**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**





**FORM
10-Q**





**x** **Quarterly
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934**


For the
quarterly period ended March 31, 2005





**o** **Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934**


For the
transition period from _____ to _____





Commission
file number: 000-29105





**1** **st** **CENTENNIAL BANCORP**


(Exact
Name of Registrant as specified in its charter)





**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**





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 No





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes No





APPLICABLE
TO CORPORATE ISSUER





Indicate
the number of shares outstanding of the issuer’s common stock on the latest
practicable date 2,085,434 shares of common stock as of May 10,
2005.











****


**TABLE
OF CONTENTS**





PAGE**PART
      I**ITEM
      1
    Financial
      Statements (unaudited)
    2ITEM
      2
    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
    10ITEM
      3
    Quantitative
      and Qualitative Disclosures about Market Risk
    32ITEM
      4
    Controls
      and Procedures
    33**PART
      II**ITEM
      1
    Legal
      Proceedings
    34ITEM
      2
    Unregistered
      Sales of Equity Securities and Use of Proceeds
    34ITEM
      3
    Defaults
      Upon Senior Securities
    34ITEM
      4
    Submission
      of Matters to a Vote of Security Holders
    34ITEM
      5
    Other
      Information
    34ITEM
      6
    Exhibits
    35Signatures
    38
















**PART
I - FINANCIAL INFORMATION**





**ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





**1** **ST** **CENTENNIAL BANCORP AND SUBSIDIARY**





**CONSOLIDATED
STATEMENTS OF CONDITION**


**March
31, 2005 and December 31, 2004**





**Dollar amounts in
      thousands**
    
    **2005**
    
    **2004****(unaudited)****ASSETS**Cash
      and due from banks
    
    $
    8,402
    
    $
    5,695Federal
      funds sold
    
    
    1,510
    
    
    —Total
      cash and cash equivalents
    
    
    9,912
    
    
    5,695Interest-bearing
      deposits in financial institutions
    
    
    3,189
    
    
    3,964Investment
      securities, available for sale
    
    
    16,964
    
    
    20,096Stock
      investments restricted, at cost
    
    
    2,367
    
    
    1,615Loans,
      net of allowance for loan losses of $4,488 and $4,137
    
    
    334,908
    
    
    308,030Accrued
      interest receivable
    
    
    1,361
    
    
    766Premises
      and equipment, net
    
    
    3,478
    
    
    3,113Goodwill
    
    
    4,180
    
    
    4,180Cash
      surrender value of life insurance
    
    
    6,544
    
    
    6,488Other
      assets
    
    
    3,266
    
    
    2,731Total
      assets
    
    $
    386,169
    
    $
    356,678**LIABILITIES**Deposits:Noninterest-bearing
      demand deposits
    
    $
    93,401
    
    $
    92,620Interest-bearing
      deposits
    
    
    210,338
    
    
    199,182Total
      deposits
    
    
    303,739
    
    
    291,802Accrued
      interest payable
    
    
    198
    
    
    146Federal
      funds purchased
    
    
    3,200
    
    
    475Borrowings
      from Federal Home Loan Bank
    
    
    34,000
    
    
    21,000Other
      liabilities
    
    
    2,754
    
    
    2,103Subordinated
      notes payable to subsidiary trusts
    
    
    13,151
    
    
    13,151Total
      liabilities
    
    
    357,042
    
    
    328,677**STOCKHOLDERS'
      EQUITY**Common
      stock, no par value; authorized 10,000,000 shares, issued and outstanding
      2,080,379 and 2,075,384 shares at March 31, 2005 and December 31, 2004,
      respectively1
    
    
    21,407
    
    
    21,208Retained
      earnings
    
    
    7,705
    
    
    6,706Accumulated
      other comprehensive income
    
    
    15
    
    
    87Total
      stockholders' equity
    
    
    29,127
    
    
    28,001Total
      liabilities and stockholders' equity
    
    $
    386,169
    
    $
    356,678








1 
Adjusted for the 7% stock dividend declared to shareholders of record on March
15, 2005, and distributed April 15, 2005.





2





**1** **ST** **CENTENNIAL BANCORP AND SUBSIDIARY**





**CONSOLIDATED
STATEMENTS OF EARNINGS**


**Three
Months Ended March 31, 2005 and 2004 (unaudited)**


****


**Dollar amounts in thousands, except per
      share amounts**
    
    **2005**
    
    **2004**Interest
      income:Interest
      and fees on loans
    
    $
    7,000
    
    $
    4,575Deposits
      in financial institutions
    
    
    39
    
    
    52Federal
      funds sold
    
    
    11
    
    
    4InvestmentsTaxable
    
    
    139
    
    
    298Tax-exempt
    
    
    41
    
    
    47Total
      interest income
    
    
    7,230
    
    
    4,976Interest
      expense:Interest
      bearing demand and savings deposits
    
    
    352
    
    
    124Time
      deposits $100,000 or greater
    
    
    275
    
    
    181Other
      time deposits
    
    
    205
    
    
    121Interest
      on borrowed funds
    
    
    398
    
    
    170Total
      interest expense
    
    
    1,230
    
    
    596Net
      interest income
    
    
    6,000
    
    
    4,380Provision
      for loan losses
    
    
    350
    
    
    428Net
      interest income after provisionfor loan
    losses
    
    
    5,650
    
    
    3,952Noninterest
      income:Customer
      service fees
    
    
    321
    
    
    280Gains
      and commissions from sale of loans
    
    
    55
    
    
    212Other
      income
    
    
    538
    
    
    348Total
      noninterest income
    
    
    914
    
    
    840Noninterest
      expense:Salaries
      and employee benefits
    
    
    2,958
    
    
    2,409Net
      occupancy expense
    
    
    447
    
    
    357Other
      operating expense
    
    
    1,528
    
    
    1,135Total
      noninterest expense
    
    
    4,933
    
    
    3,901Income
      before provision for income taxes
    
    
    1,631
    
    
    891Provision
      for income taxes
    
    
    621
    
    
    309Net
      income
    
    $
    1,010
    
    $
    582Basic
      earnings per share1
    
    $
    0.49
    
    $
    0.29Diluted
      earnings per share1
    
    $
    0.45
    
    $
    0.27





1 
Adjusted for the 7% stock dividend declared to shareholders of record on March
15, 2005, and distributed April 15, 2005.


3





**1** **ST** **CENTENNIAL BANCORP AND SUBSIDIARY**





**CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY**


**Three
Months Ended March 31, 2005 and 2004 (unaudited)**




**Shares**
    
    
    **CommonStock**
    
    
    **RetainedEarnings**
    
    
    **AccumulatedOtherComprehensiveIncome
      (Loss)**
    
    
    **Total****BALANCE,
      DECEMBER 31, 2003**
    
    
    1,502,281
    
    $
    20,456
    
    $
    3,692
    
    $
    252
    
    $
    24,400Comprehensive
      income:Net
      income
    
    
    —
    
    
    —
    
    
    582
    
    
    —
    
    
    582Change
      in net unrealized gain on investmentsecurities available for sale,
      after tax effects
    
    
    —
    
    
    —
    
    
    —
    
    
    (2
    )
    
    (2
    )Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580Exercise
      of stock options, including tax benefit
    
    
    13,113
    
    
    223
    
    
    —
    
    
    —
    
    
    223**BALANCE,
      MARCH 31, 2004**
    
    
    1,515,394
    
    $
    20,679
    
    $
    4,274
    
    $
    250
    
    $
    25,203**BALANCE,
      DECEMBER 31, 2004**
    
    
    1,939,611
    
    $
    21,208
    
    $
    6,706
    
    $
    87
    
    $
    28,001Comprehensive
      income:Net
      income
    
    
    —
    
    
    —
    
    
    1,010
    
    
    —
    
    
    1,010Change
      in net unrealized gain on investmentsecurities available for sale,
      after tax effects
    
    
    —
    
    
    —
    
    
    —
    
    
    (72
    )
    
    (72
    )Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    938Cash
      paid in lieu of fractional shares
    
    
    —
    
    
    —
    
    
    (11
    )
    
    —
    
    
    (11
    )Compensation
      expense on incentive stock options
    
    
    —
    
    
    113
    
    
    —
    
    
    —
    
    
    113Exercise
      of stock options, including tax benefit
    
    
    4,953
    
    
    86
    
    
    —
    
    
    —
    
    
    86**BALANCE,
      MARCH 31, 2005**
    
    
    1,944,564
    
    $
    21,407
    
    $
    7,705
    
    $
    15
    
    $
    29,127











4




**1** **ST** **CENTENNIAL BANCORP AND SUBSIDIARY**





**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**Three
Months Ended March 31, 2005 and 2004 (unaudited)**




**Dollar amounts in
      thousands**
    
    
    **2005**
    
    
    **2004****CASH
      FLOWS FROM OPERATING ACTIVITIES**Net
      income
    
    $
    1,010
    
    $
    582Adjustments
      to reconcile net incometo net cash provided by operating
      activities:Depreciation
      and amortization
    
