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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-QSB/A





Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934


For the quarterly period ended September 30, 2002





Commission
file number: 000-29105





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CENTENNIAL FIRST FINANCIAL SERVICES


(Name of Small Business Issuer as specified in its charter)





California

91-1995265(State of Incorporation)

(I.R.S. Employer Identification Number)218 East State Street Redlands,
California

92373(Address of Principal Executive Offices)

(Zip Code)





Issuer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





The number of shares of Common Stock of the registrant outstanding as of October 21, 2002 was 1,202,119





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TABLE OF CONTENTS





PAGEExplanation for amendment

2PART IITEM 1

Financial statements

3ITEM 2

Managements Discussion and Analysis of Financial Condition and Results of Operations

12ITEM 3

Controls and Procedures

30PART IIITEM 1

Legal Proceedings

31ITEM 2

Changes in Securities and Use of Proceeds

31ITEM 3

Defaults Upon Senior Securities

31ITEM 4

Submission of Matters to a Vote of Security Holders

31ITEM 5

Other Information

31ITEM 6

Exhibits and Reports on Form 8-K

32Signature

34






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Explanation for amendment of September 30, 2002 Form 10-QSB





This September 30, 2002 Form 10-QSB/A for
Centennial First Financial Services is being filed due to the accidental omission of the disclosure controls and procedures statement signed by the Companys President and Chief Executive Officer, Timothy P. Walbridge. This statement was
accidentally omitted from the original filing, and is included in this amended filing.





This filing also includes immaterial adjustments
related to the Trust Preferred Securities. These adjustments do not affect the substance of the original filing.




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PART IFINANCIAL INFORMATION





ITEM 1.    FINANCIAL STATEMENTS





CENTENNIAL FIRST FINANCIAL SERVICES AND
SUBSIDIARY





CONSOLIDATED STATEMENTS OF CONDITION


September 30, 2002 & December 31, 2001





2002

2001(unaudited)Dollar amounts in thousandsASSETSCash and due from banks

$
11,414

$
10,040Federal funds sold


4,190


7,503Total cash and cash equivalents


15,604


17,543Interest-bearing deposits in financial institutions


4,980


5,954Investment securities, available for sale


28,267


34,014Federal Home Loan Bank stock


361


396Loans, net


137,247


125,695Accrued interest receivable


864


932Premises and equipment, net


2,667


2,647Goodwill


4,180


4,180Cash surrender value of life insurance


4,157


3,213Other assets


1,021


3,452Total assets

$
199,348

$
198,026LIABILITIESDeposits:Noninterest-bearing

$
49,588

$
41,413Interest-bearing and NOW accounts


48,994


52,232Savings


15,531


17,340Time deposits $100,000 or greater


29,780


29,435Other time deposits


28,743


33,908Total deposits


172,636


174,328Accrued interest payable


127


223Long-term debt





3,500Redeemable Preferred Securities of Subsidiary trust holding solely Junior Subordinated Debentures


6,000


Other liabilities


3,868


4,703Total liabilities


182,631


182,754STOCKHOLDERS EQUITYCommon stock, $4 stated value; authorized 10,000,000 shares, issued and outstanding 1,202,119 and 1,144,440 shares at
September 30, 2002 and December 31, 2001, respectively


4,808


4,578Additional paid-in capital


9,100


8,386Retained earnings


2,463


2,196Accumulated other comprehensive income (loss)


346


112Total stockholders equity


16,717


15,272




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Total liabilities and stockholders equity

$
199,348

$
198,026







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CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF EARNINGS


Three and
Nine Months Ended September 30, 2002 and 2001





Three months ended September
30,


Nine Months Ended September
30,2002

2001


2002

2001(unaudited)

(unaudited)


(unaudited)

(unaudited)Dollar amounts in thousands, except per share amountsInterest income:Interest and fees on loans

$
3,238

$
2,365


$
9,287

$
6,218Deposits in financial institutions


56


75



161


209Federal funds sold


30


137



114


321Investments


375


201



1,197


478Total interest income


3,699


2,778



10,759


7,226Interest expense:Demand and savings deposits


108


218



300


710Time deposits $100,000 or greater


168


262



566


710Other time deposits


161


227



674


478Interest on borrowed funds


90


21



240


21Total interest expense


527


728



1,780


1,919Net interest income


3,172


2,050



8,979


5,307Provision for loan losses


146


230



307


280Net interest income after provision for loan losses


3,026


1,820



8,672


5,027Other income:Customer service fees


188


174



543


460Gain from sale of loans


162


71



501


270Gain (loss) from sale of investment securities





(1
)





Other income


292


327



735


610Total other income


642


571



1,779


1,340Other expenses:Salaries and wages


1,108


957



3,296


2,550Employee benefits


417


185



1,000


442Net occupancy expense


309


178



1,115


660Other operating expense


1,209


661



3,269


1,674Total other expenses


3,043


1,981



8,680


5,326Income before provision for income taxes


625


410



1,771


1,041Provision for income taxes


207


146



560


359Net income

$
418

$
264


$
1,211

$
682Basic earnings per share

$
0.35

$
0.27


$
1.01

$
0.83Diluted earnings per share

$
0.34

$
0.26


$
1.00

$
0.81




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CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


Nine Months Ended September 30, 2002 and 2001





Common Stock


Additional Paid-In Capital

Retained Earnings


Accumulated Other Comprehensive Income
(Loss)


TotalDollar amounts in thousandsBALANCE, DECEMBER 31, 2000

$
2,769


$
2,959

$
1,184


$
(42
)

$
6,870Comprehensive income:Net income









682







682Change in net unrealized gain (loss) on investment securities available for sale, after tax effects













221



221Total comprehensive income

















903Cash dividend









(35
)






(35
)Proceeds from issuance of common stock


1,694



5,359










7,053Exercise of stock options, including tax benefit


110



64










174BALANCE, SEPTEMBER 30, 2001 (unaudited)

$
4,573


$
8,382

$
1,831


$
179


$
14,965BALANCE, DECEMBER 31, 2001

$
4,578


$
8,386

$
2,194


$
112


$
15,270Comprehensive income:Net income









1,211







1,211Change in net unrealized gain on investment securities available for sale, after tax effects













234



234Total comprehensive income

















993Stock dividend


228



714


(942
)






Cash paid in lieu of Fractional shares


(3
)













(3
)Exercise of stock options, including tax benefit


5














5BALANCE, SEPTEMBER 30, 2002 (unaudited)

$
4,808


$
9,100

$
2,463


$
346


$
16,717




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CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS


Nine
Months Ended September 30, 2002 and 2001





2002


2001(unaudited)


(unaudited)Dollar amounts in thousandsCASH FLOWS FROM OPERATING ACTIVITIESNet income

$
1,211


$
682Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


425



358Provision for loan losses


307



280Gain from sale of loans


(554
)


(272
)Amortization of deferred loan fees


(387
)


(349
)Amortization of excess purchase value of deposits


(133
)


