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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

Exchange Act of 1934

For the quarterly period ended September 30, 2007

Commission file number: 000-29105



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1stCENTENNIAL BANCORP

(Exact Name of Registrant as specified in its charter)



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

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



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated
filer ̈Accelerated filer x         Non-accelerated filer ̈

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

The number of
shares of Common Stock of the registrant outstanding as of November 6, 2007 was 4,881,791.



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                       |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|ITEM                          |  |                                                                                       |  | PAGE
|                              | 
|PART I  Financial Statements |  |                                                                                      
|                              |  |                                                                                      
|ITEM 1                        |  | Unaudited Consolidated Financial Statements                                           |  | 2   
|                              |  |                                                                                      
|                              |  | Consolidated statements of condition                                                  |  | 2   
|                              |  |                                                                                      
|                              |  | Consolidated statements of earnings                                                   |  | 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 |  | 10  
|                              |  |                                                                                      
|ITEM 3                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 36  
|                              |  |                                                                                      
|ITEM 4                        |  | Controls and Procedures                                                               |  | 36  
|                              | 
|PART II  Other Information   |  |                                                                                      
|                              |  |                                                                                      
|ITEM 1                        |  | Legal Proceedings                                                                     |  | 36  
|                              |  |                                                                                      
|ITEM 1A                       |  | Risk Factors                                                                          |  | 36  
|                              |  |                                                                                      
|ITEM 2                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 37  
|                              |  |                                                                                      
|ITEM 3                        |  | Defaults Upon Senior Securities                                                       |  | 37  
|                              |  |                                                                                      
|ITEM 4                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 37  
|                              |  |                                                                                      
|ITEM 5                        |  | Other Information                                                                     |  | 37  
|                              |  |                                                                                      
|ITEM 6                        |  | Exhibits                                                                              |  | 38  
|                              |  |                                                                                      
|                              |  | Signatures                                                                            |  | 40  





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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, 2007 and December 31, 2006



|                                                                                                                                                                          |  |             |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ---- | - | -------
|Dollar amounts in thousands                                                                                                                                               |  | 2007        |         | 2006
|                                                                                                                                                                          |  | (unaudited) |         |     
|ASSETS                                                                                                                                                                    |  |             |         |      |   |        
|Cash and due from banks                                                                                                                                                   |  | $           | 12,271  |      | $ | 18,385 
|Federal funds sold                                                                                                                                                        |  |             |        |      |   | 2,900  
|                                                                                                                                                                          |  |             |         |      |   |        
|Total cash and cash equivalents                                                                                                                                           |  |             | 12,271  |      |   | 21,285 
|Interest-bearing deposits in financial institutions                                                                                                                       |  |             | 1,963   |      |   | 2,922  
|Investment securities, available for sale                                                                                                                                 |  |             | 126,198 |      |   | 72,649 
|Stock investments restricted, at cost                                                                                                                                     |  |             | 1,990   |      |   | 1,681  
|Loans, net of allowance for loan losses of $6,197 and $5,741                                                                                                              |  |             | 487,572 |      |   | 426,200
|Accrued interest receivable                                                                                                                                               |  |             | 3,668   |      |   | 3,469  
|Premises and equipment, net                                                                                                                                               |  |             | 3,045   |      |   | 3,152  
|Goodwill                                                                                                                                                                  |  |             | 4,180   |      |   | 4,180  
|Cash surrender value of life insurance                                                                                                                                    |  |             | 14,408  |      |   | 11,639 
|Other assets                                                                                                                                                              |  |             | 5,047   |      |   | 3,950  
|                                                                                                                                                                          |  |             |         |      |   |        
|Total assets                                                                                                                                                              |  | $           | 660,342 |      | $ | 551,127
|                                                                                                                                                                          |  |             |         |      |   |        
|LIABILITIES                                                                                                                                                               |  |             |         |      |   |        
|Deposits:                                                                                                                                                                 |  |             |         |      |   |        
|Noninterest-bearing demand deposits                                                                                                                                       |  | $           | 108,610 |      | $ | 111,154
|Interest-bearing deposits                                                                                                                                                 |  |             | 379,275 |      |   | 345,309
|                                                                                                                                                                          |  |             |         |      |   |        
|Total deposits                                                                                                                                                            |  |             | 487,885 |      |   | 456,463
|Accrued interest payable                                                                                                                                                  |  |             | 948     |      |   | 432    
|Federal funds purchased                                                                                                                                                   |  |             | 5,610   |      |   |       
|Borrowings from federal home loan bank                                                                                                                                    |  |             | 25,000  |      |   |       
|Repurchase agreements                                                                                                                                                     |  |             | 75,113  |      |   | 30,000 
|Other liabilities                                                                                                                                                         |  |             | 4,111   |      |   | 3,729  
|Subordinated notes payable to subsidiary trusts                                                                                                                           |  |             | 12,300  |      |   | 18,306 
|                                                                                                                                                                          |  |             |         |      |   |        
|Total liabilities                                                                                                                                                         |  |             | 610,967 |      |   | 508,930
|                                                                                                                                                                          |  |             |         |      |   |        
|SHAREHOLDERS EQUITY                                                                                                                                                      |  |             |         |      |   |        
|Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 4,881,791 and 3,212,215 shares at September 30, 2007 and
December 31, 2006, respectively |  |             | 28,985  |      |   | 27,998 
|Retained earnings                                                                                                                                                         |  |             | 20,279  |      |   | 14,038 
|Accumulated other comprehensive income                                                                                                                                    |  |             | 111     |      |   | 161    
|                                                                                                                                                                          |  |             |         |      |   |        
|Total shareholders equity                                                                                                                                                |  |             | 49,375  |      |   | 42,197 
|                                                                                                                                                                          |  |             |         |      |   |        
|Total liabilities and shareholders equity                                                                                                                                |  | $           | 660,342 |      | $ | 551,127
|                                                                                                                                                                          |  |             |         |      |   |        

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



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##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)



|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|----------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                      |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|Dollar amounts in thousands, except per share amounts |  | 2007                             |        | 2006                            |   | 2007   |  | 2006
|Interest income:                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Loans, including fees                                 |  | $                                | 11,117 |                                 | $ | 9,696  |  | $    | 32,293 |  | $ | 27,570
|Deposits in financial institutions                    |  |                                  | 26     |                                 |   | 29     |  |      | 92     |  |   | 88    
|Federal funds sold                                    |  |                                  | 99     |                                 |   | 224    |  |      | 315    |  |   | 776   
|Investments                                           |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Taxable                                               |  |                                  | 1,248  |                                 |   | 279    |  |      | 2,620  |  |   | 475   
|Tax-exempt                                            |  |                                  | 259    |                                 |   | 110    |  |      | 753    |  |   | 220   
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total interest income                                 |  |                                  | 12,749 |                                 |   | 10,338 |  |      | 36,073 |  |   | 29,129
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Interest expense:                                     |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Interest bearing demand and savings deposits          |  |                                  | 1,896  |                                 |   | 1,575  |  |      | 5,109  |  |   | 4,164 
|Time deposits $100,000 or greater                     |  |                                  | 1,170  |                                 |   | 692    |  |      | 3,149  |  |   | 1,631 
|Other time deposits                                   |  |                                  | 937    |                                 |   | 571    |  |      | 2,806  |  |   | 1,495 
|Interest on borrowed funds                            |  |                                  | 1,270  |                                 |   | 470    |  |      | 2,933  |  |   | 1,165 
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total interest expense                                |  |                                  | 5,273  |                                 |   | 3,308  |  |      | 13,997 |  |   | 8,455 
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Net interest income                                   |  |                                  | 7,476  |                                 |   | 7,030  |  |      | 22,076 |  |   | 20,674
|Provision for loan losses                             |  |                                  | 300    |                                 |   | 200    |  |      | 700    |  |   | 820   
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Net interest income after provision for loan losses   |  |                                  | 7,176  |                                 |   | 6,830  |  |      | 21,376 |  |   | 19,854
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Noninterest income:                                   |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Customer service fees                                 |  |                                  | 444    |                                 |   | 411    |  |      | 1,276  |  |   | 1,241 
|Gains from sale of loans                              |  |                                  | 134    |                                 |   | 2      |  |      | 407    |  |   | 319   
|Conduit loan referral income                          |  |                                  | 118    |                                 |   | 80     |  |      | 755    |  |   | 638   
|Other income                                          |  |                                  | 168    |                                 |   | 204    |  |      | 587    |  |   | 458   
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total noninterest income                              |  |                                  | 864    |                                 |   | 697    |  |      | 3,025  |  |   | 2,656 
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Noninterest expense:                                  |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Salaries and employee benefits                        |  |                                  | 2,544  |                                 |   | 2,302  |  |      | 7,906  |  |   | 7,254 
|Net occupancy expense                                 |  |                                  | 581    |                                 |   | 551    |  |      | 1,729  |  |   | 1,673 
|Other operating expense                               |  |                                  | 1,512  |                                 |   | 1,504  |  |      | 4,750  |  |   | 4,616 
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total noninterest expense                             |  |                                  | 4,637  |                                 |   | 4,357  |  |      | 14,385 |  |   | 13,543
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Income before provision for income taxes              |  |                                  | 3,403  |                                 |   | 3,170  |  |      | 10,016 |  |   | 8,967 
|Provision for income taxes                            |  |                                  | 1,277  |                                 |   | 1,321  |  |      | 3,769  |  |   | 3,555 
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Net income                                            |  | $                                | 2,126  |                                 | $ | 1,849  |  | $    | 6,247  |  | $ | 5,412 
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Basic earnings per share1                             |  | $                                | 0.44   |                                 | $ | 0.39   |  | $    | 1.29   |  | $ | 1.13  
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Diluted earnings per share1                           |  | $                                | 0.40   |                                 | $ | 0.35   |  | $    | 1.18   |  | $ | 1.03  
|                                                      |  |                                  |        |                                 |   |        |  |      |        |  |   |       

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



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|1 | 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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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Nine Months Ended September 30, 2007 and 2006
(unaudited)

Dollar amounts in thousands, except share amounts



|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | --------- | - |  | ----------- | ------ | ---------------- | - | ------ | ------------------------------------------ |  | - | ----- | - |  | - | ------ | -
|                                                                                             |  | Shares    |   |  | CommonStock |        | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total |  
|BALANCE, DECEMBER 31, 2005                                                                   |  | 2,100,075 |   |  | $           | 26,803 |                  | $ | 6,617  |                                            |  | $ | 1     |   |  | $ | 33,421 |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |   |  |             |       |                  |   | 5,412  |                                            |  |   |      |   |  |   | 5,412  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |                  |   |       |                                            |  |   | 155   |   |  |   | 155    |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   | 5,567  |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Stock Distribution                                                                           |  | 1,062,656 |   |  |             |       |                  |   |       |                                            |  |   |      |   |  |   |       |  
|Cash paid in lieu of fractional shares                                                       |  |          |   |  |             |       |                  |   | (6     | )                                          |  |   |      |   |  |   | (6     | )
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 398    |                  |   |       |                                            |  |   |      |   |  |   | 398    |  
|Retirement of unvested restricted stock awards                                               |  | (578      | ) |  |             |       |                  |   |       |                                            |  |   |      |   |  |   |       |  
|Exercise of stock options, including tax benefit                                             |  | 41,066    |   |  |             | 511    |                  |   |       |                                            |  |   |      |   |  |   | 511    |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE, SEPTEMBER 30, 2006                                                                  |  | 3,203,219 |   |  | $           | 27,712 |                  | $ | 12,023 |                                            |  | $ | 156   |   |  | $ | 39,891 |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|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 |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  

