollars in Thousands)           |       
|Salaries, wages and employee benefits                         |  | $                                | 9,697  |                 | 54.59  | % |        | $    | 11,445          |  | 56.90  | %      |  | $               | 9,913  |  | 61.65  | %
|Net occupancy expense                                         |  |                                  | 2,216  |                 | 12.48  | % |        |      | 2,051           |  | 10.20  | %      |  |                 | 1,462  |  | 9.09   | %
|Marketing and advertising                                     |  |                                  | 1,293  |                 | 7.28   | % |        |      | 1,558           |  | 7.75   | %      |  |                 | 702    |  | 4.37   | %
|Data processing fees                                          |  |                                  | 837    |                 | 4.71   | % |        |      | 1,056           |  | 5.25   | %      |  |                 | 837    |  | 5.21   | %
|Professional fees                                             |  |                                  | 1,081  |                 | 6.09   | % |        |      | 1,114           |  | 5.54   | %      |  |                 | 844    |  | 5.25   | %
|Postage, telephone, supplies                                  |  |                                  | 557    |                 | 3.14   | % |        |      | 594             |  | 2.95   | %      |  |                 | 555    |  | 3.45   | %
|Directors fees                                               |  |                                  | 220    |                 | 1.24   | % |        |      | 239             |  | 1.19   | %      |  |                 | 187    |  | 1.16   | %
|Other operating expense                                       |  |                                  | 1,859  |                 | 10.47  | % |        |      | 2,056           |  | 10.22  | %      |  |                 | 1,580  |  | 9.82   | %
|                                                              |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |        |  |        |  
|Total other expenses                                          |  | $                                | 17,760 |                 | 100.00 | % |        | $    | 20,113          |  | 100.00 | %      |  | $               | 16,080 |  | 100.00 | %
|                                                              |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |        |  |        |  
|Noninterest expense as a percentage of average earning assets |  |                                  |        |                 | 3.81   | % |        |      |                 |  | 5.15   | %      |  |                 |        |  | 5.45   | %
|                                                              |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |        |  |        |  
|Efficiency ratio                                              |  |                                  |        |                 | 56.66  | % |        |      |                 |  | 65.74  | %      |  |                 |        |  | 69.94  | %
|                                                              |  |                                  |        |                 |        |   |        |      |                 |  |        |        |  |                 |        |  |        |  

Income Taxes

In 2006 the Companys provision for federal and state income taxes was $4.8 million, while the provision was $3.3 million and $1.8 million for 2005 and 2004, respectively. This equates to 39.4% of income before
taxes in 2006, 39.1% in 2005, and 37.3% in 2004. The increase in the effective rate is a direct result of the Companys income level graduating to the highest federal tax rate of 35% from 34%.



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The amount of the tax provision is determined by applying the Companys statutory income tax rates
to pre-tax book income, adjusted for permanent differences between pre-tax book income and actual taxable income. Such permanent differences include but are not limited to tax-exempt interest income, increases in the cash surrender value of
bank-owned life insurance, compensation expense on incentive stock options and certain other expenses that are not allowed as tax deductions, and tax credits.

Financial Condition

A comparison between the summary year-end balance sheets for 2002 through 2006 was presented previously
in the table of Selected Financial Data (see Item 6 above). As indicated in that table, the Companys total assets, loans, and shareholders equity have grown each year for the past four years. In 2006 total assets increased $94.9
million, or 21%, due primarily to the increase in investment securities, available for sale and loan growth. The Company experienced its most pronounced growth during 2004, with total assets increasing by $102.3 million, or 40%, due to internally
generated growth, most significantly in the loan portfolio. Total assets were $551.1 million and $456.2 million at December 31, 2006 and 2005, respectively. The major components of the Companys balance sheet are individually analyzed
below, along with off-balance sheet information.

Loans

Total gross loans were $433.3 million at December 31, 2006, compared to $388.5 million and $313.7 million at December 31, 2005 and 2004, respectively. Total gross loans less unearned income represented
78% of total assets at December 31, 2006, compared to 85% and 88% of total assets at December 31, 2005 and 2004, respectively.

2006 compared to 2005 analysis. Total gross loans increased by $44.8 million, or 12% during 2006. Real estate loans, which includes construction and development loans increased $28.8 million or 13% during 2006 and represented
approximately 64% of the total loan growth of $44.8 million. This was due to the continuing strong demand for affordable housing in our market areas. Commercial loans increased $14.6 million or 10% during 2006 due to the continued success of our
business development efforts in and around the marketplaces the Company serves.

2005 compared to 2004 analysis.Total gross loans
increased by $74.8 million, or 24% during 2005. Real estate loans increased $20.3 million or 10% during 2005 and represented approximately 27% of the total loan growth of $74.8 million. Commercial loans increased $48.6 million or 47% during 2005.
The increase in loans was due to the continued success of our business development efforts in and around the marketplaces we serve. From December 31, 2004 to December 31, 2005, the growth in the commercial loan category reduced the real
estate loan percentage relative to total gross loans from 65% to 58% and increased the commercial loan percentage to 39% from 33%.

Loans Held For Sale

The Company actively generates Small Business Administration (SBA) loans as part of its primary operating activity of making loans. The
guaranteed portion of each individual loan is sold on the secondary market simultaneously with the booking, and therefore the Company has no inventory held for sale, unlike some institutions that warehouse loans to sell as
pools. The Company retains the unguaranteed portion of the SBA loans. The total gain on sale of loans was $373,000 or 0.85% of total interest and noninterest income as of December 31, 2006 and $1.394 million or 3.7% of total
interest and noninterest income as of December 31, 2005. The Company reported the gain on sale of loans as operating activities on the Consolidated Statement of Cash Flows.

Loans held for sale are sold with servicing rights retained by the Bank. To calculate the gain on sale of a loan, the Banks investment in the loan
is allocated among the retained portion of the loan, the servicing asset,



33



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the interest-only strip and the sold portion of the loan, based on the relative fair market value of each portion. The gain on the sold portion of the loan
is recognized at the time of sale based on the difference between the sale proceeds and the allocated investment. As a result of the relative fair value allocation, the carrying value of the retained portion of the loan is discounted, with the
discount accreted to interest income over the life of the loan. The portion of the loan servicing fee in excess of estimated servicing costs gives rise to a servicing asset that is amortized over an estimated life using a method approximating the
interest method. In the event future prepayments exceed managements estimates and future expected cash flows are inadequate to cover the unamortized servicing asset, additional amortization would be recognized. The portion of the loan
servicing fees in excess of the contractual servicing fee gives rise to an interest-only (I/0) strip, which is amortized over the life of the sold loan.

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,     |        
|                             |  | 2006                   |         |   | 2005           |        |   | 2004   |   |         | 2003           |  |        | 2002   | 
|                             |  | Amount                 |         |   | PercentofTotal |        |   | Amount |   |         | PercentofTotal |  |        | Amount |  |   | PercentofTotal |   |  | Amount |   |  | PercentofTotal |         |   | Amount |        |   | PercentofTotal |  
|                             |  | (Dollars in Thousands) |        
|Real estate loans:           |  |                        |         |   |                |        |   |        |   |         |                |  |        |        |  |   |                |   |  |        |   |  |                |         |   |        |        |   |                |   |         |   |  |        |  
|Construction and development |  | $                      | 174,040 |   |                | 40.16  | % |        | $ | 137,292 |                |  | 35.34  | %      |  | $ | 124,309        |   |  | 39.62  | % |  | $              | 70,654  |   |        | 36.94  | % |                | $ | 53,246  |   |  | 37.12  | %
|Residential loans            |  |                        | 3,063   |   |                | 0.71   | % |        |   | 3,440   |                |  | 0.89   | %      |  |   | 3,650          |   |  | 1.16   | % |  |                | 6,169   |   |        | 3.23   | % |                |   | 9,975   |   |  | 6.95   | %
|Commercial and multi- family |  |                        | 77,245  |   |                | 17.83  | % |        |   | 84,813  |                |  | 21.83  | %      |  |   | 77,316         |   |  | 24.64  | % |  |                | 64,260  |   |        | 33.60  | % |                |   | 34,297  |   |  | 23.91  | %
|Commercial loans             |  |                        | 165,765 |   |                | 38.26  | % |        |   | 151,207 |                |  | 38.91  | %      |  |   | 102,582        |   |  | 32.71  | % |  |                | 42,009  |   |        | 21.94  | % |                |   | 38,305  |   |  | 26.70  | %
|Consumer loans               |  |                        | 4,764   |   |                | 1.10   | % |        |   | 2,784   |                |  | 0.72   | %      |  |   | 1,107          |   |  | 0.35   | % |  |                | 2,035   |   |        | 1.06   | % |                |   | 1,583   |   |  | 1.11   | %
|Equity lines of credit       |  |                        | 6,762   |   |                | 1.56   | % |        |   | 7,644   |                |  | 1.97   | %      |  |   | 3,475          |   |  | 1.11   | % |  |                | 4,088   |   |        | 2.14   | % |                |   | 4,697   |   |  | 3.27   | %
|Credit card and other loans  |  |                        | 1,652   |   |                | 0.38   | % |        |   | 1,304   |                |  | 0.34   | %      |  |   | 1,284          |   |  | 0.41   | % |  |                | 2,063   |   |        | 1.09   | % |                |   | 1,351   |   |  | 0.94   | %
|                             |  |                        |         |   |                |        |   |        |   |         |                |  |        |        |  |   |                |   |  |        |   |  |                |         |   |        |        |   |                |   |         |   |  |        |  
|Total gross loans            |  | $                      | 433,291 |   |                | 100.00 | % |        | $ | 388,484 |                |  | 100.00 | %      |  | $ | 313,723        |   |  | 100.00 | % |  | $              | 191,278 |   |        | 100.00 | % |                | $ | 143,454 |   |  | 100.00 | %
|                             |  |                        |         |   |                |        |   |        |   |         |                |  |        |        |  |   |                |   |  |        |   |  |                |         |   |        |        |   |                |   |         |   |  |        |  
|Less:                        |  |                        |         |   |                |        |   |        |   |         |                |  |        |        |  |   |                |   |  |        |   |  |                |         |   |        |        |   |                |   |         |   |  |        |  
|Unearned income              |  |                        | (1,350  | ) |                |        |   |        |   | (1,955  | )              |  |        |        |  |   | (1,556         | ) |  |        |   |  |                | (948    | ) |        |        |   |                |   | (570    | ) |  |        |  
|Allowance for loan losses    |  |                        | (5,741  | ) |                |        |   |        |   | (5,376  | )              |  |        |        |  |   | (4,137         | ) |  |        |   |  |                | (2,108  | ) |        |        |   |                |   | (1,772  | ) |  |        |  
|                             |  |                        |         |   |                |        |   |        |   |         |                |  |        |        |  |   |                |   |  |        |   |  |                |         |   |        |        |   |                |   |         |   |  |        |  
|Total net loans              |  | $                      | 426,200 |   |                |        |   |        | $ | 381,153 |                |  |        |        |  | $ | 308,030        |   |  |        |   |  | $              | 188,222 |   |        |        |   |                | $ | 141,112 |   |  |        |  
|                             |  |                        |         |   |                |        |   |        |   |         |                |  |        |        |  |   |                |   |  |        |   |  |                |         |   |        |        |   |                |   |         |   |  |        |  



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Loan Interest Rate Sensitivity. The following table provides the maturity distribution and
repricing intervals of the Companys outstanding loans at the date indicated. In addition, the table provides the distribution of such loans between those with variable or (floating) interest rates and those with predetermined or (fixed)
interest rates. Floating rate loans are classified according to re-pricing opportunities or rate sensitivity. Fixed rate loans are based on contractual maturities although the borrowers have the ability to prepay the loans.

Loans Repricing or Maturing16



|                                                |  |                         |         |                               |   |                 |  |       |        |  |   |        
|----------------------------------------------- |  | ----------------------- | ------- | ----------------------------- | - | --------------- |  | ----- | ------ |  | - | -------
|                                                |  | As of December 31, 2006
|                                                |  | WithinOne Year          |         | After OneBut WithinFive Years |   | AfterFive Years |  | Total
|                                                |  | (Dollars in Thousands) 
|Real estate loans:                              |  |                         |         |                               |   |                 |  |       |        |  |   |        
|Construction and development                    |  | $                       | 166,002 |                               | $ | 8,004           |  | $     | 34     |  | $ | 174,040
|Residential loans                               |  |                         | 1,797   |                               |   | 29              |  |       | 1,237  |  |   | 3,063  
|Commercial and multi-family                     |  |                         | 7,474   |                               |   | 27,360          |  |       | 42,411 |  |   | 77,245 
|Commercial loans                                |  |                         | 103,217 |                               |   | 44,212          |  |       | 18,336 |  |   | 165,765
|Consumer loans                                  |  |                         | 4,162   |                               |   | 561             |  |       | 41     |  |   | 4,764  
|Equity lines of credit                          |  |                         | 6,762   |                               |   |                |  |       |       |  |   | 6,762  
|Credit card and other loans                     |  |                         | 1,652   |                               |   |                |  |       |       |  |   | 1,652  
|                                                |  |                         |         |                               |   |                 |  |       |        |  |   |        
|Total loans                                     |  | $                       | 291,066 |                               | $ | 80,166          |  | $     | 62,059 |  | $ | 433,291
|                                                |  |                         |         |                               |   |                 |  |       |        |  |   |        
|Loans with variable (floating) interest rates   |  | $                       | 227,677 |                               | $ | 40,202          |  | $     |       |  | $ | 267,879
|                                                |  |                         |         |                               |   |                 |  |       |        |  |   |        
|Loans with predetermined (fixed) interest rates |  | $                       | 63,389  |                               | $ | 39,964          |  | $     | 62,059 |  | $ | 165,412
|                                                |  |                         |         |                               |   |                 |  |       |        |  |   |        

---

|16 | Loan amounts are shown before
deferred loan fees and before the allowance for loan losses.
|-- | ------------------------------------------------------------------------------------------

For a comprehensive discussion of the Companys
liquidity position, re-pricing characteristics of the balance sheet, and sensitivity to changes in interest rates, see the Liquidity and Market Risk section.

Off-Balance Sheet Arrangements

During the ordinary course of business, the Company will provide
various forms of credit lines to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any conditions established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do
not necessarily represent future cash requirements. The Companys exposure to credit losses is represented by the contractual amount of these commitments. The Company uses the same credit underwriting policies in granting or accepting such
commitments as it does for on-balance-sheet instruments, which consist of evaluating customers creditworthiness individually.

Standby letters of credit written are conditional commitments issued by the Company to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, the Company holds appropriate collateral supporting those commitments. Management does not
anticipate any material losses as a result of these transactions.

Total unused commitments to extend credit were $226.3 million at
December 31, 2006 and $195.8 million at December 31, 2005, representing 53% of and 51% of outstanding gross loans at December 31, 2006 and 2005, respectively. The Companys standby letters of credit were $3.2 million and $2.6
million at December 31, 2006 and 2005, respectively.



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The effects on the Company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 or standby letters of credit will ever be used.

For more information regarding the Companys off-balance sheet arrangements, see Note 13 to the financial statements in Item 8 herein.

Nonperforming Assets

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.

The Company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 and on a cash basis, and previously accrued but uncollected interest is reversed against current 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.

December 31, 2005 to December 31, 2006 analysis. Nonaccrual loans at December 31, 2006 increased $2.864 million to $3.858 million,
from $994,000 at December 31, 2005, and represented 0.89% and 0.26% of total gross loans, respectively. The increase was primarily attributable to the addition of five commercial loans totaling $3.469 million, of which $2.459 million was
attributed to one commercial loan. There was also an addition of one residential real estate loan totaling $18,000. The additions were partially offset by the payoff of three commercial loans totaling $330,000. There were two commercial loans
charged-off totaling $119,000 and three commercial loans with principal paydowns totaling $174,000. At December 31, 2006 the Company had no other real estate owned and no loans 90 days or more past due and still accruing.

December 31, 2004 to December 31, 2005 analysis.Nonaccrual loans at December 31, 2005 included nine commercial loans and
represented the entire $994,000. The increase from 2004 to 2005 was primarily attributable to the addition of six commercial loans totaling $905,000 placed on nonaccrual status, offset by principal paydowns totaling approximately $32,000 on loans
that remain on nonaccrual status. However, to put this into perspective, the balance of commercial loans increased 47% and 144% in 2005 and 2004, respectively. As a percent of gross loans, 0.04% in 2004 is unusually low and 0.26% in 2005 is still
well below our peer group. At December 31, 2006 the Company had no other real estate owned and no loans 90 days or more past due and still accruing.

The Company establishes a plan with each borrower that falls into nonaccrual status that is based on receiving payments, however, it is uncertain whether such a plan will prove to be successful.



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##### 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,     |       
|                                                                                 |  | 2006                   |        |   | 2005 |   |        | 2004 |  |   | 2003     |   |  | 2002 |       
|                                                                                 |  | (Dollars in Thousands) |       
|Nonaccrual loans:17                                                              |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Real estate loans:                                                               |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Construction and development                                                     |  | $                      |       |   |      | $ |       |      |  | $ |         |   |  | $    | 69     |   |  | $ |       |  
|Residential loans                                                                |  |                        | 18     |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   | 221    |  
|Commercial and multi-family                                                      |  |                        |       |   |      |   |       |      |  |   |         |   |  |      | 353    |   |  |   | 173    |  
|Commercial loans                                                                 |  |                        | 3,840  |   |      |   | 994    |      |  |   | 125      |   |  |      | 175    |   |  |   |       |  
|Consumer loans                                                                   |  |                        |       |   |      |   |       |      |  |   |         |   |  |      | 8      |   |  |   |       |  
|Equity lines of credit                                                           |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   |       |  
|Credit card and other loans                                                      |  |                        |       |   |      |   |       |      |  |   |         |   |  |      | 16     |   |  |   |       |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Total nonaccrual loans                                                           |  |                        | 3,858  |   |      |   | 994    |      |  |   | 125      |   |  |      | 621    |   |  |   | 394    |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Loans 90 days or more past due (as to principal or interest) and still accruing: |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Real estate loans:                                                               |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Construction and development                                                     |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   |       |  
|Residential loans                                                                |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   | 50     |  
|Commercial and multi-family                                                      |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   |       |  
|Commercial loans                                                                 |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   | 137    |  
|Consumer loans                                                                   |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   |       |  
|Equity lines of credit                                                           |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   |       |  
|Credit card and other loans                                                      |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   |       |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Total loans 90 days or more past due And still accruing                          |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   | 187    |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Restructured loans                                                               |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   |       |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Total nonperforming loans                                                        |  |                        | 3,858  |   |      |   | 994    |      |  |   | 125      |   |  |      | 621    |   |  |   | 581    |  
|Other real estate owned                                                          |  |                        |       |   |      |   |       |      |  |   |         |   |  |      |       |   |  |   |       |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                                       |  | $                      | 3,858  |   |      | $ | 994    |      |  | $ | 125      |   |  | $    | 621    |   |  | $ | 581    |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Nonperforming loans as a percentage of total gross loans18                       |  |                        | 0.89   | % |      |   | 0.26   | %    |  |   | 0.04     | % |  |      | 0.33   | % |  |   | 0.41   | %
|Nonperforming assets as a percentage of total loans and other real estate owned  |  |                        | 0.89   | % |      |   | 0.26   | %    |  |   | 0.04     | % |  |      | 0.33   | % |  |   | 0.41   | %
|Allowance for loan losses to nonperforming loans                                 |  |                        | 148.81 | % |      |   | 540.85 | %    |  |   | 3,309.60 | % |  |      | 339.45 | % |  |   | 304.99 | %
|Allowance for loan losses                                                        |  | $                      | 5,741  |   |      | $ | 5,376  |      |  | $ | 4,137    |   |  | $    | 2,108  |   |  | $ | 1,772  |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  

---

|17 | During the year ended December 31, 2006, no income related to these loans was included in net
income. Additional interest income of approximately $105,000, would have been recorded for the year ended December 31, 2006 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.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18 | Total loans are gross loans less unearned income.
|-- | -------------------------------------------------



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Allowance For Loan Losses

Arriving at an appropriate level of an allowance for loan losses involves a high degree of judgment. Our allowance for loan losses provides for probable losses based upon an evaluation of known and inherent risks in
the loan portfolio. The determination of the balance in the allowance for loan losses is based on an analysis of the loans receivable portfolio using a systematic methodology that reflects an amount that, in our judgment, is adequate to provide for
probable loan losses inherent in the portfolio.

