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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

Exchange Act of 1934

For the quarterly period ended March 31, 2006

Commission file number: 000-29105

1stCENTENNIAL BANCORP

(Exact Name of
Registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 91-1995265                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                           |  |           
|------------------------------------------ |  | ----------
|218 East State Street Redlands, California |  | 92373     
|(Address of principal executive offices)   |  | (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ    No ̈

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  þ

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

Yes ̈No  þ

APPLICABLE TO CORPORATE ISSUER

The number of shares
of Common Stock of the registrant outstanding as of May 09, 2006 was 3,199,262.



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TABLE OF CONTENTS



|                               |  |         |  |                                                                                       |  |                                                      |  |     
|------------------------------ |  | ------- |  | ------------------------------------------------------------------------------------- |  | ---------------------------------------------------- |  | ----
|                               |  | ITEM    |  |                                                                                       |  |                                                      |  | PAGE
|                               | 
|PART I  Financial Information |  |        
|                               |  |         | 
|                               |  | ITEM 1  |  | Unaudited Consolidated Financial Statements                                           |  | 2                                                   
|                               |  |         |  |                                                                                       |  | Consolidated statements of condition                 |  | 2   
|                               |  |         |  |                                                                                       |  | Consolidated statements of earnings                  |  | 3   
|                               |  |         |  |                                                                                       |  | Consolidated statements of shareholders Equity      |  | 4   
|                               |  |         |  |                                                                                       |  | Consolidated statements of cash flows                |  | 5   
|                               |  |         |  |                                                                                       |  | Notes to unaudited consolidated financial statements |  | 7   
|                               |  |         | 
|                               |  | ITEM 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10                                                  
|                               |  |         | 
|                               |  | ITEM 3  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 30                                                  
|                               |  |         | 
|                               |  | ITEM 4  |  | Controls and Procedures                                                               |  | 31                                                  
|                               | 
|PART II  Other Information    |  |        
|                               |  |         | 
|                               |  | ITEM 1  |  | Legal Proceedings                                                                     |  | 32                                                  
|                               |  |         | 
|                               |  | ITEM 1A |  | Risk Factors                                                                          |  | 32                                                  
|                               |  |         | 
|                               |  | ITEM 2  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 32                                                  
|                               |  |         | 
|                               |  | ITEM 3  |  | Defaults Upon Senior Securities                                                       |  | 32                                                  
|                               |  |         | 
|                               |  | ITEM 4  |  | Submission of Matters to a Vote of Security Holders                                   |  | 32                                                  
|                               |  |         | 
|                               |  | ITEM 5  |  | Other Information                                                                     |  | 32                                                  
|                               |  |         | 
|                               |  | ITEM 6  |  | Exhibits                                                                              |  | 33                                                  
|                               |  |         | 
|                               |  |         |  | Signatures                                                                            |  | 35                                                  



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PART I  FINANCIAL INFORMATION



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

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION

March 31, 2006 and December 31, 2005



|                                                                                                                                                                      |  |             |         |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ---- | - | -------
|Dollar amounts in thousands                                                                                                                                           |  | 2006        |         | 2005
|                                                                                                                                                                      |  | (unaudited) |         |     
|ASSETS                                                                                                                                                                |  |             |         |      |   |        
|Cash and due from banks                                                                                                                                               |  | $           | 17,879  |      | $ | 16,862 
|Federal funds sold                                                                                                                                                    |  |             | 31,100  |      |   | 21,505 
|                                                                                                                                                                      |  |             |         |      |   |        
|Total cash and cash equivalents                                                                                                                                       |  |             | 48,979  |      |   | 38,367 
|Interest-bearing deposits in financial institutions                                                                                                                   |  |             | 2,350   |      |   | 2,334  
|Investment securities, available for sale                                                                                                                             |  |             | 11,141  |      |   | 12,208 
|Stock investments restricted, at cost                                                                                                                                 |  |             | 1,636   |      |   | 1,620  
|Loans, net of allowance for loan losses of $5,848 and $5,376                                                                                                          |  |             | 391,776 |      |   | 381,153
|Accrued interest receivable                                                                                                                                           |  |             | 2,243   |      |   | 2,425  
|Premises and equipment, net                                                                                                                                           |  |             | 3,493   |      |   | 3,652  
|Goodwill                                                                                                                                                              |  |             | 4,180   |      |   | 4,180  
|Cash surrender value of life insurance                                                                                                                                |  |             | 11,301  |      |   | 6,735  
|Other assets                                                                                                                                                          |  |             | 3,619   |      |   | 3,518  
|                                                                                                                                                                      |  |             |         |      |   |        
|                                                                                                                                                                      |  |            
|Total assets                                                                                                                                                          |  | $           | 480,718 |      | $ | 456,192
|                                                                                                                                                                      |  |             |         |      |   |        
|LIABILITIES                                                                                                                                                           |  |             |         |      |   |        
|Deposits:                                                                                                                                                             |  |             |         |      |   |        
|Noninterest-bearing demand deposits                                                                                                                                   |  | $           | 109,388 |      | $ | 106,121
|Interest-bearing deposits                                                                                                                                             |  |             | 313,240 |      |   | 295,154
|                                                                                                                                                                      |  |             |         |      |   |        
|Total deposits                                                                                                                                                        |  |             | 422,628 |      |   | 401,275
|Accrued interest payable                                                                                                                                              |  |             | 212     |      |   | 170    
|Other liabilities                                                                                                                                                     |  |             | 3,950   |      |   | 3,020  
|Subordinated notes payable to subsidiary trusts                                                                                                                       |  |             | 18,306  |      |   | 18,306 
|                                                                                                                                                                      |  |             |         |      |   |        
|Total liabilities                                                                                                                                                     |  |             | 445,096 |      |   | 422,771
|                                                                                                                                                                      |  |             |         |      |   |        
|SHAREHOLDERS EQUITY                                                                                                                                                  |  |             |         |      |   |        
|Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 2,125,643 and 2,100,075 shares at March 31, 2006 and
December 31, 2005, respectively |  |             | 27,281  |      |   | 26,803 
|Retained earnings                                                                                                                                                     |  |             | 8,333   |      |   | 6,617  
|Accumulated other comprehensive income                                                                                                                                |  |             | 8       |      |   | 1      
|                                                                                                                                                                      |  |             |         |      |   |        
|Total shareholders equity                                                                                                                                            |  |             | 35,622  |      |   | 33,421 
|                                                                                                                                                                      |  |             |         |      |   |        
|Total liabilities and shareholders equity                                                                                                                            |  | $           | 480,718 |      | $ | 456,192
|                                                                                                                                                                      |  |             |         |      |   |        

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



2



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

Three Months Ended March 31, 2006 and 2005 (unaudited)



|                                                                              |  |      |       |      |   |      
|----------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|Dollar amounts in thousands, except per share amounts                         |  | 2006 |       | 2005
|Interest income:                                                              |  |      |       |      |   |      
|Interest and fees on loans                                                    |  | $    | 8,558 |      | $ | 7,000
|Deposits in financial institutions                                            |  |      | 28    |      |   | 39   
|Federal funds sold                                                            |  |      | 271   |      |   | 11   
|Investments                                                                   |  |      |       |      |   |      
|Taxable                                                                       |  |      | 95    |      |   | 139  
|Tax-exempt                                                                    |  |      | 40    |      |   | 41   
|                                                                              |  |      |       |      |   |      
|Total interest income                                                         |  |      | 8,992 |      |   | 7,230
|                                                                              |  |      |       |      |   |      
|Interest expense:                                                             |  |      |       |      |   |      
|Interest bearing demand and savings deposits                                  |  |      | 1,162 |      |   | 352  
|Time deposits $100,000 or greater                                             |  |      | 561   |      |   | 275  
|Other time deposits                                                           |  |      | 321   |      |   | 205  
|Interest on borrowed funds                                                    |  |      | 339   |      |   | 398  
|                                                                              |  |      |       |      |   |      
|Total interest expense                                                        |  |      | 2,383 |      |   | 1,230
|                                                                              |  |      |       |      |   |      
|Net interest income                                                           |  |      | 6,609 |      |   | 6,000
|Provision for loan losses                                                     |  |      | 465   |      |   | 350  
|                                                                              |  |      |       |      |   |      
|Net interest income after provision for loan losses                           |  |      | 6,144 |      |   | 5,650
|                                                                              |  |      |       |      |   |      
|Noninterest income:                                                           |  |      |       |      |   |      
|Customer service fees                                                         |  |      | 328   |      |   | 321  
|Gains from sale of loans                                                      |  |      | 265   |      |   | 55   
|Conduit loan sale income                                                      |  |      | 495   |      |   | 302  
|Other income                                                                  |  |      | 80    |      |   | 236  
|                                                                              |  |      |       |      |   |      
|Total noninterest income                                                      |  |      | 1,168 |      |   | 914  
|                                                                              |  |      |       |      |   |      
|Noninterest expense:                                                          |  |      |       |      |   |      
|Salaries and employee benefits                                                |  |      | 2,487 |      |   | 2,958
|Net occupancy expense                                                         |  |      | 551   |      |   | 447  
|Other operating expense                                                       |  |      | 1,443 |      |   | 1,528
|                                                                              |  |      |       |      |   |      
|Total noninterest expense                                                     |  |      | 4,481 |      |   | 4,933
|                                                                              |  |      |       |      |   |      
|Income before provision for income taxes                                      |  |      | 2,831 |      |   | 1,631
|Provision for income taxes                                                    |  |      | 1,115 |      |   | 621  
|                                                                              |  |      |       |      |   |      
|Net income                                                                    |  | $    | 1,716 |      | $ | 1,010
|                                                                              |  |      |       |      |   |      
|Basic earnings per share1                                                     |  | $    | 0.54  |      | $ | 0.32 
|                                                                              |  |      |       |      |   |      
|Diluted earnings per share1                                                   |  | $    | 0.50  |      | $ | 0.30 
|                                                                              |  |      |       |      |   |      
|The accompanying notes are an integral part of these consolidated statements. |  |      |       |      |   |      

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|1 | Adjusted for the 50% stock distribution declared to shareholders of record on March 3, 2006, and distributed April 3, 2006.
|- | ---------------------------------------------------------------------------------------------------------------------------



3



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Three Months Ended March 31, 2006 and 2005 (unaudited)