24Amortization of excess purchase value of loans


112



-Increase in intangible asset


-



(203
)Deferred income tax provision (benefit)


438



(174
)Amortization of premiums on investment securities available for sale


191



80Increase in cash surrender value of life insurance


(144
)


(46
)Decrease (increase) in assets:Accrued interest receivable


68



(324
)Other assets


1,326



(179
)Increase (decrease) in liabilities:Accrued interest payable


(96
)


(49
)Other liabilities


(837
)


1,098Net cash provided by (used in) operating activities


1,927



926CASH FLOWS FROM INVESTING ACTIVITIESNet decrease (increase) in interest-bearing deposits in financial institutions


974



(2,690
)Activity in available for sale securities:Net sales, maturities and (purchases)


5,790



(15,994
)Purchased goodwill from the acquisition of Palomar


-



(4,180
)Proceeds from sale of other real estate owned


-



24Redemptions (Purchases) of Federal Home Loan Bank stock


35



(330
)Purchase of Pacific Coast Bankers Bank stock


-



(487
)Net increase in loans


(11,030
)


(57,678
)Additions to bank premises and equipment


(445
)


(716
)Net cash used in investing activities


(4,676
)


(82,051
)







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CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


Nine Months Ended September 30, 2002 and 2001





2002


2001(unaudited)


(unaudited)Dollar amounts in thousandsCASH FLOWS FROM FINANCING ACTIVITIESNet increase in demand and savings deposits

$
3,128


$
47,767Net (decrease) increase in time deposits


(4,820
)


38,474Cash dividends






(35
)Proceeds from issuance of long-term debt






3,300Repayment of long-term debt


(3,500
)


Proceeds from issuance of Redeemable Preferred Securities of Subsidiary Trust Holding solely Junior Subordinated
Debentures


6,000



Proceeds from stock issuance






7,054Cash paid in lieu of fractional shares


(3
)


Proceeds from exercise of stock options


5



174Net cash provided by financing activities


810



96,734Net (decrease) increase in cash and cash equivalents


(1,939
)


15,609CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


17,543



15,709CASH AND CASH EQUIVALENTS, END OF PERIOD

$
15,604


$
31,318SUPPLEMENTARY INFORMATIONInterest paid

$
1,876


$
2,175Income taxes paid

$
590


$
367







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CENTENNIAL FIRST FINANCIAL SERVICES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


September 30, 2002





Note 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The unaudited financial information included herein has been prepared in conformity with the accounting principles and practices of Centennial First
Financial Services (the Company) consolidated financial statements, Note 1, included in the Annual Report for the year ended December 31, 2001. The accompanying interim consolidated financial statements contained herein are unaudited.
However, in the opinion of the Company, all adjustments, consisting of normal recurring items necessary for a fair presentation of the operating results for the periods shown, have been made. The results of operations for the three and nine months
ended September 30, 2002 may not be indicative of operating results for the year ending December 31, 2002. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications. Cash and cash equivalents consist
of cash, due from banks, and federal funds sold.





Note 2.    EARNINGS PER SHARE





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





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





Earnings per share calculation For the three months ended September 30:2002


2001Net Income

Weighted Average Shares

Per share Amount


Net Income

Weighted Average Shares

Per share Amount(in thousands, except for per share amounts)Basic earnings per share

$
418

1,202

$
0.35


$
264

988

$
0.27Effect of dilutive shares:assumed exercise of outstanding options




10


(0.01
)




24


(0.01
)Diluted earnings per share

$
418

1,212

$
0.34


$
264

1012

$
0.26




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Earnings per share calculation For the nine months ended September 30:2002


2001Net Income

Weighted Average Shares

Per share Amount


Net Income

Weighted Average Shares

Per share Amount(in thousands, except for per share amounts)Basic earnings per share

$
1,211

1,202

$
1.01


$
682

821

$
0.83Effect of dilutive shares:assumed exercise of outstanding options




10


(0.01
)




24


(0.02
)Diluted earnings per share

$
1,211

1,212

$
1.00


$
682

845

$
0.81





Note 3.    OFF-BALANCE SHEET COMMITMENTS





In the normal course of business, there are various commitments outstanding, such as commitments to extend credit, which are not reflected in the
financial statements. At September 30, 2002 and December 31, 2001, such commitments included approximately $135,000 and $394,000, respectively, of standby letters of credit and approximately $66,237,000 and $52,510,000, respectively, of undisbursed
lines of credit and undisbursed loans in process. The Companys exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.





Note 4.    MERGER OF PALOMAR COMMUNITY BANK AND REDLANDS CENTENNIAL BANK





On May 24, 2002 Palomar Community Bank, which was previously a separate wholly-owned subsidiary of Centennial First Financial
Services, surrendered its state charter and was merged into and became a branch of Redlands Centennial Bank. Centennial First Financial Services initially acquired Palomar Community Bank on August 17, 2001.





Note 5.    ISSUANCE OF TRUST PREFERRED SECURITIES





On July 11, 2002, Centennial Capital Trust I, a newly formed Delaware statutory business trust and a wholly-owned subsidiary of the Company (the Trust), issued an aggregate of $6,000,000 of
principal amount of Floating Rate TRUPS ® (Capital Trust Pass-through Securities of the Trust) (the
Trust Preferred Securities). Salomon Smith Barney, Inc. acted as placement agent in connection with the offering of the Trust Preferred Securities. The securities issued by the Trust are fully guaranteed by the Company with respect to
distributions and amounts payable upon liquidation, redemption or repayment. The entire proceeds to the Trust from the sale of the Trust Preferred Securities were used by the Trust in order to purchase $6,000,000 in principal amount of the Floating
Rate Junior Subordinated Deferrable Interest Debentures due 2032 issued by the Company (the Subordinated Debt Securities).




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Subject to a maximum of 25% of Tier 1 capital for all cumulative preferred stock, the Trust Preferred
Securities are included as Tier 1 capital for purposes of calculating the Companys regulatory capital ratios under the Prompt Corrective Action guidelines issued by the Federal Reserve Board.





The Subordinated Debt Securities bear a variable interest rate equal to LIBOR plus 3.65% (1.8637% + 3.65% = 5.5137% at September 30, 2002), with a maximum rate
of 12.5% through the first call date in July 2007. The Company used approximately $4 million of the approximately $5.8 million in net proceeds it received from the Subordinated Debt Securities to retire existing long-tem debt. Total broker and legal
costs associated with the issuance of $191,500 will be amortized over a 10-year period starting in July 2002.







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





Centennial First
Financial Services (the Company) is the holding company for Redlands Centennial Bank (Redlands) in Redlands, California. This discussion focuses primarily on the results of operations of the Company on a consolidated basis
for the three and nine months ended September 30, 2002, and the financial condition of the Company as of September 30, 2002 and 2001. Results of operations for the three and nine months ended September 30, 2002 include Palomar Community Bank as a
branch of Redlands Centennial Bank. Results of operations for the three and nine months ended September 30, 2001 only include income from Palomar starting August 17, 2001. (See note 4 on page 8).





