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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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Quarterly report

pursuant to section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2007



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Commission file number: 000-29105

1stCENTENNIAL BANCORP

(Exact Name of
Registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|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



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

Yes  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  þ                Non-accelerated filer ̈

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

Yes ̈No  þ

The number of
shares of Common Stock of the registrant outstanding as of May 2, 2007 was 3,229,1001.



|1 | Not adjusted to reflect the 50% stock distribution payable on or about May 15, 2007 to shareholders
of record as of May 1, 2007.
|- | --------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                       |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|ITEM                          |  |                                                                                       |  | PAGE
|PART I  Financial Statements |  |                                                                                      
|                              |  |                                                                                      
|ITEM 1                        |  | Unaudited Consolidated Financial Statements                                           |  | 2   
|                              |  | Consolidated statements of condition                                                  |  | 2   
|                              |  | Consolidated statements of earnings                                                   |  | 3   
|                              |  | Consolidated statements of shareholders equity                                       |  | 4   
|                              |  | Consolidated statements of cash flows                                                 |  | 5   
|                              |  | Notes to unaudited consolidated financial statements                                  |  | 7   
|                              |  |                                                                                      
|ITEM 2                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|                              |  |                                                                                      
|ITEM 3                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 31  
|                              |  |                                                                                      
|ITEM 4                        |  | Controls and Procedures                                                               |  | 31  
|                              | 
|PART II  Other Information   |  |                                                                                      
|                              |  |                                                                                      
|ITEM 1                        |  | Legal Proceedings                                                                     |  | 31  
|                              |  |                                                                                      
|ITEM 1A                       |  | Risk Factors                                                                          |  | 31  
|                              |  |                                                                                      
|ITEM 2                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 31  
|                              |  |                                                                                      
|ITEM 3                        |  | Defaults Upon Senior Securities                                                       |  | 31  
|                              |  |                                                                                      
|ITEM 4                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 31  
|                              |  |                                                                                      
|ITEM 5                        |  | Other Information                                                                     |  | 31  
|                              |  |                                                                                      
|ITEM 6                        |  | Exhibits                                                                              |  | 32  
|                              |  |                                                                                      
|                              |  | Signatures                                                                            |  | 34  



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION

March 31, 2007 and December 31, 2006



|                                                                                                                                                                      |  |             |         |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ---- | - | -------
|Dollar amounts in thousands                                                                                                                                           |  | 2007        |         | 2006
|                                                                                                                                                                      |  | (unaudited) |         |     
|ASSETS                                                                                                                                                                |  |             |         |      |   |        
|Cash and due from banks                                                                                                                                               |  | $           | 11,068  |      | $ | 18,385 
|Federal funds sold                                                                                                                                                    |  |             | 9,850   |      |   | 2,900  
|                                                                                                                                                                      |  |             |         |      |   |        
|Total cash and cash equivalents                                                                                                                                       |  |             | 20,918  |      |   | 21,285 
|Interest-bearing deposits in financial institutions                                                                                                                   |  |             | 2,948   |      |   | 2,922  
|Investment securities, available for sale                                                                                                                             |  |             | 74,038  |      |   | 72,649 
|Stock investments restricted, at cost                                                                                                                                 |  |             | 1,699   |      |   | 1,681  
|Loans, net of allowance for loan losses of $5,804 and $5,741                                                                                                          |  |             | 447,762 |      |   | 426,200
|Accrued interest receivable                                                                                                                                           |  |             | 3,049   |      |   | 3,469  
|Premises and equipment, net                                                                                                                                           |  |             | 3,103   |      |   | 3,152  
|Goodwill                                                                                                                                                              |  |             | 4,180   |      |   | 4,180  
|Cash surrender value of life insurance                                                                                                                                |  |             | 11,751  |      |   | 11,639 
|Other assets                                                                                                                                                          |  |             | 4,713   |      |   | 3,950  
|                                                                                                                                                                      |  |             |         |      |   |        
|Total assets                                                                                                                                                          |  | $           | 574,161 |      | $ | 551,127
|                                                                                                                                                                      |  |             |         |      |   |        
|LIABILITIES                                                                                                                                                           |  |             |         |      |   |        
|Deposits:                                                                                                                                                             |  |             |         |      |   |        
|Noninterest-bearing demand deposits                                                                                                                                   |  | $           | 107,386 |      | $ | 111,154
|Interest-bearing deposits                                                                                                                                             |  |             | 369,218 |      |   | 345,309
|                                                                                                                                                                      |  |             |         |      |   |        
|Total deposits                                                                                                                                                        |  |             | 476,604 |      |   | 456,463
|Accrued interest payable                                                                                                                                              |  |             | 454     |      |   | 432    
|Repurchase agreement                                                                                                                                                  |  |             | 30,000  |      |   | 30,000 
|Other liabilities                                                                                                                                                     |  |             | 4,326   |      |   | 3,729  
|Subordinated notes payable to subsidiary trusts                                                                                                                       |  |             | 18,306  |      |   | 18,306 
|                                                                                                                                                                      |  |             |         |      |   |        
|Total liabilities                                                                                                                                                     |  |             | 529,690 |      |   | 508,930
|                                                                                                                                                                      |  |             |         |      |   |        
|SHAREHOLDERS EQUITY                                                                                                                                                  |  |             |         |      |   |        
|Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 3,223,541 and 3,212,215 shares at March 31, 2007 and
December 31, 2006, respectively |  |             | 28,291  |      |   | 27,998 
|Retained earnings                                                                                                                                                     |  |             | 16,013  |      |   | 14,038 
|Accumulated other comprehensive income                                                                                                                                |  |             | 167     |      |   | 161    
|                                                                                                                                                                      |  |             |         |      |   |        
|Total shareholders equity                                                                                                                                            |  |             | 44,471  |      |   | 42,197 
|                                                                                                                                                                      |  |             |         |      |   |        
|Total liabilities and shareholders equity                                                                                                                            |  | $           | 574,161 |      | $ | 551,127
|                                                                                                                                                                      |  |             |         |      |   |        

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



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

Three Months Ended March 31, 2007 and 2006 (unaudited)



|                                                      |  |                              |        |      |   |      
|----------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | -----
|                                                      |  | Three Months Ended March 31,
|Dollar amounts in thousands, except per share amounts |  | 2007                         |        | 2006
|Interest income:                                      |  |                              |        |      |   |      
|Loans, including fees                                 |  | $                            | 10,372 |      | $ | 8,558
|Deposits in financial institutions                    |  |                              | 37     |      |   | 28   
|Federal funds sold                                    |  |                              | 122    |      |   | 271  
|Investments                                           |  |                              |        |      |   |      
|Taxable                                               |  |                              | 681    |      |   | 95   
|Tax-exempt                                            |  |                              | 245    |      |   | 40   
|                                                      |  |                              |        |      |   |      
|Total interest income                                 |  |                              | 11,457 |      |   | 8,992
|                                                      |  |                              |        |      |   |      
|Interest expense:                                     |  |                              |        |      |   |      
|Interest bearing demand and savings deposits          |  |                              | 1,549  |      |   | 1,162
|Time deposits $100,000 or greater                     |  |                              | 1,410  |      |   | 561  
|Other time deposits                                   |  |                              | 404    |      |   | 321  
|Interest on borrowed funds                            |  |                              | 809    |      |   | 339  
|                                                      |  |                              |        |      |   |      
|Total interest expense                                |  |                              | 4,172  |      |   | 2,383
|                                                      |  |                              |        |      |   |      
|Net interest income                                   |  |                              | 7,285  |      |   | 6,609
|Provision for loan losses                             |  |                              | 100    |      |   | 465  
|                                                      |  |                              |        |      |   |      
|Net interest income after provision for loan losses   |  |                              | 7,185  |      |   | 6,144
|                                                      |  |                              |        |      |   |      
|Noninterest income:                                   |  |                              |        |      |   |      
|Customer service fees                                 |  |                              | 399    |      |   | 328  
|Gains from sale of loans                              |  |                              | 30     |      |   | 265  
|Conduit loan referral income                          |  |                              | 255    |      |   | 495  
|Other income                                          |  |                              | 222    |      |   | 80   
|                                                      |  |                              |        |      |   |      
|Total noninterest income                              |  |                              | 906    |      |   | 1,168
|                                                      |  |                              |        |      |   |      
|Noninterest expense:                                  |  |                              |        |      |   |      
|Salaries and employee benefits                        |  |                              | 2,694  |      |   | 2,487
|Net occupancy expense                                 |  |                              | 588    |      |   | 551  
|Other operating expenses                              |  |                              | 1,656  |      |   | 1,443
|                                                      |  |                              |        |      |   |      
|Total noninterest expense                             |  |                              | 4,938  |      |   | 4,481
|                                                      |  |                              |        |      |   |      
|Income before provision for income taxes              |  |                              | 3,153  |      |   | 2,831
|Provision for income taxes                            |  |                              | 1,178  |      |   | 1,115
|                                                      |  |                              |        |      |   |      
|Net income                                            |  | $                            | 1,975  |      | $ | 1,716
|                                                      |  |                              |        |      |   |      
|Basic earnings per share2                             |  | $                            | 0.41   |      | $ | 0.36 
|                                                      |  |                              |        |      |   |      
|Diluted earnings per share2                           |  | $                            | 0.37   |      | $ | 0.34 
|                                                      |  |                              |        |      |   |      

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

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|2 | As adjusted to reflect the 50% stock distribution payable on or about May 15, 2007 to shareholders of
record as of May 1, 2007.
|- | -------------------------------------------------------------------------------------------------------------------------------



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Three Months Ended March 31, 2007 and 2006
(unaudited)