Dollar amounts in thousands, except
share amounts



|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | --------- | - |  | ----------- | ------ | ---------------- | - | ----- | ----------------------------------- |  | - | ----- | - |  | - | ------ | -
|                                                                                             |  | Shares    |   |  | CommonStock |        | RetainedEarnings |   |       | AccumulatedOtherComprehensiveIncome |  |   | Total |  
|BALANCE, DECEMBER 31, 2004                                                                   |  | 1,939,611 |   |  | $           | 21,208 |                  | $ | 6,706 |                                     |  | $ | 87    |   |  | $ | 28,001 |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |   |  |             |       |                  |   | 1,010 |                                     |  |   |      |   |  |   | 1,010  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |                  |   |      |                                     |  |   | (72   | ) |  |   | (72    | )
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   | 938    |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|Cash paid in lieu of fractional shares                                                       |  |          |   |  |             |       |                  |   | (11   | )                                   |  |   |      |   |  |   | (11    | )
|Compensation expense on incentive stock options                                              |  |           |   |  |             | 113    |                  |   |      |                                     |  |   |      |   |  |   | 113    |  
|Exercise of stock options, including tax benefit                                             |  | 4,953     |   |  |             | 86     |                  |   |      |                                     |  |   |      |   |  |   | 86     |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|BALANCE, MARCH 31, 2005                                                                      |  | 1,944,564 |   |  | $           | 21,407 |                  | $ | 7,705 |                                     |  | $ | 15    |   |  | $ | 29,127 |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|BALANCE, DECEMBER 31, 2005                                                                   |  | 2,100,075 |   |  | $           | 26,803 |                  | $ | 6,617 |                                     |  | $ | 1     |   |  | $ | 33,421 |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |   |  |             |       |                  |   | 1,716 |                                     |  |   |      |   |  |   | 1,716  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |                  |   |      |                                     |  |   | 7     |   |  |   | 7      |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   | 1,723  |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|Retirement of restricted stock awards                                                        |  | (578      | ) |  |             |       |                  |   |      |                                     |  |   |      |   |  |   |       |  
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 117    |                  |   |      |                                     |  |   |      |   |  |   | 117    |  
|Exercise of stock options, including tax benefit                                             |  | 26,146    |   |  |             | 361    |                  |   |      |                                     |  |   |      |   |  |   | 361    |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  
|BALANCE, MARCH 31, 2006                                                                      |  | 2,125,643 |   |  | $           | 27,281 |                  | $ | 8,333 |                                     |  | $ | 8     |   |  | $ | 35,622 |  
|                                                                                             |  |           |   |  |             |        |                  |   |       |                                     |  |   |       |   |  |   |        |  

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



4



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2006 and 2005 (unaudited)



|                                                                                  |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Dollar amounts in thousands                                                       |  | 2006 |         |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |         |   |      |   |         |  
|Net income                                                                        |  | $    | 1,716   |   |      | $ | 1,010   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |      | 179     |   |      |   | 160     |  
|Loss (gain) on sale of fixed assets                                               |  |      | (7      | ) |      |   | 5       |  
|Provision for loan losses                                                         |  |      | 465     |   |      |   | 350     |  
|Amortization of deferred loan fees                                                |  |      | (511    | ) |      |   | (464    | )
|Amortization of excess purchase value of deposits                                 |  |      | 3       |   |      |   | 3       |  
|Amortization of excess purchase value of loans                                    |  |      |        |   |      |   | 15      |  
|Fair value of stock options and restricted stock awards, in noninterest expense   |  |      | 126     |   |      |   | 113     |  
|Deferred income tax provision                                                     |  |      | 6       |   |      |   | 48      |  
|Net amortization on investments and interest-bearing deposits                     |  |      | 50      |   |      |   | 65      |  
|Increase in cash surrender value of life insurance                                |  |      | (66     | ) |      |   | (56     | )
|Decrease (Increase) in assets:                                                    |  |      |         |   |      |   |         |  
|Accrued interest receivable                                                       |  |      | 182     |   |      |   | (595    | )
|Other assets                                                                      |  |      | (140    | ) |      |   | (586    | )
|Increase in liabilities:                                                          |  |      |         |   |      |   |         |  
|Accrued interest payable                                                          |  |      | 42      |   |      |   | 52      |  
|Other liabilities                                                                 |  |      | 921     |   |      |   | 651     |  
|                                                                                  |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |      | 2,966   |   |      |   | 771     |  
|                                                                                  |  |      |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |         |   |      |   |         |  
|Net decrease in interest-bearing deposits in financial institutions               |  |      |        |   |      |   | 775     |  
|Activity in available for sale securities:                                        |  |      |         |   |      |   |         |  
|Proceeds from sales, maturities and principal repayments of securities            |  |      | 1,038   |   |      |   | 2,990   |  
|Purchases of Federal Home Loan Bank stock                                         |  |      | (16     | ) |      |   | (752    | )
|Net increase in loans                                                             |  |      | (10,577 | ) |      |   | (26,779 | )
|Additions to bank premises and equipment                                          |  |      | (13     | ) |      |   | (525    | )
|Purchases of life insurance                                                       |  |      | (4,500  | ) |      |   |        |  
|                                                                                  |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |      | (14,068 | ) |      |   | (24,291 | )
|                                                                                  |  |      |         |   |      |   |         |  

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



5



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Three Months Ended March 31, 2006 and 2005 (unaudited)



|                                                    |  |      |        |      |   |        |  
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|Dollar amounts in thousands                         |  | 2006 |        | 2005 |  
|CASH FLOWS FROM FINANCING ACTIVITIES                |  |      |        |      |   |        |  
|Net increase in noninterest-bearing demand deposits |  |      | 3,267  |      |   | 781    |  
|Net increase in interest-bearing deposits           |  |      | 18,086 |      |   | 11,156 |  
|Proceeds from federal funds purchased               |  |      |       |      |   | 2,725  |  
|Proceeds from Federal Home Loan Bank borrowing      |  |      |       |      |   | 13,000 |  
|Cash paid in lieu of fractional shares              |  |      |       |      |   | (11    | )
|Proceeds from exercise of stock options             |  |      | 361    |      |   | 86     |  
|                                                    |  |      |        |      |   |        |  
|Net cash provided by financing activities           |  |      | 21,714 |      |   | 27,737 |  
|                                                    |  |      |        |      |   |        |  
|Net increase in cash and cash equivalents           |  |      | 10,612 |      |   | 4,217  |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD      |  |      | 38,367 |      |   | 5,695  |  
|                                                    |  |      |        |      |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD            |  | $    | 48,979 |      | $ | 9,912  |  
|                                                    |  |      |        |      |   |        |  
|SUPPLEMENTARY INFORMATION                           |  |      |        |      |   |        |  
|Interest paid                                       |  | $    | 2,338  |      | $ | 1,175  |  
|                                                    |  |      |        |      |   |        |  
|Income taxes paid                                   |  | $    | 55     |      | $ |       |  
|                                                    |  |      |        |      |   |        |  

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



6



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1STCENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2006

Note 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

1stCentennial Bancorp (the Company) is a bank holding company headquartered in Redlands, California that provides, through its subsidiary, 1stCentennial Bank (the Bank), a broad array of products and services throughout its operating areas in Southern California. The
Bank operates six branches, which provide commercial and consumer banking services.

Basis of Presentation

The unaudited financial information included herein has been prepared in conformity with the accounting principles and practices disclosed in the consolidated financial
statements, Note 1, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005. 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, 2006 may not be
indicative of operating results for the year ending December 31, 2006. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications.

Note 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On November 3, 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses the determination as to when an
investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and
requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, and supersedes EITF Topic No. D-44, Recognition of
Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The guidance in this FSP amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The FSP is
effective for reporting periods beginning after December 15, 2005. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of this guidance.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it
with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.
This standard was effective for fiscal periods beginning after June 15, 2005. Management does not believe that the adoption of SFAS 153 will have an impact on the Companys financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.
SFAS 154 replaces APB Opinion 20, Accounting Changes, and FASB Statement 3, Reporting Accounting Changes in Interim Financial Statements, and changes the accounting and reporting requirements for a change in accounting principle. SFAS 154 applies to
all voluntary changes in an accounting principle, as well as to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting
changes and error corrections made in fiscal years beginning after December 15, 2005 and requires retrospective application to prior periods financial statements for most voluntary changes in an accounting principle, unless it is
impracticable to do so. SFAS 154 did not change the guidance for reporting corrections of errors, changes in estimates or for justification of a change in accounting principle on the basis of preferability. The Company does not anticipate any
material impact to its financial condition or results of operations as a result of the adoption of SFAS No. 154.



7



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

Effective
January 1, 2006, the Company began recording compensation expense associated with stock-based awards in accordance with SFAS No. 123R. Stock-based compensation expense was $117,000 in the first quarter of 2006. It is expected that
stock-based compensation expense will increase in subsequent quarters, as additional stock options will have been granted.

