##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-QSB



Quarterly report under section 13 or 15(d)

of the Securities Exchange Act of 1934



For the quarterly period ended September 30, 2003



Commission file number: 000-29105



---



1stCENTENNIAL BANCORP

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



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



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



---



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ̈



The number of shares of Common Stock of the registrant outstanding as of November 05, 2003 was 1,502,281.



---



---

##### Table of Contents

TABLE OF CONTENTS



|        |  |                                                                                       |  | PAGE
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                      
|PART I  |  |                                                                                       |  |     
|ITEM 1  |  | Consolidated Financial Statements (unaudited)                                         |  | 2   
|ITEM 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|ITEM 3  |  | Controls and Procedures                                                               |  | 34  
|        |  |                                                                                      
|PART II |  |                                                                                       |  |     
|ITEM 1  |  | Legal Proceedings                                                                     |  | 35  
|ITEM 2  |  | Changes in Securities and Use of Proceeds                                             |  | 35  
|ITEM 3  |  | Defaults Upon Senior Securities                                                       |  | 35  
|ITEM 4  |  | Submission of Matters to a Vote of Security Holders                                   |  | 35  
|ITEM 5  |  | Other Information                                                                     |  | 35  
|ITEM 6  |  | Exhibits and Reports on Form 8-K                                                      |  | 36  
|        |  | Signature                                                                             |  | 39  



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



|ITEM 1. |  | CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|------- |  | ---------------------------------------------



1STCENTENNIAL BANCORP AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CONDITION

September 30, 2003 & December 31, 2002



|Dollar amounts in thousands                                                                                                                                               |  | 2003        |         | 2002
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ----
|                                                                                                                                                                          |  | (unaudited) |         |     
|ASSETS                                                                                                                                                                    |  |             |         |     
|Cash and due from banks                                                                                                                                                   |  | $           | 9,686   |     
|Federal funds sold                                                                                                                                                        |  |             | 9,535   |     
|                                                                                                                                                                          |  |             |         |     
|Total cash and cash equivalents                                                                                                                                           |  |             | 19,221  |     
|Interest-bearing deposits in financial institutions                                                                                                                       |  |             | 4,991   |     
|Investment securities, available for sale                                                                                                                                 |  |             | 31,793  |     
|Federal Home Loan Bank stock                                                                                                                                              |  |             | 363     |     
|Loans, net                                                                                                                                                                |  |             | 163,187 |     
|Accrued interest receivable                                                                                                                                               |  |             | 855     |     
|Premises and equipment, net                                                                                                                                               |  |             | 2,601   |     
|Goodwill                                                                                                                                                                  |  |             | 4,180   |     
|Cash surrender value of life insurance                                                                                                                                    |  |             | 6,145   |     
|Other assets                                                                                                                                                              |  |             | 1,292   |     
|                                                                                                                                                                          |  |             |         |     
|Total assets                                                                                                                                                              |  | $           | 234,628 |     
|                                                                                                                                                                          |  |             |         |     
|                                                                                                                                                                          |  |            
|LIABILITIES                                                                                                                                                               |  |             |         |     
|Deposits:                                                                                                                                                                 |  |             |         |     
|Noninterest-bearing                                                                                                                                                       |  | $           | 60,858  |     
|Interest-bearing and NOW accounts                                                                                                                                         |  |             | 56,525  |     
|Savings                                                                                                                                                                   |  |             | 19,283  |     
|Time deposits $100,000 or greater                                                                                                                                         |  |             | 39,005  |     
|Other time deposits                                                                                                                                                       |  |             | 27,738  |     
|                                                                                                                                                                          |  |             |         |     
|Total deposits                                                                                                                                                            |  |             | 203,409 |     
|Accrued interest payable                                                                                                                                                  |  |             | 281     |     
|Other liabilities                                                                                                                                                         |  |             | 1,015   |     
|Borrowings from Federal Home Loan Bank                                                                                                                                    |  |             |        |     
|Redeemable Preferred Securities of Subsidiary trust holding solely Junior Subordinated Debentures                                                                         |  |             | 6,000   |     
|                                                                                                                                                                          |  |             |         |     
|Total liabilities                                                                                                                                                         |  |             | 210,705 |     
|                                                                                                                                                                          |  |             |         |     
|                                                                                                                                                                          |  |            
|STOCKHOLDERS EQUITY                                                                                                                                                      |  |             |         |     
|Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 1,502,281 and 1,202,517 shares at September 30,
2003 and December 31, 2002, respectively |  |             | 20,456  |     
|Retained earnings                                                                                                                                                         |  |             | 3,092   |     
|Accumulated other comprehensive income                                                                                                                                    |  |             | 375     |     
|                                                                                                                                                                          |  |             |         |     
|Total stockholders equity                                                                                                                                                |  |             | 23,923  |     
|                                                                                                                                                                          |  |             |         |     
|Total liabilities and stockholders equity                                                                                                                                |  | $           | 234,628 |     
|                                                                                                                                                                          |  |             |         |     



2



---

##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF EARNINGS

Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)



|                                                      |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|----------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------
|Dollar amounts in thousands, except per share amounts |  | 2003                            |       | 2002                          
|Interest income:                                      |  |                                 |       |                               
|Interest and fees on loans                            |  | $                               | 3,849 |                               
|Deposits in financial institutions                    |  |                                 | 64    |                               
|Federal funds sold                                    |  |                                 | 37    |                               
|Investments                                           |  |                                 | 236   |                               
|                                                      |  |                                 |       |                               
|Total interest income                                 |  |                                 | 4,186 |                               
|                                                      |  |                                 |       |                               
|Interest expense:                                     |  |                                 |       |                               
|Demand and savings deposits                           |  |                                 | 126   |                               
|Time deposits $100,000 or greater                     |  |                                 | 211   |                               
|Other time deposits                                   |  |                                 | 98    |                               
|Interest on borrowed funds                            |  |                                 | 82    |                               
|                                                      |  |                                 |       |                               
|Total interest expense                                |  |                                 | 517   |                               
|                                                      |  |                                 |       |                               
|Net interest income                                   |  |                                 | 3,669 |                               
|Provision for loan losses                             |  |                                 | 150   |                               
|                                                      |  |                                 |       |                               
|Net interest income after provision for loan losses   |  |                                 | 3,519 |                               
|                                                      |  |                                 |       |                               
|Noninterest income:                                   |  |                                 |       |                               
|Customer service fees                                 |  |                                 | 297   |                               
|Gain from sale of loans                               |  |                                 | 363   |                               
|Other income                                          |  |                                 | 184   |                               
|                                                      |  |                                 |       |                               
|Total noninterest income                              |  |                                 | 844   |                               
|                                                      |  |                                 |       |                               
|Noninterest expense:                                  |  |                                 |       |                               
|Salaries and employee benefits                        |  |                                 | 2,136 |                               
|Net occupancy expense                                 |  |                                 | 388   |                               
|Other operating expense                               |  |                                 | 992   |                               
|                                                      |  |                                 |       |                               
|Total noninterest expense                             |  |                                 | 3,516 |                               
|                                                      |  |                                 |       |                               
|Income before provision for income taxes              |  |                                 | 847   |                               
|Provision for income taxes                            |  |                                 | 300   |                               
|                                                      |  |                                 |       |                               
|Net income                                            |  | $                               | 547   |                               
|                                                      |  |                                 |       |                               
|Basic earnings per share                              |  | $                               | 0.36  |                               
|                                                      |  |                                 |       |                               
|Diluted earnings per share                            |  | $                               | 0.35  |                               
|                                                      |  |                                 |       |                               



3



---

##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Nine Months Ended September 30, 2003 and 2002 (unaudited)



|Dollar amounts in thousands                                                                  |  | CommonStock |        | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  | Total |    
|-------------------------------------------------------------------------------------------- |  | ----------- | ------ | ---------------- | - | ------ | ------------------------------------------ |  | ----- | ---
|BALANCE, DECEMBER 31, 2001                                                                   |  | $           | 12,964 |                  | $ | 2,196  |                                            |  | $     | 112
|Comprehensive income:                                                                        |  |             |        |                  |   |        |                                            |  |       |    
|Net income                                                                                   |  |             |       |                  |   | 1,211  |                                            |  |       |   
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |             |       |                  |   |       |                                            |  |       | 234
|                                                                                             |  |             |        |                  |   |        |                                            |  |       |    
|Total comprehensive income                                                                   |  |             |        |                  |   |        |                                            |  |       |    
|                                                                                             |  |             |        |                  |   |        |                                            |  |       |    
|Stock dividend                                                                               |  |             | 942    |                  |   | (942   | )                                          |  |       |   
|Cash paid in lieu of fractional shares                                                       |  |             |       |                  |   | (3     | )                                          |  |       |   
|Exercise of stock options, including tax benefit                                             |  |             | 5      |                  |   |       |                                            |  |       |   
|                                                                                             |  |             |        |                  |   |        |                                            |  |       |    
|BALANCE, SEPTEMBER 30, 2002                                                                  |  | $           | 13,911 |                  | $ | 2,462  |                                            |  | $     | 346
|                                                                                             |  |             |        |                  |   |        |                                            |  |       |    
|BALANCE, DECEMBER 31, 2002                                                                   |  | $           | 13,913 |                  | $ | 2,957  |                                            |  | $     | 323
|Comprehensive income:                                                                        |  |             |        |                  |   |        |                                            |  |       |    
|Net income                                                                                   |  |             |       |                  |   | 1,488  |                                            |  |       |   
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |             |       |                  |   |       |                                            |  |       | 52 
|                                                                                             |  |             |        |                  |   |        |                                            |  |       |    
|Total comprehensive income1                                                                  |  |             |        |                  |   |        |                                            |  |       |    
|                                                                                             |  |             |        |                  |   |        |                                            |  |       |    
|Stock dividend                                                                               |  |             | 1,347  |                  |   | (1,347 | )                                          |  |       |   
|Cash paid in lieu of Fractional shares                                                       |  |             |       |                  |   | (6     | )                                          |  |       |   
|225,000 shares common stock  New Issue                                                      |  |             | 4,871  |                  |   |        |                                            |  |       |    
|Private placement  Common stock                                                             |  |             | 165    |                  |   |        |                                            |  |       |    
|(See Note 6)                                                                                 |  |             |        |                  |   |        |                                            |  |       |    
|Exercise of stock options, including tax benefit                                             |  |             | 160    |                  |   |       |                                            |  |       |   
|                                                                                             |  |             |        |                  |   |        |                                            |  |       |    
|BALANCE, SEPTEMBER 30, 2003                                                                  |  | $           | 20,456 |                  | $ | 3,092  |                                            |  | $     | 375
|                                                                                             |  |             |        |                  |   |        |                                            |  |       |    