    
    160
    
    
    136Provision
      for loan losses
    
    
    350
    
    
    428Loss
      from sale of investments
    
    
    5
    
    
    —Gain
      from sale of loans
    
    
    (51
    )
    
    (212
    )Amortization
      of deferred loan fees
    
    
    (464
    )
    
    (311
    )Amortization
      of excess purchase value of deposits
    
    
    3
    
    
    3Amortization
      of excess purchase value of loans
    
    
    15
    
    
    4Fair
      value of stock options in noninterest expense
    
    
    113
    
    
    —Deferred
      income tax provision
    
    
    48
    
    
    1Amortization
      of premiums on investmentsecurities available for sale
      (net)
    
    
    65
    
    
    115Increase
      in cash surrender value of life insurance
    
    
    (56
    )
    
    (86
    )Decrease
      (increase) in assets:Accrued
      interest receivable
    
    
    (595
    )
    
    35Other
      assets
    
    
    (586
    )
    
    (383
    )Increase
      (decrease) in liabilities:Accrued
      interest payable
    
    
    52
    
    
    (6
    )Other
      liabilities
    
    
    651
    
    
    227Net
      cash provided by operating activities
    
    
    720
    
    
    533**CASH
      FLOWS FROM INVESTING ACTIVITIES**Net
      decrease in interest-bearingdeposits in financial
      institutions
    
    
    775
    
    
    78Activity
      in available for sale securities:Proceeds
      from sales, maturities and principal repayments of securities
    
    
    2,990
    
    
    2,630Purchases
      of Federal Home Loan Bank stock
    
    
    (752
    )
    
    (489
    )Net
      increase in loans
    
    
    (26,728
    )
    
    (27,826
    )Additions
      to bank premises and equipment
    
    
    (525
    )
    
    (140
    )Net
      cash used in investing activities
    
    
    (24,240
    )
    
    (25,747
    )







5


**1** **ST** **CENTENNIAL BANCORP AND SUBSIDIARY**





**CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)**


**Three
Months Ended March 31, 2005 and 2004 (unaudited)**





**Dollar amounts in
      thousands**
    
    **2005**
    
    **2004****CASH
      FLOWS FROM FINANCING ACTIVITIES**Net
      increase in noninterest-bearing demand deposits
    
    $
    781
    
    $
    7,913Net
      increase in interest-bearing deposits
    
    
    11,156
    
    
    13,238Proceeds
      (redemptions) from federal funds purchased
    
    
    2,725
    
    
    (1,850
    )Proceeds
      from Federal Home Loan Bank borrowing
    
    
    13,000
    
    
    2,400Issuance
      of Trust Preferred Securities
    
    
    —
    
    
    7,145Cash
      paid in lieu of fractional shares
    
    
    (11
    )
    
    —Proceeds
      from exercise of stock options
    
    
    86
    
    
    223Net
      cash provided by financing activities
    
    
    27,737
    
    
    29,069Net
      increase in cash and cash equivalents
    
    
    4,217
    
    
    3,855**CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
    
    
    5,695
    
    
    9,948**CASH
      AND CASH EQUIVALENTS, END OF PERIOD**
    
    $
    9,912
    
    $
    13,803**SUPPLEMENTARY
      INFORMATION**Interest
      paid
    
    $
    1,175
    
    $
    599Income
      taxes paid
    
    $
    —
    
    $
    28








6







**1** **ST** **CENTENNIAL BANCORP AND SUBSIDIARY**





**NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**March
31, 2005**








**Note
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





The
unaudited financial information included herein has been prepared in conformity
with the accounting principles and practices disclosed in 1 st Centennial Bancorp’s (the “Company”) consolidated financial statements, Note 1,
included in the Annual Report on Form 10-KSB for the year ended December 31,
2004. 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 months ended March 31, 2005 may not be indicative of
operating results for the year ending December 31, 2005. Certain prior year and
prior quarter amounts have been reclassified to conform to current
classifications. Cash and cash equivalents consist of cash, due from banks, and
federal funds sold.





**Note
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**





In March
2004, the FASB modified Emerging Issues Task Force (EITF) Issue 03-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.” ** EITF
03-1 provides guidance for determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. The recognition and measurement provisions were initially
effective for other-than-temporary impairment evaluations in reporting periods
beginning after June 15, 2004. However, in September 2004, the effective date of
these provisions was delayed until the finalization of a FASB Staff Position to
provide additional implementation guidance. This EITF had no effect on the
Company’s consolidated financial statements.





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





SFAS No.
123R is effective for the Company on July 1, 2005, and the Company transitioned
to the fair value based accounting for stock compensation on January 1, 2005
using the modified version of prospective application (“modified prospective
method”). Under the modified prospective method as applicable to the Company,
SFAS No. 123R applies to new awards and to awards modified, repurchased, or
cancelled after January 1, 2005. Additionally, compensation cost for the portion
of awards for which the requisite service has not been rendered (generally
referring to non-vested awards) that are outstanding as of January 1, 2005 must
be recognized as the remaining requisite service rendered during the period of
and/or the periods after the adoption of SFAS 123R. The attribution of
compensation cost for those earlier awards will be based on the same method and
on the same grant-date fair values previously determined for the pro forma
disclosures as presented in the Company’s financial statements prior to the
adoption of SFAS No. 123R.








7





Subsequent
to our transition, the Securities and Exchange Commission announced on April 14,
2005 that it would provide for a phased-in-implementation process for SFAS No.
123R. The Securities and Exchange Commission’s new rule allows companies to
implement SFAS No. 123R at the beginning of their next fiscal year, instead of
the next reporting period, that begins after June 15, 2005. This ruling means
that the financial statements for our Company need not comply with SFAS No. 123R
until the interim financial statements for the first quarter of 2006 are filed
with the Securities and Exchange Commission. The new rule does not change the
accounting required by SFAS 123R; it only changes the dates for compliance with
the guidance.





In light
of the rule change, during the second quarter of 2005, the Company’s Management
will recommend to the Company’s Board of Directors to rescind the resolution for
early adoption of the rule for 2005, and, pending no further changes for
implementation by the Securities and Exchange Commission, implement adoption of
the rule beginning in January 2006.





**Note
3. EARNINGS PER SHARE**





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





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





**Earnings
      per share calculation****For
      the three months ended March 31,********(In
      thousands, except per share amounts)****20052**
    
    
    **2004****2**Net Income
    
    
    Weighted Average Shares
    
    
    Per share Amount
    
    
    Net Income
    
    
    Weighted Average Shares
    
    
    Per share AmountBasic
      earnings per share
    
    $
    1,010
    
    
    2,072
    
    $
    0.49
    
    $
    582
    
    
    2,017
    
    $
    0.29Effect
      of dilutive shares:assumed
      exercise of outstanding options
    
    
    —
    
    
    174
    
    
    (0.04
    )
    
    —
    
    
    121
    
    
    (0.02
    )Diluted
      earnings per share
    
    $
    1,010
    
    
    2,246
    
    $
    0.45
    
    $
    582
    
    
    2,138
    
    $
    0.27







2  The 2005 and 2004 earnings per share calculations have been adjusted for the 7%
stock dividend declared to shareholders of record on March 15, 2005, and
distributed April 15, 2005.


****


8


****


**Note
4. OFF-BALANCE SHEET COMMITMENTS**





In the
normal course of business, there are various commitments outstanding, such as
commitments to extend credit, which are not reflected in the financial
statements. At March 31, 2005 and December 31, 2004, such commitments included
approximately $1,957,000 and $1,157,000, respectively, of standby letters of
credit, approximately $186,712,000 and $158,179,000, respectively, of
undisbursed lines of credit and undisbursed loans in process, and $2,288,000 and
$2,162,000 respectively of available credit card lines. The Company’s exposure
to credit loss is represented by the contractual amount of these commitments.
The Company uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.








9


****


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





1 st Centennial Bancorp (the “Company”) is the holding company for 1st Centennial
Bank (the “Bank”) in Redlands, California. This discussion focuses primarily on
the results of operations of the Company on a consolidated basis for the three
months ended March 31, 2005 and 2004, and the financial condition of the Company
as of March 31, 2005 and December 31, 2004.





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 financial statements included in this report and in the
Company's 2004 Annual Report on Form 10-KSB.





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 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 10-KSB for the year ended December 31,
2004.





**CRITICAL
ACCOUNTING POLICIES**





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





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








10





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
1 st Centennial adds new products, increases the complexity of its loan portfolio,
and expands its geographic coverage, it will enhance its methodologies to keep
pace with the size and complexity of the loan portfolio. Management might report
a materially different amount for the provision for loan losses in the statement
of operations to change the allowance for loan losses if its assessment of the
above factors were different. This discussion and analysis should be read in
conjunction with 1 st Centennial’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 March 31, 2005 is
adequate to absorb losses inherent in the loan portfolio, a decline in the local
economy may result in increasing losses that cannot reasonably be predicted at
this time.