The fair value of each option
granted is estimated on the date of grant using the Binomial option-pricing model. The Company uses the following input variables as of the grant date, to arrive at the fair value for each grant:



| | 1) | Grant date;
| | -- | -----------



| | 2) | Options granted;
| | -- | ----------------



| | 3) | Exercise price;
| | -- | ---------------



| | 4) | Stock price on date of grant;
| | -- | -----------------------------



| | 5) | Expected dividend rate;
| | -- | -----------------------



| | 6) | Expected volatility;
| | -- | --------------------



| | 7) | Risk free interest rate on grant date;
| | -- | --------------------------------------



| | 8) | Expected term; and
| | -- | ------------------



| | 9) | Expected forfeiture rate.
| | -- | -------------------------

Note 3. EARNINGS PER SHARE

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

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

Earnings per share
calculation2

For the three months ended
March 31,

(In thousands, except per share amounts)



|                                        |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|--------------------------------------- |  | --------- | ----- | --------------------- | ----- | --------------- | - | ----- | --------- |  | --------------------- | ----- | --------------- | ----- |  | - | ----- | -
|                                        |  | 2006      |       |                       | 2005  |                
|                                        |  | NetIncome |       | Weightedaverageshares |       | Per shareamount |   |       | NetIncome |  | Weightedaverageshares |       | Per shareamount |      
|Basic earnings per share                |  | $         | 1,716 |                       | 3,165 |                 | $ | 0.54  |           |  | $                     | 1,010 |                 | 3,108 |  | $ | 0.32  |  
|Effect of dilutive shares:              |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|assumed exercise of outstanding options |  |           |      |                       | 246   |                 |   | (0.04 | )         |  |                       |      |                 | 287   |  |   | (0.02 | )
|Diluted earnings per share              |  | $         | 1,716 |                       | 3,411 |                 | $ | 0.50  |           |  | $                     | 1,010 |                 | 3,395 |  | $ | 0.30  |  

---

|2 | Adjusted for the 50% stock distribution declared to shareholders of record on March 3, 2006, and distributed April 3, 2006.
|- | ---------------------------------------------------------------------------------------------------------------------------



8



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Note 4. OFF-BALANCE SHEET COMMITMENTS

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

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

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

Off-Balance sheet commitments



|                                      |  |                        |         |                  |   |        
|------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                      |  | March 31, 2006         |         | December 31,2005
|                                      |  | (Dollars in Thousands)
|Standby letters of credit             |  | $                      | 2,798   |                  | $ | 2,642  
|Undisbursed loans and lines of credit |  |                        | 212,970 |                  |   | 193,672
|Available credit card lines           |  |                        | 2,352   |                  |   | 2,090  
|                                      |  |                        |         |                  |   |        
|Total off-balance sheet commitments   |  | $                      | 218,120 |                  | $ | 198,404
|                                      |  |                        |         |                  |   |        



9



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

The Company is the holding
company for 1st Centennial Bank headquartered 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, 2006 and 2005, and the financial
condition of the Company as of March 31, 2006 and December 31, 2005.

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 2005 Annual Report on Form 10-K.

Certain statements in this Report on Form 10-Q constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), which involve risks and uncertainties. The Companys actual results may differ significantly from the results
discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, possible future deteriorating economic conditions in the Companys areas of operation; interest rate risk associated with
volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates;
risks of available-for-sale securities declining significantly in value as interest rates rise or issuers of such securities suffering financial losses; and regulatory risks associated with the variety of current and future regulations to
which the Company is subject. All of these risks could have a material adverse impact on the Companys financial condition, results of operations or prospects, and these risks should be considered in evaluating the Company. Segment reporting is
not presented since the Companys revenue is attributed to a single reportable segment. For additional information concerning these factors, refer to the Companys Form 10-K for the year ended December 31, 2005.

CRITICAL ACCOUNTING POLICIES

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

Qualitative factors include the general economic environment in our markets, including economic conditions in Southern California, and in particular, the state of certain industries, the size and complexity of individual credits in relation
to lending officers background and experience levels, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in our methodologies.

As the Company adds new products, it increases the complexity of its loan portfolio, and expands its geographic coverage. The Company will enhance its methodologies to
keep pace with the size and complexity of the loan portfolio. Management might report a materially different amount for the provision for loan losses if its assessment of the above factors were different. This discussion and analysis should be read
in conjunction with the Companys financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Managements Discussion and Analysis section entitled Financial Condition - Allowance for
Loan Losses. Although Management believes the level of the allowance as of March 31, 2006 was adequate to absorb losses inherent in the loan portfolio, a decline in the local economy may result in increasing losses that cannot reasonably
be predicted at this time.



10



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SUMMARY OF PERFORMANCE

Results of operations summary

Net income for the first three months of 2006 was $1.7 million, which is $706,000 or 70% higher than
net income of $1.0 million for the first three months of 2005. Basic and diluted earnings per share were $0.54 and $0.50 respectively, for the first three months of 2006. This compares to $0.32 and $0.30 respectively, for the first three months of
2005. Return on average assets and return on average equity for the three months ended March 31, 2006 were 1.52% and 20.36% respectively, as compared to 1.10% and 14.40% respectively, for the same period in 2005. The increase in return on
average assets and return on average equity for the three months ended March 31, 2006 when compared to the same period in 2005 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 $85.5 million or 25%, from March 2005 to March 2006 primarily in non-real estate commercial loans and real estate construction and development loans. This is a result of our strong business climate and loan demand.

The primary drivers behind the variance in net income for the first quarter of 2006 relative to the first quarter of 2005 are as follows:



| |  |  | Net interest income before the provision for loan losses increased by $609,000 or 10%, primarily due to the increase in average total loans.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the first quarter of 2006, the Company updated and redesigned its Commissions and Incentives Policy. As a result, commissions and incentives expense decreased $325,000. This
reduction coupled with an increase in deferred loan origination costs offset in salary expense were the primary drivers behind the $471,000 or 16% decrease in salaries and employee benefits expense.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gains from the sale of loans increased by $210,000 or 382% and income from conduit loan sales increased $193,000 or 64% due to more loans sold during the first quarter of 2006 as
compared to the same period in 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Professional fees expense decreased $127,000 or 36% as expenses incurred for compliance with the Sarbanes Oxley Act of 2002 decreased during the first three months of 2006 in
comparison to the same period in 2005. Most of the expense to comply with the Sarbanes Oxley Act of 2002 was recorded in 2004 and 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other miscellaneous income decreased $108,000 or 111%, as a result of less fee income associated with participated loan activity during the first quarter of 2006 as compared to the
first quarter of 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Occupancy expense increased $104,000 or 23%. The increase in occupancy expense was attributable to a complete quarter of equipment depreciation, security, lease rental and other
miscellaneous occupancy expenses relating to the opening of our Irwindale and Temecula branches that opened in February 2005 and August 2005, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The provision for income taxes increased $494,000 or 80% as a direct result of increased earnings for the three months ended March 31, 2006 when compared to the same period in
2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Condition Summary

The Companys total assets were $480.7 million at March 31, 2006, an increase of $24.5 million, or 5%, compared to total assets of $456.2 million at December 31, 2005. The most significant changes in the Companys
balance sheet during the first three months of 2006 are outlined below:



| |  |  | Interest-bearing deposits increased $18.1 million or 6% from December 31, 2005. The increase in interest-bearing deposits was primarily the result of the Companys
continued emphasis towards its money market campaign to attract new customers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net loans increased $10.6 million or 3% from December 31, 2005. Strong loan demand in the Companys market areas contributed to the increase in net loans.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



11



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| |  |  | Federal funds sold increased $9.6 million or 45% from December 31, 2005 due to an improved liquidity position.
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Cash surrender value of life insurance increased $4.6 million or 68% from December 31, 2005, which is attributable to the purchase of $4.5 million in new life insurance
policies in March 2006 to help finance future executive salary continuation agreements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Noninterest-bearing demand deposits increased $3.3 million or 3% from December 31, 2005, due to new deposit relationships, coupled with an increase in deposits with our
existing customers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS

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

NET INTEREST INCOME/NET INTEREST MARGIN

The principal component of the Companys earnings is net interest income, which is the difference between the interest and fees earned on loans and investments, and
the interest paid on deposits and borrowed funds. When net interest income is expressed as a percentage of average earning assets, the result is the net interest margin. The net interest spread is the yield on average earning assets minus the
average cost of interest-bearing deposits and borrowed funds. The Companys net interest income, 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 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.

The Companys net interest margin as of
March 31, 2006 was 6.21% compared to 7.03% for the same period in 2005. The increase in rates paid for money market, time deposits and subordinated notes payable to subsidiary trusts, coupled with the increase in the average balance on these
liabilities, were the major contributors toward compressing our net interest margin. From March 31, 2005 to March 31, 2006 the percentage of total average deposits represented by money market deposits changed to 37% from 27% while average
noninterest-bearing demand deposits changed to 25% from 32%. The shift in this average deposit mix also contributed to the reduction of the net interest margin in the first quarter of 2006 versus 2005.

For the first three months of 2006, total interest earning assets averaged $431.8 million, which represented an increase of $85.4 million or 25%, as compared to $346.4
million for the same period in 2005. This increase is primarily attributable to the increase in loans as a result of our strong business climate and loan demand. Total interest bearing deposits and other interest-bearing liabilities averaged $318.8
million, which represented an increase of $72.5 million or 29%, as compared to $246.3 million for the same period in 2005. This increase is primarily attributable to the increase in money market accounts. There was also an increase of $19.7 million
in average time deposit accounts of $100,000 or more due to the addition of brokered deposits. There were no Federal Home Loan Bank borrowings outstanding during the three months ended March 31, 2006 compared to an average of $30.4 million for
the same period in 2005 while average federal funds sold increased $22.6 million. The overall increase in deposits has helped improve the Companys liquidity position during 2006.



12



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The Company reported total interest income of $9.0 million for the three months ended March 31, 2006, which
represented an increase of $1.8 million or 24%, over total interest income of $7.2 million for the same period in 2005. The increase is primarily the result of increases in interest and fees on loans of approximately $1.6 million that resulted from
an increase of $70.7 million in average loans as of March 31 2006, as compared to the same period in 2005.

The Company reported total interest
expense of $2.4 million for the three months ended March 31, 2006, which represented an increase of $1.2 million over total interest expense of $1.2 million for the same period in 2005. This increase is primarily attributable to an increase in
the average balance of money market accounts, time deposit accounts and subordinated notes payable to subsidiary trusts.

For the three months ended
March 31, 2006, net interest income before provision for loan losses was $6.6 million, which represents an increase of $609,000 or 10%, over net interest income before provision for loan losses of $6.0 million for the same period in 2005. The
increase in net interest income for the first three months of 2006 as compared to 2005 was primarily due to the increase in average total loans.



