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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





Quarterly report pursuant to section 13 or 15(d) of the Securities

Exchange
Act of 1934

For the quarterly period ended September 30, 2008





Commission file number: 000-29105

1stCENTENNIAL BANCORP

(Exact Name of Registrant as specified
in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 91-1995265                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                              
|218 East State Street Redlands, California 92373              
|(Address of principal executive offices) (Zip Code)           

Registrant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  þ        No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of preceding terms in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ̈    Accelerated filer   þ    Non-accelerated filer   ̈    Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ̈        No  þ

The number of shares of Common Stock of the registrant outstanding as of October 31, 2008 was 4,884,081.









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TABLE OF CONTENTS



|                              |  |                                                                                       |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                       |  | PAGE
|ITEM                          |  |                                                                                       |  |     
|                              | 
|PART I  Financial Statements |  |                                                                                      
|                              |  |                                                                                      
|ITEM 1                        |  | Unaudited Consolidated Financial Statements                                           |  | 2   
|                              |  | Consolidated statements of condition                                                  |  | 2   
|                              |  | Consolidated statements of operations                                                 |  | 3   
|                              |  | Consolidated statements of shareholders equity                                       |  | 4   
|                              |  | Consolidated statements of cash flows                                                 |  | 5   
|                              |  | Notes to unaudited consolidated financial statements                                  |  | 7   
|                              |  |                                                                                      
|ITEM 2                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|                              |  |                                                                                      
|ITEM 3                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 38  
|                              |  |                                                                                      
|ITEM 4                        |  | Controls and Procedures                                                               |  | 38  
|                              | 
|PART II  Other Information   |  |                                                                                      
|                              |  |                                                                                      
|ITEM 1                        |  | Legal Proceedings                                                                     |  | 38  
|                              |  |                                                                                      
|ITEM 1A                       |  | Risk Factors                                                                          |  | 38  
|                              |  |                                                                                      
|ITEM 2                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 40  
|                              |  |                                                                                      
|ITEM 3                        |  | Defaults Upon Senior Securities                                                       |  | 40  
|                              |  |                                                                                      
|ITEM 4                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 40  
|                              |  |                                                                                      
|ITEM 5                        |  | Other Information                                                                     |  | 41  
|                              |  |                                                                                      
|ITEM 6                        |  | Exhibits                                                                              |  | 41  
|                              |  |                                                                                      
|                              |  | Signatures                                                                            |  | 42  



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION

September 30, 2008 and December 31, 2007



|                                                                                                                                                                          |  |             |         |   |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ---- | - | -------
|Dollar amounts in thousands, except share data                                                                                                                            |  | 2008        |         |   | 2007
|                                                                                                                                                                          |  | (unaudited) |         |   |     
|ASSETS                                                                                                                                                                    |  |             |         |   |      |   |        
|Cash and due from banks                                                                                                                                                   |  | $           | 208,921 |   |      | $ | 11,075 
|Interest-bearing deposits in financial institutions                                                                                                                       |  |             | 6,093   |   |      |   | 1,862  
|Investment securities, available for sale                                                                                                                                 |  |             | 148,702 |   |      |   | 126,136
|Stock investments restricted, at cost                                                                                                                                     |  |             | 5,399   |   |      |   | 3,518  
|Loans, net of allowance for loan losses of $21,907 and $6,805                                                                                                             |  |             | 510,169 |   |      |   | 514,644
|Accrued interest receivable                                                                                                                                               |  |             | 3,175   |   |      |   | 4,503  
|Premises and equipment, net                                                                                                                                               |  |             | 2,734   |   |      |   | 2,985  
|Goodwill                                                                                                                                                                  |  |             | 4,180   |   |      |   | 4,180  
|Cash surrender value of life insurance                                                                                                                                    |  |             | 15,026  |   |      |   | 14,562 
|Other real estate owned                                                                                                                                                   |  |             | 14,933  |   |      |   | 2,343  
|Other assets                                                                                                                                                              |  |             | 19,787  |   |      |   | 3,693  
|                                                                                                                                                                          |  |             |         |   |      |   |        
|Total assets                                                                                                                                                              |  | $           | 939,119 |   |      | $ | 689,501
|                                                                                                                                                                          |  |             |         |   |      |   |        
|LIABILITIES                                                                                                                                                               |  |             |         |   |      |   |        
|Deposits:                                                                                                                                                                 |  |             |         |   |      |   |        
|Noninterest-bearing demand deposits                                                                                                                                       |  | $           | 83,427  |   |      | $ | 110,125
|Interest-bearing deposits                                                                                                                                                 |  |             | 628,295 |   |      |   | 367,830
|                                                                                                                                                                          |  |             |         |   |      |   |        
|Total deposits                                                                                                                                                            |  |             | 711,722 |   |      |   | 477,955
|Accrued interest payable                                                                                                                                                  |  |             | 1,006   |   |      |   | 826    
|Federal funds purchased                                                                                                                                                   |  |             |        |   |      |   | 2,560  
|Borrowings from Federal Home Loan Bank                                                                                                                                    |  |             | 103,270 |   |      |   | 64,500 
|Repurchase agreements                                                                                                                                                     |  |             | 75,113  |   |      |   | 75,113 
|Other liabilities                                                                                                                                                         |  |             | 4,459   |   |      |   | 3,925  
|Subordinated notes payable to subsidiary trusts                                                                                                                           |  |             | 12,300  |   |      |   | 12,300 
|                                                                                                                                                                          |  |             |         |   |      |   |        
|Total liabilities                                                                                                                                                         |  |             | 907,870 |   |      |   | 637,179
|                                                                                                                                                                          |  |             |         |   |      |   |        
|SHAREHOLDERS EQUITY                                                                                                                                                      |  |             |         |   |      |   |        
|Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 4,884,081 and 4,866,145 shares at September 30, 2008 and
December 31, 2007, respectively |  |             | 29,409  |   |      |   | 29,001 
|Retained earnings                                                                                                                                                         |  |             | 2,154   |   |      |   | 21,921 
|Accumulated other comprehensive income (loss)                                                                                                                             |  |             | (314    | ) |      |   | 1,400  
|                                                                                                                                                                          |  |             |         |   |      |   |        
|Total shareholders equity                                                                                                                                                |  |             | 31,249  |   |      |   | 52,322 
|                                                                                                                                                                          |  |             |         |   |      |   |        
|Total liabilities and shareholders equity                                                                                                                                |  | $           | 939,119 |   |      | $ | 689,501
|                                                                                                                                                                          |  |             |         |   |      |   |        

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



2



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)



|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                                              |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|Dollar amounts in thousands, except share data                |  | 2008                            |         |                                | 2007 |   | 2008   |  |   | 2007   
|Interest income:                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Loans, including fees                                         |  | $                               | 7,007   |                                |      | $ | 11,117 |  | $ | 24,276  |   |  | $ | 32,293
|Deposits in financial institutions                            |  |                                 | 27      |                                |      |   | 26     |  |   | 73      |   |  |   | 92    
|Federal funds sold                                            |  |                                 | 608     |                                |      |   | 99     |  |   | 682     |   |  |   | 315   
|Investments                                                   |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Taxable                                                       |  |                                 | 1,569   |                                |      |   | 1,248  |  |   | 4,420   |   |  |   | 2,620 
|Tax-exempt                                                    |  |                                 | 121     |                                |      |   | 259    |  |   | 631     |   |  |   | 753   
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Total interest income                                         |  |                                 | 9,332   |                                |      |   | 12,749 |  |   | 30,082  |   |  |   | 36,073
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Interest expense:                                             |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Interest bearing demand and savings deposits                  |  |                                 | 696     |                                |      |   | 1,896  |  |   | 2,936   |   |  |   | 5,109 
|Time deposits $100,000 or greater                             |  |                                 | 644     |                                |      |   | 1,170  |  |   | 2,443   |   |  |   | 3,149 
|Other time deposits                                           |  |                                 | 2,419   |                                |      |   | 937    |  |   | 3,807   |   |  |   | 2,806 
|Interest on borrowed funds                                    |  |                                 | 1,067   |                                |      |   | 1,270  |  |   | 3,767   |   |  |   | 2,933 
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Total interest expense                                        |  |                                 | 4,826   |                                |      |   | 5,273  |  |   | 12,953  |   |  |   | 13,997
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Net interest income                                           |  |                                 | 4,506   |                                |      |   | 7,476  |  |   | 17,129  |   |  |   | 22,076
|Provision for loan losses                                     |  |                                 | 24,900  |                                |      |   | 300    |  |   | 36,205  |   |  |   | 700   
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Net interest income (expense) after provision for loan losses |  |                                 | (20,394 | )                              |      |   | 7,176  |  |   | (19,076 | ) |  |   | 21,376
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Noninterest income:                                           |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Customer service fees                                         |  |                                 | 518     |                                |      |   | 444    |  |   | 1,427   |   |  |   | 1,276 
|Gains from sale of loans                                      |  |                                 | 174     |                                |      |   | 134    |  |   | 498     |   |  |   | 407   
|Conduit loan referral income                                  |  |                                 | 22      |                                |      |   | 118    |  |   | 408     |   |  |   | 755   
|Other income                                                  |  |                                 | 312     |                                |      |   | 168    |  |   | 1,107   |   |  |   | 587   
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Total noninterest income                                      |  |                                 | 1,026   |                                |      |   | 864    |  |   | 3,440   |   |  |   | 3,025 
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Noninterest expense:                                          |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Salaries and employee benefits                                |  |                                 | 2,512   |                                |      |   | 2,544  |  |   | 7,853   |   |  |   | 7,906 
|Net occupancy expense                                         |  |                                 | 559     |                                |      |   | 581    |  |   | 1,698   |   |  |   | 1,729 
|Other operating expense                                       |  |                                 | 3,759   |                                |      |   | 1,512  |  |   | 8,437   |   |  |   | 4,750 
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Total noninterest expense                                     |  |                                 | 6,830   |                                |      |   | 4,637  |  |   | 17,988  |   |  |   | 14,385
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Income (loss) before provision for income taxes (benefits)    |  |                                 | (26,198 | )                              |      |   | 3,403  |  |   | (33,624 | ) |  |   | 10,016
|Provision for income taxes (benefits)                         |  |                                 | (10,664 | )                              |      |   | 1,277  |  |   | (13,857 | ) |  |   | 3,769 
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Net income (loss)                                             |  | $                               | (15,534 | )                              |      | $ | 2,126  |  | $ | (19,767 | ) |  | $ | 6,247 
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Basic earnings (loss) per share1                              |  | $                               | (3.18   | )                              |      | $ | 0.44   |  | $ | (4.05   | ) |  | $ | 1.29  
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       
|Diluted earnings (loss) per share1                            |  | $                               | (3.18   | )                              |      | $ | 0.40   |  | $ | (4.05   | ) |  | $ | 1.18  
|                                                              |  |                                 |         |                                |      |   |        |  |   |         |   |  |   |       



|1 | Adjusted for the 50% stock distribution declared for shareholders of record on May 1, 2007, and distributed
May 15, 2007.
|- | -------------------------------------------------------------------------------------------------------------------------

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



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Nine Months Ended September 30, 2008 and 2007 (unaudited)

Dollar amounts in thousands, except share amounts



|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------- |  | --------- | - |  | ----------- | ------ | - | ---------------- | - | ------- | ------------------------------------------ |  | - | ------ | - |  | - | ------- | -
|                                                                                             |  | Shares    |   |  | CommonStock |        |   | RetainedEarnings |   |         | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total  |  
|BALANCE, DECEMBER 31, 2006                                                                   |  | 3,212,215 |   |  | $           | 27,998 |   |                  | $ | 14,038  |                                            |  | $ | 161    |   |  | $ | 42,197  |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|Net income                                                                                   |  |          |   |  |             |       |   |                  |   | 6,247   |                                            |  |   |       |   |  |   | 6,247   |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |   |                  |   |        |                                            |  |   | (50    | ) |  |   | (50     | )
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   | 6,197   |  
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|Stock Distribution                                                                           |  | 1,614,406 |   |  |             |       |   |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Cash paid in lieu of fractional shares                                                       |  |          |   |  |             |       |   |                  |   | (6      | )                                          |  |   |       |   |  |   | (6      | )
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 461    |   |                  |   |        |                                            |  |   |       |   |  |   | 461     |  
|Exercise of stock options, including tax benefit                                             |  | 55,170    |   |  |             | 526    |   |                  |   |        |                                            |  |   |       |   |  |   | 526     |  
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|BALANCE, SEPTEMBER 30, 2007                                                                  |  | 4,881,791 |   |  | $           | 28,985 |   |                  | $ | 20,279  |                                            |  | $ | 111    |   |  | $ | 49,375  |  
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|BALANCE, DECEMBER 31, 2007                                                                   |  | 4,866,145 |   |  | $           | 29,001 |   |                  | $ | 21,921  |                                            |  | $ | 1,400  |   |  | $ | 52,322  |  
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|Net loss                                                                                     |  |          |   |  |             |       |   |                  |   | (19,767 | )                                          |  |   |       |   |  |   | (19,767 | )
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |   |                  |   |        |                                            |  |   | (1,714 | ) |  |   | (1,714  | )
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|Total comprehensive loss                                                                     |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   | (21,481 | )
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 449    |   |                  |   |        |                                            |  |   |       |   |  |   | 449     |  
|Common stock repurchases                                                                     |  | (15,000   | ) |  |             | (294   | ) |                  |   |        |                                            |  |   |       |   |  |   | (294    | )
|Exercise of stock options, including tax benefit                                             |  | 32,936    |   |  |             | 253    |   |                  |   |        |                                            |  |   |       |   |  |   | 253     |  
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  
|BALANCE, SEPTEMBER 30, 2008                                                                  |  | 4,884,081 |   |  | $           | 29,409 |   |                  | $ | 2,154   |                                            |  | $ | (314   | ) |  | $ | 31,249  |  
|                                                                                             |  |           |   |  |             |        |   |                  |   |         |                                            |  |   |        |   |  |   |         |  