**RESULTS
OF OPERATIONS**





The
Company reported net income of $1,010,000 or $0.49 per basic share and $0.45 per
diluted share for the first three months of 2005. This compares to net income of
$582,000, or $0.29 per basic share and $0.27 per diluted share for the same
period in 2004.





Return on
average assets and return on average equity for the first quarter of 2005 was
1.10% and 14.40% respectively, as compared to 0.86% and 9.50% respectively, for
the same period in 2004. The increase in return on average assets and return on
average equity for the quarter ended March 31, 2005 when compared to the same
period in 2004 is due in part, to the increase in interest income as a result of
growth in average interest earning assets. Average interest-earning assets grew
$99.1 million or 40%, from March 2004 to March 2005 primarily in commercial
loans as a result of our strong business climate and loan demand. Net income was
$428,000, or 74% higher in 2005 as compared to the same period in
2004.





**NET
INTEREST INCOME/NET INTEREST MARGIN**





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





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




11




The
Company’s net interest margin for the first quarter of 2005 was 7.03%, as
compared to 7.12% for the same period in 2004. The small decrease was primarily
the result of the increase in volume and rates on our interest bearing
liabilities primarily in money market deposits, time deposits and FHLB
borrowings.





For the
first quarter ended March 31, 2005 total interest earning assets averaged $346.4
million, which represented an increase of $99.1 million or 40%, as compared to
$247.3 million for the same period in 2004. Total interest bearing deposits and
other interest-bearing liabilities averaged $246.0 million, which represented an
increase of $68.4 million or 39%, as compared to $177.6 million for the same
period in 2004. This increase is primarily attributable to the average increases
of $36.7 million in money market accounts due to a promotional money market
account offered to businesses and consumers during the second quarter of 2004,
coupled with an increase of $21.2 million in total average borrowings in order
to meet our loan demand.





The
Company reported total interest income of $7.2 million for the first quarter
ended March 31, 2005, which represented an increase of $2.2 million or 44%, over
total interest income of $5.0 million for the same period in 2004. The increase
in total interest income for the first quarter ended March 31, 2005 compared to
the same quarter in 2004 was primarily due to an increase of approximately $2.4
million in interest and fees on loans resulting from an increase of
approximately $116.2 million in average loans from March 2004 to March 2005.





The
Company reported total interest expense of $1.2 million for the first quarter of
2005, which represented an increase of $634,000 or 106% over total interest
expense of $596,000 for the same period in 2004. The increase was primarily due
to greater interest paid on money market deposit accounts, coupled with higher
interest expense on FHLB borrowings.





For the
quarter ended March 31, 2005, net interest income before provision for loan
losses was $6.0 million, which represented an increase of $1.6 million, or 37%,
over net interest income before provision for loan losses of $4.4 million for
the quarter ended March 31, 2004. The increase in net interest income for the
first quarter of 2005 as compared to 2004 was primarily due to the increase in
average total loans.






12




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





**Distribution,
      Yield and Rate Analysis of Net Interest Income****For
      the three Months Ending March 31,****2005**
    
    **2004****Average**
      **Balance**
    
    **Interest**
      **Income/**
      **Expense**
    
    **Average****3****Rate/Yield**
    
    **Average**
      **Balance**
    
    **Interest**
      **Income/**
      **Expense**
    
    **Average****3**
      **Rate/Yield****(Dollars
      in Thousands)****Interest-earning
      Assets:**Federal
      funds sold
    
    $
    1,732
    
    $
    11
    
    
    2.58
    %
    $
    1,737
    
    $
    4
    
    
    0.93
    %Interest-bearing
      depositsin
      financial institutions
    
    
    3,612
    
    
    39
    
    
    4.38
    %
    
    4,776
    
    
    52
    
    
    4.38
    %Investment
      securities:4Taxable
    
    
    14,973
    
    
    139
    
    
    3.76
    %
    
    30,966
    
    
    298
    
    
    3.87
    %Non-taxable
    
    
    3,894
    
    
    41
    
    
    4.27
    %
    
    3,833
    
    
    47
    
    
    4.93
    %Total
      investments
    
    
    24,211
    
    
    230
    
    
    3.85
    %
    
    41,312
    
    
    401
    
    
    3.90
    %Loans5
    
    
    322,147
    
    
    7,000
    
    
    8.81
    %
    
    205,945
    
    
    4,575
    
    
    8.93
    %Total
      interest-earning assets
    
    $
    346,358
    
    $
    7,230
    
    
    8.47
    %
    $
    247,257
    
    $
    4,976
    
    
    8.09
    %**Interest-bearing
      Liabilities:******Interest-bearing
      depositsInterest-bearing
      demand deposits
    
    $
    18,857
    
    $
    10
    
    
    0.22
    %
    $
    19,370
    
    $
    9
    
    
    0.19
    %Money
      market deposits
    
    
    80,328
    
    
    304
    
    
    1.53
    %
    
    43,644
    
    
    83
    
    
    0.76
    %Savings
      deposits
    
    
    24,662
    
    
    38
    
    
    0.62
    %
    
    21,817
    
    
    32
    
    
    0.59
    %Time
      deposits $100,000 or greater
    
    
    42,087
    
    
    275
    
    
    2.65
    %
    
    38,699
    
    
    181
    
    
    1.88
    %Other
      time deposits
    
    
    34,592
    
    
    205
    
    
    2.40
    %
    
    29,512
    
    
    121
    
    
    1.65
    %Total
      interest-bearing deposits
    
    
    200,526
    
    
    832
    
    
    1.68
    %
    
    153,042
    
    
    426
    
    
    1.12
    %FHLB
      borrowings
    
    
    30,361
    
    
    188
    
    
    2.51
    %
    
    11,625
    
    
    31
    
    
    1.07
    %Federal
      funds purchased
    
    
    2,248
    
    
    14
    
    
    2.53
    %
    
    871
    
    
    3
    
    
    1.39
    %Subordinated
      notes payable to subsidiaryTrusts6
    
    
    13,151
    
    
    196
    
    
    6.04
    %
    
    12,051
    
    
    136
    
    
    4.54
    %Total
      borrowings
    
    
    45,760
    
    
    398
    
    
    3.53
    %
    
    24,547
    
    
    170
    
    
    2.79
    %Total
      interest-bearing liabilities
    
    $
    246,286
    
    $
    1,230
    
    
    2.03
    %
    $
    177,589
    
    $
    596
    
    
    1.35
    %Net
      interest income
    
    
    
    
    $
    6,000
    
    
    
    
    
    
    
    $
    4,380Net
      interest margin7
    
    
    
    
    
    
    
    
    7.03
    %
    
    
    
    
    
    
    
    7.12
    %
 3 Average
rates/yields for these periods have been annualized using actual days for 2005
and 2004.
 4 Yields
on income have not been computed on a tax equivalent basis, because tax-exempt
investments are minimal.
 5 Loans
are gross, which excludes the allowance for loan losses, and net of deferred
fees. Nonaccrual loans are included in the table for computation purposes, but
the foregone interest on such loans is excluded. Loan fee income during the
first three months of 2005 was $1,149,000 compared to $846,000 in the first
three months of 2004.
 6 On
January 1, 2004, the Company adopted FIN 46 and deconsolidated its trust
preferred securities from its balance sheet.
 7 Net
interest income as a percentage of average interest-earning assets.
  13





The
following table shows a rate and volume analysis for changes in interest income,
interest expense, and net interest income for the three month period ending
March 31, 2005. ****


****
 **Rate/Volume
Analysis of Net Interest Income**


**Three
      Months Ended March 31,****2005
      vs. 2004****Increases
      (Decreases)****Due
      to Change In****Volume**
    
    **Rate****8**
    
    **Rate****8****/****Volume**
    
    **Total****(Dollars
      in Thousands)****Increase
      (Decrease) in Interest Income:**Federal
      funds sold
    
    $
    —
    
    $
    29
    
    $
    (22
    )
    $
    7Interest-bearing
      depositsin
      financial institutions
    
    
    (51
    )
    
    —
    
    
    38
    
    
    (13
    )Investment
      securities9
    
    
    (616
    )
    
    (58
    )
    
    509
    
    
    (165
    )Loans10
    
    
    10,382
    
    
    (252
    )
    
    (7,705
    )
    
    2,425Total
    
    $
    9,715
    
    $
    (281
    )
    $
    (7,180
    )
    $
    2,254**Increase
      (Decrease) in Interest Expense:**Interest-bearing
      demand deposits
    
    $
    (1
    )
    $
    5
    
    $
    (3
    )
    $
    1Money
      market deposits
    
    
    281
    
    
    336
    
    
    (396
    )
    
    221Savings
      deposits
    
    
    17
    
    
    8
    
    
    (19
    )
    
    6Time
      deposits $100,000 or greater
    
    
    64
    
    
    297
    
    
    (267
    )
    
    94Other
      time deposits
    
    
    79
    
    
    229
    
    
    (224
    )
    
    84FHLB
      borrowings
    
    
    201
    
    
    167
    
    
    (211
    )
    
    157Federal
      funds purchased
    
    
    19
    
    
    10
    
    
    (18
    )
    
    11Subordinated
      notes payable to subsidiarytrusts
    
    
    50
    
    
    181
    
    
    (171
    )
    
    60Total
    
    $
    710
    
    $
    1,233
    
    $
    (1,309
    )
    $
    634Total
      change in net interest income
    
    $
    9,005
    
    $
    (1,514
    )
    $
    (5,871
    )
    $
    1,620


8 Rates
for these periods on which calculations are based have been annualized using
actual days.
 9 Yields
on income have not been computed on a tax equivalent basis, because tax-exempt
investments are minimal.
 10 Loans
are gross, which excludes the allowance for loan losses, and net of deferred
fees. Nonaccrual loans are included in the table for computation purposes, but
the foregone interest of such loans is excluded. Loan fee income during the
first three months of 2005 was $1,149,000 compared to $846,000 in the first
three months of 2004.