---

|1 | Change in net unrealized gain on investment securities available for sale, after tax effects for the three months ended September 30, 2003 and 2002 was $80,000 and
$34,000, respectively, and $375,000 and $346,000 for the nine months ended September 30, 2003 and 2002 respectively. This resulted in total comprehensive income of $627,000 and $452,000 for the three months ended September 30, 2003 and 2002
respectively, and $1,540,000 and $1,445,000 for the nine months ended September 30, 2003 and 2002 respectively.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4



---

##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2003 and 2002 (unaudited)



|Dollar amounts in thousands                                                       |  | 2003 |         |   | 2002 |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |         |   |      |  
|Net income                                                                        |  | $    | 1,488   |   |      | $
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |  
|Depreciation and amortization                                                     |  |      | 500     |   |      |  
|Provision for loan losses                                                         |  |      | 360     |   |      |  
|Loss from sale of securities                                                      |  |      | 5       |   |      |  
|Gain from sale of loans                                                           |  |      | (690    | ) |      |  
|Amortization of deferred loan fees                                                |  |      | (603    | ) |      |  
|Amortization of excess purchase value of deposits                                 |  |      | (109    | ) |      |  
|Amortization of excess purchase value of loans                                    |  |      |        |   |      |  
|Deferred income tax (benefit) provision                                           |  |      | (34     | ) |      |  
|Amortization of premiums on investment securities available for sale              |  |      | 425     |   |      |  
|Increase in cash surrender value of life insurance                                |  |      | (235    | ) |      |  
|Decrease (increase) in assets:                                                    |  |      |         |   |      |  
|Accrued interest receivable                                                       |  |      | (182    | ) |      |  
|Other assets                                                                      |  |      | 51      |   |      |  
|Increase (decrease) in liabilities:                                               |  |      |         |   |      |  
|Accrued interest payable                                                          |  |      | 17      |   |      |  
|Other liabilities                                                                 |  |      | (198    | ) |      |  
|                                                                                  |  |      |         |   |      |  
|Net cash provided by operating activities                                         |  |      | 795     |   |      |  
|                                                                                  |  |      |         |   |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |         |   |      |  
|Net decrease in interest-bearing deposits in financial institutions               |  |      | 160     |   |      |  
|Activity in available for sale securities:                                        |  |      |         |   |      |  
|Net sales and maturities                                                          |  |      | 651     |   |      |  
|Purchases of Federal Home Loan Bank stock                                         |  |      | (34     | ) |      |  
|Net increase in loans                                                             |  |      | (21,142 | ) |      |  
|Additions to bank premises and equipment                                          |  |      | (475    | ) |      |  
|                                                                                  |  |      |         |   |      |  
|Net cash used in investing activities                                             |  |      | (20,840 | ) |      |  
|                                                                                  |  |      |         |   |      |  



5



---

##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Nine Months Ended September 30, 2003 and 2002 (unaudited)



|Dollar amounts in thousands                               |  | 2003 |        |   | 2002 |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | -
|CASH FLOWS FROM FINANCING ACTIVITIES                      |  |      |        |   |      |  
|Net increase in demand and savings deposits               |  | $    | 16,109 |   |      | $
|Net increase (decrease) in time deposits                  |  |      | 4,112  |   |      |  
|Proceeds from Federal Home Loan Bank borrowing            |  |      |       |   |      |  
|Repayment of long-term debt                               |  |      |       |   |      |  
|Issuance of Trust Preferred Securities                    |  |      |        |   |      |  
|Net proceeds from common stock issuance                   |  |      | 4,871  |   |      |  
|Net proceeds from private placement common stock issuance |  |      | 130    |   |      |  
|Cash paid in lieu of fractional shares                    |  |      | (6     | ) |      |  
|Proceeds from exercise of stock options                   |  |      | 30     |   |      |  
|                                                          |  |      |        |   |      |  
|Net cash provided by financing activities                 |  |      | 25,246 |   |      |  
|                                                          |  |      |        |   |      |  
|Net (decrease) increase in cash and cash equivalents      |  |      | 5,201  |   |      |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD            |  |      | 14,020 |   |      |  
|                                                          |  |      |        |   |      |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                  |  | $    | 19,221 |   |      | $
|                                                          |  |      |        |   |      |  
|SUPPLEMENTARY INFORMATION                                 |  |      |        |   |      |  
|Interest paid                                             |  | $    | 1,602  |   |      | $
|                                                          |  |      |        |   |      |  
|Income taxes paid                                         |  | $    | 1,020  |   |      | $
|                                                          |  |      |        |   |      |  



6



---

##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003



Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The unaudited financial information included herein has been prepared in conformity with the
accounting principles and practices of 1stCentennial Bancorps (the Company) consolidated
financial statements, Note 1, included in the Annual Report for the year ended December 31, 2002. The accompanying interim consolidated financial statements contained herein are unaudited. However, in the opinion of the Company, all adjustments,
consisting of normal recurring items necessary for a fair presentation of the operating results for the periods shown, have been made. The results of operations for the nine months ended September 30, 2003 may not be indicative of operating results
for the year ending December 31, 2003. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications. Cash and cash equivalents consist of cash, due from banks, and federal funds sold.



Note 2. EARNINGS PER SHARE



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



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



|                                                                   |  | Earnings per share calculation For the three months ended September 30, (In thousands, except per share
amounts)
|------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------
|                                                                   |  | 2003                                                                                                            
|                                                                   |  | NetIncome                                                                                                       
|Basic earnings per share                                           |  | $                                                                                                               
|                                                                   |  |                                                                                                                 
|Effect of dilutive shares: assumed exercise of outstanding options |  |                                                                                                                 
|                                                                   |  |                                                                                                                 
|Diluted earnings per share                                         |  | $                                                                                                               



7



---

##### Table of Contents

|                                                                   |  | Earnings per share calculation For the nine months ended September 30, (In thousands, except per share
amounts) |      
|------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------- | -----
|                                                                   |  | 2003                                                                                                            |      
|                                                                   |  | NetIncome                                                                                                       |      
|Basic earnings per share                                           |  | $                                                                                                               | 1,488
|                                                                   |  |                                                                                                                 |      
|Effect of dilutive shares: assumed exercise of outstanding options |  |                                                                                                                 |     
|                                                                   |  |                                                                                                                 |      
|Diluted earnings per share                                         |  | $                                                                                                               | 1,488



Note 3. STOCK COMPENSATION PLANS



Stock options issued under the Companys stock option plan have no
intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. Under the Companys stock option plan, compensation cost is recognized to the extent that the quoted market price of the stock on the date
of grant exceeds the amount that the employee is required to pay.



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



|                                |  | Three Months EndingSeptember 30, |         | Nine Months EndingSeptember 30,
|------------------------------- |  | -------------------------------- | ------- | -------------------------------
|                                |  | 2003                             |         | 20022                          
|Net income:                     |  |                                  |         |                                
|As reported                     |  | $                                | 547,000 |                                
|Pro forma                       |  |                                  | 533,000 |                                
|                                |  |                                  |         |                                
|Compensation cost, net of taxes |  | $                                | 14,000  |                                
|                                |  |                                  |         |                                
|Basic earnings per share:       |  |                                  |         |                                
|As reported                     |  | $                                | 0.36    |                                
|Pro forma                       |  |                                  | 0.35    |                                
|                                |  |                                  |         |                                
|Diluted earnings per share:     |  |                                  |         |                                
|As reported                     |  | $                                | 0.35    |                                
|Pro forma                       |  |                                  | 0.34    |                                

---

|2 | The 2002 earnings per share calculations have been adjusted for the 5% stock dividend declared to shareholders of record on February 7, 2003, and distributed March
7, 2003.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



8



---

##### Table of Contents

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The
following assumptions were used for options granted during the first nine months of 2003 and 2002; no dividend yield; expected volatility of 20.11% and 17.05% respectively; risk-free interest rate of 4.27% and 3.87% respectively, and expected life
of ten years for both.



Note 4. OFF-BALANCE SHEET COMMITMENTS



In the normal course of business, there are various commitments
outstanding, such as commitments to extend credit, which are not reflected in the financial statements. At September 30, 2003 and December 31, 2002, such commitments included approximately $1,564,000 and $130,000, respectively, of standby letters of
credit, approximately $91,842,000 and $67,545,000, respectively, of undisbursed lines of credit and undisbursed loans in process, and $1,531,000 and $1,424,000 respectively of available credit card lines. The Companys exposure to credit loss
is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.