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 2001 Annual Report on Form 10-KSB. Certain statements in this Report on Form 10-QSB
constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995, 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, economic conditions and competition in the geographic and business areas of San Bernardino, Los Angeles, Orange, and San Diego Counties in which
the Company conducts operations, volatility of rate sensitive deposits, asset/liability matching risks, credit quality, and government regulations. Therefore, the matters set forth below should be carefully considered when evaluating the
Companys business prospects. For additional information concerning these factors, refer to the Companys 10-KSB for the year ended December 31, 2001.





RESULTS OF OPERATIONS





The Company reported net income of $418,000 or $0.35 per basic share and $0.34 per
diluted share for the third quarter of 2002. This compares to net income of $264,000, or $0.27 per basic share and $0.26 per diluted share for the same period in 2001. Earnings per share for 2001 have been restated due to a stock dividend, which was
issued on April 1, 2002.





For the nine months ended September 30, 2002, the Company reported net income of $1.21 million or $1.01 per
basic share and $1.00 per diluted share. This compares to net income of $682,000 or $0.83 per basic share and $0.81 per diluted share for the same period in 2001.





Consolidated statements of earnings as of, and for the three and nine months ended September 30, 2001 represents only income from Redlands through August 16, 2001. Starting August 17, 2001, income from
Redlands Palomar branch is included in net income. Consolidated statements of earnings as of, and for the three and nine months ended September 30, 2002 includes income from both Redlands and its branch Palomar. The acquisition of Palomar,
which was consummated on August 17, 2001, has primarily been responsible for the increase in net income for the three and nine months ended September 30, 2002. The increase in the number of loans booked by the Company during the first nine months of
2002 has continued to positively impact the Companys earnings.




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Return on average assets and return on average equity for the third quarter of 2002 was 0.77% and 10.07%
respectively, as compared to 0.70% and 9.54% respectively, for the same period in 2001. Return on average assets and return on average equity for the nine months ended September 30, 2002 was 1.16% and 15.04% compared to 0.77% and 10.64% for the same
period in 2001. The increase in return on average assets and return on average equity is due to the fact that growth in the Companys income exceeded growth in the Companys assets. Net income for the nine months ended September 30, 2002
increased by 78% over net income for the same period in 2001, while assets grew only 3.5% during the same periods.





Net Interest
Income/Net Interest Margin





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





For the nine months ended September 30, 2002, net interest income before the provision for loan losses was $9.0 million. This represented an increase of $3.7
million, or 69.2%, over net interest income of $5.3 million for the nine months ended September 30, 2001. The increase in net interest income for the first nine months of 2002 compared to 2001 was primarily the result of the acquisition of Palomar
Community Bank, as well as an increase in the number of loans made during the first nine months of 2002. Total interest earning assets averaged $178.3 million for the first nine months of 2002. This represented an increase of $18.2 million, or
11.3%, compared to average total interest earning assets of $160.1 million for the first nine months of 2001.





The net interest margin
measures net interest income as a percentage of average earning assets. The net interest margin can be affected by changes in the yield on earning assets and the cost of interest-bearing liabilities, as well as changes in the level of
interest-bearing liabilities in proportion to earning assets. The net interest margin can also be affected by changes in the mix of earning assets as well as the mix of interest-bearing liabilities. The Companys net interest margin was 6.71%
for the first nine months of 2002, compared to 6.17% for the same period of 2001. The rate paid on average deposits and other borrowings decreased by 1.05% in these two periods. This was the primary reason for the increase in the net interest
margin, as the return on total interest earning assets only decreased by 0.55% over the same period. The Companys Prime rate averaged 7.33% during the first nine months of 2001, compared to 4.97% for the first nine months of 2002.





The yield on average interest earning assets decreased slightly in the first nine months of 2002 to 8.05% from 8.60% in the same period
of 2001. The decrease in the yield on average earning assets resulted from a market in which lower interest rates prevailed in the first 9 months of 2002 compared to 2001. The yield on average interest earning assets also decreased because
Palomars loans for the most part have lower yields than Redlands loans. The combination of Redlands and Palomars loans in the first nine months of 2002 caused a decrease in the yield of average loans




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from the same period in 2001, which only included loans from Redlands for the first 7 1⁄2 months of 2001. Decrease in yields on average loans
had the biggest effect on the decrease in the yield from average interest earning assets. The yield on average loans decreased to 9.30% for the nine months ended September 30, 2002, as compared to 10.40% for the first nine months of 2001.





The cost of average interest-bearing liabilities, including non-interest bearing deposits and borrowed funds, decreased to 1.31% for the
nine months ended September 30, 2002, compared to a cost of 2.36% for the first nine months of 2001. The decrease is a result of several factors, including a lower interest rate environment in the first nine months of 2002 compared to the same
period in 2001, and having higher rate certificates of deposit mature and being replaced by certificates of deposit that reflect the current rate environment. The cost of average interest-bearing deposits and borrowed funds was 1.73% for the first
nine months of 2002 as compared to 3.00% for the same period in 2001. The cost of borrowed funds was 7.26% for the nine months ended September 30, 2002 compared to 5.52% for the same period in 2001.





The Company reported total interest income of $10.7 million for the nine months ended September 30, 2002, which represented an increase of $3.5 million, or
48.6%, over total interest income of $7.2 million for the nine months ended September 30, 2001. Interest expense totaled $1.8 million for the nine months ended September 30, 2002, which represented a decrease of $0.1 million, or 5.3%, over total
interest expense of $1.9 million for the nine months ended September 30, 2001, and is principally the result of a reduced cost of funds in the first nine months of 2002 compared to the same period in 2001.





For the three months ending September 30, 2002, the Company had total interest income of $3.7 million, which is an increase of $0.9 million or 32.1% over total
interest income for the three months ended September 30, 2001. The increase in interest income during this period can be partially attributed to the acquisition of Palomar, but also to continued loan growth. Interest expense for the three months
ending September 30, 2002 was $527,000, which is a decrease of 27.6% or $201,000 compared to the same period in 2001. The decrease in interest expense for this period is because the average rate the Company paid for deposits and other borrowings
decreased from 2.17% to 1.15% for the three months ending September 30, 2001 and 2002.