****


14


****


**PROVISION
FOR LOAN LOSSES**





Due to
inherent risks associated with the business of making loans, the Company
regularly sets aside a provision for loan and lease losses through charges to
earnings that are added to the Allowance for Loan and Lease Losses (ALLL). These
charges are reflected in the income statements as the provision for loan losses.
Losses are charged-off against the ALLL when they are identified and quantified.
The amount allocated to the allowance is determined by Management and is based
upon a number of factors in order to maintain adequate protection for
unanticipated or future losses, and preserve the integrity of the Allowance for
Loan and Lease Losses (ALLL).




The
provision for loan losses totaled $350,000 for the three months ended March 31,
2005. This represented a decrease of $78,000 or 18% when compared to $428,000
for the same period in 2004. The decrease in the provision from 2004 to 2005 is
attributable to the continued quality of our loan portfolio. Net loan
(charge-offs) recoveries decreased from ($87,000) for the period ended March 31,
2004 to a net loan recovery of $1,000 for the period ended March 31, 2005 due to
early identification of problem credits and thorough workout
strategies.




**NONINTEREST
INCOME**





Noninterest
income for 1 st Centennial includes customer service fees, gains and commissions from sale of
loans, increase in the cash surrender value of life insurance policies, broker
fee income, conduit loan sale income, fee spread participation loan income and
other miscellaneous income.





Noninterest
income totaled $914,000 for the three months ended March 31, 2005. This
represented an increase of $74,000, or 9% when compared to $840,000 for the same
period in 2004.





The
increase in noninterest income was primarily the result of $122,000 of
additional income from participated loans due to more activity in loan
participations in the first quarter of 2005 as compared to the first quarter of
2004. Conduit loan sale income increased $163,000 as a result of more activity
in loan sales in the first quarter of 2005 as compared to the first quarter of
2004, however, gains and commissions from sale of loans decreased $157,000.





For the
first three months ended March 31, 2005 as compared to 2004, noninterest income
as an annualized percentage of average earning assets decreased to 1.07% from
1.37%. This change was due to the fact that growth in noninterest income did not
keep pace with asset growth during the quarter ended March 31, 2005. To augment
noninterest income, in March 2005 the Company formed a revenue sharing
affiliation with KWB Wealth Managers Group, a successful Linsco Private Ledger
firm that offers non-deposit and investment products. This affiliation will help
the Company grow this important line of business and increase our level of
service to our clients.











15





The
following table sets forth components of 1 st Centennial’s noninterest income for the periods indicated and expresses the
amounts as percentage of total noninterest income:


**Noninterest
      Income****For
      the Three Months Ended March 31,****2005**
    
    **2004****Amount**
    
    **Percent**
      **of
      Total**
    
    **Amount**
    
    **Percent**
      **of
      Total****(Dollars
      in Thousands)**Customer
      service fees
    
    $
    321
    
    
    35.13
    %
    $
    280
    
    
    33.33
    %Gains
      and commissions from sale of loans
    
    
    55
    
    
    6.02
    %
    
    212
    
    
    25.24
    %Increase
      in cash surrender value of life insurance
    
    
    61
    
    
    6.67
    %
    
    92
    
    
    10.95
    %Broker
      fee income
    
    
    78
    
    
    8.53
    %
    
    61
    
    
    7.26
    %Conduit
      loan sale income
    
    
    302
    
    
    33.04
    %
    
    139
    
    
    16.55
    %Fee
      spread participation loan income
    
    
    122
    
    
    13.35
    %
    
    —
    
    
    0.00
    %Other
      miscellaneous income
    
    
    (25
    )
    
    (2.74
    )%
    
    56
    
    
    6.67
    %Total
      noninterest income
    
    $
    914
    
    
    100.00
    %
    $
    840
    
    
    100.00
    %As
      a percentage of average earning assets (annualized)
    
    
    
    
    
    1.07
    %
    
    
    
    
    1.37
    %




16




**NONINTEREST
EXPENSE**





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





Noninterest
expense totaled $4,933,000 for the three months ended March 31, 2005. This
represented an increase of $1,032,000, or 26% as compared to $3,901,000 for the
same period in 2004. The increase in noninterest expense was primarily due to
the increases of $549,000, $124,000, $95,000 and $141,000 in salaries and
employee benefits, marketing expense, professional fee expense and other
operating expense, respectively.





Additional
staffing and salary increases contributed to the increase in salaries and
employee benefits of $549,000 while the increase in marketing expense of
$124,000 was attributed to expenses related to ongoing business development
efforts. The increase in professional expense of $95,000 was attributed to costs
incurred to comply with the Sarbanes Oxley Act of 2002 and expenses related to
audits, exams, CPA fees and other professional expenses. Other operating expense
increased by $141,000 as a direct result of our growth. From March 31, 2004 to
March 31, 2005 total assets grew $101.9 million or 36%.





For the
first three months ended March 31, 2005 as compared to 2004, noninterest expense
as an annualized percentage of average earning assets decreased to 5.78% from
6.35%. Even though noninterest expense increased $1,032,000 when compared to a
year ago, the increase on average earning assets of $99.1 million from 2004 to
2005 dropped this percentage. Management continues to control overhead expenses
by making certain that noninterest expenses do not increase at the same pace as
asset growth.





The
following tables set forth components of 1 st Centennial’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 March 31,****2005**
    
    **2004****Amount**
    
    **Percent**
      **of
      Total**
    
    **Amount**
    
    **Percent**
      **of
      Total****(Dollars
      in Thousands)**Salaries
      andemployee
      benefits
    
    $
    2,958
    
    
    59.96
    %
    $
    2,409
    
    
    61.75
    %Net
      occupancy expense
    
    
    447
    
    
    9.06
    %
    
    357
    
    
    9.15
    %Marketing
    
    
    308
    
    
    6.24
    %
    
    184
    
    
    4.72
    %Data
      processing fees
    
    
    231
    
    
    4.68
    %
    
    194
    
    
    4.97
    %Professional
      fees
    
    
    354
    
    
    7.18
    %
    
    259
    
    
    6.64
    %Postage,
      telephone, supplies
    
    
    140
    
    
    2.84
    %
    
    159
    
    
    4.08
    %Directors’
      fees
    
    
    60
    
    
    1.22
    %
    
    45
    
    
    1.15
    %Other
      operating expense
    
    
    435
    
    
    8.82
    %
    
    294
    
    
    7.54
    %Total
      noninterest expense
    
    $
    4,933
    
    
    100.00
    %
    $
    3,901
    
    
    100.00
    %As
      a percentage ofaverage
      earning assets (annualized)
    
    
    
    
    
    5.78
    %
    
    
    
    
    6.35
    %




17








**INCOME
TAXES**




As of
March 31, 2005 the Company’s effective income tax rate is approximately 38.0%,
as compared to 35.0% for the same period in 2004. These rates represent a blend
of the statutory federal income tax rate of 34.0% and the California income tax
rate of 7.2%. These rates also reflect the exclusion from taxable income of
income on certain tax-exempt investments.




**FINANCIAL
CONDITION**





**GENERAL**





The
Company’s total assets were $386.2 million at March 31, 2005, an increase of
$29.5 million, or 8%, compared to total assets of $356.7 million at December 31,
2004. The majority of the asset growth was in total net loans, which increased
$26.9 million or 9% to $334.9 million at March 31, 2005 as compared to $308.0
million at December 31, 2004. Strong loan demand in the Company’s market areas
contributed to the increase in total assets and total loans.





