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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 June 30, 2007

Commission file number: 000-29105



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1stCENTENNIAL BANCORP

(Exact Name of Registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 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  x    No ̈

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

Large
accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

The number of shares of Common Stock of the registrant outstanding as of August 6, 2007 was 4,867,524.



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |         |  |                                                                                       |  |     
|----------------------------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |         |  |                                                                                       |  | PAGE
|                              |  | ITEM    |  |                                                                                       |  |     
|                              | 
|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                            |  | 35  
|                              |  |         | 
|                              |  | ITEM 4  |  | Controls and Procedures                                                               |  | 35  
|                              | 
|PART II  Other Information   |  |        
|                              |  |         | 
|                              |  | ITEM 1  |  | Legal Proceedings                                                                     |  | 35  
|                              |  |         | 
|                              |  | ITEM 1A |  | Risk Factors                                                                          |  | 35  
|                              |  |         | 
|                              |  | ITEM 2  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 35  
|                              |  |         | 
|                              |  | ITEM 3  |  | Defaults Upon Senior Securities                                                       |  | 35  
|                              |  |         | 
|                              |  | ITEM 4  |  | Submission of Matters to a Vote of Security Holders                                   |  | 36  
|                              |  |         | 
|                              |  | ITEM 5  |  | Other Information                                                                     |  | 36  
|                              |  |         | 
|                              |  | ITEM 6  |  | Exhibits                                                                              |  | 37  
|                              |  |         | 
|                              |  |         |  | Signatures                                                                            |  | 39  



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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

June 30, 2007 and December 31, 2006



|                                                                                                                                                                     |  |             |         |   |      |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ---- | - | -------
|Dollar amounts in thousands                                                                                                                                          |  | 2007        |         |   | 2006
|                                                                                                                                                                     |  | (unaudited) |         |   |     
|ASSETS                                                                                                                                                               |  |             |         |   |      |   |        
|Cash and due from banks                                                                                                                                              |  | $           | 13,223  |   |      | $ | 18,385 
|Federal funds sold                                                                                                                                                   |  |             | 13,460  |   |      |   | 2,900  
|                                                                                                                                                                     |  |             |         |   |      |   |        
|Total cash and cash equivalents                                                                                                                                      |  |             | 26,683  |   |      |   | 21,285 
|Interest-bearing deposits in financial institutions                                                                                                                  |  |             | 1,943   |   |      |   | 2,922  
|Investment securities, available for sale                                                                                                                            |  |             | 75,880  |   |      |   | 72,649 
|Stock investments restricted, at cost                                                                                                                                |  |             | 1,972   |   |      |   | 1,681  
|Loans, net of allowance for loan losses of $6,100 and $5,741                                                                                                         |  |             | 457,497 |   |      |   | 426,200
|Accrued interest receivable                                                                                                                                          |  |             | 3,585   |   |      |   | 3,469  
|Premises and equipment, net                                                                                                                                          |  |             | 3,008   |   |      |   | 3,152  
|Goodwill                                                                                                                                                             |  |             | 4,180   |   |      |   | 4,180  
|Cash surrender value of life insurance                                                                                                                               |  |             | 11,864  |   |      |   | 11,639 
|Other assets                                                                                                                                                         |  |             | 5,344   |   |      |   | 3,950  
|                                                                                                                                                                     |  |             |         |   |      |   |        
|Total assets                                                                                                                                                         |  | $           | 591,956 |   |      | $ | 551,127
|                                                                                                                                                                     |  |             |         |   |      |   |        
|LIABILITIES                                                                                                                                                          |  |             |         |   |      |   |        
|Deposits:                                                                                                                                                            |  |             |         |   |      |   |        
|Noninterest-bearing demand deposits                                                                                                                                  |  | $           | 107,561 |   |      | $ | 111,154
|Interest-bearing deposits                                                                                                                                            |  |             | 385,827 |   |      |   | 345,309
|                                                                                                                                                                     |  |             |         |   |      |   |        
|Total deposits                                                                                                                                                       |  |             | 493,388 |   |      |   | 456,463
|Accrued interest payable                                                                                                                                             |  |             | 451     |   |      |   | 432    
|Repurchase agreement                                                                                                                                                 |  |             | 30,000  |   |      |   | 30,000 
|Other liabilities                                                                                                                                                    |  |             | 3,875   |   |      |   | 3,729  
|Subordinated notes payable to subsidiary trusts                                                                                                                      |  |             | 18,306  |   |      |   | 18,306 
|                                                                                                                                                                     |  |             |         |   |      |   |        
|Total liabilities                                                                                                                                                    |  |             | 546,020 |   |      |   | 508,930
|                                                                                                                                                                     |  |             |         |   |      |   |        
|SHAREHOLDERS' EQUITY                                                                                                                                                 |  |             |         |   |      |   |        
|Common stock, no par value; authorized 10,000,000 shares, issued and outstanding 4,856,866 and 3,212,215 shares at June 30, 2007 and
December 31, 2006, respectively |  |             | 28,592  |   |      |   | 27,998 
|Retained earnings                                                                                                                                                    |  |             | 18,153  |   |      |   | 14,038 
|Accumulated other comprehensive income (loss)                                                                                                                        |  |             | (809    | ) |      |   | 161    
|                                                                                                                                                                     |  |             |         |   |      |   |        
|Total shareholders' equity                                                                                                                                           |  |             | 45,936  |   |      |   | 42,197 
|                                                                                                                                                                     |  |             |         |   |      |   |        
|Total liabilities and shareholders' equity                                                                                                                           |  | $           | 591,956 |   |      | $ | 551,127
|                                                                                                                                                                     |  |             |         |   |      |   |        

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



2



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##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

Three and Six Months Ended June 30, 2007 and 2006
(unaudited)



|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|----------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|                                                      |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|Dollar amounts in thousands, except per share amounts |  | 2007                       |        | 2006                     |   | 2007  |  | 2006
|Interest income:                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Loans, including fees                                 |  | $                          | 10,804 |                          | $ | 9,316 |  | $    | 21,176 |  | $ | 17,874
|Deposits in financial institutions                    |  |                            | 29     |                          |   | 31    |  |      | 66     |  |   | 59    
|Federal funds sold                                    |  |                            | 94     |                          |   | 281   |  |      | 216    |  |   | 552   
|Investments                                           |  |                            |        |                          |   |       |  |      |        |  |   |       
|Taxable                                               |  |                            | 691    |                          |   | 101   |  |      | 1,372  |  |   | 196   
|Tax-exempt                                            |  |                            | 249    |                          |   | 70    |  |      | 494    |  |   | 110   
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Total interest income                                 |  |                            | 11,867 |                          |   | 9,799 |  |      | 23,324 |  |   | 18,791
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Interest expense:                                     |  |                            |        |                          |   |       |  |      |        |  |   |       
|Interest bearing demand and savings deposits          |  |                            | 1,664  |                          |   | 1,427 |  |      | 3,213  |  |   | 2,589 
|Time deposits $100,000 or greater                     |  |                            | 1,055  |                          |   | 500   |  |      | 1,979  |  |   | 939   
|Other time deposits                                   |  |                            | 979    |                          |   | 481   |  |      | 1,869  |  |   | 924   
|Interest on borrowed funds                            |  |                            | 854    |                          |   | 356   |  |      | 1,663  |  |   | 695   
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Total interest expense                                |  |                            | 4,552  |                          |   | 2,764 |  |      | 8,724  |  |   | 5,147 
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Net interest income                                   |  |                            | 7,315  |                          |   | 7,035 |  |      | 14,600 |  |   | 13,644
|Provision for loan losses                             |  |                            | 300    |                          |   | 155   |  |      | 400    |  |   | 620   
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Net interest income after provision for loan losses   |  |                            | 7,015  |                          |   | 6,880 |  |      | 14,200 |  |   | 13,024
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Noninterest income:                                   |  |                            |        |                          |   |       |  |      |        |  |   |       
|Customer service fees                                 |  |                            | 433    |                          |   | 449   |  |      | 832    |  |   | 830   
|Gains from sale of loans                              |  |                            | 243    |                          |   | 52    |  |      | 273    |  |   | 317   
|Conduit loan referral income                          |  |                            | 382    |                          |   | 63    |  |      | 637    |  |   | 558   
|Other income                                          |  |                            | 197    |                          |   | 174   |  |      | 419    |  |   | 254   
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Total noninterest income                              |  |                            | 1,255  |                          |   | 738   |  |      | 2,161  |  |   | 1,959 
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Noninterest expense:                                  |  |                            |        |                          |   |       |  |      |        |  |   |       
|Salaries and employee benefits                        |  |                            | 2,668  |                          |   | 2,465 |  |      | 5,362  |  |   | 4,952 
|Net occupancy expense                                 |  |                            | 560    |                          |   | 571   |  |      | 1,148  |  |   | 1,122 
|Other operating expense                               |  |                            | 1,582  |                          |   | 1,616 |  |      | 3,238  |  |   | 3,112 
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Total noninterest expense                             |  |                            | 4,810  |                          |   | 4,652 |  |      | 9,748  |  |   | 9,186 
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Income before provision for income taxes              |  |                            | 3,460  |                          |   | 2,966 |  |      | 6,613  |  |   | 5,797 
|Provision for income taxes                            |  |                            | 1,314  |                          |   | 1,119 |  |      | 2,492  |  |   | 2,234 
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Net income                                            |  | $                          | 2,146  |                          | $ | 1,847 |  | $    | 4,121  |  | $ | 3,563 
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Basic earnings per share1                             |  | $                          | 0.44   |                          | $ | 0.39  |  | $    | 0.85   |  | $ | 0.75  
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       
|Diluted earnings per share1                           |  | $                          | 0.40   |                          | $ | 0.35  |  | $    | 0.77   |  | $ | 0.68  
|                                                      |  |                            |        |                          |   |       |  |      |        |  |   |       

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



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



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1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Six Months Ended June 30, 2007 and 2006
(unaudited)