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





Quarter Ended September 30,2002


2001Average Balance

Interest Earned/ Paid

Average Interest Rate


Average Balance

Interest Earned/ Paid

Average Interest Rate(Dollars in thousands)INTEREST-EARNING ASSETS:Federal funds sold

$
5,641

$
30

2.13
%

$
25,099

$
137

3.49
%Interest-bearing deposits in financial institutions


4,633


56

4.83
%


6,941


75

5.25
%Investment securities:Taxable


24,593


329

5.35
%


15,350


161

5.28
%Non-taxable


4,184


46

4.40
%


3,687


40

4.34
%Total investments


39,051


461

4.74
%


51,077


413

4.33
%Loans


138,212


3,238

9.37
%


114,340


2,365

10.02
%Total average interest-earning assets

$
177,263

$
3,699

8.35
%

$
165,417

$
2,778

8.26
%INTEREST-BEARING LIABILITIES:Demand deposits

$
51,315

$





$
37,523

$


Interest-bearing demand deposits


15,299


12

0.31
%


18,163


14

0.47
%Money market deposits


36,019


73

0.81
%


38,940


167

1.95
%Savings deposits


17,833


23

0.52
%


14,191


37

1.22
%Time deposits of $100,000 or more


28,399


168

2.37
%


26,813


262

4.56
%Time deposits under $100,000


29,507


161

2.18
%


34,952


227

4.05
%Total average interest-bearing liabilities

$
127,057

$
437

1.38
%

$
133,059

$
707

2.75
%Other borrowings


4,492


90

8.01
%


1,596


21

5.26
%Total average deposits and other borrowings

$
182,864

$
527

1.15
%

$
172,178

$
728

2.17
%Average rate excluding demand deposits







1.60
%







2.78
%Net interest income




$
3,172







$
2,050Net interest margin







7.16
%







6.00
%


---

1 Average rates/yields for these periods have been annualized




15




---

##### Table of Contents




Nine Months Ended September 30,2002


2001Average Balance

Interest Earned/ Paid

Average Interest Rate2


Average Balance

Interest Earned/ Paid

Average Interest Rate2INTEREST-EARNING ASSETS:Federal funds sold

$
9,049

$
114

1.68
%

$
25,618

$
321

3.75
%Interest-bearing deposits in financial institutions


4,678


161

4.59
%


7,136


209

5.36
%Investment securities:Taxable


27,312


1,057

5.16
%


12,832


359

5.83
%Non-taxable


4,116


140

4.54
%


3,681


119

4.31
%Total investments


45,155


1,472

4.35
%


49,267


1,008

4.57
%Loans


133,143


9,287

9.30
%


110,849


6,218

10.40
%Total average interest-earning assets

$
178,298

$
10,759

8.05
%

$
160,116

$
7,226

8.60
%INTEREST-BEARING LIABILITIES:Demand deposits

$
43,982

$





$
35,032

$


Interest-bearing demand deposits


20,613


28

0.18
%


18,500


68

0.68
%Money market deposits


33,558


201

0.80
%


36,758


528

2.31
%Savings deposits


18,459


71

0.51
%


13,988


124

1.48
%Time deposits of $100,000 or more


29,058


566

2.60
%


24,835


710

4.95
%Time deposits under $100,000


31,377


674

2.86
%


35,300


478

4.13
%Total average interest-bearing liabilities

$
133,065

$
1,540

1.54
%

$
129,381

$
1,898

2.99
%Other borrowings


4,406


240

7.26
%


534


21

5.25
%Total average deposits and other borrowings

$
181,453

$
1,780

1.31
%

$
164,947

$
1,919

2.36
%Average rate excluding demand deposits







1.73
%







3.00
%Net interest income




$
8,979







$
5,307Net interest margin







6.71
%







6.17
%





The following table presents a rate and volume analysis for changes in interest income,
interest expense, and net interest income.





Quarter EndedSeptember 30, 2002 Comparedto Quarter Ended September 30, 2001 Increase
(Decrease) Due toVolume


Rate


Total(Dollars in thousands)INCREASE (DECREASE) IN INTEREST INCOMEFederal funds sold

$
(679
)

$
572


$
(107
)Interest-bearing deposits in financial institutions


(121
)


102



(19
)Investment securities:Taxable


488



(320
)


168Non-Taxable


22



(16
)


6Loans


2,392



(1,519
)


873





---

2 Average rates/yields for these periods have been annualized




16




---

##### Table of Contents




Total

$
2,102


$
(1,181
)

$
921INCREASE (DECREASE) ININTEREST EXPENSEInterest bearing demand deposits

$
(13
)

$
11


$
(2
)Money market deposits


(57
)


(37
)


(94
)Savings deposits


44



(58
)


(14
)Time deposits of $100,000 or more


72



(166
)


(94
)Time deposits under $100,000


(221
)


155



(66
)Other borrowings


152



(83
)


69Total

$
(23
)

$
(178
)

$
(201
)TOTAL CHANGE IN NET INTEREST INCOME

$
2,125


$
(1,003
)

$
1,122





Nine Months Ended September
30, 2002 Compared to Nine Months Ended September 30, 2001 Increase (Decrease) Due toVolume


Rate


TotalINCREASE (DECREASE) ININTEREST INCOMEFederal funds sold

$
(621
)

$
414


$
(207
)Interest-bearing deposits in financial institutions


(132
)


84



(48
)Investment securities:Taxable


844



(146
)


698Non-Taxable


19



2



21Loans


2,319



750



3,069Total


2,429



1,104



3,533INCREASE (DECREASE) IN INTEREST EXPENSEInterest bearing demand deposits


14



(44
)


(30
)Money market deposits


(74
)


(253
)


(327
)Savings deposits


66



(119
)


(53
)Time deposits of $100,000 or more


209



(353
)


(144
)Time deposits under $100,000


(162
)


358



196Other borrowings


203



16



219Total


256



(395
)


(139
)TOTAL CHANGE IN NET INTEREST INCOME

$
2,173


$
1,499


$
3,672





PROVISION FOR LOAN LOSSES





Due to the credit risk inherent in the business of making loans, Centennial First sets aside an allowance, or reserve for loan losses through charges to earnings. The charges are shown in
the income statements as provision for loan losses, and specifically identifiable and quantifiable losses are immediately charged off against current period earnings to achieve an allowance for loan




17




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losses that in Managements judgment is considered adequate to absorb losses inherent in the loan
portfolio after net charge-offs have been deducted. The amount of the allowance is based on managements regular review of the loan portfolio and consideration of such factors as historical loss experience, general prevailing economic
conditions, changes in the size and composition of the loan portfolio and specific borrower considerations, including repayment ability and the estimated value of the underlying collateral.





For the nine months ended September 30, 2002, the provision for loan losses increased 85% or $141,000 to $307,000, compared to $166,000 in the same period in 2001. The increase in 2002 is
primarily the result of the growth in the size of the Companys loan portfolio, which was due primarily to the acquisition of Palomar, as well as continued strong demand for loans. The procedures for monitoring the adequacy for the allowance
for loan losses, as well as detailed information concerning the allowance itself, are included below under Allowance for loan losses.





NON-INTEREST INCOME





Non-interest income includes revenues earned from sources other than interest income. These
sources include: service charges and fees on deposit accounts, gains from sales of loans, gain or loss on sale of securities or on other real estate owned, increases in the cash surrender value of life insurance, and other sources of income.





Other operating income totaled $1.8 million for the nine months ended September 30, 2002. This represented an increase of $0.5 million,
or 38.4%, from other operating income of $1.3 million for the nine months ended September 30, 2001. The increase was primarily the result of increases in the amount of customer service fees collected as a result of the Palomar Community Bank
acquisition in August 2001, and an increase in gains from loans sold. For the third quarter of 2002, other operating income totaled $642,000, which represents a $71,000 increase or 12.4% over the same period in 2001. The increase in the third
quarter of 2002 is primarily the result of increases in the volume of loans sold.