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



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##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2007 and 2006 (unaudited)



|                                                                                      |  |      |          |   |      |   |         |  
|------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|Dollar amounts in thousands                                                           |  | 2007 |          |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                  |  |      |          |   |      |   |         |  
|Net income                                                                            |  | $    | 6,247    |   |      | $ | 5,412   |  
|Adjustments to reconcile net income to net cash provided by operating activities:     |  |      |          |   |      |   |         |  
|Depreciation and amortization                                                         |  |      | 482      |   |      |   | 517     |  
|Gain on sale of fixed assets                                                          |  |      | (3       | ) |      |   | (7      | )
|Gain from sale of investments                                                         |  |      | (34      | ) |      |   |        |  
|Provision for loan losses                                                             |  |      | 700      |   |      |   | 820     |  
|Amortization of deferred loan fees                                                    |  |      | (953     | ) |      |   | (1,334  | )
|Amortization of excess purchase value of deposits                                     |  |      |         |   |      |   | 9       |  
|Fair value of stock options and restricted stock awards in noninterest expense        |  |      | 488      |   |      |   | 425     |  
|Deferred income tax benefit                                                           |  |      | (90      | ) |      |   | (44     | )
|Net amortization of premiums (discounts) on investments and interest-bearing deposits |  |      | (102     | ) |      |   | 82      |  
|Increase in cash surrender value of life insurance                                    |  |      | (352     | ) |      |   | (291    | )
|Change in:                                                                            |  |      |          |   |      |   |         |  
|Accrued interest receivable                                                           |  |      | (199     | ) |      |   | (429    | )
|Other assets                                                                          |  |      | (1,059   | ) |      |   | (144    | )
|Accrued interest payable                                                              |  |      | 516      |   |      |   | 185     |  
|Other liabilities                                                                     |  |      | 355      |   |      |   | 292     |  
|                                                                                      |  |      |          |   |      |   |         |  
|Net cash provided by operating activities                                             |  |      | 5,996    |   |      |   | 5,493   |  
|                                                                                      |  |      |          |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                  |  |      |          |   |      |   |         |  
|Net decrease (increase) in interest-bearing deposits in financial institutions        |  |      | 1,027    |   |      |   | (654    | )
|Activity in available for sale securities:                                            |  |      |          |   |      |   |         |  
|Purchases of securities                                                               |  |      | (60,035  | ) |      |   | (49,266 | )
|Proceeds from sales, maturities and principal repayments of securities                |  |      | 6,556    |   |      |   | 2,689   |  
|Purchases of Federal Home Loan Bank stock                                             |  |      | (309     | ) |      |   | (45     | )
|Net increase in loans                                                                 |  |      | (60,342  | ) |      |   | (44,059 | )
|Acquisition of other real estate owned                                                |  |      | (777     | ) |      |   |        |  
|Additions to bank premises and equipment                                              |  |      | (372     | ) |      |   | (149    | )
|Purchases of life insurance                                                           |  |      | (2,417   | ) |      |   | (4,500  | )
|                                                                                      |  |      |          |   |      |   |         |  
|Net cash used in investing activities                                                 |  |      | (116,669 | ) |      |   | (95,984 | )
|                                                                                      |  |      |          |   |      |   |         |  

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



5



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##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS
OF CASH FLOWS (continued)

Nine Months Ended September 30, 2007 and 2006 (unaudited)



|                                                                       |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Dollar amounts in thousands                                            |  | 2007 |         |   | 2006 |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                   |  |      |         |   |      |   |         |  
|Net increase (decrease) in noninterest-bearing demand deposits         |  |      | (2,544  | ) |      |   | 6,693   |  
|Net increase in interest-bearing deposits                              |  |      | 33,966  |   |      |   | 39,853  |  
|Proceeds from federal funds purchased                                  |  |      | 5,610   |   |      |   |        |  
|Proceeds from federal home loan bank borrowings                        |  |      | 25,000  |   |      |   |        |  
|Proceeds from repurchase agreements                                    |  |      | 45,113  |   |      |   | 30,000  |  
|Redemption of trust preferred securities                               |  |      | (6,006  | ) |      |   |        |  
|Cash paid in lieu of fractional shares                                 |  |      | (6      | ) |      |   | (6      | )
|Proceeds from exercise of stock options                                |  |      | 526     |   |      |   | 511     |  
|                                                                       |  |      |         |   |      |   |         |  
|Net cash provided by financing activities                              |  |      | 101,659 |   |      |   | 77,051  |  
|                                                                       |  |      |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                              |  |      | (9,014  | ) |      |   | (13,440 | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                         |  |      | 21,285  |   |      |   | 38,367  |  
|                                                                       |  |      |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                               |  | $    | 12,271  |   |      | $ | 24,927  |  
|                                                                       |  |      |         |   |      |   |         |  
|SUPPLEMENTAL INFORMATION:                                              |  |      |         |   |      |   |         |  
|Interest paid                                                          |  | $    | 13,481  |   |      | $ | 8,261   |  
|                                                                       |  |      |         |   |      |   |         |  
|Income taxes paid                                                      |  | $    | 3,498   |   |      | $ | 3,987   |  
|                                                                       |  |      |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |  |      |         |   |      |   |         |  
|Transfer of loans to other real estate owned, after charge-off of $446 |  | $    | 310     |   |      | $ |        |  
|                                                                       |  |      |         |   |      |   |         |  

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



6



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##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

Note 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of
Business

1stCentennial 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 1stCentennial 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.

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,
2006, 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, 2007 may not be indicative of operating results for
the full year ending December 31, 2007. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications, including the reclassification of brokered certificates of deposits from greater than $100,000 to
other time deposits that are in groups of large master certificates but are made up of individual time deposits of $1,000 each. As of September 30, 2007 and December 31, 2006, $19.2 million and $34.4 million respectively, represented such
brokered time deposits and were reclassified with no effect on net income and shareholders equity.

Note 2. RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard
(SFAS) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is
a market-based measurement, not an entity-specific measurement and, therefore, should be determined based on the assumptions that market participants would use in pricing that asset or liability. SFAS No. 157 also establishes a fair value
hierarchy that distinguishes between market participant assumptions developed based on market data obtained from independent sources and the Companys own assumptions about market participant assumptions based on the best information available.
SFAS No. 157 is effective for the Company on January 1, 2008 with earlier adoption permitted. The Company does not expect adoption to have a significant impact on the consolidated financial statements, results of operations or liquidity of
the Company.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities 
including an amendment of FASB Statement No. 115 which is effective for the Company as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the fiscal year that begins on or
after November 15, 2006, provided that the Company also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The Company has evaluated this Statement and has decided to not elect the fair value
option for eligible items at the date of adoption.



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##### Table of Contents

Note 3. EARNINGS PER SHARE2

Basic earnings per share represents income 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. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

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

Earnings per share calculation

For the three months ended
September 30,

(In thousands, except per share amounts)



|                                        |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|--------------------------------------- |  | --------- | ----- | --------------------- | ----- | --------------- | - | ----- | --------- |  | --------------------- | ----- | --------------- | ----- |  | - | ----- | -
|                                        |  | 2007      |       |                       | 2006  |                
|                                        |  | NetIncome |       | Weightedaverageshares |       | Per shareamount |   |       | NetIncome |  | Weightedaverageshares |       | Per shareamount |      
|Basic earnings per share                |  | $         | 2,126 |                       | 4,865 |                 | $ | 0.44  |           |  | $                     | 1,849 |                 | 4,791 |  | $ | 0.39  |  
|Effect of dilutive shares:              |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|assumed exercise of outstanding options |  |           |      |                       | 453   |                 |   | (0.04 | )         |  |                       |      |                 | 503   |  |   | (0.04 | )
|Diluted earnings per share              |  | $         | 2,126 |                       | 5,318 |                 | $ | 0.40  |           |  | $                     | 1,849 |                 | 5,294 |  | $ | 0.35  |  

Earnings per share calculation

For the nine months ended September 30,

(In thousands, except per share amounts)



|                                        |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|--------------------------------------- |  | --------- | ----- | --------------------- | ----- | --------------- | - | ----- | --------- |  | --------------------- | ----- | --------------- | ----- |  | - | ----- | -
|                                        |  | 2007      |       |                       | 2006  |                
|                                        |  | NetIncome |       | Weightedaverageshares |       | Per shareamount |   |       | NetIncome |  | Weightedaverageshares |       | Per shareamount |      
|Basic earnings per share                |  | $         | 6,247 |                       | 4,842 |                 | $ | 1.29  |           |  | $                     | 5,412 |                 | 4,775 |  | $ | 1.13  |  
|Effect of dilutive shares:              |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|assumed exercise of outstanding options |  |           |      |                       | 453   |                 |   | (0.11 | )         |  |                       |      |                 | 503   |  |   | (0.10 | )
|Diluted earnings per share              |  | $         | 6,247 |                       | 5,295 |                 | $ | 1.18  |           |  | $                     | 5,412 |                 | 5,278 |  | $ | 1.03  |  



---

|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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##### Table of Contents

Note 4. 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 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, 2007     |         | December 31,2006
|                                      |  | (Dollars in Thousands)
|Standby letters of credit             |  | $                      | 4,572   |                  | $ | 3,231  
|Undisbursed loans and lines of credit |  |                        | 194,467 |                  |   | 223,201
|Available credit card lines           |  |                        | 3,469   |                  |   | 3,060  
|                                      |  |                        |         |                  |   |        
|Total off-balance sheet commitments   |  | $                      | 202,508 |                  | $ | 229,492
|                                      |  |                        |         |                  |   |        

Note 5. STOCK REPURCHASE PROGRAM

On September 21, 2007 the Board of Directors of the Company approved a plan to incrementally repurchase up to an aggregate of $3.0 million of the Companys common stock. The repurchase program commenced on
October 17, 2007 and will continue for a period of twelve months thereafter, subject to earlier termination at the Companys discretion. The shares would be repurchased at the prevailing market prices from time to time in open market
transactions during the repurchase period. The timing of the purchases and the number of shares to be repurchased at any given time will depend on market conditions and SEC regulations. The Company has engaged Western Financial Corporation in
connection with the stock repurchases.



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##### Table of Contents

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

This discussion
focuses primarily on the results of operations of the Company and its subsidiary on a consolidated basis for the three and nine months ended September 30, 2007 and 2006, and the financial condition of the Company as of September 30, 2007
and December 31, 2006.

Managements discussion and analysis is written to provide greater insight into the results of operations and the
financial condition of the Company and its subsidiary. For a more complete understanding of the Company and its operations, reference should be made to the consolidated financial statements included in this report and in the Companys 2006
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 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, 2006.

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 level of the allowance as of September 30, 2007 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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##### Table of Contents

SUMMARY OF PERFORMANCE

Results of operations summary

Third quarter analysis.Net income for the quarter ended September 30, 2007 was $2.1
million, which is $277,000 or 15% higher than net income of $1.8 million for the same period in 2006. Basic and diluted earnings per share were $0.44 and $0.40 respectively, for the three months ended September 30, 2007, as compared to $0.39
and $0.35 respectively, for the same period in 2006. 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, 2007 were 1.33% and 17.73% respectively, as compared to 1.46% and 18.82% respectively, for the same period in 2006 due
to faster growth in average assets and average equity than in income.

The primary drivers behind the variance in net income for the quarter ended
September 30, 2007 relative to the same period in 2006 are as follows:



| |  |  | Net interest income before provision for loan losses increased by $446,000 or 6%, primarily due to the increase in average total loans.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gains from the sale of loans increased by $132,000, which resulted from more loans sold during the third quarter of 2007, when compared to 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Salaries and employee benefits increased by $242,000 or 11%, as a result of the Companys growth, coupled with salary increases.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

Nine-month analysis. Net income for the nine months ended September 30, 2007 was $6.2 million, which is $835,000 or 15% higher than net income of $5.4
million for the same period in 2006. Basic and diluted earnings per share were $1.29 and $1.18 respectively, for the nine months ended September 30, 2007, as compared to $1.13 and $1.03 respectively, for the same period in 2006. 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 nine months ended September 30, 2007 were 1.41% and 18.33% respectively, as compared to 1.51% and 19.60% respectively, for the same period in 2006 due to faster growth in average assets and average equity than in income.