Dollar amounts in thousands, except share amounts



|                                                                                             |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       
|-------------------------------------------------------------------------------------------- |  | --------- | - |  | ------------ | ------ | ----------------- | - | -------------------------------------- |  | ----- | --- |  | - | ------
|                                                                                             |  | Shares    |   |  | Common Stock |        | Retained Earnings |   | Accumulated Other Comprehensive Income |  | Total
|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 
|                                                                                             |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       
|Compensation expense on incentive stock options                                              |  |          |   |  |              | 117    |                   |   |                                       |  |       |    |  |   | 117   
|Retirement of unvested restricted stock awards                                               |  | (578      | ) |  |              |       |                   |   |                                       |  |       |    |  |   |      
|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
|                                                                                             |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       
|BALANCE, DECEMBER 31, 2006                                                                   |  | 3,212,215 |   |  | $            | 27,998 |                   | $ | 14,038                                 |  | $     | 161 |  | $ | 42,197
|                                                                                             |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       
|Comprehensive income:                                                                        |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       
|Net income                                                                                   |  |          |   |  |              |       |                   |   | 1,975                                  |  |       |    |  |   | 1,975 
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |              |       |                   |   |                                       |  |       | 6   |  |   | 6     
|                                                                                             |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       
|Total comprehensive income                                                                   |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   | 1,981 
|                                                                                             |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       
|Compensation expense on incentive stock options                                              |  |          |   |  |              | 126    |                   |   |                                       |  |       |    |  |   | 126   
|Exercise of stock options, including tax benefit                                             |  | 11,326    |   |  |              | 167    |                   |   |                                       |  |       |    |  |   | 167   
|                                                                                             |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       
|BALANCE, MARCH 31, 2007                                                                      |  | 3,223,541 |   |  | $            | 28,291 |                   | $ | 16,013                                 |  | $     | 167 |  | $ | 44,471
|                                                                                             |  |           |   |  |              |        |                   |   |                                        |  |       |     |  |   |       

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



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2007 and 2006 (unaudited)



|                                                                                          |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Dollar amounts in thousands                                                               |  | 2007 |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                      |  |      |         |   |      |   |         |  
|Net income                                                                                |  | $    | 1,975   |   |      | $ | 1,716   |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                             |  |      | 163     |   |      |   | 179     |  
|Gain on sale of fixed assets                                                              |  |      |        |   |      |   | (7      | )
|Gain from sale of investments                                                             |  |      | (34     | ) |      |   |        |  
|Provision for loan losses                                                                 |  |      | 100     |   |      |   | 465     |  
|Amortization of deferred loan fees                                                        |  |      | (342    | ) |      |   | (511    | )
|Amortization of excess purchase value of deposits                                         |  |      |        |   |      |   | 3       |  
|Fair value of stock options and restricted stock awards in noninterest expense            |  |      | 135     |   |      |   | 126     |  
|Deferred income tax (benefit) provision                                                   |  |      | (12     | ) |      |   | 6       |  
|Net amortization of premiums and (discounts) on investments and interest-bearing deposits |  |      | (25     | ) |      |   | 50      |  
|Increase in cash surrender value of life insurance                                        |  |      | (112    | ) |      |   | (66     | )
|Change in:                                                                                |  |      |         |   |      |   |         |  
|Accrued interest receivable                                                               |  |      | 420     |   |      |   | 182     |  
|Other assets                                                                              |  |      | (440    | ) |      |   | (140    | )
|Accrued interest payable                                                                  |  |      | 22      |   |      |   | 42      |  
|Other liabilities                                                                         |  |      | 588     |   |      |   | 921     |  
|                                                                                          |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                                 |  |      | 2,438   |   |      |   | 2,966   |  
|                                                                                          |  |      |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                      |  |      |         |   |      |   |         |  
|Activity in available for sale securities:                                                |  |      |         |   |      |   |         |  
|Purchases of securities                                                                   |  |      | (5,357  | ) |      |   |        |  
|Proceeds from sales, maturities and principal repayments of securities                    |  |      | 4,019   |   |      |   | 1,038   |  
|Purchases of Federal Home Loan Bank stock                                                 |  |      | (18     | ) |      |   | (16     | )
|Net increase in loans                                                                     |  |      | (20,874 | ) |      |   | (10,577 | )
|Acquisition of other real estate owned                                                    |  |      | (769    | ) |      |   |        |  
|Additions to bank premises and equipment                                                  |  |      | (114    | ) |      |   | (13     | )
|Purchases of life insurance                                                               |  |      |        |   |      |   | (4,500  | )
|                                                                                          |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                                     |  |      | (23,113 | ) |      |   | (14,068 | )
|                                                                                          |  |      |         |   |      |   |         |  

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



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Three Months Ended March 31, 2007 and 2006 (unaudited)



|                                                                           |  |      |        |   |      |   |       
|-------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------
|Dollar amounts in thousands                                                |  | 2007 |        |   | 2006
|CASH FLOWS FROM FINANCING ACTIVITIES                                       |  |      |        |   |      |   |       
|Net increase (decrease) in noninterest-bearing demand deposits             |  |      | (3,768 | ) |      |   | 3,267 
|Net increase in interest-bearing deposits                                  |  |      | 23,909 |   |      |   | 18,086
|Proceeds from exercise of stock options                                    |  |      | 167    |   |      |   | 361   
|                                                                           |  |      |        |   |      |   |       
|Net cash provided by financing activities                                  |  |      | 20,308 |   |      |   | 21,714
|                                                                           |  |      |        |   |      |   |       
|Net increase (decrease) in cash and cash equivalents                       |  |      | (367   | ) |      |   | 10,612
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                             |  |      | 21,285 |   |      |   | 38,367
|                                                                           |  |      |        |   |      |   |       
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                   |  | $    | 20,918 |   |      | $ | 48,979
|                                                                           |  |      |        |   |      |   |       
|SUPPLEMENTAL INFORMATION:                                                  |  |      |        |   |      |   |       
|Interest paid                                                              |  | $    | 4,150  |   |      | $ | 2,338 
|                                                                           |  |      |        |   |      |   |       
|Income taxes paid                                                          |  | $    |       |   |      | $ | 55    
|                                                                           |  |      |        |   |      |   |       
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:     |  |      |        |   |      |   |       
|Transfer of loan to other real estate owned, after charge-off of $446,000. |  | $    | 171    |   |      | $ |      
|                                                                           |  |      |        |   |      |   |       

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



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##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2007

Note 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of
Business

1stCentennial Bancorp (the Company) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as
amended and is headquartered in Redlands, California. The Company was incorporated in August 1999 and acquired 100% of the outstanding shares of 1stCentennial Bank (the Bank) in December 1999. The Bank operates six branches and three loan production offices, which provide commercial and consumer banking services and also a broad array
of products and services throughout its operating areas in Southern California.

Basis of Presentation

The unaudited financial information included herein has been prepared in conformity with the accounting principles and practices disclosed in the consolidated financial
statements, Note 1, included in the Companys Annual Report in Form 10-K, for the year ended December 31, 2006. 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, 2007 may not be
indicative of operating results for the full year ending December 31, 2007. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications.

Note 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  including an
amendment of FASB Statement No. 115 which is effective for the Company as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the fiscal year that begins on or after
November 15, 2006, provided that the Company also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The Company is currently evaluating the impact of adopting this Statement on the
Companys financial statements.

In September 2006, the EITF reached a final consensus on Issue No. 06-5 (EITF 06-5),
Accounting for Purchase of Life InsuranceDetermining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4. EITF 06-5 requires that the cash surrender value and any amounts provided by the
contractual terms of an insurance policy that are realizable at the balance sheet date be considered in determining the amount that could be realized under Technical Bulletin No. 85-4. The provisions of EITF 06-5 require (1) consideration
of the effect of contractual restrictions that limit amounts that could be realized, (2) exclusion from the amount that could be realized of amounts recoverable at the discretion of the insurance company, (3) amounts that are recoverable
by the policyholder in periods beyond one year from the surrender of the policy be discounted, and (4) an assumption that policies will be surrendered on an individual lifebyindividual life basis. The provisions of EITF 06-5 are
effective for the Company on January 1, 2007 and are to be applied as a change in accounting principle either through a cumulative-effect adjustment to retained earnings or other components of equity or net assets in the statement of financial
position as of the beginning of the year of adoption; or through retrospective application to all prior periods. The Company does not expect the adoption of EITF 06-5, to have a significant impact on the consolidated financial statements, results of
operations or liquidity of the Company.



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##### Table of Contents

Note 3. EARNINGS PER SHARE3

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

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

Earnings per share calculation

For the three months ended March 31,

(In thousands, except per share amounts)



|                                        |  |            |       |                         |       |                  |   |       |            |  |                         |       |                  |       |  |   |       |  
|--------------------------------------- |  | ---------- | ----- | ----------------------- | ----- | ---------------- | - | ----- | ---------- |  | ----------------------- | ----- | ---------------- | ----- |  | - | ----- | -
|                                        |  | 2007       |       |                         | 2006  |                 
|                                        |  | Net Income |       | Weighted average shares |       | Per share amount |   |       | Net Income |  | Weighted average shares |       | Per share amount |      
|Basic earnings per share                |  | $          | 1,975 |                         | 4,819 |                  | $ | 0.41  |            |  | $                       | 1,716 |                  | 4,748 |  | $ | 0.36  |  
|Effect of dilutive shares:              |  |            |       |                         |       |                  |   |       |            |  |                         |       |                  |       |  |   |       |  
|assumed exercise of outstanding options |  |            |      |                         | 562   |                  |   | (0.04 | )          |  |                         |      |                  | 368   |  |   | (0.02 | )
|Diluted earnings per share              |  | $          | 1,975 |                         | 5,381 |                  | $ | 0.37  |            |  | $                       | 1,716 |                  | 5,116 |  | $ | 0.34  |  

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 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.

---

|3 | As adjusted to reflect the 50% stock distribution payable on or about May 15, 2007 to shareholders
of record as of May 1, 2007.
|- | -------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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, 2007         |         | December 31,2006
|                                      |  | (Dollars in Thousands)
|Standby letters of credit             |  | $                      | 3,948   |                  | $ | 3,231  
|Undisbursed loans and lines of credit |  |                        | 215,947 |                  |   | 223,201
|Available credit card lines           |  |                        | 3,228   |                  |   | 3,060  
|                                      |  |                        |         |                  |   |        
|Total off-balance sheet commitments   |  | $                      | 223,123 |                  | $ | 229,492
|                                      |  |                        |         |                  |   |        

Note 5. SUBSEQUENT EVENT

On April 20, 2007, the Company announced that the Board of Directors approved a 50% stock distribution to shareholders of record on May 1, 2007, and payable on or about May 15, 2007. The action was
approved at the regularly scheduled Board Meeting on April 20, 2007. The distribution will result in approximately an additional 1,614,550 shares of common stock outstanding. The number of shares of common stock outstanding referenced
throughout this report are not adjusted for the 50% stock distribution except for calculating and disclosing basic and diluted earnings per share information.