13



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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, |        
|                                                    |  | 2006                                  |         |                          | 2005 |                   
|                                                    |  | Average Balance                       |         | Interest Income/ Expense |      | Average3Rate/Yield |  |      | Average Balance |  | Interest Income/ Expense |         | Average3 Rate/Yield |  
|                                                    |  | (Dollars in Thousands)                |        
|Interest-earning Assets:                            |  |                                       |         |                         
|Federal funds sold                                  |  | $                                     | 24,376  |                          | $    | 271                |  | 4.51 | %               |  | $                        | 1,732   |                     | $ | 11    |  | 2.58 | %
|Interest-bearing deposits in financial institutions |  |                                       | 2,340   |                          |      | 28                 |  | 4.85 | %               |  |                          | 3,612   |                     |   | 39    |  | 4.38 | %
|Investment securities:4                             |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Taxable                                             |  |                                       | 8,572   |                          |      | 95                 |  | 4.49 | %               |  |                          | 14,973  |                     |   | 139   |  | 3.76 | %
|Non-taxable                                         |  |                                       | 3,740   |                          |      | 40                 |  | 4.34 | %               |  |                          | 3,894   |                     |   | 41    |  | 4.27 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Total investments                                   |  |                                       | 39,028  |                          |      | 434                |  | 4.51 | %               |  |                          | 24,211  |                     |   | 230   |  | 3.85 | %
|Loans5                                              |  |                                       | 392,807 |                          |      | 8,558              |  | 8.84 | %               |  |                          | 322,147 |                     |   | 7,000 |  | 8.81 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Total interest-earning assets                       |  | $                                     | 431,835 |                          | $    | 8,992              |  | 8.44 | %               |  | $                        | 346,358 |                     | $ | 7,230 |  | 8.47 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Interest-bearing Liabilities:                       |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Interest-bearing deposits                           |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Interest-bearing demand deposits                    |  | $                                     | 26,806  |                          | $    | 22                 |  | 0.33 | %               |  | $                        | 18,857  |                     | $ | 10    |  | 0.22 | %
|Money market deposits                               |  |                                       | 147,580 |                          |      | 1,081              |  | 2.97 | %               |  |                          | 80,328  |                     |   | 304   |  | 1.53 | %
|Savings deposits                                    |  |                                       | 25,657  |                          |      | 59                 |  | 0.93 | %               |  |                          | 24,662  |                     |   | 38    |  | 0.62 | %
|Time deposits $100,000 or greater                   |  |                                       | 61,785  |                          |      | 561                |  | 3.68 | %               |  |                          | 42,087  |                     |   | 275   |  | 2.65 | %
|Other time deposits                                 |  |                                       | 38,623  |                          |      | 321                |  | 3.37 | %               |  |                          | 34,592  |                     |   | 205   |  | 2.40 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Total interest-bearing deposits                     |  |                                       | 300,451 |                          |      | 2,044              |  | 2.76 | %               |  |                          | 200,526 |                     |   | 832   |  | 1.68 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|FHLB borrowings                                     |  |                                       |        |                          |      |                   |  | 0.00 | %               |  |                          | 30,361  |                     |   | 188   |  | 2.51 | %
|Federal funds purchased                             |  |                                       |        |                          |      |                   |  | 0.00 | %               |  |                          | 2,248   |                     |   | 14    |  | 2.53 | %
|Subordinated notes payable to subsidiary trusts     |  |                                       | 18,306  |                          |      | 339                |  | 7.51 | %               |  |                          | 13,151  |                     |   | 196   |  | 6.04 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Total borrowings                                    |  |                                       | 18,306  |                          |      | 339                |  | 7.51 | %               |  |                          | 45,760  |                     |   | 398   |  | 3.53 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Total interest-bearing liabilities                  |  | $                                     | 318,757 |                          | $    | 2,383              |  | 3.03 | %               |  | $                        | 246,286 |                     | $ | 1,230 |  | 2.03 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Net interest income                                 |  |                                       |         |                          | $    | 6,609              |  |      |                 |  |                          |         |                     | $ | 6,000 |  |      |  
|                                                    |  |                                       |         |                          |      |                    |  |      |                 |  |                          |         |                     |   |       |  |      |  
|Net interest margin6                                |  |                                       |         |                          |      |                    |  | 6.21 | %               |  |                          |         |                     |   |       |  | 7.03 | %

---

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



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



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



14



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

Rate7/Volume Analysis of Net Interest Income



|                                                    |  |                                           |       |   |      |   |      |       |  |   |       |  
|--------------------------------------------------- |  | ----------------------------------------- | ----- | - | ---- | - | ---- | ----- |  | - | ----- | -
|                                                    |  | Three Months Ended March 31,2006 vs. 2005 |      
|                                                    |  | Increases (Decreases) Due to Change In    |      
|                                                    |  | Volume                                    |       |   | Rate |   |      | Total | 
|                                                    |  | (Dollars in Thousands)                    |      
|Increase (Decrease) in Interest Income:             |  |                                           |       |   |      |   |      |       |  |   |       |  
|Federal funds sold                                  |  | $                                         | 144   |   |      | $ | 116  |       |  | $ | 260   |  
|Interest-bearing deposits in financial institutions |  |                                           | (14   | ) |      |   | 3    |       |  |   | (11   | )
|Investment securities:8                             |  |                                           |       |   |      |   |      |       |  |   |       |  
|Taxable                                             |  |                                           | (59   | ) |      |   | 15   |       |  |   | (44   | )
|Non-taxable                                         |  |                                           | (2    | ) |      |   | 1    |       |  |   | (1    | )
|Loans9                                              |  |                                           | 1,535 |   |      |   | 23   |       |  |   | 1,558 |  
|                                                    |  |                                           |       |   |      |   |      |       |  |   |       |  
|Total                                               |  | $                                         | 1,604 |   |      | $ | 158  |       |  | $ | 1,762 |  
|                                                    |  |                                           |       |   |      |   |      |       |  |   |       |  
|Increase (Decrease) in Interest Expense:            |  |                                           |       |   |      |   |      |       |  |   |       |  
|Interest-bearing demand deposits                    |  | $                                         | 4     |   |      | $ | 8    |       |  | $ | 12    |  
|Money market deposits                               |  |                                           | 255   |   |      |   | 522  |       |  |   | 777   |  
|Savings deposits                                    |  |                                           | 2     |   |      |   | 19   |       |  |   | 21    |  
|Time deposits $100,000 or greater                   |  |                                           | 129   |   |      |   | 157  |       |  |   | 286   |  
|Other time deposits                                 |  |                                           | 24    |   |      |   | 92   |       |  |   | 116   |  
|FHLB borrowings                                     |  |                                           | (188  | ) |      |   |     |       |  |   | (188  | )
|Federal funds purchased                             |  |                                           | (14   | ) |      |   |     |       |  |   | (14   | )
|Subordinated notes payable to subsidiary trusts     |  |                                           | 77    |   |      |   | 66   |       |  |   | 143   |  
|                                                    |  |                                           |       |   |      |   |      |       |  |   |       |  
|Total                                               |  | $                                         | 289   |   |      | $ | 864  |       |  | $ | 1,153 |  
|                                                    |  |                                           |       |   |      |   |      |       |  |   |       |  
|Total change in net interest income                 |  | $                                         | 1,315 |   |      | $ | (706 | )     |  | $ | 609   |  
|                                                    |  |                                           |       |   |      |   |      |       |  |   |       |  

PROVISION FOR LOAN LOSSES

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

The provision for loan losses totaled $465,000 for the three months ended March 31, 2006. This represented an increase of $115,000 or 33% when compared to $350,000
for the same period in 2005. As of March 31, 2006 net recoveries were $7,000 compared to $1,000 for the same period in 2005, however, the increase in the provision was necessary in order to support the Companys growth in the loan
portfolio.

---

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



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



|9 | Loans are gross, which excludes the allowance for loan losses, and net of deferred fees. Nonaccrual loans are included in the table for computation purposes, but the
foregone interest of such loans is excluded.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



---

NONINTEREST INCOME

Noninterest income for the Company includes customer service fees, gains from sale of loans, increase in the cash surrender value of life insurance policies, broker fee income, conduit loan sales income and other miscellaneous income.

Noninterest income totaled $1,168,000 for three months ended March 31, 2006. This represented an increase of $254,000, or 28% when compared to
$914,000 for the same period in 2005.

The increase in noninterest income was primarily attributable to the increases in gains from the sale of loans of
$210,000 and conduit loan sales income of $193,000 as a result of more loans sold during the first quarter of 2006 as compared to the same period in 2005. A significant portion of these increases was offset by the decrease of $108,000 in other
miscellaneous income as a result of less fee income associated with participated loan activity during the first quarter of 2006 as compared to the first quarter of 2005.

For the three months ended March 31, 2006 as compared to 2005, noninterest income as an annualized percentage of average earning assets increased to 1.10% from 1.07%. This favorable increase is attributable to
the continuing efforts of the Company to increase noninterest income.

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

Noninterest Income



|                                                       |  |                                      |       |   |                 |        |    |        |   |                  |  |        |  
|------------------------------------------------------ |  | ------------------------------------ | ----- | - | --------------- | ------ | -- | ------ | - | ---------------- |  | ------ | -
|                                                       |  | For the Three Months Ended March 31, |      
|                                                       |  | 2006                                 |       |   | 2005            |       
|                                                       |  | Amount                               |       |   | Percentof Total |        |    | Amount |   | Percent of Total | 
|                                                       |  | (Dollars in Thousands)               |      
|Customer service fees                                  |  | $                                    | 328   |   |                 | 28.08  | %  |        | $ | 321              |  | 35.13  | %
|Gains from sale of loans                               |  |                                      | 265   |   |                 | 22.69  | %  |        |   | 55               |  | 6.02   | %
|Increase in cash surrender value of life insurance     |  |                                      | 71    |   |                 | 6.08   | %  |        |   | 61               |  | 6.67   | %
|Broker fee income                                      |  |                                      | 20    |   |                 | 1.71   | %  |        |   | 78               |  | 8.53   | %
|Conduit loan sales income                              |  |                                      | 495   |   |                 | 42.38  | %  |        |   | 302              |  | 33.04  | %
|Other miscellaneous income (expenses)                  |  |                                      | (11   | ) |                 | (0.94  | )% |        |   | 97               |  | 10.61  | %
|                                                       |  |                                      |       |   |                 |        |    |        |   |                  |  |        |  
|Total noninterest income                               |  | $                                    | 1,168 |   |                 | 100.00 | %  |        | $ | 914              |  | 100.00 | %
|                                                       |  |                                      |       |   |                 |        |    |        |   |                  |  |        |  
|As a percentage of average earning assets (annualized) |  |                                      |       |   |                 | 1.10   | %  |        |   |                  |  | 1.07   | %
|                                                       |  |                                      |       |   |                 |        |    |        |   |                  |  |        |  



16



---

NONINTEREST EXPENSE

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

Noninterest expense totaled $4,481,000 for the three months ended March 31, 2006. This represented a decrease of $452,000, or 9% when compared to $4,933,000 for the
same period in 2005. The decrease in noninterest expense was primarily due to the decreases of $471,000 and $127,000 in salaries and employee benefits and professional fee expense, respectively. These decreases were partially offset by an increase
of $104,000 in occupancy expense.