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



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2008 and 2007 (unaudited)



|                                                                                                   |  |      |         |   |      |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|Dollar amounts in thousands                                                                        |  | 2008 |         |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                               |  |      |         |   |      |   |          |  
|Net income (loss)                                                                                  |  | $    | (19,767 | ) |      | $ | 6,247    |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |      |         |   |      |   |          |  
|Depreciation and amortization                                                                      |  |      | 449     |   |      |   | 482      |  
|Gain on sale of fixed assets                                                                       |  |      |        |   |      |   | (3       | )
|Gain from sale of investments, net                                                                 |  |      | (287    | ) |      |   | (34      | )
|Provision for loan losses                                                                          |  |      | 36,205  |   |      |   | 700      |  
|Amortization of deferred loan fees                                                                 |  |      | (157    | ) |      |   | (953     | )
|Fair value of stock options and restricted stock awards in noninterest expense                     |  |      | 477     |   |      |   | 488      |  
|Deferred income tax benefit                                                                        |  |      | (1,411  | ) |      |   | (90      | )
|Net amortization of premiums (discounts) on investments and interest-bearing deposits              |  |      | (193    | ) |      |   | (102     | )
|Increase in cash surrender value of life insurance                                                 |  |      | (464    | ) |      |   | (352     | )
|Change in:                                                                                         |  |      |         |   |      |   |          |  
|Accrued interest receivable                                                                        |  |      | 1,328   |   |      |   | (199     | )
|Other assets                                                                                       |  |      | (27,301 | ) |      |   | (1,059   | )
|Accrued interest payable                                                                           |  |      | 180     |   |      |   | 516      |  
|Other liabilities                                                                                  |  |      | 534     |   |      |   | 355      |  
|                                                                                                   |  |      |         |   |      |   |          |  
|Net cash provided by (used in) operating activities                                                |  |      | (10,407 | ) |      |   | 5,996    |  
|                                                                                                   |  |      |         |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                               |  |      |         |   |      |   |          |  
|Net decrease (increase) in interest-bearing deposits in financial institutions                     |  |      | (4,174  | ) |      |   | 1,027    |  
|Activity in available for sale securities:                                                         |  |      |         |   |      |   |          |  
|Purchases of securities                                                                            |  |      | (57,654 | ) |      |   | (60,035  | )
|Proceeds from sales, maturities and principal repayments of securities                             |  |      | 33,825  |   |      |   | 6,556    |  
|Purchases of Federal Home Loan Bank stock                                                          |  |      | (1,881  | ) |      |   | (309     | )
|Net increase in loans                                                                              |  |      | (31,573 | ) |      |   | (60,342  | )
|Acquisition of other real estate owned                                                             |  |      |        |   |      |   | (777     | )
|Additions to bank premises and equipment                                                           |  |      | (198    | ) |      |   | (372     | )
|Purchases of life insurance                                                                        |  |      |        |   |      |   | (2,417   | )
|                                                                                                   |  |      |         |   |      |   |          |  
|Net cash used in investing activities                                                              |  |      | (61,655 | ) |      |   | (116,669 | )
|                                                                                                   |  |      |         |   |      |   |          |  

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



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS
OF CASH FLOWS (continued)

Nine Months Ended September 30, 2008 and 2007 (unaudited)



|                                                                       |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Dollar amounts in thousands                                            |  | 2008 |         |   | 2007 |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                   |  |      |         |   |      |   |         |  
|Net increase (decrease) in noninterest-bearing demand deposits         |  |      | (26,698 | ) |      |   | (2,544  | )
|Net increase in interest-bearing deposits                              |  |      | 260,465 |   |      |   | 33,966  |  
|Redemption/proceeds from federal funds purchased                       |  |      | (2,560  | ) |      |   | 5,610   |  
|Proceeds from Federal Home Loan Bank borrowings                        |  |      | 38,770  |   |      |   | 25,000  |  
|Stock repurchases                                                      |  |      | (294    | ) |      |   |        |  
|Proceeds from repurchase agreements                                    |  |      |        |   |      |   | 45,113  |  
|Redemption of trust preferred securities                               |  |      |        |   |      |   | (6,006  | )
|Cash paid in lieu of fractional shares                                 |  |      |        |   |      |   | (6      | )
|Proceeds from exercise of stock options                                |  |      | 225     |   |      |   | 526     |  
|                                                                       |  |      |         |   |      |   |         |  
|Net cash provided by financing activities                              |  |      | 269,908 |   |      |   | 101,659 |  
|                                                                       |  |      |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                   |  |      | 197,846 |   |      |   | (9,014  | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                         |  |      | 11,075  |   |      |   | 21,285  |  
|                                                                       |  |      |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                               |  | $    | 208,921 |   |      | $ | 12,271  |  
|                                                                       |  |      |         |   |      |   |         |  
|SUPPLEMENTAL INFORMATION:                                              |  |      |         |   |      |   |         |  
|Interest paid                                                          |  | $    | 12,773  |   |      | $ | 13,481  |  
|                                                                       |  |      |         |   |      |   |         |  
|Income taxes paid                                                      |  | $    | 125     |   |      | $ | 3,498   |  
|                                                                       |  |      |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |  |      |         |   |      |   |         |  
|Transfer of loans to other real estate owned                           |  | $    | 15,727  |   |      | $ | 310     |  
|                                                                       |  |      |         |   |      |   |         |  

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



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1STCENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

Note 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of
Business

1st Centennial Bancorp (the Company) is a California corporation registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended and is headquartered in Redlands, California. The Company was incorporated in August 1999 and acquired 100% of the outstanding shares of 1st Centennial Bank (the Bank) in December 1999. The Bank operates
six branches and three loan production offices, which provide commercial and consumer banking services and also a broad array of products and services throughout its operating areas in Southern California. The Company owns 100% of the common stock
of two unconsolidated special purpose business trusts, Centennial Capital Trust II and Centennial Capital Trust III created for the purpose of issuing capital trust pass-through securities. References herein to the
Company include 1st Centennial Bancorp and its consolidated subsidiary, the Bank, unless the context indicates otherwise.

Basis of
Presentation

The unaudited financial information included herein has been prepared in conformity with the accounting principles and practices
disclosed in the consolidated financial statements, Note 1, included in the Companys Annual Report on Form 10-K, for the year ended December 31, 2007, filed with the Securities and Exchange Commission (SEC). 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 three and nine months ended September 30, 2008 may not be indicative of operating results for the full year ending December 31, 2008. All material intercompany balances and transactions
have been eliminated in consolidation. As used throughout this report, the terms we, our, or us refer to the Company and its consolidated subsidiary.

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reflected in the consolidated
financial statements and accompanying notes. Significant estimates include, but are not limited to allowance for loan losses.

The information in the
September 30, 2008 Form 10-Q has been prepared assuming the Company will continue as a going concern. The Company has sustained net losses of $19.8 million during the nine months ended September 30, 2008. We have determined that additional
sources of capital will be required for us to continue operations through 2008 and beyond. We have engaged a financial advisor to explore strategic alternatives, including potential significant capital raises, to address our current and
expected liquidity and capital deficiencies. However, there can be no assurance that we will be able to raise additional capital. In addition, our regulators are continually monitoring our liquidity and capital adequacy. The ability of the Company
to continue as a going concern is dependent upon its success in raising additional capital.

These interim consolidated financial statements should be read
in conjunction with our consolidated financial statements, and the notes thereto, included in our Form 10-K for the year ended December 31, 2007.

Note 2. EARNINGS (LOSS) PER SHARE2

Basic earnings (loss) per share represents income (loss) available to common shareholders 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. Due to the loss for the three and nine months ended September 30, 2008, no
potentially dilutive shares are included in the diluted loss per share calculation, as including such shares in the calculation would be anti-dilutive. Potential common shares that may be issued by the Company relate solely to outstanding stock
options and are determined using the treasury stock method. Earnings (loss) per share calculations were adjusted to give retroactive effect to stock dividends and distributions.



|2 | Adjusted for the 50% stock distribution declared for shareholders of record as of May 1, 2007, and distributed May 15, 2007.
|- | ----------------------------------------------------------------------------------------------------------------------------



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

Earnings (loss) per share calculation

For the three months ended September 30,

(In thousands, except per share amounts)



|                                           |  |         |         |   |                       |       |                |   |       |           |  |                       |       |                |       |  |   |       |  
|------------------------------------------ |  | ------- | ------- | - | --------------------- | ----- | -------------- | - | ----- | --------- |  | --------------------- | ----- | -------------- | ----- |  | - | ----- | -
|                                           |  | 2008    |         |   | 2007                  |      
|                                           |  | NetLoss |         |   | Weightedaverageshares |       | Pershareamount |   |       | NetIncome |  | Weightedaverageshares |       | Pershareamount |      
|Basic earnings (loss) per share            |  | $       | (15,534 | ) |                       | 4,884 |                | $ | (3.18 | )         |  | $                     | 2,126 |                | 4,865 |  | $ | 0.44  |  
|Effect of dilutive shares:                 |  |         |         |   |                       |       |                |   |       |           |  |                       |       |                |       |  |   |       |  
|assumed exercise of outstanding options(a) |  |         |        |   |                       |      |                |   |      |           |  |                       |      |                | 453   |  |   | (0.04 | )
|                                           |  |         |         |   |                       |       |                |   |       |           |  |                       |       |                |       |  |   |       |  
|Diluted earnings (loss) per share2         |  | $       | (15,534 | ) |                       | 4,884 |                | $ | (3.18 | )         |  | $                     | 2,126 |                | 5,318 |  | $ | 0.40  |  



|(a) | For the three months ended September 30, 2008, the dilutive
effect of our 932,515 outstanding stock options was excluded from the computation of earnings per share due to anti-dilution.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Earnings (loss) per share calculation

For the nine months ended September 30,

(In thousands, except per share amounts)



|                                           |  |         |         |   |                       |       |                |   |       |           |  |                       |       |                |       |  |   |       |  
|------------------------------------------ |  | ------- | ------- | - | --------------------- | ----- | -------------- | - | ----- | --------- |  | --------------------- | ----- | -------------- | ----- |  | - | ----- | -
|                                           |  | 2008    |         |   | 2007                  |      
|                                           |  | NetLoss |         |   | Weightedaverageshares |       | Pershareamount |   |       | NetIncome |  | Weightedaverageshares |       | Pershareamount |      
|Basic earnings (loss) per share            |  | $       | (19,767 | ) |                       | 4,884 |                | $ | (4.05 | )         |  | $                     | 6,247 |                | 4,842 |  | $ | 1.29  |  
|Effect of dilutive shares:                 |  |         |         |   |                       |       |                |   |       |           |  |                       |       |                |       |  |   |       |  
|assumed exercise of outstanding options(b) |  |         |        |   |                       |      |                |   |      |           |  |                       |      |                | 453   |  |   | (0.11 | )
|                                           |  |         |         |   |                       |       |                |   |       |           |  |                       |       |                |       |  |   |       |  
|Diluted earnings (loss) per share2         |  | $       | (19,767 | ) |                       | 4,884 |                | $ | (4.05 | )         |  | $                     | 6,247 |                | 5,295 |  | $ | 1.18  |  



|(b) | For the nine months ended September 30, 2008, the dilutive
effect of 932,515 outstanding stock options was excluded from the computation of earnings per share due to anti-dilution.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 3.
OFF-BALANCE SHEET COMMITMENTS

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. The credit risk involved in issuing



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letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, the Company holds appropriate
collateral supporting those commitments. Management does not anticipate any material losses as a result of these transactions.

The following table shows
the amounts of total off-balance sheet commitments by category as of the dates indicated:

Off-Balance sheet commitments



|                                      |  |                        |         |                  |   |        
|------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                      |  | September 30,2008      |         | December 31,2007
|                                      |  | (Dollars in Thousands)
|Standby letters of credit             |  | $                      | 6,360   |                  | $ | 10,190 
|Undisbursed loans and lines of credit |  |                        | 138,820 |                  |   | 196,698
|Available credit card lines           |  |                        | 3,931   |                  |   | 3,537  
|                                      |  |                        |         |                  |   |        
|Total off-balance sheet commitments   |  | $                      | 149,111 |                  | $ | 210,425
|                                      |  |                        |         |                  |   |        

Note 4. STOCK REPURCHASE PROGRAM

We have decided to temporarily suspend our stock repurchase program that was approved by the Board of Directors on September 21, 2007, to incrementally repurchase up to an aggregate of $3.0 million of the
Companys common stock, primarily due to the continued weakness in the housing market, the decrease in our capital levels to adequately capitalized status and our desire to preserve both capital and liquidity at the present time.

Note 5. FAIR VALUE MEASUREMENTS

Effective
January 1, 2008, the Company adopted SFAS No. 157, which establishes a hierarchy for measuring fair value under GAAP. This standard applies to all financial assets and liabilities that are being measured and reported at fair value on a
recurring and non-recurring basis. Fair value is measured in levels, which are described in more detail below, and is determined based on the observability and reliability of the assumptions used to determine fair value.

Level 1: Valuation for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.

Level 2: Valuation for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3: Valuation for assets
and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models, and similar techniques, and not based on market exchange, dealer, or broker traded transactions. These valuations
incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The Company measures and reports
available-for-sale securities, mortgage servicing rights, and interest rate swaps at fair value on a recurring basis. The following table shows the balances of these assets based on the SFAS No. 157 designated levels.



|                              |  |                       |         |           |   |           |  |           |         |  |   |  
|----------------------------- |  | --------------------- | ------- | --------- | - | --------- |  | --------- | ------- |  | - | -
|                              |  | At September 30, 2008
|                              |  | Total                 |         | (level 1) |   | (Level 2) |  | (Level 3)
|Available-for-sale securities |  | $                     | 148,702 |           | $ |          |  | $         | 148,702 |  | $ | 
|                              |  |                       |         |           |   |           |  |           |         |  |   |  
|Total                         |  | $                     | 148,702 |           | $ |          |  | $         | 148,702 |  | $ | 
|                              |  |                       |         |           |   |           |  |           |         |  |   |  

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a
non-recurring basis in accordance with GAAP. During the three months ended September 30, 2008, we measured collateral dependent impaired loans and other real estate owned (OREO) at fair value. For these assets measured at fair value on a
non-recurring basis, the following table provides the assets SFAS No. 157 designated levels, as well as the fair value losses recognized during the three months ended September 30, 2008.



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|               |  |                       |         |           |   |           |  |           |   |                                                    |   |         |  |   |       
|-------------- |  | --------------------- | ------- | --------- | - | --------- |  | --------- | - | -------------------------------------------------- | - | ------- |  | - | ------
|               |  | At September 30, 2008
|               |  | Total                 |         | (level 1) |   | (Level 2) |  | (Level 3) |   | Losses for the threemonths
endedSeptember 30, 2008
|Impaired loans |  | $                     | 90,840  |           | $ |          |  | $         |  |                                                    | $ | 90,840  |  | $ | 12,929
|OREO           |  |                       | 14,933  |           |   |          |  |           |  |                                                    |   | 14,933  |  |   | 1,198 
|               |  |                       |         |           |   |           |  |           |   |                                                    |   |         |  |   |       
|               |  | $                     | 105,773 |           | $ |          |  | $         |  |                                                    | $ | 105,773 |  | $ | 14,127
|               |  |                       |         |           |   |           |  |           |   |                                                    |   |         |  |   |       

Because the Company did not elect the fair value option for any financial assets or liabilities under SFAS
No. 159, there were no other assets or liabilities that have been measured at fair value during the three months ended September 30, 2008.

Note 6. SUBSEQUENT EVENT

On September 19, 2008, subject to approval by the shareholders, the Board of Directors adopted an amendment
to the Companys Articles of Incorporation to augment the Companys authorized capital stock by increasing the number of shares of authorized common stock from ten million to 100 million shares, and by adding a new class of ten
million shares of serial preferred stock.

This amendment to the Articles of Incorporation was approved by the written consent of a majority of the
Companys outstanding shares effective November 5, 2008, and became effective on November 6, 2008 upon the filing thereof with the California Secretary of State.