The allowance for loan losses totaled $5.7 million at December 31, 2006 compared to
$5.4 million and $4.1 million at December 31, 2005 and 2004, respectively and as a percentage of total loans outstanding was 1.33%, 1.39% and 1.33%, respectively. The process for monitoring the adequacy of the allowance, as well as
supporting documentation regarding the allowance follows.

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 a number of other factors, including collateral 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 a number of factors, including the Companys loan loss experience, economic conditions, and regular reviews of delinquencies and loan portfolio quality.

The Company establishes an Allowance for Loan Losses (ALL) through charges to earnings based on Managements evaluation of the loan portfolio and a
number of other criteria. If warranted, the allowance may be increased by regular provisions in order to maintain a proper level to the aggregate funded and unfunded loan portfolio. The provision may be influenced by the amount of charge-offs and/or
recoveries. The adequacy of the ALL is determined by a number of factors that are included in the Companys ALL methodology.

Two
primary forms of analysis are used as tools to determine the adequacy of the ALL. The Portfolio Risk Analysis takes into consideration key components of the aggregate loan portfolio and selected risk weight factors are used based on the
perceived risk associated with each loan category. Heavier weight factors are assigned to delinquent loans and adversely risk rated loans. Adversely classified loans (loans rated special mention, substandard and doubtful) are assessed for the proper
amount to be used in determining the adequacy of the ALL. The other categories have formulae used to determine the needed allowance amount. Special circumstances are identified and a selected risk factor prescribed to allocate an appropriate portion
of the reserve to mitigate that specific risk. For example, because of the high concentration of construction loans, a construction concentration risk has been established as one of the components of the ALL methodology.

Another analytical tool used is a Migration Analysis. This tool tracks loan losses and recoveries over reasonable time horizons to determine a
level of ALL based on historical loss history by loan category. This methodology is structured such that the amount allocated to the reserve is based on analysis of historical losses or other risk weight factors consistent with those utilized in the
Portfolio Risk Analysis. This approach attempts to prevent an unreasonably low reserve level in the event actual loan loss history is low.

Other factors considered in the ALL methodology include the following: quality and scope of lending policies and procedures, national and local economic conditions, peer bank data, concentration or other special circumstances, and overall
quality of the loan portfolio, determined by quality of underwriting, level of loan delinquencies, non-accrual loans, and non-performing loans. An important indicator is the risk rating quality of the aggregate loan portfolio. The Company conducts
semi-annual risk rating certifications in order to maintain the integrity of the risk rating process. The risk ratings are stratified by loan type and according to risk rating.

The aggregate loan portfolio risk ratings were stratified as follows for the period indicated:



|                  |  |                    |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  
|----------------- |  | ------------------ | - |  | --------------- | - |  | ------------ | - |  | --------- | - |  | ----- | - |  | ------ | -
|                  |  | Pass/ Homogeneous: |   |  | SpecialMention: |   |  | Substandard: |   |  | Doubtful: |   |  | Loss: |   |  | Total: |  
|December 31, 2006 |  | 92.99              | % |  | 5.95            | % |  | 0.96         | % |  | 0.10      | % |  | 0.00  | % |  | 100.00 | %
|                  |  |                    |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  



38



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##### Table of Contents

Net loan charge-offs during 2006 approximated $955,000 or 0.23% of average total loans, compared to
$901,000 or 0.25% during 2005 and $69,000 or 0.03% during 2004. In 2006, $375,000 of the net loan charge-offs is represented by one interim 2nd trust deed commercial real estate loan. The Company is in the process of pursuing our legal remedies.

Implicit in lending activity is the risk that losses will occur and that the amount of such loss will vary over time. In many cases
Management exercises considerable judgment in determining the timing of the recognition of inherent losses with the objective to present a realistic presentation of the quality of the loan portfolio. Because of Managements conservative timing
of loss recognition, it is Managements opinion that there could be a possibility of future recoveries, although no assurance can be given that this will occur.

Except for nonperforming assets and impaired loans, Management is not aware of any loans as of December 31, 2006 for which known credit problems of the borrower would cause serious doubt as to the ability of such
borrowers to comply with their present loan repayment terms. Management cannot, however, predict the extent to which the deterioration in general economic conditions, real estate values, increase in general rates of interest, changing financial
conditions or business of a borrower may adversely affect a borrowers ability to repay. The ratio of the allowance for loan losses to total loans was determined by Management to be adequate at December 31, 2006 and December 31, 2005.



39



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##### 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, |        
|                                                                                |  | 2006                     |         |    | 2005 |   |         | 2004 |  |   | 2003     |    |  | 2002 |        
|                                                                                |  | (Dollars in Thousands)   |        
|Balances:                                                                       |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Average total loans outstanding during period                                   |  | $                        | 411,415 |    |      | $ | 362,231 |      |  | $ | 257,005  |    |  | $    | 161,207 |    |  | $ | 134,169 |   
|                                                                                |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Total loans outstanding at end of period, net of unearned income                |  | $                        | 431,941 |    |      | $ | 386,529 |      |  | $ | 312,167  |    |  | $    | 190,330 |    |  | $ | 142,884 |   
|                                                                                |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Allowance for Loan Losses:                                                      |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Balance at beginning of period                                                  |  | $                        | 5,376   |    |      | $ | 4,137   |      |  | $ | 2,108    |    |  | $    | 1,772   |    |  | $ | 1,460   |   
|Acquisition of allowance for loan losses, Palomar Community Bank                |  |                          |        |    |      |   |        |      |  |   |         |    |  |      |        |    |  |   |        |   
|Charge-offs:                                                                    |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Real estate loans:                                                              |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Construction and development                                                    |  |                          |        |    |      |   |        |      |  |   |         |    |  |      |        |    |  |   |        |   
|Residential loans                                                               |  |                          |        |    |      |   |        |      |  |   |         |    |  |      |        |    |  |   | 49      |   
|Commercial and multi-family                                                     |  |                          | 375     |    |      |   |        |      |  |   |         |    |  |      |        |    |  |   |        |   
|Commercial loans                                                                |  |                          | 688     |    |      |   | 996     |      |  |   | 121      |    |  |      | 217     |    |  |   | 71      |   
|Consumer loans                                                                  |  |                          |        |    |      |   | 2       |      |  |   | 14       |    |  |      | 2       |    |  |   | 65      |   
|Equity lines of credit                                                          |  |                          | 55      |    |      |   |        |      |  |   |         |    |  |      |        |    |  |   |        |   
|Credit card and other loans                                                     |  |                          | 5       |    |      |   | 10      |      |  |   | 20       |    |  |      | 2       |    |  |   | 9       |   
|                                                                                |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Total charge-offs                                                               |  |                          | 1,123   |    |      |   | 1,008   |      |  |   | 155      |    |  |      | 221     |    |  |   | 194     |   
|                                                                                |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Recoveries:                                                                     |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Real estate loans:                                                              |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Construction and development                                                    |  |                          |        |    |      |   |        |      |  |   |         |    |  |      |        |    |  |   | 3       |   
|Residential loans                                                               |  |                          | 2       |    |      |   | 2       |      |  |   | 2        |    |  |      | 23      |    |  |   |        |   
|Commercial and multi-family                                                     |  |                          |        |    |      |   |        |      |  |   |         |    |  |      |        |    |  |   |        |   
|Commercial loans                                                                |  |                          | 163     |    |      |   | 105     |      |  |   | 79       |    |  |      | 140     |    |  |   | 15      |   
|Consumer loans                                                                  |  |                          | 3       |    |      |   |        |      |  |   | 4        |    |  |      | 34      |    |  |   | 11      |   
|Equity lines of credit                                                          |  |                          |        |    |      |   |        |      |  |   |         |    |  |      |        |    |  |   |        |   
|Credit card and other loans                                                     |  |                          |        |    |      |   |        |      |  |   | 1        |    |  |      |        |    |  |   |        |   
|                                                                                |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Total recoveries                                                                |  |                          | 168     |    |      |   | 107     |      |  |   | 86       |    |  |      | 197     |    |  |   | 29      |   
|                                                                                |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Net charge-offs                                                                 |  |                          | (955    | )  |      |   | (901    | )    |  |   | (69      | )  |  |      | (24     | )  |  |   | (165    | ) 
|Provision charged to operations                                                 |  |                          | 1,320   |    |      |   | 2,140   |      |  |   | 2,098    |    |  |      | 360     |    |  |   | 477     |   
|                                                                                |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Allowance for loan losses balance, end of period                                |  | $                        | 5,741   |    |      | $ | 5,376   |      |  | $ | 4,137    |    |  | $    | 2,108   |    |  | $ | 1,772   |   
|                                                                                |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Ratios:19                                                                       |  |                          |         |    |      |   |         |      |  |   |          |    |  |      |         |    |  |   |         |   
|Net loan charge-offs to average total loans                                     |  |                          | 0.23    | %  |      |   | 0.25    | %    |  |   | 0.03     | %  |  |      | 0.01    | %  |  |   | 0.12    | % 
|Allowance for loan losses to average total loans                                |  |                          | 1.40    | %  |      |   | 1.48    | %    |  |   | 1.61     | %  |  |      | 1.31    | %  |  |   | 1.32    | % 
|Allowance for loan losses to total loans at end of period                       |  |                          | 1.33    | %  |      |   | 1.39    | %    |  |   | 1.33     | %  |  |      | 1.11    | %  |  |   | 1.24    | % 
|Allowance for loan losses to total nonperforming loans                          |  |                          | 148.81  | %  |      |   | 540.85  | %    |  |   | 3,309.60 | %  |  |      | 339.45  | %  |  |   | 304.99  | % 
|Net loan (charge-offs) recoveries to allowance for loan losses at end of period |  |                          | (16.63  | )% |      |   | (16.76  | )%   |  |   | (1.67    | )% |  |      | (1.14   | )% |  |   | (9.31   | )%
|Net loan (charge-offs) recoveries to provision for loan losses                  |  |                          | (72.35  | )% |      |   | (42.10  | )%   |  |   | (3.29    | )% |  |      | (6.67   | )% |  |   | (34.59  | )%

---

|19 | Total loans are gross loans less unearned income.
|-- | -------------------------------------------------



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##### 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.

Allocation of Allowance for Loan Losses



|                                       |  |                        |         |                                   |        |   |        |      |                                   |  |        |        |  |                                   |         |  |        |   |                                   |   |         |        |        |                                   |  |   |         |  |        |  
|-------------------------------------- |  | ---------------------- | ------- | --------------------------------- | ------ | - | ------ | ---- | --------------------------------- |  | ------ | ------ |  | --------------------------------- | ------- |  | ------ | - | --------------------------------- | - | ------- | ------ | ------ | --------------------------------- |  | - | ------- |  | ------ | -
|                                       |  | As of December 31,     |        
|                                       |  | 2006                   |         |                                   | 2005   |   |        | 2004 |                                   |  | 2003   |        |  | 2002                              |        
|Balance at End of Period Applicable 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           |  | $                      | 2,426   |                                   | 40.16  | % |        | $    | 1,705                             |  | 35.34  | %      |  | $                                 | 1,697   |  | 39.62  | % |                                   | $ | 534     |        | 36.94  | %                                 |  | $ | 671     |  | 37.12  | %
|Residential loans                      |  |                        | 24      |                                   | 0.71   | % |        |      | 33                                |  | 0.89   | %      |  |                                   | 47      |  | 1.16   | % |                                   |   | 114     |        | 3.23   | %                                 |  |   | 80      |  | 6.95   | %
|Commercial and multi- family           |  |                        | 610     |                                   | 17.83  | % |        |      | 835                               |  | 21.83  | %      |  |                                   | 454     |  | 24.64  | % |                                   |   | 392     |        | 33.60  | %                                 |  |   | 277     |  | 23.91  | %
|Commercial loans                       |  |                        | 2,434   |                                   | 38.26  | % |        |      | 2,583                             |  | 38.91  | %      |  |                                   | 1,859   |  | 32.71  | % |                                   |   | 975     |        | 21.94  | %                                 |  |   | 596     |  | 26.70  | %
|Consumer loans                         |  |                        | 153     |                                   | 1.10   | % |        |      | 98                                |  | 0.72   | %      |  |                                   | 25      |  | 0.35   | % |                                   |   |        |        | 0.31   | %                                 |  |   |        |  | 1.11   | %
|Equity lines of credit                 |  |                        | 89      |                                   | 1.56   | % |        |      | 115                               |  | 1.97   | %      |  |                                   | 39      |  | 1.11   | % |                                   |   | 46      |        | 2.14   | %                                 |  |   | 70      |  | 3.27   | %
|Credit card and other loans            |  |                        | 5       |                                   | 0.38   | % |        |      | 6                                 |  | 0.34   | %      |  |                                   | 16      |  | 0.41   | % |                                   |   | 47      |        | 1.84   | %                                 |  |   | 78      |  | 0.94   | %
|                                       |  |                        |         |                                   |        |   |        |      |                                   |  |        |        |  |                                   |         |  |        |   |                                   |   |         |        |        |                                   |  |   |         |  |        |  
|Total allowance for loan loss          |  | $                      | 5,741   |                                   | 100.00 | % |        | $    | 5,376                             |  | 100.00 | %      |  | $                                 | 4,137   |  | 100.00 | % |                                   | $ | 2,108   |        | 100.00 | %                                 |  | $ | 1,772   |  | 100.00 | %
|                                       |  |                        |         |                                   |        |   |        |      |                                   |  |        |        |  |                                   |         |  |        |   |                                   |   |         |        |        |                                   |  |   |         |  |        |  
|Total loans net of unearned income     |  | $                      | 431,941 |                                   |        |   |        | $    | 386,529                           |  |        |        |  | $                                 | 312,167 |  |        |   |                                   | $ | 190,330 |        |        |                                   |  | $ | 142,884 |  |        |  

Investment Securities

The Companys investment portfolio provides income to the Company and also serves as a source of liquidity. Total yield, risk and maturity are among the factors considered in building the investment portfolio.
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 the
Companys books at fair market value. At December 31, 2006, 2005 and 2004, 100% of the investment securities owned by the Company were classified as available for sale.

At December 31, 2006, the Companys investment portfolio at fair value consisted of $30.2 million in U.S. government agency securities, $19.7
million in federal agency mortgage-backed securities and $22.7 million in obligations of states and local government securities for a total of $72.6 million. At December 31, 2005, the Companys investment portfolio at fair value consisted
of $8.2 million in federal agency mortgage-backed securities and $4.0 million in obligations of states and local government securities for a total of $12.2 million.

2006 compared to 2005 analysis.In 2006 the Companys investment portfolio increased $60.4 million or 495% to $72.6 million. During the third quarter of 2006, the Company entered into a $30 million
repurchase agreement that included an interest rate floor to mitigate interest rate risk in a declining rate environment. The repurchase agreement is collateralized by the purchase of a $30 million FNMA U.S. agency security. In addition, the Company
added approximately $16.0 million in federal agency mortgage-backed securities, however such securities had a net increase of $11.6 million due to principal paydowns. Obligations of states and local government securities increased $18.7 million as
the Company took advantage of relative value in that sector. It is the Companys intention and strategic plan to rebalance the balance sheet and invest excess liquidity in securities, while managing its loan demand.

2005 compared to 2004 analysis. In 2005 the Companys investment portfolio decreased $7.9 million or 39% primarily due to principal paydowns
on the federal agency mortgage-backed securities. The proceeds received from the payoffs were used to fund the Companys loan growth and reduce borrowings.



41



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##### 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,    
|                                                      |  | 2006                   |        | 2005             |   | 2004             
|                                                      |  | AmortizedCost          |        | Unrealized Gains |   | Unrealized Losses |  |   | FairValue |   | AmortizedCost |   | Unrealized Gains |  | Unrealized Losses |        |  | FairValue |     | AmortizedCost |   | Unrealized Gains |   | Unrealized Losses |   |        | FairValue
|                                                      |  | (Dollars in Thousands)
|Available for Sale:                                   |  |                        |        |                  |   |                   |  |   |           |   |               |   |                  |  |                   |        |  |           |     |               |   |                  |   |                   |   |        |           |   |        |  |   |     |  |   |      |   |  |   |       
|U.S. treasury and government agency securities        |  | $                      | 30,000 |                  | $ | 210               |  | $ |          |   |               | $ | 30,210           |  | $                 |       |  | $         |    |               | $ |                 |   |                   | $ |       |           | $ | 200    |  | $ |    |  | $ | (2   | ) |  | $ | 198   
|Federal agency mortgage-backed Securities             |  |                        | 19,597 |                  |   | 190               |  |   | (61       | ) |               |   | 19,726           |  |                   | 8,242  |  |           | 51  |               |   | (120             | ) |                   |   | 8,173  |           |   | 15,754 |  |   | 110 |  |   | (113 | ) |  |   | 15,751
|Obligations of states and local government securities |  |                        | 22,782 |                  |   | 120               |  |   | (189      | ) |               |   | 22,713           |  |                   | 3,937  |  |           | 98  |               |   |                 |   |                   |   | 4,035  |           |   | 3,971  |  |   | 176 |  |   |     |   |  |   | 4,147 
|                                                      |  |                        |        |                  |   |                   |  |   |           |   |               |   |                  |  |                   |        |  |           |     |               |   |                  |   |                   |   |        |           |   |        |  |   |     |  |   |      |   |  |   |       
|Total                                                 |  | $                      | 72,379 |                  | $ | 520               |  | $ | (250      | ) |               | $ | 72,649           |  | $                 | 12,179 |  | $         | 149 |               | $ | (120             | ) |                   | $ | 12,208 |           | $ | 19,925 |  | $ | 286 |  | $ | (115 | ) |  | $ | 20,096
|                                                      |  |                        |        |                  |   |                   |  |   |           |   |               |   |                  |  |                   |        |  |           |     |               |   |                  |   |                   |   |        |           |   |        |  |   |     |  |   |      |   |  |   |       

The following table summarizes, as of December 31, 2006, 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, 2006 |    
|                                                      |  | Within OneYear          |     |       | After One ButWithin FiveYears |   |        | After Five ButWithin TenYears |        |  | 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        |  | $                       |    |       | 0.00                          | % |        | $                             | 30,210 |  | 5.45            | %      |  | $     |       |  | 0.00   | % |       | $ |       |        | 0.00 | %     |  | $ | 30,210 |  | 5.45 | %
|Federal agency mortgage-backed Securities             |  |                         | 127 |       | 4.46                          | % |        |                               | 12,527 |  | 5.11            | %      |  |       | 6,418  |  | 5.13   | % |       |   | 654    |        | 5.24 | %     |  |   | 19,726 |  | 5.12 | %
|Obligations of states and local government securities |  |                         | 1   |       | 6.77                          | % |        |                               | 2,402  |  | 4.81            | %      |  |       | 4,675  |  | 4.20   | % |       |   | 15,635 |        | 4.11 | %     |  |   | 22,713 |  | 4.20 | %
|                                                      |  |                         |     |       |                               |   |        |                               |        |  |                 |        |  |       |        |  |        |   |       |   |        |        |      |       |  |   |        |  |      |  
|Total                                                 |  | $                       | 128 |       | 4.48                          | % |        | $                             | 45,139 |  | 5.32            | %      |  | $     | 11,093 |  | 4.74   | % |       | $ | 16,289 |        | 4.16 | %     |  | $ | 72,649 |  | 4.97 | %
|                                                      |  |                         |     |       |                               |   |        |                               |        |  |                 |        |  |       |        |  |        |   |       |   |        |        |      |       |  |   |        |  |      |  

As of December 31, 2006, 2005 and 2004, the Companys investments in interest-bearing
time certificates of deposit at other financial institutions totaled $2.9 million, $2.3 million and $4.0 million, respectively.