The primary drivers behind the variance in net income for the nine months ended September 30, 2007 relative to the same period in 2006 are as
follows:



| |  |  | Net interest income before the provision for loan losses increased by $1.4 million or 7%, primarily due to the increase in average total loans.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Conduit loan referral income increased by $117,000, as a result of more referrals during the first nine months of 2007 as compared to the same period in 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Salaries and employee benefits increased $652,000 or 9% as a result of the Companys growth, coupled with salary increases.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

Financial Condition Summary

The Companys total assets
were $660.3 million at September 30, 2007, an increase of $109.2 million, or 20%, compared to total assets of $551.1 million at December 31, 2006. The most significant changes in the Companys balance sheet during the first nine
months of 2007 are outlined below:



| |  |  | The Companys investment portfolio increased $53.5 million or 74% from December 31, 2006. During the third quarter of 2007, the Company entered into a
$45.1 million repurchase agreement that included an interest rate floor to mitigate interest rate risk in a declining rate environment. The repurchase agreement was collateralized by the purchase of three federal agency mortgage-backed securities
totaling $48.6 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Net loans increased $61.4 million or 14% from December 31, 2006. Strong loan demand in the Companys market areas contributed to the increase in net
loans.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest-bearing deposits increased $34.0 million or 10% from December 31, 2006. The increase in interest-bearing deposits was primarily the result of the
Companys continued emphasis to attract new customers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At September 30, 2007 the Company had borrowings from the Federal Home Loan Bank (FHLB) totaling $25.0 million compared to no borrowings at
December 31, 2006. The Company allowed brokered certificates of deposit to run off and replaced with less expensive Federal Home Loan Bank borrowings.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stock Repurchase Program. On September 21, 2007 the Board of Directors of the Company approved a plan to incrementally repurchase up to an aggregate of $3.0
million of the Companys common stock. See note 5 above Stock Repurchase Program.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Nonperforming assets increased $5.4 million or 139% from December 31, 2006. The increase was primarily attributable to the addition of two construction and
development loans totaling $5.2 million that were placed on non-accrual status during the third quarter of 2007, partially offset by the payoff of one commercial loan totaling $2.5 million. Of the $5.2 million addition in construction and
development loans, $4.0 million represents a 29 single family tract which is 95% complete; a notice of default has been filed on the project. $1.2 million represents a 22 raw land lot tract, which subsequently has become Other Real Estate Owned in
October 2007 and is anticipated to be disposed of in the coming months. Loans 90 days past due increased $2.6 million and is attributed to one construction and development loan. In addition, $1.1 million was transferred to other real estate owned.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS

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

NET INTEREST INCOME/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, 2007 was 4.97%, compared to 5.93% for the same period in 2006. The increase in rates paid for money market deposits and time deposits, coupled with the increase in the average balance on these liabilities were the major
contributors toward compression of the net interest margin. The percentage of total average interest bearing deposits represented by time deposits increased to 45% from 36% from September 30, 2006 to September 30, 2007. The shift in this
average deposit mix also contributed to the reduction of the net interest margin as of the three months ended September 30, 2007 compared to the same period in 2006.

For the quarter ended September 30, 2007, total interest-earning assets averaged $597.3 million, which represented an increase of $126.7 million or 27%, as compared to $470.6 million for the same period in 2006.
This increase is primarily attributable to the increase in loans as a result of the strong business climate and loan demand, coupled with the purchase of a $30 million FNMA U.S. agency security that settled during September of 2006 and the purchase
of three federal agency mortgage-backed securities totaling $48.6 million that settled during July of 2007. Total interest-bearing deposits and other interest-bearing liabilities averaged $472.3 million, which represented an increase of $121.6
million or 35%, as compared to $350.7 million for the same period in 2006. This increase is primarily attributable to the increase in money market and time deposits, coupled with the increase of $55.8 million in the average balance of repurchase
agreements.



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##### Table of Contents

The Company reported total interest income of $12.7 million for the three months ended September 30, 2007, which
represented an increase of $2.4 million or 23%, over total interest income of $10.3 million for the same period in 2006. The increase is primarily the result of increases in interest and fees on loans of approximately $1.4 million and increases in
interest on taxable investments of $969,000 that resulted from an increase of $55.9 million and $66.9 million in average loans and average taxable investments, respectively for the three months ended September 30, 2007, as compared to the same
period in 2006,

The Company reported total interest expense of $5.3 million for the three months ended September 30, 2007, which represented an
increase of $2.0 million or 59%, over total interest expense of $3.3 million for the same period in 2006. The increase is primarily attributable to an increase in the average balance of money market and time deposits, coupled with the increase of
the average balance of repurchase agreements.

For the three months ended September 30, 2007, net interest income before provision for loan losses was
$7.5 million, which represented an increase of $446,000 or 6%, over net interest income before provision for loan losses of $7.0 million for the same period in 2006. The increase in net interest income for the three months ended September 30,
2007 as compared to 2006 was primarily due to the increase in average total loans.

Nine-month analysis. The Companys year-to-date net
interest margin as of September 30, 2007 was 5.29% compared to 6.16% for the same period in 2006. The increase in rates paid for money market deposits and time deposits, coupled with the increase in the average balance on these liabilities were
the major contributors toward compressing our net interest margin. The percentage of total average interest-bearing deposits represented by time deposits increased to 45% from 34% from September 30, 2006 to 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 2007 versus 2006.

For the first nine
months of 2007, total interest-earning assets averaged $557.5 million, which represented an increase of $108.7 million or 24%, as compared to $448.8 million for the same period in 2006. This increase is primarily attributable to the increase in
loans as a result of the strong business climate and loan demand, coupled with the purchase of a $30 million FNMA U.S. agency security that settled during September of 2006 and the purchase of three federal agency mortgage-backed securities totaling
$48.6 million that settled during July of 2007. Total interest-bearing deposits and other interest-bearing liabilities averaged $434.2 million, which represented an increase of $101.1 million or 30%, as compared to $333.1 million for the same period
in 2006. This increase is primarily attributable to the increase in money market and time deposits, coupled with the increase of $38.7 million in the average balance of repurchase agreements.

The Company reported total interest income of $36.1 million for the nine months ended September 30, 2007, which represented an increase of $7.0 million or 24%, over
total interest income of $29.1 million for the same period in 2006. The increase for the nine months ended September 30, 2007, when compared to the same period in 2006 is primarily the result of increases in interest and fees on loans of
approximately $4.7 million that resulted from an increase of $55.0 million in average loans, coupled with the increase of $2.1 million in interest income on taxable investments that resulted in part from the addition of the $45.1 million in federal
agency mortgage backed securities that settled during the third quarter of 2007.

The Company reported total interest expense of $14.0 million for the nine
months ended September 30, 2007, which represented an increase of $5.5 million or 66%, over total interest expense of $8.5 million for the same period in 2006. The increase is primarily attributable to an increase in the average balance of time
deposits, coupled with the increase in the average balance of repurchase agreements.

For the nine months ended September 30, 2007, net interest
income before provision for loan losses was $22.1 million, which represented an increase of $1.4 million or 7%, over net interest income before provision for loan losses of $20.7 million for the same period in 2006. The increase in net interest
income for the first nine months of 2007 as compared to 2006 was primarily due to the increase in average total loans.



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##### Table of Contents

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

Distribution, Yield and Rate3Analysis of Net Interest Income



|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|--------------------------------------------------- |  | ---------------------------------------- | ------- | ------------------------ | ---- | ------------------ |  | ---- | --------------- |  | ------------------------ | ------- | ------------------ | - | ------ |  | ---- | -
|                                                    |  | For the Three Months Ended September 30, |        
|                                                    |  | 2007                                     |         |                          | 2006 |                   
|                                                    |  | Average Balance                          |         | Interest Income/ Expense |      | Average Rate/Yield |  |      | Average Balance |  | Interest Income/ Expense |         | Average Rate/Yield |  
|                                                    |  | (Dollars in Thousands)                   |        
|Interest-earning Assets:                            |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Federal funds sold                                  |  | $                                        | 7,831   |                          | $    | 99                 |  | 5.02 | %               |  | $                        | 17,030  |                    | $ | 224    |  | 5.22 | %
|Interest-bearing deposits in financial institutions |  |                                          | 1,951   |                          |      | 26                 |  | 5.29 | %               |  |                          | 2,614   |                    |   | 29     |  | 4.40 | %
|Investment securities:4                             |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Taxable                                             |  |                                          | 88,309  |                          |      | 1,248              |  | 5.61 | %               |  |                          | 21,376  |                    |   | 279    |  | 5.18 | %
|Non-taxable                                         |  |                                          | 24,002  |                          |      | 259                |  | 4.28 | %               |  |                          | 10,351  |                    |   | 110    |  | 4.22 | %
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total investments                                   |  |                                          | 122,093 |                          |      | 1,632              |  | 5.30 | %               |  |                          | 51,371  |                    |   | 642    |  | 4.96 | %
|Loans5                                              |  |                                          | 475,186 |                          |      | 11,117             |  | 9.28 | %               |  |                          | 419,268 |                    |   | 9,696  |  | 9.17 | %
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total interest-earning assets                       |  | $                                        | 597,279 |                          |      | 12,749             |  | 8.47 | %               |  | $                        | 470,639 |                    |   | 10,338 |  | 8.71 | %
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Interest-bearing Liabilities:                       |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Interest-bearing deposits                           |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Interest-bearing demand deposits                    |  | $                                        | 17,267  |                          |      | 12                 |  | 0.28 | %               |  | $                        | 24,617  |                    |   | 24     |  | 0.39 | %
|Money market deposits                               |  |                                          | 184,593 |                          |      | 1,858              |  | 3.99 | %               |  |                          | 164,114 |                    |   | 1,498  |  | 3.62 | %
|Savings deposits                                    |  |                                          | 12,338  |                          |      | 26                 |  | 0.84 | %               |  |                          | 18,566  |                    |   | 53     |  | 1.13 | %
|Time deposits $100,000 or greater                   |  |                                          | 95,872  |                          |      | 1,170              |  | 4.84 | %               |  |                          | 61,549  |                    |   | 692    |  | 4.46 | %
|Other time deposits                                 |  |                                          | 79,503  |                          |      | 937                |  | 4.68 | %               |  |                          | 57,015  |                    |   | 571    |  | 3.97 | %
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total interest-bearing deposits                     |  |                                          | 389,573 |                          |      | 4,003              |  | 4.08 | %               |  |                          | 325,861 |                    |   | 2,838  |  | 3.46 | %
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|FHLB borrowings                                     |  |                                          | 6,993   |                          |      | 88                 |  | 4.99 | %               |  |                          |        |                    |   |       |  | 0.00 | %
|Federal funds purchased                             |  |                                          | 589     |                          |      | 9                  |  | 6.06 | %               |  |                          |        |                    |   |       |  | 0.00 | %
|Repurchase agreement                                |  |                                          | 62,364  |                          |      | 934                |  | 5.94 | %               |  |                          | 6,522   |                    |   | 94     |  | 5.72 | %
|Subordinated notes payable to subsidiary trusts     |  |                                          | 12,822  |                          |      | 239                |  | 7.40 | %               |  |                          | 18,306  |                    |   | 376    |  | 8.15 | %
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total borrowings                                    |  |                                          | 82,768  |                          |      | 1,270              |  | 6.09 | %               |  |                          | 24,828  |                    |   | 470    |  | 7.51 | %
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total interest-bearing liabilities                  |  | $                                        | 472,341 |                          |      | 5,273              |  | 4.43 | %               |  | $                        | 350,689 |                    |   | 3,308  |  | 3.74 | %
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Net interest income                                 |  |                                          |         |                          | $    | 7,476              |  |      |                 |  |                          |         |                    | $ | 7,030  |  |      |  
|                                                    |  |                                          |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Net interest margin6                                |  |                                          |         |                          |      |                    |  | 4.97 | %               |  |                          |         |                    |   |        |  | 5.93 | %



---

|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.
|- | -----------------------------------------------------------------------