Total
deposits at March 31, 2005 were $303.7 million, which represented an increase of
$11.9 million, or 4% from total deposits of $291.8 million at December 31, 2004.
The increase was primarily in interest-bearing deposits. Interest-bearing
deposits increased $11.2 million or 6% to $210.3 million at March 31, 2005
compared to $159.4 million at December 31, 2004. These deposit increases and the
addition of $13.0 million in FHLB borrowings were used to support our loan
growth from December 31, 2004 to March 31, 2005.





**LOANS**





Total
gross loans were $341.2 million at March 31, 2005 as compared to $313.7 million
at December 31, 2004. Total gross loans represented 88% of total assets at
March 31, 2005 and at December 31, 2004. Total gross loans increased by
$27.5 million, or 9% for the first three months of 2005. Construction and
development loans increased $4.8 million or 4% during the first three months of
2005 due to the continuing strong demand for affordable housing in our market
areas. Commercial and multi-family and Commercial loans increased $6.4 million
or 8% and $12.9 million, or 13% respectively, during the first three months of
2005 due to our strong business climate and loan demand.






18





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


**Loan
      Portfolio Composition****March
      31, 2005**
    
    **December
      31, 2004****Amount**
    
    **Percent**
      **of
      Total**
    
    **Amount**
    
    **Percent**
      **of
      Total****(Dollars
      in Thousands)**Real
      estate loans:Construction
      and development
    
    $
    129,111
    
    
    37.83
    %
    $
    124,309
    
    
    39.62
    %Residential
      loans11
    
    
    4,655
    
    
    1.36
    %
    
    3,650
    
    
    1.16
    %Commercial
      and multi-family
    
    
    83,692
    
    
    24.53
    %
    
    77,316
    
    
    24.64
    %Commercial
      loans
    
    
    115,492
    
    
    33.85
    %
    
    102,582
    
    
    32.71
    %Consumer
      loans
    
    
    1,008
    
    
    0.30
    %
    
    1,107
    
    
    0.35
    %Equity
      lines of credit
    
    
    6,200
    
    
    1.82
    %
    
    3,475
    
    
    1.11
    %Credit
      card and other loans
    
    
    1,064
    
    
    0.31
    %
    
    1,284
    
    
    0.41
    %Total
      gross loans
    
    
    341,222
    
    
    100.00
    %
    
    313,723
    
    
    100.00
    %Less:Unearned
      income
    
    
    (1,826
    )
    
    
    
    
    (1,556
    )Allowance
      for loan losses
    
    
    (4,488
    )
    
    
    
    
    (4,137
    )Total
      net loans
    
    $
    334,908
    
    
    
    
    $
    308,030
 **NON-PERFORMING
ASSETS**





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




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





Nonperforming
assets at March 31, 2005 decreased $4,000 to $121,000, from $125,000 at
December 31, 2004, representing 0.04% of total gross loans for both
periods.





Nonperforming
assets at March 31, 2005 decreased $391,000 to $121,000, from $512,000 at
March 31, 2004, representing 0.04% and 0.23% of total gross loans,
respectively. This decrease was primarily attributed to the payoff of two real
estate commercial and multi-family loans totaling $353,000 and one consumer loan
for $15,000 which was reclassified from nonaccrual to accrual status.




11 Includes
one $267M loan available for sale.


19





The
following table provides information with respect to all nonperforming assets as
of March 31, 2005 and 2004, and December 31, 2004:


**Nonperforming
      Assets****March
      31, 2005**
    
    **December
      31, 2004**
    
    **March
      31, 2004****(Dollars
      in Thousands)****Nonaccrual
      loans:****12**Real
      estate loans:Construction
      and development
    
    $
    —
    
    $
    —
    
    $
    —Residential
      loans
    
    
    —
    
    
    —
    
    
    —Commercial
      and multi-family
    
    
    —
    
    
    —
    
    
    353Commercial
      loans
    
    
    90
    
    
    92
    
    
    98Consumer
      loans
    
    
    —
    
    
    —
    
    
    15Equity
      lines of credit
    
    
    —
    
    
    —
    
    
    —Credit
      card and other loans
    
    
    31
    
    
    33
    
    
    42Total
      nonaccrual loans
    
    $
    121
    
    $
    125
    
    $
    508**Loans
      90 days or more past due****(as
      to principal****or****interest) and still accruing:**Real
      estate loans:Construction
      and development
    
    
    —
    
    
    —
    
    
    —Residential
      loans
    
    
    —
    
    
    —
    
    
    —Commercial
      and multi-family
    
    
    —
    
    
    —
    
    
    —Commercial
      loans
    
    
    —
    
    
    —
    
    
    4Consumer
      loans
    
    
    —
    
    
    —
    
    
    —Equity
      lines of credit
    
    
    —
    
    
    —
    
    
    —Credit
      card and other loans
    
    
    —
    
    
    —
    
    
    —Total
      loans 90 days or more past dueand
      still accruing
    
    $
    —
    
    $
    —
    
    $
    4Restructured
      loans13
    
    $
    —
    
    $
    —
    
    $
    —Total
      nonperforming loans
    
    $
    121
    
    $
    125
    
    $
    512Other
      real estate owned
    
    
    —
    
    
    —
    
    
    —Total
      nonperforming assets
    
    $
    121
    
    $
    125
    
    $
    512Nonperforming
      loans as a percentageof
      total gross loans14
    
    
    0.04
    %
    
    0.04
    %
    
    0.23
    %Nonperforming
      assets as a percentageof
      total gross loans and other real estate owned
    
    
    0.04
    %
    
    0.04
    %
    
    0.23
    %Allowance
      for loan losses to nonperforming loans
    
    
    3,709.09
    %
    
    3,309.60
    %
    
    478.32
    %Allowance
      for loan losses
    
    $
    4,488
    
    $
    4,137
    
    $
    2,449


12 During
the three months ended March 31, 2005, no income related to these loans was
included in net income. Additional interest income of approximately $13,000,
would have been recorded for the three months ended March 31, 2005 if these
loans had been paid in accordance with their original terms and had been
outstanding throughout the applicable period then ended or, if not outstanding
throughout the applicable period then ended, since origination.
 13 A
“restructured loan” is when the terms of which were negotiated to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower.
 14 Total
loans are gross loans less unearned income.




20





**ALLOWANCE
FOR LOAN LOSSES**





The
allowance for loan losses totaled $4.5 million at March 31, 2005 compared to
$4.1 million at December 31, 2004. 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 and Lease Losses 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 Allowance for Loan and Lease
Losses (ALLL) is determined by a number of factors that are included in the
Company’s ALLL methodology.




Two
primary forms of analysis are used as tools to determine the adequacy of the
ALLL. 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. Classified loans are assigned traditional weight
factors, based on the severity of the classification. 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 ALLL 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 ALLL based on historical loss history by loan category.
This methodology is structured such that the amount allocated to the reserve
defaults to the higher of 1) that, which is based on historical losses, or 2)
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 ALLL methodology include the following: depth and
experience of Management and staff, quality of the Board of Directors, 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 to maintain the
integrity of the risk rating process. The risk ratings are stratified by loan
type and according to risk rating.







21




As of
March 31, 2005, the aggregate loan portfolio risk ratings were stratified as
follows:




Pass/Homogeneous:
    94.05%Special
      Mention:
    5.10%Substandard:
    0.76%Doubtful:
    0.08%





The
allowance for loan losses as a percentage of total loans outstanding as of March
31, 2005 was 1.32%, as compared to 1.33% at December 31, 2004 and 1.12% at March
31, 2004. There were no charge-offs during the first three months of 2005
compared to $124,000 during the same period in 2004. Recoveries totaled $1,000
during the first three months of 2005 as compared to $37,000 during the same
period in 2004. The ratio of the allowance for loan losses to average total
loans was determined by management to be adequate at March 31, 2005 and December
31, 2004.