This action was taken to provide maximum flexibility with respect to the Companys ability to augment its capital in the near future, and to provide greater flexibility for declaration of stock dividends and for
other proper corporate purposes in the long term. As previously disclosed, the Company has engaged the investment banking firm D.A. Davidson & Company as its financial advisor to explore strategic alternatives, which may include
issuing additional shares of common stock and/or preferred stock in order to enhance our capital position.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This discussion focuses primarily on the Companys consolidated results of operations for the three and nine months ended September 30, 2008 and 2007, and consolidated financial condition as of
September 30, 2008 and December 31, 2007.

Managements discussion and analysis is written to provide greater insight into the results of
operations and the financial condition of the Company. For a more complete understanding of the Company and its operations, reference should be made to the consolidated financial statements included in this report and in the Companys 2007
Annual Report on Form 10-K.

Certain statements in this report on Form 10-Q 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 or falling 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 consolidated financial condition, results of operations or prospects, and these risks should be considered in evaluating the Company. Segment reporting
is not presented since the Companys revenue is attributed to a single reportable segment. For additional information concerning these factors, refer to the Companys Form 10-K for the year ended December 31, 2007 and Part II,
Item 4A herein.

CRITICAL ACCOUNTING POLICIES

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

Quantitative factors include our historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers sensitivity to interest rate movements
and borrowers sensitivity to quantifiable external factors including commodity and finished goods 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, the 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 the Company adds new products and expands its geographic coverage, it increases the
complexity of its loan portfolio. The Company 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 if its assessment
of the above factors were different. This discussion and analysis should be read in conjunction with the Companys financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Managements
Discussion and Analysis section entitled Financial Condition - Allowance for Loan Losses. Although Management believes the further level of the allowance as of September 30, 2008 was 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.



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SUMMARY OF PERFORMANCE

Results of operations summary

Third quarter analysis.Net loss for the quarter ended September 30, 2008 was $(15.5)
million, as compared to the net income of $2.1 million for the same period in 2007. Basic and diluted (loss) per share were $(3.18) and $(3.18) respectively, for the three months ended September 30, 2008, as compared to basic and diluted
earnings per share of $0.44 and $0.40 respectively, for the same period in 2007. Earnings per share calculations were adjusted to give retroactive effect to stock dividends and distributions, including the 50% stock distribution paid on May 15,
2007 to shareholders of record as of May 1, 2007. Return on average assets and return on average equity for the three months ended September 30, 2008 were (7.20)% and (133.03)% respectively, as compared to 1.33% and 17.73% respectively,
for the same period in 2007.

The primary factors behind the net loss for the quarter ended September 30, 2008 relative to the same period in 2007 are
as follows:



| |  |  | Provision for loan losses increased $24.6 million to $24.9 million for the third quarter of 2008, as compared to $300,000 for the third quarter of 2007, primarily
due to the net increase in nonperforming loans at September 30, 2008 to $90.8 million, net increase of $20.9 million in net loan charge-offs and the net increase in OREO of $13.9 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The net interest margin decreased by 275 basis points to 2.22% for the quarter ended September 30, 2008, primarily due to lower yields on our loan portfolio
reflecting the reversal of interest income relating to the $82.7 million net increase in nonaccrual loans on a comparable year-to-year basis and to the lower interest income associated with the downward trend in interest rates as noted by the
decrease in interest rates by the Federal Reserve Bank (FRB). The FRB federal funds rate was reduced by 325 basis points from September 2007 through September 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest income decreased by $3.4 million or 27% to $9.3 million for the quarter ended September 30, 2008, primarily due to the reversal of interest
income associated with the net increase in nonaccrual loans and lower interest income associated with the downward trend in interest rates by the FRB. The decrease in interest income was partially offset by lower interest expense of $447,000. The
decrease in interest expense was primarily due to the downward trend in interest rates as noted above by the FRB, partially offset by the increase in our deposit portfolio, primarily using broker deposits.



| |  |  | Noninterest income decreased to $1.0 million for the quarter ended September 30, 2008 as compared to $1.2 million for the previous quarter ended June 30,
2008, primarily due to lower gains on sales of mortgage-backed securities and conduit loan fee income, partially offset by an increase in customer service fees, gain on sale of loans, gain on sale of OREO and Bank Owned Life Insurance income.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest expense increased $1.1 million to $6.8 million for the quarter ended September 30, 2008 as compared to $5.7 million for the quarter ended
June 30, 2008, primarily due to higher costs associated with OREO and FDIC insurance.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Nine-month analysis. Net loss for the
nine months ended September 30, 2008 was $(19.8) million, as compared to net income of $6.2 million for the same period in 2007. Basic and diluted loss per share were $(4.05) and $(4.05) respectively, for the nine months ended
September 30, 2008, as compared to $1.29 and $1.18 respectively, for the same period in 2007. Earnings (loss) per share calculations were adjusted to give retroactive effect to stock dividends and distributions, including the 50% stock
distribution paid on May 15, 2007 to shareholders of record as of May 1, 2007. Return on average assets and return on average equity for the nine months ended September 30, 2008 were (3.47)% and (52.65)% respectively, as compared to
1.41% and 18.33% respectively, for the same period in 2007.

The primary factors behind the variance in results of operations for the nine months
ended September 30, 2008 relative to the same period in 2007 are as follows:



| |  |  | Provision for loan losses increased $35.5 million to $36.2 million for the nine months ended September 30, 2008, as compared to $700,000 for the same period
last year. The increase in provision for loan losses was primarily due to the
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | increase in nonperforming loans at September 30, 2008 to $90.8 million as compared to nonaccrual loans totaling $5.5 million at September 30, 2007
and the increase in net loan charge-offs of $21.2 million for the nine months ended September 30, 2008 as compared to $244,000 for the same period in 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The net interest margin decreased by 208 basis points to 3.21% for the nine months ended September 30, 2008, as compared to 5.29% for the same period last
year. Total interest income decreased $6.0 million to $30.1 million for the nine months ended September 30, 2008, as compared to $36.1 million for the same period last year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The decreases in net interest margin and in total interest income was primarily due to lower yields on our loan portfolio reflecting the reversal of
interest income relating to the $84.7 million increase in nonaccrual loans on a comparable year-to-year basis and the lower interest income associated with the downward trend in interest rates as noted by the decrease in interest rates by the FRB.
The decrease in interest income was partially offset by lower interest expense of $1.1 million for the nine months ended September 30, 2008 as compared to the same period last year. The decrease in interest expense was primarily due to the
downward trend in interest rates as noted above by the FRB, partially offset by the increase in our deposit portfolio, primarily using broker deposits. Given the current financial market conditions, shareholder and depositors concerns
regarding the financial services industry, we increased our cash levels at the Bank in order to bolster our liquidity by attracting additional funds using brokered certificates of deposit.



| |  |  | Total noninterest expense increased $3.6 million or 25% to $18.0 million for the nine months ended September 30, 2008, primarily related to increases in other
real estate owned (OREO) expense of $2.2 million to $2.3 million as compared to $73,000 for the same period last year and Federal Deposit Insurance Corporation (FDIC) insurance expense of $503,000 to $566,000 as compared to
$63,000 for the same period last year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Condition Summary

The Companys total assets were $939.1 million at September 30, 2008, an increase of $249.6 million, or 27%, compared to total assets of $689.5 million at
December 31, 2007. The most significant changes in the Companys balance sheet during the first nine months of 2008 are outlined below:



| |  |  | Nonperforming assets at September 30, 2008 increased $89.9 million to $105.2 million, from $15.3 million at December 31, 2007, and represented 19.12% and
2.92% of total gross loans including OREO, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The net increase in nonaccrual loans was primarily attributable
to the net addition of 35 construction and land development loans totaling $86.2 million, 6 commercial real estate loans totaling $822,000 and one home equity loan of $90,000 that were placed on non-accrual status during the nine months ended
September 30, 2008. The net additions to nonaccrual loans were partially offset by the transfer of 2 construction loans totaling $6.0 million to OREO during the nine months ended September 30, 2008.



| |  |  | Cash and due from banks was $208.9 million at September 30, 2008, an increase of $197.8 million as compared to $11.1 million at December 31, 2007. This
increase was primarily the result of the increase in interest bearing deposits to $628.3 million as compared to $367.8 million at December 31, 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in interest bearing deposits was primarily the result of the Companys efforts to attract new customers to participate in the Certificate of
Deposit Account Registry Service (CDARS) and to attract broker certificates of deposits for liquidity purposes, due to adverse publicity and customer concern relating to the financial industry in general and community banks in
particular, precipitated in large part by the failure of IndyMac Bank, headquartered in Pasadena, California, in July 2008. Since December 31, 2007, the Company increased CDARS deposits by $34.4 million to $42.5 million and broker certificates
of deposit by $309.4 million to $331.7 million, respectively.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by interest-earning assets less, interest expense
on interest-bearing liabilities. The second is noninterest income, which primarily consists of



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customer service fees but also comes from non-customer sources such as loan sales, bank-owned life insurance, and other income. The majority of the
Companys noninterest expenses are operating costs that relate to providing a full range of banking services to our customers.

NET INTEREST
INCOME/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, net interest margin and interest spread 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, and the local economies in which the Company conducts business.

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 as of the quarter ended September 30, 2008 was 2.22%, compared to 4.97% for the same period in 2007, due to a combination of the reversal of interest income on nonaccrual loans and
reductions in the FRB federal funds rate. The yield on total interest earning assets decreased 3.87% to 4.60% while the cost on total deposits and other borrowings decreased 1.76% to 2.67% for the three months ended September 30, 2008.

For the quarter ended September 30, 2008, average total interest-earning assets increased $209.6 million or 35% to $806.9 million, compared to $597.3
million for the same period in 2007. This increase is primarily attributable to the increase in the average balances of federal funds sold of $126.3 million to $134.1 million, investment securities of $135.5 million to $261.6 million and loans of
$70.1 million to $545.3 million.

For the quarter ended September 30, 2008, average interest-bearing liabilities increased $246.6 million or 52% to
$719.0 million, compared to $472.3 million for the same period in 2007. This increase is primarily attributable to the increase in the average balances of interest-bearing deposits of $143.9 million to $533.5 million, coupled with the increase in
repurchase agreements of $12.7 million to $75.1 million and the increase in FHLB advances of $91.1 million to $98.1 million.

The Company reported total
interest income of $9.3 million for the three months ended September 30, 2008, which represented a decrease of $3.4 million or 27%, over total interest income of $12.7 million for the same period in 2007. This decrease was primarily due to the
325 basis point reduction in the FRB federal funds rate from September 2007 through September 2008 and the reversal of interest income relating to the net increase of $84.7 million in nonaccrual loans from the same period in 2007.

The Company reported total interest expense of $4.8 million for the three months ended September 30, 2008, which represented a decrease of $447,000 or 8%, over
total interest expense of $5.3 million for the same period in 2007. For the three months ended September 30, 2008, net interest income before provision for loan losses was $4.5 million, which represented a decrease of $3.0 million or 40%, over
net interest income before provision for loan losses of $7.5 million for the same period in 2007.

Nine-month analysis. The Companys
year-to-date net interest margin as of September 30, 2008 was 3.21% compared to 5.29% for the same period in 2007, due to a combination of the reversal of interest income on nonaccrual loans and reductions in the FRB federal funds rate. The
yield on total interest earning assets decreased 3.02% to 5.63% while the cost on total deposits and other borrowings decreased 1.47% to 2.84% for the nine months ended September 30, 2008 as compared to the same period last year. The percentage
of total average interest-bearing deposits represented by time deposits increased to 54% for the nine months ended September 30, 2008 as compared to 45% for the nine months ended September 30, 2007. The shift in this average deposit mix
also contributed to the reduction of the net interest margin in the first nine months of 2008 versus 2007.



14



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##### Table of Contents

For the first nine months of 2008, total interest-earning assets averaged $713.8 million, which represented an increase
of $156.3 million or 28%, as compared to $557.5 million for the same period in 2007. This increase is primarily attributable to the increase in loans, investment securities and federal funds sold. Total interest-bearing liabilities averaged $608.2
million, which represented an increase of $174.0 million or 40%, as compared to $434.2 million for the same period in 2007. This increase is primarily attributable to the increase in the average balances of broker certificates and repurchase
agreements, partially offset by decreases in money market and time deposits.

The Company reported total interest income of $30.1 million for the nine
months ended September 30, 2008, which represented a decrease of $6.0 million or 17%, over total interest income of $36.1 million for the same period in 2007. The decrease in total interest income for the nine months ended September 30,
2008, when compared to the same period in 2007 is primarily the result of decreases in interest income and fees on loans of $8.0 million, partially offset by an increase in the average loan balances of $75.1 million, coupled with an increase of $1.8
million in interest income on taxable investments, resulting in part by the increase in the average balance of $43.4 million in taxable investment securities. The decrease in interest income on loans was primarily due to the reversal of interest
income related to the increase in nonaccrual loans during the nine months ended September 30, 2008. The increase in taxable investment securities was primarily the purchase of federally insured mortgage-backed securities.

The Company reported total interest expense of $13.0 million for the nine months ended September 30, 2008, which represented a decrease of $1.0 million or 7%, over
total interest expense of $14.0 million for the same period in 2007. The decrease in total interest expense was primarily attributable to lower interest rates associated with the downward trend in interest rates as noted by the decrease in interest
rates by the FRB, partially offset by higher interest expense associated with the increase in FHLB advances, reverse repurchase agreements and broker certificates of deposit.

For the nine months ended September 30, 2008, net interest income before provision for loan losses was $17.1 million, which represented a decrease of $4.9 million or 22%, over net interest income before provision
for loan losses of $22.1 million for the same period in 2007. The decrease in net interest income for the first nine months of 2008 as compared to 2007 was primarily due to reversal of income on nonaccrual loans and interest expense associated with
brokered certificates of deposit.

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.