18




---

##### Table of Contents




The following table sets forth components of Centennial Firsts non-interest income for the periods
indicated and expresses the amounts as percentage of total non-interest income:





Three months ended September 30,

Nine months ended September 30,2002

2001

2002

2001Amount

Amount

Amount

Amount(Dollars in thousands)NON-INTEREST INCOME:Customer service fees

$
188

$
174

$
543

$
460Gain from sale of loans


162


71


501


270Increase in cash value Of life insurance


53


41


152


54Broker fee income


94


58


188


133Other income


145


227


395


423Total other income

$
642

$
571

$
1,779

$
1,340





Three months ended September 30,


Nine months ended September 30,2002


2001


2002


2001Amount


Amount


Amount


AmountCustomer service fees

29.28
%

30.47
%

30.52
%

34.33
%Gain from sale of loans

25.23
%

12.43
%

26.16
%

20.15
%Increase in cash value Of life insurance

8.26
%

7.18
%

8.54
%

4.03
%Broker fee income

14.64
%

10.16
%

10.57
%

9.92
%Other income

22.59
%

39.76
%

22.20
%

31.57
%Total other income

100.00
%

100.00
%

100.00
%

100.00
%Total non-interest income as a percent of average assets (annualized):

1.18
%

1.52
%

1.14
%

1.52
%





NON-INTEREST EXPENSE





Non-interest expenses for the Company includes expenses for salaries and benefits, occupancy, equipment, professional services, promotion and other expenses (data processing, stationery and
supplies, deposit insurance, promotional, other real estate owned, and misc. expenses). Other operating expenses totaled $8.7 million for the nine months ended September 30, 2002. This represented an increase of $3.4 million, or 64.2%, over other
operating expenses of $5.3 million for the nine months ended September 30, 2001. The increase in non-interest expense is due to the acquisition of Palomar Community Bank, as well as increases in professional fees due to the merger of Palomar
Community Bank into Redlands Centennial Bank in 2002, as well as increases in salaries during the first 9 months of 2002. For the third quarter of 2002, other operating expenses totaled $3.0 million. This represents a $1.0 million increase or 50.0%
over the same period in 2001. The increase in the third quarter of 2002 is primarily the result of the acquisition of Palomar Community Bank in the second half of 2001, as well as increased professional fees related to the merger of Palomar into
Redlands Centennial Bank.




19




---

##### Table of Contents




The following table sets forth components of Centennial Firsts non-interest expense for the
periods indicated and expresses the amounts as a percentage of total non-interest expense:





Three months ended September 30,

Nine months ended September 30,2002

2001

2002

2001Amount

Amount

Amount

Amount(Dollars in thousands)OTHER EXPENSES:Salaries, wages, and employee benefits

$
1,525

$
1,142

$
4,296

$
2,992Net occupancy expense


432


178


1,115


660Marketing


70


108


163


167Data processing fees


238


111


564


274Professional fees


181


76


645


329Postage, telephone, supplies


109


38


389


113Directors fees


35


30


113


88Legal settlement


225





425


Other operating expenses


228


298


970


703Total other expenses

$
3,043

$
1,981

$
8,680

$
5,326





Three months ended September 30,


Nine months ended September 30,2002


2001


2002


2001Amount


Amount


Amount


AmountSalaries, wages, and employee benefits

50.12
%

57.64
%

49.49
%

56.17
%Net occupancy expense

14.20
%

8.99
%

12.85
%

12.39
%Marketing

2.30
%

5.45
%

1.88
%

3.14
%Data processing fees

7.82
%

5.60
%

6.50
%

5.14
%Professional fees

5.95
%

3.84
%

7.43
%

6.18
%Postage, telephone, supplies

3.58
%

1.92
%

4.48
%

2.12
%Directors fees

1.15
%

1.51
%

1.30
%

1.65
%Legal settlement

7.39
%

0.00
%

4.90
%

0.00
%Other operating expense

7.49
%

15.05
%

11.17
%

13.21
%Total other expenses

100.00
%

100.00
%

100.00
%

100.00
%Total non-interest expense as a percent of average assets (annualized):

5.61
%

5.34
%

5.54
%

6.08
%





FINANCIAL CONDITION





GENERAL





The Companys total assets were $199.3 million at
September 30, 2002, an increase of 0.7% or $1.3 million, compared to total assets of $198.0 million at December 31, 2001. Total deposits at September 30, 2002 were $172.6 million, a slight decrease from total deposits of $174.3 million at December
31, 2001. Total loans, net of the allowance for loan losses and unearned income increased 9.1%, or $11.5 million to a total of $137.2 million. Strong loan demand in the market areas of Redlands and Palomar contributed to the increase in total assets
and total loans.





LOANS





The Companys total gross loans at September 30, 2002 were $139.3 million, representing a 9.2% increase over total gross loans at December 31, 2001 of $127.6 million. The Companys lending focus is commercial, real estate,
and construction loans. These types of loans make up 93% of the




20




---

##### Table of Contents

total loan portfolio. The performance and future repayment of construction and real estate loans is dependent on a number of regional economic
factors, including real estate prices. The future repayment of commercial loans is generally dependent on future cash flows from business operations.





The remaining types of loans consist of auto loans, equity loans, indirect loans, and other types of consumer loans. These types of loans make up the remaining 7% of the total loan portfolio.





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





September 30, 2002


December 31, 2001Amount


%


Amount


%(Dollars in thousands)Real estate loansConstruction and development

$
50,715


36
%

$
37,950


30
%Mortgage loans


46,262


33
%


49,127


39
%Commercial loans


32,945


24
%


30,581


24
%Automobile loans


2,185


2
%


2,362


2
%Indirect loans


16


0
%


583


0
%Equity loans


5,567


4
%


4,759


3
%Consumer and other loans


1,604


1
%


2,198


2
%Total loans


139,294


100
%


127,560


100
%Less unearned income


(377
)





(405
)Less allowance for loans losses


(1,670
)





(1,460
)Net loans

$
137,247





$
125,695





Non-performing assets





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





Nonperforming assets include loans for which interest is no longer accruing, loans 90 or more days past due, impaired loans and other real estate owned. As a
result of Centennial Firsts continued adherence to strict loan standards and policies, nonperforming assets at September 30, 2002 were $543,000 compared to $241,000 at December 31, 2001, representing .39% and .19% of gross loans at September
30, 2002 and December 31, 2001, respectively.