Note 5. MERGER OF PALOMAR COMMUNITY BANK AND 1ST CENTENNIAL BANK



On May 24, 2002 Palomar Community Bank, which was previously a separate wholly-owned subsidiary of 1st Centennial Bancorp, surrendered its
state charter and was merged into and became a branch of 1st Centennial Bank. 1st Centennial Bancorp initially acquired Palomar Community Bank on August 17, 2001.



Note 6. LAWSUIT SETTLEMENT



Refer to June 30, 2003 Form 10-QSB filed on August 13, 2003, under the caption Legal proceedings on page 35.



Note 7. COMMON STOCK OFFERING



Refer to June 30, 2003 Form 10-QSB filed on August 13, 2003, under the caption Changes
in securities and use of proceeds on page 35.



9



---

##### Table of Contents

|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | ------------------------------------------------------------------------------------



1stCentennial Bancorp (the Company) is the holding company for 1st Centennial Bank (the Bank) in Redlands, California. This discussion focuses primarily on the results of operations of the Company on a consolidated basis for the
three months and nine months ended September 30, 2003 and 2002, and the financial condition of the Company as of September 30, 2003 and December 31, 2002. Consolidated results of operations for the nine months ended September 30, 2003 include
Palomar Community Bank as a branch of 1st Centennial Bank. Consolidated results of operations for the nine months ended September 30, 2002 include Palomar Community Bank as a separate subsidiary of 1stCentennial Bancorp. (See note 5 on page 9.)



Managements discussion and analysis is written to provide greater insight into the results of operations and the financial condition of the Company and its
subsidiaries. For a more complete understanding of the Company and its operations, reference should be made to the financial statements included in this report and in the Companys 2002 Annual Report on Form 10-KSB.



Certain statements in this Report on Form 10-QSB constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), which involve risks and uncertainties. The Companys actual results may differ significantly from the results discussed in
such forward-looking statements. Factors that might cause such a difference include, but are not limited to, possible future deteriorating economic conditions in the Companys areas of operation; interest rate risk associated with volatile
interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of
available-for-sale securities declining significantly in value as interest rates rise or issuers of such securities suffering financial losses; and regulatory risks associated with the variety of current and future regulations to which the
Company is subject. All of these risks could have a material adverse impact on the Companys financial condition, results of operations or prospects, and these risks should be considered in evaluating the Company. For additional information
concerning these factors, refer to the Companys 10-KSB for the year ended December 31, 2002.



CRITICAL ACCOUNTING POLICY



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



10



---

##### Table of Contents

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.



As 1stCentennial adds new products, increases the complexity of its loan portfolio, and expands its geographic coverage, it will
enhance its methodologies to keep pace with the size and complexity of the loan portfolio. Management might report a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses
if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with 1stCentennials financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Managements Discussion and Analysis section entitled Financial Condition - Allowance for Loan
Losses. Although Management believes the level of the allowance as of September 30, 2003 is adequate to absorb losses inherent in the loan portfolio, a decline in the local economy may result in increasing losses that cannot reasonably be
predicted at this time.



RESULTS OF OPERATIONS



The Company reported net income of $547,000 or $0.36 per basic share and $0.35 per diluted
share for the third quarter of 2003 and $1,488,000 or $1.08 per basic share and $1.02 per diluted share for the first nine months of 2003. This compares to net income of $418,000, or $0.33 per basic share and diluted share, and $1,211,000 or $0.96
per basic share and $0.95 per diluted share for the same periods in 2002. Earnings per share for 2002 have been restated to reflect the 5% stock dividend paid in March 2003.



Return on average assets and return on average equity for the third quarter of 2003 was 0.91% and 9.27% respectively, as compared to 0.77%
and 10.07% respectively, for the same period in 2002. Return on average assets and return on average equity for the nine months ended September 30, 2003 was 0.88% and 9.81% respectively, as compared to 0.77% and 10.03% respectively, for the same
period in 2002. Average interest-earning assets for the first nine months of 2003 grew $23.1 million or 13.0%, and net income was $277,000 or 22.9% higher compared to this same period in 2002. This increased the return on average assets. The
decrease in return on average equity is due in part, to more equity in 2003 than in 2002 as a result of the sale and issuance of 225,000 shares in a public stock offering completed in May of 2003. The Companys focus is on steady, controlled
asset growth while at the same time emphasizing increased income from interest and fee sources.



11



---

##### Table of Contents

NET INTEREST INCOME/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 interest rates, inflation, monetary supply, and the strength of the economy, in general, 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.



Third
quarter analysis.The Companys net interest margin was 6.83% for the third quarter of 2003, compared to 7.10% for the same period in 2002. The rate paid on total average interest bearing deposits, other borrowings, and redeemable preferred
securities decreased by 0.21% to 1.36% in the third quarter of 2003, compared to 1.57% for the same period in 2002. The decrease was primarily the result of the higher rate certificates of deposit maturing and renewed at lower interest rates that
reflect the current market, coupled with the replacement of higher interest borrowings with lower interest borrowings. The reason for the decrease in the net interest margin was the decrease in yield in total investments from the current
markets lower interest rates.



The Company reported total interest
income of $4.2 million for the third quarter of 2003, which represented an increase of $487,000 or 13.2%, over total interest income of $3.7 million for the same period in 2002. The increase in total interest income for the third quarter of 2003
compared to 2002 was primarily due to an increase of approximately $611,000 in interest and fees on loans. This increase is attributed to an increase in the average balance of total loans outstanding for the third quarter of 2003, compared to 2002.



The Company reported total interest expense of $517,000 for the third
quarter of 2003, which represented a decrease of $10,000, or 1.9%, from total interest expense of $527,000 for the same period in 2002.



For the third quarter of 2003, net interest income before the provision for loan losses was $3.7 million. This represented an increase of $497,000, or 15.7%, over net
interest income of $3.2 million for the same period in 2002. The increase in net interest income for the third quarter of 2003 compared to 2002 was primarily the result of a $26.0 million increase in average total loans. Average total loans
increased from $138.2 million for the three months ended September 30, 2002 to $164.2 million for the same period in 2003. Total interest earning assets averaged $213.1 million for the three months ended September 30, 2003, which represents an
increase of $35.9 million, or 20.2%, compared to average total interest earning assets of $177.3 million for the same period of 2002.



12



---

##### Table of Contents

Nine month analysis.The Companys year-to-date net interest margin was 7.00% for the first nine months of
2003, compared to 6.73% for the same period in 2002. The year-to-date rate paid on total average interest bearing deposits, other borrowings, and redeemable preferred securities decreased by 0.21% to 1.49% in the first nine months of 2003, compared
to 1.70% for the same period in 2002. The decrease was primarily the result of the higher rate certificates of deposit maturing and renewed at lower interest rates that reflect the current market. The reason for the increase in the net interest
margin was an increase in the volume of earning assets and a small increase in the yield discussed below coupled with a decline in rates on interest-bearing liabilities. The Companys reference rate averaged 4.75% during the first nine months
of 2002, compared to 4.16% for the first nine months of 2003.



The Company
reported total interest income of $12.2 million for the nine months ended September 30, 2003, which represented an increase of $1.4 million or 13.1%, over total interest income of $10.8 million for the nine months ended September 30, 2002. The
increase in total interest income for the first nine months of 2003 compared to 2002 was primarily due to an increase of approximately $1.8 million in interest and fees on loans. The increase in interest and fees on loans was due to an increase in
the average balance of total loans outstanding for the first nine months of 2003 compared to 2002. The continued low interest rates during the first nine months of 2003 kept some of our variable rate loans at their interest rate floors, which helped
maintain a higher loan yield.



The Company reported total interest expense of
$1.6 million for the nine months ended September 30, 2003, which represented a decrease of $161,000, or 9.0%, over total interest expense of $1.8 million for the nine months ended September 30, 2002. The decrease was primarily the result of the
higher rate certificates of deposit maturing and renewed at lower interest rates that reflect the current market. The decrease in the cost of average interest-bearing liabilities, including borrowed funds, was also influenced by a decrease in the
cost of borrowed funds. The cost of borrowed funds was 3.73% for the nine months ended September 30, 2003 compared to 4.38% for the same period in 2002, primarily due to the replacement of higher interest borrowings with lower interest borrowings.



For the nine months ended September 30, 2003, net interest income before the
provision for loan losses was $10.6 million. This represented an increase of $1.6 million, or 17.8%, over net interest income of $9.0 million for the nine months ended September 30, 2002. The increase in net interest income for the first nine months
of 2003 compared to 2002 was primarily the result of a $24.2 million increase in average total loans and a 9 basis point increase in average loan yield for the nine months ended September 30, 2003 as compared to the same period in 2002. Average
total loans increased from $133.1 million for the nine months ended September 30, 2002 to $157.4 million for the same period in 2003. Total interest earning assets averaged $201.4 million for the first nine months of 2003 which represents an
increase of $23.1 million, or 13.0%, compared to average total interest earning assets of $178.3 million for the first nine months of 2002.



13



---

##### Table of Contents

The following tables show the average interest-earning assets and interest-bearing liabilities; the amount of interest
income or interest expense; and the average yield or rate for each category of interest-earning assets and interest bearing liabilities and the net interest margin (net interest income divided by average earning assets) for the periods indicated.