15



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##### Table of Contents

Distribution, Yield and Rate3Analysis of Net Interest Income



|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|--------------------------------------------------- |  | ---------------------------------------- | ------- | ---------------------- | ---- | ----------------- |  | ---- | -------------- |  | ---------------------- | ------- | ----------------- | - | ------ |  | ---- | -
|                                                    |  | For the Three Months Ended September 30, |        
|                                                    |  | 2008                                     |         |                        | 2007 |                  
|                                                    |  | AverageBalance                           |         | InterestIncome/Expense |      | AverageRate/Yield |  |      | AverageBalance |  | InterestIncome/Expense |         | AverageRate/Yield |  
|                                                    |  | (Dollars in Thousands)                   |        
|Interest-earning Assets:                            |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Federal funds sold                                  |  | $                                        | 134,112 |                        | $    | 608               |  | 1.80 | %              |  | $                      | 7,831   |                   | $ | 99     |  | 5.02 | %
|Interest-bearing deposits in financial institutions |  |                                          | 2,372   |                        |      | 27                |  | 4.53 | %              |  |                        | 1,951   |                   |   | 26     |  | 5.29 | %
|Investment securities:4                             |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Taxable                                             |  |                                          | 113,647 |                        |      | 1,569             |  | 5.49 | %              |  |                        | 88,309  |                   |   | 1,248  |  | 5.61 | %
|Non-taxable                                         |  |                                          | 11,443  |                        |      | 121               |  | 4.21 | %              |  |                        | 24,002  |                   |   | 259    |  | 4.28 | %
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total investments                                   |  |                                          | 261,574 |                        |      | 2,325             |  | 3.54 | %              |  |                        | 122,093 |                   |   | 1,632  |  | 5.30 | %
|Loans5                                              |  |                                          | 545,308 |                        |      | 7,007             |  | 5.11 | %              |  |                        | 475,186 |                   |   | 11,117 |  | 9.28 | %
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total interest-earning assets                       |  | $                                        | 806,882 |                        |      | 9,332             |  | 4.60 | %              |  | $                      | 597,279 |                   |   | 12,749 |  | 8.47 | %
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Interest-bearing Liabilities:                       |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Interest-bearing deposits                           |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Interest-bearing demand deposits                    |  | $                                        | 20,652  |                        |      | 7                 |  | 0.13 | %              |  | $                      | 17,267  |                   |   | 12     |  | 0.28 | %
|Money market deposits                               |  |                                          | 141,096 |                        |      | 682               |  | 1.92 | %              |  |                        | 184,593 |                   |   | 1,858  |  | 3.99 | %
|Savings deposits                                    |  |                                          | 10,297  |                        |      | 7                 |  | 0.27 | %              |  |                        | 12,338  |                   |   | 26     |  | 0.84 | %
|Time deposits $100,000 or greater                   |  |                                          | 83,324  |                        |      | 645               |  | 3.08 | %              |  |                        | 95,872  |                   |   | 1,170  |  | 4.84 | %
|Other time deposits                                 |  |                                          | 278,098 |                        |      | 2,418             |  | 3.46 | %              |  |                        | 79,503  |                   |   | 937    |  | 4.68 | %
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total interest-bearing deposits                     |  |                                          | 533,467 |                        |      | 3,759             |  | 2.80 | %              |  |                        | 389,573 |                   |   | 4,003  |  | 4.08 | %
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|FHLB borrowings                                     |  |                                          | 98,091  |                        |      | 752               |  | 3.05 | %              |  |                        | 6,993   |                   |   | 88     |  | 4.99 | %
|Federal funds purchased                             |  |                                          |        |                        |      |                  |  |     | %              |  |                        | 589     |                   |   | 9      |  | 6.06 | %
|Repurchase agreement                                |  |                                          | 75,113  |                        |      | 134               |  | 0.71 | %              |  |                        | 62,364  |                   |   | 934    |  | 5.94 | %
|Subordinated notes payable to subsidiary trusts     |  |                                          | 12,300  |                        |      | 181               |  | 5.85 | %              |  |                        | 12,822  |                   |   | 239    |  | 7.40 | %
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total borrowings                                    |  |                                          | 185,504 |                        |      | 1,067             |  | 2.29 | %              |  |                        | 82,768  |                   |   | 1,270  |  | 6.09 | %
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total interest-bearing liabilities                  |  | $                                        | 718,971 |                        |      | 4,826             |  | 2.67 | %              |  | $                      | 472,341 |                   |   | 5,273  |  | 4.43 | %
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Net interest income                                 |  |                                          |         |                        | $    | 4,506             |  |      |                |  |                        |         |                   | $ | 7,476  |  |      |  
|                                                    |  |                                          |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Net interest margin6                                |  |                                          |         |                        |      |                   |  | 2.22 | %              |  |                        |         |                   |   |        |  | 4.97 | %



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



|4 | Yields on securities have not been adjusted to a tax equivalent basis because the impact is not material.
|- | ---------------------------------------------------------------------------------------------------------



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



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



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##### Table of Contents

Distribution, Yield and Rate7Analysis of Net Interest Income



|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|--------------------------------------------------- |  | --------------------------------------- | ------- | ---------------------- | ---- | ----------------- |  | ---- | -------------- |  | ---------------------- | ------- | ----------------- | - | ------ |  | ---- | -
|                                                    |  | For the Nine Months Ended September 30, |        
|                                                    |  | 2008                                    |         |                        | 2007 |                  
|                                                    |  | AverageBalance                          |         | InterestIncome/Expense |      | AverageRate/Yield |  |      | AverageBalance |  | InterestIncome/Expense |         | AverageRate/Yield |  
|                                                    |  | (Dollars in Thousands)                  |        
|Interest-earning Assets:                            |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Federal funds sold                                  |  | $                                       | 49,925  |                        | $    | 682               |  | 1.82 | %              |  | $                      | 8,165   |                   | $ | 315    |  | 5.16 | %
|Interest-bearing deposits in financial institutions |  |                                         | 1,990   |                        |      | 73                |  | 4.90 | %              |  |                        | 2,392   |                   |   | 92     |  | 5.14 | %
|Investment securities:8                             |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Taxable                                             |  |                                         | 106,549 |                        |      | 4,420             |  | 5.54 | %              |  |                        | 63,193  |                   |   | 2,620  |  | 5.54 | %
|Non-taxable                                         |  |                                         | 20,214  |                        |      | 631               |  | 4.17 | %              |  |                        | 23,770  |                   |   | 753    |  | 4.24 | %
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total investments                                   |  |                                         | 178,678 |                        |      | 5,806             |  | 4.34 | %              |  |                        | 97,520  |                   |   | 3,780  |  | 5.18 | %
|Loans9                                              |  |                                         | 535,150 |                        |      | 24,276            |  | 6.06 | %              |  |                        | 460,013 |                   |   | 32,293 |  | 9.39 | %
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total interest-earning assets                       |  | $                                       | 713,828 |                        |      | 30,082            |  | 5.63 | %              |  | $                      | 557,533 |                   |   | 36,073 |  | 8.65 | %
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Interest-bearing Liabilities:                       |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Interest-bearing deposits                           |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Interest-bearing demand deposits                    |  | $                                       | 19,360  |                        |      | 28                |  | 0.19 | %              |  | $                      | 20,552  |                   |   | 52     |  | 0.34 | %
|Money market deposits                               |  |                                         | 168,474 |                        |      | 2,887             |  | 2.29 | %              |  |                        | 171,539 |                   |   | 4,975  |  | 3.88 | %
|Savings deposits                                    |  |                                         | 11,503  |                        |      | 21                |  | 0.24 | %              |  |                        | 13,067  |                   |   | 82     |  | 0.84 | %
|Time deposits $100,000 or greater                   |  |                                         | 89,033  |                        |      | 2,444             |  | 3.67 | %              |  |                        | 87,427  |                   |   | 3,149  |  | 4.82 | %
|Other time deposits                                 |  |                                         | 143,653 |                        |      | 3,806             |  | 3.54 | %              |  |                        | 80,582  |                   |   | 2,806  |  | 4.66 | %
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total interest-bearing deposits                     |  |                                         | 432,023 |                        |      | 9,186             |  | 2.84 | %              |  |                        | 373,167 |                   |   | 11,064 |  | 3.96 | %
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|FHLB borrowings                                     |  |                                         | 85,239  |                        |      | 2,128             |  | 3.33 | %              |  |                        | 2,924   |                   |   | 111    |  | 5.08 | %
|Federal funds purchased                             |  |                                         | 3,506   |                        |      | 95                |  | 3.62 | %              |  |                        | 744     |                   |   | 31     |  | 5.57 | %
|Repurchase agreement                                |  |                                         | 75,113  |                        |      | 973               |  | 1.73 | %              |  |                        | 40,906  |                   |   | 1,817  |  | 5.94 | %
|Subordinated notes payable to subsidiary trusts     |  |                                         | 12,300  |                        |      | 571               |  | 6.20 | %              |  |                        | 16,458  |                   |   | 974    |  | 7.91 | %
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total borrowings                                    |  |                                         | 176,158 |                        |      | 3,767             |  | 2.86 | %              |  |                        | 61,032  |                   |   | 2,933  |  | 6.43 | %
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Total interest-bearing liabilities                  |  | $                                       | 608,181 |                        |      | 12,953            |  | 2.84 | %              |  | $                      | 434,199 |                   |   | 13,997 |  | 4.31 | %
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Net interest income                                 |  |                                         |         |                        | $    | 17,129            |  |      |                |  |                        |         |                   | $ | 22,076 |  |      |  
|                                                    |  |                                         |         |                        |      |                   |  |      |                |  |                        |         |                   |   |        |  |      |  
|Net interest margin10                               |  |                                         |         |                        |      |                   |  | 3.21 | %              |  |                        |         |                   |   |        |  | 5.29 | %



|7 | Average rates/yields for these periods have been annualized using actual days.
|- | ------------------------------------------------------------------------------



|8 | Yields on securities have not been adjusted to a tax equivalent basis because the impact is not material.
|- | ---------------------------------------------------------------------------------------------------------



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



|10 | Net interest income as a percentage of average interest-earning
assets.
|-- | -----------------------------------------------------------------------



17



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##### Table of Contents

The following table shows a rate and volume analysis for changes in interest income, interest expense, and net interest
income for the periods indicated.

Rate11/Volume Analysis of Net Interest Income



|                                                    |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  
|--------------------------------------------------- |  | ------------------------------------------------------------------------- | ----- | - | ------------------------------------------------------------------------ | - | ------ | ----- |  | - | ------ | - |  | ---- | ----- | - | ----- | - | ------- | - |  | - | ------ | -
|                                                    |  | Three Months EndedSeptember 30, 2008 vs. 2007Increases (Decreases) Due to |       |   | Nine Months EndedSeptember 30, 2008 vs. 2007Increases (Decreases) Due to |  
|                                                    |  | Volume                                                                    |       |   | Rate                                                                     |   |        | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|                                                    |  | (Dollars in Thousands)                                                    |      
|Increase (Decrease) in Interest Income:             |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  
|Federal funds sold                                  |  | $                                                                         | 1,596 |   |                                                                          | $ | (1,087 | )     |  | $ | 509    |   |  | $    | 1,611 |   |       | $ | (1,244  | ) |  | $ | 367    |  
|Interest-bearing deposits in financial institutions |  |                                                                           | 6     |   |                                                                          |   | (5     | )     |  |   | 1      |   |  |      | (15   | ) |       |   | (4      | ) |  |   | (19    | )
|Investment securities:12                            |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  
|Taxable                                             |  |                                                                           | 358   |   |                                                                          |   | (37    | )     |  |   | 321    |   |  |      | 1,798 |   |       |   | 2       |   |  |   | 1,800  |  
|Non-taxable                                         |  |                                                                           | (136  | ) |                                                                          |   | (2     | )     |  |   | (138   | ) |  |      | (113  | ) |       |   | (9      | ) |  |   | (122   | )
|Loans13                                             |  |                                                                           | 1,641 |   |                                                                          |   | (5,751 | )     |  |   | (4,110 | ) |  |      | 5,275 |   |       |   | (13,292 | ) |  |   | (8,017 | )
|                                                    |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  
|Total                                               |  | $                                                                         | 3,465 |   |                                                                          | $ | (6,882 | )     |  | $ | (3,417 | ) |  | $    | 8,556 |   |       | $ | (14,547 | ) |  | $ | (5,991 | )
|                                                    |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  
|Increase (Decrease) in Interest Expense:            |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  
|Interest-bearing demand deposits                    |  | $                                                                         | 2     |   |                                                                          | $ | (7     | )     |  | $ | (5     | ) |  | $    | (3    | ) |       | $ | (28     | ) |  | $ | (31    | )
|Money market deposits                               |  |                                                                           | (438  | ) |                                                                          |   | (738   | )     |  |   | (1,176 | ) |  |      | (117  | ) |       |   | (1,971  | ) |  |   | (2,088 | )
|Savings deposits                                    |  |                                                                           | (4    | ) |                                                                          |   | (15    | )     |  |   | (19    | ) |  |      | (10   | ) |       |   | (44     | ) |  |   | (54    | )
|Time deposits $100,000 or greater                   |  |                                                                           | (153  | ) |                                                                          |   | (372   | )     |  |   | (525   | ) |  |      | 58    |   |       |   | (763    | ) |  |   | (705   | )
|Other time deposits                                 |  |                                                                           | 2,341 |   |                                                                          |   | (860   | )     |  |   | 1,481  |   |  |      | 2,196 |   |       |   | (1,196  | ) |  |   | 1,000  |  
|FHLB borrowings                                     |  |                                                                           | 1,143 |   |                                                                          |   | (479   | )     |  |   | 664    |   |  |      | 1,711 |   |       |   | (3,589  | ) |  |   | (1,878 | )
|Federal funds purchased                             |  |                                                                           | (9    | ) |                                                                          |   |       |       |  |   | (9     | ) |  |      |      |   |       |   |        |   |  |   |       |  
|Repurchase agreement                                |  |                                                                           | 191   |   |                                                                          |   | (991   | )     |  |   | (800   | ) |  |      | 1,519 |   |       |   | (2,363  | ) |  |   | (844   | )
|Subordinated notes payable to subsidiary trusts     |  |                                                                           | (10   | ) |                                                                          |   | (48    | )     |  |   | (58    | ) |  |      | (246  | ) |       |   | (157    | ) |  |   | (403   | )
|                                                    |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  
|Total                                               |  | $                                                                         | 3,063 |   |                                                                          | $ | (3,510 | )     |  | $ | (447   | ) |  | $    | 5,108 |   |       | $ | (10,111 | ) |  | $ | (5,003 | )
|                                                    |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  
|Total change in net interest income                 |  | $                                                                         | 402   |   |                                                                          | $ | (3,372 | )     |  | $ | (2,970 | ) |  | $    | 3,448 |   |       | $ | (4,436  | ) |  | $ | (988   | )
|                                                    |  |                                                                           |       |   |                                                                          |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |        |  

PROVISION FOR LOAN LOSSES

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

The provision for loan losses totaled $36.2 million for the nine months ended September 30, 2008. This represented a increase of $35.5 million when compared to
$700,000 for the same period in 2007. The increase was due to the increase in net charge-offs and the level of nonperforming loans during the first nine months of 2008. For the nine months ended September 30, 2008 and 2007, the Company had net
charge-offs of $21.1 million and $244,000, respectively. For the nine months ended September 30, 2008, the Companys nonperforming loans increased $77.9 million to $90.8 million, as compared to $13.0 million at December 31 2007.





|11 | Rates for these periods on which calculations are based have
been annualized using actual days.
|-- | -----------------------------------------------------------------------------------------------



|12 | Yields on securities have not been adjusted to a tax equivalent
basis because the impact is not material.
|-- | ---------------------------------------------------------------------------------------------------------



|13 | Loans are gross, which excludes the allowance for loan losses,
and net of deferred fees. Nonaccrual loans are included in the table for computation purposes, but the foregone interest on such loans is excluded.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



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##### Table of Contents

The process for monitoring the adequacy of the allowance for loan losses, as well as supporting documentation, regarding the allowance for loan losses is
analyzed below. See Allowance for Loan Losses.

NONINTEREST INCOME

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

Third quarter analysis.Noninterest income totaled $1.0 million for the quarter ended September 30, 2008. This represented an increase of $162,000 or 19% when compared to $864,000 for the same period in 2007.