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##### Table of Contents

Cash and due from banks

Cash on hand and balances due from correspondent banks totaled $18.4 million at the end of 2006 and $16.9 million at the end of 2005. At December 31, 2006, cash and due from banks comprised 3.3% of total
assets, compared to 3.7% at December 31, 2005. These balances fluctuate frequently and by large amounts depending on the status of cash items in process of collection and cash on hand, thus period-end balances are not optimal indicators of
trends in cash and due from banks. Annual average balances provide a much more appropriate gauge. The average balance for 2006 was $12.2 million, an increase of $1.65 million or 15% from the average of $10.6 million for 2005. The increase from 2005
to 2006 is attributed to the increase in total deposits.

Deposits

Information concerning the average balance and average rates paid on deposits by deposit type for the past three fiscal years is contained in the Distribution, Rate, and Yield table located in the previous section on
Results of OperationsNet Interest Income and Net Interest Margin. The composition and cost of the Companys deposit base are important components in analyzing the Companys net interest margin and balance sheet liquidity
characteristics, both of which are discussed in greater detail in other sections herein. The Companys liquidity is impacted by the volatility of deposits or other funding instruments, or in other words by the tendency of that money to leave
the institution for rate-related or other reasons. Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposits, meaning time deposits with balances that equal or exceed $100,000, as customers with balances
of that magnitude are typically more rate-sensitive than customers with smaller balances. The Companys community-oriented deposit gathering activities, however, seem to have gathered a base of local customers who tend to display more brand
loyalty and thus are less likely to leave the Company than might otherwise be expected.

Total deposits were $456.5 million at
December 31, 2006, compared to $401.3 million and $291.8 million at December 31, 2005 and 2004, respectively, and represented increases of 14% and 38% in 2006 and 2005, respectively.

2006 compared to 2005 analysis. Total deposits increased $55.2 million, or 14%, to $456.5 million at December 31, 2006 from $401.3 million at
December 31, 2005. Noninterest-bearing demand deposits increased $5.0 million or 5% at December 31, 2006 as compared to December 31, 2005. Interest bearing and money market deposit accounts increased $10.3 million, or 8% at
December 31, 2006 as compared to December 31, 2005. Savings deposit accounts decreased $10.0 million or 36% at December 31, 2006 as compared to December 31, 2005. Time deposits of $100,000 or greater increased $49.0 million, or
82% at December 31, 2006 as compared to December 31, 2005, and other time deposits increased $842,000, or 2%. The overall increase in deposits has helped maintain the Companys liquidity position during 2006.

During the third quarter of 2006 the Bank launched a noninterest-bearing deposit sales campaign. As of December 31, 2006 the Bank was able to
attract approximately $5.1 million in new noninterest-bearing deposits, based on average balance in 2006. The deposit sales campaign was the primary contributor to the increase in noninterest-bearing demand deposits from December 31, 2005 to
December 31, 2006. The increase in interest-bearing and money market deposit accounts was primarily the result of the Companys efforts to attract new customers. The increase in time deposits of $100,000 or greater was primarily the result
of additional brokered certificates of deposit acquired to support our loan growth.

2005 compared to 2004 analysis. Total deposits
increased $109.5 million, or 38%, to $401.3 million at December 31, 2005 from $291.8 million at December 31, 2004. Noninterest-bearing demand deposits increased $13.5 million or 15% at December 31, 2005 as compared to
December 31, 2004. Interest-bearing demand deposits and money market accounts increased $67.7 million, or 68% at December 31, 2005 as compared to December 31, 2004. Savings deposit accounts increased $2.2 million or 8% at
December 31, 2005 as compared to December 31, 2004. Time deposits of $100,000 or greater increased $20.0 million, or 50% at December 31, 2005 as compared to December 31, 2004, while other time deposits increased $6.1 million, or
18%.



43



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##### Table of Contents

The Company had a favorable increase in noninterest-bearing demand deposits from December 31, 2004
to December 31, 2005; however, the percentage to total average deposits remained approximately the same. This favorable increase is primarily attributable to new deposit relationships, coupled with an increase in deposits with our existing
customers. The increase in interest-bearing demand deposits and money market accounts was primarily the result of additional money market deposits acquired as a result of a promotional money market account offered to businesses and consumers during
2005. The increase in time deposits of $100,000 or greater was primarily the result of additional brokered certificates of deposit acquired to support our loan growth. The overall increase in deposits has helped improve the Companys liquidity
position during 2005.

Cost of funds

The Companys cost of funds is calculated as total interest expense on interest-bearing deposits and other interest-bearing liabilities, as a percentage of average interest-bearing deposits and other interest-bearing liabilities.

2006 compared to 2005 analysis. The rate paid on the Banks interest-bearing deposits increased to 3.25% for the year ended
December 31, 2006 from 2.24% for the same period in 2005. For all interest bearing liabilities, the average rate for the year ended December 31, 2006 was 3.57% as compared to 2.53% for the same period in 2005. Market rate increases, the
addition of $30 million repurchase agreement and the increase in rates paid on money market deposit accounts as a result of the Companys efforts to attract new customers impacted the Companys cost of funds.

From December 31, 2005 to December 31, 2006 the percentage of total average deposits represented by money market deposits changed to 37% from
29% while average noninterest-bearing demand deposits changed to 25% from 30%. The shift in this average deposit mix also contributed to the increased cost of funds in the year ended December 31, 2006 versus 2005.

2005 compared to 2004 analysis. From December 31, 2004 to December 31, 2005 market rate increases impacted the Companys cost of
funds. The rate paid on the Companys interest-bearing liabilities increased to 2.53% at December 31, 2005 from 1.58% at December 31, 2004. The increase is attributable to the increases in rates paid on time deposits as a result of
additional brokered certificates of deposit acquired to help support our loan growth, the rates paid on money market deposits as a result of a promotional money market account offered to businesses and consumers during 2005 and the variable rates
paid on the Companys subordinated notes payable to subsidiary trusts, due to the increases in the libor rate.

From December 31,
2004 to December 31, 2005 the percentage of total average deposits represented by time deposits $100,000 or greater changed to 17% from 15% while average savings deposits changed to 7% from 10%. Average money market deposits changed to 29% from
25% while average interest-bearing demand deposits as a percentage of total average deposits changed to 6% from 8%.



44



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##### Table of Contents

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, |        
|                                                |  | 2006                             |         |             | 2005 |   |                 | 2004 |            
|                                                |  | Average Balance                  |         | AverageRate |      |   | Average Balance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|                                                |  | (Dollars in Thousands)           |        
|Demand deposits, noninterest bearing            |  | $                                | 107,797 |             | 0.00 | % |                 | $    | 105,462     |  | 0.00 | %              |  | $           | 81,185  |  | 0.00 | %
|                                                |  |                                  |         |             |      |   |                 |      |             |  |      |                |  |             |         |  |      |  
|Interest-bearing deposits:                      |  |                                  |         |             |      |   |                 |      |             |  |      |                |  |             |         |  |      |  
|Interest-bearing demand deposits                |  |                                  | 26,468  |             | 0.36 | % |                 |      | 21,400      |  | 0.26 | %              |  |             | 20,255  |  | 0.20 | %
|Money market deposits                           |  |                                  | 158,763 |             | 3.43 | % |                 |      | 99,052      |  | 2.25 | %              |  |             | 67,188  |  | 1.31 | %
|Savings deposits                                |  |                                  | 21,196  |             | 1.05 | % |                 |      | 24,655      |  | 0.76 | %              |  |             | 25,752  |  | 0.65 | %
|Time deposits $100,000 or greater               |  |                                  | 75,377  |             | 4.27 | % |                 |      | 58,537      |  | 3.16 | %              |  |             | 39,144  |  | 2.01 | %
|Other time deposits                             |  |                                  | 38,993  |             | 3.72 | % |                 |      | 37,787      |  | 2.88 | %              |  |             | 32,811  |  | 1.93 | %
|                                                |  |                                  |         |             |      |   |                 |      |             |  |      |                |  |             |         |  |      |  
|Total interest-bearing deposits                 |  |                                  | 320,797 |             | 3.25 | % |                 |      | 241,431     |  | 2.24 | %              |  |             | 185,150 |  | 1.35 | %
|                                                |  |                                  |         |             |      |   |                 |      |             |  |      |                |  |             |         |  |      |  
|FHLB borrowings                                 |  |                                  |        |             | 0.00 | % |                 |      | 22,255      |  | 2.92 | %              |  |             | 12,571  |  | 1.49 | %
|Federal funds purchased                         |  |                                  | 9       |             | 0.00 | % |                 |      | 708         |  | 2.68 | %              |  |             | 723     |  | 1.80 | %
|Repurchase agreement                            |  |                                  | 9,205   |             | 5.93 | % |                 |      |            |  | 0.00 | %              |  |             |        |  | 0.00 | %
|Subordinated notes payable to subsidiary trusts |  |                                  | 18,306  |             | 7.88 | % |                 |      | 14,492      |  | 6.73 | %              |  |             | 12,877  |  | 4.88 | %
|                                                |  |                                  |         |             |      |   |                 |      |             |  |      |                |  |             |         |  |      |  
|Total deposits and other borrowings             |  | $                                | 456,114 |             | 2.72 | % |                 | $    | 384,348     |  | 1.84 | %              |  | $           | 292,506 |  | 1.14 | %
|                                                |  |                                  |         |             |      |   |                 |      |             |  |      |                |  |             |         |  |      |  
|Average rate excluding demand deposits          |  |                                  |         |             | 3.57 | % |                 |      |             |  | 2.53 | %              |  |             |         |  | 1.58 | %

The following table summarizes the composition of average deposits as a percentage of total
average deposits for the periods indicated:

Percent of Total Average Deposit Composition



|                                     |  |                                  |   |  |                  |   |  |                  |  
|------------------------------------ |  | -------------------------------- | - |  | ---------------- | - |  | ---------------- | -
|                                     |  | For the Years Ended December 31, |  
|                                     |  | 2006                             |   |  | 2005             |   |  | 2004             |  
|                                     |  | Percent of Total                 |   |  | Percent of Total |   |  | Percent of Total |  
|Demand deposits, noninterest bearing |  | 25.15                            | % |  | 30.41            | % |  | 30.47            | %
|Interest-bearing deposits:           |  |                                  |   |  |                  |   |  |                  |  
|Interest-bearing demand deposits     |  | 6.18                             | % |  | 6.17             | % |  | 7.61             | %
|Money market deposits                |  | 37.03                            | % |  | 28.55            | % |  | 25.23            | %
|Savings deposits                     |  | 4.95                             | % |  | 7.11             | % |  | 9.67             | %
|Time deposits $100,000 or greater    |  | 17.59                            | % |  | 16.87            | % |  | 14.70            | %
|Other time deposits                  |  | 9.10                             | % |  | 10.89            | % |  | 12.32            | %
|                                     |  |                                  |   |  |                  |   |  |                  |  
|Total average deposits               |  | 100.00                           | % |  | 100.00           | % |  | 100.00           | %
|                                     |  |                                  |   |  |                  |   |  |                  |  

The following table sets forth the scheduled maturities of the Companys time deposits in
denominations of $100,000 or greater for the periods indicated:



|                  |  |                        |        |                                |   |                                |  |               |        |       |   |        |  |   |        
|----------------- |  | ---------------------- | ------ | ------------------------------ | - | ------------------------------ |  | ------------- | ------ | ----- | - | ------ |  | - | -------
|                  |  | 3 Months orLess        |        | Over 3 Months Through 6 Months |   | Over 6 MonthsThrough 12 Months |  | Over 12Months |        | Total
|                  |  | (Dollars in Thousands)
|December 31, 2006 |  | $                      | 52,251 |                                | $ | 23,418                         |  | $             | 24,308 |       | $ | 9,124  |  | $ | 109,101
|                  |  |                        |        |                                |   |                                |  |               |        |       |   |        |  |   |        
|December 31, 2005 |  | $                      | 15,061 |                                | $ | 11,100                         |  | $             | 18,925 |       | $ | 15,007 |  | $ | 60,093 
|                  |  |                        |        |                                |   |                                |  |               |        |       |   |        |  |   |        



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##### Table of Contents

Other Borrowings

The Company utilizes other short-term borrowings to temporarily fund loan growth when customer deposit growth has not kept pace with increases in outstanding loan balances, or when additional liquidity is required to
support higher customer cash utilization.

Short-term borrowings principally include overnight fed funds purchased and advances from the
Federal Home Loan Bank of San Francisco (FHLB). The details of these borrowings for the years 2006, 2005, and 2004 are presented below:

Short-term Borrowings



|                                            |  |                        |      |   |      |   |        |      |  |   |        |  
|------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                            |  | 2006                   |      |   | 2005 |   |        | 2004 | 
|                                            |  | (dollars in thousands) |     
|Federal funds purchased:                    |  |                        |      |   |      |   |        |      |  |   |        |  
|Balance at December 31,                     |  | $                      |     |   |      | $ |       |      |  | $ | 475    |  
|Average amount outstanding                  |  | $                      | 9    |   |      | $ | 708    |      |  | $ | 723    |  
|Maximum amount outstanding at any month end |  | $                      |     |   |      | $ | 7,000  |      |  | $ | 4,750  |  
|Average interest rate for the year          |  |                        | 5.63 | % |      |   | 2.68   | %    |  |   | 1.80   | %
|FHLB Borrowings:                            |  |                        |      |   |      |   |        |      |  |   |        |  
|Balance at December 31,                     |  | $                      |     |   |      | $ |       |      |  | $ | 21,000 |  
|Average amount outstanding                  |  | $                      |     |   |      | $ | 22,255 |      |  | $ | 12,571 |  
|Maximum amount outstanding at any month end |  | $                      |     |   |      | $ | 40,000 |      |  | $ | 21,000 |  
|Average interest rate for the year          |  |                        | 0.00 | % |      |   | 2.92   | %    |  |   | 1.49   | %

Contractual Obligations

As of December 31, 2006, the Company had contractual obligations for the following payments, by type and period due:



|                            |  |                        |        |                 |   |          |  |          |       |                   |   |     |  |   |       
|--------------------------- |  | ---------------------- | ------ | --------------- | - | -------- |  | -------- | ----- | ----------------- | - | --- |  | - | ------
|                            |  | Payments Due by Period
|                            |  | Total                  |        | Less than1 Year |   | 1-3Years |  | 3-5Years |       | More than 5 years
|                            |  | (Dollars in Thousands)
|Long-term debt obligations  |  | $                      | 18,306 |                 | $ |         |  | $        |      |                   | $ |    |  | $ | 18,306
|Operating lease obligations |  |                        | 2,329  |                 |   | 1,036    |  |          | 1,037 |                   |   | 256 |  |   |      
|                            |  |                        |        |                 |   |          |  |          |       |                   |   |     |  |   |       
|Total                       |  | $                      | 20,635 |                 | $ | 1,036    |  | $        | 1,037 |                   | $ | 256 |  | $ | 18,306
|                            |  |                        |        |                 |   |          |  |          |       |                   |   |     |  |   |       

Capital Resources

The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a monthly basis and takes appropriate action to ensure that such measurements are within
established internal and external guidelines. The external guidelines, which are issued by the Federal Reserve Board and the FDIC, establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
There are two categories of capital under the Federal Reserve Board and FDIC guidelines: Tier 1 and Tier 2 Capital. Tier 1 Capital currently includes common shareholders equity and the proceeds from the issuance of trust preferred securities
(trust preferred securities are included up to a maximum of 25% of Tier 1 capital), less goodwill and certain other deductions, notably the unrealized net gains or losses (after tax adjustments) on securities available for sale, which are carried at
fair market value. Tier 2 Capital includes preferred stock and certain types of debt equity, which the Company does not hold, as well as the allowance for loan losses, subject to certain limitations. (For a more detailed definition, see Item
1, BusinessCapital Adequacy RequirementsPrompt Corrective Action Provisions herein.)



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##### Table of Contents

Management anticipates that continued growth of the Company may require the Company to raise additional
funds through sales of the Companys common stock or the issuance of trust preferred securities 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 through the issuance of trust preferred securities that it will be able to do so, or that it will be able to do so on terms the Company deems favorable.

Shareholders equity

Total
Shareholders equity was $42.2 million at December 31, 2006, compared to $33.4 million and $28.0 million at December 31, 2005 and 2004, respectively.

2006 compared to 2005 analysis. The increase of $8.8 million, or 26% as of December 31, 2006 was primarily due to $7.4 million in year-to-date net income, $542,000 credited to capital in relation to
compensation expense associated with the vesting of stock options, the proceeds of $653,000 from the exercise of stock options and the issuance of restricted stock awards, and the $160,000 increase in the unrealized gain of marketable securities.

2005 compared to 2004 analysis. The increase of $5.4 million or 19% as of December 31, 2005 was primarily due to $5.1 million
in year-to-date net income, the proceeds of $426,000 from the exercise of stock options and the issuance of restricted stock awards, and the $86,000 decline in the unrealized gain of marketable securities.

Regulatory

As of December 31,
2006, the Companys Total Risk-Based and Tier 1 Risk-Based Capital Ratios were 12.92% and 10.83%, compared to 12.86% and 9.92% at December 31, 2005. The Companys leverage ratio was 9.46%, compared to 9.02% at December 31, 2005.

As of December 31, 2006, the Banks Total Risk-Based and Tier 1 Risk-Based Capital Ratios were 12.47% and 11.22%, compared to
12.49% and 11.24% at December 31, 2005. The Banks Leverage Capital Ratio was 9.82%, compared to 10.21% at December 31, 2005.

As of the end of 2006, both the Company and the Bank were considered to be well capitalized by regulatory standards. We do not foresee any circumstances that would cause either the Company or the Bank to be less than well
capitalized, although no assurance can be given that this will not occur.

Trust preferred securities

The Company has issued a total of $18 million in trust preferred securities through its unconsolidated wholly owned subsidiaries, Centennial Capital Trust
I, Centennial Capital Trust II, and Centennial Capital Trust III. Trust preferred proceeds are generally considered to be Tier 1 or Tier 2 capital for regulatory purposes, but long-term debt in accordance with generally accepted accounting
principles. At December 31, 2006, 25% of the Companys Tier 1 capital consisted of trust preferred securities; however, no assurance can be given that trust preferred securities will continue to be treated as Tier 1 capital in the future.

Detailed information concerning the capital amounts and ratios for both the Company and the Bank is contained in Note 17 to the financial
statements appearing elsewhere herein.



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##### Table of Contents

Liquidity and market risk management

Liquidity

The Companys liquidity is primarily a reflection of the Companys
ability to raise money quickly, without principal loss and at a reasonable cost to meet loan demand and deposit withdrawals, and to service other liabilities as they come due. The Company has adopted policies to manage its liquidity position so it
can respond to changes in the financial environment and ensure that sufficient funds are available to meet those needs. Generally, the Companys major sources of liquidity are customer deposits, maturities, paydowns and sales of investment
securities, the use of federal funds markets, borrowings from correspondent banks, borrowings from the Federal Home Loan Bank (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 assets include cash and
due from banks, less the federal reserve requirement, federal funds sold, interest-bearing deposits in financial institutions, unpledged investment securities available-for-sale, Federal Home Loan Bank stock investment, less the stock requirement,
restricted at cost, Pacific Coast Bankers Bank stock investment, restricted at cost, and cash surrender value of life insurance policies.

In order to augment liquidity, as of December 31, 2006 the Company had federal funds borrowing arrangements with five correspondent banks totaling $45.0 million, and a secured line of credit with the FHLB totaling approximately $34.3
million.

The Companys liquidity ratio, with policy guidelines of above 10%, is a measure of liquid assets to deposits,
plus short-term liabilities, plus Federal Home Loan Bank borrowings due within one year, less pledged deposits for treasury tax and loan. On a consolidated basis, the liquidity ratio increased to 17.03% at December 31, 2006 from 14.98% at
December 31, 2005. The Company also monitors its net non-core funding dependence ratio, with policy guidelines of less than 30%. The net non-core dependence ratio is a measure of non-core liabilities less short-term investments,
divided by long-term earning assets. The ratio was 24.65% at December 31, 2006 and 7.08% at December 31, 2005.