During the first quarter of 2006, the Company updated and redesigned its Commissions and Incentives Policy. As a result,
commissions and incentives expense decreased $325,000. This reduction coupled with an increase in deferred loan origination costs offset in salary expense were the major contributors in the reduction of salaries and employee benefits expense of
$471,000. Professional expense decreased $127,000. Expenses related to the compliance of the Sarbanes Oxley Act of 2002 decreased in during the first three months of 2006 when compared to the same period in 2005. Most of the expense to comply with
the Sarbanes Oxley Act of 2002 was recorded in 2004 and 2005. The increase in occupancy expense of $104,000 was attributable to equipment depreciation, security expense, lease rental expense and other miscellaneous occupancy expenses relating to the
opening of our Irwindale and Temecula branches that opened February 2005 and August 2005, respectively.

For the three months ended March 31, 2006 as
compared to 2005, noninterest expense as an annualized percentage of average earning assets decreased to 4.21% from 5.78%. This decrease is reflective of Managements continuing efforts to control overhead expenses.

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

Noninterest Expense



|                                                       |  |                                      |       |                 |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | ------------------------------------ | ----- | --------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Three Months Ended March 31, |      
|                                                       |  | 2006                                 |       |                 | 2005   |  
|                                                       |  | Amount                               |       | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)               |      
|Salaries and employee benefits                         |  | $                                    | 2,487 |                 | 55.49  | % |        | $ | 2,958           |  | 59.96  | %
|Net occupancy expense                                  |  |                                      | 551   |                 | 12.30  | % |        |   | 447             |  | 9.06   | %
|Marketing                                              |  |                                      | 379   |                 | 8.46   | % |        |   | 310             |  | 6.28   | %
|Data processing fees                                   |  |                                      | 145   |                 | 3.24   | % |        |   | 231             |  | 4.68   | %
|Professional fees                                      |  |                                      | 227   |                 | 5.07   | % |        |   | 354             |  | 7.18   | %
|Postage, telephone, supplies                           |  |                                      | 151   |                 | 3.37   | % |        |   | 140             |  | 2.84   | %
|Directors fees                                        |  |                                      | 56    |                 | 1.25   | % |        |   | 60              |  | 1.22   | %
|Other operating expense                                |  |                                      | 485   |                 | 10.82  | % |        |   | 433             |  | 8.78   | %
|                                                       |  |                                      |       |                 |        |   |        |   |                 |  |        |  
|Total noninterest expense                              |  | $                                    | 4,481 |                 | 100.00 | % |        | $ | 4,933           |  | 100.00 | %
|                                                       |  |                                      |       |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                      |       |                 | 4.21   | % |        |   |                 |  | 5.78   | %
|                                                       |  |                                      |       |                 |        |   |        |   |                 |  |        |  

INCOME TAXES

For the three months ended March 31, 2006 the Companys effective income tax rate was 39.4%, as compared to 38.1% for the same period in 2005. The increase in the effective rate was a direct result of the Companys increase
in volume of taxable income verses tax-exempt income on certain tax-exempt investments. These rates represent a blend of the statutory federal income tax rate of 34.0% and the California income tax rate of 11.0%, net of federal tax benefit.



17



---

FINANCIAL CONDITION

GENERAL

The Companys total assets were $480.7 million at March 31, 2006, an increase of $24.5 million, or 5%, compared to total
assets of $456.2 million at December 31, 2005. The largest single component of the asset growth was in total net loans, which increased $10.6 million or 3% to $391.8 million at March 31, 2006 as compared to $381.2 million at
December 31, 2005. Nearly as substantial was the increase in federal funds sold of $9.6 million, or 45%, to $31.1 million at March 31, 2006 as compared to $21.5 million at December 31, 2005. Total deposits at March 31, 2006 were
$422.6 million, which represented an increase of $21.3 million, or 5% from total deposits of $401.3 million at December 31, 2005. The increase was primarily in interest-bearing deposits. Interest-bearing deposits increased $18.1 million or 6%
to $313.2 million at March 31, 2006 compared to $295.1 million at December 31, 2005. Noninterest bearing demand deposits increased $3.3 million or 3% to $109.4 million at March 31, 2006 compared to $106.1 million at December 31,
2005. The major components of the Companys balance sheet are individually analyzed below, along with off-balance sheet information.

LOANS

Total gross loans were $399.4 million at March 31, 2006 as compared to $388.5 million at December 31, 2005. Total gross loans increased by
$10.9 million, or 3% for the first three months of 2006. Total gross loans represented 83% and 85% of total assets at March 31, 2006 and December 31, 2005, respectively. Real estate loans, which includes construction and development
increased $18.3 million or 8% during the first three months of 2006 and represented approximately 168% of the total loan growth of $10.9 million. This was due to the continuing strong demand for affordable housing in our market areas. Commercial
loans decreased $9.4 million or 6% during the first three months of 2006 due to loan runoff, coupled with the runoff of our accounts receivable financing program which was discontinued effective January 2006.

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

Loan Portfolio Composition



|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|---------------------------- |  | ---------------------- | ------- | - | ----------------- | ------ | - | ------ | - | ------- | --------------- |  | ------ | -
|                             |  | March 31, 2006         |         |   | December 31, 2005 |       
|                             |  | Amount                 |         |   | Percentof Total   |        |   | Amount |   |         | Percentof Total | 
|                             |  | (Dollars in Thousands) |        
|Real estate loans:           |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Construction and development |  | $                      | 154,145 |   |                   | 38.59  | % |        | $ | 137,292 |                 |  | 35.34  | %
|Residential loans            |  |                        | 3,388   |   |                   | 0.85   | % |        |   | 3,440   |                 |  | 0.89   | %
|Commercial and multi-family  |  |                        | 86,324  |   |                   | 21.61  | % |        |   | 84,813  |                 |  | 21.83  | %
|Commercial loans             |  |                        | 141,764 |   |                   | 35.50  | % |        |   | 151,207 |                 |  | 38.91  | %
|Consumer loans               |  |                        | 3,508   |   |                   | 0.88   | % |        |   | 2,784   |                 |  | 0.72   | %
|Equity lines of credit       |  |                        | 8,975   |   |                   | 2.25   | % |        |   | 7,644   |                 |  | 1.97   | %
|Credit card and other loans  |  |                        | 1,276   |   |                   | 0.32   | % |        |   | 1,304   |                 |  | 0.34   | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total gross loans            |  |                        | 399,380 |   |                   | 100.00 | % |        |   | 388,484 |                 |  | 100.00 | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Less:                        |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Unearned income              |  |                        | (1,756  | ) |                   |        |   |        |   | (1,955  | )               |  |        |  
|Allowance for loan losses    |  |                        | (5,848  | ) |                   |        |   |        |   | (5,376  | )               |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total net loans              |  | $                      | 391,776 |   |                   |        |   |        | $ | 381,153 |                 |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  



18



---

NON-PERFORMING ASSETS

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

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.

December 31, 2005 to March 31, 2006 analysis.Nonperforming assets at March 31, 2006 decreased $487,000 to $507,000, from $994,000 at
December 31, 2005, and represented 0.13% and 0.26% of total gross loans, respectively. The decrease was primarily attributable to the payoff of three commercial loans totaling $330,000 and the charge-off of two commercial loans totaling
$119,000. There were also principal paydowns totaling approximately $38,000 on loans that remain on nonaccrual status.

March 31, 2005 to
March 31, 2006 analysis.Nonperforming assets at March 31, 2006 increased $386,000 to $507,000, from $121,000 at March 31, 2005, and represented 0.13% and 0.04% of total gross loans, respectively. The increase was primarily
attributable to the addition of two commercial loans totaling $489,000 offset against the payoff of one commercial loan totaling $87,000 and the principal paydown on one commercial loan totaling approximately $13,000 that remains on nonaccrual
status.



19



---

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

Nonperforming Assets



|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  
|------------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ---------------- | - | ------ | -------------- |  | - | -------- | -
|                                                                                      |  | March 31, 2006         |          |   | December 31,2005 |   |        | March 31, 2005 | 
|                                                                                      |  | (Dollars in Thousands) |         
|Nonaccrual loans:10                                                                   |  |                        |          |   |                  |   |        |                |  |   |          |  
|Real estate loans:                                                                    |  |                        |          |   |                  |   |        |                |  |   |          |  
|Construction and development                                                          |  | $                      |         |   |                  | $ |       |                |  | $ |         |  
|Residential loans                                                                     |  |                        |         |   |                  |   |       |                |  |   |         |  
|Commercial and multi-family                                                           |  |                        |         |   |                  |   |       |                |  |   |         |  
|Commercial loans                                                                      |  |                        | 507      |   |                  |   | 994    |                |  |   | 121      |  
|Consumer loans                                                                        |  |                        |         |   |                  |   |       |                |  |   |         |  
|Equity lines of credit                                                                |  |                        |         |   |                  |   |       |                |  |   |         |  
|Credit card and other loans                                                           |  |                        |         |   |                  |   |       |                |  |   |         |  
|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  
|Total nonaccrual loans                                                                |  |                        | 507      |   |                  |   | 994    |                |  |   | 121      |  
|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  
|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                                                                      |  |                        |         |   |                  |   |       |                |  |   |         |  
|Consumer loans                                                                        |  |                        |         |   |                  |   |       |                |  |   |         |  
|Equity lines of credit                                                                |  |                        |         |   |                  |   |       |                |  |   |         |  
|Credit card and other loans                                                           |  |                        |         |   |                  |   |       |                |  |   |         |  
|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  
|Total loans 90 days or more past due and still accruing                               |  |                        |         |   |                  |   |       |                |  |   |         |  
|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  
|Restructured loans11                                                                  |  |                        |         |   |                  |   |       |                |  |   |         |  
|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  
|Total nonperforming loans                                                             |  |                        | 507      |   |                  |   | 994    |                |  |   | 121      |  
|Other real estate owned                                                               |  |                        |         |   |                  |   |       |                |  |   |         |  
|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  
|Total nonperforming assets                                                            |  | $                      | 507      |   |                  | $ | 994    |                |  | $ | 121      |  
|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  
|Nonperforming loans as a percentage of total gross loans12                            |  |                        | 0.13     | % |                  |   | 0.26   | %              |  |   | 0.04     | %
|Nonperforming assets as a percentage of total gross loans and other real estate owned |  |                        | 0.13     | % |                  |   | 0.26   | %              |  |   | 0.04     | %
|Allowance for loan losses to nonperforming loans                                      |  |                        | 1,153.45 | % |                  |   | 540.85 | %              |  |   | 3,709.09 | %
|Allowance for loan losses                                                             |  | $                      | 5,848    |   |                  | $ | 5,376  |                |  | $ | 4,488    |  
|                                                                                      |  |                        |          |   |                  |   |        |                |  |   |          |  

---

|10 | During the three months ended March 31, 2006, no income related to these loans was included in net income. Additional interest income of approximately $7,000,
would have been recorded for the three months ended March 31, 2006 if these loans had been paid or accrued in accordance with their original terms and had been outstanding throughout the applicable period then ended or, if not outstanding
throughout the applicable period then ended, since origination.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11 | Restructured loans are loans where the terms are renegotiated to provide a reduction or deferral of interest or principal due to deterioration in the financial
position of the borrower.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12 | Total loans are gross loans less unearned income.
|-- | -------------------------------------------------



20



---

ALLOWANCE FOR LOAN LOSSES

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

The allowance for loan losses totaled $5.8 million at March 31, 2006 compared to $5.4 million at
December 31, 2005 and as a percentage of total loans outstanding was 1.47% and 1.39%, respectively. The process for monitoring the adequacy of the allowance, as well as supporting documentation regarding the allowance follows.