14



---

##### Table of Contents

Distribution, Yield and Rate7Analysis of Net Interest Income



|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|--------------------------------------------------- |  | --------------------------------------- | ------- | ------------------------ | ---- | ------------------ |  | ---- | --------------- |  | ------------------------ | ------- | ------------------ | - | ------ |  | ---- | -
|                                                    |  | For the Nine Months Ended September 30, |        
|                                                    |  | 2007                                    |         |                          | 2006 |                   
|                                                    |  | Average Balance                         |         | Interest Income/ Expense |      | Average Rate/Yield |  |      | Average Balance |  | Interest Income/ Expense |         | Average Rate/Yield |  
|                                                    |  | (Dollars in Thousands)                  |        
|Interest-earning Assets:                            |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Federal funds sold                                  |  | $                                       | 8,165   |                          | $    | 315                |  | 5.16 | %               |  | $                        | 21,501  |                    | $ | 776    |  | 4.83 | %
|Interest-bearing deposits in financial institutions |  |                                         | 2,392   |                          |      | 92                 |  | 5.14 | %               |  |                          | 2,462   |                    |   | 88     |  | 4.78 | %
|Investment securities:8                             |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Taxable                                             |  |                                         | 63,193  |                          |      | 2,620              |  | 5.54 | %               |  |                          | 12,953  |                    |   | 475    |  | 4.90 | %
|Non-taxable                                         |  |                                         | 23,770  |                          |      | 753                |  | 4.24 | %               |  |                          | 6,898   |                    |   | 220    |  | 4.26 | %
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total investments                                   |  |                                         | 97,520  |                          |      | 3,780              |  | 5.18 | %               |  |                          | 43,814  |                    |   | 1,559  |  | 4.76 | %
|Loans9                                              |  |                                         | 460,013 |                          |      | 32,293             |  | 9.39 | %               |  |                          | 405,009 |                    |   | 27,570 |  | 9.10 | %
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total interest-earning assets                       |  | $                                       | 557,533 |                          |      | 36,073             |  | 8.65 | %               |  | $                        | 448,823 |                    |   | 29,129 |  | 8.68 | %
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Interest-bearing Liabilities:                       |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Interest-bearing deposits                           |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Interest-bearing demand deposits                    |  | $                                       | 20,552  |                          |      | 52                 |  | 0.34 | %               |  | $                        | 26,364  |                    |   | 69     |  | 0.35 | %
|Money market deposits                               |  |                                         | 171,539 |                          |      | 4,975              |  | 3.88 | %               |  |                          | 157,411 |                    |   | 3,926  |  | 3.33 | %
|Savings deposits                                    |  |                                         | 13,067  |                          |      | 82                 |  | 0.84 | %               |  |                          | 21,842  |                    |   | 169    |  | 1.03 | %
|Time deposits $100,000 or greater                   |  |                                         | 87,427  |                          |      | 3,149              |  | 4.82 | %               |  |                          | 54,117  |                    |   | 1,631  |  | 4.03 | %
|Other time deposits                                 |  |                                         | 80,582  |                          |      | 2,806              |  | 4.66 | %               |  |                          | 52,878  |                    |   | 1,495  |  | 3.78 | %
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total interest-bearing deposits                     |  |                                         | 373,167 |                          |      | 11,064             |  | 3.96 | %               |  |                          | 312,612 |                    |   | 7,290  |  | 3.12 | %
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|FHLB borrowings                                     |  |                                         | 2,924   |                          |      | 111                |  | 5.08 | %               |  |                          |        |                    |   |       |  | 0.00 | %
|Federal funds purchased                             |  |                                         | 744     |                          |      | 31                 |  | 5.57 | %               |  |                          |        |                    |   |       |  | 0.00 | %
|Repurchase agreement                                |  |                                         | 40,906  |                          |      | 1,817              |  | 5.94 | %               |  |                          | 2,198   |                    |   | 94     |  | 5.72 | %
|Subordinated notes payable to subsidiary trusts     |  |                                         | 16,458  |                          |      | 974                |  | 7.91 | %               |  |                          | 18,306  |                    |   | 1,071  |  | 7.82 | %
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total borrowings                                    |  |                                         | 61,032  |                          |      | 2,933              |  | 6.43 | %               |  |                          | 20,504  |                    |   | 1,165  |  | 7.60 | %
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Total interest-bearing liabilities                  |  | $                                       | 434,199 |                          |      | 13,997             |  | 4.31 | %               |  | $                        | 333,116 |                    |   | 8,455  |  | 3.39 | %
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Net interest income                                 |  |                                         |         |                          | $    | 22,076             |  |      |                 |  |                          |         |                    | $ | 20,674 |  |      |  
|                                                    |  |                                         |         |                          |      |                    |  |      |                 |  |                          |         |                    |   |        |  |      |  
|Net interest margin10                               |  |                                         |         |                          |      |                    |  | 5.29 | %               |  |                          |         |                    |   |        |  | 6.16 | %



---

|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.
|-- | -----------------------------------------------------------------------



15



---

##### 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 Ended September 30, 2007 vs. 2006 |       |   | Nine Months Ended September 30, 2007 vs. 2006 |  
|                                                    |  | Increases (Decreases) Due to                   |       |   | Increases (Decreases) Due to                  |  
|                                                    |  | Volume                                         |       |   | Rate                                          |   |      | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|                                                    |  | (Dollars in Thousands)                         |      
|Increase (Decrease) in Interest Income:             |  |                                                |       |   |                                               |   |      |       |  |   |        |   |  |      |       |   |       |   |       |   |  |   |       |  
|Federal funds sold                                  |  | $                                              | (121  | ) |                                               | $ | (4   | )     |  | $ | (125   | ) |  | $    | (481  | ) |       | $ | 20    |   |  | $ | (461  | )
|Interest-bearing deposits in financial institutions |  |                                                | (7    | ) |                                               |   | 4    |       |  |   | (3     | ) |  |      | (3    | ) |       |   | 7     |   |  |   | 4     |  
|Investment securities:12                            |  |                                                |       |   |                                               |   |      |       |  |   |        |   |  |      |       |   |       |   |       |   |  |   |       |  
|Taxable                                             |  |                                                | 874   |   |                                               |   | 95   |       |  |   | 969    |   |  |      | 1,842 |   |       |   | 303   |   |  |   | 2,145 |  
|Non-taxable                                         |  |                                                | 145   |   |                                               |   | 4    |       |  |   | 149    |   |  |      | 538   |   |       |   | (5    | ) |  |   | 533   |  
|Loans13                                             |  |                                                | 1,293 |   |                                               |   | 128  |       |  |   | 1,421  |   |  |      | 3,744 |   |       |   | 979   |   |  |   | 4,723 |  
|                                                    |  |                                                |       |   |                                               |   |      |       |  |   |        |   |  |      |       |   |       |   |       |   |  |   |       |  
|Total                                               |  | $                                              | 2,184 |   |                                               | $ | 227  |       |  | $ | 2,411  |   |  | $    | 5,640 |   |       | $ | 1,304 |   |  | $ | 6,944 |  
|                                                    |  |                                                |       |   |                                               |   |      |       |  |   |        |   |  |      |       |   |       |   |       |   |  |   |       |  
|Increase (Decrease) in Interest Expense:            |  |                                                |       |   |                                               |   |      |       |  |   |        |   |  |      |       |   |       |   |       |   |  |   |       |  
|Interest-bearing demand deposits                    |  | $                                              | (7    | ) |                                               | $ | (5   | )     |  | $ | (12    | ) |  | $    | (15   | ) |       | $ | (2    | ) |  | $ | (17   | )
|Money market deposits                               |  |                                                | 187   |   |                                               |   | 173  |       |  |   | 360    |   |  |      | 352   |   |       |   | 697   |   |  |   | 1,049 |  
|Savings deposits                                    |  |                                                | (18   | ) |                                               |   | (9   | )     |  |   | (27    | ) |  |      | (68   | ) |       |   | (19   | ) |  |   | (87   | )
|Time deposits $100,000 or greater                   |  |                                                | 386   |   |                                               |   | 92   |       |  |   | 478    |   |  |      | 1,004 |   |       |   | 514   |   |  |   | 1,518 |  
|Other time deposits                                 |  |                                                | 225   |   |                                               |   | 141  |       |  |   | 366    |   |  |      | 783   |   |       |   | 528   |   |  |   | 1,311 |  
|FHLB borrowings                                     |  |                                                |      |   |                                               |   | 88   |       |  |   | 88     |   |  |      |      |   |       |   | 111   |   |  |   | 111   |  
|Federal funds purchased                             |  |                                                |      |   |                                               |   | 9    |       |  |   | 9      |   |  |      |      |   |       |   | 31    |   |  |   | 31    |  
|Repurchase agreement                                |  |                                                | 805   |   |                                               |   | 35   |       |  |   | 840    |   |  |      | 1,655 |   |       |   | 68    |   |  |   | 1,723 |  
|Subordinated notes payable to subsidiary trusts     |  |                                                | (113  | ) |                                               |   | (24  | )     |  |   | (137   | ) |  |      | (108  | ) |       |   | 11    |   |  |   | (97   | )
|                                                    |  |                                                |       |   |                                               |   |      |       |  |   |        |   |  |      |       |   |       |   |       |   |  |   |       |  
|Total                                               |  | $                                              | 1,465 |   |                                               | $ | 500  |       |  | $ | 1,965  |   |  | $    | 3,603 |   |       | $ | 1,939 |   |  | $ | 5,542 |  
|                                                    |  |                                                |       |   |                                               |   |      |       |  |   |        |   |  |      |       |   |       |   |       |   |  |   |       |  
|Total change in net interest income                 |  | $                                              | 719   |   |                                               | $ | (273 | )     |  | $ | 446    |   |  | $    | 2,037 |   |       | $ | (635  | ) |  | $ | 1,402 |  
|                                                    |  |                                                |       |   |                                               |   |      |       |  |   |        |   |  |      |       |   |       |   |       |   |  |   |       |  

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 earnings 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 $700,000 for the nine months ended September 30, 2007. This represented a decrease of $120,000 or 15% when compared to
$820,000 for the same period in 2006. The decrease was due to the decrease in net charge-offs during the first nine months of 2007, when compared to the same period in 2006 and in spite of an increase in the level of nonperforming loans. For the
nine months ended September 30, 2007 and 2006, the Company had net charge-offs of $244,000 and $359,000, respectively. 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.



---

|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.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



---

##### Table of Contents

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
$864,000 for the quarter ended September 30, 2007. This represented an increase of $167,000 or 24% when compared to $697,000 for the same period in 2006.

The increase in noninterest income was primarily attributable to the increase in gains from the sale of Small Business Administration (SBA) loans of $132,000 which resulted from more loans sold during the third quarter of 2007,
when compared to 2006.

For the three months ended September 30, 2007 as compared to 2006, noninterest income as an annualized percentage of average
earning assets decreased to 0.57% from 0.59%.

Nine-month analysis.Noninterest income totaled $3.0 million for the nine months ended
September 30, 2007. This represented an increase of $369,000 or 14% when compared to $2.7 million for the same period in 2006.

The increase in
noninterest income was primarily attributable to the increase in conduit loan referral income of $117,000 or 18% as a result of more referrals during the first nine months of 2007 as compared to the same period in 2006. Gains from the sale of SBA
loans increased $88,000 or 28% which resulted from more loans sold during the first nine months of 2007, when compared to 2006. Also as a result of the Companys growth, other miscellaneous income increased by $81,000 or 140% during the first
nine months of 2007, when compared to the same period in 2006.

For the nine months ended September 30, 2007 as compared to 2006, noninterest income
as an annualized percentage of average earning decreased to 0.73% from 0.79%.