21




---

##### Table of Contents




The following table provides information with respect to all nonperforming assets
as of September 30, 2002 and December 31, 2001:





September 30 2002


December 31 2001(Dollars in thousands)Loans on nonaccrual status

$
543


$
241Loans past due greater than 90 days






Total nonperforming assets

$
543


$
241Allowance for loan losses

$
1,670


$
1,460Ratio of total nonperforming assets3to total loans


.39
%


.19
%Ratio of allowance for loan losses to total nonperforming assets


307.55
%


605.09
%Ratio of non-performing loans to total loans


.39
%


.19
%





ALLOWANCE FOR LOAN LOSSES





The allowance for loan losses totaled $1.7 million at September 30, 2002, compared to $1.5 million at December 31, 2001. The procedures for monitoring the adequacy of the allowance, as well
as detailed information concerning the allowance itself, are included below. The increase in the allowance in the nine months ended September 30, 2002 was primarily due to a decrease in the amount of loans charged off in the first nine months of
2002 compared to the same period in 2001, as well as an increase in the provision charged to operations for the same nine month periods.





The allowance for loan losses is increased by the provision for loan losses and decreased by charge-offs, and increased for recoveries. The adequacy of the allowance for loan losses is measured in the context of several key ratios
and factors including: (1) the ratio of the allowance to total outstanding loans; (2) the ratio of total nonperforming loans to total loans; and, (3) the ratio of net charge-offs (recoveries) to average loans outstanding. Additional factors
considered in establishing an appropriate allowance include a careful assessment of the financial condition of the borrower; a realistic determination of the value and adequacy of underlying collateral; the condition of the local economy and the
condition of the specific industry of the borrower; comprehensive analysis of the levels and trends of loan categories; and a review of delinquent and classified loans. Managements evaluation is based on a system whereby each loan is
graded at the time of origination, extension or renewal. Each grade is assessed a risk factor, which is calculated to assess the adequacy of the allowance for loan losses. Further, management considers other factors including changes in
the nature and volume of the loan portfolio, overall portfolio quality, loan concentrations, trends in the level of delinquent and classified loans, specific problem loans and commitments, and current and anticipated economic conditions. Management
and the Board of Directors review the allowance for loan losses monthly. While the Board of Directors believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in
material adjustments, and net earnings could be


---

3 Consists entirely of nonperforming loans. The Company had no OREO as of September 30, 2002 or December 31, 2001.




22




---

##### Table of Contents




significantly adversely affected, if circumstances differ substantially from the assumptions used in
making the final determination.





The allowance for loan losses as a percentage of total loans outstanding as of September 30, 2002 was
1.20%, as compared to 1.19% as of September 30, 2001. Net loan charge-offs during the third quarter of 2002 approximated $68,000, or 0.05% of average total loans, compared to $186,000 or 0.16% during the same period in 2001. Net loan charge-offs
during the first nine months of 2002 totaled $97,000, compared to $227,000 during the same period in 2001. The Company maintains the allowance for loan losses at a level management feels is adequate to absorb losses inherent in the loan portfolio.
The evaluation is based upon a continuous review of the Companys and the banking industrys historical loan loss experience, known and inherent risks contained in the loan portfolio, composition and growth of the loan portfolio, current
and projected economic conditions and other factors. However, no assurance can be given that changes in the current economic environment in the Companys market areas or other circumstances will not result in increased losses in the loan
portfolio in the future.





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





Nine months ended September 30,2002


2001(Dollars in thousands)Allowance for loan losses balance, beginning of period

$
1,460


$
868Acquisition allowance, Palomar






603Loans charged off:Real estate


49



Commercial


22



163Consumer


46



64Lease financing






Credit card and related accounts


5



8Total loans charged off


122



235Recoveries:Real estate


2



Commercial


12



3Consumer


11



5Credit card and related accounts






Total recoveries


25



8Net (charge-offs) recoveries


(97
)


(227
)Provision charged to operations


307



280Provision for off-balance sheet commitments






(114
)Allowance for loan losses balance, end of period

$
1,670


$
1,410Loans outstanding at end of period, net of unearned interest income

$
139,294


$
118,203Average loans outstanding for the period, net of unearned interest income

$
133,143


$
110,849Ratio of net loans charged off (recovered) to average loans outstanding


.07
%


.21
%Ratio of allowance for loan losses to loans at end of period


1.20
%


1.19
%




23




---

##### Table of Contents




The following table summarizes the allocation of the allowance for loan losses:





September 30, 2002


December 31, 2001Allowance for Loan Losses

Ratio of Loan Category to Outstanding Total Loans


Allowance for Loan Losses

Ratio of Loan Category to Outstanding Total Loans(Dollars in thousands)Real estate-construction

$
468

36
%

$
200

30
%Real estate-mortgage


561

33
%


430

39
%Commercial loans


507

24
%


571

24
%Automobile


0

2
%


69

2
%Indirect


0

0
%


0

0
%Equity loans


54

4
%


25

3
%Consumer & other


80

1
%


45

2
%Not allocated








120Total allowance for loan loss

$
1,670

100
%

$
1,460

100
%Total loans

$
139,294




$
127,155





INVESTMENTS





Centennial Firsts investment portfolio provides income to Centennial First and also serves as a source of liquidity. Total yield, maturity and risk 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 Centennial Firsts books at fair market value. At September 30, 2002 and December 31, 2001, 100% of the investment securities owned by the Company were classified as Available for Sale. At September 30, 2002,
Centennial Firsts investment portfolio at fair value consisted of $22.7 million in mortgage-backed securities, $4.8 million in municipal bonds, $487,000 of marketable equity securities, and $271,000 in U.S. Treasury obligations compared to
$28.7 million, $4.5 million, $487,000 and $264,000 respectively at December 31, 2001. The decrease in the Companys investment portfolio was due to maturities, early payoffs for some of the Mortgage-backed securities, and funds reinvested in
loans.





The Company also has cash invested in interest-bearing deposits and short-term time certificates at other financial institutions
totaling $4.98 million at September 30, 2002 versus $5.95 million at December 31, 2001. Overnight federal funds sold totaled $4.19 million at September 30, 2002, versus $7.50 million at December 31, 2001.




24




---

##### Table of Contents




The following table is a comparison of amortized cost and fair value of investment securities at
September 30, 2002 and December 31, 2001:





September 30, 2002Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value(Dollars in thousands)AVAILABLE-FOR-SALE:Mortgage-backed securities

$
22,323

$
388

$


$
22,711Obligations of States and Local Governments


4,596


202





4,798Marketable Equity Securities


487








487U.S. Treasury Obligations


257


14





271$
27,663

$
604

$


$
28,267





December 31, 2001Amortized Cost

Unrealized Gains

Unrealized Losses

Fair ValueAVAILABLE-FOR-SALE:Mortgage-backed securities

$
28,436

$
271

$


$
28,707Obligations of States and Local Governments


4,624


3


71


4,556Marketable Equity Securities


487








487U.S. Treasury Obligations


260


4





264$
33,807

$
278

$
71

$
34,014





DEPOSITS





Total deposits decreased slightly by $1.7 million, or 1.0%, to $172.6 million at September 30, 2002 from $174.3 million at December 31, 2001. Noninterest-bearing demand deposits at September 30, 2002,
were $49.6 million, an increase of $8.2 million, or 19.8% from $41.4 million at December 31, 2001. Interest bearing and NOW accounts decreased 6.3%, or $3.3 million to $48.9 million at September 30, 2002 from $52.2 million at December 31, 2001.
Savings and time deposits decreased by $6.7 million to $74.0 million at September 30, 2002 from $80.7 million at December 31, 2001. The slight decrease in deposits in the first nine months of 2002 is due to a decrease in deposits at the Palomar
branch after the fee structure of Redlands was implemented at Palomar.