The Company
believes it is beneficial to take advantage of the earnings opportunity presented by current loan demand, and to make certain arrangements to ensure adequate liquidity. In order to enhance deposit growth, the Company has a plan in place to increase
deposits by:



| | 1) | Encouraging deposit relationships with all loan customers;
| | -- | ----------------------------------------------------------



| | 2) | A revised incentive program for business development officers to reward deposit growth;
| | -- | ---------------------------------------------------------------------------------------



| | 3) | Hiring personnel whose primary focus is deposit growth;
| | -- | -------------------------------------------------------



| | 4) | Advertising competitive deposit rates;
| | -- | --------------------------------------



| | 5) | Offering deposit promotions; and
| | -- | --------------------------------



| | 6) | Buying brokered deposits and public funds to a limit of 15% of total deposits.
| | -- | ------------------------------------------------------------------------------

As of December 31, 2006, brokered deposits and public funds totaled $50.8 million and were 11.13% of total deposits.

In addition, to the extent that we are not able to generate sufficient deposit growth to maintain our target liquidity ratio, we will continue to utilize the FHLB for borrowings, as well as short-term borrowings from
our correspondent banks, and will also, where appropriate, sell loan participations to other banks.

Management is of the opinion that the
standby funding sources it has in place are adequate and reliable to meet the Companys current and anticipated short-term liquidity needs.



48



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##### Table of Contents

The following table sets forth certain information with respect to the Companys liquidity as of the
periods indicated:

Liquidity



|                                                                          |  |                        |        |   |                  |   |        |  
|------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ------ | -
|                                                                          |  | December 31,2006       |        |   | December 31,2005 |  
|                                                                          |  | (Dollars in Thousands) |       
|Cash and due from banks (net of federal reserve bank reserve requirement) |  | $                      | 17,771 |   |                  | $ | 16,015 |  
|Federal funds sold                                                        |  |                        | 2,900  |   |                  |   | 21,505 |  
|Interest-bearing deposits in financial institutions                       |  |                        | 2,922  |   |                  |   | 2,334  |  
|Unpledged investment securities available for sale                        |  |                        | 40,815 |   |                  |   | 11,904 |  
|Stock investments restricted, at cost                                     |  |                        | 1,681  |   |                  |   | 1,620  |  
|Cash surrender value of life insurance                                    |  |                        | 11,639 |   |                  |   | 6,735  |  
|                                                                          |  |                        |        |   |                  |   |        |  
|Total liquid assets                                                       |  | $                      | 77,728 |   |                  | $ | 60,113 |  
|                                                                          |  |                        |        |   |                  |   |        |  
|Liquidity ratio:                                                          |  |                        |        |   |                  |   |        |  
|Percentage of ending deposits and short-term liabilities                  |  |                        | 17.03  | % |                  |   | 14.98  | %

Market Risk Management

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Companys market risk exposure is primarily that of interest rate risk, and it has established policies
and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates. The Company does not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates. The
Companys earnings depend primarily upon the difference between the income it receives from its interest earning assets and its cost of funds, principally interest expense incurred on interest-bearing liabilities. Interest rates charged by the
Company on its loans are affected principally by the demand for loans, the supply of money available for lending purposes, and competitive factors. In turn, these factors are influenced by general economic conditions and other constraints beyond the
Companys control, such as governmental economic and tax policies, general supply of money in the economy, governmental budgetary actions and the actions of the federal reserve bank.

Interest Rate Risk Management

The
principal objective of interest rate risk management (often referred to as asset/liability management) is to manage the financial components of the Company in a manner that will optimize the risk/reward equation for earnings and capital
in relation to changing interest rates. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort, the Company measures interest rate risk utilizing both a modeling program from
an outside vendor, as well as reports from third party sources, which can be compared and analyzed together, enabling Management to better manage economic risk and interest rate risk.

The fundamental objective of the Companys management of its assets and liabilities is to maximize the economic value of the Company 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. The Company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. The Company, like other financial institutions, is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-bearing liabilities, i.e., not at the same time, or to the same magnitude. The Company manages its mix of assets and liabilities with the goal of limiting its exposure to



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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. The Companys interest rate and pricing strategies are driven by its asset/liability management analyses and by local market conditions.

In connection with the foregoing strategy, the Company studies the change in net interest income and net interest margin given immediate and parallel
interest rate shocks over a 12-month horizon. The Companys goal is to manage the effect of these changes within Board-established parameters of less than a 15% change for up/down 100 and 200 basis points. Shown below are possible
changes to net interest income and the net interest margin based upon the models program under 100 and 200 basis points increases or decreases as of December 31, 2006:



|                         |  |                                          |        |                              |   |        |                                |  |       |                    |  |      |  
|------------------------ |  | ---------------------------------------- | ------ | ---------------------------- | - | ------ | ------------------------------ |  | ----- | ------------------ |  | ---- | -
|Change (in Basis Points) |  | Net Interest Income (next twelve months) |        | Change in NetInterest Income |   |        | % Change inNet Interest Income |  |       | Net InterestMargin | 
|(Dollars in Thousands)   | 
|+ 200                    |  | $                                        | 32,909 |                              | $ | 2,507  |                                |  | 8.25  | %                  |  | 6.35 | %
|+ 100                    |  |                                          | 31,664 |                              |   | 1,261  |                                |  | 4.15  | %                  |  | 6.11 | %
|0                        |  |                                          | 30,402 |                              |   |       |                                |  | 0.00  | %                  |  | 5.87 | %
| 100                    |  |                                          | 29,172 |                              |   | (1,230 | )                              |  | (4.05 | )%                 |  | 5.63 | %
| 200                    |  |                                          | 27,926 |                              |   | (2,476 | )                              |  | (8.14 | )%                 |  | 5.39 | %

These results indicate the effect of immediate rate changes, which are unlikely and do not
consider the yield from reinvesting in short-term versus long-term instruments. The net interest margin will improve if rates rise and decline if rates fall. Management and the Board of Directors consider the results indicated by the report
acceptable.

The following table sets forth the interest rate sensitivity of the Companys interest-earning assets and
interest-bearing liabilities as of the period indicated 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, 2006



|                                                |  |                                     |         |   |           |   |              |  |              |         |  |       |          |   |  |   |         |  
|----------------------------------------------- |  | ----------------------------------- | ------- | - | --------- | - | ------------ |  | ------------ | ------- |  | ----- | -------- | - |  | - | ------- | -
|                                                |  | Amounts Subject to Repricing Within |        
|                                                |  | 0-12Months                          |         |   | 1-5 Years |   | After 5Years |  | NonSensitive |         |  | Total |         
|                                                |  | (Dollars in Thousands)              |        
|Assets                                          |  |                                     |         |   |           |   |              |  |              |         |  |       |          |   |  |   |         |  
|Federal funds sold                              |  | $                                   | 2,900   |   |           | $ |             |  | $            |        |  | $     |         |   |  | $ | 2,900   |  
|Interest-bearing deposits with banks            |  |                                     | 1,308   |   |           |   | 1,515        |  |              | 99      |  |       |         |   |  |   | 2,922   |  
|Investment securities                           |  |                                     | 128     |   |           |   | 45,139       |  |              | 27,382  |  |       |         |   |  |   | 72,649  |  
|Stock Investments, restricted, at cost          |  |                                     |        |   |           |   |             |  |              | 1,681   |  |       |         |   |  |   | 1,681   |  
|Loans, net of deferred fees                     |  |                                     | 286,301 |   |           |   | 79,916       |  |              | 61,866  |  |       | 3,858    |   |  |   | 431,941 |  
|Allowance for loan losses                       |  |                                     |        |   |           |   |             |  |              |        |  |       | (5,741   | ) |  |   | (5,741  | )
|Cash surrender value of life insurance          |  |                                     |        |   |           |   |             |  |              | 11,639  |  |       |         |   |  |   | 11,639  |  
|Noninterest earning assets                      |  |                                     |        |   |           |   |             |  |              |        |  |       | 33,136   |   |  |   | 33,136  |  
|                                                |  |                                     |         |   |           |   |              |  |              |         |  |       |          |   |  |   |         |  
|Total assets                                    |  | $                                   | 290,637 |   |           | $ | 126,570      |  | $            | 102,667 |  | $     | 31,253   |   |  | $ | 551,127 |  
|                                                |  |                                     |         |   |           |   |              |  |              |         |  |       |          |   |  |   |         |  
|Liabilities                                     |  |                                     |         |   |           |   |              |  |              |         |  |       |          |   |  |   |         |  
|Noninterest-bearing deposits                    |  | $                                   |        |   |           | $ |             |  | $            |        |  | $     | 111,154  |   |  | $ | 111,154 |  
|Interest-bearing deposits                       |  |                                     | 308,255 |   |           |   | 18,983       |  |              | 18,071  |  |       |         |   |  |   | 345,309 |  
|Repurchase agreement                            |  |                                     | 30,000  |   |           |   |             |  |              |        |  |       |         |   |  |   | 30,000  |  
|Subordinated notes payable to subsidiary trusts |  |                                     | 6,006   |   |           |   | 12,300       |  |              |        |  |       |         |   |  |   | 18,306  |  
|Noninterest paying liabilities                  |  |                                     |        |   |           |   |             |  |              |        |  |       | 4,161    |   |  |   | 4,161   |  
|Shareholders equity                            |  |                                     |        |   |           |   |             |  |              |        |  |       | 42,197   |   |  |   | 42,197  |  
|                                                |  |                                     |         |   |           |   |              |  |              |         |  |       |          |   |  |   |         |  
|Total liabilities and shareholders equity      |  | $                                   | 344,261 |   |           | $ | 31,283       |  | $            | 18,071  |  | $     | 157,512  |   |  | $ | 551,127 |  
|                                                |  |                                     |         |   |           |   |              |  |              |         |  |       |          |   |  |   |         |  
|Interest rate sensitivity gap                   |  | $                                   | (53,624 | ) |           | $ | 95,287       |  | $            | 84,596  |  | $     | (126,259 | ) |  |   |         |  
|Cumulative interest rate sensitivity gap        |  | $                                   | (53,624 | ) |           | $ | 41,663       |  | $            | 126,259 |  |       |         |   |  |   |         |  



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The preceding table indicates that the Company had a negative one-year cumulative gap of
$53.6 million at December 31, 2006. This gap position suggests that we are liability-sensitive. In any interest rate environment, the opportunity to reprice assets in the same dollar amounts and at the same time as liabilities would
minimize interest rate risk. The difference between the amounts of assets and liabilities repriced at the same time, or gap, represents the risk, or opportunity, in repricing. 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.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

The information concerning quantitative and qualitative disclosures about market risk is included as part of Part I, Item 1A above. See Risk Factors and Part II, Item 7 above. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Market Risk Management.



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|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | --------------------------------------------------------

The following consolidated financial statements of the Company and Subsidiary at December 31, 2006 and 2005 and for each of the years in the three-year period ended December 31, 2006, are included herein:



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|Report of Independent Registered Public Accounting Firm |  | 53  
|                                                        | 
|Consolidated Statements of Condition                    |  | 54  
|                                                        | 
|Consolidated Statements of Earnings                     |  | 55  
|                                                        | 
|Consolidated Statements of Shareholders Equity         |  | 56  
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | 57  
|                                                        | 
|Notes to Consolidated Financial Statements              |  | 59  



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Shareholders of

1st Centennial Bancorp and Subsidiary

Redlands, California

We have audited the accompanying consolidated statements of condition of 1st Centennial Bancorp and
subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of earnings, shareholders equity, and cash flows for each of the years in the three-year period ended December 31, 2006. We also have audited
managements assessment, appearing under Item 9A of the Form 10-K, that 1stCentennial Bancorp and
subsidiary maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organization of the
Treadway Commission (COSO). 1st Centennial Bancorp and subsidiarys management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on managements assessment, and an opinion on the effectiveness of the Companys internal control over
financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of 1st Centennial Bancorp and subsidiary as of December 31, 2006 and 2005, and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, managements assessment that 1st Centennial Bancorp and subsidiary maintained effective internal control over financial reporting as
of December 31, 2006 is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. Furthermore, in our opinion, 1st Centennial Bancorp and subsidiary
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the COSO.

/s/    HUTCHINSON AND BLOODGOOD LLP

Glendale, California

February 2, 2007



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION

December 31, 2006 and 2005

(Dollars In Thousands, Except Share Data)



|                                                                                                                                                            |  |      |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                            |  | 2006 |         | 2005
|ASSETS                                                                                                                                                      |  |      |         |      |   |        
|Cash and due from banks                                                                                                                                     |  | $    | 18,385  |      | $ | 16,862 
|Federal funds sold                                                                                                                                          |  |      | 2,900   |      |   | 21,505 
|                                                                                                                                                            |  |      |         |      |   |        
|Total cash and cash equivalents                                                                                                                             |  |      | 21,285  |      |   | 38,367 
|Interest-bearing deposits in financial institutions                                                                                                         |  |      | 2,922   |      |   | 2,334  
|Investment securities available for sale                                                                                                                    |  |      | 72,649  |      |   | 12,208 
|Stock investments, restricted, at cost                                                                                                                      |  |      | 1,681   |      |   | 1,620  
|Loans, net of allowance for loan losses of $5,741 and $ 5,376                                                                                               |  |      | 426,200 |      |   | 381,153
|Accrued interest receivable                                                                                                                                 |  |      | 3,469   |      |   | 2,425  
|Premises and equipment, net                                                                                                                                 |  |      | 3,152   |      |   | 3,652  
|Goodwill                                                                                                                                                    |  |      | 4,180   |      |   | 4,180  
|Cash surrender value of life insurance                                                                                                                      |  |      | 11,639  |      |   | 6,735  
|Other assets                                                                                                                                                |  |      | 3,950   |      |   | 3,518  
|                                                                                                                                                            |  |      |         |      |   |        
|Total assets                                                                                                                                                |  | $    | 551,127 |      | $ | 456,192
|                                                                                                                                                            |  |      |         |      |   |        
|LIABILITIES                                                                                                                                                 |  |      |         |      |   |        
|Deposits:                                                                                                                                                   |  |      |         |      |   |        
|Noninterest-bearing                                                                                                                                         |  | $    | 111,154 |      | $ | 106,121
|Interest-bearing                                                                                                                                            |  |      | 345,309 |      |   | 295,154
|                                                                                                                                                            |  |      |         |      |   |        
|Total deposits                                                                                                                                              |  |      | 456,463 |      |   | 401,275
|Accrued interest payable                                                                                                                                    |  |      | 432     |      |   | 170    
|Repurchase agreement                                                                                                                                        |  |      | 30,000  |      |   |       
|Other liabilities                                                                                                                                           |  |      | 3,729   |      |   | 3,020  
|Subordinated notes payable to subsidiary trusts                                                                                                             |  |      | 18,306  |      |   | 18,306 
|                                                                                                                                                            |  |      |         |      |   |        
|Total liabilities                                                                                                                                           |  |      | 508,930 |      |   | 422,771
|                                                                                                                                                            |  |      |         |      |   |        
|COMMITMENTS AND CONTINGENCIES(Notes 13 and 15)                                                                                                              |  |      |         |      |   |        
|SHAREHOLDERS EQUITY                                                                                                                                        |  |      |         |      |   |        
|Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 3,212,215 and 2,100,075 shares at December 31, 2006 and
2005, respectively |  |      | 27,998  |      |   | 26,803 
|Retained earnings                                                                                                                                           |  |      | 14,038  |      |   | 6,617  
|Accumulated other comprehensive income                                                                                                                      |  |      | 161     |      |   | 1      
|                                                                                                                                                            |  |      |         |      |   |        
|Total shareholders equity                                                                                                                                  |  |      | 42,197  |      |   | 33,421 
|                                                                                                                                                            |  |      |         |      |   |        
|Total liabilities and shareholders equity                                                                                                                  |  | $    | 551,127 |      | $ | 456,192
|                                                                                                                                                            |  |      |         |      |   |        

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



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

Years Ended December 31, 2006, 2005 and 2004

(Dollars In Thousands, Except Per Share Data)



|                                                    |  |      |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | 2006 |        | 2005 |   | 2004  
|Interest income:                                    |  |      |        |      |   |        |  |   |       
|Loans, including fees                               |  | $    | 38,065 |      | $ | 32,097 |  | $ | 22,442
|Deposits in financial institutions                  |  |      | 125    |      |   | 134    |  |   | 200   
|Federal funds sold                                  |  |      | 1,010  |      |   | 350    |  |   | 66    
|Investments:                                        |  |      |        |      |   |        |  |   |       
|Taxable                                             |  |      | 1,148  |      |   | 450    |  |   | 841   
|Tax-exempt                                          |  |      | 395    |      |   | 165    |  |   | 169   
|                                                    |  |      |        |      |   |        |  |   |       
|Total interest income                               |  |      | 40,743 |      |   | 33,196 |  |   | 23,718
|                                                    |  |      |        |      |   |        |  |   |       
|Interest expense:                                   |  |      |        |      |   |        |  |   |       
|Interest bearing demand and savings deposits        |  |      | 5,768  |      |   | 2,472  |  |   | 1,085 
|Time deposits $100,000 or greater                   |  |      | 3,217  |      |   | 1,852  |  |   | 788   
|Other time deposits                                 |  |      | 1,450  |      |   | 1,089  |  |   | 634   
|Interest on borrowed funds                          |  |      | 1,989  |      |   | 1,643  |  |   | 828   
|                                                    |  |      |        |      |   |        |  |   |       
|Total interest expense                              |  |      | 12,424 |      |   | 7,056  |  |   | 3,335 
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income                                 |  |      | 28,319 |      |   | 26,140 |  |   | 20,383
|Provision for loan losses                           |  |      | 1,320  |      |   | 2,140  |  |   | 2,098 
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income after provision for loan losses |  |      | 26,999 |      |   | 24,000 |  |   | 18,285
|                                                    |  |      |        |      |   |        |  |   |       
|Noninterest income:                                 |  |      |        |      |   |        |  |   |       
|Customer service fees                               |  |      | 1,344  |      |   | 1,376  |  |   | 1,221 
|Gains from sale of loans                            |  |      | 373    |      |   | 1,394  |  |   | 295   
|Conduit loan sale income                            |  |      | 684    |      |   | 972    |  |   | 398   
|Other income                                        |  |      | 623    |      |   | 714    |  |   | 694   
|                                                    |  |      |        |      |   |        |  |   |       
|Total noninterest income                            |  |      | 3,024  |      |   | 4,456  |  |   | 2,608 
|                                                    |  |      |        |      |   |        |  |   |       
|Noninterest expense:                                |  |      |        |      |   |        |  |   |       
|Salaries and employee benefits                      |  |      | 9,697  |      |   | 11,445 |  |   | 9,913 
|Net occupancy expense                               |  |      | 2,216  |      |   | 2,051  |  |   | 1,462 
|Other operating expenses                            |  |      | 5,847  |      |   | 6,617  |  |   | 4,705 
|                                                    |  |      |        |      |   |        |  |   |       
|Total noninterest expense                           |  |      | 17,760 |      |   | 20,113 |  |   | 16,080
|                                                    |  |      |        |      |   |        |  |   |       
|Income before provision for income taxes            |  |      | 12,263 |      |   | 8,343  |  |   | 4,813 
|Provision for income taxes                          |  |      | 4,836  |      |   | 3,260  |  |   | 1,793 
|                                                    |  |      |        |      |   |        |  |   |       
|Net income                                          |  | $    | 7,427  |      | $ | 5,083  |  | $ | 3,020 
|                                                    |  |      |        |      |   |        |  |   |       
|Basic earnings per share20                          |  | $    | 2.33   |      | $ | 1.62   |  | $ | 0.98  
|                                                    |  |      |        |      |   |        |  |   |       
|Diluted earnings per share20                        |  | $    | 2.12   |      | $ | 1.51   |  | $ | 0.91  
|                                                    |  |      |        |      |   |        |  |   |       