17



---

##### 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, |    
|                                                       |  | 2007                                     |     |                  | 2006   |  
|                                                       |  | Amount                                   |     | Percent of Total |        |   | Amount |   | Percent of Total | 
|                                                       |  | (Dollars in Thousands)                   |    
|Customer service fees                                  |  | $                                        | 444 |                  | 51.38  | % |        | $ | 411              |  | 58.96  | %
|Gains from sale of loans                               |  |                                          | 134 |                  | 15.51  | % |        |   | 2                |  | 0.29   | %
|Increase in cash surrender value of life insurance     |  |                                          | 127 |                  | 14.70  | % |        |   | 140              |  | 20.09  | %
|Broker fee income                                      |  |                                          | 15  |                  | 1.74   | % |        |   | 18               |  | 2.58   | %
|Conduit loan referral income                           |  |                                          | 118 |                  | 13.66  | % |        |   | 80               |  | 11.48  | %
|Other miscellaneous income                             |  |                                          | 26  |                  | 3.01   | % |        |   | 46               |  | 6.60   | %
|                                                       |  |                                          |     |                  |        |   |        |   |                  |  |        |  
|Total noninterest income                               |  | $                                        | 864 |                  | 100.00 | % |        | $ | 697              |  | 100.00 | %
|                                                       |  |                                          |     |                  |        |   |        |   |                  |  |        |  
|As a percentage of average earning assets (annualized) |  |                                          |     |                  | 0.57   | % |        |   |                  |  | 0.59   | %
|                                                       |  |                                          |     |                  |        |   |        |   |                  |  |        |  

Noninterest Income



|                                                       |  |                                         |       |                  |        |   |        |   |                  |  |        |  
|------------------------------------------------------ |  | --------------------------------------- | ----- | ---------------- | ------ | - | ------ | - | ---------------- |  | ------ | -
|                                                       |  | For the Nine Months Ended September 30, |      
|                                                       |  | 2007                                    |       |                  | 2006   |  
|                                                       |  | Amount                                  |       | Percent of Total |        |   | Amount |   | Percent of Total | 
|                                                       |  | (Dollars in Thousands)                  |      
|Customer service fees                                  |  | $                                       | 1,276 |                  | 42.18  | % |        | $ | 1,241            |  | 46.73  | %
|Gains from sale of loans                               |  |                                         | 407   |                  | 13.45  | % |        |   | 319              |  | 12.01  | %
|Increase in cash surrender value of life insurance     |  |                                         | 352   |                  | 11.64  | % |        |   | 321              |  | 12.09  | %
|Broker fee income                                      |  |                                         | 96    |                  | 3.17   | % |        |   | 79               |  | 2.97   | %
|Conduit loan referral income                           |  |                                         | 755   |                  | 24.96  | % |        |   | 638              |  | 24.02  | %
|Other miscellaneous income                             |  |                                         | 139   |                  | 4.60   | % |        |   | 58               |  | 2.18   | %
|                                                       |  |                                         |       |                  |        |   |        |   |                  |  |        |  
|Total noninterest income                               |  | $                                       | 3,025 |                  | 100.00 | % |        | $ | 2,656            |  | 100.00 | %
|                                                       |  |                                         |       |                  |        |   |        |   |                  |  |        |  
|As a percentage of average earning assets (annualized) |  |                                         |       |                  | 0.73   | % |        |   |                  |  | 0.79   | %
|                                                       |  |                                         |       |                  |        |   |        |   |                  |  |        |  



18



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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 $4.6 million for the quarter ended September 30, 2007. This represented an increase of $280,000 or 6%
when compared to $4.3 million for the same period in 2006.

Due to the Companys growth, coupled with salary increases, salaries and employee benefits
increased $242,000 or 11%. Other operating expense decreased $137,000 or 23% as a result of a non-recurring reversal of $200,000 in reserve for loan losses on undisbursed balances due to a decline of off-balance sheet commitments. See note 4 above
Off-Balance Sheet Commitments.

For the three months ended September 30, 2007 as compared to 2006, noninterest expense as an annualized
percentage of average earning assets decreased to 3.08% from 3.67%.

Nine-month analysis.Noninterest expense totaled $14.4 million for the nine
months ended September 30, 2007. This represented an increase of $842,000 or 6% when compared to $13.5 million for the same period in 2006. The increase in noninterest expense was primarily due to increases of $652,000 or 9% and $181,000 or 30%
in salaries and employee benefits and data processing expense, respectively, due to the Companys growth.

For the nine months ended
September 30, 2007 as compared to 2006, noninterest expense as an annualized percentage of average earning assets decreased to 3.45% from 4.03%. This decrease is reflective of Managements continuing efforts to control overhead expenses
and improve operating efficiency.



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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, |      
|                                                       |  | 2007                                     |       |                 | 2006   |  
|                                                       |  | Amount                                   |       | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)                   |      
|Salaries and employee benefits                         |  | $                                        | 2,544 |                 | 54.85  | % |        | $ | 2,302           |  | 52.83  | %
|Net occupancy expense                                  |  |                                          | 581   |                 | 12.53  | % |        |   | 551             |  | 12.65  | %
|Marketing                                              |  |                                          | 340   |                 | 7.33   | % |        |   | 286             |  | 6.56   | %
|Data processing fees                                   |  |                                          | 263   |                 | 5.67   | % |        |   | 223             |  | 5.12   | %
|Professional fees                                      |  |                                          | 246   |                 | 5.31   | % |        |   | 217             |  | 4.98   | %
|Postage, telephone, supplies                           |  |                                          | 131   |                 | 2.83   | % |        |   | 129             |  | 2.96   | %
|Directors fees                                        |  |                                          | 74    |                 | 1.60   | % |        |   | 54              |  | 1.24   | %
|Other operating expense                                |  |                                          | 458   |                 | 9.88   | % |        |   | 595             |  | 13.66  | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  
|Total noninterest expense                              |  | $                                        | 4,637 |                 | 100.00 | % |        | $ | 4,357           |  | 100.00 | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                          |       |                 | 3.08   | % |        |   |                 |  | 3.67   | %
|                                                       |  |                                          |       |                 |        |   |        |   |                 |  |        |  

Noninterest Expense



|                                                       |  |                                         |        |                 |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | --------------------------------------- | ------ | --------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Nine Months Ended September 30, |       
|                                                       |  | 2007                                    |        |                 | 2006   |  
|                                                       |  | Amount                                  |        | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)                  |       
|Salaries and employee benefits                         |  | $                                       | 7,906  |                 | 54.96  | % |        | $ | 7,254           |  | 53.57  | %
|Net occupancy expense                                  |  |                                         | 1,729  |                 | 12.02  | % |        |   | 1,673           |  | 12.35  | %
|Marketing                                              |  |                                         | 1,008  |                 | 7.01   | % |        |   | 1,057           |  | 7.80   | %
|Data processing fees                                   |  |                                         | 792    |                 | 5.51   | % |        |   | 611             |  | 4.51   | %
|Professional fees                                      |  |                                         | 737    |                 | 5.12   | % |        |   | 706             |  | 5.21   | %
|Postage, telephone, supplies                           |  |                                         | 410    |                 | 2.85   | % |        |   | 413             |  | 3.05   | %
|Directors fees                                        |  |                                         | 215    |                 | 1.49   | % |        |   | 165             |  | 1.22   | %
|Other operating expense                                |  |                                         | 1,588  |                 | 11.04  | % |        |   | 1,664           |  | 12.29  | %
|                                                       |  |                                         |        |                 |        |   |        |   |                 |  |        |  
|Total noninterest expense                              |  | $                                       | 14,385 |                 | 100.00 | % |        | $ | 13,543          |  | 100.00 | %
|                                                       |  |                                         |        |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                         |        |                 | 3.45   | % |        |   |                 |  | 4.03   | %
|                                                       |  |                                         |        |                 |        |   |        |   |                 |  |        |  

INCOME TAXES

The tax provision was $3.8 million for the first nine months of 2007 and $3.6 million for the first nine months of 2006, representing 37.6% and 39.6%, respectively, of pre-tax income for those periods. The amount of the tax provision is
determined by applying the Companys statutory income tax rates to pre-tax book income, adjusted for permanent differences between pre-tax book income and actual taxable income. Such permanent differences include but are not limited to
tax-exempt interest income, increases in the cash surrender value of bank-owned life insurance, compensation expense associated with stock options and certain other expenses that are not allowed as tax deductions, and tax credits.



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##### Table of Contents

FINANCIAL CONDITION

GENERAL

The Companys total assets were $660.3 million at September 30, 2007, an increase of $109.2 million, or 20%, compared to
total assets of $551.1 million at December 31, 2006. Total net loans increased $61.4 million, or 14%, to $487.6 million at September 30, 2007 as compared to $426.2 million at December 31, 2006. The Companys investment portfolio
increased $53.6 million or 74% to $126.2 million at September 30, 2007 as compared to $72.6 million at December 31, 2006. Total deposits at September 30, 2007 were $487.9 million, which represented an increase of $31.4 million, or 7%
from total deposits of $456.5 million at December 31, 2006. The increase was primarily in interest-bearing deposits, which increased $34.0 million or 10% to $379.3 million at September 30, 2007 compared to $345.3 million at
December 31, 2006. Noninterest bearing demand deposits decreased $2.6 million or 2% to $108.6 million at September 30, 2007 compared to $111.2 million at December 31, 2006.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 $494.9 million at September 30, 2007 as compared to $433.3 million at December 31, 2006. Total gross loans increased by $61.6 million, or
14% for the first nine months of 2007. Total gross loans represented 75% of total assets at September 30, 2007 and 78% of total assets at December 31, 2006. Real estate loans, which include construction and development loans, increased
$45.3 million or 18% during the first nine months of 2007 and represented approximately 74% of the total loan growth of $61.6 million. This was due to the continuing strong demand for affordable housing in our market areas. Commercial loans
increased $13.8 million or 8% during the first nine months of 2007 due to the continued success of our business development efforts in and around the marketplaces the Company serves.

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 $407,000 or 1.04% of total interest and noninterest income as of September 30, 2007 and $319,000 or 1.00% of total
interest and noninterest income as of September 30, 2006.



21



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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, 2007     |         |   | December 31, 2006 |       
|                             |  | Amount                 |         |   | Percentof Total   |        |   | Amount |   |         | Percentof Total | 
|                             |  | (Dollars in Thousands) |        
|Real estate loans:           |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Construction and development |  | $                      | 221,111 |   |                   | 44.68  | % |        | $ | 174,040 |                 |  | 40.16  | %
|Residential loans            |  |                        | 2,572   |   |                   | 0.52   | % |        |   | 3,063   |                 |  | 0.71   | %
|Commercial and multi-family  |  |                        | 75,985  |   |                   | 15.35  | % |        |   | 77,245  |                 |  | 17.83  | %
|Commercial loans             |  |                        | 179,571 |   |                   | 36.28  | % |        |   | 165,765 |                 |  | 38.26  | %
|Consumer loans               |  |                        | 7,271   |   |                   | 1.47   | % |        |   | 4,764   |                 |  | 1.10   | %
|Equity lines of credit       |  |                        | 7,293   |   |                   | 1.47   | % |        |   | 6,762   |                 |  | 1.56   | %
|Credit card and other loans  |  |                        | 1,124   |   |                   | 0.23   | % |        |   | 1,652   |                 |  | 0.38   | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total gross loans            |  |                        | 494,927 |   |                   | 100.00 | % |        |   | 433,291 |                 |  | 100.00 | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Less:                        |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Unearned income              |  |                        | (1,158  | ) |                   |        |   |        |   | (1,350  | )               |  |        |  
|Allowance for loan losses    |  |                        | (6,197  | ) |                   |        |   |        |   | (5,741  | )               |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total net loans              |  | $                      | 487,572 |   |                   |        |   |        | $ | 426,200 |                 |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  

NONPERFORMING ASSETS

Nonperforming assets include loans for which interest is no longer accruing, loans 90 or more days past due and still accruing, restructured loans and other real estate owned.

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

December 31, 2006
to September 30, 2007 analysis. Nonperforming assets at September 30, 2007 increased $5.3 million to $9.2 million, from $3.9 million at December 31, 2006, and represented 1.87% and 0.89% of total gross loans and other real estate
owned, respectively. The increase was primarily attributable to the addition of two construction and development loans totaling $5.2 million that were placed on non-accrual status during the third quarter of 2007, partially offset by the payoff of
one commercial loan totaling $2.5 million.

Of the $5.2 million addition in construction and development loans, $4.0 million represents a 29 single family
tract which is 95% complete; a notice of default has been filed on the project. $1.2 million represents a 22 raw land lot tract, which subsequently has become Other Real Estate Owned in October 2007 and is anticipated to be disposed of in the coming
months.

Loans 90 days past due increased $2.6 million and is attributed to one construction and development loan. In addition, $1.1 million was
transferred to other real estate owned (See below).

Other real estate owned 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.



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##### Table of Contents

In February 2007, the Company acquired through foreclosure the underlying real property collateralizing a commercial loan
of $617,000. To acquire the property, the Company assumed senior debt of approximately $769,000. The transaction resulted in the Company charging off $446,000 against the allowance for loan losses that represented the difference between the total
debt outstanding on the property less its fair value net of selling cost.

In August 2007, the Company acquired through foreclosure the underlying real
property collateralizing a construction and development loan of $139,000. To acquire the property, the Company capitalized $8,000 in costs associated with the acquisition, however, there was no charge against the allowance for loan losses.