Distribution, Yield and Rate Analysis of Net Interest Income



|                                                                                                  |  | For the Three Months Ending September 30, |        
|------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | -------
|                                                                                                  |  | 2003                                      |        
|                                                                                                  |  | AverageBalance                            |        
|                                                                                                  |  | (Dollars in Thousands)                    |        
|                                                                                                  | 
|Interest-earning Assets:                                                                          |  |                                           |        
|Federal funds sold                                                                                |  | $                                         | 15,422 
|Interest-bearing deposits in financial institutions                                               |  |                                           | 4,981  
|Investment securities:4                                                                           |  |                                           |        
|Taxable                                                                                           |  |                                           | 24,618 
|Non-taxable                                                                                       |  |                                           | 3,910  
|                                                                                                  |  |                                           |        
|Total investments                                                                                 |  |                                           | 48,931 
|Loans5                                                                                            |  |                                           | 164,205
|                                                                                                  |  |                                           |        
|Total interest-earning assets                                                                     |  | $                                         | 213,136
|                                                                                                  |  |                                           |        
|                                                                                                  |  |                                           |        
|Interest-bearing Liabilities:                                                                     |  |                                           |        
|Interest-bearing deposits                                                                         |  |                                           |        
|Interest-bearing demand deposits                                                                  |  | $                                         | 18,094 
|Money market deposits                                                                             |  |                                           | 37,580 
|Savings deposits                                                                                  |  |                                           | 19,187 
|Time deposits $100,000 or greater                                                                 |  |                                           | 39,295 
|Other time deposits                                                                               |  |                                           | 28,408 
|                                                                                                  |  |                                           |        
|Total interest-bearing deposits                                                                   |  |                                           | 142,564
|                                                                                                  |  |                                           |        
|FHLB borrowings and long-term debt                                                                |  |                                           | 2,092  
|Federal funds purchased                                                                           |  |                                           |       
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                                           | 6,000  
|                                                                                                  |  |                                           |        
|Total borrowings                                                                                  |  |                                           | 8,092  
|                                                                                                  |  |                                           |        
|Total interest-bearing liabilities                                                                |  | $                                         | 150,656
|                                                                                                  |  |                                           |        
|Net interest income                                                                               |  |                                           |        
|                                                                                                  |  |                                           |        
|Net interest margin6                                                                              |  |                                           |        



14



---

##### Table of Contents

Distribution, Yield and Rate Analysis of Net Interest Income (continued)



|                                                                                                  |  | For the Nine Months Ending September 30, |        
|------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------
|                                                                                                  |  | 2003                                     |        
|                                                                                                  |  | AverageBalance                           |        
|                                                                                                  |  | (Dollars in Thousands)                   |        
|                                                                                                  | 
|Interest-earning Assets:                                                                          |  |                                          |        
|Federal funds sold                                                                                |  | $                                        | 9,189  
|Interest-bearing deposits in financial institutions                                               |  |                                          | 5,045  
|Investment securities:4                                                                           |  |                                          |        
|Taxable                                                                                           |  |                                          | 25,858 
|Non-taxable                                                                                       |  |                                          | 3,960  
|                                                                                                  |  |                                          |        
|Total investments                                                                                 |  |                                          | 44,052 
|Loans5                                                                                            |  |                                          | 157,372
|                                                                                                  |  |                                          |        
|Total interest-earning assets                                                                     |  | $                                        | 201,424
|                                                                                                  |  |                                          |        
|                                                                                                  |  |                                          |        
|Interest-bearing Liabilities:                                                                     |  |                                          |        
|Interest-bearing deposits                                                                         |  |                                          |        
|Interest-bearing demand deposits                                                                  |  | $                                        | 17,471 
|Money market deposits                                                                             |  |                                          | 35,267 
|Savings deposits                                                                                  |  |                                          | 17,613 
|Time deposits $100,000 or greater                                                                 |  |                                          | 37,642 
|Other time deposits                                                                               |  |                                          | 28,041 
|                                                                                                  |  |                                          |        
|Total interest-bearing deposits                                                                   |  |                                          | 136,034
|                                                                                                  |  |                                          |        
|FHLB borrowings and long-term debt                                                                |  |                                          | 3,103  
|Federal funds purchased                                                                           |  |                                          | 439    
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                                          | 6,000  
|                                                                                                  |  |                                          |        
|Total borrowings                                                                                  |  |                                          | 9,542  
|                                                                                                  |  |                                          |        
|Total interest-bearing liabilities                                                                |  | $                                        | 145,576
|                                                                                                  |  |                                          |        
|Net interest income                                                                               |  |                                          |        
|                                                                                                  |  |                                          |        
|Net interest margin6                                                                              |  |                                          |        

---

|3 | Average rates/yields for these periods have been annualized using actual days for 2003 and 2002.
|- | ------------------------------------------------------------------------------------------------



|4 | Yields on income have not been computed on a tax equivalent basis, because tax exempt investments are minimal.
|- | --------------------------------------------------------------------------------------------------------------



|5 | 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 during the third quarter of 2003 were $688,000 compared to $639,000 in the third quarter of 2002, and loan fees were $1,898,000 and $1,407,000 for the nine months ended September 30, 2003 and
2002 respectively.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



15



---

##### Table of Contents

The following tables present a rate and volume analysis for changes in interest income, interest expense, and net
interest income for the latest quarter and nine month period ending September 30, 2003.



Rate/Volume Analysis of Net Interest Income



|                                                                                                  |  | Quarter Ended September 30,2003 vs. 2002 |      
|------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -----
|                                                                                                  |  | Increases (Decreases)Due to Change In    |      
|                                                                                                  |  | Volume                                   |      
|                                                                                                  |  | (Dollars in Thousands)                   |      
|                                                                                                  |  |                                          |      
|Increase (Decrease) in Interest Income:                                                           |  |                                          |      
|Federal funds sold                                                                                |  | $                                        | 206  
|Interest-bearing deposits in financial institutions                                               |  |                                          | 17   
|Investment securities8                                                                            |  |                                          | (11  
|Loans9                                                                                            |  |                                          | 2,416
|                                                                                                  |  |                                          |      
|Total                                                                                             |  | $                                        | 2,628
|                                                                                                  |  |                                          |      
|                                                                                                  |  |                                          |      
|Increase (Decrease) in Interest Expense:                                                          |  |                                          |      
|Interest-bearing demand deposits                                                                  |  | $                                        | 8    
|Money market deposits                                                                             |  |                                          | 13   
|Savings deposits                                                                                  |  |                                          | 7    
|Time deposits $100,000 or greater                                                                 |  |                                          | 256  
|Other time deposits                                                                               |  |                                          | (24  
|FHLB borrowings and long-term debt                                                                |  |                                          | 98   
|Federal funds purchased                                                                           |  |                                          |     
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                                          | 41   
|                                                                                                  |  |                                          |      
|Total                                                                                             |  | $                                        | 399  
|                                                                                                  |  |                                          |      
|                                                                                                  |  |                                          |      
|Total change in net interest income                                                               |  | $                                        | 2,229
|                                                                                                  |  |                                          |      



16



---

##### Table of Contents

Rate/Volume Analysis of Net Interest Income (continued)



|                                                                                                  |  | Nine Months Ended September 30,2003 vs. 2002 |      
|------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | -----
|                                                                                                  |  | Increases (Decreases)Due to Change In        |      
|                                                                                                  |  | Volume                                       |      
|                                                                                                  |  | (Dollars in Thousands)                       |      
|                                                                                                  |  |                                              |      
|Increase (Decrease) in Interest Income:                                                           |  |                                              |      
|Federal funds sold                                                                                |  | $                                            | 2    
|Interest-bearing deposits in financial institutions                                               |  |                                              | 17   
|Investment securities8                                                                            |  |                                              | (82  
|Loans9                                                                                            |  |                                              | 2,260
|                                                                                                  |  |                                              |      
|Total                                                                                             |  | $                                            | 2,197
|                                                                                                  |  |                                              |      
|                                                                                                  |  |                                              |      
|Increase (Decrease) in Interest Expense:                                                          |  |                                              |      
|Interest-bearing demand deposits                                                                  |  | $                                            | (6   
|Money market deposits                                                                             |  |                                              | 15   
|Savings deposits                                                                                  |  |                                              | (4   
|Time deposits $100,000 or greater                                                                 |  |                                              | 223  
|Other time deposits                                                                               |  |                                              | (96  
|FHLB borrowings and long-term debt                                                                |  |                                              | (90  
|Federal funds purchased                                                                           |  |                                              | 17   
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  |                                              | 262  
|                                                                                                  |  |                                              |      
|Total                                                                                             |  | $                                            | 321  
|                                                                                                  |  |                                              |      
|                                                                                                  |  |                                              |      
|Total change in net interest income                                                               |  | $                                            | 1,876
|                                                                                                  |  |                                              |      

---

|7 | Rates for these periods on which calculations are based have been annualized.
|- | -----------------------------------------------------------------------------

|8 | Yields on income have not been computed on a tax equivalent basis, because tax-exempt investments are minimal.
|- | --------------------------------------------------------------------------------------------------------------

|9 | 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 during the third quarter of 2003 were $688,000 compared to $639,000 in the third quarter of 2002, and loan fees were $1,898,000 and $1,407,000 for the nine months ended September 30, 2003 and
2002 respectively.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

##### Table of Contents

PROVISION FOR LOAN LOSSES



Due to the credit risk inherent in the business of making loans, the Company sets aside an allowance or reserve for loan losses through
charges to earnings. The charges are shown in the income statements as provision for loan losses, and specifically identifiable and quantifiable losses are immediately charged off against the allowance. The amount of the provision is determined by
Management as that required to be added to bring the allowance to a level, which is considered adequate to absorb losses inherent in the loan portfolio, after net charge-offs have been deducted. The amount of the provision is based on
managements regular review of the loan portfolio and consideration of such factors as historical loss experience, general prevailing economic conditions, changes in the size and composition of the loan portfolio and specific borrower
considerations, including repayment ability and the estimated value of the underlying collateral.