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##### Table of Contents

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

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

Managements discussion and analysis is written to provide greater insight into the results of
operations and the financial condition of the Company and its subsidiary. For a more complete understanding of the Company and its operations, reference should be made to the financial statements included in this report and in the Companys
2006 Annual Report on Form 10-K.

Certain statements in this Report on Form 10-Q constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), which involve risks and uncertainties. The Companys actual results may differ significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to, possible future deteriorating economic conditions in the Companys areas of operation; interest rate risk associated with volatile interest rates and related
asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of available-for-sale
securities declining significantly in value as interest rates rise or issuers of such securities suffering financial losses; and regulatory risks associated with the variety of current and future regulations to which the Company is subject.
All of these risks could have a material adverse impact on the Companys financial condition, results of operations or prospects, and these risks should be considered in evaluating the Company. Segment reporting is not presented since the
Companys revenue is attributed to a single reportable segment. For additional information concerning these factors, refer to the Companys Form 10-K for the year ended December 31, 2006.

CRITICAL ACCOUNTING POLICIES

The Companys 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 and expands its geographic coverage, it increases the complexity of its loan portfolio. The Company will enhance its methodologies to
keep pace with the size and complexity of the loan portfolio. Management might report a materially different amount for the provision for loan losses if its assessment of the above factors were different. This discussion and analysis should be read
in conjunction with the Companys financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Managements Discussion and Analysis section entitled Financial ConditionAllowance for
Loan Losses. Although Management believes the level of the allowance as of March 31, 2007 was adequate to absorb losses inherent in the loan portfolio, a decline in the local economy may result in increasing losses that cannot reasonably
be predicted at this time.



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##### Table of Contents

SUMMARY OF PERFORMANCE

Results of operations summary

Net income for the three months ended March 31, 2007 was $1.975 million, which is $259,000 or
15% higher than net income of $1.716 million for the same period in 2006. Basic and diluted earnings per share were $0.41 and $0.37 respectively, for the three months ended March 31, 2007, as compared to $0.36 and $0.34 respectively, for the
same period in 2006. Earnings per share calculations were adjusted to give retroactive effect to stock dividends and distributions, including the 50% stock distribution paid on May 15, 2007 to shareholders of record as of May 1, 2007.
Return on average assets and return on average equity for the three months ended March 31, 2007 were 1.43% and 18.42% respectively, as compared to 1.52% and 20.36% respectively, for the same period in 2006.

The primary drivers behind the variance in net income for the three months ended March 31, 2007 relative to the same period in 2006 are as follows:



| |  |  | Net interest income before the provision for loan losses increased by $676,000 or 10%, primarily due to the increase in average total loans.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The provision for loan losses decreased $365,000 or 78%. The allowance for loan losses at March 31, 2007 stood at 1.28% of total gross loans and was determined
to be acceptable by management after our analysis.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gains from the sale of loans decreased by $235,000 or 89% as a result of unanticipated personnel changes in the SBA department, which resulted in a temporary
decrease in SBA loans sold during the first quarter of 2007 as compared to the same period in 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Conduit loan referral income decreased $240,000 or 48% as a result of a decrease in referrals during the first three months of 2007 as compared to the same period
in 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Salaries and employee benefits increased $207,000 or 8% as a result of the Companys growth, coupled with salary increases.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Also attributable to growth and an increase in deposits, data processing expense increased $111,000 or 77%.
| | - |  | -----------------------------------------------------------------------------------------------------------

Financial Condition Summary

The Companys total assets
were $574.2 million at March 31, 2007, an increase of $23.1 million, or 4%, compared to total assets of $551.1 million at December 31, 2006. The most significant changes in the Companys balance sheet during the first three months of
2007 are outlined below:



| |  |  | Net loans increased $21.6 million or 5% from December 31, 2006. Strong loan demand in the Companys market areas contributed to the increase in net loans.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest-bearing deposits increased $23.9 million or 7% from December 31, 2006. The increase in interest-bearing deposits was primarily the result of the
Companys continued emphasis to attract new customers, coupled with additional brokered certificates of deposit acquired to support our loan growth.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



11



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##### Table of Contents

NET INTEREST INCOME/NET INTEREST MARGIN

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

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

The Companys net interest margin as of March 31, 2007 was 5.60% compared to 6.21%
for the same period in 2006. The increase in rates paid for money market deposits and time deposits, coupled with the increase in the average balance on these liabilities and the addition of the $30 million repurchase agreement were the major
contributors toward compressing our net interest margin. From March 31, 2006 to March 31, 2007 the percentage of total average interest bearing deposits represented by time deposits of $100,000 or greater increased to 33% from 21%. The
shift in this average deposit mix also contributed to the reduction of the net interest margin in the first three months of 2007 versus 2006. During the third quarter of 2006, the Company entered into a $30 million repurchase agreement that included
an interest rate floor to mitigate interest rate risk in a declining rate environment. The repurchase agreement is collateralized by the purchase of a $30 million FNMA U.S. agency security.

For the first three months of 2007, total interest-earning assets averaged $527.3 million, which represented an increase of $95.5 million or 22%, as compared to $431.8
million for the same period in 2006. This increase is primarily attributable to the increase in loans as a result of our strong business climate and loan demand, coupled with the purchase of a $30 million FNMA U.S. agency security that settled
during the third quarter of 2006. Total interest-bearing deposits and other interest-bearing liabilities averaged $406 million, which represented an increase of $87.2 million or 27%, as compared to $318.8 million for the same period in 2006. This
increase is primarily attributable to the increase in time deposits of $100,000 or greater, coupled with the addition of the $30 million repurchase agreement. The overall increase in deposits has helped maintain the Companys liquidity position
during 2007.

The Company reported total interest income of $11.5 million for the three months ended March 31, 2007, which represented an increase of
$2.5 million or 27%, over total interest income of $9.0 million for the same period in 2006. The increase is primarily the result of increases in interest and fees on loans of approximately $1.8 million that resulted from an increase of $48.4
million in average loans for the three months ended March 31, 2007, as compared to the same period in 2006.

The Company reported total interest
expense of $4.2 million for the three months ended March 31, 2007, which represented an increase of $1.8 million or 75%, over total interest expense of $2.4 million for the same period in 2006. The increase is primarily attributable to an
increase in the average balance of time deposits of $100,000 or greater, coupled with the addition of the $30 million repurchase agreement.

For the three
months ended March 31, 2007, net interest income before provision for loan losses was $7.3 million, which represented an increase of $676,000 or 10%, over net interest income before provision for loan losses of $6.6 million for the same period
in 2006. The increase in net interest income for the first three months of 2007 as compared to 2006 was primarily due to the increase in average total loans.



12



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##### Table of Contents

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

Distribution, Yield and Rate4Analysis of Net Interest Income



|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|--------------------------------------------------- |  | ------------------------------------- | ------- | ------------------------ | ---- | ------------------ |  | ---- | -------------- |  | ------------------------ | ------- | ------------------ | - | ----- |  | ---- | -
|                                                    |  | For the Three Months Ending March 31, |        
|                                                    |  | 2007                                  |         |                          | 2006 |                   
|                                                    |  | Average Balance                       |         | Interest Income/ Expense |      | Average Rate/Yield |  |      | AverageBalance |  | Interest Income/ Expense |         | Average Rate/Yield |  
|                                                    |  | (Dollars in Thousands)                |        
|Interest-earning Assets:                            |  |                                       |         |                         
|Federal funds sold                                  |  | $                                     | 9,275   |                          | $    | 122                |  | 5.33 | %              |  | $                        | 24,376  |                    | $ | 271   |  | 4.51 | %
|Interest-bearing deposits in financial institutions |  |                                       | 2,932   |                          |      | 37                 |  | 5.12 | %              |  |                          | 2,340   |                    |   | 28    |  | 4.85 | %
|Investment securities:5                             |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Taxable                                             |  |                                       | 50,306  |                          |      | 681                |  | 5.49 | %              |  |                          | 8,572   |                    |   | 95    |  | 4.49 | %
|Non-taxable                                         |  |                                       | 23,510  |                          |      | 245                |  | 4.23 | %              |  |                          | 3,740   |                    |   | 40    |  | 4.34 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total investments                                   |  |                                       | 86,023  |                          |      | 1,085              |  | 5.12 | %              |  |                          | 39,028  |                    |   | 434   |  | 4.51 | %
|Loans6                                              |  |                                       | 441,256 |                          |      | 10,372             |  | 9.53 | %              |  |                          | 392,807 |                    |   | 8,558 |  | 8.84 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total interest-earning assets                       |  | $                                     | 527,279 |                          |      | 11,457             |  | 8.81 | %              |  | $                        | 431,835 |                    |   | 8,992 |  | 8.44 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Interest-bearing Liabilities:                       |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Interest-bearing deposits                           |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Interest-bearing demand deposits                    |  | $                                     | 24,416  |                          |      | 23                 |  | 0.38 | %              |  | $                        | 26,806  |                    |   | 22    |  | 0.33 | %
|Money market deposits                               |  |                                       | 161,690 |                          |      | 1,497              |  | 3.75 | %              |  |                          | 147,580 |                    |   | 1,081 |  | 2.97 | %
|Savings deposits                                    |  |                                       | 13,757  |                          |      | 29                 |  | 0.85 | %              |  |                          | 25,657  |                    |   | 59    |  | 0.93 | %
|Time deposits $100,000 or greater                   |  |                                       | 118,457 |                          |      | 1,410              |  | 4.83 | %              |  |                          | 61,785  |                    |   | 561   |  | 3.68 | %
|Other time deposits                                 |  |                                       | 38,887  |                          |      | 404                |  | 4.21 | %              |  |                          | 38,623  |                    |   | 321   |  | 3.37 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total interest-bearing deposits                     |  |                                       | 357,207 |                          |      | 3,363              |  | 3.82 | %              |  |                          | 300,451 |                    |   | 2,044 |  | 2.76 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Federal funds purchased                             |  |                                       | 471     |                          |      | 7                  |  | 6.03 | %              |  |                          |        |                    |   |      |  | 0.00 | %
|Repurchase agreement                                |  |                                       | 30,000  |                          |      | 437                |  | 5.91 | %              |  |                          |        |                    |   |      |  | 0.00 | %
|Subordinated notes payable to subsidiary trusts     |  |                                       | 18,306  |                          |      | 365                |  | 8.09 | %              |  |                          | 18,306  |                    |   | 339   |  | 7.51 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total borrowings                                    |  |                                       | 48,777  |                          |      | 809                |  | 6.73 | %              |  |                          | 18,306  |                    |   | 339   |  | 7.51 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total interest-bearing liabilities                  |  | $                                     | 405,984 |                          |      | 4,172              |  | 4.17 | %              |  | $                        | 318,757 |                    |   | 2,383 |  | 3.03 | %
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Net interest income                                 |  |                                       |         |                          | $    | 7,285              |  |      |                |  |                          |         |                    | $ | 6,609 |  |      |  
|                                                    |  |                                       |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Net interest margin7                                |  |                                       |         |                          |      |                    |  | 5.60 | %              |  |                          |         |                    |   |       |  | 6.21 | %