---

|20 | As adjusted for the 50% stock distribution declared to shareholders of record on March 3, 2006, and
distributed April 3, 2006.
|-- | ------------------------------------------------------------------------------------------------------------------------------

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



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Years Ended December 31, 2006, 2005 and 2004

(Dollars In Thousands, Except Share Data)



|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | --------- | - |  | ----------- | ------ | ----------------- | - | ------ | ------------------------------------ |  | - | ----- | - |  | - | ------ | -
|                                                                                             |  | Shares    |   |  | CommonStock |        | Retained Earnings |   |        | AccumulatedOtherComprehensive Income |  |   | Total |  
|Balance, December 31, 2003                                                                   |  | 1,502,281 |   |  | $           | 20,456 |                   | $ | 3,692  |                                      |  | $ | 252   |   |  | $ | 24,400 |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |   |  |             |       |                   |   | 3,020  |                                      |  |   |      |   |  |   | 3,020  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |                   |   |       |                                      |  |   | (165  | ) |  |   | (165   | )
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   | 2,855  |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Stock dividend                                                                               |  | 378,664   |   |  |             |       |                   |   |       |                                      |  |   |      |   |  |   |       |  
|Cash paid in lieu of fractional shares                                                       |  |          |   |  |             |       |                   |   | (6     | )                                    |  |   |      |   |  |   | (6     | )
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 10     |                   |   |       |                                      |  |   |      |   |  |   | 10     |  
|Issuance of restricted stock awards                                                          |  | 9,000     |   |  |             | 41     |                   |   |       |                                      |  |   |      |   |  |   | 41     |  
|Exercise of stock options, including tax benefit                                             |  | 49,666    |   |  |             | 701    |                   |   |       |                                      |  |   |      |   |  |   | 701    |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Balance, December 31, 2004                                                                   |  | 1,939,611 |   |  |             | 21,208 |                   |   | 6,706  |                                      |  |   | 87    |   |  |   | 28,001 |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |   |  |             |       |                   |   | 5,083  |                                      |  |   |      |   |  |   | 5,083  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |                   |   |       |                                      |  |   | (86   | ) |  |   | (86    | )
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   | 4,997  |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Stock dividend                                                                               |  | 135,815   |   |  |             | 5,161  |                   |   | (5,161 | )                                    |  |   |      |   |  |   |       |  
|Cash paid in lieu of fractional shares                                                       |  |          |   |  |             |       |                   |   | (11    | )                                    |  |   |      |   |  |   | (11    | )
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 8      |                   |   |       |                                      |  |   |      |   |  |   | 8      |  
|Vesting on issuance of restricted stock awards                                               |  |          |   |  |             | 41     |                   |   |       |                                      |  |   |      |   |  |   | 41     |  
|Exercise of stock options, including tax benefit                                             |  | 24,649    |   |  |             | 385    |                   |   |       |                                      |  |   |      |   |  |   | 385    |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Balance, December 31, 2005                                                                   |  | 2,100,075 |   |  |             | 26,803 |                   |   | 6,617  |                                      |  |   | 1     |   |  |   | 33,421 |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |   |  |             |       |                   |   | 7,427  |                                      |  |   |      |   |  |   | 7,427  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |                   |   |       |                                      |  |   | 160   |   |  |   | 160    |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   | 7,587  |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Stock distribution                                                                           |  | 1,062,656 |   |  |             |       |                   |   |       |                                      |  |   |      |   |  |   |       |  
|Cash paid in lieu of fractional shares                                                       |  |          |   |  |             |       |                   |   | (6     | )                                    |  |   |      |   |  |   | (6     | )
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 542    |                   |   |       |                                      |  |   |      |   |  |   | 542    |  
|Retirement of unvested restricted stock awards                                               |  | (578      | ) |  |             |       |                   |   |       |                                      |  |   |      |   |  |   |       |  
|Vesting on issuance of restricted stock awards                                               |  |          |   |  |             | 36     |                   |   |       |                                      |  |   |      |   |  |   | 36     |  
|Exercise of stock options, including tax benefit                                             |  | 50,062    |   |  |             | 617    |                   |   |       |                                      |  |   |      |   |  |   | 617    |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  
|Balance, December 31, 2006                                                                   |  | 3,212,215 |   |  | $           | 27,998 |                   | $ | 14,038 |                                      |  | $ | 161   |   |  | $ | 42,197 |  
|                                                                                             |  |           |   |  |             |        |                   |   |        |                                      |  |   |       |   |  |   |        |  

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



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004

(Dollars In Thousands)



|                                                                                  |  |      |         |   |      |   |         |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                  |  | 2006 |         |   | 2005 |   |         | 2004 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |          |  
|Net income                                                                        |  | $    | 7,427   |   |      | $ | 5,083   |      |  | $ | 3,020    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |      |  |   |          |  
|Depreciation and amortization                                                     |  |      | 675     |   |      |   | 662     |      |  |   | 528      |  
|Loss (gain) on disposal of equipment                                              |  |      | (7      | ) |      |   | 16      |      |  |   | 5        |  
|Provision for loan losses                                                         |  |      | 1,320   |   |      |   | 2,140   |      |  |   | 2,098    |  
|Loss (gain) from sale of investments                                              |  |      | (3      | ) |      |   | 5       |      |  |   |         |  
|Amortization of deferred loan fees                                                |  |      | (1,714  | ) |      |   | (2,157  | )    |  |   | (1,780   | )
|Amortization of excess purchase value of deposits                                 |  |      | 9       |   |      |   | 14      |      |  |   | 14       |  
|Stock compensation expense                                                        |  |      | 578     |   |      |   | 49      |      |  |   | 51       |  
|Deferred income tax benefit                                                       |  |      | (178    | ) |      |   | (625    | )    |  |   | (688     | )
|Amortization of excess value of loans                                             |  |      |        |   |      |   | 38      |      |  |   | 33       |  
|Net amortization on investments and interest-bearing deposits                     |  |      | 62      |   |      |   | 204     |      |  |   | 525      |  
|Increase in cash surrender value of life insurance                                |  |      | (404    | ) |      |   | (247    | )    |  |   | (282     | )
|Increase in assets:                                                               |  |      |         |   |      |   |         |      |  |   |          |  
|Accrued interest receivable                                                       |  |      | (1,044  | ) |      |   | (1,659  | )    |  |   | (56      | )
|Other assets                                                                      |  |      | (318    | ) |      |   | (135    | )    |  |   | (614     | )
|Increase (decrease) in liabilities:                                               |  |      |         |   |      |   |         |      |  |   |          |  
|Accrued interest payable                                                          |  |      | 262     |   |      |   | (145    | )    |  |   | 91       |  
|Other liabilities                                                                 |  |      | 709     |   |      |   | 1,086   |      |  |   | 398      |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |          |  
|Net cash provided by operating activities                                         |  |      | 7,374   |   |      |   | 4,329   |      |  |   | 3,343    |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |         |   |      |   |         |      |  |   |          |  
|Net decrease (increase) in interest-bearing deposits in financial institutions    |  |      | (514    | ) |      |   | 1,691   |      |  |   | 842      |  
|Activity in available-for-sale securities:                                        |  |      |         |   |      |   |         |      |  |   |          |  
|Purchase of securities                                                            |  |      | (37,266 | ) |      |   |        |      |  |   |         |  
|Proceeds from sales, maturities and principal repayments of securities            |  |      | 6,907   |   |      |   | 7,491   |      |  |   | 14,753   |  
|Purchases of Federal Home Loan Bank stock                                         |  |      | (61     | ) |      |   | (5      | )    |  |   | (748     | )
|Net increase in loans                                                             |  |      | (44,653 | ) |      |   | (73,144 | )    |  |   | (120,159 | )
|Additions to bank premises and equipment                                          |  |      | (168    | ) |      |   | (1,217  | )    |  |   | (1,178   | )
|Purchase of life insurance policies                                               |  |      | (4,500  | ) |      |   |        |      |  |   |         |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |          |  
|Net cash used in investing activities                                             |  |      | (80,255 | ) |      |   | (65,184 | )    |  |   | (106,490 | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |          |  

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



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended
December 31, 2006, 2005 and 2004

(Dollars In Thousands)



|                                                                    |  |      |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                    |  | 2006 |         |   | 2005 |   |         | 2004 | 
|CASH FLOWS FROM FINANCING ACTIVITIES                                |  |      |         |   |      |   |         |      |  |   |        |  
|Net increase in noninterest-bearing demand deposits                 |  | $    | 5,033   |   |      | $ | 13,501  |      |  | $ | 25,984 |  
|Net increase in interest-bearing deposits                           |  |      | 50,155  |   |      |   | 95,972  |      |  |   | 53,045 |  
|Repayments of federal funds purchased                               |  |      |        |   |      |   | (475    | )    |  |   | (1,375 | )
|Proceeds from (repayments of) Federal Home Loan Bank borrowings     |  |      |        |   |      |   | (21,000 | )    |  |   | 13,400 |  
|Proceeds from issuance of trust preferred securities                |  |      |        |   |      |   | 5,155   |      |  |   | 7,145  |  
|Cash dividends paid in lieu of fractional shares                    |  |      | (6      | ) |      |   | (11     | )    |  |   | (6     | )
|Proceeds from exercise of stock options                             |  |      | 617     |   |      |   | 385     |      |  |   | 701    |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |        |  
|Net cash provided by financing activities                           |  |      | 55,799  |   |      |   | 93,527  |      |  |   | 98,894 |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                |  |      | (17,082 | ) |      |   | 32,672  |      |  |   | (4,253 | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                        |  |      | 38,367  |   |      |   | 5,695   |      |  |   | 9,948  |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |        |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                              |  | $    | 21,285  |   |      | $ | 38,367  |      |  | $ | 5,695  |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |        |  
|SUPPLEMENTARY INFORMATION:                                          |  |      |         |   |      |   |         |      |  |   |        |  
|Interest paid                                                       |  | $    | 12,153  |   |      | $ | 7,187   |      |  | $ | 3,244  |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |        |  
|Income taxes paid                                                   |  | $    | 5,468   |   |      | $ | 3,677   |      |  | $ | 2,564  |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |        |  
|NON CASH INVESTING AND FINANCING ACTIVITIES:                        |  |      |         |   |      |   |         |      |  |   |        |  
|Acquisition of investment securities through a repurchase agreement |  | $    | 30,000  |   |      | $ |        |      |  | $ |       |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |        |  

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



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

1stCentennial Bancorp (the Company) is a bank holding company headquartered in Redlands, California that provides, through its
subsidiary, 1stCentennial Bank (the Bank), a broad array of products and services throughout its operating areas in
Southern California. The Bank operates six branches, which provide commercial and consumer banking services. Segment reporting is not presented since the Companys revenue is attributed to a single reportable segment.

A summary of the Companys significant accounting policies follows:

Basis of Presentation and Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies the Company follows conform, in all
material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry.

In consolidating, the Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting
principles generally accepted in the United States. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the
obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entitys activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting
interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in an entity is present when an
enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entitys expected losses, receive a majority of the entitys expected residual returns, or both. The enterprise with a
controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Companys wholly owned subsidiaries, Centennial Capital Trust I, Centennial Capital Trust II and Centennial Capital Trust III, are VIEs for which the
Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Companys consolidated financial statements.

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, but are not limited to, the determination of
the allowance for loan losses and the valuation of foreclosed real estate.

Interest-Bearing Deposits in Financial Institutions

Interest-bearing deposits in financial institutions mature within ten years and are carried at cost.



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES(Continued)



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, net of related tax. There were no debt securities held to maturity at December 31, 2006 and 2005.

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 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.

Restricted Stock Investments

Federal Home Loan Bank and Pacific Coast Bankers Bank stock are carried at cost, and are 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 development, and commercial 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, generally if no payment is received after ninety days and all accrued and uncollected interest income is reversed against current period operations. Interest income on nonaccrual loans is recognized only
when the loan is paid in full.

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. Amortization of deferred fees is discontinued when a loan is placed on nonaccrual status.

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. NATURE OF BUSINESS AND 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 a charge to income. The Company actively generates Small Business Administration (SBA) loans as
part of its primary operating activity of making loans. The guaranteed portion of each individual loan is sold on the secondary market simultaneously with the booking, and therefore the Company has no inventory held for sale, unlike some
institutions that warehouse loans to sell as pools. The Company retains the unguaranteed portion of the SBA loans. The total gain on sale of loans was $373,000 or 0.85% of gross revenue for 2006, $1.394 million or 3.7% for 2005 and
$295,000 or 1.12% for 2004. The Company reported the gain on sale of loans as operating activities on the Consolidated Statement of Cash Flows.

Allowance for Loan Losses

The allowance for possible loan losses is a reserve established through a provision for
possible loan losses charged to expense, which represents, in managements judgment the known and inherent credit losses existing in the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan
losses inherent in the loan portfolio. The allowance for possible loan losses includes allowance allocations calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors
for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a LoanIncome Recognition and Disclosures, and allowance allocations calculated in accordance with SFAS
No. 5, Accounting for Contingencies. The level of the allowance reflects managements continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present
economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing. Portions of the allowance may be allocated for specific credits; however, the entire allowance is
available for any credit that, in managements judgment, should be charged off.

While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Companys control, including the performance of the Companys loan portfolio, the economy, changes in interest rates and the
view of the regulatory authorities toward loan classifications.

The Companys allowance for possible loan losses consists of three
elements: (i) specific valuation allowances established for probable losses on specific loans; (ii) historical valuation allowances calculated based on historical loan loss experience for similar loans with similar characteristics and
trends; and (iii) unallocated general valuation allowances determined based on general economic conditions and other qualitative risk factors both internal and external to the Company.

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

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES(Continued)

Allowance for Loan Losses (Continued)



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.

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.

Premises and Equipment

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 3 to 39 years. Leasehold
improvements are amortized over the shorter of their estimated useful life or life of related leases, whichever is shorter.

Goodwill
and Other Intangible Assets

Goodwill is carried as an asset on the Companys statement of condition, 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. There were no changes to the carrying amount of goodwill during the years ended December 31, 2006 and 2005.

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 one year.

Foreclosed Real Estate

Assets
acquired through, or in lieu of, loan foreclosures are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. 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.

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES(Continued)

Foreclosed Real Estate (Continued)



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.

Advertising cost

Advertising costs are accrued then paid as incurred.

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.

Stock Incentive Plan

The Company has a stock incentive plan that includes, among other awards, both incentive and
nonqualified stock options, and authorizes the issuance of stock options to salaried employees and non-employee directors (See Note 11).

In December 2004, the Financial Accounting Standards Board (the FASB) issued SFAS No. 123R (Revised 2004), Share-Based Payment, which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation.SFAS No. 123R supersedes APB No. 25 and amends FASB Statement No. 95, Statement of Cash Flows. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized
as compensation expense through the income statement based on their fair values at issue date. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow required under current guidelines.

The Company adopted the provisions of SFAS 123R, effective
January 1, 2006, using the modified prospective method and began recording compensation expense associated with stock-based awards in accordance with SFAS No. 123R. Stock-based compensation expense was $542,000 for the year ended
December 31, 2006 net of related tax benefits.

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES(Continued)

Stock Incentive Plan (Continued)



As a result of the adoption of SFAS No. 123R and based on the stock-based compensation awards outstanding as of December 31, 2006, the Company
expects to recognize additional pre-tax compensation cost (in thousands) as follows:



|     |     |      |   |      |  |      |     |      |   |       |  |   |    |  |   |      
|---- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | ----- |  | - | -- |  | - | -----
|2007 |     | 2008 |   | 2009 |  | 2010 |     | 2011 |   | Total
|$    | 425 |      | $ | 332  |  | $    | 270 |      | $ | 261   |  | $ | 32 |  | $ | 1,320

Future levels of compensation cost recognized related to stock-based compensation awards
(including the aforementioned expected costs during the period of adoption) may be impacted by new awards and/or modifications, repurchases and cancellations of existing awards before and after the adoption of this standard.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model for those options granted through
December 31, 2005 and the Binomial method for those options granted after December 31, 2005. Under both methods, the following weighted average assumptions were used for option granted in 2006, 2005 and 2004, to arrive at the fair value
for each grant:



|                        |  |          |   |  |          |   |  |          |  
|----------------------- |  | -------- | - |  | -------- | - |  | -------- | -
|                        |  | 2006     |   |  | 2005     |   |  | 2004     |  
|Dividend yield          |  | 0        | % |  | 0        | % |  | 0        | %
|Expected volatility     |  | 21.50    | % |  | 21.88    | % |  | 22.30    | %
|Risk free interest rate |  | 4.65     | % |  | 4.15     | % |  | 4.23     | %
|Expected term           |  | 10 years |   |  | 10 years |   |  | 10 years |  

The expected volatility is based on historical volatility. The risk-free interest rates for
periods within the contractual life of the awards are based on the U.S. Treasury yield in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Companys
history and expectation of dividend payouts.

The following table illustrates the effect on the Companys net income and earnings per
share, had the Company applied the fair value recognition provision of SFAS 123R for the years ended December 31, 2005 and 2004:



|                                |  |                          |       |      |   |      
|------------------------------- |  | ------------------------ | ----- | ---- | - | -----
|                                |  | Years Ended December 31,
|                                |  | 2005                     |       | 2004
|Net income:                     |  |                          |       |      |   |      
|As reported                     |  | $                        | 5,083 |      | $ | 3,020
|Pro forma                       |  |                          | 4,791 |      |   | 2,462
|Compensation cost, net of taxes |  | $                        | 292   |      | $ | 558  
|                                |  |                         
|Basic earnings per share:       |  |                          |       |      |   |      
|As reported                     |  | $                        | 1.62  |      | $ | 0.98 
|Pro forma                       |  |                          | 1.53  |      |   | 0.80 
|                                |  |                         
|Diluted earnings per share:     |  |                          |       |      |   |      
|As reported                     |  | $                        | 1.51  |      | $ | 0.91 
|Pro forma                       |  |                          | 1.42  |      |   | 0.74 

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES(Continued)



Employee Stock Ownership Plan with 401(k) Provisions (KSOP)

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

Earnings Per Share21

Basic earnings per share
represent income available to common shareholders 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 to outstanding stock grants and stock options and are
determined using the treasury stock method. Weighted-average number of common shares outstanding for basic earnings per share amounted to 3,186,668, 3,128,809 and 3,068,549 for 2006, 2005 and 2004, respectively. Weighted-average number of common
shares outstanding for dilutive earnings per share amounted to 3,511,324, 3,369,527 and 3,322,197 for 2006, 2005 and 2004, respectively.

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.

Comprehensive Income

Generally accepted accounting principles (GAAP) requires 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 at December 31 are as follows:



|                                                                  |  |      |     |   |      |   |      |      |  |   |      |  
|----------------------------------------------------------------- |  | ---- | --- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                  |  | 2006 |     |   | 2005 |   |      | 2004 | 
|Unrealized holding gain (loss) on Available for sale securities   |  | $    | 260 |   |      | $ | (148 | )    |  | $ | (275 | )
|Reclassification adjustment for (gains) losses realized in income |  |      | (3  | ) |      |   | 5    |      |  |   |     |  
|                                                                  |  |      |     |   |      |   |      |      |  |   |      |  
|Net unrealized loss                                               |  |      | 257 |   |      |   | (143 | )    |  |   | (275 | )
|Tax effect                                                        |  |      | (97 | ) |      |   | 57   |      |  |   | 110  |  
|                                                                  |  |      |     |   |      |   |      |      |  |   |      |  
|Unrealized gain (loss) net-of-tax                                 |  | $    | 160 |   |      | $ | (86  | )    |  | $ | (165 | )
|                                                                  |  |      |     |   |      |   |      |      |  |   |      |  

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement
No. 109) which is effective for fiscal years beginning after December 15,



---

|21 | All share and per share
information has been adjusted to reflect the 50% stock distribution declared to shareholders of record on March 3, 2006, and distributed April 3, 2006.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES(Continued)

Recent Accounting Pronouncements (Continued)



2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is currently evaluating the potential
impact of this interpretation.