September 30, 2006 to September 30, 2007 analysis. Nonperforming assets at September 30, 2007 increased $4.4 million to $9.2
million, from $4.8 million at September 30, 2006, and represented 1.87% and 1.12% of total gross loans and other real estate owned, respectively. The increase was primarily attributable to the addition of two construction and development loans
totaling $5.2 million that were placed in non-accrual status during the third quarter of 2007, partially offset by the payoff of one commercial loan totaling $2.5 million. Loans 90 days past due increased $1.6 million and is attributed to one
construction and development loan.



23



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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, 2007     |       |   | December 31,2006 |   |        | September 30, 2006 | 
|                                                                                 |  | (Dollars in Thousands) |      
|Nonaccrual loans:14                                                              |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Real estate loans:                                                               |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Construction and development                                                     |  | $                      | 5,166 |   |                  | $ |       |                    |  | $ |       |  
|Residential loans                                                                |  |                        |      |   |                  |   | 18     |                    |  |   |       |  
|Commercial and multi-family                                                      |  |                        |      |   |                  |   |       |                    |  |   | 375    |  
|Commercial loans                                                                 |  |                        | 345   |   |                  |   | 3,840  |                    |  |   | 3,352  |  
|Consumer loans                                                                   |  |                        |      |   |                  |   |       |                    |  |   |       |  
|Equity lines of credit                                                           |  |                        |      |   |                  |   |       |                    |  |   |       |  
|Credit card and other loans                                                      |  |                        |      |   |                  |   |       |                    |  |   |       |  
|                                                                                 |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Total nonaccrual loans                                                           |  |                        | 5,511 |   |                  |   | 3,858  |                    |  |   | 3,727  |  
|                                                                                 |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Loans 90 days or more past due (as to principal or interest) and still accruing: |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Real estate loans:                                                               |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Construction and development                                                     |  |                        | 2,639 |   |                  |   |       |                    |  |   |       |  
|Residential loans                                                                |  |                        |      |   |                  |   |       |                    |  |   | 18     |  
|Commercial and multi-family                                                      |  |                        |      |   |                  |   |       |                    |  |   | 237    |  
|Commercial loans                                                                 |  |                        |      |   |                  |   |       |                    |  |   | 831    |  
|Consumer loans                                                                   |  |                        |      |   |                  |   |       |                    |  |   |       |  
|Equity lines of credit                                                           |  |                        |      |   |                  |   |       |                    |  |   |       |  
|Credit card and other loans                                                      |  |                        |      |   |                  |   |       |                    |  |   |       |  
|                                                                                 |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Total loans 90 days or more past due and still accruing                          |  |                        | 2,639 |   |                  |   |       |                    |  |   | 1,086  |  
|                                                                                 |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Restructured loans15                                                             |  |                        |      |   |                  |   |       |                    |  |   |       |  
|                                                                                 |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Total nonperforming loans                                                        |  |                        | 8,150 |   |                  |   | 3,858  |                    |  |   | 4,813  |  
|Other real estate owned                                                          |  |                        | 1,082 |   |                  |   |       |                    |  |   |       |  
|                                                                                 |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Total nonperforming assets                                                       |  | $                      | 9,232 |   |                  | $ | 3,858  |                    |  | $ | 4,813  |  
|                                                                                 |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Nonperforming loans as a percentage of total loans16                             |  |                        | 1.65  | % |                  |   | 0.89   | %                  |  |   | 1.12   | %
|Nonperforming assets as a percentage of total loans and other real estate owned  |  |                        | 1.87  | % |                  |   | 0.89   | %                  |  |   | 1.12   | %
|Allowance for loan losses to nonperforming loans                                 |  |                        | 76.04 | % |                  |   | 148.81 | %                  |  |   | 121.28 | %
|Allowance for loan losses                                                        |  | $                      | 6,197 |   |                  | $ | 5,741  |                    |  | $ | 5,837  |  
|                                                                                 |  |                        |       |   |                  |   |        |                    |  |   |        |  



---

|14 | Additional interest income of approximately $259,000 would have been recorded for
the nine months ended September 30, 2007 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 | Restructured loans are loans where the terms are renegotiated to provide a
reduction or deferral of interest or principal due to deterioration in the financial position of the borrower.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16 | 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 involves a high degree of judgment. Our allowance for loan losses provides for probable losses based upon an evaluation of known and inherent risks in the loan portfolio. The
determination of the balance in the allowance for loan losses is based on an analysis of the loans receivable portfolio using a systematic methodology that reflects an amount that, in our judgment, is adequate to provide for probable loan losses
inherent in the portfolio.

The allowance for loan losses totaled $6.2 million at September 30, 2007 compared to $5.7 million at December 31,
2006 and as a percentage of total loans outstanding was 1.26% and 1.33%, respectively. The process for monitoring the adequacy of the allowance, as well as supporting documentation regarding the allowance follows.

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

The Company establishes an Allowance for Loan
Losses (ALL) through charges to earnings based on Managements evaluation of the loan portfolio and a number of other criteria. If warranted, the allowance may be increased by regular provisions in order to maintain a proper
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.

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



|                   |  |                    |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  
|------------------ |  | ------------------ | - |  | --------------- | - |  | ------------ | - |  | --------- | - |  | ----- | - |  | ------ | -
|                   |  | Pass/ Homogeneous: |   |  | SpecialMention: |   |  | Substandard: |   |  | Doubtful: |   |  | Loss: |   |  | Total: |  
|September 30, 2007 |  | 92.83              | % |  | 6.86            | % |  | 0.30         | % |  | 0.01      | % |  | 0.00  | % |  | 100.00 | %
|                   |  |                    |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  



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##### Table of Contents

For the nine months ended September 30, 2007 and 2006, the Company had net charge-offs of $244,000 and $359,000,
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, 2007 for which known credit problems of the borrower would cause serious doubt as to the ability of such borrowers to comply with their present loan repayment terms. Management cannot,
however, predict the extent to which the deterioration in general economic conditions, real estate values, increase in general rates of interest, changing financial conditions or business of a borrower may adversely affect a borrowers ability
to repay. The ratio of the allowance for loan losses to total loans was determined by Management to be adequate at September 30, 2007 and December 31, 2006.



26



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##### Table of Contents

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

Allowance for Loan Losses



|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|------------------------------------------------------------------ |  | ---------------------- | ------- | -- | ---------------- | - | ------- | ----------------- |  | - | ------- | -
|                                                                   |  | September 30,2007      |         |    | December 31,2006 |   |         | September 30,2006 | 
|                                                                   |  | (Dollars in Thousands) |        
|Balances:                                                          |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Average total loans outstanding during period                      |  | $                      | 460,013 |    |                  | $ | 411,415 |                   |  | $ | 405,009 |  
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Total loans outstanding at end of period, net of unearned income   |  | $                      | 493,769 |    |                  | $ | 431,941 |                   |  | $ | 431,563 |  
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Allowance for Loan Losses:                                         |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Balance at beginning of period                                     |  | $                      | 5,741   |    |                  | $ | 5,376   |                   |  | $ | 5,376   |  
|Charge-offs:                                                       |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Real estate loans:                                                 |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Construction and development                                       |  |                        |        |    |                  |   |        |                   |  |   |        |  
|Residential loans                                                  |  |                        |        |    |                  |   |        |                   |  |   |        |  
|Commercial and multi-family                                        |  |                        |        |    |                  |   | 375     |                   |  |   |        |  
|Commercial loans                                                   |  |                        | 654     | 17 |                  |   | 688     |                   |  |   | 443     |  
|Consumer loans                                                     |  |                        | 2       |    |                  |   |        |                   |  |   |        |  
|Equity lines of credit                                             |  |                        |        |    |                  |   | 55      |                   |  |   | 55      |  
|Credit card and other loans                                        |  |                        |        |    |                  |   | 5       |                   |  |   | 4       |  
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Total charge-offs                                                  |  |                        | 656     |    |                  |   | 1,123   |                   |  |   | 502     |  
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Recoveries:                                                        |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Real estate loans:                                                 |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Construction and development                                       |  |                        |        |    |                  |   |        |                   |  |   |        |  
|Residential loans                                                  |  |                        | 2       |    |                  |   | 2       |                   |  |   | 2       |  
|Commercial and multi-family                                        |  |                        |        |    |                  |   |        |                   |  |   |        |  
|Commercial loans                                                   |  |                        | 410     |    |                  |   | 163     |                   |  |   | 138     |  
|Consumer loans                                                     |  |                        |        |    |                  |   | 3       |                   |  |   | 3       |  
|Equity lines of credit                                             |  |                        |        |    |                  |   |        |                   |  |   |        |  
|Credit card and other loans                                        |  |                        |        |    |                  |   |        |                   |  |   |        |  
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Total recoveries                                                   |  |                        | 412     |    |                  |   | 168     |                   |  |   | 143     |  
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Net (charge-offs) recoveries                                       |  |                        | (244    | )  |                  |   | (955    | )                 |  |   | (359    | )
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Provision charged to operations                                    |  |                        | 700     |    |                  |   | 1,320   |                   |  |   | 820     |  
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Allowance for loan losses balance, end of period                   |  | $                      | 6,197   |    |                  | $ | 5,741   |                   |  | $ | 5,837   |  
|                                                                   |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Ratios:18                                                          |  |                        |         |    |                  |   |         |                   |  |   |         |  
|Net loan charge-offs to average total loans                        |  |                        | 0.05    | %  |                  |   | 0.23    | %                 |  |   | 0.09    | %
|Allowance for loan losses to average total loans                   |  |                        | 1.35    | %  |                  |   | 1.40    | %                 |  |   | 1.44    | %
|Allowance for loan losses to total loans at end of period          |  |                        | 1.26    | %  |                  |   | 1.33    | %                 |  |   | 1.35    | %
|Allowance for loan losses to total nonperforming loans             |  |                        | 76.04   | %  |                  |   | 148.81  | %                 |  |   | 121.28  | %
|Net loan charge-offs to allowance for loan losses at end of period |  |                        | 3.94    | %  |                  |   | 16.63   | %                 |  |   | 6.15    | %
|Net loan charge-offs to provision for loan losses                  |  |                        | 34.86   | %  |                  |   | 72.35   | %                 |  |   | 43.78   | %



---

|17 | Includes a $446,000 charge to the allowance for loan losses for the difference
between total debt outstanding and the estimated fair value, less selling costs on other real estate owned recorded. (See nonperforming assets above).
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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, 2007 and December 31, 2006, 100% of the investment securities owned by the Company were classified as Available for Sale.

At September 30, 2007, the Companys investment portfolio at fair value consisted of $30.2 million in U.S. government agency securities, $71.4 million in federal agency mortgage-backed securities and $24.6 million in obligations
of states and local government securities for a total of $126.2 million. At December 31, 2006, the Companys investment portfolio at fair value consisted of $30.2 million in U.S. government agency securities, $19.7 million in federal
agency mortgage-backed securities and $22.7 million in obligations of states and local government securities for a total of $72.6 million.

The
Companys investment portfolio increased $53.5 million or 74% to $126.2 million. During the third quarter of 2007, the Company entered into a $45.1 million repurchase agreement that included an interest rate floor to mitigate interest rate risk
in a declining rate environment. The repurchase agreement was collateralized by the purchase of three federal agency mortgage-backed securities totaling $48.6 million. In addition, obligations of states and local government securities increased $1.8
million as the Company took advantage of relative value in that sector.