---

|4 | Average rates/yields for these periods have been annualized using actual days.
|- | ------------------------------------------------------------------------------



|5 | Yields on securities have not been adjusted to a tax equivalent basis because the impact is not
material.
|- | ---------------------------------------------------------------------------------------------------------



|6 | 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7 | Net interest income as a percentage of average interest-earning assets.
|- | -----------------------------------------------------------------------



13



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##### Table of Contents

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

Rate8/Volume Analysis of Net Interest Income



|                                                    |  |                                            |       |   |      |   |       |       |  |   |       |  
|--------------------------------------------------- |  | ------------------------------------------ | ----- | - | ---- | - | ----- | ----- |  | - | ----- | -
|                                                    |  | Three Months Ended March 31, 2007 vs. 2006 |      
|                                                    |  | Increases (Decreases) Due to               |      
|                                                    |  | Volume                                     |       |   | Rate |   |       | Total | 
|                                                    |  | (Dollars in Thousands)                     |      
|Increase (Decrease) in Interest Income:             |  |                                            |       |   |      |   |       |       |  |   |       |  
|Federal funds sold                                  |  | $                                          | (168  | ) |      | $ | 19    |       |  | $ | (149  | )
|Interest-bearing deposits in financial institutions |  |                                            | 7     |   |      |   | 2     |       |  |   | 9     |  
|Investment securities:9                             |  |                                            |       |   |      |   |       |       |  |   |       |  
|Taxable                                             |  |                                            | 463   |   |      |   | 123   |       |  |   | 586   |  
|Non-taxable                                         |  |                                            | 211   |   |      |   | (6    | )     |  |   | 205   |  
|Loans10                                             |  |                                            | 1,056 |   |      |   | 758   |       |  |   | 1,814 |  
|                                                    |  |                                            |       |   |      |   |       |       |  |   |       |  
|Total                                               |  | $                                          | 1,569 |   |      | $ | 896   |       |  | $ | 2,465 |  
|                                                    |  |                                            |       |   |      |   |       |       |  |   |       |  
|Increase (Decrease) in Interest Expense:            |  |                                            |       |   |      |   |       |       |  |   |       |  
|Interest-bearing demand deposits                    |  | $                                          | (2    | ) |      | $ | 3     |       |  | $ | 1     |  
|Money market deposits                               |  |                                            | 103   |   |      |   | 313   |       |  |   | 416   |  
|Savings deposits                                    |  |                                            | (27   | ) |      |   | (3    | )     |  |   | (30   | )
|Time deposits $100,000 or greater                   |  |                                            | 515   |   |      |   | 334   |       |  |   | 849   |  
|Other time deposits                                 |  |                                            | 2     |   |      |   | 81    |       |  |   | 83    |  
|Federal funds purchased                             |  |                                            |      |   |      |   | 7     |       |  |   | 7     |  
|Repurchase agreement                                |  |                                            |      |   |      |   | 437   |       |  |   | 437   |  
|Subordinated notes payable to subsidiary trusts     |  |                                            |      |   |      |   | 26    |       |  |   | 26    |  
|                                                    |  |                                            |       |   |      |   |       |       |  |   |       |  
|Total                                               |  | $                                          | 591   |   |      | $ | 1,198 |       |  | $ | 1,789 |  
|                                                    |  |                                            |       |   |      |   |       |       |  |   |       |  
|Total change in net interest income                 |  | $                                          | 978   |   |      | $ | (302  | )     |  | $ | 676   |  
|                                                    |  |                                            |       |   |      |   |       |       |  |   |       |  

PROVISION FOR LOAN LOSSES

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

The provision for loan losses totaled $100,000 for the three months ended March 31, 2007. This represented a decrease of $365,000 or 78% when compared to $465,000
for the same period in 2006. The process for monitoring the adequacy of the allowance for loan losses, as well as supporting documentation, regarding the allowance for loan losses is analyzed below. See Allowance for Loan Losses.

---

|8 | Rates for these periods on which calculations are based have been annualized using actual days.
|- | -----------------------------------------------------------------------------------------------



|9 | Yields on securities have not been adjusted to a tax equivalent basis because the impact is not
material.
|- | ---------------------------------------------------------------------------------------------------------



|10 | Loans are gross, which excludes the allowance for loan losses, and net of deferred fees. Nonaccrual
loans are included in the table for computation purposes, but the foregone interest on such loans is excluded.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



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##### Table of Contents

NONINTEREST INCOME

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

Noninterest income totaled $906,000 for the three months
ended March 31, 2007. This represented a decrease of $262,000, or 22% when compared to $1.2 million for the same period in 2006.

The decrease in
noninterest income was attributable to the decrease in gains from the sale of SBA loans of $235,000 as a result of unanticipated personnel changes in the SBA department, which resulted in a temporary decrease in SBA loans sold during the first three
months of 2007 as compared to the same period in 2006. It is the Companys intention to increase noninterest income by increasing the volume of SBA loan sales in the future; however, it is uncertain whether such an increase will occur. Conduit
loan referral income decreased $240,000 as a result of a decrease in referrals during the first three months of 2007 as compared to the same period in 2006.

For the three months ended March 31, 2007 as compared to 2006, noninterest income as an annualized percentage of average earning assets decreased to 0.70% from 1.10%.

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

Noninterest Income



|                                                       |  |                                      |     |                  |        |   |        |   |       |                  |  |        |   
|------------------------------------------------------ |  | ------------------------------------ | --- | ---------------- | ------ | - | ------ | - | ----- | ---------------- |  | ------ | --
|                                                       |  | For the Three Months Ended March 31, |    
|                                                       |  | 2007                                 |     |                  | 2006   |  
|                                                       |  | Amount                               |     | Percent of Total |        |   | Amount |   |       | Percent of Total | 
|                                                       |  | (Dollars in Thousands)               |    
|Customer service fees                                  |  | $                                    | 399 |                  | 44.03  | % |        | $ | 328   |                  |  | 28.08  | % 
|Gains from sale of loans                               |  |                                      | 30  |                  | 3.31   | % |        |   | 265   |                  |  | 22.69  | % 
|Increase in cash surrender value of life insurance     |  |                                      | 111 |                  | 12.25  | % |        |   | 71    |                  |  | 6.08   | % 
|Broker fee income                                      |  |                                      | 42  |                  | 4.64   | % |        |   | 20    |                  |  | 1.71   | % 
|Conduit loan referral income                           |  |                                      | 255 |                  | 28.15  | % |        |   | 495   |                  |  | 42.38  | % 
|Other miscellaneous income (expenses)                  |  |                                      | 69  |                  | 7.62   | % |        |   | (11   | )                |  | (0.94  | )%
|                                                       |  |                                      |     |                  |        |   |        |   |       |                  |  |        |   
|Total noninterest income                               |  | $                                    | 906 |                  | 100.00 | % |        | $ | 1,168 |                  |  | 100.00 | % 
|                                                       |  |                                      |     |                  |        |   |        |   |       |                  |  |        |   
|As a percentage of average earning assets (annualized) |  |                                      |     |                  | 0.70   | % |        |   |       |                  |  | 1.10   | % 
|                                                       |  |                                      |     |                  |        |   |        |   |       |                  |  |        |   



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##### Table of Contents

NONINTEREST EXPENSE

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

Noninterest expense totaled $4.9 million for the three months ended March 31, 2007. This represented an increase of $457,000 or 10% when compared to $4.5 million
for the same period in 2006. The increase in noninterest expense was primarily due to increases of $207,000, $111,000 and $86,000 in salaries and employee benefits, data processing expense and other operating expense, respectively.

Due to the Companys growth, coupled with salary increases, salaries and employee benefits increased $207,000. Also attributable to growth and an increase in
deposits, data processing expense and other operating expenses increased $111,000 and $86,000, respectively.

For the three months ended March 31,
2007 as compared to 2006, noninterest expense as an annualized percentage of average earning assets decreased to 3.80% from 4.21%. This decrease is reflective of Managements continuing efforts to control overhead expenses and improve operating
efficiency.