The average rate paid on time deposits was significantly lower in
the first nine months of 2002 compared to 2001, with the average rate paid on time deposits of $100,000 or more decreased from 4.95% for the year ended December 31, 2001 to 2.60% for the nine months ended September 30, 2002, while the average rate
on time deposits under $100,000 decreased from 4.11% for the year ended December 31, 2001 to 2.86% for the nine months ended September 30, 2002. The decrease in the rates paid on time deposits is a result of the interest rate decreases throughout
2001.




25




---

##### Table of Contents




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





Nine Months Ended September
30, 2002


Year Ended December 31,
2001Average Balance

Average Rate


Average Balance

Average Rate(Dollars in thousands)INTEREST-BEARING LIABILITIES:Demand deposits

$
43,982




$
36,050

Interest-bearing demand deposits


20,613

0.18
%


17,455

0.45
%Money market deposits


33,558

0.80
%


37,429

2.00
%Savings deposits


18,459

0.51
%


14,554

1.41
%Time deposits of $100,000 or more


29,058

2.60
%


25,211

4.94
%Time deposits under $100,000


31,377

2.86
%


36,489

4.11
%Total interest-bearing deposits


133,065

1.54
%

$
131,138

2.11
%Total deposits

$
177,047

1.16
%

$
167,188

1.56
%





The following table sets forth, by time remaining to maturity, all time certificates of
deposit accounts outstanding in amounts of $100,000 or more at September 30, 2002 and December 31, 2001:





As of September 30, 2002

As of December 31, 2001(Dollars in thousands)Three months or less

$
10,168

$
14,035Over three through twelve months


18,147


14,374Over one year to three years


206


924Over three years


1,259


102Total

$
29,780

$
29,435





LIQUIDITY





Liquidity is the Companys ability to absorb fluctuations in deposits while simultaneously providing for the credit needs of its borrowers. The Company has adopted policies to maintain a
relatively liquid position to enable it to respond to changes in the financial environment and ensure sufficient funds are available to meet those needs. Generally, the Companys major sources of liquidity are customer deposits, sales and
maturities of investment securities, proceeds from the sale of loans, the use of federal funds markets, borrowings from the Federal Home Loan Bank (FHLB), and net cash provided by operating activities. Scheduled loan payments are a relatively stable
source of funds, while deposit inflows and unscheduled loan repayments are not a stable source of liquidity. The Company holds overnight federal funds as a cushion for temporary




26




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liquidity needs. During the nine months ended September 30, 2002, federal funds sold averaged $9.0 million, or 4.3% of total average assets compared to $25.6 million or 13.3% of total average
assets at September 30, 2001. Redlands also maintains borrowing arrangements with several correspondent banks.





The following table sets
forth certain information with respect to Centennial Firsts liquidity as of September 30, 2002 and December 31, 2001.





As of September 30, 2002


As of December 31, 2001(Dollars in thousands)Cash and due from banks

$
11,414


$
10,040Federal funds sold


4,190



7,503Interest earning deposits


4,980



5,954Unpledged securities


26,956



31,377Total liquid assets

$
47,540


$
54,874Liquidity ratios(1)Liquid assetsEnding assets


23.83
%


27.71
%Ending deposits(2)


27.54
%


31.95
%


---

|(1) |  | Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits and market value of available-for-sale securities less book value
of pledged securities.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Less pledged public deposits.
|--- |  | -----------------------------




ASSET/LIABILITY MANAGEMENT





The purpose of asset/liability management is to provide stable net interest income
growth by protecting The Companys earnings from undue interest rate risk. The Company expects to generate earnings from increasing loan volume, appropriate loan pricing and expense control, and not from trying to accurately forecast interest
rates. Another important function of asset/liability management is managing the risk/return relationship between interest rate risk, liquidity, market risk and capital adequacy. The Company gives priority to liquidity concerns followed by capital
adequacy, then interest rate risk and market risk in the investment portfolio. The Company controls the exposure of earnings to changing interest rates by generally maintaining a position within a narrow range around an earnings neutral
position. An earnings neutral position is defined as the mix of assets and liabilities that generate a net interest margin that is not affected by interest rate changes. However, Management does not believe that the Company can maintain a
totally earnings neutral position. Further, the actual timing of repricing of assets and liabilities does not always correspond to the timing assumed by the Company for analytical purposes. Therefore, changes in market rates can generally impact the
Companys net interest income and net interest margin for long or short periods of time.





The Company monitors its interest rate
risk on a monthly basis through the use of a model, which calculates the effect on earnings of changes in the prevailing market interest rate, rates up environment and rates down environment. The model converts a prevailing market interest rate
change into rate changes for each major class of asset and liability, then simulates the net interest




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margin based on actual repricing over a one year period, assuming that maturities are reinvested in
instruments similar to those maturing during the period.





INTEREST RATE RISK. The table below shows the potential change in
NIM (before taxes) if rates changed as of September 30, 2002. NIM is the net interest margin which is the spread or difference between interest-earning assets and interest-paying liabilities. Centennial Firsts NIM tends to increase
if rates rise, and tends to decline if rates fall. The cause of this exposure is due to Centennial Firsts concentration of short-term and rate sensitive loans as of September 30, 2002.





ECONOMIC RISK. Centennial First establishes earnings risk limits for flat rates, up/down 100 basis points, and up/down 200 basis points. Centennial First has determined that
under these scenarios, the resultant economic value of equity or EVE should be no higher than 20% and no lower than 7%. The Company measures the potential change in the net present value of its net existing assets and
liabilities if rates change (the EVE). The table below also shows the EVE. The EVE is determined by valuing Centennial Firsts assets and liabilities as of September 30, 2002, using a present value cash flow calculation as if
Centennial First is liquidated. The EVE increases when rates increase because there are more variable rate assets than variable rate liabilities.





The following table presents possible changes to net interest margin based on changes in prevailing interest rates:





Change in Interest
Rates

Change in NIM (In thousands
pre-tax)

% Change in NIM to Shareholder
Equity (pre-tax)

% of EVE(Dollars in thousands)+2%

$(3,404)

(19.26%)

7.39%+1%

(1,680)

( 9.50%)

8.19%-1%

1,487

8.41%

9.63%-2%

2,555

14.46%

10.10%





CAPITAL RESOURCES





The Federal Reserve Board and the FDIC have established similar guidelines to implement risk-based capital requirements. Falling below minimum established levels may limit the bank holding company,
bank or savings bank from certain activities. Failure to satisfy applicable guidelines may also subject a banking institution to a variety of enforcement actions by federal regulatory authorities.