The increase in noninterest income was primarily attributable to the increases in customer service fees of $74,000, or 17% to $518,000, gains from the sale of SBA loans
of $40,000 or 30% to 174,000 and other income of $144,000 or 86% to $312,000. These increases were partially offset by a decrease in conduit loan fee referral income of 96,000 or 81% to 22,000, which is primarily associated with the overall decrease
in conduit loan referral volume directly related to the housing crisis affecting the financial services industry. The increase in other income for the three months ended September 30, 2008 is primarily attributable to an increase in the
earnings of Bank Owned Life Insurance of $36,000 or 28% to $163,000, an increase in the net gain on investment securities of $19,000 compared to none for the same period in 2007.

For the three months ended September 30, 2008 as compared to 2007, noninterest income as an annualized percentage of average earning assets decreased to 0.64% from 0.57%%.

Nine-month analysis.Noninterest income totaled $3.4 million for the nine months ended September 30, 2008. This represented an increase of $415,000 or 14%
when compared to $3.0 million for the same period in 2007.

The increase in noninterest income was primarily due to increases in gain on sale of investment
securities of $252,000 to $287,000, BOLI of $112,000 to $464,000, customer service fees of $151,000 to $1.4 million and gains on sale of loans of $91,000 to $498,000 for the nine months ended September 30, 2008 as compared to the same period
year. These increases were partially offset by a decrease of $347,000 to $408,000 in conduit loan referral income for the nine months ended September 30, 2008 as compared to the same period last year.

For the nine months ended September 30, 2008 as compared to 2007, noninterest income as an annualized percentage of average earning decreased to 0.51% from 0.73%.



19



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##### Table of Contents

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

Noninterest Income



|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | ---------------------------------------- | ----- | --------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Three Months Ended September 30, |      
|                                                       |  | 2008                                     |       |                 | 2007   |  
|                                                       |  | Amount                                   |       | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)                   |      
|Customer service fees                                  |  | $                                        | 518   |                 | 50.49  | % |        | $ | 444             |  | 51.38  | %
|Gains from sale of loans                               |  |                                          | 174   |                 | 16.96  | % |        |   | 134             |  | 15.51  | %
|Increase in cash surrender value of life insurance     |  |                                          | 163   |                 | 15.89  | % |        |   | 127             |  | 14.70  | %
|Broker fee income                                      |  |                                          | 10    |                 | 0.97   | % |        |   | 15              |  | 1.74   | %
|Conduit loan referral income                           |  |                                          | 22    |                 | 2.14   | % |        |   | 118             |  | 13.66  | %
|Other miscellaneous income                             |  |                                          | 139   |                 | 13.55  | % |        |   | 26              |  | 3.01   | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  
|Total noninterest income                               |  | $                                        | 1,026 |                 | 100.00 | % |        | $ | 864             |  | 100.00 | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                          |       |                 | 0.64   | % |        |   |                 |  | 0.57   | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  

Noninterest Income



|                                                       |  |                                         |       |                 |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | --------------------------------------- | ----- | --------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Nine Months Ended September 30, |      
|                                                       |  | 2008                                    |       |                 | 2007   |  
|                                                       |  | Amount                                  |       | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)                  |      
|Customer service fees                                  |  | $                                       | 1,427 |                 | 41.48  | % |        | $ | 1,276           |  | 42.18  | %
|Gains from sale of loans                               |  |                                         | 498   |                 | 14.48  | % |        |   | 407             |  | 13.45  | %
|Increase in cash surrender value of life insurance     |  |                                         | 464   |                 | 13.49  | % |        |   | 352             |  | 11.64  | %
|Broker fee income                                      |  |                                         | 33    |                 | 0.96   | % |        |   | 96              |  | 3.17   | %
|Conduit loan referral income                           |  |                                         | 408   |                 | 11.86  | % |        |   | 755             |  | 24.96  | %
|Other miscellaneous income                             |  |                                         | 610   |                 | 17.73  | % |        |   | 139             |  | 4.60   | %
|                                                       |  |                                         |       |                 |        |   |        |   |                 |  |        |  
|Total noninterest income                               |  | $                                       | 3,440 |                 | 100.00 | % |        | $ | 3,025           |  | 100.00 | %
|                                                       |  |                                         |       |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                         |       |                 | 0.51   | % |        |   |                 |  | 0.73   | %
|                                                       |  |                                         |       |                 |        |   |        |   |                 |  |        |  



20



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##### Table of Contents

NONINTEREST EXPENSE

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

Third quarter analysis. Noninterest expense totaled $6.8 million for the three months ended September 30, 2008, an increase of $2.2 million or 47% when
compared to $4.6 million for the same period in 2007. The increase was primarily due to an increase in OREO expenses of $1.5 million and FDIC expense of $309,000. The increase in OREO expenses was primarily due to the increase in OREO to $14.9
million at September 30, 2008 as compared to $2.3 million at December 31, 2007, and as compared to $1.1 million at September 30, 2007.

For
the three months ended September 30, 2008 as compared to 2007, noninterest expense as an annualized percentage of average earning assets increased to 3.37% from 3.08%. This increase is primarily attributable to the increase in noninterest
expenses of $2.2 million, partially offset by $209.6 million in interest earning assets. The increase in noninterest expenses for the three months ended September 30, 2008 was primarily related to increases in OREO expenses and FDIC expenses.

Nine -month analysis.Noninterest expense totaled $18.0 million for the nine months ended September 30, 2008, an increase of $3.6 million or
25% when compared to $14.4 million for the same period in 2007. The increase was primarily due to increases in OREO expenses of $2.2 million, FDIC expense of $503,000 and director deferred compensation expense of $206,000.

For the nine months ended September 30, 2008 as compared to 2007, noninterest expense as an annualized percentage of average earning assets decreased to 3.37% from
3.45%. This decrease is primarily attributable to the increase of $156.3 million in interest earning assets partially offset by an increase in noninterest expenses of $3.6 million.



21



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##### Table of Contents

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

Noninterest Expense



|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | ---------------------------------------- | ----- | --------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Three Months Ended September 30, |      
|                                                       |  | 2008                                     |       |                 | 2007   |  
|                                                       |  | Amount                                   |       | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)                   |      
|Salaries and employee benefits                         |  | $                                        | 2,512 |                 | 36.78  | % |        | $ | 2,544           |  | 54.85  | %
|Net occupancy expense                                  |  |                                          | 559   |                 | 8.19   | % |        |   | 581             |  | 12.53  | %
|Marketing                                              |  |                                          | 218   |                 | 3.19   | % |        |   | 340             |  | 7.33   | %
|Data processing fees                                   |  |                                          | 267   |                 | 3.91   | % |        |   | 263             |  | 5.67   | %
|Professional fees                                      |  |                                          | 559   |                 | 8.19   | % |        |   | 246             |  | 5.31   | %
|Postage, telephone, supplies                           |  |                                          | 116   |                 | 1.70   | % |        |   | 131             |  | 2.83   | %
|Directors fees                                        |  |                                          | 74    |                 | 1.08   | % |        |   | 74              |  | 1.60   | %
|FDIC expense                                           |  |                                          | 345   |                 | 5.05   | % |        |   | 36              |  | 0.78   | %
|OREO expense                                           |  |                                          | 1,550 |                 | 22.69  | % |        |   | 62              |  | 1.34   | %
|Other operating expense                                |  |                                          | 630   |                 | 9.22   | % |        |   | 360             |  | 7.76   | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  
|Total noninterest expense                              |  | $                                        | 6,830 |                 | 100.00 | % |        | $ | 4,637           |  | 100.00 | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                          |       |                 | 3.37   | % |        |   |                 |  | 3.08   | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  

Noninterest Expense



|                                                       |  |                                         |        |                 |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | --------------------------------------- | ------ | --------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Nine Months Ended September 30, |       
|                                                       |  | 2008                                    |        |                 | 2007   |  
|                                                       |  | Amount                                  |        | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)                  |       
|Salaries and employee benefits                         |  | $                                       | 7,853  |                 | 43.66  | % |        | $ | 7,906           |  | 54.96  | %
|Net occupancy expense                                  |  |                                         | 1,698  |                 | 9.44   | % |        |   | 1,729           |  | 12.02  | %
|Marketing                                              |  |                                         | 769    |                 | 4.27   | % |        |   | 1,008           |  | 7.01   | %
|Data processing fees                                   |  |                                         | 815    |                 | 4.53   | % |        |   | 792             |  | 5.51   | %
|Professional fees                                      |  |                                         | 1,216  |                 | 6.76   | % |        |   | 737             |  | 5.12   | %
|Postage, telephone, supplies                           |  |                                         | 378    |                 | 2.10   | % |        |   | 410             |  | 2.85   | %
|Directors fees                                        |  |                                         | 222    |                 | 1.23   | % |        |   | 215             |  | 1.49   | %
|FDIC expense                                           |  |                                         | 566    |                 | 3.15   | % |        |   | 63              |  | 0.44   | %
|OREO expense                                           |  |                                         | 2,286  |                 | 12.71  | % |        |   | 73              |  | 0.51   | %
|Other operating expense                                |  |                                         | 2,185  |                 | 12.15  | % |        |   | 1,452           |  | 10.09  | %
|                                                       |  |                                         |        |                 |        |   |        |   |                 |  |        |  
|Total noninterest expense                              |  | $                                       | 17,988 |                 | 100.00 | % |        | $ | 14,385          |  | 100.00 | %
|                                                       |  |                                         |        |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                         |        |                 | 3.37   | % |        |   |                 |  | 3.45   | %
|                                                       |  |                                         |        |                 |        |   |        |   |                 |  |        |  

INCOME TAXES

Income tax benefits were $(13.9) million for the first nine months of 2008 compared to income tax provision of $1.3 million for the first nine months of 2007, representing effective tax (benefit) rates of (40.7)% and 37.5%, respectively, of
pre-tax income (loss) for those periods. The amount of tax provision (benefits) is determined by applying the Companys statutory income tax rates to pre-tax book income, adjusted for permanent differences between pre-tax book income and actual
taxable income. Such permanent



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##### Table of Contents

differences include but are not limited to tax-exempt interest income, increases in the cash surrender value of bank-owned life insurance, compensation
expense associated with stock options and certain other expenses that are not allowed as tax deductions, and tax credits.

FINANCIAL CONDITION

GENERAL

The Companys total assets were
$939.1 million at September 30, 2008, an increase of $249.6 million, or 27%, compared to total assets of $689.5 million at December 31, 2007. Total net loans decreased $4.5 million or less than 1% to $510.1 million at September 30,
2008 as compared to $514.6 million at December 31, 2007. The Companys investment portfolio increased $22.6 million or 17.9% to $148.7 million at September 30, 2008 as compared to $126.1 million at December 31, 2007. Total
deposits at September 30, 2008 were $711.7 million, which represented an increase of $233.8 million, or 49% from total deposits of $478.0 million at December 31, 2007. The increase was primarily in interest-bearing deposits, which
increased $260.5 million or 71% to $628.3 million at September 30, 2008 compared to $367.8 million at December 31, 2007. Noninterest bearing demand deposits decreased $26.7 million or 24% to $83.4 million at September 30, 2008
compared to $110.1 million at December 31, 2007.The major components of the Companys statement of condition are individually analyzed below, along with off-balance sheet information.

LOANS

Total gross loans were $532.4 million at September 30,
2008 as compared to $522.2 million at December 31, 2007. Total gross loans increased by $10.2 million, or 2% for the nine months ended September 30, 2008. Total gross loans represented 57% of total assets at September 30, 2008 and 76%
of total assets at December 31, 2007. Real estate loans, which include construction and development loans, decreased $3.1 million or less than one percent to $319.8 million during the nine months ended September 30, 2008. Commercial loans
increased $10.2 million or 6% to $191.6 during the nine months ended September 30, 2008 due to our focus in business development efforts in and around the marketplaces the Company serves. As of September 30, 2008, we have significantly
curtailed originating construction and land loans, since new home construction has slowed down in the Riverside and San Bernardino Counties of Southern California. We will concentrate on originating loans for our commercial and consumer loan product
line.

LOANS HELD FOR SALE

The Company actively
generates SBA loans as part of its primary operating activity of making loans. The guaranteed portion of each individual loan is sold on the secondary market simultaneously with the booking of the loan, and therefore the Company has no inventory
held-for-sale, unlike some institutions that warehouse loans to sell as pools. The Company retains the unguaranteed portion of the SBA loans. The total gain on sale of loans was $498,000 or 1.5% of total interest and
noninterest income as of September 30, 2008 and $407,000 or 1.04% of total interest and noninterest income as of September 30, 2007.



23



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##### Table of Contents

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

Loan Portfolio Composition



|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|---------------------------- |  | ---------------------- | ------- | - | ----------------- | ------ | - | ------ | - | ------- | --------------- |  | ------ | -
|                             |  | September 30, 2008     |         |   | December 31, 2007 |       
|                             |  | Amount                 |         |   | Percentof Total   |        |   | Amount |   |         | Percentof Total | 
|                             |  | (Dollars in Thousands) |        
|Real estate loans:           |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Construction and development |  | $                      | 223,703 |   |                   | 42.02  | % |        | $ | 240,550 |                 |  | 46.06  | %
|Residential loans            |  |                        | 5,941   |   |                   | 1.12   | % |        |   | 2,505   |                 |  | 0.48   | %
|Commercial and multi-family  |  |                        | 90,175  |   |                   | 16.94  | % |        |   | 79,820  |                 |  | 15.29  | %
|Commercial loans             |  |                        | 191,610 |   |                   | 35.99  | % |        |   | 181,426 |                 |  | 34.75  | %
|Consumer loans               |  |                        | 8,558   |   |                   | 1.61   | % |        |   | 8,556   |                 |  | 1.64   | %
|Equity lines of credit       |  |                        | 10,179  |   |                   | 1.91   | % |        |   | 7,111   |                 |  | 1.36   | %
|Credit card and other loans  |  |                        | 2,197   |   |                   | 0.41   | % |        |   | 2,191   |                 |  | 0.42   | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total gross loans            |  |                        | 532,363 |   |                   | 100.00 | % |        |   | 522,159 |                 |  | 100.00 | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Less:                        |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Unearned income              |  |                        | (287    | ) |                   |        |   |        |   | (710    | )               |  |        |  
|Allowance for loan losses    |  |                        | (21,907 | ) |                   |        |   |        |   | (6,805  | )               |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total net loans              |  | $                      | 510,169 |   |                   |        |   |        | $ | 514,644 |                 |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  

NONPERFORMING ASSETS

Nonperforming assets include loans for which interest is no longer accruing, loans 90 or more days past due and still accruing, restructured loans and OREO. The Companys policy is to recognize interest income on an accrual basis
unless the full collectibility of principal and interest is uncertain. Loans that are delinquent 90 days or more, unless well secured and in the process of collection, are placed on nonaccrual status and on a cash basis, and previously accrued but
uncollected interest is reversed against current income. Thereafter, income is recognized only as it is collected in cash. Collectibility is determined by considering the borrowers financial condition, cash flow, quality of management, the
existence of collateral or guarantees and the state of the local economy.