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

Noninterest Expense



|                                                       |  |                                      |       |                  |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | ------------------------------------ | ----- | ---------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Three Months Ended March 31, |      
|                                                       |  | 2007                                 |       |                  | 2006   |  
|                                                       |  | Amount                               |       | Percent of Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)               |      
|Salaries and employee benefits                         |  | $                                    | 2,694 |                  | 54.55  | % |        | $ | 2,487           |  | 55.49  | %
|Net occupancy expense                                  |  |                                      | 588   |                  | 11.91  | % |        |   | 551             |  | 12.30  | %
|Marketing                                              |  |                                      | 312   |                  | 6.32   | % |        |   | 352             |  | 7.86   | %
|Data processing fees                                   |  |                                      | 256   |                  | 5.18   | % |        |   | 145             |  | 3.24   | %
|Professional fees                                      |  |                                      | 277   |                  | 5.61   | % |        |   | 227             |  | 5.07   | %
|Postage, telephone, supplies                           |  |                                      | 146   |                  | 2.96   | % |        |   | 151             |  | 3.37   | %
|Directors fees                                        |  |                                      | 67    |                  | 1.36   | % |        |   | 56              |  | 1.25   | %
|Other operating expense                                |  |                                      | 598   |                  | 12.11  | % |        |   | 512             |  | 11.42  | %
|                                                       |  |                                      |       |                  |        |   |        |   |                 |  |        |  
|Total noninterest expense                              |  | $                                    | 4,938 |                  | 100.00 | % |        | $ | 4,481           |  | 100.00 | %
|                                                       |  |                                      |       |                  |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                      |       |                  | 3.80   | % |        |   |                 |  | 4.21   | %
|                                                       |  |                                      |       |                  |        |   |        |   |                 |  |        |  

INCOME TAXES

The tax provision was $1.2 million for the first three months of 2007 and $1.1 million for the first three months of 2006, representing 37.4% and 39.4%, respectively, of pre-tax income for those periods. The amount of the tax provision is
determined by applying the Companys statutory income tax rates to pre-tax book income, adjusted for permanent differences between pre-tax book income and actual taxable income. Such permanent differences include but are not limited to
tax-exempt interest income, increases in the cash surrender value of bank-owned life insurance, compensation expense associated with stock options and certain other expenses that are not allowed as tax deductions, and tax credits.



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##### Table of Contents

FINANCIAL CONDITION

GENERAL

The Companys total assets were $574.2 million at March 31, 2007, an increase of $23.1 million, or 4%, compared to total
assets of $551.1 million at December 31, 2006. The largest single component of the asset growth was in total net loans of $21.6 million, or 5%, to $447.8 million at March 31, 2007 as compared to $426.2 million at December 31, 2006.
Total deposits at March 31, 2007 were $476.6 million, which represented an increase of $20.1 million, or 4% from total deposits of $456.5 million at December 31, 2006. The increase was primarily in interest-bearing deposits, which
increased $23.9 million or 7% to $369.2 million at March 31, 2007 compared to $345.3 million at December 31, 2006. Noninterest bearing demand deposits decreased $3.8 million or 3% to $107.4 million at March 31, 2007 compared to $111.2
million at December 31, 2006. The major components of the Companys balance sheet are individually analyzed below, along with off-balance sheet information.

LOANS

Total gross loans were $455.1 million at March 31, 2007 as compared to $433.3 million at
December 31, 2006. Total gross loans increased by $21.8 million, or 5% for the first three months of 2007. Total gross loans represented 79% and 78% of total assets at March 31, 2007 and December 31, 2006, respectively. Real estate
loans, which includes construction and development loans increased $15.9 million or 6% during the first three months of 2007 and represented approximately 73% of the total loan growth of $21.8 million. This was due to the continuing strong demand
for affordable housing in our market areas. Commercial loans increased $5.1 million or 3% during the first three months of 2007 due to the continued success of our business development efforts in and around the marketplaces the Company serves.

LOANS HELD FOR SALE

The Company actively generates
Small Business Administration (SBA) loans as part of its primary operating activity of making loans. The guaranteed portion of each individual loan is sold on the secondary market simultaneously with the booking, and therefore the Company has no
inventory held-for-sale, unlike some institutions that warehouse loans to sell as pools. The Company retains the unguaranteed portion of the SBA loans. The total gain on sale of loans was $30,000 or 0.24% of total interest
and noninterest income as of March 31, 2007 and $265,000 or 2.61% of total interest and noninterest income as of March 31, 2006. The Company reported the gain on sale of loans as operating activities on the Statement of Cash Flows.



17



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##### Table of Contents

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

Loan Portfolio Composition



|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|---------------------------- |  | ---------------------- | ------- | - | ----------------- | ------ | - | ------ | - | ------- | --------------- |  | ------ | -
|                             |  | March 31, 2007         |         |   | December 31, 2006 |       
|                             |  | Amount                 |         |   | Percentof Total   |        |   | Amount |   |         | Percentof Total | 
|                             |  | (Dollars in Thousands) |        
|Real estate loans:           |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Construction and development |  | $                      | 188,589 |   |                   | 41.43  | % |        | $ | 174,040 |                 |  | 40.16  | %
|Residential loans            |  |                        | 3,035   |   |                   | 0.67   | % |        |   | 3,063   |                 |  | 0.71   | %
|Commercial and multi-family  |  |                        | 78,650  |   |                   | 17.28  | % |        |   | 77,245  |                 |  | 17.83  | %
|Commercial loans             |  |                        | 170,857 |   |                   | 37.54  | % |        |   | 165,765 |                 |  | 38.26  | %
|Consumer loans               |  |                        | 6,096   |   |                   | 1.34   | % |        |   | 4,764   |                 |  | 1.10   | %
|Equity lines of credit       |  |                        | 6,580   |   |                   | 1.45   | % |        |   | 6,762   |                 |  | 1.56   | %
|Credit card and other loans  |  |                        | 1,312   |   |                   | 0.29   | % |        |   | 1,652   |                 |  | 0.38   | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total gross loans            |  |                        | 455,119 |   |                   | 100.00 | % |        |   | 433,291 |                 |  | 100.00 | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Less:                        |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Unearned income              |  |                        | (1,553  | ) |                   |        |   |        |   | (1,350  | )               |  |        |  
|Allowance for loan losses    |  |                        | (5,804  | ) |                   |        |   |        |   | (5,741  | )               |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total net loans              |  | $                      | 447,762 |   |                   |        |   |        | $ | 426,200 |                 |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  

NONPERFORMING ASSETS

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.

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

December 31, 2006
to March 31, 2007 analysis. Nonaccrual loans at March 31, 2007 decreased $1.1 million to $2.8 million, from $3.9 million at December 31, 2006, and represented 0.62% and 0.89% of total gross loans, respectively. The decrease was
primarily attributable to the payoff of two commercial loans totaling $371,000 and the principal reduction of two commercial loans totaling $104,000. In addition, one commercial loan totaling $617,000 was transferred to other real estate owned as
the Company foreclosed on the real property that collateralized the loan. (See below).

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



18



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##### Table of Contents

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

March 31, 2006 to March 31, 2007 analysis. Nonaccrual loans at
March 31, 2007 increased $2.3 million to $2.8 million, from $507,000 at March 31, 2006, and represented 0.62% and 0.13% of total gross loans, respectively. The increase was primarily attributable to the addition of four commercial loans
totaling $2.7 million, of which, $2.4 million was attributed to one commercial loan placed on nonaccrual in July 2006. The additions were offset by the payoff of two commercial loans totaling $490,000.



19



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##### Table of Contents

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

Nonperforming Assets



|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  
|-------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ------ | -------------- |  | - | -------- | -
|                                                                                 |  | March 31, 2007         |        |   | December 31,2006 |   |        | March 31, 2006 | 
|                                                                                 |  | (Dollars in Thousands) |       
|Nonaccrual loans:11                                                              |  |                        |        |   |                  |   |        |                |  |   |          |  
|Real estate loans:                                                               |  |                        |        |   |                  |   |        |                |  |   |          |  
|Construction and development                                                     |  | $                      |       |   |                  | $ |       |                |  | $ |         |  
|Residential loans                                                                |  |                        | 17     |   |                  |   | 18     |                |  |   |         |  
|Commercial and multi-family                                                      |  |                        |       |   |                  |   |       |                |  |   |         |  
|Commercial loans                                                                 |  |                        | 2,748  |   |                  |   | 3,840  |                |  |   | 507      |  
|Consumer loans                                                                   |  |                        |       |   |                  |   |       |                |  |   |         |  
|Equity lines of credit                                                           |  |                        |       |   |                  |   |       |                |  |   |         |  
|Credit card and other loans                                                      |  |                        |       |   |                  |   |       |                |  |   |         |  
|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  
|Total nonaccrual loans                                                           |  |                        | 2,765  |   |                  |   | 3,858  |                |  |   | 507      |  
|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  
|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                                                                 |  |                        | 62     |   |                  |   |       |                |  |   |         |  
|Consumer loans                                                                   |  |                        |       |   |                  |   |       |                |  |   |         |  
|Equity lines of credit                                                           |  |                        |       |   |                  |   |       |                |  |   |         |  
|Credit card and other loans                                                      |  |                        |       |   |                  |   |       |                |  |   |         |  
|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  
|Total loans 90 days or more past due and still accruing                          |  |                        | 62     |   |                  |   |       |                |  |   |         |  
|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  
|Restructured loans12                                                             |  |                        |       |   |                  |   |       |                |  |   |         |  
|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  
|Total nonperforming loans                                                        |  |                        | 2,827  |   |                  |   | 3,858  |                |  |   | 507      |  
|Other real estate owned                                                          |  |                        | 940    |   |                  |   |       |                |  |   |         |  
|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  
|Total nonperforming assets                                                       |  | $                      | 3,767  |   |                  | $ | 3,858  |                |  | $ | 507      |  
|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  
|Nonperforming loans as a percentage of total loans13                             |  |                        | 0.62   | % |                  |   | 0.89   | %              |  |   | 0.13     | %
|Nonperforming assets as a percentage of total loans and other real estate owned  |  |                        | 0.83   | % |                  |   | 0.89   | %              |  |   | 0.13     | %
|Allowance for loan losses to nonperforming loans                                 |  |                        | 205.31 | % |                  |   | 148.81 | %              |  |   | 1,153.45 | %
|Allowance for loan losses                                                        |  | $                      | 5,804  |   |                  | $ | 5,741  |                |  | $ | 5,848    |  
|                                                                                 |  |                        |        |   |                  |   |        |                |  |   |          |  

---

|11 | During the three months ended March 31, 2007, no income related to these loans was included in net
income. Additional interest income of approximately $67,000 would have been recorded for the three months ended March 31, 2007 if these loans had been paid or accrued in accordance with their original terms and had been outstanding throughout
the applicable period then ended or, if not outstanding throughout the applicable period then ended, since origination.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12 | 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.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

ALLOWANCE FOR LOAN LOSSES

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

The allowance for loan losses totaled $5.8 million at March 31, 2007 compared to $5.7 million at December 31, 2006
and as a percentage of total loans outstanding was 1.28% and 1.33%, respectively. The process for monitoring the adequacy of the allowance, as well as supporting documentation regarding the allowance follows.