Dollar amounts in thousands, except share amounts



|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | --------- | - |  | ----------- | ------ | ---------------- | - | ------ | ------------------------------------------ |  | - | ----- | - |  | - | ------ | -
|                                                                                             |  | Shares    |   |  | CommonStock |        | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total |  
|BALANCE, DECEMBER 31, 2005                                                                   |  | 2,100,075 |   |  | $           | 26,803 |                  | $ | 6,617  |                                            |  | $ | 1     |   |  | $ | 33,421 |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |   |  |             |       |                  |   | 3,563  |                                            |  |   |      |   |  |   | 3,563  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |                  |   |       |                                            |  |   | (130  | ) |  |   | (130   | )
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   | 3,433  |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Stock Distribution                                                                           |  | 1,062,656 |   |  |             |       |                  |   |       |                                            |  |   |      |   |  |   |       |  
|Cash paid in lieu of fractional shares                                                       |  |          |   |  |             |       |                  |   | (6     | )                                          |  |   |      |   |  |   | (6     | )
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 255    |                  |   |       |                                            |  |   |      |   |  |   | 255    |  
|Retirement of unvested restricted stock awards                                               |  | (578      | ) |  |             |       |                  |   |       |                                            |  |   |      |   |  |   |       |  
|Exercise of stock options, including tax benefit                                             |  | 38,508    |   |  |             | 475    |                  |   |       |                                            |  |   |      |   |  |   | 475    |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE, JUNE 30, 2006                                                                       |  | 3,200,661 |   |  | $           | 27,533 |                  | $ | 10,174 |                                            |  | $ | (129  | ) |  | $ | 37,578 |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE, DECEMBER 31, 2006                                                                   |  | 3,212,215 |   |  | $           | 27,998 |                  | $ | 14,038 |                                            |  | $ | 161   |   |  | $ | 42,197 |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Comprehensive income:                                                                        |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Net income                                                                                   |  |          |   |  |             |       |                  |   | 4,121  |                                            |  |   |      |   |  |   | 4,121  |  
|Change in net unrealized gain on investment securities available for sale, after tax effects |  |          |   |  |             |       |                  |   |       |                                            |  |   | (970  | ) |  |   | (970   | )
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                   |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   | 3,151  |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|Stock Distribution                                                                           |  | 1,614,406 |   |  |             |       |                  |   |       |                                            |  |   |      |   |  |   |       |  
|Cash paid in lieu of fractional shares                                                       |  |          |   |  |             |       |                  |   | (6     | )                                          |  |   |      |   |  |   | (6     | )
|Compensation expense on incentive stock options                                              |  |          |   |  |             | 301    |                  |   |       |                                            |  |   |      |   |  |   | 301    |  
|Exercise of stock options, including tax benefit                                             |  | 30,245    |   |  |             | 293    |                  |   |       |                                            |  |   |      |   |  |   | 293    |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  
|BALANCE, JUNE 30, 2007                                                                       |  | 4,856,866 |   |  | $           | 28,592 |                  | $ | 18,153 |                                            |  | $ | (809  | ) |  | $ | 45,936 |  
|                                                                                             |  |           |   |  |             |        |                  |   |        |                                            |  |   |       |   |  |   |        |  

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



4



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##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2007 and 2006 (unaudited)



|                                                                                          |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Dollar amounts in thousands                                                               |  | 2007 |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                      |  |      |         |   |      |   |         |  
|Net income                                                                                |  | $    | 4,121   |   |      | $ | 3,563   |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                             |  |      | 326     |   |      |   | 353     |  
|Gain on sale of fixed assets                                                              |  |      |        |   |      |   | (7      | )
|Gain from sale of investments                                                             |  |      | (34     | ) |      |   |        |  
|Provision for loan losses                                                                 |  |      | 400     |   |      |   | 620     |  
|Amortization of deferred loan fees                                                        |  |      | (655    | ) |      |   | (956    | )
|Amortization of excess purchase value of deposits                                         |  |      |        |   |      |   | 7       |  
|Fair value of stock options and restricted stock awards in noninterest expense            |  |      | 319     |   |      |   | 273     |  
|Deferred income tax (benefit) provision                                                   |  |      | (686    | ) |      |   | 98      |  
|Net amortization of premiums and (discounts) on investments and interest-bearing deposits |  |      | (46     | ) |      |   | 72      |  
|Increase in cash surrender value of life insurance                                        |  |      | (225    | ) |      |   | (165    | )
|Change in:                                                                                |  |      |         |   |      |   |         |  
|Accrued interest receivable                                                               |  |      | (116    | ) |      |   | (70     | )
|Other assets                                                                              |  |      | (738    | ) |      |   | (358    | )
|Accrued interest payable                                                                  |  |      | 19      |   |      |   | 22      |  
|Other liabilities                                                                         |  |      | 128     |   |      |   | 171     |  
|                                                                                          |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                                 |  |      | 2,813   |   |      |   | 3,623   |  
|                                                                                          |  |      |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                      |  |      |         |   |      |   |         |  
|Net decrease (increase) in interest-bearing deposits in financial institutions            |  |      | 1,027   |   |      |   | (132    | )
|Activity in available for sale securities:                                                |  |      |         |   |      |   |         |  
|Purchases of securities                                                                   |  |      | (9,760  | ) |      |   | (7,190  | )
|Proceeds from sales, maturities and principal repayments of securities                    |  |      | 5,621   |   |      |   | 1,925   |  
|Purchases of Federal Home Loan Bank stock                                                 |  |      | (291    | ) |      |   | (30     | )
|Net increase in loans                                                                     |  |      | (30,273 | ) |      |   | (29,262 | )
|Acquisition of other real estate owned                                                    |  |      | (769    | ) |      |   |        |  
|Additions to bank premises and equipment                                                  |  |      | (182    | ) |      |   | (85     | )
|Purchases of life insurance                                                               |  |      |        |   |      |   | (4,500  | )
|                                                                                          |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                                     |  |      | (34,627 | ) |      |   | (39,274 | )
|                                                                                          |  |      |         |   |      |   |         |  

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



5



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##### Table of Contents

1STCENTENNIAL BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS
OF CASH FLOWS (continued)

Six Months Ended June 30, 2007 and 2006 (unaudited)



|                                                                           |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|Dollar amounts in thousands                                                |  | 2007 |        |   | 2006 |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                       |  |      |        |   |      |   |        |  
|Net increase (decrease) in noninterest-bearing demand deposits             |  |      | (3,593 | ) |      |   | 3,640  |  
|Net increase in interest-bearing deposits                                  |  |      | 40,518 |   |      |   | 27,029 |  
|Cash paid in lieu of fractional shares                                     |  |      | (6     | ) |      |   | (6     | )
|Proceeds from exercise of stock options                                    |  |      | 293    |   |      |   | 475    |  
|                                                                           |  |      |        |   |      |   |        |  
|Net cash provided by financing activities                                  |  |      | 37,212 |   |      |   | 31,138 |  
|                                                                           |  |      |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                       |  |      | 5,398  |   |      |   | (4,513 | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                             |  |      | 21,285 |   |      |   | 38,367 |  
|                                                                           |  |      |        |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                   |  | $    | 26,683 |   |      | $ | 33,854 |  
|                                                                           |  |      |        |   |      |   |        |  
|SUPPLEMENTAL INFORMATION:                                                  |  |      |        |   |      |   |        |  
|Interest paid                                                              |  | $    | 8,705  |   |      | $ | 5,118  |  
|                                                                           |  |      |        |   |      |   |        |  
|Income taxes paid                                                          |  | $    | 2,230  |   |      | $ | 2,537  |  
|                                                                           |  |      |        |   |      |   |        |  
|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

June 30, 2007

Note 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of
Business

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

Basis of Presentation

The unaudited financial information
included herein has been prepared in conformity with the accounting principles and practices disclosed in the consolidated financial statements, Note 1, included in the Companys Annual Report on Form 10-K, for the year ended December 31,
2006 filed with the Securities and Exchange commission. The accompanying interim consolidated financial statements contained herein are unaudited. However, in the opinion of the Company, all adjustments, consisting of normal recurring items
necessary for a fair presentation of the operating results for the periods shown, have been made. The results of operations for the three and six months ended June 30, 2007 may not be indicative of operating results for the full year ending
December 31, 2007. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications including the reclassification of brokered certificates of deposits from greater than $100,000 to other time deposits
that are in groups of large master certificates but are made up of individual time deposits of $1,000 each.

As of June 30, 2007 and December 31,
2006, $47.8 million and $34.4 million respectively, represented such brokered time deposits and were reclassified.

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.



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##### Table of Contents

Note 3. EARNINGS PER SHARE2

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

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

Earnings per share calculation

For the three months ended
June 30,

(In thousands, except per share amounts)



|                                        |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|--------------------------------------- |  | --------- | ----- | --------------------- | ----- | --------------- | - | ----- | --------- |  | --------------------- | ----- | --------------- | ----- |  | - | ----- | -
|                                        |  | 2007      |       |                       | 2006  |                
|                                        |  | NetIncome |       | Weightedaverageshares |       | Per shareamount |   |       | NetIncome |  | Weightedaverageshares |       | Per shareamount |      
|Basic earnings per share                |  | $         | 2,146 |                       | 4,843 |                 | $ | 0.44  |           |  | $                     | 1,847 |                 | 4,784 |  | $ | 0.39  |  
|Effect of dilutive shares:              |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|assumed exercise of outstanding options |  |           |      |                       | 541   |                 |   | (0.04 | )         |  |                       |      |                 | 510   |  |   | (0.04 | )
|Diluted earnings per share              |  | $         | 2,146 |                       | 5,384 |                 | $ | 0.40  |           |  | $                     | 1,847 |                 | 5,294 |  | $ | 0.35  |  

Earnings per share calculation

For the six months ended June 30,

(In thousands, except per share amounts)



|                                        |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|--------------------------------------- |  | --------- | ----- | --------------------- | ----- | --------------- | - | ----- | --------- |  | --------------------- | ----- | --------------- | ----- |  | - | ----- | -
|                                        |  | 2007      |       |                       | 2006  |                
|                                        |  | NetIncome |       | Weightedaverageshares |       | Per shareamount |   |       | NetIncome |  | Weightedaverageshares |       | Per shareamount |      
|Basic earnings per share                |  | $         | 4,121 |                       | 4,831 |                 | $ | 0.85  |           |  | $                     | 3,563 |                 | 4,766 |  | $ | 0.75  |  
|Effect of dilutive shares:              |  |           |       |                       |       |                 |   |       |           |  |                       |       |                 |       |  |   |       |  
|assumed exercise of outstanding options |  |           |      |                       | 541   |                 |   | (0.08 | )         |  |                       |      |                 | 510   |  |   | (0.07 | )
|Diluted earnings per share              |  | $         | 4,121 |                       | 5,372 |                 | $ | 0.77  |           |  | $                     | 3,563 |                 | 5,276 |  | $ | 0.68  |  



---

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



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##### Table of Contents

Note 4. OFF-BALANCE SHEET COMMITMENTS

Commitments to extend credit are agreements to lend to customers, provided there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Commitments 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.

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

Off-Balance sheet commitments



|                                      |  |                        |         |                  |   |        
|------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                      |  | June 30, 2007          |         | December 31,2006
|                                      |  | (Dollars in Thousands)
|Standby letters of credit             |  | $                      | 4,542   |                  | $ | 3,231  
|Undisbursed loans and lines of credit |  |                        | 181,703 |                  |   | 223,201
|Available credit card lines           |  |                        | 3,449   |                  |   | 3,060  
|                                      |  |                        |         |                  |   |        
|Total off-balance sheet commitments   |  | $                      | 189,694 |                  | $ | 229,492
|                                      |  |                        |         |                  |   |        

Note 5. SUBSEQUENT EVENT

Effective July 20, 2007, 1stCentennial Bank (the Bank), a wholly-owned subsidiary of 1st Centennial Bancorp (the Company), entered into a Director Deferred Compensation Plan/Agreement (the Plan/Agreement),
with each of the following non-employee directors: James R. Appleton, Bruce J. Bartells, Carole H. Beswick, Larry Jacinto, Ronald J. Jeffrey, William A. McCalmon, Patrick J. Meyer, Stanley C. Weisser and Douglas F. Welebir. The plan/agreement
provides for payments of $25,000 per year for ten years to each of the named directors (or designated beneficiaries) at the earlier of age 73 or after 5 years from July 20, 2007. It is expected that the expense accruals associated with the
plan/agreement will be entirely offset by earnings on the purchase of $2.417 million in single premium life insurance, although no assurance can be made in that regard.

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



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##### 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 and six months ended June 30, 2007 and 2006, and the financial condition of the Company as of
June 30, 2007 and December 31, 2006.