The following are some specific steps the Company has taken in relation to
nonperforming assets during the nine months ended September 30, 2008:



| |  |  | We have reviewed our entire loan portfolio, with specific emphasis on our construction loan portfolio and feel confident that our allowance for loan losses is
adequate to protect against probable known losses.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have significantly curtailed our construction lending and will be concentrating on our commercial lending product line.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

December 31, 2007 to September 30, 2008 analysis. Nonperforming assets at September 30, 2008 increased $90.5 million to $105.8 million, from $15.3
million at December 31, 2007, and represented 19.34% and 2.92% of total gross loans and OREO, respectively.

Nonaccrual loans:

The net increase in nonaccrual loans during the current quarter ended September 30, 2008 increased to $90.2 million or 17.07% of total loans was primarily
attributable to the addition of 11 construction and development loans totaling $29.0 million and 5 commercial real estate loans totaling $652,000 that were placed on non-accrual. The additions to nonaccrual loans during the current quarter ended
September 30, 2008 were partially offset by the transfer to OREO of 4 construction loans totaling $10.5 million and 1 commercial real estate loan totaling $1.2 million and additional net charge-offs of $12.9 million.



24



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As of September 30, 2008 nonaccrual loans totaled $90.2 million and have been adjusted for impairment that resulted
in approximately $21.3 million in charge-offs during the nine months ended September 30, 2008. The Company establishes a plan with each borrower that falls into nonaccrual status that is based on receiving payments. However, it is uncertain
whether such a plan will prove to be successful. It is also uncertain to determine whether the loans that are currently classified as nonaccrual will require further adjustments for impairment.

Loans 90 days or more past due:

Loans 90 days or more past due and
still accruing decreased $2.2 million to $619,000 at September 30, 2008 as compared to December 31, 2007 and is attributable to one commercial real estate loan totaling $1.2 million that was transferred to nonaccrual status and the payoff
of two commercial loans totaling $956,000, partially offset by 1 construction loan totaling $603,000 and one credit card loan totaling $16,000 being placed on loans 90 days or more past due and still accruing.

OREO:

OREO is recorded at the fair value of the property at the time
of acquisition. Fair value is based on current appraisals less estimated selling costs. The excess of the recorded loan balance over the estimated fair value of the property at the time of acquisition is charged to the allowance for loan losses. Any
subsequent write downs are charged to noninterest expense and recognized as a valuation allowance. Subsequent increases in the fair value of the asset less selling costs reduce the valuation allowance, but not below zero, and are credited to
noninterest expense. Operating expenses of such properties and gains and losses on their disposition are included in noninterest income and expense.

During the nine months ended September 30, 2008, the Company acquired through foreclosure the underlying real property collateralizing 6 construction and development loans totaling $14.7 million and one commercial loan totaling $1.2
million, respectively. During the nine months ended September 30, 2008, we recorded $1.7 million in write-offs reflecting the lower of cost or market valuation of OREO.

September 30, 2007 to September 30, 2008 analysis. Nonperforming assets at September 30, 2008 increased $96.5 million to $105.8 million, from $9.2 million at September 30, 2007, and
represented 19.34% and 1.87% of total gross loans and OREO, respectively. The increase in nonperforming assets was primarily due to the net increase in nonaccrual loans of $84.7 million and OREO of $13.9 million between September 30, 2007 and
September 30, 2008.

Nonaccrual loans:

The net
increase in nonaccrual loans was primarily attributable to the addition of 37 construction and development loans totaling $89.1 million, 8 commercial loans totaling $572,000 and one commercial real estate loan totaling $1.2 million that were placed
on non-accrual status since June 30, 2007. The additions were partially offset by the payoff of four commercial loans totaling $2.6 million.

The
increase in nonaccrual loans was primarily attributable to the addition of 37 construction and development loans totaling $89.1 million and 8 commercial loans totaling $1.0 million that were placed on non-accrual status since September 30,
2007. The additions were partially offset by the transfer of 2 construction loans to OREO totaling $5.2 million and the payoff of 4 commercial loans totaling $345,000.

OREO:

Since September 30, 2007, the Company acquired through foreclosure the underlying real property
collateralizing 7 construction and land development loans totaling $15.9 million and one commercial real estate loan totaling $1.2 million, including additional OREO write-downs of $1.7 million. These additions to OREO were partially offset by the
sale of the commercial real estate OREO totaling $1.2 million and the partial sale of 2 construction OREO properties totaling $431,000.

On a sequential
quarter basis, June 30, 2008 to September 30, 2008, the Company acquired through foreclosure the underlying real property collateralizing 5 construction and land development loans totaling $10.5 million and one commercial real estate loan
totaling $1.2 million, including additional OREO write-downs of $1.2 million. These additions to OREO were partially offset by the sale of the commercial real estate OREO totaling $1.2 million and the partial sale of 2 construction OREO properties
totaling $431,000.



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##### Table of Contents

Except for nonperforming assets and impaired loans, Management is not aware of any loans as of September 30, 2008
for which known credit problems of the borrower would cause serious doubt as to the ability of such borrowers to comply with their present loan repayment terms. Management cannot, however, predict the extent to which the deterioration in general
economic conditions, real estate values, increase in general rates of interest, changing financial conditions or business of a borrower may adversely affect a borrowers ability to repay.



26



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##### Table of Contents

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

Nonperforming Assets



|                                                                                 |  |                        |         |                  |   |        |                   |  |   |       |  
|-------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | ------ | ----------------- |  | - | ----- | -
|                                                                                 |  | September 30,2008      |         | December 31,2007 |   |        | September 30,2007 | 
|                                                                                 |  | (Dollars in Thousands) |        
|Nonaccrual loans:14                                                              |  |                        |         |                  |   |        |                   |  |   |       |  
|Real estate loans:                                                               |  |                        |         |                  |   |        |                   |  |   |       |  
|Construction and development15                                                   |  | $                      | 89,086  |                  | $ | 9,994  |                   |  | $ | 5,166 |  
|Residential loans                                                                |  |                        |        |                  |   |       |                   |  |   |      |  
|Commercial and multi-family                                                      |  |                        |        |                  |   |       |                   |  |   |      |  
|Commercial loans                                                                 |  |                        | 1,045   |                  |   | 736    |                   |  |   | 345   |  
|Consumer loans                                                                   |  |                        |        |                  |   |       |                   |  |   |      |  
|Equity lines of credit                                                           |  |                        | 90      |                  |   |       |                   |  |   |      |  
|Credit card and other loans                                                      |  |                        |        |                  |   |       |                   |  |   |      |  
|                                                                                 |  |                        |         |                  |   |        |                   |  |   |       |  
|Total nonaccrual loans                                                           |  |                        | 90,221  |                  |   | 10,730 |                   |  |   | 5,511 |  
|                                                                                 |  |                        |         |                  |   |        |                   |  |   |       |  
|Loans 90 days or more past due (as to principal or interest) and still accruing: |  |                        |         |                  |   |        |                   |  |   |       |  
|Real estate loans:                                                               |  |                        |         |                  |   |        |                   |  |   |       |  
|Construction and development                                                     |  |                        | 603     |                  |   |       |                   |  |   | 2,639 |  
|Residential loans                                                                |  |                        |        |                  |   |       |                   |  |   |      |  
|Commercial and multi-family                                                      |  |                        |        |                  |   | 1,223  |                   |  |   |      |  
|Commercial loans                                                                 |  |                        |        |                  |   | 979    |                   |  |   |      |  
|Consumer loans                                                                   |  |                        |        |                  |   |       |                   |  |   |      |  
|Equity lines of credit                                                           |  |                        |        |                  |   |       |                   |  |   |      |  
|Credit card and other loans                                                      |  |                        | 16      |                  |   | 18     |                   |  |   |      |  
|                                                                                 |  |                        |         |                  |   |        |                   |  |   |       |  
|Total loans 90 days or more past due and still accruing                          |  |                        | 619     |                  |   | 2,220  |                   |  |   | 2,639 |  
|                                                                                 |  |                        |         |                  |   |        |                   |  |   |       |  
|Total nonperforming loans                                                        |  |                        | 90,840  |                  |   | 12,950 |                   |  |   | 8,150 |  
|OREO                                                                             |  |                        | 14,933  |                  |   | 2,343  |                   |  |   | 1,082 |  
|                                                                                 |  |                        |         |                  |   |        |                   |  |   |       |  
|Total nonperforming assets                                                       |  | $                      | 105,773 |                  | $ | 15,293 |                   |  | $ | 9,232 |  
|                                                                                 |  |                        |         |                  |   |        |                   |  |   |       |  
|Performing troubled debt restructurings16                                        |  | $                      | 5,579   |                  | $ |       |                   |  | $ |      |  
|Nonperforming loans as a percentage of total loans17                             |  |                        | 17.07   |                  |   | 2.48   | %                 |  |   | 1.65  | %
|Nonperforming assets as a percentage of total loans and OREO                     |  |                        | 19.34   |                  |   | 2.92   | %                 |  |   | 1.87  | %
|Allowance for loan losses to nonperforming loans                                 |  |                        | 24.12   |                  |   | 52.55  | %                 |  |   | 76.04 | %
|Allowance for loan losses                                                        |  | $                      | 21,907  |                  | $ | 6,805  |                   |  | $ | 6,197 |  
|                                                                                 |  |                        |         |                  |   |        |                   |  |   |       |  



|14 | Additional interest income of approximately $4.6 million would
have been recorded for the nine months ended September 30, 2008, if these loans had been paid or accrued in accordance with their original terms and had been outstanding throughout the applicable period then ended.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|15 | Construction and development nonaccrual loans includes one
troubled debt restructured construction loans for $1.1 million, whereby the terms were renegotiated by a interest rate reduction below market value and the loan maturity was extended to terms not normally given.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|16 | Represents 2 performing construction loans totaling $4.6 million and one performing single family loan totaling $1.0
million classified as troubled debt restructurings.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|17 | Total loans are gross loans, which excludes the allowance for
loan losses, and net of deferred fees.
|-- | ----------------------------------------------------------------------------------------------------



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##### Table of Contents

ALLOWANCE FOR LOAN LOSSES

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

The ALL totaled $21.9 million at September 30, 2008 compared to $6.8 million at December 31, 2007 and as a percentage of total loans
outstanding was 4.12% and 1.31%, respectively. The ratio of the ALL to total loans was determined by Management to be adequate at September 30, 2008 and December 31, 2007.

The process for monitoring the adequacy of the allowance, as well as supporting documentation regarding the allowance follows.

In originating loans, the Company recognizes that credit losses will be experienced and that the risk of loss will vary with the type of loan being made and a number of other factors, including collateral and the creditworthiness of the
borrower over the term of the loan. It is Managements policy to maintain an adequate ALL based on a number of factors, including the Companys loan loss experience, economic conditions, and regular reviews of delinquencies and loan
portfolio quality.

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

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

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

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



28



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##### Table of Contents

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



|                   |  |                   |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  
|------------------ |  | ----------------- | - |  | --------------- | - |  | ------------ | - |  | --------- | - |  | ----- | - |  | ------ | -
|                   |  | Pass/Homogeneous: |   |  | SpecialMention: |   |  | Substandard: |   |  | Doubtful: |   |  | Loss: |   |  | Total: |  
|September 30, 2008 |  | 76.02             | % |  | 6.32            | % |  | 17.63        | % |  | 0.03      | % |  | 0.00  | % |  | 100.00 | %
|                   |  |                   |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  

For the nine months ended September 30, 2008 and 2007, the Company had net charge-offs of $21.1 million and
$244,000, respectively. Implicit in lending activity is the risk that losses will occur and that the amount of such loss will vary over time. In many cases Management exercises considerable judgment in determining the timing of the recognition of
inherent losses with the objective to present a realistic presentation of the quality of the loan portfolio.

Except for nonperforming assets and impaired
loans, Management is not aware of any loans as of September 30, 2008 for which known credit problems of the borrower would cause serious doubt as to the ability of such borrowers to comply with their present loan repayment terms. Management
cannot, however, predict the extent to which the deterioration in general economic conditions, real estate values, increase in general rates of interest, changing financial conditions or business of a borrower may adversely affect a borrowers
ability to repay. The ratio of the ALL to total loans was determined by Management to be adequate at September 30, 2008 and December 31, 2007.



29



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##### Table of Contents

The following table summarizes the activity in the Companys ALL for the periods indicated:

Allowance for Loan Losses



|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|------------------------------------------------------------------ |  | ---------------------- | ------- | -- | ---------------- | - | ------- | ----------------- |  | - | ------- | --
|                                                                   |  | September 30,2008      |         |    | December 31,2007 |   |         | September 30,2007 | 
|                                                                   |  | (Dollars in Thousands) |        
|Balances:                                                          |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Average total loans outstanding during period                      |  | $                      | 535,150 |    |                  | $ | 471,926 |                   |  | $ | 460,013 |   
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Total loans outstanding at end of period, net of unearned income   |  | $                      | 532,076 |    |                  | $ | 521,449 |                   |  | $ | 493,769 |   
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Allowance for Loan Losses:                                         |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Balance at beginning of period                                     |  | $                      | 6,805   |    |                  | $ | 5,741   |                   |  | $ | 5,741   |   
|Charge-offs:                                                       |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Real estate loans:                                                 |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Construction and development                                       |  |                        | 20,303  |    |                  |   | 725     |                   |  |   |        |   
|Residential loans                                                  |  |                        |        |    |                  |   |        |                   |  |   |        |   
|Commercial and multi-family                                        |  |                        |        |    |                  |   |        |                   |  |   |        |   
|Commercial loans                                                   |  |                        | 873     |    |                  |   | 1,007   |                   |  |   | 654     |   
|Consumer loans                                                     |  |                        | 41      |    |                  |   | 8       |                   |  |   | 2       |   
|Equity lines of credit                                             |  |                        |        |    |                  |   |        |                   |  |   |        |   
|Credit card and other loans                                        |  |                        | 39      |    |                  |   | 2       |                   |  |   |        |   
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Total charge-offs                                                  |  |                        | 21,256  |    |                  |   | 1,742   |                   |  |   | 656     |   
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Recoveries:                                                        |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Real estate loans:                                                 |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Construction and development                                       |  |                        |        |    |                  |   |        |                   |  |   |        |   
|Residential loans                                                  |  |                        | 4       |    |                  |   | 2       |                   |  |   | 2       |   
|Commercial and multi-family                                        |  |                        |        |    |                  |   |        |                   |  |   |        |   
|Commercial loans                                                   |  |                        | 149     |    |                  |   | 454     |                   |  |   | 410     |   
|Consumer loans                                                     |  |                        |        |    |                  |   |        |                   |  |   |        |   
|Equity lines of credit                                             |  |                        |        |    |                  |   |        |                   |  |   |        |   
|Credit card and other loans                                        |  |                        |        |    |                  |   |        |                   |  |   |        |   
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Total recoveries                                                   |  |                        | 153     |    |                  |   | 456     |                   |  |   | 412     |   
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Net (charge-offs) recoveries                                       |  |                        | (21,103 | )  |                  |   | (1,286  | )                 |  |   | (244    | ) 
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Provision charged to operations                                    |  |                        | 36,205  |    |                  |   | 2,350   |                   |  |   | 700     |   
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Allowance for loan losses balance, end of period                   |  | $                      | 21,907  |    |                  | $ | 6,805   |                   |  | $ | 6,197   |   
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Ratios:18                                                          |  |                        |         |    |                  |   |         |                   |  |   |         |   
|Net loan charge-offs to average total loans                        |  |                        | 3.94    | %  |                  |   | 0.27    | %                 |  |   | 0.05    | % 
|Allowance for loan losses to average total loans                   |  |                        | 4.09    | %  |                  |   | 1.44    | %                 |  |   | 1.35    | % 
|Allowance for loan losses to total loans at end of period          |  |                        | 4.12    | %  |                  |   | 1.31    | %                 |  |   | 1.26    | % 
|Allowance for loan losses to total nonperforming loans             |  |                        | 24.12   | %  |                  |   | 52.55   | %                 |  |   | 76.04   | % 
|Net loan charge-offs to allowance for loan losses at end of period |  |                        | (96.33  | )% |                  |   | (18.90  | )%                |  |   | (3.94   | )%
|Net loan charge-offs to provision for loan losses                  |  |                        | (58.29  | )% |                  |   | (54.72  | )%                |  |   | (34.86  | )%



|18 | Total loans are gross loans, which excludes the allowance for loan losses, and net of deferred fees.
|-- | ----------------------------------------------------------------------------------------------------



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##### Table of Contents

INVESTMENTS

The
Companys investment portfolio provides income to the Company and also serves as a source of liquidity. Total yield, risk and maturity are among the factors considered in building the investment portfolio. Pursuant to FASB 115, securities must
be classified as held to maturity, available for sale, or trading securities. Those securities held in the available for sale category must be carried on the Companys books at fair market value.
At September 30, 2008 and December 31, 2007, 100% of the investment securities owned by the Company were classified as Available for Sale.