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

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

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

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

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

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



|               |  |                    |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  
|-------------- |  | ------------------ | - |  | --------------- | - |  | ------------ | - |  | --------- | - |  | ----- | - |  | ------ | -
|               |  | Pass/ Homogeneous: |   |  | SpecialMention: |   |  | Substandard: |   |  | Doubtful: |   |  | Loss: |   |  | Total: |  
|March 31, 2007 |  | 93.48              | % |  | 5.77            | % |  | 0.74         | % |  | 0.01      | % |  | 0.00  | % |  | 100.00 | %
|               |  |                    |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  



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##### Table of Contents

For the three months ended March 31, 2007 and 2006, the Company had net (charge-offs) recoveries of ($37,000) and
$7,000, 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, 2007 for which known credit problems of the borrower would cause serious doubt as to the ability of such borrowers to comply with their present loan repayment terms. Management cannot, however, predict the extent to
which the deterioration in general economic conditions, real estate values, increase in general rates of interest, changing financial conditions or business of a borrower may adversely affect a borrowers ability to repay. The ratio of the
allowance for loan losses to total loans was determined by Management to be adequate at March 31, 2007 and December 31, 2006.



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##### Table of Contents

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

Allowance for Loan Losses



|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|------------------------------------------------------------------------------- |  | ---------------------- | ------- | -- | ----------------- | - | ------- | -------------- |  | - | -------- | -
|                                                                                |  | March 31, 2007         |         |    | December 31, 2006 |   |         | March 31, 2006 | 
|                                                                                |  | (Dollars in Thousands) |        
|Balances:                                                                       |  |                        |         |    |                   |   |         |                |  |   |          |  
|Average total loans outstanding during period                                   |  | $                      | 441,256 |    |                   | $ | 411,415 |                |  | $ | 392,807  |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Total loans outstanding at end of period, net of unearned income                |  | $                      | 453,566 |    |                   | $ | 431,941 |                |  | $ | 397,624  |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Allowance for Loan Losses:                                                      |  |                        |         |    |                   |   |         |                |  |   |          |  
|Balance at beginning of period                                                  |  | $                      | 5,741   |    |                   | $ | 5,376   |                |  | $ | 5,376    |  
|Charge-offs:                                                                    |  |                        |         |    |                   |   |         |                |  |   |          |  
|Real estate loans:                                                              |  |                        |         |    |                   |   |         |                |  |   |          |  
|Construction and development                                                    |  |                        |        |    |                   |   |        |                |  |   |         |  
|Residential loans                                                               |  |                        |        |    |                   |   |        |                |  |   |         |  
|Commercial and multi-family                                                     |  |                        |        |    |                   |   | 375     |                |  |   |         |  
|Commercial loans                                                                |  |                        | 446     | 14 |                   |   | 688     |                |  |   | 119      |  
|Consumer loans                                                                  |  |                        |        |    |                   |   |        |                |  |   |         |  
|Equity lines of credit                                                          |  |                        |        |    |                   |   | 55      |                |  |   |         |  
|Credit card and other loans                                                     |  |                        |        |    |                   |   | 5       |                |  |   |         |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Total charge-offs                                                               |  |                        | 446     |    |                   |   | 1,123   |                |  |   | 119      |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Recoveries:                                                                     |  |                        |         |    |                   |   |         |                |  |   |          |  
|Real estate loans:                                                              |  |                        |         |    |                   |   |         |                |  |   |          |  
|Construction and development                                                    |  |                        |        |    |                   |   |        |                |  |   |         |  
|Residential loans                                                               |  |                        | 1       |    |                   |   | 2       |                |  |   | 1        |  
|Commercial and multi-family                                                     |  |                        |        |    |                   |   |        |                |  |   |         |  
|Commercial loans                                                                |  |                        | 408     |    |                   |   | 163     |                |  |   | 124      |  
|Consumer loans                                                                  |  |                        |        |    |                   |   | 3       |                |  |   | 1        |  
|Equity lines of credit                                                          |  |                        |        |    |                   |   |        |                |  |   |         |  
|Credit card and other loans                                                     |  |                        |        |    |                   |   |        |                |  |   |         |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Total recoveries                                                                |  |                        | 409     |    |                   |   | 168     |                |  |   | 126      |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Net (charge-offs) recoveries                                                    |  |                        | (37     | )  |                   |   | (955    | )              |  |   | 7        |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Provision charged to operations                                                 |  |                        | 100     |    |                   |   | 1,320   |                |  |   | 465      |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Allowance for loan losses balance, end of period                                |  | $                      | 5,804   |    |                   | $ | 5,741   |                |  | $ | 5,848    |  
|                                                                                |  |                        |         |    |                   |   |         |                |  |   |          |  
|Ratios:15                                                                       |  |                        |         |    |                   |   |         |                |  |   |          |  
|Net loan charge-offs to average total loans                                     |  |                        | 0.01    | %  |                   |   | 0.23    | %              |  |   | 0.00     | %
|Allowance for loan losses to average total loans                                |  |                        | 1.32    | %  |                   |   | 1.40    | %              |  |   | 1.49     | %
|Allowance for loan losses to total loans at end of period                       |  |                        | 1.28    | %  |                   |   | 1.33    | %              |  |   | 1.47     | %
|Allowance for loan losses to total nonperforming loans                          |  |                        | 205.31  | %  |                   |   | 148.81  | %              |  |   | 1,153.45 | %
|Net loan (charge-offs) recoveries to allowance for loan losses at end of period |  |                        | (0.64   | )% |                   |   | (16.63  | )%             |  |   | 0.12     | %
|Net loan (charge-offs) recoveries to provision for loan losses                  |  |                        | (37.00  | )% |                   |   | (72.35  | )%             |  |   | 1.51     | %

---

|14 | Represents the Companys charge to the allowance for loan losses for the difference between total
debt outstanding and the estimated fair value, less selling costs on other real estate owned recorded. (See nonperforming assets above).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|15 | Total loans are gross loans,
which excludes the allowance for loan losses, and net of deferred fees.
|-- | ----------------------------------------------------------------------------------------------------



23



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##### Table of Contents

INVESTMENTS

The
Companys investment portfolio provides income to the Company and also serves as a source of liquidity. Total yield, risk and maturity are among the factors considered in building the investment portfolio. Pursuant to FASB 115, securities must
be classified as held to maturity, available for sale, or trading securities. Those securities held in the available for sale category must be carried on the Companys books at fair market value.
At March 31, 2007 and December 31, 2006, 100% of the investment securities owned by the Company were classified as Available for Sale.

At March 31, 2007, the Companys investment portfolio at fair value consisted of $30.3 million in U.S. government agency securities, $19.7 million in federal agency mortgage-backed securities and $24.0 million in obligations of
states and local government securities for a total of $74.0 million. At December 31, 2006, the Companys investment portfolio at fair value consisted of $30.2 million in U.S. government agency securities, $19.7 million in federal agency
mortgage-backed securities and $22.7 million in obligations of states and local government securities for a total of $72.6 million.

The Companys
investment portfolio increased $1.4 million or 2% to $74.0 million during the first three months of 2007. The Company added a $1 million federal agency mortgage-backed security, however, such existing class of securities in the portfolio had
principal paydowns of approximately the same amount. Obligations of states and local government securities increased $1.3 million as the Company took advantage of relative value in that sector.

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

Investment Portfolio



|                                                      |  |                        |        |                   |   |                   |  |   |            |   |                |   |                  |  |                  |        |  |            |     |  |   |      |   |  |   |       
|----------------------------------------------------- |  | ---------------------- | ------ | ----------------- | - | ----------------- |  | - | ---------- | - | -------------- | - | ---------------- |  | ---------------- | ------ |  | ---------- | --- |  | - | ---- | - |  | - | ------
|                                                      |  | March 31, 2007         |        | December 31, 2006
|                                                      |  | Amortized Cost         |        | Unrealized Gains  |   | Unrealized Losses |  |   | Fair Value |   | Amortized Cost |   | Unrealized Gains |  | UnrealizedLosses |        |  | Fair Value
|                                                      |  | (Dollars in Thousands)
|Available for Sale:                                   |  |                        |       
|U.S. government agency securities                     |  | $                      | 30,000 |                   | $ | 292               |  | $ |           |   |                | $ | 30,292           |  | $                | 30,000 |  | $          | 210 |  | $ |     |   |  | $ | 30,210
|Federal agency mortgage-backed securities             |  |                        | 19,545 |                   |   | 211               |  |   | (45        | ) |                |   | 19,711           |  |                  | 19,597 |  |            | 190 |  |   | (61  | ) |  |   | 19,726
|Obligations of states and local government securities |  |                        | 24,214 |                   |   | 85                |  |   | (264       | ) |                |   | 24,035           |  |                  | 22,782 |  |            | 120 |  |   | (189 | ) |  |   | 22,713
|                                                      |  |                        |        |                   |   |                   |  |   |            |   |                |   |                  |  |                  |        |  |            |     |  |   |      |   |  |   |       
|Total                                                 |  | $                      | 73,759 |                   | $ | 588               |  | $ | (309       | ) |                | $ | 74,038           |  | $                | 72,379 |  | $          | 520 |  | $ | (250 | ) |  | $ | 72,649
|                                                      |  |                        |        |                   |   |                   |  |   |            |   |                |   |                  |  |                  |        |  |            |     |  |   |      |   |  |   |       

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



24



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##### Table of Contents

DEPOSITS

Total
deposits increased $20.1 million, or 4%, to $476.6 million at March 31, 2007 from $456.5 million at December 31, 2006. Noninterest-bearing demand deposits decreased $3.8 million or 3% at March 31, 2007 as compared to December 31,
2006. Interest bearing demand deposits decreased $1.3 million or 5%, while money market deposit accounts increased $16.7 million, or 11% at March 31, 2007 as compared to December 31, 2006. Savings deposit accounts decreased $4.9 million or
27% at March 31, 2007 as compared to December 31, 2006. Time deposits of $100,000 or greater increased $16 million, or 15% at March 31, 2007 as compared to December 31, 2006, and other time deposits decreased $2.6 million, or 6%.