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

The Company establishes an Allowance for Loan and
Lease Losses (ALLL) 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 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: quality and scope of lending policies and procedures, national and local economic conditions, peer bank data, concentration or other special circumstances, and overall
quality of the loan portfolio, determined by quality of underwriting, level of loan delinquencies, non-accrual loans, and non-performing loans. An important indicator is the risk rating quality of the aggregate loan portfolio. The Company conducts
semi-annual risk rating certifications in order to maintain the integrity of the risk rating process. The risk ratings are stratified by loan type and according to risk rating.

As of March 31, 2006, the aggregate loan portfolio risk ratings were stratified as follows:



|                  |  |        |  
|----------------- |  | ------ | -
|Pass/Homogeneous: |  | 91.27  | %
|Special Mention:  |  | 7.29   | %
|Substandard:      |  | 1.32   | %
|Doubtful:         |  | 0.12   | %
|                  |  |        |  
|                  |  | 100.00 | %
|                  |  |        |  



21



---

For the first three months ended March 31, 2006 and 2005, the Company had net recoveries of $7,000 and $1,000,
respectively. Implicit in lending activity is the risk that losses will occur and that the amount of such loss will vary over time. In many cases Management exercises considerable judgment in determining the timing of the recognition of inherent
losses with the objective to present a realistic presentation of the quality of the loan portfolio. Because of Managements conservative timing of loss recognition, it is Managements opinion that there could be a possibility of future
recoveries, although no assurance can be given that this will occur.

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



22



---

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

Allowance for Loan Losses



|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ---------------- | - | ------- | ------------- |  | - | -------- | -
|                                                                                |  | March 31,2006          |          |   | December 31,2005 |   |         | March 31,2005 | 
|                                                                                |  | (Dollars in Thousands) |         
|Balances:                                                                       |  |                        |          |   |                  |   |         |               |  |   |          |  
|Average total loans outstanding during period                                   |  | $                      | 392,807  |   |                  | $ | 362,231 |               |  | $ | 322,147  |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Total loans outstanding at end of period, net of unearned income                |  | $                      | 397,624  |   |                  | $ | 386,529 |               |  | $ | 339,396  |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Allowance for Loan Losses:                                                      |  |                        |          |   |                  |   |         |               |  |   |          |  
|Balance at beginning of period                                                  |  | $                      | 5,376    |   |                  | $ | 4,137   |               |  | $ | 4,137    |  
|Charge-offs:                                                                    |  |                        |          |   |                  |   |         |               |  |   |          |  
|Real estate loans:                                                              |  |                        |          |   |                  |   |         |               |  |   |          |  
|Construction and development                                                    |  |                        |         |   |                  |   |        |               |  |   |         |  
|Residential loans                                                               |  |                        |         |   |                  |   |        |               |  |   |         |  
|Commercial and multi-family                                                     |  |                        |         |   |                  |   |        |               |  |   |         |  
|Commercial loans                                                                |  |                        | 119      |   |                  |   | 996     |               |  |   |         |  
|Consumer loans                                                                  |  |                        |         |   |                  |   | 2       |               |  |   |         |  
|Equity lines of credit                                                          |  |                        |         |   |                  |   |        |               |  |   |         |  
|Credit card and other loans                                                     |  |                        |         |   |                  |   | 10      |               |  |   |         |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Total charge-offs                                                               |  |                        | 119      |   |                  |   | 1,008   |               |  |   |         |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Recoveries:                                                                     |  |                        |          |   |                  |   |         |               |  |   |          |  
|Real estate loans:                                                              |  |                        |          |   |                  |   |         |               |  |   |          |  
|Construction and development                                                    |  |                        |         |   |                  |   |        |               |  |   |         |  
|Residential loans                                                               |  |                        | 1        |   |                  |   | 2       |               |  |   |         |  
|Commercial and multi-family                                                     |  |                        |         |   |                  |   |        |               |  |   |         |  
|Commercial loans                                                                |  |                        | 124      |   |                  |   | 105     |               |  |   | 1        |  
|Consumer loans                                                                  |  |                        | 1        |   |                  |   |        |               |  |   |         |  
|Equity lines of credit                                                          |  |                        |         |   |                  |   |        |               |  |   |         |  
|Credit card and other loans                                                     |  |                        |         |   |                  |   |        |               |  |   |         |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Total recoveries                                                                |  |                        | 126      |   |                  |   | 107     |               |  |   | 1        |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Net (charge-offs) recoveries                                                    |  |                        | 7        |   |                  |   | (901    | )             |  |   | 1        |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Provision charged to operations                                                 |  |                        | 465      |   |                  |   | 2,140   |               |  |   | 350      |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Allowance for loan losses balance, end of period                                |  | $                      | 5,848    |   |                  | $ | 5,376   |               |  | $ | 4,488    |  
|                                                                                |  |                        |          |   |                  |   |         |               |  |   |          |  
|Ratios:13                                                                       |  |                        |          |   |                  |   |         |               |  |   |          |  
|Net loan charge-offs to average total loans                                     |  |                        | 0.00     | % |                  |   | 0.25    | %             |  |   | 0.00     | %
|Allowance for loan losses to average total loans                                |  |                        | 1.49     | % |                  |   | 1.48    | %             |  |   | 1.39     | %
|Allowance for loan losses to total loans at end of period                       |  |                        | 1.47     | % |                  |   | 1.39    | %             |  |   | 1.32     | %
|Allowance for loan losses to total nonperforming loans                          |  |                        | 1,153.45 | % |                  |   | 540.85  | %             |  |   | 3,709.09 | %
|Net loan (charge-offs) recoveries to allowance for loan losses at end of period |  |                        | 0.12     | % |                  |   | (16.76  | )%            |  |   | 0.02     | %
|Net loan (charge-offs) recoveries to provision for loan losses                  |  |                        | 1.51     | % |                  |   | (42.10  | )%            |  |   | 0.29     | %

---

|13 | Total loans are gross loans less unearned income.
|-- | -------------------------------------------------



23



---

INVESTMENTS

The
Companys investment portfolio provides income to the Company and also serves as a source of liquidity. Total yield, risk and maturity are among the factors considered in building the investment portfolio. Pursuant to FASB 115, securities must
be classified as held to maturity, available for sale, or trading securities. Those securities held in the available for sale category must be carried on the Companys books at fair market value.
At March 31, 2006 and December 31, 2005, 100% of the investment securities owned by the Company were classified as Available for Sale.

At March 31, 2006, the Companys investment portfolio at fair value consisted of $7.2 million in federal agency mortgage-backed securities and $3.9 million in obligations of states and local government securities for a total of
$11.1 million. At December 31, 2005, the portfolio consisted of $8.2 million in federal agency mortgage-backed securities and $4.0 million in obligations of states and local government securities for a total of $12.2 million. The $1.1 million
or 10% decrease in the Companys investment portfolio was due to principal paydowns on the federal agency mortgage-backed securities. The proceeds received from the payoffs were used to fund the Companys loan growth and augment liquidity.

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

Investment Portfolio



|                                                      |  |                        |        |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|----------------------------------------------------- |  | ---------------------- | ------ | ----------------- | - | ----------------- |  | - | ---------- | - | ------------- | - | ---------------- |  | ----------------- | ------ |  | ---------- | --- |  | - | ---- | - |  | - | ------
|                                                      |  | March 31, 2006         |        | December 31, 2005
|                                                      |  | AmortizedCost          |        | Unrealized Gains  |   | Unrealized Losses |  |   | Fair Value |   | AmortizedCost |   | Unrealized Gains |  | Unrealized Losses |        |  | Fair Value
|                                                      |  | (Dollars in Thousands)
|Available for Sale:                                   |  |                        |        |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|Federal agency mortgage-backed securities             |  | $                      | 7,333  |                   | $ | 34                |  | $ | (104       | ) |               | $ | 7,263            |  | $                 | 8,242  |  | $          | 51  |  | $ | (120 | ) |  | $ | 8,173 
|Obligations of states and local government securities |  |                        | 3,795  |                   |   | 83                |  |   |           |   |               |   | 3,878            |  |                   | 3,937  |  |            | 98  |  |   |     |   |  |   | 4,035 
|                                                      |  |                        |        |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|Total                                                 |  | $                      | 11,128 |                   | $ | 117               |  | $ | (104       | ) |               | $ | 11,141           |  | $                 | 12,179 |  | $          | 149 |  | $ | (120 | ) |  | $ | 12,208
|                                                      |  |                        |        |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       

The Company also has investments in interest-bearing time certificates of deposit at other financial institutions
totaling $2.3 million at March 31, 2006 and December 31, 2005.



24



---

DEPOSITS

Total
deposits increased $21.3 million, or 5%, to $422.6 million at March 31, 2006 from $401.3 million at December 31, 2005. Noninterest-bearing demand deposits increased $3.3 million or 3% at March 31, 2006 as compared to December 31,
2005. Interest bearing and money market accounts increased $20.3 million, or 12% at March 31, 2006 as compared to December 31, 2005. Savings deposit accounts decreased $4.2 million or 15% at March 31, 2006 as compared to
December 31, 2005. Time deposits $100,000 or greater increased $3.6 million, or 6% at March 31, 2006 as compared to December 31, 2005, while other time deposits decreased $1.7 million, or 4%. The overall increase in deposits has
helped improve the Companys liquidity position during 2006.