22





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




**Allowance
      for Loan Losses******March
      31,**2005**
    
    ****December
      31,**2004**
    
    ****March
      31,**2004****(Dollars
      in Thousands)****Balances:**Average
      total loans outstanding during period
    
    $
    322,147
    
    $
    257,005
    
    $
    205,945Total
      loans outstanding at end of period,net
      of unearned income
    
    $
    339,396
    
    $
    312,167
    
    $
    218,588**Allowance
      for Loan Losses:**Balance
      at beginning of period
    
    $
    4,137
    
    $
    2,108
    
    $
    2,108Charge-offs:Real
      estate loans:Construction
      and development
    
    
    —
    
    
    —
    
    
    —Residential
      loans
    
    
    —
    
    
    —
    
    
    —Commercial
      and multi-family
    
    
    —
    
    
    —
    
    
    —Commercial
      loans
    
    
    —
    
    
    121
    
    
    103Consumer
      loans
    
    
    —
    
    
    14
    
    
    9Equity
      lines of credit
    
    
    —
    
    
    —
    
    
    —Credit
      card and other loans
    
    
    —
    
    
    20
    
    
    12Total
      charge-offs
    
    
    —
    
    
    155
    
    
    124Recoveries:Real
      estate loans:Construction
      and development
    
    
    —
    
    
    —
    
    
    —Residential
      loans
    
    
    —
    
    
    2
    
    
    —Commercial
      and multi-family
    
    
    —
    
    
    —
    
    
    —Commercial
      loans
    
    
    1
    
    
    79
    
    
    36Consumer
      loans
    
    
    —
    
    
    4
    
    
    —Equity
      lines of credit
    
    
    —
    
    
    —
    
    
    —Credit
      card and other loans
    
    
    —
    
    
    1
    
    
    1Total
      recoveries
    
    
    1
    
    
    86
    
    
    37Net
      (charge-offs) recoveries
    
    
    1
    
    
    (69
    )
    
    (87
    )Provision
      charged to operations
    
    
    350
    
    
    2,098
    
    
    428Allowance
      for loan losses balance,end
      of period
    
    $
    4,488
    
    $
    4,137
    
    $
    2,449**Ratios:****15**Net
      loan charge-offsto
      average total loans
    
    
    0.00
    %
    
    0.03
    %
    
    0.04
    %Allowance
      for loan losses to average total loans
    
    
    1.39
    %
    
    1.61
    %
    
    1.19
    %Allowance
      for loan losses to total loansat
      end of period
    
    
    1.32
    %
    
    1.33
    %
    
    1.12
    %Allowance
      for loan losses to totalnonperforming
      loans
    
    
    3,709.09
    %
    
    3,309.60
    %
    
    478.32
    %Net
      loan (charge-offs) recoveries toallowance
      for loan losses at end of period
    
    
    0.02
    %
    
    (1.67
    )%
    
    (3.55
    )%Net
      loan (charge-offs) recoveriesto
      provision for loan losses
    
    
    0.29
    %
    
    (3.29
    )%
    
    (20.33
    )%
  15 Total
loans are gross loans less unearned income.


23


****


**INVESTMENTS**





1 st Centennial’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 March 31, 2005
and December 31, 2004, 100% of the investment securities owned by the Company
were classified as “Available for Sale.”





At March
31, 2005, the Company’s investment portfolio at fair value consisted of $12.9
million in federal agency mortgage-backed securities and $4.1 million in
obligations of states and local government securities for a total of $17.0
million. At December 31, 2004, the portfolio consisted of $198,000 in U.S.
treasury and government agency securities, $15.8 million in federal agency
mortgage-backed securities and $4.1 million in obligations of states and local
government securities for a total of $20.1 million. The $3.1 million or 16%
decrease in the Company’s investment portfolio was primarily due to principal
paydowns on the federal agency mortgage-backed securities. The proceeds received
from the payoffs were used to fund the Company’s loan growth.





The
following table is a comparison of amortized cost and fair value of investment
securities at March 31, 2005 and December 31, 2004:




**Investment
      Portfolio****March 31,
    2005**
    
    **March 31,
      2005****Amortized****Cost**
    
    **Unrealized**
      **Gains**
    
    **Unrealized**
      **Losses**
    
    **Fair**
      **Value**
    
    **Amortized**
      **Cost**
    
    **Unrealized**
      **Gains**
    
    **Unrealized**
      **Losses**
    
    **Fair**
      **Value****Available
      for Sale:**U.S.
      treasury and governmentagency
      securities
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    200
    
    $
    —
    
    $
    (2
    )
    $
    198Federal
      agency mortgage-backedsecurities
    
    
    12,969
    
    
    83
    
    
    (151
    )
    
    12,901
    
    
    15,754
    
    
    110
    
    
    (113
    )
    
    15,751Obligations
      of states and localgovernment
      securities
    
    
    3,943
    
    
    120
    
    
    —
    
    
    4,063
    
    
    3,971
    
    
    176
    
    
    —
    
    
    4,147Total
    
    $
    16,912
    
    $
    203
    
    $
    (151
    )
    $
    16,964
    
    $
    19,925
    
    $
    286
    
    $
    (115
    )
    $
    20,096
   The
Company also has investments in interest-bearing time certificates of deposit at
other financial institutions totaling $3.2 million at March 31, 2005 as compared
to $4.0 million at December 31, 2004.




24








**DEPOSITS**





Total
deposits increased $11.9 million, or 4%, to $303.7 million at March 31, 2005
from $291.8 million at December 31, 2004. Noninterest-bearing demand deposits
increased $781,000, or 1% to $93.4 at March 31, 2005 as compared to $92.6 at
December 31, 2004. Interest-bearing and money market accounts decreased $4.1
million, or 4% at March 31, 2005 as compared to December 31, 2004. Savings
deposit accounts decreased $2.5 million, or 10% at March 31, 2005 as compared to
December 31, 2004. Time deposits $100,000 or greater increased $14.6 million, or
36% at March 31, 2005 as compared to December 31, 2004, while other time
deposits increased $3.2 million, or 10%. The increase in time deposits $100,000
or greater was primarily the result of additional brokered certificates of
deposit acquired to help support our loan growth.





From
March 31, 2004 to March 31, 2005, total average deposits increased $25.6 million
or 37%. As a percentage of average total deposits, average money market deposits
increased to 27% on March 31, 2005, from 20% on March 31, 2004, while time
deposits $100,000 or greater declined to 14% on March 31, 2005, from 17% on
March 31, 2004. Although there was a decline in time deposits $100,000 or more
as a percentage of total average deposits, time deposits $100,000 or more
increased $3.4 million, or 9% from a year ago.





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
1.68% at March 31, 2005 from 1.12% at March 31, 2004. The increase from 2004 to
2005 is primarily attributable to the increase in rates paid on money market
deposits and time deposits, which matured and renewed at a higher rate. For all
interest bearing liabilities, the average rate for the three months ended March
31, 2005 was 2.03% as compared to 1.35% for the same period in 2004, and 1.58%
for the year ended December 31, 2004.








25


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




**Average
      Deposits and Other Borrowings******Three
      Months Ended**March 31, 2005**
    
    
    ****Year
      Ended**December 31, 2004****Average**
      **Balance**
    
    
    **Average****16**
      **Rate**
    
    
    **Average**
      **Balance**
    
    
    **Average**
      **Rate****(Dollars
      in Thousands)**Demand
      deposits, noninterest bearing
    
    $
    94,591
    
    
    0.00
    %
    $
    81,185
    
    
    0.00
    %Interest-bearing
      deposits:Interest-bearing
      demand deposits
    
    
    18,857
    
    
    0.22
    %
    
    20,255
    
    
    0.20
    %Money
      market deposits
    
    
    80,328
    
    
    1.53
    %
    
    67,188
    
    
    1.31
    %Savings
      deposits
    
    
    24,662
    
    
    0.62
    %
    
    25,752
    
    
    0.65
    %Time
      deposits $100,000 or greater
    
    
    42,087
    
    
    2.65
    %
    
    39,144
    
    
    2.01
    %Other
      time deposits
    
    
    34,592
    
    
    2.40
    %
    
    32,811
    
    
    1.93
    %Total
      interest-bearing deposits
    
    
    200,526
    
    
    1.68
    %
    
    185,150
    
    
    1.35
    %FHLB
      borrowings
    
    
    30,361
    
    
    2.51
    %
    
    12,571
    
    
    1.49
    %Federal
      funds purchased
    
    
    2,248
    
    
    2.53
    %
    
    723
    
    
    1.80
    %Subordinated
      notes payable tosubsidiary
      trusts
    
    
    13,151
    
    
    6.04
    %
    
    12,877
    
    
    4.88
    %Total
      depositsand
      other borrowings
    
    $
    340,877
    
    
    1.46
    %
    $
    292,506
    
    
    1.14
    %Average
      rate excludingnoninterest
      bearing demand deposits
    
    
    
    
    
    2.03
    %
    
    
    
    
    1.58
    %
 The
following tables sets forth the scheduled maturities of time certificates of
deposit accounts outstanding in amounts of $100,000 or more at March 31, 2005
and December 31, 2004:




****Maturities
      of Time Deposits of****$100,000
      or More**(Dollars in Thousands)****March
      31, 2005**
    
    
    **December
      31, 2004**Three
      months or less
    
    $
    12,419
    
    $
    10,459Over
      three months through six months
    
    
    15,903
    
    
    10,083Over
      six months through twelve months
    
    
    14,404
    
    
    8,978Over
      twelve months
    
    
    11,910
    
    
    10,548Total
    
    $
    54,636
    
    $
    40,068


16Rates
for these periods on which calculations are based have been annualized using
actual days.