At September 30, 2008, the Companys investment portfolio at fair value consisted of $31.0 million in U.S. government agency securities, $106.7 million in federal agency mortgage-backed securities and $11.0 million in obligations
of states and local government securities for a total of $148.7 million. At December 31, 2007, the Companys investment portfolio at fair value consisted of $30.8 million in U.S. government agency securities, $71.2 million in federal
agency mortgage-backed securities and $24.1 million in obligations of states and local government securities for a total of $126.1 million.

The
Companys investment portfolio increased $24.4 million or 20% to $148.7 million for the three months ended September 30, 2008. During the third quarter of 2008, the Company sold $6.7 million in municipal securities for a net gain of
$19,000. The investment portfolio sales were replaced with purchases of $32.7 million in GNMA mortgage- backed securities and $588,000 in United States treasury securities. The advantage of GNMA and United States treasury securities is that they are
risk weighted at zero percent for risk-based capital purposes.

The following table is a comparison of amortized cost and fair value of investment
securities as of the dates indicated:

Investment Portfolio



|                                                      |  |                        |         |                   |   |                  |  |   |           |   |               |   |                 |  |                  |         |  |           |       |  |   |      |   |  |   |        
|----------------------------------------------------- |  | ---------------------- | ------- | ----------------- | - | ---------------- |  | - | --------- | - | ------------- | - | --------------- |  | ---------------- | ------- |  | --------- | ----- |  | - | ---- | - |  | - | -------
|                                                      |  | September 30, 2008     |         | December 31, 2007
|                                                      |  | AmortizedCost          |         | UnrealizedGains   |   | UnrealizedLosses |  |   | FairValue |   | AmortizedCost |   | UnrealizedGains |  | UnrealizedLosses |         |  | FairValue
|                                                      |  | (Dollars in Thousands)
|Available for Sale:                                   |  |                        |         |                   |   |                  |  |   |           |   |               |   |                 |  |                  |         |  |           |       |  |   |      |   |  |   |        
|U.S. government agency securities                     |  | $                      | 30,589  |                   | $ | 370              |  | $ |          |   |               | $ | 30,959          |  | $                | 30,000  |  | $         | 816   |  | $ |     |   |  | $ | 30,816 
|Federal agency mortgage-backed securities             |  |                        | 106,511 |                   |   | 1,380            |  |   | (1,172    | ) |               |   | 106,719         |  |                  | 69,352  |  |           | 1,852 |  |   | (23  | ) |  |   | 71,181 
|Obligations of states and local government securities |  |                        | 12,125  |                   |   | 2                |  |   | (1,103    | ) |               |   | 11,024          |  |                  | 24,450  |  |           | 78    |  |   | (389 | ) |  |   | 24,139 
|                                                      |  |                        |         |                   |   |                  |  |   |           |   |               |   |                 |  |                  |         |  |           |       |  |   |      |   |  |   |        
|Total                                                 |  | $                      | 149,225 |                   | $ | 1,752            |  | $ | (2,275    | ) |               | $ | 148,702         |  | $                | 123,802 |  | $         | 2,746 |  | $ | (412 | ) |  | $ | 126,136
|                                                      |  |                        |         |                   |   |                  |  |   |           |   |               |   |                 |  |                  |         |  |           |       |  |   |      |   |  |   |        

The Company also had investments in interest-bearing time certificates of deposit at other financial institutions
totaling $6.1 million at September 30, 2008 and $1.9 million at December 31, 2007.



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##### Table of Contents

DEPOSITS

Total
deposits increased $233.8 million, or 49%, to $711.7 million at September 30, 2008 from $478.0 million at December 31, 2007. Noninterest-bearing demand deposits decreased $26.7 million or 24% at September 30, 2008 as compared to
December 31, 2007. Total interest bearing deposits increased $260.5 million or 71% at September 30, 2008 as compared to $367.8 million at December 31, 2007. The increase in interest bearing deposits consisted of an increase in
interest bearing demand deposits of $5.1 million or 33%, while money market deposit accounts increased $85.1 million, or 45% at September 30, 2008 as compared to December 31, 2007. Savings deposit accounts decreased $2.1 million or 17% at
September 30, 2008 as compared to December 31, 2007. Time deposits of $100,000 or greater decreased $12.1million, or 13% at September 30, 2008 as compared to December 31, 2007, and other time deposits increased $354.7 million, or
633%. The increase in other time deposits of $354.7 million for the nine months ended September 30, 2008, included an increase of $309.4 million in broker certificates of deposit and $34.4 million in CDARS deposits.

The increase in money market deposit accounts was primarily the result of the Companys efforts to attract new customers. The decrease in other time deposits was
primarily the result of the Company allowing brokered certificates of deposit to run off and replacing them with less expensive FHLB borrowings.

Cost
of funds

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

The average rate paid on the Banks
interest-bearing deposits decreased to 2.84% for the nine months ended September 30, 2008 from 3.96% for the same period in 2007. For all interest bearing liabilities, the average rate for the nine months ended September 30, 2008 was 2.84%
as compared to 4.31% for the same period in 2007. From September 30, 2007 to September 30, 2008 the percentage of total average deposits represented by time deposits increased from 45% to 54%. The decrease in the average rate on the
Banks interest-bearing deposits was primarily due to the 325 basis point decrease in the FRB federal funds rate from the same period last year.

As
part of an Asset/Liability strategy to mitigate interest rate risk in a decreasing rates environment and reduce our asset sensitivity risk, the Company entered into two repurchase agreements that included embedded interest rate floors during the
third quarters of 2006 and 2007, for $30.0 million and $45.1 million, respectively. The average rate paid on the Banks reverse repurchase agreements decreased to 1.73% for the nine months ended September 30, 2008 from 5.94% for the same
period in 2007. The overall downward trend in interest rates by the FRB has lowered our cost of funds on a year-to-year basis.



32



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##### Table of Contents

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

Average Deposits and Other Borrowings19



|                                                           |  |                                 |         |             |      |   |                |   |             |  |      |  
|---------------------------------------------------------- |  | ------------------------------- | ------- | ----------- | ---- | - | -------------- | - | ----------- |  | ---- | -
|                                                           |  | Nine Months Ended September 30, |        
|                                                           |  | 2008                            |         |             | 2007 |  
|                                                           |  | AverageBalance                  |         | AverageRate |      |   | AverageBalance |   | AverageRate | 
|                                                           |  | (Dollars in Thousands)          |        
|Demand deposits, noninterest bearing                       |  | $                               | 98,726  |             | 0.00 | % |                | $ | 108,092     |  | 0.00 | %
|                                                           |  |                                 |         |             |      |   |                |   |             |  |      |  
|Interest-bearing deposits:                                 |  |                                 |         |             |      |   |                |   |             |  |      |  
|Interest-bearing demand deposits                           |  |                                 | 19,360  |             | 0.19 | % |                |   | 20,552      |  | 0.34 | %
|Money market deposits                                      |  |                                 | 168,474 |             | 2.29 | % |                |   | 171,539     |  | 3.88 | %
|Savings deposits                                           |  |                                 | 11,503  |             | 0.24 | % |                |   | 13,067      |  | 0.84 | %
|Time deposits $100,000 or greater                          |  |                                 | 89,033  |             | 3.67 | % |                |   | 87,427      |  | 4.82 | %
|Other time deposits                                        |  |                                 | 143,653 |             | 3.54 | % |                |   | 80,582      |  | 4.66 | %
|                                                           |  |                                 |         |             |      |   |                |   |             |  |      |  
|Total interest-bearing deposits                            |  |                                 | 432,023 |             | 2.84 | % |                |   | 373,167     |  | 3.96 | %
|                                                           |  |                                 |         |             |      |   |                |   |             |  |      |  
|FHLB borrowings                                            |  |                                 | 85,573  |             | 3.32 | % |                |   | 2,924       |  | 5.08 | %
|Federal funds purchased                                    |  |                                 | 3,506   |             | 3.62 | % |                |   | 744         |  | 5.57 | %
|Repurchase agreement                                       |  |                                 | 75,113  |             | 1.73 | % |                |   | 40,906      |  | 5.94 | %
|Subordinated notes payable to subsidiary trusts            |  |                                 | 12,300  |             | 6.20 | % |                |   | 16,458      |  | 7.91 | %
|                                                           |  |                                 |         |             |      |   |                |   |             |  |      |  
|Total deposits and other borrowings                        |  | $                               | 707,241 |             | 2.45 | % |                | $ | 542,291     |  | 3.45 | %
|                                                           |  |                                 |         |             |      |   |                |   |             |  |      |  
|Average rate excluding noninterest bearing demand deposits |  |                                 |         |             | 2.84 | % |                |   |             |  | 4.31 | %
|                                                           |  |                                 |         |             |      |   |                |   |             |  |      |  



|19 | Rates for these periods on which calculations are based have
been annualized using actual days.
|-- | -----------------------------------------------------------------------------------------------

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

Percent of Total Average Deposit Composition



|                                     |  |                                |   |  |                 |  
|------------------------------------ |  | ------------------------------ | - |  | --------------- | -
|                                     |  | Nine Months EndedSeptember 30, |  
|                                     |  | 2008                           |   |  | 2007            |  
|                                     |  | Percent ofTotal                |   |  | Percent ofTotal |  
|Demand deposits, noninterest bearing |  | 18.60                          | % |  | 22.46           | %
|Interest-bearing deposits:           |  |                                |   |  |                 |  
|Interest-bearing demand deposits     |  | 3.65                           | % |  | 4.27            | %
|Money market deposits                |  | 31.74                          | % |  | 35.64           | %
|Savings deposits                     |  | 2.17                           | % |  | 2.72            | %
|Time deposits $100,000 or greater    |  | 16.77                          | % |  | 18.17           | %
|Other time deposits                  |  | 27.07                          | % |  | 16.74           | %
|                                     |  |                                |   |  |                 |  
|Total average deposits               |  | 100.00                         | % |  | 100.00          | %
|                                     |  |                                |   |  |                 |  



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##### Table of Contents

The following table sets forth the scheduled maturities of time certificates of deposit outstanding in amounts of
$100,000 or more for the periods indicated:



|                   |  |                        |        |                             |   |                              |  |               |         |       |   |        |  |   |        
|------------------ |  | ---------------------- | ------ | --------------------------- | - | ---------------------------- |  | ------------- | ------- | ----- | - | ------ |  | - | -------
|                   |  | 3 Monthsor Less        |        | Over 3MonthsThrough6 Months |   | Over 6MonthsThrough12 Months |  | Over 12Months |         | Total
|                   |  | (Dollars in Thousands)
|September 30, 2008 |  | $                      | 73,266 |                             | $ | 94,979                       |  | $             | 165,300 |       | $ | 61,183 |  | $ | 394,728
|                   |  |                        |        |                             |   |                              |  |               |         |       |   |        |  |   |        
|December 31, 2007  |  | $                      | 34,550 |                             | $ | 26,540                       |  | $             | 16,310  |       | $ | 16,289 |  | $ | 93,689 
|                   |  |                        |        |                             |   |                              |  |               |         |       |   |        |  |   |        

LIQUIDITY AND MARKET RISK MANAGEMENT

Liquidity

Liquidity is defined as the Companys ability to raise cash when it needs it at a reasonable
cost and with a minimum of principal loss. The Company must be capable of meeting all obligations to our customers at any time and, therefore, active management of our liquidity position is critical.

Given the uncertain nature of our customers demands as well as the Companys desire to take advantage of earnings enhancement opportunities, the Company must
have available adequate sources of on and off balance sheet funds that can be acquired in time of need. Accordingly, in addition to the liquidity provided by normal cash flows, liquidity must be supplemented with additional sources. As of
September 30, 2008 the Company had Federal Funds borrowing arrangements with one correspondent bank totaling $10.0 million, and a secured line of credit with the FHLB totaling approximately $103.3 million. The Bank also has an available line of
credit with the FRB discount window of $8.7 million as of September 30, 2008. Since our capital ratios are now designated as adequately capitalized, we no longer can access new broker certificates of deposit, unless we receive a
waiver from the FDIC.

The Banks policy is to maintain the liquidity ratio at or above 10%. The Banks liquidity ratio is a measure of liquid
assets to total consolidated assets. Liquid assets are defined as federal funds sold, unused lines of credit, unused broker certificate deposit capacity, unpledged government guaranteed mortgage backed securities and interest-earnings assets in
financial institutions maturing within 30 days less short term liabilities. Short term liabilities are defined as federal funds purchased, 25% of regular time deposits maturing within 30 days, 30% of time deposits greater than $100,000 maturing
within 30 days and 10% of other selected deposits.

The Banks liquidity ratio was 17.7% at September 30, 2008 and 21.2% at December 31, 2007. The
decrease in the Banks liquidity ratio to 17.7% was primarily due to higher liabilities resulting from the Bank increasing brokered certificates of deposits up to the maximum amount approved by the Board of Directors at September 30, 2008 as
compared to December 31, 2007, whereby brokered certificates of deposits were funded at 22% of the maximum amount authorized by the Board of Directors. The increase in brokered certificates of deposits was partially offset by cash on hand in federal
funds sold and lower short term liability balances. As of September 30, 2008, brokered certificates of deposits (excluding CDARS) totaled $331.7 million, representing 35% of total consolidated assets at the Bank, as compared to brokered certificates
of deposits (excluding CDARS) of $22.3 million at December 31, 2007, representing 3.2% of total consolidated assets at the Bank. Total cash and due form banks was $208.9 million at September 30, 2008, as compared to $11.1 million at
December 31, 2007.