Managements discussion and analysis is written to provide greater insight into the results of
operations and the financial condition of the Company and its subsidiary. For a more complete understanding of the Company and its operations, reference should be made to the 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 June 30, 2007 was adequate to absorb losses inherent in the loan portfolio, a decline in the local economy may result in increasing losses that cannot reasonably
be predicted at this time.



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##### Table of Contents

SUMMARY OF PERFORMANCE

Results of operations summary

Second quarter analysis. Net income for the quarter ended June 30, 2007 was $2.1 million,
which is $299,000 or 16% higher than net income of $1.8 million for the same period in 2006. Basic and diluted earnings per share were $0.44 and $0.40 respectively, for the three months ended June 30, 2007, as compared to $0.39 and $0.35
respectively, for the same period in 2006. Earnings per share calculations were adjusted to give retroactive effect to stock dividends and distributions, including the 50% stock distribution paid on May 15, 2007 to shareholders of record as of
May 1, 2007. Return on average assets and return on average equity for the three months ended June 30, 2007 were 1.54% and 20.03% respectively, as compared to 1.56% and 20.09% respectively, for the same period in 2006.

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



| |  |  | Conduit loan referral income increased $319,000 or 506% as a result of more referrals during the second quarter of 2007 as compared to the same period in 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gains from the sale of loans increased by $191,000 or 367%, which resulted from more loans sold during the second quarter of 2007, when compared to 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Salaries and employee benefits increased $203,000 or 8% as a result of the Companys growth, coupled with salary increases.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

Six-month analysis. Net income for the six months ended June 30, 2007 was $4.1 million, which is $558,000 or 16% higher than net income of $3.6 million for
the same period in 2006. Basic and diluted earnings per share were $0.85 and $0.77 respectively, for the six months ended June 30, 2007, as compared to $0.75 and $0.68 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 six months ended June 30, 2007 were 1.45% and 18.65% respectively, as compared to 1.48% and 18.87% respectively, for the same period in 2006.

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



| |  |  | Net interest income before the provision for loan losses increased by $956,000 or 7%, primarily due to the increase in average total loans.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Salaries and employee benefits increased $410,000 or 8% as a result of the Companys growth, coupled with salary increases.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

Financial Condition Summary

The Companys total assets
were $591.9 million at June 30, 2007, an increase of $40.8 million, or 7%, 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 six months of
2007 are outlined below:



| |  |  | Net loans increased $31.3 million or 7% from December 31, 2006. Strong loan demand in the Companys market areas contributed to the increase in net loans.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Federal funds sold increased $10.6 million or 364% from December 31, 2006 due to an improved liquidity position.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Interest-bearing deposits increased $40.5 million or 12% 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | The investment security portfolio had a net unrealized loss of $1.3 million at June 30, 2007 compared to a net unrealized gain of $270,000 at December 31,
2006. This deterioration is due to market interest rate movements rather than changes in credit quality, and is therefore deemed to be temporary.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS

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

NET INTEREST INCOME/NET INTEREST MARGIN

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

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

Second quarter analysis. The Companys net interest margin as of the quarter ended June 30, 2007 was 5.36% compared to 6.36% 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 June 30, 2006 to June 30, 2007 the percentage of total average interest bearing deposits represented by time deposits increased to 46% from 33%. The shift in this average deposit mix also
contributed to the reduction of the net interest margin as of the three months ended June 30, 2007 when compared to the same period in 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 quarter ended June 30, 2007, total interest-earning assets averaged $547.3 million, which represented an increase of $103.7 million or 23%, as compared to
$443.6 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 $423.5 million, which represented an increase of $94.0 million or 29%, as compared to $329.5 million for the same period in
2006. This increase is primarily attributable to the increase in time deposits, coupled with the addition of the $30 million repurchase agreement.

The
Company reported total interest income of $11.9 million for the three months ended June 30, 2007, which represented an increase of $2.1 million or 21%, over total interest income of $9.8 million for the same period in 2006. The increase is
primarily the result of increases in interest and fees on loans of approximately $1.5 million that resulted from an increase of $61.1 million in average loans for the three months ended June 30, 2007, as compared to the same period in 2006.

The Company reported total interest expense of $4.6 million for the three months ended June 30, 2007, which represented an increase of $1.8 million
or 65%, over total interest expense of $2.8 million for the same period in 2006. The increase is primarily attributable to an increase in the average balance of time deposits, coupled with the addition of the $30 million repurchase agreement.



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##### Table of Contents

For the three months ended June 30, 2007, net interest income before provision for loan losses was $7.3 million,
which represented an increase of $280,000 or 4%, over net interest income before provision for loan losses of $7.0 million for the same period in 2006. The increase in net interest income for the three months ended June 30, 2007 as compared to
2006 was primarily due to the increase in average total loans.

Six-month analysis. The Companys year-to-date net interest margin as of
June 30, 2007 was 5.48% compared to 6.29% 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 June 30, 2006 to June 30, 2007 the percentage of total average interest bearing deposits represented by time deposits increased to
45% from 33%. The shift in this average deposit mix also contributed to the reduction of the net interest margin in the first six months of 2007 versus 2006.

For the first six months of 2007, total interest-earning assets averaged $537.3 million, which represented an increase of $99.5 million or 23%, as compared to $437.8 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 $414.8 million, which represented an increase of $90.6 million or 28%, as compared to $324.2 million for the same period in 2006. This increase is primarily attributable to the increase in time deposits,
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 $23.3 million for the six months ended June 30, 2007, which represented an increase of $4.5 million or 24%, over total interest income of $18.8 million for the same
period in 2006. The increase for the six months ended June 30, 2007, when compared to the same period in 2006 is primarily the result of increases in interest and fees on loans of approximately $3.3 million that resulted from an increase of
$54.5 million in average loans, coupled with the increase of $1.2 million in interest income on taxable investments that resulted in part from the addition of the $30 million FNMA U.S. agency security that settled during the third quarter of 2006.

The Company reported total interest expense of $8.7 million for the six months ended June 30, 2007, which represented an increase of $3.6 million or
70%, over total interest expense of $5.1 million for the same period in 2006. The increase is primarily attributable to an increase in the average balance of time deposits, coupled with the addition of the $30 million repurchase agreement.

For the six months ended June 30, 2007, net interest income before provision for loan losses was $14.6 million, which represented an increase of
$956,000 or 7%, over net interest income before provision for loan losses of $13.6 million for the same period in 2006. The increase in net interest income for the first six months of 2007 as compared to 2006 was primarily due to the increase in
average total loans.



13



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##### Table of Contents

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

Distribution, Yield and Rate3Analysis of Net Interest Income



|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|--------------------------------------------------- |  | ------------------------------------ | ------- | ------------------------ | ---- | ------------------ |  | ---- | -------------- |  | ------------------------ | ------- | ------------------ | - | ----- |  | ---- | -
|                                                    |  | For the Three Months Ending June 30, |        
|                                                    |  | 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                                  |  | $                                    | 7,404   |                          | $    | 94                 |  | 5.09 | %              |  | $                        | 23,179  |                    | $ | 281   |  | 4.86 | %
|Interest-bearing deposits in financial institutions |  |                                      | 2,305   |                          |      | 29                 |  | 5.05 | %              |  |                          | 2,429   |                    |   | 31    |  | 5.12 | %
|Investment securities:4                             |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Taxable                                             |  |                                      | 50,549  |                          |      | 691                |  | 5.48 | %              |  |                          | 8,772   |                    |   | 101   |  | 4.62 | %
|Non-taxable                                         |  |                                      | 23,791  |                          |      | 249                |  | 4.20 | %              |  |                          | 6,532   |                    |   | 70    |  | 4.30 | %
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total investments                                   |  |                                      | 84,049  |                          |      | 1,063              |  | 5.07 | %              |  |                          | 40,912  |                    |   | 483   |  | 4.74 | %
|Loans5                                              |  |                                      | 463,223 |                          |      | 10,804             |  | 9.36 | %              |  |                          | 402,661 |                    |   | 9,316 |  | 9.28 | %
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total interest-earning assets                       |  | $                                    | 547,272 |                          |      | 11,867             |  | 8.70 | %              |  | $                        | 443,573 |                    |   | 9,799 |  | 8.86 | %
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Interest-bearing Liabilities:                       |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Interest-bearing deposits                           |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Interest-bearing demand deposits                    |  | $                                    | 20,051  |                          |      | 17                 |  | 0.34 | %              |  | $                        | 27,693  |                    |   | 23    |  | 0.33 | %
|Money market deposits                               |  |                                      | 168,081 |                          |      | 1,620              |  | 3.87 | %              |  |                          | 160,356 |                    |   | 1,347 |  | 3.37 | %
|Savings deposits                                    |  |                                      | 13,121  |                          |      | 27                 |  | 0.83 | %              |  |                          | 21,383  |                    |   | 57    |  | 1.07 | %
|Time deposits $100,000 or greater                   |  |                                      | 87,820  |                          |      | 1,055              |  | 4.82 | %              |  |                          | 51,771  |                    |   | 500   |  | 3.87 | %
|Other time deposits                                 |  |                                      | 83,294  |                          |      | 979                |  | 4.71 | %              |  |                          | 50,043  |                    |   | 481   |  | 3.86 | %
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total interest-bearing deposits                     |  |                                      | 372,367 |                          |      | 3,698              |  | 3.98 | %              |  |                          | 311,246 |                    |   | 2,408 |  | 3.10 | %
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|FHLB borrowings                                     |  |                                      | 1,703   |                          |      | 23                 |  | 5.42 | %              |  |                          |        |                    |   |      |  | 0.00 | %
|Federal funds purchased                             |  |                                      | 1,170   |                          |      | 15                 |  | 5.14 | %              |  |                          |        |                    |   |      |  | 0.00 | %
|Repurchase agreement                                |  |                                      | 30,000  |                          |      | 446                |  | 5.96 | %              |  |                          |        |                    |   |      |  | 0.00 | %
|Subordinated notes payable to subsidiary trusts     |  |                                      | 18,306  |                          |      | 370                |  | 8.11 | %              |  |                          | 18,306  |                    |   | 356   |  | 7.80 | %
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total borrowings                                    |  |                                      | 51,179  |                          |      | 854                |  | 6.69 | %              |  |                          | 18,306  |                    |   | 356   |  | 7.80 | %
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Total interest-bearing liabilities                  |  | $                                    | 423,546 |                          |      | 4,552              |  | 4.31 | %              |  | $                        | 329,552 |                    |   | 2,764 |  | 3.36 | %
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Net interest income                                 |  |                                      |         |                          | $    | 7,315              |  |      |                |  |                          |         |                    | $ | 7,035 |  |      |  
|                                                    |  |                                      |         |                          |      |                    |  |      |                |  |                          |         |                    |   |       |  |      |  
|Net interest margin6                                |  |                                      |         |                          |      |                    |  | 5.36 | %              |  |                          |         |                    |   |       |  | 6.36 | %



---

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

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

|5 | Loans are gross, which excludes the allowance for loan losses, and net of deferred
fees. Nonaccrual loans are included in the table for computation purposes, but the foregone interest on such loans is excluded.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