For the three months ended September 30, 2003, the provision for loan losses was $150,000, compared to $146,000 for the same period in 2002, and for the nine months ended September 30, 2003, the provision for loan
losses was $360,000, compared to $307,000 for the same period in 2002. The increase in the provision from 2002 to 2003 was the result of increased growth in the loan portfolio netted against net loan (charge-offs) and recoveries for the first nine
months of 2003 compared to 2002. One of the procedures used for monitoring the loan portfolio is migration analysis. Based on the results of this program, in addition to managements determination, the provision is increased or decreased. The
procedures for monitoring the adequacy of the Allowance, as well as detailed information concerning the allowance itself, are included in the Allowance for Loan Losses section.



NONINTEREST INCOME



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



Third quarter analysis.Total noninterest income increased $202,000 or 31.5% to
$844,000 for the third quarter of 2003, compared to $642,000 for the same period of 2002, primarily due to the increase in gains on the sale of loans. During the third quarter of 2003 we recorded $363,000 in gains from the sale of loans, compared to
$162,000 for the same period of 2002. This was the result of more loans originated and sold through our conduit for loan sales. For the third quarter of 2003 compared to 2002, noninterest income as an annualized percentage of average earning assets
increased to 1.57% from 1.44%.



Nine month analysis. Total noninterest
income increased $472,000 or 26.5% to $2,251,000 for the nine months ended September 30, 2003, compared to $1,779,000 for the same period of 2002. The increase was primarily the result of the increases of $168,000, $189,000 and $98,000 in customer
service fees, gain from sale of loans and broker fee income respectively. Customer service fees increased as a result of the increased collection of analysis service charges on homeowner association accounts, as well as increased service charges on
deposit accounts due to growth from the previous period. The increase in gain from sale of loans was the result of more loans originated and sold through our conduit for loan sales. Broker fee income increased from the same period in 2002 due to the
increased volume of refinancing, and from referrals from completed



18



---

##### Table of Contents

construction loan buildings. This slightly reduced the percentage in customer service fees to 43.18% from 45.19% of total noninterest income. For the first
nine months ended September 30, 2003 compared to 2002, noninterest income as an annualized percentage of average earning assets increased to 1.49% from 1.33%.



The following tables set forth components of 1stCentennials noninterest income for the periods indicated and expresses the amounts as percentage of total noninterest income:



|Noninterest Income                                     | 
|------------------------------------------------------ | 
|                                                       | 
|                                                       | 
|                                                       | 
|                                                       | 
|                                                       | 
|Customer service fees                                  | 
|Gain from sale of loans                                | 
|Increase in cash surrender value of life insurance     | 
|Broker fee income                                      | 
|Other miscellaneous income                             | 
|                                                       | 
|Total noninterest income                               | 
|                                                       | 
|As a percentage of average earning assets (annualized) | 
|                                                       | 
|                                                      
|Noninterest Income                                     | 
|                                                       | 
|                                                       | 
|                                                       | 
|                                                       | 
|                                                       | 
|Customer service fees                                  | 
|Gain from sale of loans                                | 
|Increase in cash surrender value of life insurance     | 
|Broker fee income                                      | 
|Other miscellaneous income                             | 
|                                                       | 
|Total noninterest income                               | 
|                                                       | 
|As a percentage of average earning assets (annualized) | 
|                                                       | 



19



---

##### Table of Contents

NONINTEREST EXPENSE



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



Third quarter analysis.Noninterest expense totaled $3,516,000 for the third
quarter of 2003. This represented an increase of $473,000 when compared to $3,043,000 for the same period of 2002. The $611,000 or 40.1% increase in salaries, wages and employee benefits for the third quarter of 2003 as compared to 2002 was caused
by staffing for the recently opened Palm Desert office, increased commissions paid due to increased gains on sale of loans and a rise in the employers portion of group insurance coverage expense. This caused the percentage of total noninterest
expense for this category to increase from 50.1% in the third quarter of 2002 to 60.8% in the third quarter of 2003. Part of this period increase was offset by a $251,000 or 61.8% reduction in legal and consulting expense, as a result of the absence
of litigation expense in 2003, due to the resolution of an on-going case that was resolved in 2003. (Refer to June 30, 2003 Form 10-QSB filed on August 13, 2003, under the caption Legal proceedings on page 35.) This reduced the
percentage in professional fees to 4.4% from 13.3% of total noninterest expense. For the third quarter of 2003 compared to 2002, noninterest expense as an annualized percentage of average earning assets decreased to 6.54% from 6.81%.



Nine month analysis.Noninterest expense totaled $10,161,000 for the nine months ended
September 30, 2003. This represented an increase of $1,481,000 when compared to $8,680,000 for the same period of 2002. The increase in noninterest expense was due to the $1,634,000 increase in salaries, wages and employee benefits and the $225,000
increase in marketing expense, offset by the reduction of $628,000 in professional expense. The increase in salaries, wages and employee benefits was caused by additional staffing, salary increases, and opening the new Palm Desert Branch in March of
2003. The dollar increase in this category caused the percentage of total noninterest expense to increase from 49.5% to 58.4% for the nine month periods ended September 30, 2002 and September 30, 2003, respectively. The increase in marketing expense
of $225,000 was due to the expense related to the continued success of our business development efforts in growing assets, loans and deposits. Part of the increase in noninterest expense was offset by $628,000 or a 58.7% reduction in professional
fees as a result of decreased legal expense, from the absence of litigation expense discussed above. For the first nine months ended September 30, 2003 compared to 2002, noninterest expense as an annualized percentage of average earning assets
increased to 6.74% from 6.51%.



20



---

##### Table of Contents

The following tables set forth components of 1stCentennials noninterest expense for the periods indicated and expresses the amounts as a percentage of total noninterest expense:



|Noninterest Expense                                    | 
|------------------------------------------------------ | 
|                                                       | 
|                                                       | 
|                                                       | 
|                                                       | 
|                                                       | 
|Salaries, wages and employee benefits                  | 
|Net occupancy expense                                  | 
|Marketing                                              | 
|Data processing fees                                   | 
|Professional fees                                      | 
|Postage, telephone, supplies                           | 
|Directors fees                                        | 
|Other operating expense                                | 
|                                                       | 
|Total noninterest expense                              | 
|                                                       | 
|As a percentage of average earning assets (annualized) | 
|                                                       | 
|                                                      
|Noninterest Expense                                    | 
|                                                       | 
|                                                       | 
|                                                       | 
|                                                       | 
|                                                       | 
|Salaries, wages and employee benefits                  | 
|Net occupancy expense                                  | 
|Marketing                                              | 
|Data processing fees                                   | 
|Professional fees                                      | 
|Postage, telephone, supplies                           | 
|Directors fees                                        | 
|Other operating expense                                | 
|                                                       | 
|Total noninterest expense                              | 
|                                                       | 
|As a percentage of average earning assets (annualized) | 
|                                                       | 



21



---

##### Table of Contents

FINANCIAL CONDITION



GENERAL



The Companys total assets were $234.6 million at September 30, 2003, an increase of 12.8% or $26.7 million, compared to total assets of $207.9 million at December 31, 2002. Total deposits at September 30, 2003
were $203.4 million, an increase of $20.2 million, or 11.0% from total deposits of $183.2 million at December 31, 2002. Total loans, net of the allowance for loan losses and unearned income increased 15.7%, or $22.1 million to $163.2 million
compared to $141.1 million at December 31, 2002. Strong loan demand in the Companys market areas contributed to the increase in total assets and total loans. The majority of the deposit increase occurred in interest-bearing and NOW accounts,
which were $7.5 million or 15.3% higher at September 30, 2003 as compared to December 31, 2002. In addition, noninterest-bearing deposits increased $7.0 million or 13.0%, and time deposits $100,000 or greater increased $4.4 million or 12.7% since
December 31, 2002.



LOANS



Total gross loans were $166.1 million at September 30, 2003, compared to $143.5 million at
December 31, 2002. Total gross loans represented 70.8% of total assets at September 30, 2003 compared to 69.0% of total assets at December 31, 2002. Total gross loans increased by $22.6 million or 15.7% in the first nine months of 2003, primarily
due to continued strong loan demand in our market areas. This increased the percentage in mortgage loans to 35.98% from 30.86% of total gross loans.



The following table shows the amounts of total loans outstanding by category as of the dates indicated:



|Loan Portfolio Composition   | 
|---------------------------- | 
|                             | 
|                             | 
|                             | 
|                             | 
|Real estate loans:           | 
|Construction and development | 
|Mortgage loans               | 
|Commercial loans             | 
|Consumer loans               | 
|Equity lines of credit       | 
|Credit card and other loans  | 
|                             | 
|Total gross loans            | 
|                             | 
|Less:                        | 
|Unearned income              | 
|Allowance for loan losses    | 
|                             | 
|Total net loans              | 
|                             | 



22



---

##### Table of Contents

NON-PERFORMING ASSETS



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



Nonperforming assets include loans for which interest is no longer accruing, loans 90 or more days past due, restructured loans and other real estate owned. Nonperforming assets at September 30, 2003 increased
$183,000 to $764,000, compared to $581,000 at December 31, 2002, representing 0.46% and 0.41% of gross loans, respectively. This increase was primarily caused by one 1  4 family residential construction loan for $510,000 and four commercial
loans totaling $237,000 placed on nonaccrual status during the second and third quarters of 2003. There were three mortgage loans totaling $394,000 on nonaccrual status on December 31, 2002, that were removed from nonaccrual during the first and
second quarters of 2003.