In February 2006, the FASB published SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments,which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.The
statement resolves issues addressed in SFAS No. 133 Implementation Issue No. Dl, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would require bifurcation and clarifies which interest-only strips and principal-only strips are not subject to SFAS No. 133 requirements. SFAS No. 155 also
establishes a requirement to evaluate interests in securitized financial assets in order to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a QSPE from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The
fair value election may also be applied upon adoption of SFAS No. 155 for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS No. 155. The Company does not expect
adoption of SFAS No. 155 will have a material affect on the consolidated financial statements results of operations or liquidity of the Company.

In March of 2006, the FASB published SFAS No. 156, Accounting for Servicing of Financial Assets, which amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with respect to the accounting for servicing of financial assets. SFAS No. 156 requires that all separately recognized servicing rights be initially measured at fair value, if practicable. For each class of
separately recognized servicing assets and liabilities, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods: (1) the amortization of servicing assets or liabilities in proportion to and over the
period of estimated net servicing income or net servicing loss or (2) the reporting of servicing assets or liabilities at fair value at each reporting date and reporting changes in fair value in earnings in the period in which the changes
occur. SFAS No. 156 also requires additional disclosures for all separately recognized servicing rights. Early adoption is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial
statements, including interim financial statements, for any period of that fiscal year. SFAS No. 156 is effective the earlier of the date an entity adopts the requirements of SFAS No. 156, or as of the beginning of its first fiscal year
beginning after September 15, 2006. An entity should apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions after the effective date of SFAS No. 156.
The Company does not expect adoption of SFAS No. 156 will have a material affect on the consolidated financial statements results of operations or liquidity of the Company.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but applies under other existing accounting pronouncements that require or permit fair value
measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and, therefore, should be determined based on

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES(Continued)

Recent Accounting Pronouncements (Continued)



the assumptions that market participants would use in pricing that asset or liability. SFAS No. 157 also establishes a fair value hierarchy that
distinguishes between market participant assumptions developed based on market data obtained from independent sources and the Companys own assumptions about market participant assumptions based on the best information available. SFAS
No. 157 is effective for the Company on January 1, 2008 with earlier adoption permitted. The Company does not expect adoption to have a significant impact on the consolidated financial statements, results of operations or liquidity of the
Company.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize the overfunded or underfunded status of defined benefit postretirement plans, other than
multiemployer plans, as assets or liabilities on the balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. The recognition and disclosure provisions of SFAS No. 158 are
effective for the Company as of December 31, 2006. The Company does not expect adoption of SFAS No. 158, to have a significant impact on the consolidated financial statements, results of operations or liquidity of the Company.

In September 2006, the Emerging Issues Task Force (EITF) reached a final consensus on Issue No. 06-4 (EITF 06-4),
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires employers to recognize a liability for future benefits provided through
endorsement split-dollar life insurance arrangements that extend into postretirement periods in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions or APB Opinion No. 12,
Omnibus Opinion1967. The provisions of EITF 06-4 are effective for the Company on January 1, 2007 and are to be applied as a change in accounting principle either through a cumulative-effect adjustment to retained earnings or
other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption; or through retrospective application to all prior periods. The Company is currently evaluating the financial statement
impact of adoption of EITF 06-4.

In September 2006, the EITF reached a final consensus on Issue No. 06-5 (EITF
06-5), Accounting for Purchase of Life InsuranceDetermining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4. EITF 06-5 requires that the cash surrender value and any amounts
provided by the contractual terms of an insurance policy that are realizable at the balance sheet date be considered in determining the amount that could be realized under Technical Bulletin No. 85-4. The provisions of EITF 06-5 require
(1) consideration of the effect of contractual restrictions that limit amounts that could be realized, (2) exclusion from the amount that could be realized of amounts recoverable at the discretion of the insurance company, (3) amounts
that are recoverable by the policyholder in periods beyond one year from the surrender of the policy be discounted, and (4) an assumption that policies will be surrendered on an individual lifebyindividual life basis. The provisions
of EITF 06-5 are effective for the Company on January 1, 2007 and are to be applied as a change in accounting principle either through a cumulative-effect adjustment to retained earnings or other components of equity or net assets in the
statement of financial position as of the beginning of the year of adoption; or through retrospective application to all prior periods. The Company is currently evaluating the financial statement impact of adoption of EITF 06-5.

Note 2. RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

The Bank is required to maintain an average account balance with the Federal Reserve Bank. At December 31, 2006 and 2005, the Company met the requirements which amounted to $614,000, and $847,000, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 3. INVESTMENT SECURITIES, AVAILABLE FOR SALE

The following is a comparison of amortized cost and fair value of investment securities at December 31, 2006 and 2005:



|                                                      |               |               |                      |                      |                       |                       |  |           |           |   |  |   |       
|----------------------------------------------------- | ------------- | ------------- | -------------------- | -------------------- | --------------------- | --------------------- |  | --------- | --------- | - |  | - | ------
|                                                      |               | 2006         
|                                                      | AmortizedCost |               | GrossUnrealizedGains |                      | GrossUnrealizedLosses |                       |  | FairValue
|US agency securities                                  |               | $             | 30,000               |                      | $                     | 210                   |  | $         |          |   |  | $ | 30,210
|Federal agency mortgage-backed securities             |               |               | 19,597               |                      |                       | 190                   |  |           | (61       | ) |  |   | 19,726
|Obligations of states and local government securities |               |               | 22,782               |                      |                       | 120                   |  |           | (189      | ) |  |   | 22,713
|                                                      |               |               |                      |                      |                       |                       |  |           |           |   |  |   |       
|                                                      |               | $             | 72,379               |                      | $                     | 520                   |  | $         | (250      | ) |  | $ | 72,649
|                                                      |               |               |                      |                      |                       |                       |  |           |           |   |  |   |       
|                                                      |              
|                                                      |               | 2005         
|                                                      |               | AmortizedCost |                      | GrossUnrealizedGains |                       | GrossUnrealizedLosses |  |           | FairValue
|Federal agency mortgage-backed securities             |               | $             | 8,242                |                      | $                     | 51                    |  | $         | (120      | ) |  | $ | 8,173 
|Obligations of states and local government securities |               |               | 3,937                |                      |                       | 98                    |  |           |          |   |  |   | 4,035 
|                                                      |               |               |                      |                      |                       |                       |  |           |           |   |  |   |       
|                                                      |               | $             | 12,179               |                      | $                     | 149                   |  | $         | (120      | ) |  | $ | 12,208
|                                                      |               |               |                      |                      |                       |                       |  |           |           |   |  |   |       

The amortized cost and fair value of investment securities available for sale at December 31,
2006, 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                           |  | $             | 1      |           | $ | 1     
|Over 1 year to 5 years                    |  |               | 32,361 |           |   | 32,612
|Over 5 years to 10 years                  |  |               | 4,632  |           |   | 4,675 
|Over 10 years                             |  |               | 15,788 |           |   | 15,635
|                                          |  |               |        |           |   |       
|                                          |  |               | 52,782 |           |   | 52,923
|Federal agency mortgage-backed securities |  |               | 19,597 |           |   | 19,726
|                                          |  |               |        |           |   |       
|                                          |  | $             | 72,379 |           | $ | 72,649
|                                          |  |               |        |           |   |       

As of December 31, 2006 and 2005, U.S. treasury and agency securities, federal agency
mortgage-backed securities and obligations of states and local government securities with an amortized cost of $31,331,000 and $302,000 and fair values of $31,584,000 and $304,000 respectively, were pledged as collateral as required or permitted by
law.

During the year ended December 31, 2006, the Company sold 17 securities with proceeds of $3,302,000 and a net realized gain of
$3,000. The tax provision applicable to this realized gain amounted to $1,000. During the year ended December 31, 2005, the Company sold one security with proceeds of $200,000 and a gross realized loss of $5,000. The tax benefit applicable to
this realized loss amounted to $2,000.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 3. INVESTMENT SECURITIES, AVAILABLE FOR SALE(Continued)



Information pertaining to securities with gross unrealized losses at
December 31, 2006, 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
|                                                      |  | GrossUnrealizedLosses |      |                | FairValue |   | GrossUnrealizedLosses |  |   | FairValue
|Federal agency mortgage-backed securities             |  | $                     | (22  | )              |           | $ | 5,400                 |  | $ | (39       | ) |  | $ | 2,373
|Obligations of states and local government securities |  |                       | (189 | )              |           |   | 16,312                |  |   |          |   |  |   |     
|                                                      |  |                       |      |                |           |   |                       |  |   |           |   |  |   |      
|                                                      |  | $                     | (211 | )              |           | $ | 21,712                |  | $ | (39       | ) |  | $ | 2,373
|                                                      |  |                       |      |                |           |   |                       |  |   |           |   |  |   |      

At December 31, 2006, the aggregate depreciation of the investment securities with unrealized
losses was 1.03% from the Companys amortized cost basis. These unrealized losses relate principally to long-term Federal agency mortgage-backed securities and obligations of states and local government securities. The securities are well
secured, and the Company has the ability to hold them to maturity. Thus, no declines are deemed to be other than temporary.

Note 4. STOCK INVESTMENTS,
RESTRICTED

Restricted stock investments include the following at December 31, and are recorded at cost:



|                                  |  |      |       |      |   |      
|--------------------------------- |  | ---- | ----- | ---- | - | -----
|                                  |  | 2006 |       | 2005
|Pacific Coast Bankers Bank stock |  | $    | 487   |      | $ | 487  
|Federal Home Loan Bank stock      |  |      | 1,194 |      |   | 1,133
|                                  |  |      |       |      |   |      
|                                  |  | $    | 1,681 |      | $ | 1,620
|                                  |  |      |       |      |   |      

The Bank is required to hold shares of stock in the Federal Home Loan Bank of San Francisco (FHLB)
based on the greater of 1% of the membership asset value, which is calculated using Call Report data from the most recent year end, or 4.7% of its advances from the FHLB as of the most recent quarter end.

Note 5. LOANS

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



|                               |  |      |         |   |      |   |         |  
|------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                               |  | 2006 |         |   | 2005 |  
|Real estate loans              |  |      |         |   |      |   |         |  
|Construction and development   |  | $    | 174,040 |   |      | $ | 137,292 |  
|Residential                    |  |      | 3,063   |   |      |   | 3,440   |  
|Commercial and multi-family    |  |      | 77,245  |   |      |   | 84,813  |  
|Commercial loans               |  |      | 165,765 |   |      |   | 151,207 |  
|Consumer loans                 |  |      | 4,764   |   |      |   | 2,784   |  
|Equity lines of credit         |  |      | 6,762   |   |      |   | 7,644   |  
|Credit card and other loans    |  |      | 1,652   |   |      |   | 1,304   |  
|                               |  |      |         |   |      |   |         |  
|Total loans                    |  |      | 433,291 |   |      |   | 388,484 |  
|Less unearned income           |  |      | (1,350  | ) |      |   | (1,955  | )
|Less allowance for loan losses |  |      | (5,741  | ) |      |   | (5,376  | )
|                               |  |      |         |   |      |   |         |  
|Net loans                      |  | $    | 426,200 |   |      | $ | 381,153 |  
|                               |  |      |         |   |      |   |         |  

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 5. LOANS(Continued)



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



|                                           |  |      |        |   |      |   |        |      |  |   |       |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                           |  | 2006 |        |   | 2005 |   |        | 2004 | 
|Balance as of January 1                    |  | $    | 5,376  |   |      | $ | 4,137  |      |  | $ | 2,108 |  
|Provision charged to expense               |  |      | 1,320  |   |      |   | 2,140  |      |  |   | 2,098 |  
|Loans charged-off                          |  |      | (1,123 | ) |      |   | (1,008 | )    |  |   | (155  | )
|Recoveries of loans previously charged-off |  |      | 168    |   |      |   | 107    |      |  |   | 86    |  
|                                           |  |      |        |   |      |   |        |      |  |   |       |  
|Balance as of December 31                  |  | $    | 5,741  |   |      | $ | 5,376  |      |  | $ | 4,137 |  
|                                           |  |      |        |   |      |   |        |      |  |   |       |  

Loans serviced for others are not included in the accompanying statements of condition. The unpaid
principal balances of loans serviced for others were $54,711,000 and $90,900,000 at December 31, 2006 and 2005, respectively.

The
balance of capitalized loan servicing rights included in other assets was $409,000 and $439,000 at December 31, 2006 and 2005, respectively.

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



|                                                            |  |      |       |      |   |    
|----------------------------------------------------------- |  | ---- | ----- | ---- | - | ---
|                                                            |  | 2006 |       | 2005
|Impaired loans without a valuation allowance                |  | $    | 2,880 |      | $ | 83 
|Impaired loans with a valuation allowance                   |  |      | 978   |      |   | 911
|                                                            |  |      |       |      |   |    
|Total impaired loans                                        |  | $    | 3,858 |      | $ | 994
|                                                            |  |      |       |      |   |    
|Valuation allowance related to impaired loans               |  | $    | 304   |      | $ | 284
|                                                            |  |      |       |      |   |    
|Total non-accrual loans                                     |  | $    | 3,858 |      | $ | 994
|                                                            |  |      |       |      |   |    
|Total loans past-due ninety days or more and still accruing |  | $    |      |      | $ |   
|                                                            |  |      |       |      |   |    



|                                     |  |                          |       |      |   |      |  |   |    
|------------------------------------ |  | ------------------------ | ----- | ---- | - | ---- |  | - | ---
|                                     |  | Years Ended December 31,
|                                     |  | 2006                     |       | 2005 |   | 2004
|Average investment in impaired loans |  | $                        | 1,707 |      | $ | 416  |  | $ | 254
|                                     |  |                          |       |      |   |      |  |   |    

For the years ended December 31, 2006, 2005 and 2004, there was no interest income recognized
on impaired loans on a cash basis. No additional funds were committed to be advanced in connection with impaired loans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 6. PREMISES AND EQUIPMENT

Premises and equipment at December 31 consist of the following:



|                                                          |  |      |        |   |      |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                          |  | 2006 |        |   | 2005 |  
|Land                                                      |  | $    | 132    |   |      | $ | 132    |  
|Building                                                  |  |      | 1,133  |   |      |   | 1,133  |  
|Equipment, leasehold improvements, furniture and fixtures |  |      | 6,209  |   |      |   | 6,066  |  
|Construction in progress                                  |  |      | 45     |   |      |   | 42     |  
|                                                          |  |      |        |   |      |   |        |  
|Total                                                     |  |      | 7,519  |   |      |   | 7,373  |  
|Less accumulated depreciation and amortization            |  |      | (4,367 | ) |      |   | (3,721 | )
|                                                          |  |      |        |   |      |   |        |  
|                                                          |  | $    | 3,152  |   |      | $ | 3,652  |  
|                                                          |  |      |        |   |      |   |        |  

Total depreciation expense amounted to $675,000, $662,000 and $528,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.

The Company leases space for branch and loan premises. Pursuant to the terms of the
noncancelable operating lease agreements in effect at December 31, 2006, future minimum rent commitments under these leases are as follows:



|     |  |                       |       |                |   |                 |  |   |      
|---- |  | --------------------- | ----- | -------------- | - | --------------- |  | - | -----
|     |  | OperatingLeaseExpense |       | SubleaseIncome |   | NetLeaseExpense
|2007 |  | $                     | 1,036 |                | $ | 76              |  | $ | 960  
|2008 |  |                       | 586   |                |   | 11              |  |   | 575  
|2009 |  |                       | 451   |                |   |                |  |   | 451  
|2010 |  |                       | 236   |                |   |                |  |   | 236  
|2011 |  |                       | 20    |                |   |                |  |   | 20   
|     |  |                       |       |                |   |                 |  |   |      
|     |  | $                     | 2,329 |                | $ | 87              |  | $ | 2,242
|     |  |                       |       |                |   |                 |  |   |      

Gross rent expense for the years ended December 31, 2006, 2005 and 2004 amounted to $887,000,
$855,000 and $569,000, respectively. Total sublease income for the years ended December 31, 2006, 2005 and 2004 amounted to $83,000, $61,000 and $51,000, respectively.

Note 7. DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or greater at
December 31, 2006 and 2005 were $109,101,000 and $60,093,000, respectively.

A summary of total time deposits by maturity at
December 31 is as follows:



|                              |  |      |         |      |   |       
|----------------------------- |  | ---- | ------- | ---- | - | ------
|                              |  | 2006 |         | 2005
|Within 1 year                 |  | $    | 130,234 |      | $ | 70,640
|After 1 year through 3 years  |  |      | 17,117  |      |   | 20,600
|After 3 years through 5 years |  |      | 1,866   |      |   | 7,937 
|After 5 years                 |  |      |        |      |   | 190   
|                              |  |      |         |      |   |       
|                              |  | $    | 149,217 |      | $ | 99,367
|                              |  |      |         |      |   |       

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Note 8. REPURCHASE AGREEMENT

In September 2006, the Company entered into a repurchase agreement totaling $30.0 million, which was collateralized with the acquisition of a $30.0 million US agency security. The average amount outstanding and
the maximum month end balance outstanding during the year were $9.2 million and $30.0 million, respectively. Interest is at 3-month LIBOR (5.35% at December 31, 2006) plus .53% with an additional downward adjustment if LIBOR falls below 5.4%.
The interest rate was 5.84% at December 31, 2006 with an average interest rate of 5.93% during the year. As of December 31, 2006, the $30.0 million repurchase agreement matures within three years. These borrowings are secured by a US
agency security classified as available for sale with a carrying value of $30.2 million. The repurchase agreement is carried at cost and as structured, does not result in holding a derivative instrument.

Note 9. SUBORDINATED NOTES PAYABLE TO SUBSIDIARY TRUSTS

Centennial Capital Trust I

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% (5.37% + 3.65% =
9.02% at December 31, 2006), 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 long-tem debt. Total broker and legal costs associated with the issuance amounted to $191,500 and are being amortized over a 10-year period.

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%. (5.37% + 2.85% = 8.22% at December 31, 2006). The Company used the proceeds of approximately $7 million as a capital infusion for its subsidiary 1stCentennial Bank in August 2004. Total broker and legal costs associated with the issuance amounted to $87,500 and are being
amortized over a 5-year period.



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Note 9. SUBORDINATED NOTES PAYABLE TO SUBSIDIARY TRUSTS(Continued)



Centennial Capital Trust III

On September 28, 2005, Centennial Capital Trust III, a newly formed Delaware statutory business trust and a wholly-owned subsidiary of the Company
(the Trust), issued an aggregate of $5.0 million of principal amount of Floating Rate TRUPS® (Capital Trust Pass-through Securities of the Trust) (the Trust Preferred Securities). RBC Dain Rauscher 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 $5.0 million in principal amount of the Floating Rate Junior Subordinated Deferrable Interest Debentures due 2035 issued by the Company (the Subordinated Debt Securities).

The Subordinated Debt Securities bear interest at 6.032% for the first five years through
December 15, 2010 and at a variable interest rate equal to LIBOR (5.37% at December 31, 2006) plus 1.45% thereafter. The Company used the proceeds of approximately $5 million as a capital infusion for its subsidiary, 1stCentennial Bank, in September 2005. There was no cost to the Trust associated with the issuance.

As of December 31, 2006, accrued interest payable to Centennial Capital Trust I, II and III aggregated $289,000 and is included in other liabilities
in the accompanying statement of condition.

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 shareholders. All loans were made under terms that are consistent with the Companys normal lending policies.

Aggregate related party loan transactions were as follows:



|                          |  |      |       |      |   |      
|------------------------- |  | ---- | ----- | ---- | - | -----
|                          |  | 2006 |       | 2005
|Balance as of January 1   |  | $    | 2,430 |      | $ | 2,270
|Net borrowings            |  |      | 26    |      |   | 160  
|                          |  |      |       |      |   |      
|Balance as of December 31 |  | $    | 2,456 |      | $ | 2,430
|                          |  |      |       |      |   |      

Deposits from related parties held by the Company at December 31, 2006 and 2005 totaled
$3,965,000 and $2,720,000, respectively.