14



---

##### Table of Contents

Distribution, Yield and Rate7Analysis of Net Interest Income



|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|--------------------------------------------------- |  | ---------------------------------- | ------- | ------------------------ | ---- | ------------------ |  | ---- | -------------- |  | ------------------------ | ------- | ------------------ | - | ------ |  | ---- | -
|                                                    |  | For the Six Months Ending June 30, |        
|                                                    |  | 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                                  |  | $                                  | 8,334   |                          | $    | 216                |  | 5.23 | %              |  | $                        | 23,774  |                    | $ | 552    |  | 4.68 | %
|Interest-bearing deposits in financial institutions |  |                                    | 2,617   |                          |      | 66                 |  | 5.09 | %              |  |                          | 2,385   |                    |   | 59     |  | 4.99 | %
|Investment securities:8                             |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Taxable                                             |  |                                    | 50,428  |                          |      | 1,372              |  | 5.49 | %              |  |                          | 8,672   |                    |   | 196    |  | 4.56 | %
|Non-taxable                                         |  |                                    | 23,651  |                          |      | 494                |  | 4.21 | %              |  |                          | 5,144   |                    |   | 110    |  | 4.31 | %
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Total investments                                   |  |                                    | 85,030  |                          |      | 2,148              |  | 5.09 | %              |  |                          | 39,975  |                    |   | 917    |  | 4.63 | %
|Loans9                                              |  |                                    | 452,300 |                          |      | 21,176             |  | 9.44 | %              |  |                          | 397,762 |                    |   | 17,874 |  | 9.06 | %
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Total interest-earning assets                       |  | $                                  | 537,330 |                          |      | 23,324             |  | 8.75 | %              |  | $                        | 437,737 |                    |   | 18,791 |  | 8.66 | %
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Interest-bearing Liabilities:                       |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Interest-bearing deposits                           |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Interest-bearing demand deposits                    |  | $                                  | 22,222  |                          |      | 40                 |  | 0.36 | %              |  | $                        | 27,252  |                    |   | 45     |  | 0.33 | %
|Money market deposits                               |  |                                    | 164,903 |                          |      | 3,117              |  | 3.81 | %              |  |                          | 154,003 |                    |   | 2,428  |  | 3.18 | %
|Savings deposits                                    |  |                                    | 13,437  |                          |      | 56                 |  | 0.84 | %              |  |                          | 23,508  |                    |   | 116    |  | 1.00 | %
|Time deposits $100,000 or greater                   |  |                                    | 83,160  |                          |      | 1,979              |  | 4.80 | %              |  |                          | 50,313  |                    |   | 939    |  | 3.76 | %
|Other time deposits                                 |  |                                    | 81,107  |                          |      | 1,869              |  | 4.65 | %              |  |                          | 50,803  |                    |   | 924    |  | 3.67 | %
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Total interest-bearing deposits                     |  |                                    | 364,829 |                          |      | 7,061              |  | 3.90 | %              |  |                          | 305,879 |                    |   | 4,452  |  | 2.94 | %
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|FHLB borrowings                                     |  |                                    | 856     |                          |      | 23                 |  | 5.42 | %              |  |                          |        |                    |   |       |  | 0.00 | %
|Federal funds purchased                             |  |                                    | 823     |                          |      | 22                 |  | 5.39 | %              |  |                          |        |                    |   |       |  | 0.00 | %
|Repurchase agreement                                |  |                                    | 30,000  |                          |      | 883                |  | 5.94 | %              |  |                          |        |                    |   |       |  | 0.00 | %
|Subordinated notes payable to subsidiary trusts     |  |                                    | 18,306  |                          |      | 735                |  | 8.10 | %              |  |                          | 18,306  |                    |   | 695    |  | 7.66 | %
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Total borrowings                                    |  |                                    | 49,985  |                          |      | 1,663              |  | 6.71 | %              |  |                          | 18,306  |                    |   | 695    |  | 7.66 | %
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Total interest-bearing liabilities                  |  | $                                  | 414,814 |                          |      | 8,724              |  | 4.24 | %              |  | $                        | 324,185 |                    |   | 5,147  |  | 3.20 | %
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Net interest income                                 |  |                                    |         |                          | $    | 14,600             |  |      |                |  |                          |         |                    | $ | 13,644 |  |      |  
|                                                    |  |                                    |         |                          |      |                    |  |      |                |  |                          |         |                    |   |        |  |      |  
|Net interest margin10                               |  |                                    |         |                          |      |                    |  | 5.48 | %              |  |                          |         |                    |   |        |  | 6.29 | %



---

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

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

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

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



15



---

##### Table of Contents

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

Rate11/Volume Analysis of Net Interest Income



|                                                    |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|--------------------------------------------------- |  | ----------------------------------------- | ----- | - | -------------------------------------- | - | ----- | ----- |  | - | ------ | - |  | ---- | ----- | - | ----- | - | ------ | - |  | - | ----- | -
|                                                    |  | Three Months Ended June 30, 2007 vs. 2006 |       |   | Six Months Ended June 30,2007 vs. 2006 |  
|                                                    |  | Increases (Decreases) Due to              |       |   | Increases (Decreases) Due to           |  
|                                                    |  | Volume                                    |       |   | Rate                                   |   |       | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|                                                    |  | (Dollars in Thousands)                    |      
|Increase (Decrease) in Interest Income:             |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Federal funds sold                                  |  | $                                         | (191  | ) |                                        | $ | 4     |       |  | $ | (187   | ) |  | $    | (358  | ) |       | $ | 22     |   |  | $ | (336  | )
|Interest-bearing deposits in financial institutions |  |                                           | (2    | ) |                                        |   |      |       |  |   | (2     | ) |  |      | 6     |   |       |   | 1      |   |  |   | 7     |  
|Investment securities:12                            |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Taxable                                             |  |                                           | 481   |   |                                        |   | 109   |       |  |   | 590    |   |  |      | 944   |   |       |   | 232    |   |  |   | 1,176 |  
|Non-taxable                                         |  |                                           | 185   |   |                                        |   | (6    | )     |  |   | 179    |   |  |      | 396   |   |       |   | (12    | ) |  |   | 384   |  
|Loans13                                             |  |                                           | 1,401 |   |                                        |   | 87    |       |  |   | 1,488  |   |  |      | 2,451 |   |       |   | 851    |   |  |   | 3,302 |  
|                                                    |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total                                               |  | $                                         | 1,874 |   |                                        | $ | 194   |       |  | $ | 2,068  |   |  | $    | 3,439 |   |       | $ | 1,094  |   |  | $ | 4,533 |  
|                                                    |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Increase (Decrease) in Interest Expense:            |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Interest-bearing demand deposits                    |  | $                                         | (6    | ) |                                        | $ |      |       |  | $ | (6     | ) |  | $    | (8    | ) |       | $ | 3      |   |  | $ | (5    | )
|Money market deposits                               |  |                                           | 65    |   |                                        |   | 208   |       |  |   | 273    |   |  |      | 172   |   |       |   | 517    |   |  |   | 689   |  
|Savings deposits                                    |  |                                           | (22   | ) |                                        |   | (8    | )     |  |   | (30    | ) |  |      | (50   | ) |       |   | (10    | ) |  |   | (60   | )
|Time deposits $100,000 or greater                   |  |                                           | 348   |   |                                        |   | 207   |       |  |   | 555    |   |  |      | 613   |   |       |   | 427    |   |  |   | 1,040 |  
|Other time deposits                                 |  |                                           | 320   |   |                                        |   | 178   |       |  |   | 498    |   |  |      | 551   |   |       |   | 394    |   |  |   | 945   |  
|FHLB borrowings                                     |  |                                           |      |   |                                        |   | 23    |       |  |   | 23     |   |  |      |      |   |       |   | 23     |   |  |   | 23    |  
|Federal funds purchased                             |  |                                           |      |   |                                        |   | 15    |       |  |   | 15     |   |  |      |      |   |       |   | 22     |   |  |   | 22    |  
|Repurchase agreement                                |  |                                           |      |   |                                        |   | 446   |       |  |   | 446    |   |  |      |      |   |       |   | 883    |   |  |   | 883   |  
|Subordinated notes payable to subsidiary trusts     |  |                                           |      |   |                                        |   | 14    |       |  |   | 14     |   |  |      |      |   |       |   | 40     |   |  |   | 40    |  
|                                                    |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total                                               |  | $                                         | 705   |   |                                        | $ | 1,083 |       |  | $ | 1,788  |   |  | $    | 1,278 |   |       | $ | 2,299  |   |  | $ | 3,577 |  
|                                                    |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total change in net interest income                 |  | $                                         | 1,169 |   |                                        | $ | (889  | )     |  | $ | 280    |   |  | $    | 2,161 |   |       | $ | (1,205 | ) |  | $ | 956   |  
|                                                    |  |                                           |       |   |                                        |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  

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 $400,000 for the six months ended June 30, 2007. This represented a decrease of $220,000 or 35% when compared to $620,000 for
the same period in 2006. The decrease was due to the decrease in net (charge-offs) during the first six months of 2007, when compared to the same period in 2006. For the six months ended June 30, 2007 and 2006, the Company had net (charge-offs)
recoveries of ($41,000) and ($151,000), respectively. The process for monitoring the adequacy of the allowance for loan losses, as well as supporting documentation, regarding the allowance for loan losses is analyzed below. See Allowance for
Loan Losses.



---

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

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

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



16



---

##### Table of Contents

NONINTEREST INCOME

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

Second quarter analysis.Noninterest income totaled
$1.3 million for the quarter ended June 30, 2007. This represented an increase of $517,000 or 70% when compared to $738,000 for the same period in 2006.

The increase in noninterest income was primarily attributable to the increase in conduit loan referral income of $319,000 or 506% as a result of more referrals during the second quarter of 2007 as compared to the same period in 2006. It is
customary for the Company to generate noninterest income by way of conduit loan referrals, however, it is uncertain to determine the quantity or frequency of such referrals. In addition there was an increase in gains from the sale of SBA loans of
$191,000 or 367% which resulted from more loans sold during the second quarter of 2007, when compared to 2006.

For the three months ended June 30,
2007 as compared to 2006, noninterest income as an annualized percentage of average earning assets increased to 0.92% from 0.67%.

Six-month analysis.Noninterest income totaled $2.2 million for the six months ended June 30, 2007. This represented an increase of $202,000 or 10% when compared to $1.9 million for the same period in 2006.

The increase in noninterest income was primarily attributable to the increase in conduit loan referral income of $79,000 or 14% as a result of more referrals during the
first six months of 2007 as compared to the same period in 2006. Also as a result of the Companys growth, other miscellaneous income increased by $101,000 or 842% during the first six months of 2007, when compared to the same period in 2006.

For the six months ended June 30, 2007 as compared to 2006, noninterest income as an annualized percentage of average earning decreased to 0.81% from
0.90%.