The increase in money market deposit accounts was primarily the result of the Companys efforts to attract new customers. The increase in time
deposits $100,000 or greater was primarily the result of additional brokered certificates of deposit acquired. The overall increase in deposits has helped maintain the Companys liquidity position and supported loan growth during 2007.

Cost of funds

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

The rate paid on the Banks interest-bearing deposits increased to 3.82% for the three months ended March 31, 2007 from 2.76% for the same period in 2006. For
all interest bearing liabilities, the average rate for the three months ended March 31, 2007 was 4.17% as compared to 3.03% for the same period in 2006. Market rate increases, coupled with the increase in rates paid on money market deposit
accounts as a result of the Companys efforts to attract new customers impacted the Companys cost of funds.

From March 31, 2006 to
March 31, 2007 the percentage of total average deposits represented by time deposits of $100,000 or greater increased from 15% to 26%. The shift in this average deposit mix also contributed to the increase in cost of funds for the first quarter
ended March 31, 2007 versus 2006.



25



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##### Table of Contents

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

Average Deposits and Other Borrowings16



|                                                           |  |                                  |         |              |                                  |   |                 |   |              |  |      |  
|---------------------------------------------------------- |  | -------------------------------- | ------- | ------------ | -------------------------------- | - | --------------- | - | ------------ |  | ---- | -
|                                                           |  | Three Months EndedMarch 31, 2007 |         |              | Three Months EndedMarch 31, 2006 |  
|                                                           |  | Average Balance                  |         | Average Rate |                                  |   | Average Balance |   | Average Rate | 
|                                                           |  | (Dollars in Thousands)           |        
|Demand deposits, noninterest bearing                       |  | $                                | 106,711 |              | 0.00                             | % |                 | $ | 102,603      |  | 0.00 | %
|                                                           |  |                                  |         |              |                                  |   |                 |   |              |  |      |  
|Interest-bearing deposits:                                 |  |                                  |         |              |                                  |   |                 |   |              |  |      |  
|Interest-bearing demand deposits                           |  |                                  | 24,416  |              | 0.38                             | % |                 |   | 26,806       |  | 0.33 | %
|Money market deposits                                      |  |                                  | 161,690 |              | 3.75                             | % |                 |   | 147,580      |  | 2.97 | %
|Savings deposits                                           |  |                                  | 13,757  |              | 0.85                             | % |                 |   | 25,657       |  | 0.93 | %
|Time deposits $100,000 or greater                          |  |                                  | 118,457 |              | 4.83                             | % |                 |   | 61,785       |  | 3.68 | %
|Other time deposits                                        |  |                                  | 38,887  |              | 4.21                             | % |                 |   | 38,623       |  | 3.37 | %
|                                                           |  |                                  |         |              |                                  |   |                 |   |              |  |      |  
|Total interest-bearing deposits                            |  |                                  | 357,207 |              | 3.82                             | % |                 |   | 300,451      |  | 2.76 | %
|                                                           |  |                                  |         |              |                                  |   |                 |   |              |  |      |  
|Federal funds purchased                                    |  |                                  | 471     |              | 6.03                             | % |                 |   |             |  | 0.00 | %
|Repurchase agreement                                       |  |                                  | 30,000  |              | 5.91                             | % |                 |   |             |  | 0.00 | %
|Subordinated notes payable to subsidiary trusts            |  |                                  | 18,306  |              | 8.09                             | % |                 |   | 18,306       |  | 7.51 | %
|                                                           |  |                                  |         |              |                                  |   |                 |   |              |  |      |  
|Total deposits and other borrowings                        |  | $                                | 512,695 |              | 3.30                             | % |                 | $ | 421,360      |  | 2.29 | %
|                                                           |  |                                  |         |              |                                  |   |                 |   |              |  |      |  
|Average rate excluding noninterest bearing demand deposits |  |                                  |         |              | 4.17                             | % |                 |   |              |  | 3.03 | %
|                                                           |  |                                  |         |              |                                  |   |                 |   |              |  |      |  

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 31,2007    |   |  | March 31,2006    |  
|                                     |  | Percent of Total |   |  | Percent of Total |  
|Demand deposits, noninterest bearing |  | 23.00            | % |  | 25.46            | %
|Interest-bearing deposits:           |  |                  |   |  |                  |  
|Interest-bearing demand deposits     |  | 5.26             | % |  | 6.65             | %
|Money market deposits                |  | 34.86            | % |  | 36.61            | %
|Savings deposits                     |  | 2.97             | % |  | 6.37             | %
|Time deposits $100,000 or greater    |  | 25.53            | % |  | 15.33            | %
|Other time deposits                  |  | 8.38             | % |  | 9.58             | %
|                                     |  |                  |   |  |                  |  
|Total average deposits               |  | 100.00           | % |  | 100.00           | %
|                                     |  |                  |   |  |                  |  

---

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



26



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##### Table of Contents

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



|                  |  |                        |        |                               |   |                               |  |               |        |       |   |       |  |   |        
|----------------- |  | ---------------------- | ------ | ----------------------------- | - | ----------------------------- |  | ------------- | ------ | ----- | - | ----- |  | - | -------
|                  |  | 3 Monthsor Less        |        | Over 3 Months Through 6Months |   | Over 6 MonthsThrough 12Months |  | Over 12Months |        | Total
|                  |  | (Dollars in Thousands)
|March 31, 2007    |  | $                      | 37,525 |                               | $ | 42,562                        |  | $             | 37,302 |       | $ | 7,702 |  | $ | 125,091
|                  |  |                        |        |                               |   |                               |  |               |        |       |   |       |  |   |        
|December 31, 2006 |  | $                      | 52,251 |                               | $ | 23,418                        |  | $             | 24,308 |       | $ | 9,124 |  | $ | 109,101
|                  |  |                        |        |                               |   |                               |  |               |        |       |   |       |  |   |        

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, 2007 the Company has Federal Funds borrowing arrangements with five correspondent banks totaling $45.0 million, and a secured line of credit with the FHLB totaling approximately $33.3 million.

The Companys policy is to maintain the liquidity ratio at above 10%. The Companys liquidity ratio is a measure of liquid assets to deposits, plus short-term
liabilities, plus Federal Home Loan Bank borrowings due within one year, less deposits for treasury tax and loan. On a consolidated basis, the liquidity ratio decreased to 16.57% at March 31, 2007 from 17.03% at December 31, 2006. The
Company also monitors its net non-core funding dependence ratio, with policy guidelines of less than 30%. 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 22.21% at March 31, 2007 and 24.65% at December 31, 2006.

The Company believes it is beneficial to continue to take
advantage of the earnings opportunity presented by current loan demand, and to continue to implement various arrangements we have made to ensure adequate liquidity. Including enhancing deposit growth by:



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



| | 2) | An incentive program to reward business development officers for 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, 2007, brokered deposits and public funds totaled $57.9 million and were 12.16% 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.



27



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##### Table of Contents

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

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

Liquidity



|                                                         |  |                        |        |   |                  |   |        |  
|-------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ------ | -
|                                                         |  | March 31,2007          |        |   | December 31,2006 |  
|                                                         |  | (Dollars in Thousands) |       
|Cash and due from banks (net of FRB reserve requirement) |  | $                      | 10,521 |   |                  | $ | 17,771 |  
|Federal funds sold                                       |  |                        | 9,850  |   |                  |   | 2,900  |  
|Interest-bearing deposits in financial institutions      |  |                        | 2,948  |   |                  |   | 2,922  |  
|Unpledged investment securities, available-for-sale      |  |                        | 42,205 |   |                  |   | 40,815 |  
|Stock investments, restricted at cost                    |  |                        | 1,699  |   |                  |   | 1,681  |  
|Cash surrender value of life insurance                   |  |                        | 11,751 |   |                  |   | 11,639 |  
|                                                         |  |                        |        |   |                  |   |        |  
|Total liquid assets                                      |  | $                      | 78,974 |   |                  | $ | 77,728 |  
|                                                         |  |                        |        |   |                  |   |        |  
|Liquidity ratio:                                         |  |                        |        |   |                  |   |        |  
|Percentage of ending deposits and short-term liabilities |  |                        | 16.57  | % |                  |   | 17.03  | %

Market Risk Management

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

Interest Rate Risk Management

The principal objective of interest rate risk management (often referred to as
asset/liability management) is to manage the financial components of the Company 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



28



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##### Table of Contents

differently than its interest-bearing liabilities, i.e., not at the same time, or to the same magnitude. The Company manages its mix of assets and
liabilities with the goal of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds. Interest income and interest expense are affected by general economic conditions and by
competition in the marketplace. The Companys interest and pricing strategies are driven by its asset/liability management analyses and by local market conditions.

In connection with the 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, 2007:



|                         |  |                                          |  |                               |  |                                 |  |                    
|------------------------ |  | ---------------------------------------- |  | ----------------------------- |  | ------------------------------- |  | -------------------
|Change (in Basis Points) |  | Net Interest Income (next twelve months) |  | Change in Net Interest Income |  | % Change in Net Interest Income |  | Net Interest Margin
|(Dollars in Thousands)  
|+200                     |  | $31,950                                  |  | $2,405                        |  | 8.14%                           |  | 6.06%              
|+100                     |  | 30,737                                   |  | 1,192                         |  | 4.03%                           |  | 5.83%              
|0                        |  | 29,545                                   |  |                              |  | 0.00%                           |  | 5.60%              
| 100                    |  | 28,311                                   |  | (1,234)                       |  | (4.18%)                         |  | 5.37%              
| 200                    |  | 27,098                                   |  | (2,447)                       |  | (8.28%)                         |  | 5.14%              

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

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

Total shareholders equity was $44.5 million at March 31, 2007, compared to $42.2
million at December 31, 2006. The increase of $2.374 million, or 5% during the first three months of 2007 was primarily due to $1.975 million in year-to-date net income, $126,000 credited to capital in relation to compensation expense
associated with the issuance of stock options and the proceeds of $167,000 from the exercise of stock options, including tax benefit.