23



---

##### Table of Contents

The following table provides information with respect to all nonperforming assets as of September 30, 2003 and 2002, and
December 31, 2002:



Nonperforming Assets



|                                                                                 |  | September 30, 2003     |        |   | December 31, 2002 |   |        | September 30, 2002 | 
|-------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ----------------- | - | ------ | ------------------ | 
|                                                                                 |  | (Dollars in Thousands) |       
|Nonaccrual loans:10                                                              |  |                        |        |   |                   |   |        |                    | 
|Real estate loans:                                                               |  |                        |        |   |                   |   |        |                    | 
|Construction and development                                                     |  | $                      | 510    |   |                   | $ |       |                    | 
|Mortgage loans                                                                   |  |                        |       |   |                   |   | 394    |                    | 
|Commercial loans                                                                 |  |                        | 237    |   |                   |   |       |                    | 
|Consumer loans                                                                   |  |                        | 17     |   |                   |   |       |                    | 
|Equity lines of credit                                                           |  |                        |       |   |                   |   |       |                    | 
|Credit card and other loans                                                      |  |                        |       |   |                   |   |       |                    | 
|                                                                                 |  |                        |        |   |                   |   |        |                    | 
|Total nonaccrual loans                                                           |  | $                      | 764    |   |                   | $ | 394    |                    | 
|                                                                                 |  |                        |        |   |                   |   |        |                    | 
|Loans 90 days or more past due (as to principal or interest) and still accruing: |  |                        |        |   |                   |   |        |                    | 
|                                                                                 |  |                        |        |   |                   |   |        |                    | 
|Real estate loans:                                                               |  |                        |        |   |                   |   |        |                    | 
|Mortgage loans                                                                   |  |                        |       |   |                   |   | 50     |                    | 
|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 loans11                                                             |  | $                      |       |   |                   | $ |       |                    | 
|                                                                                 |  |                        |        |   |                   |   |        |                    | 
|Total nonperforming loans                                                        |  | $                      | 764    |   |                   | $ | 581    |                    | 
|Other real estate owned                                                          |  |                        |       |   |                   |   |       |                    | 
|                                                                                 |  |                        |        |   |                   |   |        |                    | 
|Total nonperforming assets                                                       |  | $                      | 764    |   |                   | $ | 581    |                    | 
|                                                                                 |  |                        |        |   |                   |   |        |                    | 
|Nonperforming loans as a percentage of total gross loans12                       |  |                        | 0.46   | % |                   |   | 0.41   | %                  | 
|Nonperforming assets as a percentage of total loans and other real estate owned  |  |                        | 0.46   | % |                   |   | 0.41   | %                  | 
|Allowance for loan losses to nonperforming loans                                 |  |                        | 276.57 | % |                   |   | 304.99 | %                  | 
|Allowance for loan losses                                                        |  | $                      | 2,113  |   |                   | $ | 1,772  |                    | 
|                                                                                 |  |                        |        |   |                   |   |        |                    | 

---

|10 | During the nine months ended September 30, 2003, no income related to these loans was included in net income. Additional interest income of approximately $35,000,
would have been recorded for the nine months ended September 30, 2003 if these loans had been paid in accordance with their original terms and had been outstanding throughout the applicable period then ended or, if not outstanding throughout the
applicable period then ended, since origination.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11 | A restructured loan is one the terms of which were negotiated to provide a reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12 | Total loans are gross of the allowance for loan losses and net of deferred fees.
|-- | --------------------------------------------------------------------------------



24



---

##### Table of Contents

ALLOWANCE FOR LOAN LOSSES



The allowance for loan losses totaled $2.1 million at September 30, 2003 and $1.8 million at December 31, 2002. The procedures for
monitoring the adequacy of the allowance, as well as detailed information concerning the allowance itself, are included below.



The allowance for loan losses is increased by the provision for loan losses and decreased by loan charge-offs, and increased by loan recoveries. The adequacy of the
allowance for loan losses is measured in the context of several key ratios and factors including: (1) the ratio of the allowance to total outstanding loans; (2) the ratio of total nonperforming loans to total loans; and, (3) the ratio of net
(charge-offs) recoveries to average loans outstanding. Additional factors considered in establishing an appropriate allowance include a careful assessment of the financial condition of the borrower; a realistic determination of the value and
adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; comprehensive analysis of the levels and trends of loan categories; and a review of delinquent and classified loans.



Managements evaluation is based on a system whereby each loan is
graded at the time of origination, extension or renewal. Each grade is assessed a risk factor, which is calculated to assess the adequacy of the allowance for loan losses. Further, management considers other factors including changes in
the nature and volume of the loan portfolio, overall portfolio quality, loan concentrations, trends in the level of delinquent and classified loans, specific problem loans and commitments, and current and anticipated economic conditions. Management
and the Board of Directors review the allowance for loan losses monthly. While the Board of Directors believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in
material adjustments, and net earnings could be significantly adversely affected, if circumstances differ substantially from the assumptions used in making the final determination.



The allowance for loan losses as a percentage of total loans outstanding as of September 30, 2003 was 1.28%, as compared to 1.20% at
September 30, 2002. The allowance for loan losses as a percentage of total non-performing assets was 276.57% at September 30, 2003 as compared to 327.45% at September 30, 2002. Management has determined that the allowance for loan losses is adequate
given the level of loans and nonperforming assets. One of the procedures used for monitoring the loan portfolio is migration analysis. Based on the results of this program, in addition to managements determination, the amount of the allowance
is increased or decreased. Net loan charge-offs during the first nine months of 2003 approximated $19,000 or 0.01% of average total loans as compared to $97,000 or 0.07% of average total loans during the same period in 2002.



25



---

##### Table of Contents

The following table summarizes the changes in the allowance for loan losses for the periods indicated:



Allowance for Loan Losses

|                                                                                |  | Nine Months EndedSeptember 30, |         |   | Year EndedDecember 31, |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------- | -
|                                                                                |  | 2003                           |         |   | 2002                   |  
|                                                                                |  | (Dollars in Thousands)         |        
|Balances:                                                                       |  |                                |         |   |                        |  
|Average total loans outstanding during period                                   |  | $                              | 157,372 |   |                        | $
|                                                                                |  |                                |         |   |                        |  
|Total loans outstanding at end of period, net of unearned income                |  | $                              | 165,300 |   |                        | $
|                                                                                |  |                                |         |   |                        |  
|Allowance for Loan Losses:                                                      |  |                                |         |   |                        |  
|Balance at beginning of period                                                  |  | $                              | 1,772   |   |                        | $
|Charge-offs:                                                                    |  |                                |         |   |                        |  
|Real estate loans:                                                              |  |                                |         |   |                        |  
|Construction and development                                                    |  |                                |        |   |                        |  
|Mortgage loans                                                                  |  |                                |        |   |                        |  
|Commercial loans                                                                |  |                                | 206     |   |                        |  
|Consumer loans                                                                  |  |                                | 2       |   |                        |  
|Equity lines of credit                                                          |  |                                |        |   |                        |  
|Credit card and other loans                                                     |  |                                | 2       |   |                        |  
|                                                                                |  |                                |         |   |                        |  
|Total charge-offs                                                               |  |                                | 210     |   |                        |  
|                                                                                |  |                                |         |   |                        |  
|Recoveries:                                                                     |  |                                |         |   |                        |  
|Real estate loans:                                                              |  |                                |         |   |                        |  
|Construction and development                                                    |  |                                |        |   |                        |  
|Mortgage loans                                                                  |  |                                | 22      |   |                        |  
|Commercial loans                                                                |  |                                | 135     |   |                        |  
|Consumer loans                                                                  |  |                                | 34      |   |                        |  
|Equity lines of credit                                                          |  |                                |        |   |                        |  
|Credit card and other loans                                                     |  |                                |        |   |                        |  
|                                                                                |  |                                |         |   |                        |  
|Total recoveries                                                                |  |                                | 191     |   |                        |  
|                                                                                |  |                                |         |   |                        |  
|Net charge-offs                                                                 |  |                                | (19     | ) |                        |  
|                                                                                |  |                                |         |   |                        |  
|Provision charged to operations                                                 |  |                                | 360     |   |                        |  
|                                                                                |  |                                |         |   |                        |  
|Allowance for loan losses balance, end of period                                |  | $                              | 2,113   |   |                        | $
|                                                                                |  |                                |         |   |                        |  
|Ratios:13                                                                       |  |                                |         |   |                        |  
|Net loan charge-offs to average total loans                                     |  |                                | 0.01    | % |                        |  
|Allowance for loan losses to average total loans                                |  |                                | 1.34    | % |                        |  
|Allowance for loan losses to total loans at end of period                       |  |                                | 1.28    | % |                        |  
|Allowance for loan losses to total nonperforming loans                          |  |                                | 276.57  | % |                        |  
|Net loan (charge-offs) recoveries to allowance for loan losses at end of period |  |                                | 0.90    | % |                        |  
|Net loan (charge-offs) recoveries to provision for loan losses                  |  |                                | 5.28    | % |                        |  