17



---

##### Table of Contents

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

Noninterest Income



|                                                       |  |                                     |       |                  |        |   |        |   |                  |  |        |  
|------------------------------------------------------ |  | ----------------------------------- | ----- | ---------------- | ------ | - | ------ | - | ---------------- |  | ------ | -
|                                                       |  | For the Three Months Ended June 30, |      
|                                                       |  | 2007                                |       |                  | 2006   |  
|                                                       |  | Amount                              |       | Percent of Total |        |   | Amount |   | Percent of Total | 
|                                                       |  | (Dollars in Thousands)              |      
|Customer service fees                                  |  | $                                   | 433   |                  | 34.50  | % |        | $ | 449              |  | 60.82  | %
|Gains from sale of loans                               |  |                                     | 243   |                  | 19.36  | % |        |   | 52               |  | 7.05   | %
|Increase in cash surrender value of life insurance     |  |                                     | 114   |                  | 9.08   | % |        |   | 110              |  | 14.91  | %
|Broker fee income                                      |  |                                     | 39    |                  | 3.11   | % |        |   | 41               |  | 5.56   | %
|Conduit loan referral income                           |  |                                     | 382   |                  | 30.44  | % |        |   | 63               |  | 8.54   | %
|Other miscellaneous income                             |  |                                     | 44    |                  | 3.51   | % |        |   | 23               |  | 3.12   | %
|                                                       |  |                                     |       |                  |        |   |        |   |                  |  |        |  
|Total noninterest income                               |  | $                                   | 1,255 |                  | 100.00 | % |        | $ | 738              |  | 100.00 | %
|                                                       |  |                                     |       |                  |        |   |        |   |                  |  |        |  
|As a percentage of average earning assets (annualized) |  |                                     |       |                  | 0.92   | % |        |   |                  |  | 0.67   | %
|                                                       |  |                                     |       |                  |        |   |        |   |                  |  |        |  

Noninterest Income



|                                                       |  |                                   |       |                  |        |   |        |   |                  |  |        |  
|------------------------------------------------------ |  | --------------------------------- | ----- | ---------------- | ------ | - | ------ | - | ---------------- |  | ------ | -
|                                                       |  | For the Six Months Ended June 30, |      
|                                                       |  | 2007                              |       |                  | 2006   |  
|                                                       |  | Amount                            |       | Percent of Total |        |   | Amount |   | Percent of Total | 
|                                                       |  | (Dollars in Thousands)            |      
|Customer service fees                                  |  | $                                 | 832   |                  | 38.50  | % |        | $ | 830              |  | 42.38  | %
|Gains from sale of loans                               |  |                                   | 273   |                  | 12.63  | % |        |   | 317              |  | 16.18  | %
|Increase in cash surrender value of life insurance     |  |                                   | 225   |                  | 10.41  | % |        |   | 181              |  | 9.24   | %
|Broker fee income                                      |  |                                   | 81    |                  | 3.75   | % |        |   | 61               |  | 3.11   | %
|Conduit loan referral income                           |  |                                   | 637   |                  | 29.48  | % |        |   | 558              |  | 28.48  | %
|Other miscellaneous income                             |  |                                   | 113   |                  | 5.23   | % |        |   | 12               |  | 0.61   | %
|                                                       |  |                                   |       |                  |        |   |        |   |                  |  |        |  
|Total noninterest income                               |  | $                                 | 2,161 |                  | 100.00 | % |        | $ | 1,959            |  | 100.00 | %
|                                                       |  |                                   |       |                  |        |   |        |   |                  |  |        |  
|As a percentage of average earning assets (annualized) |  |                                   |       |                  | 0.81   | % |        |   |                  |  | 0.90   | %
|                                                       |  |                                   |       |                  |        |   |        |   |                  |  |        |  



18



---

##### 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.

Second quarter analysis.Noninterest expense totaled $4.8 million for the quarter ended June 30, 2007. This represented an increase of $158,000 or 3% when
compared to $4.7 million for the same period in 2006. The increase in noninterest expense was primarily due to increase of $203,000 or 8% in salaries and employee benefits.

Due to the Companys growth, coupled with salary increases, salaries and employee benefits increased $203,000 or 8%.

For the three months ended June 30, 2007 as compared to 2006, noninterest expense as an annualized percentage of average earning assets decreased to 3.53% from 4.21%.

Six-month analysis.Noninterest expense totaled $9.7 million for the six months ended June 30, 2007. This represented an increase of $562,000 or 6% when compared to $9.2 million for the same period in
2006. The increase in noninterest expense was primarily due to increases of $410,000 or 8% and $141,000 or 36% in salaries and employee benefits and data processing expense, respectively.

Due to the Companys growth, coupled with salary increases, salaries and employee benefits increased $410,000 or 8%. Also attributable to growth and an increase in
deposits, data processing expense increased $141,000 or 36%.

For the six months ended June 30, 2007 as compared to 2006, noninterest expense as an
annualized percentage of average earning assets decreased to 3.66% from 4.23%. This decrease is reflective of Managements continuing efforts to control overhead expenses and improve operating efficiency.



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##### Table of Contents

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

Noninterest Expense



|                                                       |  |                                     |       |                 |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | ----------------------------------- | ----- | --------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Three Months Ended June 30, |      
|                                                       |  | 2007                                |       |                 | 2006   |  
|                                                       |  | Amount                              |       | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)              |      
|Salaries and employee benefits                         |  | $                                   | 2,668 |                 | 55.46  | % |        | $ | 2,465           |  | 53.00  | %
|Net occupancy expense                                  |  |                                     | 560   |                 | 11.64  | % |        |   | 571             |  | 12.27  | %
|Marketing                                              |  |                                     | 356   |                 | 7.40   | % |        |   | 419             |  | 9.01   | %
|Data processing fees                                   |  |                                     | 273   |                 | 5.68   | % |        |   | 243             |  | 5.22   | %
|Professional fees                                      |  |                                     | 214   |                 | 4.45   | % |        |   | 262             |  | 5.63   | %
|Postage, telephone, supplies                           |  |                                     | 133   |                 | 2.77   | % |        |   | 133             |  | 2.86   | %
|Directors fees                                        |  |                                     | 74    |                 | 1.54   | % |        |   | 55              |  | 1.18   | %
|Other operating expense                                |  |                                     | 532   |                 | 11.06  | % |        |   | 504             |  | 10.83  | %
|                                                       |  |                                     |       |                 |        |   |        |   |                 |  |        |  
|Total noninterest expense                              |  | $                                   | 4,810 |                 | 100.00 | % |        | $ | 4,652           |  | 100.00 | %
|                                                       |  |                                     |       |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                     |       |                 | 3.53   | % |        |   |                 |  | 4.21   | %
|                                                       |  |                                     |       |                 |        |   |        |   |                 |  |        |  

Noninterest Expense



|                                                       |  |                                   |       |                 |        |   |        |   |                 |  |        |  
|------------------------------------------------------ |  | --------------------------------- | ----- | --------------- | ------ | - | ------ | - | --------------- |  | ------ | -
|                                                       |  | For the Six Months Ended June 30, |      
|                                                       |  | 2007                              |       |                 | 2006   |  
|                                                       |  | Amount                            |       | Percentof Total |        |   | Amount |   | Percentof Total | 
|                                                       |  | (Dollars in Thousands)            |      
|Salaries and employee benefits                         |  | $                                 | 5,362 |                 | 55.00  | % |        | $ | 4,952           |  | 53.92  | %
|Net occupancy expense                                  |  |                                   | 1,148 |                 | 11.78  | % |        |   | 1,122           |  | 12.21  | %
|Marketing                                              |  |                                   | 668   |                 | 6.85   | % |        |   | 771             |  | 8.39   | %
|Data processing fees                                   |  |                                   | 529   |                 | 5.43   | % |        |   | 388             |  | 4.22   | %
|Professional fees                                      |  |                                   | 491   |                 | 5.04   | % |        |   | 489             |  | 5.32   | %
|Postage, telephone, supplies                           |  |                                   | 279   |                 | 2.86   | % |        |   | 284             |  | 3.09   | %
|Directors fees                                        |  |                                   | 141   |                 | 1.45   | % |        |   | 111             |  | 1.21   | %
|Other operating expense                                |  |                                   | 1,130 |                 | 11.59  | % |        |   | 1,069           |  | 11.64  | %
|                                                       |  |                                   |       |                 |        |   |        |   |                 |  |        |  
|Total noninterest expense                              |  | $                                 | 9,748 |                 | 100.00 | % |        | $ | 9,186           |  | 100.00 | %
|                                                       |  |                                   |       |                 |        |   |        |   |                 |  |        |  
|As a percentage of average earning assets (annualized) |  |                                   |       |                 | 3.66   | % |        |   |                 |  | 4.23   | %
|                                                       |  |                                   |       |                 |        |   |        |   |                 |  |        |  

INCOME TAXES

The tax provision was $2.5 million for the first six months of 2007 and $2.2 million for the first six months of 2006, representing 37.7% and 38.5%, 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 $591.9 million at June 30, 2007, an increase of $40.8 million, or 7%, 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 $31.3 million, or 7%, to $457.5 million at June 30, 2007 as compared to $426.2 million at December 31, 2006.
Total deposits at June 30, 2007 were $493.4 million, which represented an increase of $36.9 million, or 8% from total deposits of $456.5 million at December 31, 2006. The increase was primarily in interest-bearing deposits, which increased
$40.5 million or 12% to $385.8 million at June 30, 2007 compared to $345.3 million at December 31, 2006. Noninterest bearing demand deposits decreased $3.6 million or 3% to $107.6 million at June 30, 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 $464.6 million at June 30, 2007 as compared to $433.3 million at December 31, 2006. Total gross
loans increased by $31.3 million, or 7% for the first six months of 2007. Total gross loans represented 78% of total assets at June 30, 2007 and December 31, 2006. Real estate loans, which includes construction and development loans,
increased $18.9 million or 7% during the first six months of 2007 and represented approximately 60% of the total loan growth of $31.3 million. This was due to the continuing strong demand for affordable housing in our market areas. Commercial loans
increased $10.8 million or 7% during the first six 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 of the loan, and therefore the Company has no inventory held-for-sale, unlike some
institutions that warehouse loans to sell as pools. The Company retains the unguaranteed portion of the SBA loans. The total gain on sale of loans was $273,000 or 1.07% of total interest and noninterest income as of June 30, 2007
and $317,000 or 1.53% of total interest and noninterest income as of June 30, 2006. The Company reported the gain on sale of loans as operating activities on the Statement of Cash Flows.



21



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##### Table of Contents

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

Loan Portfolio Composition



|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|---------------------------- |  | ---------------------- | ------- | - | ----------------- | ------ | - | ------ | - | ------- | --------------- |  | ------ | -
|                             |  | June 30, 2007          |         |   | December 31, 2006 |       
|                             |  | Amount                 |         |   | Percentof Total   |        |   | Amount |   |         | Percentof Total | 
|                             |  | (Dollars in Thousands) |        
|Real estate loans:           |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Construction and development |  | $                      | 193,262 |   |                   | 41.60  | % |        | $ | 174,040 |                 |  | 40.16  | %
|Residential loans            |  |                        | 2,611   |   |                   | 0.56   | % |        |   | 3,063   |                 |  | 0.71   | %
|Commercial and multi-family  |  |                        | 77,340  |   |                   | 16.64  | % |        |   | 77,245  |                 |  | 17.83  | %
|Commercial loans             |  |                        | 176,579 |   |                   | 38.00  | % |        |   | 165,765 |                 |  | 38.26  | %
|Consumer loans               |  |                        | 6,624   |   |                   | 1.43   | % |        |   | 4,764   |                 |  | 1.10   | %
|Equity lines of credit       |  |                        | 7,019   |   |                   | 1.51   | % |        |   | 6,762   |                 |  | 1.56   | %
|Credit card and other loans  |  |                        | 1,210   |   |                   | 0.26   | % |        |   | 1,652   |                 |  | 0.38   | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total gross loans            |  |                        | 464,645 |   |                   | 100.00 | % |        |   | 433,291 |                 |  | 100.00 | %
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Less:                        |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Unearned income              |  |                        | (1,048  | ) |                   |        |   |        |   | (1,350  | )               |  |        |  
|Allowance for loan losses    |  |                        | (6,100  | ) |                   |        |   |        |   | (5,741  | )               |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  
|Total net loans              |  | $                      | 457,497 |   |                   |        |   |        | $ | 426,200 |                 |  |        |  
|                             |  |                        |         |   |                   |        |   |        |   |         |                 |  |        |  

NONPERFORMING ASSETS

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

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

December 31, 2006
to June 30, 2007 analysis. Nonperforming assets at June 30, 2007 increased $1.3 million to $5.2 million, from $3.9 million at December 31, 2006, and represented 1.11% and 0.89% of total gross loans, respectively. The increase was
primarily attributable to one construction and development loan for $1.2 million that was 90 days past due as of June 30, 2007. In addition, $940,000 was transferred to other real estate owned (See below). These increases were partially offset
by a reduction in nonaccrual loans of $962,000.