The increase in noninterest-bearing demand deposits from December 31, 2005 to
March 31, 2006 was primarily attributable to new deposit relationships, coupled with an increase in deposits with our existing customers. The increase in interest-bearing and money market accounts was primarily the result of the Companys
money market campaign to attract new customers.

Cost of funds

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

The rate paid on the Banks interest-bearing deposits increased to 2.76% at March 31, 2006 from 1.68% at March 31, 2005. For
all interest bearing liabilities, the average rate for the three months ended March 31, 2006 was 3.03% as compared to 2.03% for the same period in 2005. Market rate increases, coupled with the increase in rates paid on money market accounts as
a result of the Companys money market campaign to attract new customers impacted the Companys cost of funds.

From March 31, 2005 to
March 31, 2006 the percentage of total average deposits represented by money market deposits changed to 37% from 27% while average noninterest-bearing demand deposits changed to 25% from 32%. The shift in this average deposit mix also
contributed to the increased cost of funds in the first quarter of 2006 versus 2005.



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 EndedMarch 31, 2006 |         |               | Three Months EndedMarch 31, 2005 |  
|                                                           |  | Average Balance                  |         | Average14Rate |                                  |   | Average Balance |   | Average14Rate | 
|                                                           |  | (Dollars in Thousands)           |        
|Demand deposits, noninterest bearing                       |  | $                                | 102,603 |               | 0.00                             | % |                 | $ | 94,591        |  | 0.00 | %
|                                                           |  |                                  |         |               |                                  |   |                 |   |               |  |      |  
|Interest-bearing deposits:                                 |  |                                  |         |               |                                  |   |                 |   |               |  |      |  
|Interest-bearing demand deposits                           |  |                                  | 26,806  |               | 0.33                             | % |                 |   | 18,857        |  | 0.22 | %
|Money market deposits                                      |  |                                  | 147,580 |               | 2.97                             | % |                 |   | 80,328        |  | 1.53 | %
|Savings deposits                                           |  |                                  | 25,657  |               | 0.93                             | % |                 |   | 24,662        |  | 0.62 | %
|Time deposits $100,000 or greater                          |  |                                  | 61,785  |               | 3.68                             | % |                 |   | 42,087        |  | 2.65 | %
|Other time deposits                                        |  |                                  | 38,623  |               | 3.37                             | % |                 |   | 34,592        |  | 2.40 | %
|                                                           |  |                                  |         |               |                                  |   |                 |   |               |  |      |  
|Total interest-bearing deposits                            |  |                                  | 300,451 |               | 2.76                             | % |                 |   | 200,526       |  | 1.68 | %
|                                                           |  |                                  |         |               |                                  |   |                 |   |               |  |      |  
|FHLB borrowings                                            |  |                                  |        |               | 0.00                             | % |                 |   | 30,361        |  | 2.51 | %
|Federal funds purchased                                    |  |                                  |        |               | 0.00                             | % |                 |   | 2,248         |  | 2.53 | %
|Subordinated notes payable to subsidiary trusts            |  |                                  | 18,306  |               | 7.51                             | % |                 |   | 13,151        |  | 6.04 | %
|                                                           |  |                                  |         |               |                                  |   |                 |   |               |  |      |  
|Total deposits and other borrowings                        |  | $                                | 421,360 |               | 2.29                             | % |                 | $ | 340,877       |  | 1.46 | %
|                                                           |  |                                  |         |               |                                  |   |                 |   |               |  |      |  
|Average rate excluding noninterest bearing demand deposits |  |                                  |         |               | 3.03                             | % |                 |   |               |  | 2.03 | %

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

Percent of Total Average Deposit Composition



|                                     |  |                  |   |  |                  |  
|------------------------------------ |  | ---------------- | - |  | ---------------- | -
|                                     |  | March 31,2006    |   |  | March 31,2005    |  
|                                     |  | Percent of Total |   |  | Percent of Total |  
|Demand deposits, noninterest bearing |  | 25.46            | % |  | 32.05            | %
|Interest-bearing deposits:           |  |                  |   |  |                  |  
|Interest-bearing demand deposits     |  | 6.65             | % |  | 6.39             | %
|Money market deposits                |  | 36.61            | % |  | 27.22            | %
|Savings deposits                     |  | 6.37             | % |  | 8.36             | %
|Time deposits $100,000 or greater    |  | 15.33            | % |  | 14.26            | %
|Other time deposits                  |  | 9.58             | % |  | 11.72            | %
|                                     |  |                  |   |  |                  |  
|Total average deposits               |  | 100.00           | % |  | 100.00           | %
|                                     |  |                  |   |  |                  |  

---

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



26



---

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



|                  |  |                        |        |                              |   |                               |  |               |        |       |   |        |  |   |       
|----------------- |  | ---------------------- | ------ | ---------------------------- | - | ----------------------------- |  | ------------- | ------ | ----- | - | ------ |  | - | ------
|                  |  | 3 Monthsor Less        |        | Over 3 MonthsThrough 6Months |   | Over 6 MonthsThrough 12Months |  | Over 12Months |        | Total
|                  |  | (Dollars in Thousands)
|March 31, 2006    |  | $                      | 14,169 |                              | $ | 14,881                        |  | $             | 17,679 |       | $ | 16,934 |  | $ | 63,663
|                  |  |                        |        |                              |   |                               |  |               |        |       |   |        |  |   |       
|December 31, 2005 |  | $                      | 15,061 |                              | $ | 11,100                        |  | $             | 18,925 |       | $ | 15,007 |  | $ | 60,093
|                  |  |                        |        |                              |   |                               |  |               |        |       |   |        |  |   |       

LIQUIDITY AND MARKET RISK MANAGEMENT

Liquidity

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

In order to augment liquidity,
as of March 31, 2006 the Company has Federal Funds borrowing arrangements with four correspondent banks totaling $25.0 million, and a secured line of credit with the FHLB totaling approximately $37.3 million.

On a consolidated basis, the Companys liquidity ratio, with policy guidelines of above 10% is a measure of liquid assets to deposits, plus short-term
liabilities, plus Federal Home Loan Bank borrowings due within one year, less pledged deposits for treasury tax and loan, increased to 17.60% at March 31, 2006 from 14.98% as of December 31, 2005. The Company also monitors its net non-core
funding dependence ratio, with policy guidelines of less than 25%. The net non-core dependence ratio is a measure of non-core liabilities less short-term investments, divided by long-term earning assets. The ratio was 3.40% at
March 31, 2006 and 7.08% at December 31, 2005.

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. In order to enhance our deposit growth, we have a plan in place to increase deposits by:



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



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



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



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



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



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

As of March 31, 2006, total brokered deposits and public funds totaled $27.9 million and were 6.60% of total deposits.

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

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



27



---

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

Liquidity



|                                                      |  |                        |        |   |                  |   |        |  
|----------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ------ | -
|                                                      |  | March 31,2006          |        |   | December 31,2005 |  
|                                                      |  | (Dollars in Thousands) |       
|Cash and due from banks (net FRB reserve requirement) |  | $                      | 17,126 |   |                  | $ | 16,015 |  
|Federal funds sold                                    |  |                        | 31,100 |   |                  |   | 21,505 |  
|Interest-bearing deposits in financial institutions   |  |                        | 2,350  |   |                  |   | 2,334  |  
|Unpledged investment securities, available-for-sale   |  |                        | 10,841 |   |                  |   | 11,904 |  
|Stock investments, restricted at cost                 |  |                        | 1,636  |   |                  |   | 1,620  |  
|Cash surrender value of life insurance                |  |                        | 11,301 |   |                  |   | 6,735  |  
|                                                      |  |                        |        |   |                  |   |        |  
|Total liquid assets                                   |  | $                      | 74,354 |   |                  | $ | 60,113 |  
|                                                      |  |                        |        |   |                  |   |        |  
|Liquidity ratio:                                      |  |                        |        |   |                  |   |        |  
|Ending deposits and short-term liabilities            |  |                        | 17.60  | % |                  |   | 14.98  | %

Interest Rate Risk Management

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Companys market risk exposure is primarily that of interest rate risk, and it has established policies
and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates. The Company does not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates. The
Companys earnings depend primarily upon the difference between the income it receives from its interest earning assets and its cost of funds, principally interest expense incurred on interest-bearing liabilities. Interest rates charged 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.

Asset/Liability Management

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

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



28



---

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

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



|                        |  |                                         |        |                              |   |        |                                |  |        |                      |  |      |  
|----------------------- |  | --------------------------------------- | ------ | ---------------------------- | - | ------ | ------------------------------ |  | ------ | -------------------- |  | ---- | -
|Change(in Basis Points) |  | Net Interest Income(next twelve months) |        | Change in NetInterest Income |   |        | % Change in NetInterest Income |  |        | Net InterestMargin15 | 
|(Dollars in Thousands)  | 
|+200                    |  | $                                       | 31,758 |                              | $ | 4,573  |                                |  | 16.82  | %                    |  | 7.16 | %
|+100                    |  |                                         | 29,477 |                              |   | 2,292  |                                |  | 8.43   | %                    |  | 6.64 | %
|0                       |  |                                         | 27,185 |                              |   |       |                                |  | 0.00   | %                    |  | 6.12 | %
| 100                   |  |                                         | 25,403 |                              |   | (1,782 | )                              |  | (6.56  | %)                   |  | 5.72 | %
| 200                   |  |                                         | 23,544 |                              |   | (3,641 | )                              |  | (13.39 | %)                   |  | 5.30 | %

These results indicate the effect of immediate rate changes, which are unlikely and do not consider the yield from
reinvesting in short-term versus long-term instruments. This report shows liquidation values in an extremely downward movement, which is highly unlikely. Although out of compliance in one area, the results produced are desirable. The net interest
margin will improve if rates rise and decline if rates fall. Management and the Board of Directors consider the results indicated by the report acceptable.

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 shareholders equity was $35.6 million at March 31, 2006, compared to
$33.4 million at December 31, 2005. The increase of $2.2 million, or 7% during the first three months of 2006 was primarily due to $1,716,000 in year-to-date net income, $117,000 in compensation expense credited to capital from the issuance of
incentive stock options and the proceeds of $361,000 from the exercise of stock options.