---

|13 | Total loans are gross of the allowance for loan losses and net of deferred fees.
|-- | --------------------------------------------------------------------------------



26



---

##### Table of Contents

The following table summarizes the allocation of the allowance for loan losses at September 30, 2003 and December 31,
2002:



Allocation of Allowance for Loan Losses

|                                       |  | September 30, 2003     |         |                                   | December 31, 2002 |  
|-------------------------------------- |  | ---------------------- | ------- | --------------------------------- | ----------------- | -
|Balance at End of Period Applicable to |  | Amount                 |         | % ofLoans inCategoryto TotalLoans |                   |  
|                                       |  | (Dollars in Thousands) |        
|Real estate loans:                     |  |                        |         |                                   |                   |  
|Construction and development           |  | $                      | 677     |                                   | 35.43             | %
|Mortgage loans                         |  |                        | 454     |                                   | 35.98             | %
|Commercial loans                       |  |                        | 883     |                                   | 24.13             | %
|Consumer loans                         |  |                        | 53      |                                   | 0.82              | %
|Equity lines of credit loans           |  |                        | 46      |                                   | 2.65              | %
|Credit card and other loans            |  |                        |        |                                   | 0.99              | %
|                                       |  |                        |         |                                   |                   |  
|Total allowance for loan loss          |  | $                      | 2,113   |                                   | 100.00            | %
|                                       |  |                        |         |                                   |                   |  
|Total loans net of unearned income     |  | $                      | 165,300 |                                   |                   |  





27



---

##### Table of Contents

INVESTMENTS



1stCentennial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 September 30,
2003 and December 31, 2002, 100% of the investment securities owned by the Company were classified as Available for Sale.



At September 30, 2003, the Companys investment portfolio at fair value consisted of $26.8 million in mortgage-backed securities, $4.3 million in municipal bonds,
$487,000 of marketable equity securities, and $263,000 in U.S. Treasury obligations for a total of $31.8 million. At December 31, 2002 the totals were $27.6 million, $4.5 million, $487,000 and $269,000 respectively for a total of $32.8 million. The
$1.0 million or 3.0% decrease in the Companys investment portfolio was due to maturities and principal paydowns on the mortgage-backed securities.



The Company also has investments in interest-bearing time certificates of deposit at other financial institutions totaling $5.0 million at September 30, 2003 versus $5.2
million at December 31, 2002. Overnight federal funds sold totaled $9.5 million at September 30, 2003, versus $2.0 million at December 31, 2002. A portion of the increase in fed funds sold was a result of the $4.9 million in net proceeds from the
sale of common stock in May 2003. The rest of the increase came from deposit growth.



The following table is a comparison of amortized cost and fair value of investment securities at September 30, 2003 and December 31, 2002:



Investment Portfolio



|                                           |  | September 30, 2003     |        | December 31, 2002
|------------------------------------------ |  | ---------------------- | ------ | -----------------
|                                           |  | AmortizedCost          |        | Unrealized Gains 
|                                           |  | (Dollars in Thousands)
|Available for Sale:                        |  |                        |        |                  
|Mortgage-backed securities                 |  | $                      | 26,304 |                  
|Obligations of state and local governments |  |                        | 4,096  |                  
|Marketable equity securities               |  |                        | 487    |                  
|U.S. Treasury obligations                  |  |                        | 254    |                  
|                                           |  |                        |        |                  
|Total                                      |  | $                      | 31,141 |                  
|                                           |  |                        |        |                  



28



---

##### Table of Contents

DEPOSITS



Total deposits increased $20.2 million, or 11.0%, to $203.4 million at September 30, 2003 from $183.2 million at December 31, 2002. Noninterest-bearing demand deposits at
September 30, 2003, were $60.9 million, an increase of $7.0 million, or 13.0% from $53.9 million at December 31, 2002. Interest bearing and NOW accounts increased 15.3%, or $7.5 million to $56.5 million at September 30, 2003 from $49.0 million at
December 31, 2002. Savings and time deposits increased by $5.7 million to $86.0 million at September 30, 2003 from $80.3 million at December 31, 2002. For the nine months ended September 30, 2003, noninterest bearing demand deposits and time
deposits $100,000 or greater increased as a percentage of average total deposits to 30.16% and 19.33% compared to 26.03% and 16.95% for the year ended December 31, 2002, respectively.



The Companys cost of funds is the result of total interest expense on interest-bearing deposits and other interest-bearing liabilities
as a percent of average interest-bearing deposits and other interest-bearing liabilities. For the nine months ended September 30, 2003, the average cost of funds was 1.49% compared to 1.71% as of December 31, 2002. The decrease in the cost of funds
was primarily the result of higher rate certificates of deposit maturing and being replaced by certificates of deposit that reflect the current lower rate environment, as well as new deposits priced at lower rates.



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



Average Deposits and Other
Borrowings



|                                                                                                  |  | Nine Months EndedSeptember 30, 2003 |         |               | Year EndedDecember 31, 2002 |  
|------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | ------------- | --------------------------- | -
|                                                                                                  |  | AverageBalance                      |         | AverageRate14 |                             |  
|                                                                                                  |  | (Dollars in Thousands)              |        
|                                                                                                  |  |                                     |         |              
|Demand deposits, noninterest bearing                                                              |  | $                                   | 58,746  |               | 0.00                        | %
|                                                                                                  |  |                                     |         |               |                             |  
|                                                                                                  |  |                                     |         |              
|Interest-bearing deposits:                                                                        |  |                                     |         |               |                             |  
|Interest-bearing demand deposits                                                                  |  |                                     | 17,471  |               | 0.28                        | %
|Money market deposits                                                                             |  |                                     | 35,267  |               | 1.04                        | %
|Savings deposits                                                                                  |  |                                     | 17,613  |               | 0.65                        | %
|Time deposits $100,000 or greater                                                                 |  |                                     | 37,642  |               | 2.36                        | %
|Other time deposits                                                                               |  |                                     | 28,041  |               | 1.39                        | %
|                                                                                                  |  |                                     |         |               |                             |  
|Total interest-bearing deposits                                                                   |  | $                                   | 136,034 |               | 1.33                        | %
|                                                                                                  |  |                                     |         |               |                             |  
|Other borrowings                                                                                  |  | $                                   | 3,542   |               | 1.32                        | %
|                                                                                                  |  |                                     |         |               |                             |  
|Redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |  | $                                   | 6,000   |               | 5.15                        | %
|                                                                                                  |  |                                     |         |               |                             |  
|Total deposits and other borrowings                                                               |  | $                                   | 204,322 |               | 1.06                        | %
|                                                                                                  |  |                                     |         |               |                             |  
|Average rate excluding noninterest bearing demand deposits                                        |  |                                     |         |               | 1.49                        | %

---

|14 | Rates for these periods on which calculations are based have been annualized.
|-- | -----------------------------------------------------------------------------



29



---

##### Table of Contents

The following tables sets forth the scheduled maturities of time certificates of deposit accounts outstanding in amounts
of $100,000 or more at September 30, 2003 and December 31, 2002:



Maturities of Time Deposits of

$100,000 or More at September 30, 2003

(Dollars in Thousands)



|Three months or less                    |  | $ | 16,236
|--------------------------------------- |  | - | ------
|Over three months through twelve months |  |   | 19,601
|Over one year through three years       |  |   | 974   
|Over three years                        |  |   | 2,194 
|                                        |  |   |       
|Total                                   |  | $ | 39,005
|                                        |  |   |       



Maturities of Time
Deposits of

$100,000 or More at December 31, 2002

(Dollars in Thousands)



|Three months or less                    |  | $ | 11,525
|--------------------------------------- |  | - | ------
|Over three months through twelve months |  |   | 20,478
|Over one year through three years       |  |   | 450   
|Over three years                        |  |   | 2,122 
|                                        |  |   |       
|Total                                   |  | $ | 34,575
|                                        |  |   |       



LIQUIDITY



The Companys liquidity is primarily a reflection of 1stCentennials ability to meet loan demand and deposit withdrawals, and to service other liabilities as they come due.
1stCentennial has adopted policies to maintain a relatively liquid position so it can respond to changes in the
financial environment and ensure that sufficient funds are available to meet those needs. Generally, 1stCentennials major sources of liquidity are customer deposits, maturities and sales of investment securities, the use of federal funds markets, 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 asset balances include cash, amounts due from other banks, federal funds sold, and securities available-for-sale. To augment liquidity, 1stCentennial Bank has Federal Funds borrowing arrangements with two correspondent banks totaling $6 million, and a secured line of credit with the FHLB.



The Companys liquidity ratio, which is a measure of liquid assets to
deposits and short-term liabilities, showed a decline at the end of the third quarter of 2003 due to the $22.1 million increase in net loans. The liquidity ratio to ending assets and ending deposits was 24.97% and 28.81% at the end of December 2002,
respectively, and dropped to 18.91% and 21.81% by the end of September 2003. Managements policy is to maintain a ratio of liquidity to assets of 20% or greater. Liquidity to assets is temporarily below managements policy of 20%, but
expected cash flows from loan payoffs and new incoming deposits should result in the Companys ratio returning to 20% or greater in the 4thquarter of 2003. Management is also of the opinion that the standby funding sources it has arranged are more than sufficient to meet 1stCentennials current and anticipated short-term liquidity needs.