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.

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.



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##### Table of Contents

June 30, 2006 to June 30, 2007 analysis. Nonperforming assets at June 30, 2007 increased $3.7
million to $5.2 million, from $1.4 million at June 30, 2006, and represented 1.11% and 0.34% of total gross loans, respectively. The increase was primarily attributable to the addition of six commercial loans totaling $2.7 million, of which
$2.3 million was attributed to one commercial loan placed on nonaccrual in July 2006. In addition, in February 2007 $940,000 was transferred to other real estate owned (See above).



23



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##### Table of Contents

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

Nonperforming Assets



|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  
|-------------------------------------------------------------------------------- |  | ---------------------- | ------ | -- | ---------------- | - | ------ | ------------- |  | - | ------ | -
|                                                                                 |  | June 30, 2007          |        |    | December 31,2006 |   |        | June 30, 2006 | 
|                                                                                 |  | (Dollars in Thousands) |       
|Nonaccrual loans:14                                                              |  |                        |        |    |                  |   |        |               |  |   |        |  
|Real estate loans:                                                               |  |                        |        |    |                  |   |        |               |  |   |        |  
|Construction and development                                                     |  | $                      |       |    |                  | $ |       |               |  | $ |       |  
|Residential loans                                                                |  |                        | 17     |    |                  |   | 18     |               |  |   |       |  
|Commercial and multi-family                                                      |  |                        |       |    |                  |   |       |               |  |   |       |  
|Commercial loans                                                                 |  |                        | 2,879  |    |                  |   | 3,840  |               |  |   | 748    |  
|Consumer loans                                                                   |  |                        |       |    |                  |   |       |               |  |   |       |  
|Equity lines of credit                                                           |  |                        |       |    |                  |   |       |               |  |   |       |  
|Credit card and other loans                                                      |  |                        |       |    |                  |   |       |               |  |   |       |  
|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  
|Total nonaccrual loans                                                           |  |                        | 2,896  |    |                  |   | 3,858  |               |  |   | 748    |  
|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  
|Loans 90 days or more past due (as to principal or interest) and still accruing: |  |                        |        |    |                  |   |        |               |  |   |        |  
|Real estate loans:                                                               |  |                        |        |    |                  |   |        |               |  |   |        |  
|Construction and development                                                     |  |                        | 1,320  | 15 |                  |   |       |               |  |   |       |  
|Residential loans                                                                |  |                        |       |    |                  |   |       |               |  |   |       |  
|Commercial and multi-family                                                      |  |                        |       |    |                  |   |       |               |  |   |       |  
|Commercial loans                                                                 |  |                        |       |    |                  |   |       |               |  |   | 656    |  
|Consumer loans                                                                   |  |                        |       |    |                  |   |       |               |  |   |       |  
|Equity lines of credit                                                           |  |                        |       |    |                  |   |       |               |  |   |       |  
|Credit card and other loans                                                      |  |                        |       |    |                  |   |       |               |  |   | 4      |  
|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  
|Total loans 90 days or more past due and still accruing                          |  |                        | 1,320  |    |                  |   |       |               |  |   | 660    |  
|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  
|Restructured loans16                                                             |  |                        |       |    |                  |   |       |               |  |   |       |  
|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  
|Total nonperforming loans                                                        |  |                        | 4,216  |    |                  |   | 3,858  |               |  |   | 1,408  |  
|Other real estate owned                                                          |  |                        | 940    |    |                  |   |       |               |  |   |       |  
|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  
|Total nonperforming assets                                                       |  | $                      | 5,156  |    |                  | $ | 3,858  |               |  | $ | 1,408  |  
|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  
|Nonperforming loans as a percentage of total loans17                             |  |                        | 0.91   | %  |                  |   | 0.89   | %             |  |   | 0.34   | %
|Nonperforming assets as a percentage of total loans and other real estate owned  |  |                        | 1.11   | %  |                  |   | 0.89   | %             |  |   | 0.34   | %
|Allowance for loan losses to nonperforming loans                                 |  |                        | 144.69 | %  |                  |   | 148.81 | %             |  |   | 415.13 | %
|Allowance for loan losses                                                        |  | $                      | 6,100  |    |                  | $ | 5,741  |               |  | $ | 5,845  |  
|                                                                                 |  |                        |        |    |                  |   |        |               |  |   |        |  



---

|14 | During the six months
ended June 30, 2007, no income related to these loans was included in net income. Additional interest income of approximately $123,000 would have been recorded for the six months ended June 30, 2007 if these loans had been paid or accrued
in accordance with their original terms and had been outstanding throughout the applicable period then ended or, if not outstanding throughout the applicable period then ended, since origination.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15 | Consists of two loans that
were placed on nonaccrual status in July 2007. Interest income accrued as of June 30, 2007 and now reversed was $48,000.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|16 | 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.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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##### Table of Contents

ALLOWANCE FOR LOAN LOSSES

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

The allowance for loan losses totaled $6.1 million at June 30, 2007 compared to $5.7 million at December 31, 2006 and
as a percentage of total loans outstanding was 1.32% 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: |  
|June 30, 2007 |  | 91.95              | % |  | 7.46            | % |  | 0.58         | % |  | 0.01      | % |  | 0.00  | % |  | 100.00 | %
|              |  |                    |   |  |                 |   |  |              |   |  |           |   |  |       |   |  |        |  



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##### Table of Contents

For the six months ended June 30, 2007 and 2006, the Company had net (charge-offs) recoveries of ($41,000) and
($151,000), respectively. Implicit in lending activity is the risk that losses will occur and that the amount of such loss will vary over time. In many cases Management exercises considerable judgment in determining the timing of the recognition of
inherent losses with the objective to present a realistic presentation of the quality of the loan portfolio.

Except for nonperforming assets and impaired
loans, Management is not aware of any loans as of June 30, 2007 for which known credit problems of the borrower would cause serious doubt as to the ability of such borrowers to comply with their present loan repayment terms. Management cannot,
however, predict the extent to which the deterioration in general economic conditions, real estate values, increase in general rates of interest, changing financial conditions or business of a borrower may adversely affect a borrowers ability
to repay. The ratio of the allowance for loan losses to total loans was determined by Management to be adequate at June 30, 2007 and December 31, 2006.



26



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##### Table of Contents

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

Allowance for Loan Losses



|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|------------------------------------------------------------------------------- |  | ---------------------- | ------- | -- | ---------------- | - | ------- | ------------ |  | - | ------- | --
|                                                                                |  | June 30,2007           |         |    | December 31,2006 |   |         | June 30,2006 | 
|                                                                                |  | (Dollars in Thousands) |        
|Balances:                                                                       |  |                        |         |    |                  |   |         |              |  |   |         |   
|Average total loans outstanding during period                                   |  | $                      | 452,300 |    |                  | $ | 411,415 |              |  | $ | 397,762 |   
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|Total loans outstanding at end of period, net of unearned income                |  | $                      | 463,597 |    |                  | $ | 431,941 |              |  | $ | 416,596 |   
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|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                                                                |  |                        | 450     | 18 |                  |   | 688     |              |  |   | 281     |   
|Consumer loans                                                                  |  |                        | 2       |    |                  |   |        |              |  |   |        |   
|Equity lines of credit                                                          |  |                        |        |    |                  |   | 55      |              |  |   |        |   
|Credit card and other loans                                                     |  |                        |        |    |                  |   | 5       |              |  |   |        |   
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|Total charge-offs                                                               |  |                        | 452     |    |                  |   | 1,123   |              |  |   | 281     |   
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|Recoveries:                                                                     |  |                        |         |    |                  |   |         |              |  |   |         |   
|Real estate loans:                                                              |  |                        |         |    |                  |   |         |              |  |   |         |   
|Construction and development                                                    |  |                        |        |    |                  |   |        |              |  |   |        |   
|Residential loans                                                               |  |                        | 2       |    |                  |   | 2       |              |  |   | 1       |   
|Commercial and multi-family                                                     |  |                        |        |    |                  |   |        |              |  |   |        |   
|Commercial loans                                                                |  |                        | 409     |    |                  |   | 163     |              |  |   | 126     |   
|Consumer loans                                                                  |  |                        |        |    |                  |   | 3       |              |  |   | 3       |   
|Equity lines of credit                                                          |  |                        |        |    |                  |   |        |              |  |   |        |   
|Credit card and other loans                                                     |  |                        |        |    |                  |   |        |              |  |   |        |   
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|Total recoveries                                                                |  |                        | 411     |    |                  |   | 168     |              |  |   | 130     |   
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|Net (charge-offs) recoveries                                                    |  |                        | (41     | )  |                  |   | (955    | )            |  |   | (151    | ) 
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|Provision charged to operations                                                 |  |                        | 400     |    |                  |   | 1,320   |              |  |   | 620     |   
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|Allowance for loan losses balance, end of period                                |  | $                      | 6,100   |    |                  | $ | 5,741   |              |  | $ | 5,845   |   
|                                                                                |  |                        |         |    |                  |   |         |              |  |   |         |   
|Ratios:19                                                                       |  |                        |         |    |                  |   |         |              |  |   |         |   
|Net loan charge-offs to average total loans                                     |  |                        | 0.01    | %  |                  |   | 0.23    | %            |  |   | 0.04    | % 
|Allowance for loan losses to average total loans                                |  |                        | 1.35    | %  |                  |   | 1.40    | %            |  |   | 1.47    | % 
|Allowance for loan losses to total loans at end of period                       |  |                        | 1.32    | %  |                  |   | 1.33    | %            |  |   | 1.40    | % 
|Allowance for loan losses to total nonperforming loans                          |  |                        | 144.69  | %  |                  |   | 148.81  | %            |  |   | 415.13  | % 
|Net loan (charge-offs) recoveries to allowance for loan losses at end of period |  |                        | (0.67   | )% |                  |   | (16.63  | )%           |  |   | (2.58   | )%
|Net loan (charge-offs) recoveries to provision for loan losses                  |  |                        | (10.25  | )% |                  |   | (72.35  | )%           |  |   | (24.35  | )%



---

|18 | Includes a $446,000 charge
to the allowance for loan losses for the difference between total debt outstanding and the estimated fair value, less selling costs on other real estate owned recorded. (See nonperforming assets above).
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19 | Total loans are gross
loans, which excludes the allowance for loan losses, and net of deferred fees.
|-- | ----------------------------------------------------------------------------------------------------



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##### Table of Contents

INVESTMENTS

The
Companys investment portfolio provides income to the Company and also serves as a source of liquidity. Total yield, risk and maturity are among the factors considered in building the investment portfolio. Pursuant to FASB 115, securities must
be classified as held to maturity, available for sale, or trading securities. Those securities held in the available for sale category must be carried on the Companys books at fair market value.
At June 30, 2007 and December 31, 2006, 100% of the investment securities owned by the Company were classified as Available for Sale.