26


****


**LIQUIDITY
AND MARKET RATE RISK/INTEREST RATE RISK MANAGEMENT**





*Liquidity*





The
Company’s liquidity is primarily a reflection of 1 st Centennial’s ability to raise money quickly, without principal loss and at a
reasonable cost to meet loan demand and deposit withdrawals, and to service
other liabilities as they come due. 1 st Centennial has adopted policies to manage its liquidity position so it can
respond to changes in the financial environment and ensure that sufficient funds
are available to meet those needs. Generally, 1 st Centennial’s major sources of liquidity are customer deposits, maturities,
paydowns and sales of investment securities, the use of federal funds markets,
borrowings from correspondent banks, borrowings from the Federal Home Loan Bank
(FHLB) and net cash provided by operating activities. Scheduled loan repayments
are a relatively stable source of funds, while deposit inflows and unscheduled
loan prepayments, which are influenced by general interest rate levels, interest
rates available on other investments, competition, economic conditions, and
other factors, are not. Liquid assets include cash and due from banks, less the
federal reserve requirement, federal funds sold, interest-bearing deposits in
financial institutions, unpledged investment securities available-for-sale,
Federal Home Loan Bank and Pacific Coast Bankers’ Bank stock investments,
restricted at cost and cash surrender value of life insurance.




In light
of the Company’s growth, in October 2004, the Board of Directors changed the
liquidity policy to maintain a ratio of liquid assets to ending deposits and
short-term liabilities of 10% - 20% instead of 20% or more. In addition, the
Company increased its off balance sheet liquidity sources. In order to augment
liquidity, 1 st Centennial Bank has Federal Funds borrowing arrangements with four correspondent
banks totaling $20.0 million, and a secured line of credit with the FHLB
totaling approximately $39.2 million.




On a
consolidated basis, the Company’s liquidity ratio, which is a measure of liquid
assets to deposits, plus short-term liabilities, plus federal home loan bank
borrowings, due within one year, less pledged securities for treasury tax and
loan, increased to 11.21% at March 31, 2005 from 7.08% as of December 31, 2004.
Although the Company was not in compliance with its internal liquidity policy at
December 31, 2004, it did achieve compliance with its internal policy at March
31, 2005.





On a
consolidated basis, the ratio of liquid assets to ending assets as of March 31,
2005 was 9.90% as compared to 6.21% as of December 31, 2004.





In order
to help support the Company’s $26.9 million increase in net loans, the Company
pledged approximately $74.3 million in loans as of March 31, 2005 to the FHLB as
collateral against our secured line of credit.





We
believe it is beneficial to take advantage of the earnings opportunity presented
by current loan demand, and to make certain temporary arrangements to ensure
adequate liquidity, until our deposit growth has an opportunity to catch up to
the loan growth. In order to enhance our deposit growth, we have a plan in place
to increase deposits by:








27





1)
    Advertising
      competitive deposit rates;


2)
    Revising
      the incentive program for business development officers to reward deposit
      growth;


3)
    Hiring
      personnel whose primary focus is deposit
growth;


4)
    Special
      deposit promotions; and


5)
    Buying
      brokered deposits and public funds to a limit of 10% of total
      deposits.


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




Management
is of the opinion that the standby funding sources it has arranged for are
adequate and reliable to meet 1 st Centennial’s current and anticipated short-term liquidity needs.




The
following table sets forth certain information with respect to 1 st Centennial’s liquidity as of March 31, 2005 and December 31, 2004.


***Liquidity****March
      31, 2005**
    
    **December
      31, 2004****(Dollars
      in Thousands)**Cash
      and due from banks (less FRB reserve requirement)
    
    $
    8,129
    
    $
      5,195Federal
      funds sold
    
    
    1,510
    
    —Interest-bearing
      deposits in financial institutions
    
    
    3,189
    
    3,964Unpledged
      investment securities, available for sale
    
    
    16,480
    
    4,891Stock
      investments, restricted at cost
    
    
    2,367
    
    1,615Cash
      surrender value of life insurance
    
    
    6,544
    
    6,488Total
      liquid assets
    
    $
    38,219
    
    $
      22,153Liquidity
      ratios:Ending
      assets
    
    
    9.90
    %
    6.21%Ending
      deposits and short-termliabilities
    
    
    11.21
    %
    7.08%
***


*Market
Rate Risk/Interest Rate Risk Management*


**


*Interest
Rates and Differentials*





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 on the Company’s 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 FRB.


**


28


**


*Asset/Liability
Management*




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




The
fundamental objective of 1 st Centennial’s management of its assets and liabilities is to maximize the
economic value of 1 st Centennial 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. 1 st Centennial’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. 1 st Centennial, like other financial institutions, is subject to interest rate risk
to the degree that its interest-earning assets reprice differently than its
interest-bearing liabilities, and not at the same time, or to the same
magnitude. 1 st Centennial 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. 1 st Centennial’s interest and pricing strategies are driven by its asset-liability
management analyses and by local market conditions.




In
connection with the foregoing strategy, 1 st Centennial studies the net change in interest income and net interest margin
given immediate and parallel interest rate shocks over a 12-month horizon.
1 st Centennial’s goal is to manage the effect of these changes within
Board-established parameters for up/down 100 and 200 basis points. Shown below
are possible changes to net interest income 17  and the
net interest margin 17 based
upon the model’s program under 100 and 200 basis point increases or decreases as
of March 31, 2005:




**Change****(****in
      Basis Points****)**
    
    **Net
      Interest Income****(****next
      twelve months****)**
    
    **Change
      in Net****Interest
      Income**
    
    **%
      Change in Net****Interest
      Income**
    
    **Net
      Interest****Margin****(Dollars in
      Thousands)**+
      200
    
    $
    21,932
    
    $
    1,836
    
    
    9.13
    %
    
    6.03
    %+
      100
    
    
    21,008
    
    
    911
    
    
    4.54
    %
    
    5.79
    %0
    
    
    20,097
    
    
    —
    
    
    —
    
    
    5.54
    %-
      100
    
    
    19,212
    
    
    (885
    )
    
    (4.40
    %)
    
    5.31
    %-
      200
    
    
    18,281
    
    
    (1,816
    )
    
    (9.03
    %)
    
    5.05
    %





These
results indicate the effect of immediate rate changes, and do not consider the
yield from reinvesting in short-term versus long-term instruments. The above
table shows values in a sudden, significant upward or downward movement. The net
interest margin will improve if rates rise and decline if rates fall. The
results indicated by the report are considered acceptable by management and the
Board of Directors.


****


17 Excluding
loan fees.


****


29


****


**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 holding company or bank from certain activities. Failure to satisfy
applicable guidelines may also subject a banking institution to a variety of
enforcement actions by federal regulatory authorities.





The
Company and 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, 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 other qualifying instruments). Under the
established guidelines, the Company has attained the highest level of
capitalization, characterized as “Well Capitalized.” It is the intent of the
Company to continue to maintain “Well Capitalized” risk-based capital
ratios.





Total
stockholders’ equity was $29.1 million at March 31, 2005, compared to $28.0
million at December 31, 2004. The increase of $1.1 million, or 4% during
the first three months of 2005 was primarily due to $1,010,000 in year-to-date
net income and proceeds of $86,000 from the exercise of stock
options.





30








The
following table illustrates the capital and prompt corrective action guidelines
applicable to the Company and 1st Centennial Bank, as well as their total
risk-based capital ratios, Tier 1 capital ratios and leverage ratios as of March
31, 2005 and December 31, 2004:





Actual
    
    MinimumCapitalRequirement
    
    MinimumTo
      Be WellCapitalized
      UnderPrompt CorrectiveAction
      ProvisionsAmount/Ratio
    
    Amount/Ratio
    
    Amount/Ratio**As of March 31, 2005:**Total
      capital to risk-weighted assets:Consolidated
    
    $
    41,910
    
    
    11.67
    %
    $
    28,730
    
    
    8.00
    %
    $
    35,913
    
    
    10.00
    %1st
      Centennial Bank
    
    
    40,035
    
    
    11.16
    %
    
    28,699
    
    
    8.00
    %
    
    35,874
    
    
    10.00
    %Tier
      1 capital to risk-weighted assets:Consolidated
    
    
    34,118
    
    
    9.50
    %
    
    14,365
    
    
    4.00
    %
    
    21,548
    
    
    6.00
    %1st
      Centennial Bank
    
    
    35,541
    
    
    9.90
    %
    
    14,360
    
    
    4.00
    %
    
    21,540
    
    
    6.00
    %Tier
      1 capital to average assets:Consolidated
    
    
    34,118
    
    
    9.30
    %
    
    14,674
    
    
    4.00
    %
    
    18,343
    
    
    5.00
    %1st
      Centennial Bank
    
    
    35,541
    
    
    9.70
    %
    
    14,656
    
    
    4.00
    %
    
    18,320
    
    
    5.00
    %**As
      of December 31, 2004:**Total
      capital to risk-weighted assets:Consolidated
    