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

Investment Portfolio



|                                                      |  |                        |         |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|----------------------------------------------------- |  | ---------------------- | ------- | ----------------- | - | ----------------- |  | - | ---------- | - | ------------- | - | ---------------- |  | ----------------- | ------ |  | ---------- | --- |  | - | ---- | - |  | - | ------
|                                                      |  | September 30, 2007     |         | December 31, 2006
|                                                      |  | AmortizedCost          |         | Unrealized Gains  |   | Unrealized Losses |  |   | Fair Value |   | AmortizedCost |   | Unrealized Gains |  | Unrealized Losses |        |  | Fair Value
|                                                      |  | (Dollars in Thousands)
|Available for Sale:                                   |  |                        |         |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|U.S. government agency securities                     |  | $                      | 30,000  |                   | $ | 224               |  | $ |           |   |               | $ | 30,224           |  | $                 | 30,000 |  | $          | 210 |  | $ |     |   |  | $ | 30,210
|Federal agency mortgage-backed securities             |  |                        | 70,811  |                   |   | 733               |  |   | (124       | ) |               |   | 71,420           |  |                   | 19,597 |  |            | 190 |  |   | (61  | ) |  |   | 19,726
|Obligations of states and local government securities |  |                        | 25,201  |                   |   | 62                |  |   | (709       | ) |               |   | 24,554           |  |                   | 22,782 |  |            | 120 |  |   | (189 | ) |  |   | 22,713
|                                                      |  |                        |         |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|Total                                                 |  | $                      | 126,012 |                   | $ | 1,019             |  | $ | (833       | ) |               | $ | 126,198          |  | $                 | 72,379 |  | $          | 520 |  | $ | (250 | ) |  | $ | 72,649
|                                                      |  |                        |         |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       

The Company also had investments in interest-bearing time certificates of deposit at other financial institutions
totaling $2.0 million at September 30, 2007 and $2.9 million at December 31, 2006.



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##### Table of Contents

DEPOSITS

Total
deposits increased $31.4 million, or 7%, to $487.9 million at September 30, 2007 from $456.5 million at December 31, 2006. Noninterest-bearing demand deposits decreased $2.5 million or 2% at September 30, 2007 as compared to
December 31, 2006. Interest bearing demand deposits decreased $9.2 million or 37%, while money market deposit accounts increased $33.2 million, or 22% at September 30, 2007 as compared to December 31, 2006. Savings deposit accounts
decreased $6.1 million or 34% at September 30, 2007 as compared to December 31, 2006. Time deposits of $100,000 or greater increased $27.1 million, or 36% at September 30, 2007 as compared to December 31, 2006, and other time
deposits decreased $11.1 million, or 15%.

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 rate paid on the Banks interest-bearing deposits increased to 3.96% for the nine months ended September 30, 2007 from 3.12% for the same period in 2006.
For all interest bearing liabilities, the average rate for the nine months ended September 30, 2007 was 4.31% as compared to 3.39% for the same period in 2006. Market rate increases, coupled with the increase in rates paid on money market
deposit accounts as a result of the Companys efforts to attract new customers impacted the Companys cost of funds.

From September 30,
2006 to September 30, 2007 the percentage of total average deposits represented by time deposits increased from 26% to 35%. The shift in this average deposit mix also contributed to the increase in cost of funds for the first nine months of
2007 versus 2006.



29



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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, |        
|                                                           |  | 2007                            |         |             | 2006 |  
|                                                           |  | Average Balance                 |         | AverageRate |      |   | Average Balance |   | AverageRate | 
|                                                           |  | (Dollars in Thousands)          |        
|Demand deposits, noninterest bearing                       |  | $                               | 108,092 |             | 0.00 | % |                 | $ | 106,168     |  | 0.00 | %
|                                                           |  |                                 |         |             |      |   |                 |   |             |  |      |  
|Interest-bearing deposits:                                 |  |                                 |         |             |      |   |                 |   |             |  |      |  
|Interest-bearing demand deposits                           |  |                                 | 20,552  |             | 0.34 | % |                 |   | 26,364      |  | 0.35 | %
|Money market deposits                                      |  |                                 | 171,539 |             | 3.88 | % |                 |   | 157,411     |  | 3.33 | %
|Savings deposits                                           |  |                                 | 13,067  |             | 0.84 | % |                 |   | 21,842      |  | 1.03 | %
|Time deposits $100,000 or greater                          |  |                                 | 87,427  |             | 4.82 | % |                 |   | 54,117      |  | 4.03 | %
|Other time deposits                                        |  |                                 | 80,582  |             | 4.66 | % |                 |   | 52,878      |  | 3.78 | %
|                                                           |  |                                 |         |             |      |   |                 |   |             |  |      |  
|Total interest-bearing deposits                            |  |                                 | 373,167 |             | 3.96 | % |                 |   | 312,612     |  | 3.12 | %
|                                                           |  |                                 |         |             |      |   |                 |   |             |  |      |  
|FHLB borrowings                                            |  |                                 | 2,924   |             | 5.08 | % |                 |   |            |  | 0.00 | %
|Federal funds purchased                                    |  |                                 | 744     |             | 5.57 | % |                 |   |            |  | 0.00 | %
|Repurchase agreement                                       |  |                                 | 40,906  |             | 5.94 | % |                 |   | 2,198       |  | 5.72 | %
|Subordinated notes payable to subsidiary trusts            |  |                                 | 16,458  |             | 7.91 | % |                 |   | 18,306      |  | 7.82 | %
|                                                           |  |                                 |         |             |      |   |                 |   |             |  |      |  
|Total deposits and other borrowings                        |  | $                               | 542,291 |             | 3.45 | % |                 | $ | 439,284     |  | 2.57 | %
|                                                           |  |                                 |         |             |      |   |                 |   |             |  |      |  
|Average rate excluding noninterest bearing demand deposits |  |                                 |         |             | 4.31 | % |                 |   |             |  | 3.39 | %
|                                                           |  |                                 |         |             |      |   |                 |   |             |  |      |  

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, |  
|                                     |  | 2007                           |   |  | 2006             |  
|                                     |  | Percent of Total               |   |  | Percent of Total |  
|Demand deposits, noninterest bearing |  | 22.46                          | % |  | 25.35            | %
|Interest-bearing deposits:           |  |                                |   |  |                  |  
|Interest-bearing demand deposits     |  | 4.27                           | % |  | 6.30             | %
|Money market deposits                |  | 35.64                          | % |  | 37.58            | %
|Savings deposits                     |  | 2.72                           | % |  | 5.22             | %
|Time deposits $100,000 or greater    |  | 18.17                          | % |  | 12.92            | %
|Other time deposits                  |  | 16.74                          | % |  | 12.63            | %
|                                     |  |                                |   |  |                  |  
|Total average deposits               |  | 100.00                         | % |  | 100.00           | %
|                                     |  |                                |   |  |                  |  



---

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



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##### Table of Contents

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



|                   |  |                        |        |                               |   |                               |  |               |        |       |   |        |  |   |        
|------------------ |  | ---------------------- | ------ | ----------------------------- | - | ----------------------------- |  | ------------- | ------ | ----- | - | ------ |  | - | -------
|                   |  | 3 Monthsor Less        |        | Over 3 Months Through 6Months |   | Over 6 MonthsThrough 12Months |  | Over 12Months |        | Total
|                   |  | (Dollars in Thousands)
|September 30, 2007 |  | $                      | 38,418 |                               | $ | 25,232                        |  | $             | 18,929 |       | $ | 19,243 |  | $ | 101,822
|                   |  |                        |        |                               |   |                               |  |               |        |       |   |        |  |   |        
|December 31, 2006  |  | $                      | 23,514 |                               | $ | 23,418                        |  | $             | 19,739 |       | $ | 8,093  |  | $ | 74,764 
|                   |  |                        |        |                               |   |                               |  |               |        |       |   |        |  |   |        

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 cashflows, liquidity must be supplemented with additional sources. As of
September 30, 2007 the Company had Federal Funds borrowing arrangements with five correspondent banks totaling $50.0 million, and a secured line of credit with the FHLB totaling approximately $32.6 million. Other funding alternatives may also
be appropriate, including, wholesale and retail repurchase agreements and Brokered certificates of deposit to a limit of 30% of total consolidated assets.

As of September 30, 2007, brokered deposits totaled $33.0 million or were 5% of total consolidated assets.

The Company will periodically (at
least quarterly) review a Tier 3 Basic Surplus/Deficitcalculation. If the calculation produces a positive net number BASIC SURPLUS, then all of the Companys short-term and potentially volatile liabilities are covered by its
liquid asset position. Conversely, a negative number BASIC DEFICIT represents the extent to which non-liquid assets are being supported by vulnerable liabilities. Since there can be a significant cost associated with carrying excess
liquidity, the Company will exercise care to avoid unnecessary expense/opportunity loss in this regard. The Board of Directors also authorizes the use of qualifying FHLB loan collateral and Brokered CDs in the Companys liquidity/funds
management practices to supplement basic surplus.

The Companys policy is to maintain the liquidity ratio at above 10%. The Companys liquidity
ratio is a measure of liquid assets to total consolidated assets. On a consolidated basis, the liquidity ratio was 21.3% at September 30, 2007 and 24.8% at December 31, 2006.

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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##### Table of Contents

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

Liquidity/Basic Surplus



|                                                                            |  |                        |         |   |                  |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                            |  | September 30,2007      |         |   | December 31,2006 |  
|                                                                            |  | (Dollars in Thousands) |        
|I. Liquid Assets                                                            |  |                        |         |   |                  |   |         |  
|Federal funds sold                                                          |  | $                      |        |   |                  | $ | 2,900   |  
|Available/unencumbered security collateral                                  |  |                        | 10,700  |   |                  |   | 17,450  |  
|Unpledged government and agency guaranteed loans                            |  |                        | 570     |   |                  |   | 132     |  
|Interest-bearing deposits in financial institutions maturing within 30 days |  |                        | 100     |   |                  |   |        |  
|                                                                            |  |                        |         |   |                  |   |         |  
|Total liquid assets                                                         |  |                        | 11,370  |   |                  |   | 20,482  |  
|                                                                            |  |                        |         |   |                  |   |         |  
|II. Short Term / Potentially Volatile Liabilities & Coverages               |  |                        |         |   |                  |   |         |  
|Federal funds purchased                                                     |  |                        | (5,610  | ) |                  |   |        |  
|25% of regular time deposits maturing within 30 days                        |  |                        | (1,131  | ) |                  |   | (730    | )
|30% of time deposits $100,000 or greater maturing within 30 days            |  |                        | (4,610  | ) |                  |   | (1,885  | )
|10% of other deposits                                                       |  |                        | (32,267 | ) |                  |   | (30,725 | )
|                                                                            |  |                        |         |   |                  |   |         |  
|Basic Surplus                                                               |  |                        | (32,248 | ) |                  |   | (12,858 | )
|                                                                            |  |                        |         |   |                  |   |         |  
|III. Qualifying FHLB Loan Collateral                                        |  |                        |         |   |                  |   |         |  
|Maximum borrowing capacity                                                  |  |                        | 32,556  |   |                  |   | 34,255  |  
|Current FHLB advance balances                                               |  |                        | (25,000 | ) |                  |   |        |  
|                                                                            |  |                        |         |   |                  |   |         |  
|Basic Surplus with FHLB                                                     |  |                        | (24,692 | ) |                  |   | 21,397  |  
|                                                                            |  |                        |         |   |                  |   |         |  
|IV. Brokered Deposit Access                                                 |  |                        |         |   |                  |   |         |  
|Maximum Board authorized brokered CD capacity                               |  |                        | 198,103 |   |                  |   | 165,338 |  
|Current brokered CD balances                                                |  |                        | (33,002 | ) |                  |   | (50,324 | )
|                                                                            |  |                        |         |   |                  |   |         |  
|Basic Surplus with FHLB and brokered CDs                                   |  | $                      | 140,409 |   |                  | $ | 136,411 |  
|                                                                            |  |                        |         |   |                  |   |         |  
|Percent of assets                                                           |  |                        | 21.3    | % |                  |   | 24.8    | %

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 (FRB).



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##### Table of Contents

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, 2007:



|                         |  |                                          |        |                               |   |        |                                |  |       |                    |  |      |  
|------------------------ |  | ---------------------------------------- | ------ | ----------------------------- | - | ------ | ------------------------------ |  | ----- | ------------------ |  | ---- | -
|Change (in Basis Points) |  | Net Interest Income (next twelve months) |        | Change in Net Interest Income |   |        | % Change inNet Interest Income |  |       | Net InterestMargin | 
|(Dollars in Thousands)   | 
|+ 200                    |  | $                                        | 32,164 |                               | $ | 2,503  |                                |  | 8.44  | %                  |  | 5.39 | %
| 200                    |  |                                          | 27,166 |                               |   | (2,494 | )                              |  | (8.41 | %)                 |  | 4.55 | %

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, the net interest margin over the next twelve months would likely be
4.55%. Conversely, if there were an immediate increase of 200 basis points in interest rates, the Companys net interest margin would likely be 5.39%. The net interest margin will improve if rates rise and decline if rates fall. Management and
the Board of Directors consider the results indicated by the report to be acceptable.