At June 30, 2007, the Companys investment portfolio at fair value consisted of $29.7 million in U.S. government agency securities, $22.9 million in federal agency mortgage-backed securities and $23.3 million in obligations of
states and local government securities for a total of $75.9 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 $3.2 million or 4% to $75.9 million during the first six months of 2007. The increase is primarily attributable to the addition of $5.4 million in federal agency mortgage-backed securities, however, such existing class
of securities in the portfolio had principal paydowns of approximately $2.1 million. The Company added $4.3 million in obligations of states and local government securities, however, the addition was offset by the sale of $2.8 million and the
reduction in market value of $858,000 in such existing class of securities.

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

Investment Portfolio



|                                                      |  |                        |        |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|----------------------------------------------------- |  | ---------------------- | ------ | ----------------- | - | ----------------- |  | - | ---------- | - | ------------- | - | ---------------- |  | ----------------- | ------ |  | ---------- | --- |  | - | ---- | - |  | - | ------
|                                                      |  | June 30, 2007          |        | December 31, 2006
|                                                      |  | AmortizedCost          |        | Unrealized Gains  |   | Unrealized Losses |  |   | Fair Value |   | AmortizedCost |   | Unrealized Gains |  | Unrealized Losses |        |  | Fair Value
|                                                      |  | (Dollars in Thousands)
|Available for Sale:                                   |  |                        |        |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|U.S. government agency securities                     |  | $                      | 30,000 |                   | $ |                  |  | $ | (282       | ) |               | $ | 29,718           |  | $                 | 30,000 |  | $          | 210 |  | $ |     |   |  | $ | 30,210
|Federal agency mortgage-backed securities             |  |                        | 23,014 |                   |   | 52                |  |   | (191       | ) |               |   | 22,875           |  |                   | 19,597 |  |            | 190 |  |   | (61  | ) |  |   | 19,726
|Obligations of states and local government securities |  |                        | 24,214 |                   |   | 23                |  |   | (950       | ) |               |   | 23,287           |  |                   | 22,782 |  |            | 120 |  |   | (189 | ) |  |   | 22,713
|                                                      |  |                        |        |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       
|Total                                                 |  | $                      | 77,228 |                   | $ | 75                |  | $ | (1,423     | ) |               | $ | 75,880           |  | $                 | 72,379 |  | $          | 520 |  | $ | (250 | ) |  | $ | 72,649
|                                                      |  |                        |        |                   |   |                   |  |   |            |   |               |   |                  |  |                   |        |  |            |     |  |   |      |   |  |   |       

The Company also has investments in interest-bearing time certificates of deposit at other financial institutions
totaling $1.9 million at June 30, 2007 and $2.9 million at December 31, 2006.



28



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##### Table of Contents

DEPOSITS

Total
deposits increased $36.9 million, or 8%, to $493.4 million at June 30, 2007 from $456.5 million at December 31, 2006. Noninterest-bearing demand deposits decreased $3.5 million or 3% at June 30, 2007 as compared to December 31,
2006. Interest bearing demand deposits decreased $5.6 million or 23%, while money market deposit accounts increased $20.9 million, or 14% at June 30, 2007 as compared to December 31, 2006. Savings deposit accounts decreased $4.8 million or
26% at June 30, 2007 as compared to December 31, 2006. Time deposits of $100,000 or greater increased $18.2 million, or 24% at June 30, 2007 as compared to December 31, 2006, and other time deposits increased $11.7 million, or
16%.

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 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 3.90% for the six months ended June 30, 2007 from 2.94% for the same period in 2006. For all
interest bearing liabilities, the average rate for the six months ended June 30, 2007 was 4.24% as compared to 3.20% 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 June 30, 2006 to June 30, 2007
the percentage of total average deposits represented by time deposits increased from 25% to 35%. The shift in this average deposit mix also contributed to the increase in cost of funds for the first six months of 2007 versus 2006.



29



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##### Table of Contents

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

Average Deposits and Other Borrowings20



|                                                           |  |                           |         |             |      |   |                |   |             |  |      |  
|---------------------------------------------------------- |  | ------------------------- | ------- | ----------- | ---- | - | -------------- | - | ----------- |  | ---- | -
|                                                           |  | Six Months Ended June 30, |        
|                                                           |  | 2007                      |         |             | 2006 |  
|                                                           |  | Average Balance           |         | AverageRate |      |   | AverageBalance |   | AverageRate | 
|                                                           |  | (Dollars in Thousands)    |        
|Demand deposits, noninterest bearing                       |  | $                         | 107,385 |             | 0.00 | % |                | $ | 104,402     |  | 0.00 | %
|                                                           |  |                           |         |             |      |   |                |   |             |  |      |  
|Interest-bearing deposits:                                 |  |                           |         |             |      |   |                |   |             |  |      |  
|Interest-bearing demand deposits                           |  |                           | 22,222  |             | 0.36 | % |                |   | 27,252      |  | 0.33 | %
|Money market deposits                                      |  |                           | 164,903 |             | 3.81 | % |                |   | 154,003     |  | 3.18 | %
|Savings deposits                                           |  |                           | 13,437  |             | 0.84 | % |                |   | 23,508      |  | 1.00 | %
|Time deposits $100,000 or greater                          |  |                           | 83,160  |             | 4.80 | % |                |   | 50,313      |  | 3.76 | %
|Other time deposits                                        |  |                           | 81,107  |             | 4.65 | % |                |   | 50,803      |  | 3.67 | %
|                                                           |  |                           |         |             |      |   |                |   |             |  |      |  
|Total interest-bearing deposits                            |  |                           | 364,829 |             | 3.90 | % |                |   | 305,879     |  | 2.94 | %
|                                                           |  |                           |         |             |      |   |                |   |             |  |      |  
|FHLB borrowings                                            |  |                           | 856     |             | 5.42 | % |                |   |            |  | 0.00 | %
|Federal funds purchased                                    |  |                           | 823     |             | 5.39 | % |                |   |            |  | 0.00 | %
|Repurchase agreement                                       |  |                           | 30,000  |             | 5.94 | % |                |   |            |  | 0.00 | %
|Subordinated notes payable to subsidiary trusts            |  |                           | 18,306  |             | 8.10 | % |                |   | 18,306      |  | 7.66 | %
|                                                           |  |                           |         |             |      |   |                |   |             |  |      |  
|Total deposits and other borrowings                        |  | $                         | 522,199 |             | 3.37 | % |                | $ | 428,587     |  | 2.42 | %
|                                                           |  |                           |         |             |      |   |                |   |             |  |      |  
|Average rate excluding noninterest bearing demand deposits |  |                           |         |             | 4.24 | % |                |   |             |  | 3.20 | %

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



|                                     |  |                           |   |  |                  |  
|------------------------------------ |  | ------------------------- | - |  | ---------------- | -
|                                     |  | Six Months Ended June 30, |  
|                                     |  | 2007                      |   |  | 2006             |  
|                                     |  | Percent ofTotal           |   |  | Percent of Total |  
|Demand deposits, noninterest bearing |  | 22.74                     | % |  | 25.45            | %
|Interest-bearing deposits:           |  |                           |   |  |                  |  
|Interest-bearing demand deposits     |  | 4.71                      | % |  | 6.64             | %
|Money market deposits                |  | 34.91                     | % |  | 37.54            | %
|Savings deposits                     |  | 2.85                      | % |  | 5.73             | %
|Time deposits $100,000 or greater    |  | 17.61                     | % |  | 12.26            | %
|Other time deposits                  |  | 17.18                     | % |  | 12.38            | %
|                                     |  |                           |   |  |                  |  
|Total average deposits               |  | 100.00                    | % |  | 100.00           | %
|                                     |  |                           |   |  |                  |  



---

|20 | Rates for these periods on
which calculations are based have been annualized using actual days.
|-- | -----------------------------------------------------------------------------------------------



30



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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)
|June 30, 2007     |  | $                      | 35,579 |                               | $ | 27,948                        |  | $             | 19,400 |       | $ | 9,994 |  | $ | 92,921
|                  |  |                        |        |                               |   |                               |  |               |        |       |   |       |  |   |       
|December 31, 2006 |  | $                      | 23,514 |                               | $ | 23,418                        |  | $             | 19,739 |       | $ | 8,093 |  | $ | 74,764
|                  |  |                        |        |                               |   |                               |  |               |        |       |   |       |  |   |       

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, and cash surrender value of life insurance policies.

In order to augment liquidity, as of June 30, 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 $32.9 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
increased to 16.99% at June 30, 2007 from 16.67% 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 23.00% at June 30, 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 to ensure adequate liquidity
including enhancing deposit growth by:



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



| | 2) | Maintaining 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 June 30, 2007, brokered deposits and public funds totaled $61.7 million and were 12.50% of total deposits.

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

Management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.



31



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##### Table of Contents

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

Liquidity



|                                                         |  |                        |        |   |                   |   |        |  
|-------------------------------------------------------- |  | ---------------------- | ------ | - | ----------------- | - | ------ | -
|                                                         |  | June 30, 2007          |        |   | December 31, 2006 |  
|                                                         |  | (Dollars in Thousands) |       
|Cash and due from banks (net of FRB reserve requirement) |  | $                      | 12,468 |   |                   | $ | 17,771 |  
|Federal funds sold                                       |  |                        | 13,460 |   |                   |   | 2,900  |  
|Interest-bearing deposits in financial institutions      |  |                        | 1,943  |   |                   |   | 2,922  |  
|Unpledged investment securities, available-for-sale      |  |                        | 44,080 |   |                   |   | 40,815 |  
|Cash surrender value of life insurance                   |  |                        | 11,864 |   |                   |   | 11,639 |  
|                                                         |  |                        |        |   |                   |   |        |  
|Total liquid assets                                      |  | $                      | 83,815 |   |                   | $ | 76,047 |  
|                                                         |  |                        |        |   |                   |   |        |  
|Liquidity ratio:                                         |  |                        |        |   |                   |   |        |  
|Percentage of ending deposits and short-term liabilities |  |                        | 16.99  | % |                   |   | 16.67  | %

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 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.



32



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##### Table of Contents

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 June 30, 2007:



|                         |  |                                         |        |                              |   |        |                                |  |       |                    |  |      |  
|------------------------ |  | --------------------------------------- | ------ | ---------------------------- | - | ------ | ------------------------------ |  | ----- | ------------------ |  | ---- | -
|Change (in Basis Points) |  | Net Interest Income(next twelve months) |        | Change in NetInterest Income |   |        | % Change in NetInterest Income |  |       | Net InterestMargin | 
|                         |  | (Dollars in Thousands)                  |        |                              |   |        |                                |  |      
|+ 200                    |  | $                                       | 31,832 |                              | $ | 2,492  |                                |  | 8.49  | %                  |  | 5.82 | %
|+ 100                    |  |                                         | 30,595 |                              |   | 1,255  |                                |  | 4.28  | %                  |  | 5.59 | %
|0                        |  |                                         | 29,340 |                              |   |       |                                |  | 0.00  | %                  |  | 5.36 | %
| 100                    |  |                                         | 28,121 |                              |   | (1,220 | )                              |  | (4.16 | )%                 |  | 5.14 | %
| 200                    |  |                                         | 26,883 |                              |   | (2,457 | )                              |  | (8.37 | )%                 |  | 4.91 | %

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 to be 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 $45.9 million at June 30, 2007, compared to $42.2
million at December 31, 2006. The increase of $3.7 million, or 9% during the first six months of 2007 was primarily due to $4.1 million in year-to-date net income, less $970,000 in the change in net unrealized loss on investment securities
available for sale, after tax effects, $301,000 credited to capital in relation to compensation expense associated with the issuance of stock options and the proceeds of $293,000 from the exercise of stock options, including tax benefit.