Managements position is that the standby funding sources available to the Company are adequate and reliable to meet the
Companys current and anticipated short-term liquidity needs.



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Market Risk Management

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

Interest Rate Risk Management

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

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

In connection with
the above-mentioned strategy, the Company studies the change in net interest income and net interest margin given immediate and parallel interest rate shocks over a 12-month horizon. The Companys goal is to manage the effect of these changes
within Board-established parameters of less than a 10% change for up/down 200 basis points. Shown below are possible changes to net interest income and the net interest margin based upon the models program under 200 basis point
increases or decreases as of September 30, 2008:



|                         |  |                                         |        |                              |   |        |                                |  |       |                    |  |      |  
|------------------------ |  | --------------------------------------- | ------ | ---------------------------- | - | ------ | ------------------------------ |  | ----- | ------------------ |  | ---- | -
|Change (in Basis Points) |  | Net Interest Income(next twelve months) |        | Change in NetInterest Income |   |        | % Change in NetInterest Income |  |       | Net InterestMargin | 
|(Dollars in Thousands)   | 
|+ 200                    |  | $                                       | 19,678 |                              | $ | 1,752  |                                |  | 9.77  | %                  |  | 2.44 | %
| 200                    |  |                                         | 16,162 |                              |   | (1,764 | )                              |  | (9.84 | )%                 |  | 2.00 | %

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 profile illustrates that if there were an immediate and sustained downward adjustment of 200 basis points in interest rates and lower interest income due to the reversal of interest income on
nonaccrual loans, the net interest margin over the next twelve months would likely be 2.00%. Conversely, if there were an immediate increase of 200 basis points in interest rates, the Companys net interest margin would likely be 2.44%. All
other things being equal, the net interest margin would improve if rates rise and decline if rates fall. Management and the Board of Directors consider the results indicated by the report to be acceptable.



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CAPITAL RESOURCES

The Federal Reserve Board and the FDIC have both established guidelines to implement risk-based capital requirements. Falling below minimum established levels might limit a bank or bank holding company 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 the Bank 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, minority interests in equity accounts of consolidated subsidiary and trust preferred securities to certain limits, including notes payable to unconsolidated
special purpose entities that issue trust preferred securities, less goodwill and other intangibles) and Tier 2 (supplementary capital including allowance for possible credit losses to certain limits, certain preferred stock, eligible subordinated
debt, and trust preferred securities, including notes payable to unconsolidated special purpose entities that issue trust preferred securities that are in excess of the limits for inclusion in Tier 1 capital). Under the established guidelines, at
September 30, 2008, the Company is characterized as Adequately Capitalized.

The Company is currently evaluating capital alternatives in
order to strengthen our capital position, and we have engaged the investment banking firm D.A. Davidson & Company as our financial advisor with respect to evaluating capital and other strategic alternatives to enhance shareholder value.

Total shareholders equity was $31.2 million at September 30, 2008, compared to $52.3 million at December 31, 2007. The decrease of $21.1
million, or 40.3% during the first nine months of 2008 was primarily due to $19.8 million in year-to-date net loss, $1.7 million change in unrealized gain on investment securities available for sale and $294,000 in common stock repurchases. These
items were partially offset by $449,000 credited to capital in relation to compensation expense associated with the issuance of stock options and the proceeds of $253,000 from the exercise of stock options, including tax benefit.



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The following table illustrates the capital and prompt corrective action guidelines applicable to the Company and the
Bank, as well as their total risk-based capital ratios, Tier 1 capital ratios and leverage ratios as of the dates indicated:



|                                        |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|--------------------------------------- |  | ------------------ | ------ |  | ------------------------------------- | - |  | -------------------------------------------------------------------------------- | ------ |  | ---- | - |  | - | ------ |  | ----- | -
|                                        |  | ActualAmount/Ratio |        |  | MinimumCapitalRequirementAmount/Ratio |   |  | Minimum To BeWell CapitalizedUnder PromptCorrective ActionProvisionsAmount/Ratio |       
|As of September 30, 2008:               |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|Total capital to risk-weighted assets:  |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|the Company                             |  | $                  | 46,430 |  | 8.43                                  | % |  | $                                                                                | 44,082 |  | 8.00 | % |  | $ | 55,103 |  | 10.00 | %
|the Bank                                |  |                    | 45,018 |  | 8.18                                  | % |  |                                                                                  | 44,034 |  | 8.00 | % |  |   | 55,043 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                    | 37,868 |  | 6.87                                  | % |  |                                                                                  | 22,041 |  | 4.00 | % |  |   | 33,062 |  | 6.00  | %
|the Bank                                |  |                    | 37,943 |  | 6.89                                  | % |  |                                                                                  | 22,017 |  | 4.00 | % |  |   | 33,026 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                    | 37,868 |  | 4.42                                  | % |  |                                                                                  | 34,270 |  | 4.00 | % |  |   | 42,838 |  | 5.00  | %
|the Bank                                |  |                    | 37,943 |  | 4.43                                  | % |  |                                                                                  | 34,252 |  | 4.00 | % |  |   | 42,815 |  | 5.00  | %
|As of December 31, 2007:                |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|Total capital to risk-weighted assets:  |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|the Company                             |  | $                  | 65,006 |  | 12.94                                 | % |  | $                                                                                | 40,178 |  | 8.00 | % |  | $ | 50,223 |  | 10.00 | %
|the Bank                                |  |                    | 62,859 |  | 12.52                                 | % |  |                                                                                  | 40,172 |  | 8.00 | % |  |   | 50,215 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                    | 58,713 |  | 11.69                                 | % |  |                                                                                  | 20,089 |  | 4.00 | % |  |   | 30,134 |  | 6.00  | %
|the Bank                                |  |                    | 56,566 |  | 11.26                                 | % |  |                                                                                  | 20,086 |  | 4.00 | % |  |   | 30,129 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |                    |        |  |                                       |   |  |                                                                                  |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                    | 58,713 |  | 8.74                                  | % |  |                                                                                  | 26,870 |  | 4.00 | % |  |   | 33,587 |  | 5.00  | %
|the Bank                                |  |                    | 56,566 |  | 8.43                                  | % |  |                                                                                  | 26,852 |  | 4.00 | % |  |   | 33,565 |  | 5.00  | %

Of the Companys $37.9 million of Tier 1 capital at September 30, 2008, $10.5 million consisted of Trust
Preferred Securities. Tier 2 capital included $1.5 million of the Companys Trust Preferred Securities, that did not qualify as Tier 1 capital. Trust Preferred Securities, up to the amount of 25% of core capital, may be included in Tier 1
capital for regulatory purposes, but classified as long-term debt in accordance with generally accepted accounting principles, however, no assurance can be given that trust preferred securities will continue to be treated as Tier 1 capital in the
future.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

The
information concerning quantitative and qualitative disclosures about market risk is included as part of Part I, Item 2 above. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity
and Market Risk Management.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

The Companys Interim Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Companys
disclosure controls and procedures (as defined in Exchange Act Rules 13a  15(e) promulgated under the Exchange Act) as of the end of the period covered by this quarterly report (the Evaluation Date) have concluded that as of the
Evaluation Date, the Companys disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiary would be made known to them by others within those
entities, particularly during the period in which this 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, accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no significant changes in the Companys internal controls over financial reporting or in other factors that occurred in the third quarter of 2008 that
have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.

PART II  OTHER INFORMATION



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

In the normal course of business, the Company
from time to time is involved in claims and legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Companys financial condition or results of operation.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

The following discussion describes material changes
from the risk factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2007, and should be read in conjunction with the risk factors section of the Form 10-K and all other information contained in this Form 10-Q
and other reports filed by the Company with the SEC. The remaining risk factors disclosed in our Form 10-K have not changed in any material respect.

Changes in economic conditions in our market areas have and may continue to materially affect our business.

Our success significantly
depends upon the growth in population, income levels, deposits and housing starts in our primary and secondary markets. If prevailing economic conditions locally or nationally are unfavorable, the communities in which we operate could be adversely
affected. We are currently experiencing adverse economic conditions in some of our real estate market areas, which could affect the ability of our customers to repay their loans to us and generally negatively affect our financial condition and
results of operations. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies and are thus disproportionately impacted.

The market value of the real estate securing our loans as collateral has been adversely affected by the slowing economy and unfavorable changes in economic conditions in
our market areas and may be further adversely affected in the future. As of



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September 30, 2008, approximately 60% of our loans receivable were secured by real estate. Any sustained period of increased payment delinquencies,
foreclosures or losses caused by the adverse market and economic conditions such as we experienced during the nine months ended September 30, 2008, will adversely affect the value of our assets, our revenues, results of operations and financial
condition. In addition, the State of California continues to face fiscal challenges, the short-term effects of which on the States economy cannot be predicted.

Due to our concentrations in real estate loans, current conditions and deterioration in the housing market and the homebuilding industry may lead to increased losses and further worsening of delinquencies and
nonperforming assets in our loan portfolios, which may have a further adverse impact on our results of operations.

Our loan portfolio is heavily
concentrated in construction and development real estate loans. As of September 30, 2008, $223.7 million represented construction and land loans secured by real estate, $5.9 million represented residential loans secured by residential real
estate and $90.2 million represented loans secured by commercial and multifamily real estate. Total nonperforming assets at September 30, 2008 increased $90.5 million to $105.8 million, from $15.3 million at December 31, 2007, and
represented 19.34% and 2.92% of total gross loans and OREO, respectively. During the nine months ended September 30, 2008, our net charge-off were $21.1 million, compared to $1.3 million for the year ended December 31, 2007 and $244,000
for the nine months ended September 30, 2007. See Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations  Nonperforming Assets and  Allowance for Loan Losses.

There has been substantial industry concern and national publicity over real estate asset quality among financial institutions due in large part to issues
related to subprime mortgage lending, declining real estate values and general economic concerns. While the Company had no subprime mortgage loans as of September 30, 2008 or at any time in its history, the ripple effect from the subprime
mortgage crisis has had a severe impact on the housing and the residential mortgage markets. The homebuilding industry in some of the market areas in which we lend has experienced a significant decline in demand for new homes and an oversupply of
new and existing homes available for sale. Our customers who are builders and developers face greater difficulty in selling their homes in markets where these trends are more pronounced. The result was a sharp increase in our delinquencies and
nonperforming assets during the nine months ended September 30, 2008. While we do not anticipate charge-offs or increases in our level of nonperforming assets of the same magnitude as we experienced during the nine months ended
September 30, 2008, they may continue until the housing market conditions improve.

In general, the banking regulators have begun to give commercial
real estate (CRE) loans greater scrutiny, due to perceived risks relating to the cyclical nature of the real estate market and the related risks for lenders with high concentrations of such loans.

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

At September 30, 2008, construction and development loans represented 44%, residential, commercial and multi-family loans represented 16% and commercial loans represented 36% of our total loan portfolio.

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

Construction lending differs from other types of real estate lending because of uncertainties inherent in estimating construction costs, the length of the construction period and the market for the project upon
completion. Commercial mortgage lending entails risks of delays in leasing and excessive vacancy rates. All real estate secured lending involves risks that real estate values in general will fall. We seek to reduce our risk of loss through our
underwriting and monitoring procedures. The overwhelming majority of our nonperforming assets as of September 30, 2008, and our charge-offs for nine months ended September 30, 2008, primarily involved construction and land loans. See
Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations  Nonperforming Assets and  Allowance for Loan Losses.



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If our ALL is not sufficient to cover actual loan losses, our earnings could be negatively impacted.

Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a likelihood of credit losses. The risk
of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for the
loan. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses that Management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on our results of operations.
Management maintains an ALL based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based on such factors, Management makes various assumptions and
judgments about the ultimate collectability of the loan portfolio and provides an ALL including allocations for specific loans when their ultimate collectability is considered impaired.

If our assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan
portfolio. Material additions to our allowance would materially decrease our net income. As a result of the precipitous decrease in housing prices subsequent to year-end, we undertook a critical evaluation of the loan portfolio relating to
residential real estate loans, resulting in substantial charge-offs for the nine months ended September 30, 2008, a substantial increase in the level of nonperforming assets, and a provision for loan losses of $36.2 million. At
September 30, 2008, the ALL was $21.9 million, or 4.1% of total loans, compared to $6.8 million or 1.3% of total loans as of December 31, 2007. At September 30, 2008, the ratio of the ALL to nonperforming loans was 24.1%, compared to
52.6% at December 31, 2007. We expect to continue to make additional provisions to our allowance in 2008; however, we can make no assurance that our allowance will be adequate to cover future loan losses given current and future market
conditions.

We require additional capital for us to maintain adequate capital levels.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We have determined that additional sources of capital will be required for us to continue operations
through 2008 and beyond. Our ability to raise additional capital will depend on conditions in the capital markets, which are outside our control, and on our financial performance. We have engaged a financial advisor to explore strategic
alternatives, including potential significant capital raises, in order to address any doubt related to our ability to continue as a going concern.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None



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

None.



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

On
September 19, 2008, subject to approval by the shareholders, the Board of Directors adopted an amendment to Article Three of the Companys Articles of Incorporation to increase the number of shares of authorized common stock from ten
million to 100 million shares, and to add a new class of ten million shares of serial preferred stock (the Amendment). Proxies were solicited by the Companys management by means of written consent pursuant to Regulation 14
under the Securities Exchange Act of 1934.

This amendment to the Articles of Incorporation was approved by the written consent of a majority
(56.3%) of the Companys outstanding shares effective November 5, 2008. The total number of outstanding shares entitled to give their written consents with respect to the Amendment was 4,884,081 common shares. The number of shares
consenting to, withholding consent from, and abstaining with respect to the approval of the Amendment as of November 5, 2008 were 2,747,267, 102,283 and 14,103 shares, respectively. No broker non-votes were received with respect to this
proposal.



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

None.



|ITEM 6. | EXHIBITS
|------- | --------



|            |  |                                                                       
|----------- |  | ----------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibits                                               
|3.1         |  | Restated Articles of Incorporation of he Company *                    
|            | 
|31.1        |  | Certification of Chief Executive Officer (Section 302 Certification)  
|            | 
|31.2        |  | Certification of Chief Financial Officer (Section 302 Certification)  
|            | 
|32          |  | Certification of Periodic Financial Report (Section 906 Certification)



|* | This exhibit replaces Exhibits 3.1 through 3.3 as described in the exhibit index to the Form 10-K for the fiscal year ending December 31, 2007.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on this 10thday of November 2008.



1ST CENTENNIAL BANCORP/s/ Suzanne DondanvilleSuzanne DondanvilleInterim President and Chief Executive Officer/s/ Beth SandersBeth SandersExecutive Vice President and Chief Financial Officer




42