29



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##### Table of Contents

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



|                                        |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|--------------------------------------- |  | ------------------- | ------ |  | --------------------------------------- | - |  | ------------------------------------------------------------------------------------- | ------ |  | ---- | - |  | - | ------ |  | ----- | -
|                                        |  | Actual Amount/Ratio |        |  | Minimum CapitalRequirement Amount/Ratio |   |  | Minimum To Be Well Capitalized
Under Prompt Corrective Action Provisions Amount/Ratio |       
|As of March 31, 2007:                   |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|                                        |  |                     |        |  |                                         |  
|Total capital to risk-weighted assets:  |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  | $                   | 64,383 |  | 12.79                                   | % |  | $                                                                                     | 40,257 |  | 8.00 | % |  | $ | 50,321 |  | 10.00 | %
|The Bank                                |  |                     | 62,339 |  | 12.38                                   | % |  |                                                                                       | 40,269 |  | 8.00 | % |  |   | 50,336 |  | 10.00 | %
|                                        |  |                     |        |  |                                         |  
|Tier 1 capital to risk-weighted assets: |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  |                     | 54,855 |  | 10.90                                   | % |  |                                                                                       | 20,128 |  | 4.00 | % |  |   | 30,192 |  | 6.00  | %
|The Bank                                |  |                     | 56,041 |  | 11.13                                   | % |  |                                                                                       | 20,134 |  | 4.00 | % |  |   | 30,202 |  | 6.00  | %
|                                        |  |                     |        |  |                                         |  
|Tier 1 capital to average assets:       |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  |                     | 54,855 |  | 9.86                                    | % |  |                                                                                       | 22,248 |  | 4.00 | % |  |   | 27,810 |  | 5.00  | %
|The Bank                                |  |                     | 56,041 |  | 10.09                                   | % |  |                                                                                       | 22,226 |  | 4.00 | % |  |   | 27,783 |  | 5.00  | %
|                                        |  |                     |        |  |                                         |  
|As of December 31, 2006:                |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|                                        |  |                     |        |  |                                         |  
|Total capital to risk-weighted assets:  |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  | $                   | 61,806 |  | 12.92                                   | % |  | $                                                                                     | 38,284 |  | 8.00 | % |  | $ | 47,855 |  | 10.00 | %
|The Bank                                |  |                     | 59,691 |  | 12.47                                   | % |  |                                                                                       | 38,283 |  | 8.00 | % |  |   | 47,854 |  | 10.00 | %
|                                        |  |                     |        |  |                                         |  
|Tier 1 capital to risk-weighted assets: |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  |                     | 51,827 |  | 10.83                                   | % |  |                                                                                       | 19,142 |  | 4.00 | % |  |   | 28,713 |  | 6.00  | %
|The Bank                                |  |                     | 53,701 |  | 11.22                                   | % |  |                                                                                       | 19,142 |  | 4.00 | % |  |   | 28,712 |  | 6.00  | %
|                                        |  |                     |        |  |                                         |  
|Tier 1 capital to average assets:       |  |                     |        |  |                                         |   |  |                                                                                       |        |  |      |   |  |   |        |  |       |  
|The Company                             |  |                     | 51,827 |  | 9.46                                    | % |  |                                                                                       | 21,905 |  | 4.00 | % |  |   | 27,381 |  | 5.00  | %
|The Bank                                |  |                     | 53,701 |  | 9.82                                    | % |  |                                                                                       | 21,885 |  | 4.00 | % |  |   | 27,356 |  | 5.00  | %

Of the Companys $54.9 million of Tier 1 capital at March 31, 2007, $14.8 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,
however, no assurance can be given that trust preferred securities will continue to be treated as Tier 1 capital in the future. The remaining $3.2 million of Trust Preferred Securities is included in Tier 2 capital.



30



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##### Table of Contents

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

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



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

Evaluation of Disclosure Controls and
Procedures

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

Changes in Internal Controls

There were no significant changes in the Companys internal controls over financial reporting or in other factors that occurred in the first quarter of 2007 that
have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.

PART II  OTHER INFORMATION



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

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



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

There has not been any material change in the risk
factors disclosure from that contained in the Companys 2006 Form 10-K for the fiscal year ended December 31, 2006.



|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.



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##### Table of Contents

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



|           |  |                                                                                                    
|---------- |  | ---------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description of Exhibits                                                                            
|           | 
|3.1        |  | Articles of Incorporation of the Company17                                                         
|           | 
|3.2        |  | Amendment to Articles of Incorporation of the Company18                                            
|           | 
|3.3        |  | Amendment to Articles of Incorporation of the Company19                                            
|           | 
|3.4        |  | Restated By-Laws of the Company20                                                                  
|           | 
|10.1       |  | Form of Indemnification Agreement21                                                                
|           | 
|10.2       |  | Amended and Restated Stock Incentive Plan22                                                        
|           | 
|10.3       |  | 1st Centennial Bank Employee Stock Ownership Plan (with 401(k) provisions) dated August 1, 200423  
|           | 
|10.4       |  | Employment Agreement of Beth Sanders dated December 1, 200424                                      
|           | 
|10.5       |  | Employment Agreement of Suzanne Dondanville dated December 1, 200425                               
|           | 
|10.6       |  | Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200126                   
|           | 
|10.7       |  | Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200227                     
|           | 
|10.8       |  | Salary Continuation Agreement of Clifford Schoonover dated December 17, 200228                     
|           | 
|10.9       |  | Amendment to Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200129      
|           | 
|10.10      |  | Amendment to Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200230        
|           | 
|10.11      |  | Amendment to Salary Continuation Agreement of Clifford Schoonover dated December 17, 200231        
|           | 
|10.12      |  | Salary Continuation Agreement of Thomas E. Vessey dated April 7, 200632                            
|           | 
|10.13      |  | Salary Continuation Agreement of John P. Lang dated April 7, 200633                                
|           | 
|10.14      |  | Form of Agreement between 1stCentennial Bank and Officers
with respect to Death Benefit.34         
|           | 
|10.15      |  | Indenture for Trust Preferred Securities dated September 28, 200535                                
|           | 
|10.16      |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated September 28, 200536
|           | 
|10.17      |  | Guarantee Agreement for Trust Preferred Securities dated September 28, 200537                      

---

|17 | Incorporated by reference to
exhibit of the same number on Form S-4 dated October 20, 1999.
|-- | -------------------------------------------------------------------------------------------



|18 | Incorporated by reference to
exhibit of the same number on Form 10-QSB for the quarter ended June 30, 2002.
|-- | -----------------------------------------------------------------------------------------------------------



|19 | Incorporated by reference to
exhibit of the same number on Form SB-2 dated March 13, 2003.
|-- | ------------------------------------------------------------------------------------------



|20 | Incorporated by reference to
exhibit of the same number on Form 8-K dated January 19, 2007.
|-- | -------------------------------------------------------------------------------------------



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



|22 | Incorporated by reference to
exhibit 10.10 on Form 10-KSB for the year ended December 31, 2004.
|-- | -----------------------------------------------------------------------------------------------



|23 | Incorporated by reference to
exhibit 10.9 on Form 10-KSB for the year ended December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------



|24 | Incorporated by reference to
exhibit 10.31 on Form 10-KSB for the year ended December 31, 2004.
|-- | -----------------------------------------------------------------------------------------------



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



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



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



|28 | Incorporated by reference to
exhibit 10.18 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------



|29 | Incorporated by reference to
exhibit 10.25 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------



|30 | Incorporated by reference to
exhibit 10.24 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------



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



|32 | Incorporated by reference to
exhibit 99.1 on Form 8-K dated April 11, 2006.
|-- | ---------------------------------------------------------------------------



|33 | Incorporated by reference to
exhibit 99.1 on Form 8-K dated April 11, 2006.
|-- | ---------------------------------------------------------------------------



|34 | Incorporated by reference to
exhibit 99.1 on Form 8-K dated November 3, 2006.
|-- | -----------------------------------------------------------------------------



|35 | Incorporated by reference to
exhibit 10.35 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------



|36 | Incorporated by reference to
exhibit 10.36 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------



|37 | Incorporated by reference to
exhibit 10.37 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------



32



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##### Table of Contents

|      |  |                                                                                                  
|----- |  | -------------------------------------------------------------------------------------------------
|      | 
|10.18 |  | Indenture for Trust Preferred Securities dated January 15, 200438                                
|      | 
|10.19 |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated January 15, 200439
|      | 
|10.20 |  | Guarantee Agreement for Trust Preferred Securities dated January 15, 200440                      
|      | 
|10.21 |  | Indenture for Trust Preferred Securities dated July 11, 200241                                   
|      | 
|10.22 |  | Amended and Restated Declaration of Trust for trust preferred securities dated July 11, 200242   
|      | 
|10.23 |  | Guarantee Agreement for Trust Preferred Securities dated July 11, 200243                         
|      | 
|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)                           

---

|38 | Incorporated by reference to exhibit 10.25 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------



|39 | Incorporated by reference to exhibit 10.26 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------



|40 | Incorporated by reference to exhibit 10.27 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------



|41 | Incorporated by reference to exhibit 10.17 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------



|42 | Incorporated by reference to exhibit 10.18 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------



|43 | Incorporated by reference to exhibit 10.19 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------



33



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##### Table of Contents

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 3rdday of May 2007.



1ST CENTENNIAL BANCORP/s/ Thomas E. VesseyThomas E. VesseyPresident and Chief Executive Officer/s/ Beth SandersBeth SandersExecutive Vice President and Chief Financial Officer




34