33



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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 |        |  | MinimumCapitalRequirementAmount/Ratio |   |  | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction ProvisionsAmount/Ratio |       
|As of June 30, 2007:                    |  |                     |        |  |                                       |   |  |                                                                                   |        |  |      |   |  |   |        |  |       |  
|Total capital to risk-weighted assets:  |  |                     |        |  |                                       |   |  |                                                                                   |        |  |      |   |  |   |        |  |       |  
|the Company                             |  | $                   | 66,836 |  | 13.26                                 | % |  | $                                                                                 | 40,313 |  | 8.00 | % |  | $ | 50,392 |  | 10.00 | %
|the Bank                                |  |                     | 58,948 |  | 11.70                                 | % |  |                                                                                   | 40,313 |  | 8.00 | % |  |   | 50,391 |  | 10.00 | %
|Tier 1 capital to risk-weighted assets: |  |                     |        |  |                                       |   |  |                                                                                   |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                     | 58,110 |  | 11.53                                 | % |  |                                                                                   | 20,157 |  | 4.00 | % |  |   | 30,235 |  | 6.00  | %
|the Bank                                |  |                     | 52,640 |  | 10.45                                 | % |  |                                                                                   | 20,157 |  | 4.00 | % |  |   | 30,235 |  | 6.00  | %
|Tier 1 capital to average assets:       |  |                     |        |  |                                       |   |  |                                                                                   |        |  |      |   |  |   |        |  |       |  
|the Company                             |  |                     | 58,110 |  | 10.06                                 | % |  |                                                                                   | 23,111 |  | 4.00 | % |  |   | 28,889 |  | 5.00  | %
|the Bank                                |  |                     | 52,640 |  | 9.12                                  | % |  |                                                                                   | 23,090 |  | 4.00 | % |  |   | 28,863 |  | 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 $58.1 million of Tier 1 capital at June 30, 2007, $15.6 million consisted of Trust
Preferred Securities. Trust Preferred Securities, up to the amount of 25% of core capital, may be included in Tier 1 capital for regulatory purposes, but classified as long-term debt in accordance with generally accepted accounting principles,
however, no assurance can be given that trust preferred securities will continue to be treated as Tier 1 capital in the future. The remaining $2.4 million of Trust Preferred Securities is included in Tier 2 capital.

On July 7, 2007, Centennial Capital Trust I (the Trust), a wholly-owned subsidiary of 1st Centennial Bancorp (the Company), redeemed 100% of
its trust preferred securities that were issued on July 11, 2002 with a maturity date of October 7, 2032. See Note 5, Subsequent Event.



34



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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 second 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.



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##### Table of Contents

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

The
Companys annual meeting of shareholders was held on May 15, 2007. A total of 2,306,219 shares were represented and voting at the meeting, constituting 71.5% of the 3,223,541 issued and outstanding shares entitled to vote at the
meeting. Proxies were solicited by the Companys management pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to Managements nominees for directorship as listed in the
proxy statement, and all of such nominees were elected pursuant to the vote of shareholders. The directors noted below were elected to one-year terms. The votes tabulated were:



|                    |  |                  |  |                     |  |          
|------------------- |  | ---------------- |  | ------------------- |  | ---------
|NAME:               |  | AUTHORITY GIVEN: |  | AUTHORITY WITHHELD: |  | TOTAL:   
|James R. Appleton   |  | 2,297,504        |  | 8,715               |  | 2,306,219
|Bruce J. Bartells   |  | 2,297,504        |  | 8,715               |  | 2,306,219
|Carole H. Beswick   |  | 2,297,504        |  | 8,715               |  | 2,306,219
|Larry Jacinto       |  | 2,297,504        |  | 8,715               |  | 2,306,219
|Ronald J. Jeffrey   |  | 2,297,144        |  | 9,075               |  | 2,306,219
|William A. McCalmon |  | 2,297,504        |  | 8,715               |  | 2,306,219
|Patrick J. Meyer    |  | 2,297,504        |  | 8,715               |  | 2,306,219
|Thomas E. Vessey    |  | 2,297,504        |  | 8,715               |  | 2,306,219
|Stanley C. Weisser  |  | 2,297,504        |  | 8,715               |  | 2,306,219
|Douglas F. Welebir  |  | 2,297,504        |  | 8,715               |  | 2,306,219

There were no broker non-votes received with respect to this item.



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

None.



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##### Table of Contents

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



|            |  |                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibits                                                                            
|3.1         |  | Articles of Incorporation of the Company21                                                         
|            | 
|3.2         |  | Amendment to Articles of Incorporation of the Company22                                            
|            | 
|3.3         |  | Amendment to Articles of Incorporation of the Company23                                            
|            | 
|3.4         |  | Restated By-Laws of the Company24                                                                  
|            | 
|10.1        |  | Form of Indemnification Agreement25                                                                
|            | 
|10.2        |  | Amended and Restated Stock Incentive Plan26                                                        
|            | 
|10.3        |  | 1st Centennial Bank Employee Stock Ownership Plan (with 401(k) provisions) dated August 1, 200427  
|            | 
|10.4        |  | Employment Agreement of Beth Sanders dated December 1, 200428                                      
|            | 
|10.5        |  | Employment Agreement of Suzanne Dondanville dated December 1, 200429                               
|            | 
|10.6        |  | Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200130                   
|            | 
|10.7        |  | Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200231                     
|            | 
|10.8        |  | Salary Continuation Agreement of Clifford Schoonover dated December 17, 200232                     
|            | 
|10.9        |  | Amendment to Salary Continuation Agreement of Anne Elizabeth Sanders dated December 1, 200133      
|            | 
|10.10       |  | Amendment to Salary Continuation Agreement of Suzanne Dondanville dated December 17, 200234        
|            | 
|10.11       |  | Amendment to Salary Continuation Agreement of Clifford Schoonover dated December 17, 200235        
|            | 
|10.12       |  | Salary Continuation Agreement of Thomas E. Vessey dated April 7, 200636                            
|            | 
|10.13       |  | Salary Continuation Agreement of John P. Lang dated April 7, 200637                                
|            | 
|10.14       |  | Form of Agreement between 1stCentennial Bank and Officers with respect to Death Benefit.38         
|            | 
|10.15       |  | Indenture for Trust Preferred Securities dated September 28, 200539                                
|            | 
|10.16       |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated September 28, 200540
|            | 
|10.17       |  | Guarantee Agreement for Trust Preferred Securities dated September 28, 200541                      



---

|21 | Incorporated by reference
to exhibit of the same number on Form S-4 dated October 20, 1999.
|-- | -------------------------------------------------------------------------------------------

|22 | Incorporated by reference
to exhibit of the same number on Form 10-QSB for the quarter ended June 30, 2002.
|-- | -----------------------------------------------------------------------------------------------------------

|23 | Incorporated by reference
to exhibit of the same number on Form SB-2 dated March 13, 2003.
|-- | ------------------------------------------------------------------------------------------

|24 | Incorporated by reference
to exhibit of the same number on Form 8-K dated January 19, 2007.
|-- | -------------------------------------------------------------------------------------------

|25 | Incorporated by reference
to exhibit 10.2 on Form SB-2 dated March 21, 2001.
|-- | ----------------------------------------------------------------------------

|26 | Incorporated by reference
to exhibit 10.10 on Form 10-KSB for the year ended December 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|27 | Incorporated by reference
to exhibit 10.9 on Form 10-KSB for the year ended December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------

|28 | Incorporated by reference
to exhibit 10.31 on Form 10-KSB for the year ended December 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|29 | Incorporated by reference
to exhibit 10.32 on Form 10-KSB for the year ended December 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

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

|31 | Incorporated by reference
to exhibit 10.17 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------

|32 | Incorporated by reference
to exhibit 10.18 on Form SB-2 dated March 13, 2003.
|-- | -----------------------------------------------------------------------------

|33 | Incorporated by reference
to exhibit 10.25 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------

|34 | Incorporated by reference
to exhibit 10.24 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------

|35 | Incorporated by reference
to exhibit 10.26 on Form 10-KSB for the year ended December 31, 2003.
|-- | -----------------------------------------------------------------------------------------------

|36 | Incorporated by reference
to exhibit 99.1 on Form 8-K dated April 11, 2006.
|-- | ---------------------------------------------------------------------------

|37 | Incorporated by reference
to exhibit 99.1 on Form 8-K dated April 11, 2006.
|-- | ---------------------------------------------------------------------------

|38 | Incorporated by reference
to exhibit 99.1 on Form 8-K dated November 3, 2006.
|-- | -----------------------------------------------------------------------------

|39 | Incorporated by reference
to exhibit 10.35 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------

|40 | Incorporated by reference
to exhibit 10.36 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------

|41 | Incorporated by reference
to exhibit 10.37 on Form 10-Q for the quarter ended September 30, 2005.
|-- | -------------------------------------------------------------------------------------------------



37



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##### Table of Contents

|      |  |                                                                                                                     
|----- |  | --------------------------------------------------------------------------------------------------------------------
|10.18 |  | Indenture for Trust Preferred Securities dated January 15, 200442                                                   
|      | 
|10.19 |  | Amended and Restated Declaration of Trust for Trust Preferred Securities dated January 15, 200443                   
|      | 
|10.20 |  | Guarantee Agreement for Trust Preferred Securities dated January 15, 200444                                         
|      | 
|10.21 |  | Indenture for Trust Preferred Securities dated July 11, 200245                                                      
|      | 
|10.22 |  | Amended and Restated Declaration of Trust for trust preferred securities dated July 11, 200246                      
|      | 
|10.23 |  | Guarantee Agreement for Trust Preferred Securities dated July 11, 200247                                            
|      | 
|10.24 |  | Director Deferred Compensation Plan/Agreement entered into with each non-employee Director effective July 20, 200748
|      | 
|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)                                              



---

|42 | Incorporated by reference
to exhibit 10.25 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|43 | Incorporated by reference
to exhibit 10.26 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|44 | Incorporated by reference
to exhibit 10.27 on Form 10-QSB for the quarter ended March 31, 2004.
|-- | -----------------------------------------------------------------------------------------------

|45 | Incorporated by reference
to exhibit 10.17 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------

|46 | Incorporated by reference
to exhibit 10.18 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------

|47 | Incorporated by reference
to exhibit 10.19 on Form 10-QSB for the quarter ended September 30, 2002.
|-- | ---------------------------------------------------------------------------------------------------

|48 | Incorporated by reference
to exhibit 99.1 on Form 8-K dated July 20, 2007.
|-- | --------------------------------------------------------------------------



38



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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 7thday of August
2007.



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




39