---

|15 | Excluding loan fees.
|-- | --------------------



29



---

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



|                                        |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|--------------------------------------- |  | ------------------- | ------ |  | --------------------------------------- | - |  | ------------------------------------------------------------------------------------- | ------ |  | ---- | - |  | - | ------ |  | ----- | -
|                                        |  | Actual Amount/Ratio |        |  | Minimum CapitalRequirement Amount/Ratio |   |  | Minimum To Be Well Capitalized
Under Prompt Corrective Action Provisions Amount/Ratio |       
|As of March 31, 2006:                   |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|Total capital to risk-weighted assets:  |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  | $                   | 54,652 |  | 13.01                                   | % |  | $                                                                                     | 33,606 |  | 8.00 | % |  | $ | 42,008 |  | 10.00 | %
|The Bank                                |  |                     | 53,041 |  | 12.63                                   | % |  |                                                                                       | 33,597 |  | 8.00 | % |  |   | 41,996 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  |                     | 43,254 |  | 10.30                                   | % |  |                                                                                       | 16,798 |  | 4.00 | % |  |   | 25,197 |  | 6.00  | %
|The Bank                                |  |                     | 47,772 |  | 11.37                                   | % |  |                                                                                       | 16,806 |  | 4.00 | % |  |   | 25,209 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  |                     | 43,254 |  | 9.51                                    | % |  |                                                                                       | 18,193 |  | 4.00 | % |  |   | 22,741 |  | 5.00  | %
|The Bank                                |  |                     | 47,772 |  | 10.51                                   | % |  |                                                                                       | 18,182 |  | 4.00 | % |  |   | 22,727 |  | 5.00  | %
|As of December 31, 2005:                |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|Total capital to risk-weighted assets:  |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  | $                   | 52,283 |  | 12.86                                   | % |  | $                                                                                     | 32,524 |  | 8.00 | % |  | $ | 40,656 |  | 10.00 | %
|The Bank                                |  |                     | 50,779 |  | 12.49                                   | % |  |                                                                                       | 32,525 |  | 8.00 | % |  |   | 40,656 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  |                     | 40,327 |  | 9.92                                    | % |  |                                                                                       | 16,261 |  | 4.00 | % |  |   | 24,391 |  | 6.00  | %
|The Bank                                |  |                     | 45,697 |  | 11.24                                   | % |  |                                                                                       | 16,262 |  | 4.00 | % |  |   | 24,393 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  |                     | 40,327 |  | 9.02                                    | % |  |                                                                                       | 17,883 |  | 4.00 | % |  |   | 22,354 |  | 5.00  | %
|The Bank                                |  |                     | 45,697 |  | 10.21                                   | % |  |                                                                                       | 17,903 |  | 4.00 | % |  |   | 22,379 |  | 5.00  | %

Of the Companys $43.3 million of Tier 1 capital at March 31, 2006, $11.9 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 remaining $6.1 million of Trust Preferred Securities is included in Tier 2 capital.



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

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



30



---

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

Evaluation of Disclosure Controls and
Procedures

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

Disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, 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.

Changes in Internal Controls

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



31



---

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

There has not been any material change in the risk
factors disclosure from that contained in the Companys 2005 Form 10-K for the fiscal year ended December 31, 2005.



|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.



32



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



|           |  |                                                                                                  
|---------- |  | -------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description of Exhibits                                                                          
|           | 
|3.1        |  | Articles of Incorporation of the Company16                                                       
|           | 
|3.2        |  | Amendment to Articles of Incorporation of the Company filed May 5, 200017                        
|           | 
|3.3        |  | Amendment to Articles of Incorporation of the Company filed February 18, 200318                  
|           | 
|3.4        |  | Restated By-Laws of the Company17                                                                
|           | 
|10.1       |  | Brea Branch Lease, dated September 20, 200019                                                    
|           | 
|10.2       |  | Form of Indemnification Agreement19                                                              
|           | 
|10.9       |  | 1st Centennial Bank Employee Stock Ownership Plan (with 401(k) provisions) dated August 1, 200420
|           | 
|10.10      |  | Amended and Restated Stock Incentive Plan20                                                      
|           | 
|10.11      |  | Palomar Community Bank (now Escondido branch) lease dated April 15, 198721                       
|           | 
|10.12      |  | Indenture for Trust Preferred Securities dated July 11, 200222                                   
|           | 
|10.13      |  | Amended and Restated Declaration of Trust for trust preferred securities dated July 11, 200223   
|           | 
|10.14      |  | Guarantee Agreement for Trust Preferred Securities dated July 11, 200224                         
|           | 
|10.15      |  | Salary Continuation Agreement of Suzanne Dondanville, dated December 17, 200225                  
|           | 
|10.16      |  | Salary Continuation Agreement of Clifford Schoonover, dated December 17, 200226                  
|           | 
|10.17      |  | Amendment to Construction Department Lease dated August 28, 200227                               
|           | 
|10.18      |  | Commercial Lending Group Lease, dated December 23, 200228                                        
|           | 
|10.19      |  | Palm Desert Branch Lease, dated November 13, 200229                                              
|           | 
|10.20      |  | Amendment to Escondido Branch Lease, dated June 6, 200130                                        

---

|16 | Incorporated by reference to the exhibit of the same number to the Companys Registration Statement on Form S-4 datedOctober 20, 1999.
|-- | --------------------------------------------------------------------------------------------------------------------------------------



|17 | Incorporated by reference to the exhibit of the same number on Form 10-QSB for the quarter ended June 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------------------



|18 | Incorporated by reference to the exhibit of the same number on Form SB-2 dated March 13, 2003.
|-- | ----------------------------------------------------------------------------------------------



|19 | Incorporated by reference to the exhibit of the same number to the Companys Registration Statement on Form SB-2 datedMarch 21, 2001.
|-- | -------------------------------------------------------------------------------------------------------------------------------------



|20 | Incorporated by reference to the exhibit of the same number on Form 10-KSB for the year ended December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------------------------



|21 | Incorporated by reference to exhibit 10.13 on Form 10-QSB for the fiscal quarter ended March 31, 2002.
|-- | ------------------------------------------------------------------------------------------------------



|22 | Incorporated by reference to exhibit 10.14 on Form 10-QSB for the fiscal quarter ended September 30, 2002.
|-- | ----------------------------------------------------------------------------------------------------------



|23 | Incorporated by reference to exhibit 10.15 on Form 10-QSB for the fiscal quarter ended September 30, 2002.
|-- | ----------------------------------------------------------------------------------------------------------



|24 | Incorporated by reference to exhibit 10.16 on Form 10-QSB for the fiscal quarter ended September 30, 2002.
|-- | ----------------------------------------------------------------------------------------------------------



|25 | Incorporated by reference to exhibit 10.17 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------



|26 | Incorporated by reference to exhibit 10.18 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------



|27 | Incorporated by reference to exhibit 10.20 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------



|28 | Incorporated by reference to exhibit 10.21 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------



|29 | Incorporated by reference to exhibit 10.22 on Form 10-KSB for the year ended December 31, 2002.
|-- | -----------------------------------------------------------------------------------------------



|30 | Incorporated by reference to exhibit 10.23 on Form 10-KSB for the year ended
December 31, 2002.
|-- | -----------------------------------------------------------------------------------------------



33



---

|      |  |                                                                                                    
|----- |  | ---------------------------------------------------------------------------------------------------
|      | 
|10.21 |  | Amendment to Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200231        
|      | 
|10.22 |  | Amendment to Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200132      
|      | 
|10.23 |  | Amendment to Salary Continuation Agreement of Clifford Schoonover dated December 17, 200233        
|      | 
|10.25 |  | Indenture for Trust Preferred Securities dated January 15, 200434                                  
|      | 
|10.26 |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated January 15, 200434  
|      | 
|10.27 |  | Guarantee Agreement for Trust Preferred Securities dated January 15, 200434                        
|      | 
|10.28 |  | Amendment to Brea Branch Lease dated August 16, 200435                                             
|      | 
|10.29 |  | Irwindale Branch Lease dated August 12, 200435                                                     
|      | 
|10.30 |  | Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200135                   
|      | 
|10.31 |  | Employment Agreement of Beth Sanders dated December 1, 200436                                      
|      | 
|10.32 |  | Employment Agreement of Suzanne Dondanville dated December 1, 200436                               
|      | 
|10.33 |  | Temecula Branch Lease dated December 15, 200436                                                    
|      | 
|10.34 |  | Real Estate Department Lease dated November 30, 200036                                             
|      | 
|10.35 |  | Indenture for Trust Preferred Securities dated September 28, 200537                                
|      | 
|10.36 |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated September 28, 200537
|      | 
|10.37 |  | Guarantee Agreement for Trust Preferred Securities dated September 28, 200537                      
|      | 
|10.38 |  | Salary Continuation Agreement of Thomas E. Vessey dated April 7, 200638                            
|      | 
|10.39 |  | Salary Continuation Agreement of John P. Lang dated April 7, 200638                                
|      | 
|21.1  |  | Subsidiaries of 1stCentennial Bancorp37                                                            
|      | 
|23.1  |  | Consent of Hutchinson and Bloodgood, LLP39                                                         
|      | 
|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)                             

---

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



|32 | Incorporated by reference to exhibit 10.25 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------



|33 | Incorporated by reference to exhibit 10.26 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------



|34 | Incorporated by reference to the exhibit of the same number on Form 10-QSB for the quarter ended March 31, 2004.
|-- | ----------------------------------------------------------------------------------------------------------------



|35 | Incorporated by reference to the exhibit of the same number on Form 10-QSB for the quarter ended September 30, 2004.
|-- | --------------------------------------------------------------------------------------------------------------------



|36 | Incorporated by reference to the exhibit of the same number on Form 10-KSB for the year ended December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------------------------



|37 | Incorporated by reference to Form 10-Q for the quarter ended September 30, 2005.
|-- | --------------------------------------------------------------------------------



|38 | Incorporated by reference to Exhibit 99.1 to current report on Form 8-K dated April 11, 2006.
|-- | ---------------------------------------------------------------------------------------------



|39 | Incorporated by reference to the exhibit of the same number on Form 10-K for the year ended December 31, 2005.
|-- | --------------------------------------------------------------------------------------------------------------



34



---

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 11th day of May 2006.



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




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




35