30



---

##### Table of Contents

The following table sets forth certain information with respect to 1stCentennials liquidity as of September 30, 2003 and December 31, 2002.



Liquidity



|                                             |  | September 30,2003      |        |   | December 31,2002 |  
|-------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | -
|                                             |  | (Dollars in Thousands) |       
|                                             |  |                       
|Cash and due from banks                      |  | $                      | 9,686  |   |                  | $
|Federal funds sold                           |  |                        | 9,535  |   |                  |  
|Interest earning deposits                    |  |                        | 4,991  |   |                  |  
|Unpledged securities, at fair market value15 |  |                        | 20,156 |   |                  |  
|                                             |  |                        |        |   |                  |  
|                                             |  |                       
|Total liquid assets                          |  | $                      | 44,368 |   |                  | $
|                                             |  |                        |        |   |                  |  
|                                             |  |                       
|Liquidity ratios:                            |  |                        |        |   |                  |  
|Ending assets                                |  |                        | 18.91  | % |                  |  
|Ending deposits16                            |  |                        | 21.81  | % |                  |  



ASSET/LIABILITY MANAGEMENT



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



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



---

|15 | The decrease in unpledged securities of $12.6 million was partially the result of increased collateral at the Federal Home Loan Bank to support a secured borrowing
line of credit, and maturities and principal paydowns.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|16 | Less pledged public deposits of zero on September 30, 2003 and $3,000 on December 31, 2002.
|-- | -------------------------------------------------------------------------------------------



31



---

##### Table of Contents

In addition, 1stCentennial studies the net change in interest income and net interest margin given immediate and parallel interest rate shocks over a 12-month horizon. 1stCentennials goal is to manage the effect of these changes within Board-established parameters for up/down 100 and 200 basis points. 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 point increases or decreases as of September 30, 2003:



|Change (in Basis Points) |  | Net Interest Income(next twelve months) |        | Change in NetInterest Income |   |        | % Change in NetInterest Income |  |        | Net InterestMargin | 
|------------------------ |  | --------------------------------------- | ------ | ---------------------------- | - | ------ | ------------------------------ |  | ------ | ------------------ | 
|(Dollars in Thousands)   | 
|                         |  |                                         |        |                             
|+ 200                    |  | $                                       | 13,964 |                              | $ | 1,761  |                                |  | 14.43  | %                  | 
|+ 100                    |  |                                         | 13,063 |                              |   | 860    |                                |  | 7.05   | %                  | 
|0                        |  |                                         | 12,204 |                              |   |       |                                |  |       |                    | 
| 100                    |  |                                         | 11,419 |                              |   | (784   | )                              |  | (6.43  | %)                 | 
| 200                    |  |                                         | 10,592 |                              |   | (1,612 | )                              |  | (13.21 | %)                 | 



These results indicate the effect of
immediate rate changes, and do not consider the yield from reinvesting in short-term versus long-term instruments. The above table shows values in a sudden, significant upward or downward movement, which is highly unlikely due to the historically
low rates at 1stCentennial at September 30, 2003. The net interest margin will improve if rates rise and decline if
rates fall. However, the results indicated by the report, are considered acceptable by management.



CAPITAL RESOURCES



The Federal Reserve
Board and the FDIC have established similar guidelines to implement risk-based capital requirements. Falling below minimum established levels may limit a bank holding company or bank from certain activities. Failure to satisfy applicable guidelines
may also subject a banking institution to a variety of enforcement actions by federal regulatory authorities.



The Company and its subsidiary are required to maintain the following minimum ratios: Total risk based capital ratio of at least 8%, Tier 1 Risk-based capital ratio of at least 4%, and a leverage ratio of at least 4%.
Total capital is classified into two components: Tier 1 (common shareholders equity, qualifying perpetual preferred stock to certain limits, trust preferred securities to certain limits, and minority interests in equity accounts of consolidated
subsidiaries, less goodwill and other intangibles) and Tier 2 (supplementary capital including allowance for possible credit losses, certain preferred stock, eligible subordinated debt, and other qualifying instruments). Under the established
guidelines, the Company has attained the highest level of capitalization, characterized as Well Capitalized. It is the intent of the Company to continue to maintain Well Capitalized risk-based capital ratios.



Total stockholders equity was $23.9 million at September 30, 2003, compared to $17.2
million at December 31, 2002. The increase of $6.7 million or 39.0% as of the third quarter of 2003 was primarily due to $4,871,000 in net proceeds from the sale of 225,000 shares of common stock in a public offering, in the second quarter of 2003,
and $1,488,000 in year-to-date net income.



32



---

##### Table of Contents

The following table illustrates the capital and prompt corrective action guidelines applicable to the Company and 1st
Centennial Bank, as well as their total risk-based capital ratios, tier 1 capital ratios and leverage ratios as of September 30, 2003 and December 31, 2002:



Risk-based capital ratios



|                                |  | At 9/30/03 |   |  | At 12/31/02 |   |  | Minimum To BeWell CapitalizedUnder PromptCorrective ActionProvisions |   |  | Minimum CapitalRequirement |  
|------------------------------- |  | ---------- | - |  | ----------- | - |  | -------------------------------------------------------------------- | - |  | -------------------------- | -
|1st Centennial Bancorp:         |  |            |   |  |             |   |  |                                                                      |   |  |                            |  
|                                |  |            |   | 
|Total Risk-Based capital ratio  |  | 15.00      | % |  | 13.27       | % |  | 10.00                                                                | % |  | 8.00                       | %
|Tier 1 Risk-Based capital ratio |  | 13.27      | % |  | 10.87       | % |  | 6.00                                                                 | % |  | 4.00                       | %
|Tier 1 Leverage Ratio           |  | 10.44      | % |  | 8.28        | % |  | 5.00                                                                 | % |  | 4.00                       | %
|                                |  |            |   | 
|1st Centennial Bank:            |  |            |   |  |             |   |  |                                                                      |   |  |                            |  
|                                |  |            |   | 
|Total Risk-Based capital ratio  |  | 13.88      | % |  | 11.84       | % |  | 10.00                                                                | % |  | 8.00                       | %
|Tier 1 Risk-Based capital ratio |  | 12.62      | % |  | 10.58       | % |  | 6.00                                                                 | % |  | 4.00                       | %
|Tier 1 Leverage Ratio           |  | 9.93       | % |  | 8.09        | % |  | 5.00                                                                 | % |  | 4.00                       | %



Of the Companys $24.4 million of
Tier 1 capital at September 30, 2003, $5.1 million consisted of Trust Preferred Securities. Trust Preferred Securities, up to the amount of 25% of Tier 1 capital, are considered to be Tier 1 capital for regulatory purposes, but long-term debt in
accordance with generally accepted accounting principles. The remainder of the $6 million in Trust Preferred Securities is considered in Tier 2 capital.



On May 21, 2003, the Company completed a public stock offering of 225,000 shares of its Common Stock at a purchase price of $23.00 per share. The offering was fully
subscribed and the net proceeds to the Company were approximately $4.9 million.



33



---

##### Table of Contents

|ITEM 3. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



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



1st Centennials Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of 1st Centennials disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a date within 45 days of the filing date of this quarterly report (the Evaluation Date) have concluded that as of the Evaluation Date, 1st Centennials
disclosure controls and procedures were adequate and effective to ensure that material information relating to 1st Centennial and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the
period in which this quarterly report was being prepared.



Disclosure controls
and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



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



There were no significant changes in the Companys internal controls or in other factors that could significantly affect the Companys internal controls subsequent to the Evaluation Date, nor any significant
deficiencies or material weaknesses in such controls requiring corrective actions. As a result, no corrective actions were taken.



34



---

##### Table of Contents

PART II  OTHER INFORMATION



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



The response to this item required by item 103 of Regulation S-B incorporates by reference the information under the caption Legal proceedings on page 35 of the Companys 10-QSB filed on August 13,
2003.



|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------



The response to this item required by item 701 of Regulation S-B incorporates by reference the information under the caption Changes in securities and use of
proceeds on page 35 of the Companys 10-QSB filed on August 13, 2003.



|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES
|------- |  | -------------------------------



None.



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



None.



|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------



None.



35



---

##### Table of Contents

|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



(A) EXHIBITS



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



36



---

##### Table of Contents

|      | 
|----- | 
|10.7  | 
|      | 
|10.8  | 
|      | 
|10.9  | 
|      | 
|10.10 | 
|      | 
|10.11 | 
|      | 
|10.12 | 
|      | 
|10.13 | 
|      | 
|10.14 | 
|      | 
|10.15 | 
|      | 
|10.16 | 
|      | 
|10.17 | 
|      | 
|10.18 | 



37



---

##### Table of Contents

|      | 
|----- | 
|10.19 | 
|      | 
|10.20 | 
|      | 
|10.21 | 
|      | 
|10.22 | 
|      | 
|10.23 | 
|      | 
|31.1  | 
|      | 
|31.2  | 
|      | 
|32    | 



(B) REPORTS ON FORM 8-K



On September 18, 2003, the Company filed a Current Report on Form 8-K including a press
release announcing the earnings for the second quarter of 2003.



38



---

##### Table of Contents

SIGNATURE



In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |  |  | 1ST CENTENNIAL BANCORP (Registrant)                                                                                            
|---------------------- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------
|                       |  | 
|Date November 05, 2003 |  |  |  | /s/    BETH SANDERS                                                                                                            
|                       |  |  | 
|                       |  |  |  | Beth Sanders Chief Financial Officer (Principal Accounting Officer, and officer authorized to sign on behalf of the registrant)





39