Note 11. STOCK OPTIONS22

The
Company has an omnibus stock incentive plan which includes, among other awards, both incentive and nonqualified stock options, and authorizes the issuance of stock options to salaried employees and non-employee directors. Incentive stock options are
only available to employees of the Company, while nonqualified stock options are available to directors of the Company.



---

|22 | All share and per share information has been adjusted to reflect the 50% stock distribution declared to
shareholders of record on March 3, 2006, and distributed April 3, 2006.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Note 11. STOCK OPTIONS(Continued)



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 712,029 shares of the Companys capital stock. The number of stock options remaining available for future issuance is
109,805. Options issued have an exercise price ranging from $2.68 to $33.00 per share. Upon exercise of stock options, it is the Companys policy to issue new shares of stock rather than repurchase existing shares.

The following is a summary of the Companys stock option activity for 2006 and 2005:



|                                                           |  |         |   |      |                                |       |        |         |   |                                |   |      
|---------------------------------------------------------- |  | ------- | - | ---- | ------------------------------ | ----- | ------ | ------- | - | ------------------------------ | - | -----
|                                                           |  | 2006    |   | 2005
|                                                           |  | Shares  |   |      | Weighted AverageExercise Price |       | Shares |         |   | Weighted AverageExercise Price
|Options granted and outstanding at beginning of year       |  | 563,075 |   |      | $                              | 12.97 |        | 571,808 |   |                                | $ | 13.09
|Stock dividends/distributions                              |  |        |   |      |                                |      |        | 40,028  |   |                                |   |     
|Options granted                                            |  | 133,375 |   |      |                                | 24.41 |        | 22,197  |   |                                |   | 23.44
|Options exercised                                          |  | (63,135 | ) |      |                                | 9.78  |        | (37,494 | ) |                                |   | 10.26
|Options forfeited                                          |  | (31,091 | ) |      |                                | 16.32 |        | (33,464 | ) |                                |   | 12.90
|                                                           |  |         |   |      |                                |       |        |         |   |                                |   |      
|Options granted and outstanding at end of year             |  | 602,224 |   |      | $                              | 15.66 |        | 563,075 |   |                                | $ | 12.97
|                                                           |  |         |   |      |                                |       |        |         |   |                                |   |      
|Options exercisable at year-end                            |  | 342,891 |   |      | $                              | 11.76 |        | 311,029 |   |                                | $ | 10.61
|Weighted average fair value of options granted during year |  |         |   |      | $                              | 15.61 |        |         |   |                                | $ | 10.00

Information pertaining to options outstanding at December 31, 2006 and 2005 are as follows:



|                                   |  |                     |  |                                         |  |                              |       |                   |         |                              |   |      
|---------------------------------- |  | ------------------- |  | --------------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|                                   |  | 2006               
|                                   |  | Options Outstanding |  | Options Exercisable                    
|Range of Exercise Prices           |  | NumberOutstanding   |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | NumberExercisable |         | WeightedAverageExercisePrice
|$2.68 to $ 15.00                   |  | 334,136             |  | 5.06 years                              |  | $                            | 9.59  |                   | 270,481 |                              | $ | 8.96 
|$15.01 to $ 33.00                  |  | 268,088             |  | 8.55 years                              |  | $                            | 23.22 |                   | 72,410  |                              | $ | 22.22
|                                   |  |                     |  |                                         |  |                              |       |                   |         |                              |   |      
|Options outstanding at end of year |  | 602,224             |  | 6.61 years                              |  | $                            | 15.66 |                   | 342,891 |                              | $ | 11.76
|                                   |  |                     |  |                                         |  |                              |       |                   |         |                              |   |      

The intrinsic value of options exercised during the year ended December 31, 2006 was $1.1
million.

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Note 11. STOCK OPTIONS(Continued)



The aggregate intrinsic values of stock options outstanding and exercisable at December 31, 2006 were $10.9 million and
$7.5 million, respectively.



|                                      |  |                 |   |  |                                    |      
|------------------------------------- |  | --------------- | - |  | ---------------------------------- | -----
|                                      |  | Numberof Shares |   |  | WeightedAverageGrantDate FairValue
|Non-vested options, December 31, 2005 |  | 252,046         |   |  | $                                  | 10.08
|Options granted                       |  | 133,375         |   |  | $                                  | 15.61
|Options vested                        |  | (94,997         | ) |  | $                                  | 6.93 
|Options canceled                      |  | (31,091         | ) |  | $                                  | 11.21
|                                      |  |                 |   |  |                                    |      
|Non-vested options, December 31, 2006 |  | 259,333         |   |  | $                                  | 13.06
|                                      |  |                 |   |  |                                    |      

Note 12. INCOME TAXES

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



|                                  |  |      |       |   |      |   |       |      |  |   |       |  
|--------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                  |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Current tax provision:            |  |      |       |   |      |   |       |      |  |   |       |  
|Federal                           |  | $    | 3,698 |   |      | $ | 2,889 |      |  | $ | 1,823 |  
|State                             |  |      | 1,316 |   |      |   | 996   |      |  |   | 658   |  
|                                  |  |      |       |   |      |   |       |      |  |   |       |  
|                                  |  |      | 5,014 |   |      |   | 3,885 |      |  |   | 2,481 |  
|                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Deferred tax provision (benefit): |  |      |       |   |      |   |       |      |  |   |       |  
|Federal                           |  |      | (143  | ) |      |   | (527  | )    |  |   | (532  | )
|State                             |  |      | (35   | ) |      |   | (98   | )    |  |   | (156  | )
|                                  |  |      |       |   |      |   |       |      |  |   |       |  
|                                  |  |      | (178  | ) |      |   | (625  | )    |  |   | (688  | )
|                                  |  |      |       |   |      |   |       |      |  |   |       |  
|                                  |  | $    | 4,836 |   |      | $ | 3,260 |      |  | $ | 1,793 |  
|                                  |  |      |       |   |      |   |       |      |  |   |       |  

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



|                                        |  |      |   |  |      |   |  |      |  
|--------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                        |  | 2006 |   |  | 2005 |   |  | 2004 |  
|Statutory tax rates                     |  | 35.0 | % |  | 34.0 | % |  | 34.0 | %
|Increase (decrease) resulting from:     |  |      |   |  |      |   |  |      |  
|State taxes, net of federal tax benefit |  | 7.2  |   |  | 7.2  |   |  | 7.2  |  
|Municipal bond income                   |  | (1.2 | ) |  | (0.7 | ) |  | (1.3 | )
|Cash surrender value of life insurance  |  | (1.5 | ) |  | (1.3 | ) |  | (2.6 | )
|Stock compensation expense              |  | 1.8  |   |  |     |   |  |     |  
|Other, net                              |  | (1.9 | ) |  | (.1  | ) |  |     |  
|                                        |  |      |   |  |      |   |  |      |  
|Effective tax rates                     |  | 39.4 | % |  | 39.1 | % |  | 37.3 | %
|                                        |  |      |   |  |      |   |  |      |  

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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:



|                                                                |  |      |       |   |      |   |       |  
|--------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                |  | 2006 |       |   | 2005 |  
|Deferred tax assets:                                            |  |      |       |   |      |   |       |  
|Allowance for loan losses                                       |  | $    | 2,040 |   |      | $ | 2,019 |  
|Employee benefit plans                                          |  |      | 327   |   |      |   | 183   |  
|State income taxes                                              |  |      | 447   |   |      |   | 338   |  
|Depreciation and amortization                                   |  |      | 22    |   |      |   |      |  
|                                                                |  |      |       |   |      |   |       |  
|                                                                |  |      | 2,836 |   |      |   | 2,540 |  
|                                                                |  |      |       |   |      |   |       |  
|Deferred tax liabilities:                                       |  |      |       |   |      |   |       |  
|Net unrealized gain on investment securities available-for-sale |  |      | (111  | ) |      |   | (12   | )
|Depreciation and amortization                                   |  |      |      |   |      |   | (7    | )
|Deferred loan costs                                             |  |      | (119  | ) |      |   | (116  | )
|Goodwill                                                        |  |      | (465  | ) |      |   | (378  | )
|FHLB stock dividends                                            |  |      | (72   | ) |      |   | (47   | )
|Restricted stock awards                                         |  |      | (38   | ) |      |   | (28   | )
|                                                                |  |      |       |   |      |   |       |  
|                                                                |  |      | (805  | ) |      |   | (588  | )
|                                                                |  |      |       |   |      |   |       |  
|Net deferred tax asset                                          |  | $    | 2,031 |   |      | $ | 1,952 |  
|                                                                |  |      |       |   |      |   |       |  

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 statements of condition.

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.

As of December 31, 2006 and 2005, the following
financial instruments were outstanding whose contract amounts represent credit risk:



|                                                       |  |      |         |      |   |        
|------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                       |  | 2006 |         | 2005
|Standby letters of credit                              |  | $    | 3,231   |      | $ | 2,642  
|Unadvanced funds on construction and development loans |  |      | 143,676 |      |   | 133,206
|Unadvanced funds on commercial loans                   |  |      | 63,235  |      |   | 51,531 
|Unadvanced funds on consumer loans                     |  |      | 5,304   |      |   | 2,740  
|Unadvanced funds on equity lines of credit             |  |      | 10,986  |      |   | 6,195  
|Unadvanced funds on credit card and other loans        |  |      | 3,060   |      |   | 2,090  
|                                                       |  |      |         |      |   |        
|                                                       |  | $    | 229,492 |      | $ | 198,404
|                                                       |  |      |         |      |   |        

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Note 13. COMMITMENTS AND CONTINGENCIES(Continued)

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



Commitments to extend credit are agreements to lend to customers, provided there is no violation of any conditions
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being
drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. The Companys exposure to credit losses is represented by the contractual amount of these commitments. The Company uses the same credit
underwriting policies in granting or accepting such commitments as it does for on-balance-sheet instruments, which consist of evaluating customers creditworthiness individually.

Standby letters of credit written are conditional commitments issued by the Company to guarantee the financial performance of a customer to a third
party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary,
the Company holds appropriate collateral supporting those commitments. Management does not anticipate any material losses as a result of these transactions. The Company considers standby letters of credit to be guarantees under FIN 45. The amount of
the liability related to guarantees on December 31, 2006 was immaterial.

Legal Proceedings

Various legal claims may 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 consolidated financial statements.

Employment Agreements and Special Termination Agreements

The Company has entered into employment agreements with two 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 acknowledge the establishment of a salary
continuation plan to provide benefits to certain executive officers at the age of retirement. (See Note 16)

Both 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

Employee Stock
Ownership Plan with 401(k) Provisions (KSOP)

The Company has established an employee stock ownership plan with 401(k) provisions
(KSOP) covering substantially all employees of the Company. Employees who have completed six months of service and have attained age 21 are eligible to participate in the KSOP. Employees become fully vested after five years of service. Contributions
to the KSOP, 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 employee stock ownership
plan portion of the KSOP during the years ended December 31, 2006, 2005 and 2004.

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Note 14. EMPLOYEE BENEFIT PLANS(Continued)

Employee Stock Ownership Plan with 401(k) Provisions (KSOP) (Continued)



The Companys 401(k) savings and retirement provision to the KSOP includes substantially all employees. The employees
attain vesting in the Companys contribution over six years. Employees may contribute up to 75% of their compensation, subject to certain limits based on federal tax laws. Under the terms of the KSOP, the Company may make matching contributions
at the discretion of the Board of Directors. Matching Contributions to the 401(k) portion of the KSOP by the Company amounted to $166,000, $227,000 and $186,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

Note 15. CONCENTRATION OF CREDIT RISK

The Company
services customers in Redlands, Brea, Escondido, Palm Desert, Irwindale and Temecula and has no concentration of deposits with any one particular customer or industry.

At December 31, 2006 and 2005, the Company had approximately $17,164,000 and $15,805,000, respectively, of noninterest-bearing deposits with its correspondent banks. At December 31, 2006 and 2005,
approximately 59% and 58%, respectively, of the Companys loan portfolio consisted of construction and development, residential, commercial and multi-family loans.

Note 16. SALARY CONTINUATION AGREEMENTS

The Company has entered into salary continuation agreements,
which provide for payments to certain officers at the age of retirement. Included in other liabilities at December 31, 2006 and 2005, respectively, is $796,000 and $443,000 of deferred compensation related to these agreements. The plans are
funded through life insurance policies that generate a cash surrender value to fund the future benefits.

Note 17. SHAREHOLDERS EQUITY

Minimum Regulatory Requirements

The Company (on a consolidated basis) and the Bank 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and its subsidiary must meet specific capital guidelines that involve quantitative measures of the Company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 the Bank 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, 2006
and 2005, that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2006, the
most recent notification from the Federal Deposit Insurance Corporation categorized the Bank and Company 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

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Note 17. SHAREHOLDERS EQUITY(Continued)

Minimum Regulatory Requirements (Continued)



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 Companys or the Banks category.

The Companys and the Banks actual capital amounts and ratios as of
December 31, 2006 and 2005 are as follows:



|                                        |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|--------------------------------------- |  | ------ | ------ | ----- | ------------------------- | - | ------ | -------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                        |  | Actual |        |       | MinimumCapitalRequirement |   |        | Minimum To BeWell CapitalizedUnder PromptCorrective ActionProvisions |       
|                                        |  | Amount |        | Ratio |                           |   | Amount |                                                                      | Ratio  |  |      | Amount |  | Ratio |       
|As of December 31, 2006:                |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Total capital to risk-weighted assets:  |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  | $      | 61,806 |       | 12.92                     | % |        | $                                                                    | 32,284 |  | 8.00 | %      |  | $     | 47,855 |  | 10.00 | %
|1st Centennial Bank                     |  |        | 59,691 |       | 12.47                     | % |        |                                                                      | 32,284 |  | 8.00 | %      |  |       | 47,855 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |        | 51,827 |       | 10.83                     | % |        |                                                                      | 19,142 |  | 4.00 | %      |  |       | 28,713 |  | 6.00  | %
|1st Centennial Bank                     |  |        | 53,701 |       | 11.22                     | % |        |                                                                      | 19,142 |  | 4.00 | %      |  |       | 28,713 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |        | 51,827 |       | 9.46                      | % |        |                                                                      | 21,905 |  | 4.00 | %      |  |       | 27,381 |  | 5.00  | %
|1st Centennial Bank                     |  |        | 53,701 |       | 9.82                      | % |        |                                                                      | 21,885 |  | 4.00 | %      |  |       | 27,356 |  | 5.00  | %
|As of December 31, 2005:                |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Total capital to risk-weighted assets:  |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  | $      | 52,283 |       | 12.86                     | % |        | $                                                                    | 32,524 |  | 8.00 | %      |  | $     | 40,656 |  | 10.00 | %
|1st Centennial Bank                     |  |        | 50,779 |       | 12.49                     | % |        |                                                                      | 32,525 |  | 8.00 | %      |  |       | 40,656 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |        | 40,327 |       | 9.92                      | % |        |                                                                      | 16,261 |  | 4.00 | %      |  |       | 24,391 |  | 6.00  | %
|1st Centennial Bank                     |  |        | 45,697 |       | 11.24                     | % |        |                                                                      | 16,262 |  | 4.00 | %      |  |       | 24,393 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |        |        |       |                           |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated                            |  |        | 40,327 |       | 9.02                      | % |        |                                                                      | 17,883 |  | 4.00 | %      |  |       | 22,354 |  | 5.00  | %
|1st Centennial Bank                     |  |        | 45,697 |       | 10.21                     | % |        |                                                                      | 17,903 |  | 4.00 | %      |  |       | 22,379 |  | 5.00  | %

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 that may be paid at any date is generally limited to the retained earnings of the Bank; 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. As of December 31, 2006, the Company does not have any outstanding loans or advances with the Bank. The Companys policy in reference to loans or advances between the Company and the Bank
states that any loans will be made in accordance with applicable federal and state regulations regarding affiliate transactions and generally accepted accounting principles.

Note 19. DIVIDENDS PAID

The Company did not pay a cash dividend in 2006 or 2005. During 2006, the
Company made a 50% stock distribution, which resulted in the issuance of 1,062,656 shares. During 2005, the Board of Directors approved a

79



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 19. DIVIDENDS PAID(Continued)



7% stock dividend, which resulted in the issuance of 135,815 shares. During 2004, the Company issued a 25% stock dividend, accounted for as a 5 for 4 stock
split, which resulted in the issuance of 378,664 shares.

Note 20. OTHER OPERATING EXPENSES

The following sets forth the breakdown of other operating expenses for the years ended December 31:



|                             |  |      |       |      |   |       |  |   |      
|---------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                             |  | 2006 |       | 2005 |   | 2004 
|Marketing and advertising    |  | $    | 1,293 |      | $ | 1,558 |  | $ | 702  
|Data processing fees         |  |      | 837   |      |   | 1,056 |  |   | 837  
|Professional fees            |  |      | 1,081 |      |   | 1,114 |  |   | 844  
|Postage, telephone, supplies |  |      | 557   |      |   | 594   |  |   | 555  
|Directors fees              |  |      | 220   |      |   | 239   |  |   | 187  
|Other operating expense      |  |      | 1,859 |      |   | 2,056 |  |   | 1,580
|                             |  |      |       |      |   |       |  |   |      
|                             |  | $    | 5,847 |      | $ | 6,617 |  | $ | 4,705
|                             |  |      |       |      |   |       |  |   |      

Note 21. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

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

STATEMENTS OF CONDITION

December 31, 2006 and 2005

(Dollars In Thousands)



|                                                |  |      |        |      |   |       
|----------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                |  | 2006 |        | 2005
|ASSETS                                          |  |      |        |      |   |       
|Cash                                            |  | $    | 1,432  |      | $ | 1,008 
|Investment in subsidiaries                      |  |      | 58,527 |      |   | 50,425
|Other assets                                    |  |      | 1,061  |      |   | 750   
|                                                |  |      |        |      |   |       
|Total assets                                    |  | $    | 61,020 |      | $ | 52,183
|                                                |  |      |        |      |   |       
|LIABILITIES AND SHAREHOLDERS EQUITY            |  |      |        |      |   |       
|Subordinated notes payable to subsidiary trusts |  | $    | 18,306 |      | $ | 18,306
|Other liabilities                               |  |      | 517    |      |   | 456   
|                                                |  |      |        |      |   |       
|                                                |  |      | 18,823 |      |   | 18,762
|                                                |  |      |        |      |   |       
|Shareholders equity                            |  |      |        |      |   |       
|Common stock                                    |  |      | 27,998 |      |   | 26,803
|Retained earnings                               |  |      | 14,038 |      |   | 6,617 
|Accumulated other comprehensive income          |  |      | 161    |      |   | 1     
|                                                |  |      |        |      |   |       
|Total shareholders equity                      |  |      | 42,197 |      |   | 33,421
|                                                |  |      |        |      |   |       
|Total liabilities and shareholders equity      |  | $    | 61,020 |      | $ | 52,183
|                                                |  |      |        |      |   |       

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 21. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY(Continued)



STATEMENTS OF EARNINGS

Years Ended December 31, 2006, 2005 and 2004

(Dollars In Thousands)



|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                             |  | 2006 |        |   | 2005 |   |        | 2004 | 
|Income:                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Interest income on capital securities of subsidiary trusts   |  | $    | 42     |   |      | $ | 27     |      |  | $ | 16     |  
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Expense:                                                     |  |      |        |   |      |   |        |      |  |   |        |  
|Interest expense                                             |  |      | 1,443  |   |      |   | 975    |      |  |   | 628    |  
|Other expense                                                |  |      | 1,183  |   |      |   | 707    |      |  |   | 660    |  
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Total expense                                                |  |      | 2,626  |   |      |   | 1,682  |      |  |   | 1,288  |  
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Loss before equity in undistributed net income of subsidiary |  |      | (2,584 | ) |      |   | (1,655 | )    |  |   | (1,272 | )
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Equity in undistributed net income of subsidiary             |  |      | 8,957  |   |      |   | 5,996  |      |  |   | 3,722  |  
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Tax benefit                                                  |  |      | 1,054  |   |      |   | 742    |      |  |   | 570    |  
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                                   |  | $    | 7,427  |   |      | $ | 5,083  |      |  | $ | 3,020  |  
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004