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##### Table of Contents

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, the
Company has attained the highest level of capitalization, characterized as Well Capitalized. It is the intent of the Company to continue to maintain Well Capitalized ratios.

Total shareholders equity was $49.4 million at September 30, 2007, compared to $42.2 million at December 31, 2006. The increase of $7.2 million, or 17%
during the first nine months of 2007 was primarily due to $6.2 million in year-to-date net income, $461,000 credited to capital in relation to compensation expense associated with the issuance of stock options and the proceeds of $526,000 from the
exercise of stock options, including tax benefit.



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##### Table of Contents

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:



|                                        |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|--------------------------------------- |  | ------------------- | ------ |  | --------------------------------------- | - |  | ------------------------------------------------------------------------------------- | ------ |  | ---- | - |  | - | ------ |  | ----- | -
|                                        |  | Actual Amount/Ratio |        |  | Minimum CapitalRequirement Amount/Ratio |   |  | Minimum To Be Well Capitalized
Under Prompt Corrective Action Provisions Amount/Ratio |       
|As of September 30, 2007:               |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|Total capital to risk-weighted assets:  |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|the Company                             |  | $                   | 63,696 |  | 11.99                                   | % |  | $                                                                                     | 42,504 |  | 8.00 | % |  | $ | 53,130 |  | 10.00 | %
|the Bank                                |  |                     | 61,749 |  | 11.62                                   | % |  |                                                                                       | 42,496 |  | 8.00 | % |  |   | 53,120 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                     | 57,051 |  | 10.74                                   | % |  |                                                                                       | 21,252 |  | 4.00 | % |  |   | 31,878 |  | 6.00  | %
|the Bank                                |  |                     | 55,105 |  | 10.37                                   | % |  |                                                                                       | 21,248 |  | 4.00 | % |  |   | 31,872 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                     | 57,051 |  | 9.05                                    | % |  |                                                                                       | 25,212 |  | 4.00 | % |  |   | 31,515 |  | 5.00  | %
|the Bank                                |  |                     | 55,105 |  | 8.75                                    | % |  |                                                                                       | 25,194 |  | 4.00 | % |  |   | 31,493 |  | 5.00  | %
|                                        |  |                     |        |  |                                         |  
|As of December 31, 2006:                |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|Total capital to risk-weighted assets:  |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|the Company                             |  | $                   | 61,806 |  | 12.92                                   | % |  | $                                                                                     | 38,284 |  | 8.00 | % |  | $ | 47,855 |  | 10.00 | %
|the Bank                                |  |                     | 59,691 |  | 12.47                                   | % |  |                                                                                       | 38,283 |  | 8.00 | % |  |   | 47,854 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                     | 51,827 |  | 10.83                                   | % |  |                                                                                       | 19,142 |  | 4.00 | % |  |   | 28,713 |  | 6.00  | %
|the Bank                                |  |                     | 53,701 |  | 11.22                                   | % |  |                                                                                       | 19,142 |  | 4.00 | % |  |   | 28,712 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                     | 51,827 |  | 9.46                                    | % |  |                                                                                       | 21,905 |  | 4.00 | % |  |   | 27,381 |  | 5.00  | %
|the Bank                                |  |                     | 53,701 |  | 9.82                                    | % |  |                                                                                       | 21,885 |  | 4.00 | % |  |   | 27,356 |  | 5.00  | %

Of the Companys $57.1 million of Tier 1 capital at September 30, 2007, $12.0 million consisted of Trust
Preferred Securities. 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.

On July 7, 2007,
Centennial Capital Trust I (the Trust), a wholly-owned subsidiary of 1st Centennial Bancorp (the Company), redeemed 100% of its trust preferred securities that were issued on July 11, 2002 with a maturity date of
October 7, 2032, as allowed by the early redemption provisions of the transaction documents concerning those securities. Simultaneously, the Company retired the $6,186,000 principal amount of junior subordinated debentures issued to the Trust
that became due and payable upon redemption of the trust preferred securities. The Trust, which was dissolved on July 12, 2007, returned the $186,000 in capital to the Company in exchange for the cancellation of the common securities in that
amount originally issued by the Trust to the Company at the close of the transaction in 2002.



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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 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.

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 2007 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, 2006, 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.

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

Approximately $299.7 million or 60.5% of our loan portfolio as of September 30, 2007, and $254.3 million or 58.7% of our loan portfolio as of December 31, 2006, was concentrated in real estate loans. Of this amount, as of
September 30, 2007, $221.1 million represented construction and development loans, $2.6 million represented residential loans, and $76.0 million represented commercial and multi-family loans. As of September 30, 2007, our total
nonperforming assets increased to $9.2 million, or 1.87% of total loans and other real estate owned, compared to $3.9 million or .89% at December 31, 2006. As of September 30, 2007, approximately $8.9 million or 96.3% of the nonperforming
assets involved real estate loans. The Southern California real estate market ended 2006 with declining prices and a slower sales pace. If real estate sales and appreciation continue to weaken, we might experience an increase in the percentage of
nonperforming assets in our commercial real estate and commercial and industrial loan portfolios. If the level of our nonperforming real estate loans and other real estate owned further increases, the result could be reduced income, increased
expenses, and less cash available for lending and other activities.



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As the primary collateral for many of our loans rests on commercial real estate properties, deterioration in the real
estate market in the areas we serve could reduce the value of the collateral for many of our loans and negatively impact the repayment ability of many of our borrowers. In addition, such deterioration would likely reduce the amount of loans we make
to businesses in the construction and real estate industry, which could negatively impact our business. Similarly, the occurrence of a natural disaster like those California has experienced in the past, including earthquakes, brush fires, and
flooding, could impair the value of the collateral we hold for real estate secured loans and negatively impact our results of operations.

The Company has
approximately $2.1 million in construction and development loans that are in the general area of the recent California fires that began in October 2007. We are unable to determine the extent of damage at this point, however, fire insurance coverage
is in place on all properties eliminating the Companys potential exposure to loss.

In addition, 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. The regulators may require banks with
higher levels of CRE loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, and may possibly require higher levels of allowances for possible loan losses and capital levels as a result of
CRE lending growth and exposures.



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

Stock Repurchases

On September 21, 2007 the Board of Directors of the Company approved a plan to incrementally repurchase up to an aggregate of $3.0 million of the Companys
common stock. There were no repurchases during the third quarter of 2007. The repurchase program commenced on October 17, 2007 and will continue for a period of twelve months thereafter. See Notes to Consolidated Financial Statements
 Note 5, Stock Repurchase Program.



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

None.



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

None



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

None.



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##### Table of Contents

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



|            |  |                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibits                                                                            
|            | 
|3.1         |  | Articles of Incorporation of the Company20                                                         
|            | 
|3.2         |  | Amendment to Articles of Incorporation of the Company21                                            
|            | 
|3.3         |  | Amendment to Articles of Incorporation of the Company22                                            
|            | 
|3.4         |  | Restated By-Laws of the Company23                                                                  
|            | 
|10.1        |  | Form of Indemnification Agreement24                                                                
|            | 
|10.2        |  | Amended and Restated Stock Incentive Plan25                                                        
|            | 
|10.3        |  | 1st Centennial Bank Employee Stock Ownership Plan (with 401(k) provisions) dated August 1, 200425  
|            | 
|10.4        |  | Employment Agreement of Beth Sanders dated December 1, 200425                                      
|            | 
|10.5        |  | Employment Agreement of Suzanne Dondanville dated December 1, 200425                               
|            | 
|10.6        |  | Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200126                   
|            | 
|10.7        |  | Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200227                     
|            | 
|10.8        |  | Salary Continuation Agreement of Clifford Schoonover dated December 17, 200227                     
|            | 
|10.9        |  | Amendment to Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200128      
|            | 
|10.10       |  | Amendment to Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200228        
|            | 
|10.11       |  | Amendment to Salary Continuation Agreement of Clifford Schoonover dated December 17, 200228        
|            | 
|10.12       |  | Salary Continuation Agreement of Thomas E. Vessey dated April 7, 200629                            
|            | 
|10.13       |  | Salary Continuation Agreement of John P. Lang dated April 7, 200629                                
|            | 
|10.14       |  | Form of Agreement between 1stCentennial Bank and Officers with respect to Death Benefit.30         
|            | 
|10.15       |  | Indenture for Trust Preferred Securities dated September 28, 200531                                
|            | 
|10.16       |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated September 28, 200531
|            | 
|10.17       |  | Guarantee Agreement for Trust Preferred Securities dated September 28, 200531                      
|            | 
|10.18       |  | Indenture for Trust Preferred Securities dated January 15, 200432                                  
|            | 
|10.19       |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated January 15, 200432  
|            | 
|10.20       |  | Guarantee Agreement for Trust Preferred Securities dated January 15, 200432                        

---

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

|21 | Incorporated by reference to exhibit of the same number on Form 10-QSB for the
quarter ended June 30, 2002.
|-- | -----------------------------------------------------------------------------------------------------------

|22 | Incorporated by reference to exhibit of the same number on Form SB-2 dated
March 13, 2003.
|-- | ------------------------------------------------------------------------------------------

|23 | Incorporated by reference to exhibit of the same number on Form 8-K dated
January 19, 2007.
|-- | -------------------------------------------------------------------------------------------

|24 | Incorporated by reference to exhibit 10.2 on Form SB-2 dated March 21, 2001.
|-- | ----------------------------------------------------------------------------

|25 | Incorporated by reference to exhibit 10.10, 10.9, 10.31 and 10.32, respectively,
on Form 10-KSB for the year ended December 31, 2004.
|-- | -------------------------------------------------------------------------------------------------------------------------------------

|26 | Incorporated by reference to exhibit 10.30 on Form 10-QSB for the quarter ended
September 30, 2004.
|-- | ---------------------------------------------------------------------------------------------------

|27 | Incorporated by reference to exhibit 10.17 and 10.18, respectively, on Form SB-2
dated March 13, 2003.
|-- | ------------------------------------------------------------------------------------------------------

|28 | Incorporated by reference to exhibit 10.25, 10.24 and 10.26, respectively, on Form
10-KSB for the year ended December 31, 2003.
|-- | -------------------------------------------------------------------------------------------------------------------------------

|29 | Incorporated by reference to exhibit 99.1 on Form 8-K dated April 11, 2006.
|-- | ---------------------------------------------------------------------------

|30 | Incorporated by reference to exhibit 99.1 on Form 8-K dated November 3, 2006.
|-- | -----------------------------------------------------------------------------

|31 | Incorporated by reference to exhibit 10.35, 10.36 and 10.37, respectively, on Form
10-Q for the quarter ended September 30, 2005.
|-- | ---------------------------------------------------------------------------------------------------------------------------------

|32 | Incorporated by reference to exhibit 10.25, 10.26 and 10.27, respectively, on Form
10-QSB for the quarter ended March 31, 2004.
|-- | -------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|      |  |                                                                                                                     
|----- |  | --------------------------------------------------------------------------------------------------------------------
|      | 
|10.21 |  | Indenture for Trust Preferred Securities dated July 11, 200233                                                      
|      | 
|10.22 |  | Amended and Restated Declaration of Trust for trust preferred securities dated July 11, 200233                      
|      | 
|10.23 |  | Guarantee Agreement for Trust Preferred Securities dated July 11, 200233                                            
|      | 
|10.24 |  | Director Deferred Compensation Plan/Agreement entered into with each non-employee Director effective July 20, 200734
|      | 
|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)                                              

---

|33 | Incorporated by reference to exhibit 10.17, 10.18 and 10.19, respectively, on Form
10-QSB for the quarter ended September 30, 2002.
|-- | -----------------------------------------------------------------------------------------------------------------------------------

|34 | Incorporated by reference to exhibit 99.1 on Form 8-K dated July 20, 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 7thday of November
2007.



1ST CENTENNIAL BANCORP/s/    Thomas E. VesseyThomas E. Vessey President and Chief Executive
Officer




/s/    Beth SandersBeth Sanders Executive Vice President and Chief
Financial Officer




40