    $
    40,587
    
    
    12.26
    %
    $
    26,484
    
    
    8.00
    %
    $
    33,105
    
    
    10.00
    %1st
      Centennial Bank
    
    
    38,559
    
    
    11.68
    %
    
    26,410
    
    
    8.00
    %
    
    33,013
    
    
    10.00
    %Tier
      1 capital to risk-weighted assets:Consolidated
    
    
    32,749
    
    
    9.89
    %
    
    13,245
    
    
    4.00
    %
    
    19,868
    
    
    6.00
    %1st
      Centennial Bank
    
    
    34,429
    
    
    10.43
    %
    
    13,204
    
    
    4.00
    %
    
    19,806
    
    
    6.00
    %Tier
      1 capital to average assets:Consolidated
    
    
    32,749
    
    
    9.25
    %
    
    14,162
    
    
    4.00
    %
    
    17,702
    
    
    5.00
    %1st
      Centennial Bank
    
    
    34,429
    
    
    9.73
    %
    
    14,154
    
    
    4.00
    %
    
    17,692
    
    
    5.00
    %





Of the
Company’s $34.1 million of Tier 1 capital at March 31, 2005, $9.7 million
consisted of Trust Preferred Securities. Trust Preferred Securities, up to the
amount of 25% of Tier 1 capital, are considered to be Tier 1 capital for
regulatory purposes, but classified as long-term debt in accordance with
generally accepted accounting principles. The remainder of the $13 million of
Trust Preferred Securities is included in Tier 2 capital.





31








**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 Rate/Interest Rate Risk Management.”








****





32





**ITEM
4. CONTROLS AND PROCEDURES**





(a)  Evaluation
of Disclosure Controls and Procedures




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




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







(b)  Changes
in Internal Controls




There
were no significant changes in the Company's internal controls over financial
reporting that occurred in the first quarter of 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.







33





**PART
II - OTHER INFORMATION**





**ITEM
1. LEGAL PROCEEDINGS**





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





**ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS**





None.





**ITEM
3. DEFAULTS UPON SENIOR SECURITIES**





None.





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





None.





**ITEM
5. OTHER INFORMATION**





None.


****





34


****


**ITEM
6. EXHIBITS**




**Exhibit
      Number**
    
    **Description
      of Exhibits**3.1
    
    Articles
      of Incorporation of Centennial First Financial Services (Incorporated by
      reference from Exhibit to the Company’s Registration Statement on Form S-4
      filed on October 20, 1999.)3.2
    
    Amendment
      to Articles of Incorporation of Centennial First Financial Services filed
      May 5, 2000 (Incorporated by reference to Exhibit to Company’s Form 10-QSB
      for the quarter ended June 30, 2002.)3.3
    
    Amendment
      to Articles of Incorporation of Centennial First Financial Services filed
      February 18, 2003 (Incorporated by reference to Exhibit to Company’s Form
      SB-2 filed on March 13, 2003.)3.4
    
    Restated
      By-Laws of Centennial First Financial Services (Incorporated by reference
      from Exhibit to the Company’s Form 10-QSB for the quarter ended June 30,
      2002.)10.1
    
    Brea
      Branch Lease, dated September 20, 2000 (Incorporated by reference from
      Exhibit to the Company’s Registration Statement on Form SB-2 filed on
      March 21, 2001.)10.2
    
    Form
      of Indemnification Agreement (Incorporated by reference from Exhibit to
      the Company’s Registration Statement on Form SB-2 filed on March 21,
      2001.)10.9
    
    1st
      Centennial Bank Employee Stock Ownership Plan (with 401(k) provisions),
      dated August 1, 2004. (Incorporated by reference to Form 10-KSB for the
      year ended December 31, 2004.)10.10
    
    Amended
      and Restated Stock Incentive Plan. (Incorporated by reference to Form
      10-KSB for the year ended December 31, 2004.)10.11
    
    Palomar
      Community Bank (now Escondido branch) lease dated April 15, 1987
      (Incorporated by reference from Exhibit 10.13 to Form 10-QSB for the
      fiscal quarter ended March 31, 2002.)10.12
    
    Indenture
      for Trust Preferred Securities dated July 11, 2002 (Incorporated by
      reference from Exhibit 10.14 to Form 10-QSB for the fiscal quarter ended
      September 30, 2002.)






35





10.13
    
    Amended
      and Restated Declaration of Trust for trust preferred securities dated
      July 11, 2002 (Incorporated by reference from Exhibit 10.15 to Form 10-QSB
      for the fiscal quarter ended September 30, 2002.)10.14
    
    Guarantee
      Agreement for Trust Preferred Securities dated July 11, 2002 (Incorporated
      by reference from Exhibit 10.16 to Form 10-QSB for the fiscal quarter
      ended September 30, 2002.)10.15
    
    Salary
      Continuation Agreement of Suzanne Dondanville, dated December 17, 2002
      (Incorporated by reference from Exhibit 10.17 to Form SB-2 dated March 13,
      2003.)10.16
    
    Salary
      Continuation Agreement of Clifford Schoonover, dated December 17, 2002
      (Incorporated by reference from Exhibit 10.18 to Form SB-2 dated March 13,
      2003.)10.17
    
    Amendment
      to Construction Department Lease dated August 28, 2002 (Incorporated by
      reference from Exhibit 10.20 to Form SB-2 dated March 13, 2003.)10.18
    
    Commercial
      Lending Group Lease, dated December 23, 2002 (Incorporated by reference
      from Exhibit 10.21 to Form SB-2 dated March 13, 2003.)10.19
    
    Palm
      Desert Branch Lease, dated November 13, 2002 (Incorporated by reference
      from Exhibit 10.22 to Form 10-KSB for the year ended December 31,
      2002.)10.20
    
    Amendment
      to Escondido Branch Lease, dated June 6, 2001 (Incorporated by reference
      from Exhibit 10.23 to Form 10-KSB for the year ended December 31,
      2002.)10.21
    
    Amendment
      to Salary Continuation Agreement of Suzanne Dondanville, dated December
      17, 2002. (Incorporated by reference from Exhibit 10.24 to Form 10-KSB for
      the year ended December 31, 2003.)10.22
    
    Amendment
      to Salary Continuation Agreement of Anne Elizabeth Sanders, dated December
      1, 2001. (Incorporated by reference from Exhibit 10.25 to Form 10-KSB for
      the year ended December 31, 2003.)10.23
    
    Amendment
      to Salary Continuation Agreement of Clifford Schoonover, dated December
      17, 2002. (Incorporated by reference from Exhibit 10.26 to Form 10-KSB for
      the year ended December 31, 2003.)10.25
    
    Indenture
      for Trust Preferred Securities dated January 15, 2004. (Incorporated by
      reference to Form 10-QSB for the quarter ended March 31,
      2004.)




36




10.26
    
    Amended
      and Restated Declaration of Trust for Trust Preferred Securities dated
      January 15, 2004. (Incorporated by reference to Form 10-QSB for the
      quarter ended March 31, 2004.)10.27
    
    Guarantee
      Agreement for Trust Preferred Securities dated January 15, 2004.
      (Incorporated by reference to Form 10-QSB for the quarter ended March 31,
      2004.)10.28
    
    Amendment
      to Brea Branch Lease dated August 16, 2004. (Incorporated by reference to
      Form 10-QSB for the quarter ended September 30, 2004.)10.29
    
    Irwindale
      Branch Lease dated August 12, 2004. (Incorporated by reference to Form
      10-QSB for the quarter ended September 30, 2004.)10.30
    
    Salary
      Continuation Agreement of Anne Elizabeth Sanders, dated December 1, 2001.
      (Supersedes exhibit 10.5 Salary Continuation Agreement of Beth Sanders,
      dated October 1, 2001, Incorporated by reference to Form 10-QSB for the
      quarter ended September 30, 2004.)10.31
    
    Employment
      Agreement of Beth Sanders, dated December 1, 2004. (Incorporated by
      reference to Form 10-KSB for the year ended December 31,
      2004.)10.32
    
    Employment
      Agreement of Suzanne Dondanville, dated December 1, 2004. (Incorporated by
      reference to Form 10-KSB for the year ended December 31,
      2004.)10.33
    
    Temecula
      Branch Lease, dated December 15, 2004. (Incorporated by reference to Form
      10-KSB for the year ended December 31, 2004.)10.34
    
    Real
      Estate Department Lease, dated November 30, 2000. (Incorporated by
      reference to Form 10-KSB for the year ended December 31,
      2004.)21.1
    
    Subsidiaries
      of 1stCentennial Bancorp. (Incorporated by reference to Form 10-QSB for the
      quarter ended March 31, 2004.)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)




37


**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 12 th day of
May 2005.




**1ST CENTENNIAL
      BANCORP**/s/ Thomas E. VesseyThomas
      E. VesseyPresident
      and Chief Executive Officer




******/s/ Beth SandersBeth
      SandersExecutive
      Vice President and Chief Financial Officer(Principal
      Financial Officer)**









38