(Dollars In Thousands)



|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                             |  | 2006 |        |   | 2005 |   |        | 2004 | 
|OPERATING ACTIVITIES                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                                                   |  | $    | 7,427  |   |      | $ | 5,083  |      |  | $ | 3,020  |  
|Adjustment to reconcile net income to net cash used in operating activities: |  |      |        |   |      |   |        |      |  |   |        |  
|Equity in undistributed income of subsidiaries                               |  |      | (8,957 | ) |      |   | (5,996 | )    |  |   | (3,722 | )
|Amortization                                                                 |  |      | 2      |   |      |   | 1      |      |  |   | 1      |  
|Fair value of options and restricted stock awards, in noninterest expense    |  |      | 578    |   |      |   | 49     |      |  |   | 51     |  
|Decrease (increase) in other assets                                          |  |      | (298   | ) |      |   | (171   | )    |  |   | 124    |  
|Increase in other liabilities                                                |  |      | 61     |   |      |   | 237    |      |  |   | 148    |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash used in operating activities                                        |  |      | (1,187 | ) |      |   | (797   | )    |  |   | (378   | )
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|INVESTING ACTIVITIES                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Payments from (advances to) subsidiaries                                     |  | $    | 1,000  |   |      | $ | (5,000 | )    |  | $ | (7,000 | )
|Advances to subsidiary trusts                                                |  |      |       |   |      |   | (155   | )    |  |   | (233   | )
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) investing activities                          |  |      | 1,000  |   |      |   | (5,155 | )    |  |   | (7,233 | )
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|FINANCING ACTIVITIES                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net proceeds from subordinated notes payable to subsidiary trusts            |  |      |       |   |      |   | 5,155  |      |  |   | 7,145  |  
|Cash dividends paid in lieu of fractional shares                             |  |      | (6     | ) |      |   | (11    | )    |  |   | (6     | )
|Proceeds from exercise of stock options                                      |  |      | 617    |   |      |   | 385    |      |  |   | 701    |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash provided by financing activities                                    |  |      | 611    |   |      |   | 5,529  |      |  |   | 7,840  |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                         |  |      | 424    |   |      |   | (423   | )    |  |   | 229    |  
|Cash and cash equivalents, beginning of year                                 |  |      | 1,008  |   |      |   | 1,431  |      |  |   | 1,202  |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents, end of year                                       |  | $    | 1,432  |   |      | $ | 1,008  |      |  | $ | 1,431  |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 22. FEDERAL HOME LOAN BANK LINE OF CREDIT

The Company is a member of the Federal Home Loan Bank of San Francisco (FHLB). The Company 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. A standard credit program and a securities-backed credit program on qualified collateral secure all borrowings from the FHLB. The
Company had no outstanding advances at December 31, 2006 and December 31, 2005.

Note 23. 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 Company.

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 value.

Interest-Bearing Deposits in Financial InstitutionsThe carrying amounts of
interest-bearing deposits are estimated using discounted cash flow analyses and interest rates currently being offered for interest-bearing deposits with similar terms.

Investment SecuritiesFair values for securities are based on quoted market prices.

Restricted StockThe carrying value of restricted stock approximate fair value.

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

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 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-



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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 23. FAIR VALUE OF FINANCIAL INSTRUMENTS(Continued)



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.

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

Short-Term BorrowingsThe carrying amounts for short-term borrowings approximate the estimated fair value of such
liabilities.

Subordinated Notes Payable to Subsidiary TrustsThe carrying amounts for subordinated notes
payable to subsidiary trusts approximate the estimated fair value of such liabilities.

Off-Balance-Sheet
InstrumentsThe carrying amount of commitments to extend credit approximate fair value.

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



|                                                           |  |                |         |            |   |                |  |            |         |  |   |        
|---------------------------------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                                           |  | December 31,  
|                                                           |  | 2006           |         | 2005      
|                                                           |  | CarryingAmount |         | Fair Value |   | CarryingAmount |  | Fair Value
|Financial assets:                                          |  |                |         |            |   |                |  |            |         |  |   |        
|Cash and cash equivalents                                  |  | $              | 21,285  |            | $ | 21,285         |  | $          | 38,367  |  | $ | 38,367 
|Interest bearing deposits in financial institutions        |  |                | 2,922   |            |   | 3,224          |  |            | 2,334   |  |   | 2,452  
|Investment securities, available for sale                  |  |                | 72,649  |            |   | 72,649         |  |            | 12,208  |  |   | 12,208 
|Restricted stock                                           |  |                | 1,681   |            |   | 1,681          |  |            | 1,620   |  |   | 1,620  
|Loans, net                                                 |  |                | 426,200 |            |   | 424,454        |  |            | 381,153 |  |   | 378,987
|Accrued interest receivable                                |  |                | 3,469   |            |   | 3,469          |  |            | 2,425   |  |   | 2,425  
|Cash surrender value of life insurance                     |  |                | 11,639  |            |   | 11,639         |  |            | 6,735   |  |   | 6,735  
|Financial liabilities:                                     |  |                |         |            |   |                |  |            |         |  |   |        
|Deposits                                                   |  |                | 456,463 |            |   | 452,701        |  |            | 401,275 |  |   | 398,782
|Accrued interest payable                                   |  |                | 432     |            |   | 432            |  |            | 170     |  |   | 170    
|Subordinated notes payable to subsidiary trusts            |  |                | 18,306  |            |   | 18,306         |  |            | 18,306  |  |   | 18,306 
|Off-balance sheet credit related to financial instruments: |  |                |         |            |   |                |  |            |         |  |   |        
|Commitments to extend credit                               |  | $              | 229,492 |            | $ | 229,492        |  | $          | 198,404 |  | $ | 198,404

The fair value estimates presented herein are based on pertinent information available to
management as of December 31, 2006 and 2005. 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.

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1ST CENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 24. QUARTERLY DATA (UNAUDITED)



|                                                    |  |                                               |        |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|--------------------------------------------------- |  | --------------------------------------------- | ------ | -------- | - | -------- |  | -------- | ----- | -------- | - | -------- |  | -------- | ----- | -------- | - | ----- |  | - | ----- |  | - | -----
|                                                    |  | Years Ended December 31,                     
|                                                    |  | 2006                                          |        | 2005    
|                                                    |  | (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                                     |  | $                                             | 11,614 |          | $ | 10,338   |  | $        | 9,799 |          | $ | 8,992    |  | $        | 9,288 |          | $ | 8,518 |  | $ | 8,160 |  | $ | 7,230
|Interest expense                                    |  |                                               | 3,969  |          |   | 3,308    |  |          | 2,764 |          |   | 2,383    |  |          | 2,162 |          |   | 1,992 |  |   | 1,672 |  |   | 1,230
|                                                    |  |                                               |        |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Net interest income                                 |  |                                               | 7,645  |          |   | 7,030    |  |          | 7,035 |          |   | 6,609    |  |          | 7,126 |          |   | 6,526 |  |   | 6,488 |  |   | 6,000
|Provision for loan losses                           |  |                                               | 500    |          |   | 200      |  |          | 155   |          |   | 465      |  |          | 830   |          |   | 300   |  |   | 660   |  |   | 350  
|                                                    |  |                                               |        |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Net interest income after provision for loan losses |  |                                               | 7,145  |          |   | 6,830    |  |          | 6,880 |          |   | 6,144    |  |          | 6,296 |          |   | 6,226 |  |   | 5,828 |  |   | 5,650
|Noninterest income                                  |  |                                               | 621    |          |   | 589      |  |          | 646   |          |   | 1,168    |  |          | 1,236 |          |   | 1,185 |  |   | 1,121 |  |   | 914  
|Noninterest expense                                 |  |                                               | 4,470  |          |   | 4,249    |  |          | 4,560 |          |   | 4,481    |  |          | 4,984 |          |   | 5,268 |  |   | 4,928 |  |   | 4,933
|                                                    |  |                                               |        |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Income before provision for income taxes            |  |                                               | 3,296  |          |   | 3,170    |  |          | 2,966 |          |   | 2,831    |  |          | 2,548 |          |   | 2,143 |  |   | 2,021 |  |   | 1,631
|Provision for income taxes                          |  |                                               | 1,281  |          |   | 1,321    |  |          | 1,119 |          |   | 1,115    |  |          | 1,003 |          |   | 844   |  |   | 792   |  |   | 621  
|                                                    |  |                                               |        |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Net income                                          |  | $                                             | 2,015  |          | $ | 1,849    |  | $        | 1,847 |          | $ | 1,716    |  | $        | 1,545 |          | $ | 1,299 |  | $ | 1,229 |  | $ | 1,010
|                                                    |  |                                               |        |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Earnings per share (basic)23                        |  | $                                             | 0.63   |          | $ | 0.58     |  | $        | 0.58  |          | $ | 0.54     |  | $        | 0.49  |          | $ | 0.41  |  | $ | 0.39  |  | $ | 0.33 
|                                                    |  |                                               |        |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      
|Earnings per share (diluted)23                      |  | $                                             | 0.57   |          | $ | 0.52     |  | $        | 0.52  |          | $ | 0.51     |  | $        | 0.46  |          | $ | 0.38  |  | $ | 0.36  |  | $ | 0.31 
|                                                    |  |                                               |        |          |   |          |  |          |       |          |   |          |  |          |       |          |   |       |  |   |       |  |   |      

---

|23 | As adjusted to reflect the 50% stock distribution paid on April 3, 2006 to shareholders of record
as of March 3, 2006.
|-- | ----------------------------------------------------------------------------------------------------------------------



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

Not applicable



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

The Companys Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the
Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a15(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, the Companys disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiary 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.

Managements Annual Report on Internal Control over Financial Reporting

Management of the
Company is responsible for the preparation, integrity, and reliability of the consolidated financial statements and related financial information contained in this annual report. The consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based on judgments and estimates of management.

Management has established and is responsible for maintaining effective internal control over financial reporting. The Companys internal control
over financial reporting includes those policies and procedures that:



| | (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect
on the financial statements.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There are inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in
conditions, the effectiveness of internal control may vary over time. The system contains monitoring mechanisms, and actions are taken to correct deficiencies identified.



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Management assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2006. This assessment was based on criteria for effective internal control over financial reporting described in Internal ControlIntegrated Framework published by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2006.

Our assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2006 has been audited by
Hutchinson and Bloodgood LLP, an independent registered public accounting firm, as stated in their report appearing in Item 8.

Changes in Internal
Controls

There were no significant changes in the Companys internal controls over financial reporting or in other factors in the
fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None

PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

The information required to be furnished pursuant to this item with respect to Directors and Executive Officers of the Company will be set forth under the caption Election of Directors in the Companys proxy statement for
the 2007 Annual Meeting of Shareholders (the Proxy Statement), which the Company will file with the SEC within 120 days after the close of the Companys 2006 fiscal year in accordance with SEC Regulation 14A under the Securities
Exchange Act of 1934. Such information is hereby incorporated by reference.

The information required to be furnished pursuant to this item
with respect to compliance with Section 16(a) of the Exchange Act will be set forth under the caption Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement, and is incorporated herein by reference.

The information required to be furnished pursuant to this item with respect to the Companys Code of Ethics and corporate governance
matters will be set forth under the caption Corporate Governance in the Proxy Statement, and is incorporated herein by reference.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information required to
be furnished pursuant to this item will be set forth under the captions Executive Compensation and Compensation Discussion and Analysis in the Proxy Statement, and is incorporated herein by reference.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

Securities Authorized for Issuance Under Equity Compensation Plans

The information required by
Item 12 with respect to securities authorized for issuance under equity compensation plans is set forth under Item 5Market for Registrants Common Equity and Issuer Repurchases of Equity Securities above.



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Other Information Concerning Security Ownership of Certain Beneficial Owners and Management

The remainder of the information required by Item 12 will be set forth under the captions Security Ownership of Certain Beneficial Owners
and Election of Directors in the Proxy Statement, and is incorporated herein by reference.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

The information required to be furnished pursuant to this item will be set forth under the captions Certain Transactions and Corporate Governance in the Proxy Statement, and is incorporated
herein by reference.



|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

The
information required to be furnished pursuant to this item will be set forth under the caption Relationship with Independent AccountantsFees in the Proxy Statement, and is incorporated herein by reference.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

(a) Exhibits



|            |  |                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibits                                                                            
|            | 
|3.1         |  | Articles of Incorporation of the Company24                                                         
|            | 
|3.2         |  | Amendment to Articles of Incorporation of the Company25                                            
|            | 
|3.3         |  | Amendment to Articles of Incorporation of the Company26                                            
|            | 
|3.4         |  | Restated By-Laws of the Company27                                                                  
|            | 
|10.1        |  | Form of Indemnification Agreement28                                                                
|            | 
|10.2        |  | Amended and Restated Stock Incentive Plan29                                                        
|            | 
|10.3        |  | 1st Centennial Bank Employee Stock Ownership Plan (with 401(k) provisions) dated August 1, 200430  
|            | 
|10.4        |  | Employment Agreement of Beth Sanders dated December 1, 200431                                      
|            | 
|10.5        |  | Employment Agreement of Suzanne Dondanville dated December 1, 200432                               
|            | 
|10.6        |  | Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200133                   
|            | 
|10.7        |  | Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200234                     
|            | 
|10.8        |  | Salary Continuation Agreement of Cliff Schoonover dated December 17, 200235                        
|            | 
|10.9        |  | Amendment to Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200136      
|            | 
|10.10       |  | Amendment to Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200237        
|            | 
|10.11       |  | Amendment to Salary Continuation Agreement of Cliff Schoonover dated December 17, 200238           
|            | 
|10.12       |  | Salary Continuation Agreement of Thomas E. Vessey dated April 7, 200639                            
|            | 
|10.13       |  | Salary Continuation Agreement of John P. Lang dated April 7, 200640                                
|            | 
|10.14       |  | Form of Agreement between 1stCentennial Bank and Officers
with respect to Death Benefit.41         
|            | 
|10.15       |  | Indenture for Trust Preferred Securities dated September 28, 200542                                
|            | 
|10.16       |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated September 28, 200543
|            | 
|10.17       |  | Guarantee Agreement for Trust Preferred Securities dated September 28, 200544                      
|            | 
|10.18       |  | Indenture for Trust Preferred Securities dated January 15, 200445                                  
|            | 
|10.19       |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated January 15, 200446  
|            | 
|10.20       |  | Guarantee Agreement for Trust Preferred Securities dated January 15, 200447                        
|            | 
|10.21       |  | Indenture for Trust Preferred Securities dated July 11, 200248                                     
|            | 
|10.22       |  | Amended and Restated Declaration of Trust for trust preferred securities dated July 11, 200249     
|            | 
|10.23       |  | Guarantee Agreement for Trust Preferred Securities dated July 11, 200250                           



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|            |  |                                                                       
|----------- |  | ----------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibits                                               
|            | 
|21.1        |  | Subsidiaries of 1stCentennial Bancorp                                 
|            | 
|23.1        |  | Consent of Hutchinson and 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)



---

|24 | Incorporated by reference to exhibit of the same number on Form S-4 dated October 20, 1999.
|-- | -------------------------------------------------------------------------------------------

|25 | Incorporated by reference to exhibit of the same number on Form 10-QSB for the quarter ended
June 30, 2002.
|-- | -----------------------------------------------------------------------------------------------------------

|26 | Incorporated by reference to exhibit of the same number on Form SB-2 dated March 13, 2003.
|-- | ------------------------------------------------------------------------------------------

|27 | Incorporated by reference to exhibit of the same number on Form 8-K dated January 19, 2007.
|-- | -------------------------------------------------------------------------------------------

|28 | Incorporated by reference to exhibit 10.2 on Form SB-2 dated March 21, 2001.
|-- | ----------------------------------------------------------------------------

|29 | Incorporated by reference to exhibit 10.10 on Form 10-KSB for the year ended December 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|30 | Incorporated by reference to exhibit 10.9 on Form 10-KSB for the year ended December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------

|31 | Incorporated by reference to exhibit 10.31 on Form 10-KSB for the year ended December 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|32 | Incorporated by reference to exhibit 10.32 on Form 10-KSB for the year ended December 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|33 | Incorporated by reference to exhibit 10.30 on Form 10-QSB for the quarter ended September 30, 2004.
|-- | ---------------------------------------------------------------------------------------------------

|34 | Incorporated by reference to exhibit 10.17 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------

|35 | Incorporated by reference to exhibit 10.18 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------

|36 | Incorporated by reference to exhibit 10.25 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------

|37 | Incorporated by reference to exhibit 10.24 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------

|38 | Incorporated by reference to exhibit 10.26 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------

|39 | Incorporated by reference to exhibit 99.1 on Form 8-K dated April 11, 2006.
|-- | ---------------------------------------------------------------------------

|40 | Incorporated by reference to exhibit 99.1 on Form 8-K dated April 11, 2006.
|-- | ---------------------------------------------------------------------------

|41 | Incorporated by reference to exhibit 99.1 on Form 8-K dated November 3, 2006.
|-- | -----------------------------------------------------------------------------

|42 | Incorporated by reference to exhibit 10.35 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------

|43 | Incorporated by reference to exhibit 10.36 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------

|44 | Incorporated by reference to exhibit 10.37 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------

|45 | Incorporated by reference to exhibit 10.25 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|46 | Incorporated by reference to exhibit 10.26 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|47 | Incorporated by reference to exhibit 10.27 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|48 | Incorporated by reference to exhibit 10.17 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------

|49 | Incorporated by reference to exhibit 10.18 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------

|50 | Incorporated by reference to exhibit 10.19 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------

(b) Financial Statement Schedules

Schedules to the financial statements are omitted because the required information is not applicable or because the required information is presented in the Companys Consolidated Financial Statements or related
notes.



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##### 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 8thday of March 2007.



/s/    THOMAS E. VESSEYThomas E. Vessey President and Chief Executive Officer/s/    BETH
SANDERSBeth Sanders Executive Vice President and Chief 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 and on the dates indicated.



|                                               |  |                                                 |  |               
|---------------------------------------------- |  | ----------------------------------------------- |  | --------------
|Signature:                                     |  | Title:                                          |  | Date:         
|                                               |  |                                                
|/s/    JAMES R.
APPLETON James R. Appleton     |  | Director                                        |  | March 08, 2007
|                                               |  |                                                
|/s/    BRUCE J.
BARTELLS Bruce J. Bartells     |  | Director                                        |  | March 08, 2007
|                                               |  |                                                
|/s/    CAROLE H.
BESWICK Carole H. Beswick     |  | Director                                        |  | March 08, 2007
|                                               |  |                                                
|/s/    LARRY
JACINTO Larry Jacinto             |  | Director                                        |  | March 08, 2007
|                                               |  |                                                
|/s/    RONALD J.
JEFFREY Ronald J. Jeffrey     |  | Director                                        |  | March 08, 2007
|                                               |  |                                                
|/s/    WILLIAM A.
MCCALMON William A. McCalmon |  | Director                                        |  | March 08, 2007
|                                               |  |                                                
|/s/    PATRICK J.
MEYER Patrick J. Meyer       |  | Chairman of the Board                           |  | March 08, 2007
|                                               |  |                                                
|/s/    STANLEY C.
WEISSER Stanley C. Weisser   |  | Director                                        |  | March 08, 2007
|                                               |  |                                                
|/s/    DOUGLAS F.
WELEBIR Douglas F. Welebir   |  | Director                                        |  | March 08, 2007
|                                               |  |                                                
|/s/    THOMAS E.
VESSEY Thomas E. Vessey       |  | Director, President and Chief Executive Officer |  | March 08, 2007



90