The Company and its subsidiary 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, trust preferred securities, and minority
interests in equity accounts of consolidated subsidiaries, less intangibles) and Tier 2 (supplementary capital including allowance for possible credit losses, certain preferred stock, eligible subordinated debt, and other qualifying instruments).
Under the established guidelines, the Company has attained the highest level of capitalization, characterized as Well Capitalized. It is the intent of the Company to continue to maintain Well Capitalized risk-based capital
ratios.




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The total risk-based capital ratio, tier 1 risk-based capital ratio, and leverage ratio for the Company
increased by 22.2%, 30.5%, and 45.3% respectively from December 31, 2001 to September 30, 2002. These increases are primarily due to the issuance of the Junior Subordinated Debt (Trust Preferred Securities) by the Company on July 11, 2002.





The total risk-based capital ratio, tier 1 risk-based capital ratio, and leverage ratio for Redlands Centennial Bank increased by 18.0%,
19.1%, and 22.1% respectively from December 31, 2001 to September 30, 2002. These increases are primarily due to the merger of Palomar Community Bank into Redlands Centennial Bank on May 24, 2002.





The following table illustrates the capital and prompt corrective action guidelines applicable to the Company and Redlands Centennial Bank, as well as their
total risk-based capital ratios, Tier 1 capital ratios and leverage ratios as of September 30, 2002 and December 31, 2001:





At 9/30/02

At 12/31/01

Minimum Necessary to Be Well Capitalized

Minimum Necessary to Be Adequately
CapitalizedCentennial FirstFinancial Services:Total risk-based capital ratio

13.53%

11.07%

10.0%

8.0%Tier 1 risk-based capital ratio

10.83%

8.30%

6.0%

4.0%Leverage ratio

8.27%

5.69%

5.0%

4.0%





At 9/30/02

At 12/31/01

Minimum Necessary to Be Well Capitalized

Minimum Necessary to Be Adequately
CapitalizedRedlands Centennial Bank:Total risk-based capital ratio

11.85%

10.04%

10.0%

8.0%Tier 1 risk-based capital ratio

10.60%

8.90%

6.0%

4.0%Leverage ratio

8.01%

6.56%

5.0%

4.0%





Risked-based capital ratios for Palomar Community Bank are included in Redlands Centennial
Bank as of September 30, 2002.




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ITEM 3.    
CONTROLS AND PROCEDURES





(a)    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-14(c) and 15-d-14(c) as of a date within 90 days of the filing date of this 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 subsidiaries would be made known to them by others within those entities, particularly
during the period in which this quarterly report was being prepared.





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





(b)    Changes in Internal Controls





There were no significant changes in the Companys
internal controls or in other factors that could significantly affect the Companys internal controls subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions. As a
result, no corrective actions were taken.




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PART IIOTHER INFORMATION





ITEM 1.    
LEGAL PROCEEDINGS





On July 10, 2002 the Company settled a breach of contract lawsuit for $425,000, all of which
was expensed in 2002. For more information, refer to the caption LEGAL PROCEEDINGS on page 22 of the Companys form 10-KSB filed on March 29, 2002.





ITEM 2.    
CHANGES IN SECURITIES AND USE OF PROCEEDS





None.





ITEM 3.    
DEFAULTS UPON SENIOR SECURITIES





None.





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





None.





ITEM 5.    
OTHER INFORMATION





None.




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ITEM 6.    
EXHIBITS AND REPORTS ON FORM 8-K





(A)    EXHIBITS





Item

Description1.

Plan of Reorganization and Agreement of Merger, Dated December 1, 1999 Filed as exhibit to Form S-4 dated October 20, 19993.1

Articles of Incorporation, Filed as exhibit to Form S-4 dated October 20, 19993.2

Certificate of Amendment of Articles of Incorporation, dated May 4, 2000. Filed as exhibit to Form 10-QSB, dated August 9, 20023.3

Restated Bylaws of the Corporation, dated July 26, 2002. Filed as exhibit to Form 10-QSB, dated August 9, 2002.10.1

Plan document for the Redlands Centennial Bank Employee Stock Ownership Plan Filed as exhibit to Form S-4 date October 20, 1999.10.2

Redlands Centennial Bank 1990 Stock Option Plan and Addendums Filed as exhibit to Form S-4 dated October 20, 1999.10.3

Brea Branch Lease, dated September 20, 2000 Filed as exhibit to Form SB-2 dated March 21, 2001.10.4

Form of Indemnification Agreement Filed as exhibit to Form SB-2 dated March 21, 2001 .10.5

Stock Purchase Agreement for Palomar Community Bank Dated December 1, 2000 Filed as exhibit to Form SB-2 dated March 21, 2001.10.6

Employment Agreement of Richard Sanborn, dated December 1, 2000. Filed as exhibit to Form 10-KSB dated March 29, 2002.10.7

Salary Continuation plan of Timothy P. Walbridge, dated August 1, 2001. Filed as exhibit to Form 10-KSB dated March 29, 2002.10.8

Salary Continuation plan for Beth Sanders, dated October 1, 2001. Filed as exhibit to Form 10-KSB dated March 29, 2002.10.9

Salary Continuation plan of Richard Sanborn, dated October 1, 2001. Filed as exhibit to Form 10-KSB dated March 29, 2002.10.10

Employment Agreement of Timothy P. Walbridge, dated December 1, 2001. Filed as exhibit to Form 10-KSB dated March 29, 2002.10.11

Employment Agreement of Beth Sanders, dated December 1, 2001. Filed as exhibit to Form 10-KSB dated March 29, 2002.10.12

Amendment to Salary Continuation plan of Timothy P. Walbridge, dated December 1, 2001 Filed as exhibit to Form 10-KSB dated March 29, 2002.10.13

Amendment to Salary Continuation plan of Richard Sanborn, dated December 1, 2001. Filed as exhibit to Form 10-KSB dated March 29, 2002.10.14

Redlands Centennial Bank Employee Stock Ownership Plan, dated February 1, 2000 Filed as exhibit to Form 10-QSB dated May 12, 2000.10.15

Centennial First Financial Services Amended Stock Option Plan, dated February 20, 2002. Filed as exhibit to Form 10-QSB dated November 14, 2002.10.16

Palomar Community Bank lease, dated April 15, 1987 Filed as exhibit to Form 10-QSB dated, May 14, 2002.10.17

Trust Preferred Securities Indenture, dated July 11, 2002. Filed as exhibit to Form 10-QSB dated November 14, 2002.10.18

Trust Preferred Securities Amended and Restated Declaration of Trust, dated July 11, 2002. Filed as exhibit to Form 10-QSB dated November 14, 2002.10.19

Trust Preferred Securities Guarantee Agreement, dated July 11, 2002. Filed as exhibit to Form 10-QSB dated November 14, 2002.99.1

Certification of periodic financial report.




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(B)    REPORTS ON FORM 8-K





The Company filed no reports on form 8-K during the third quarter of 2002.







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SIGNATURE





In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.





CENTENNIAL FIRST FINANCIAL SERVICES (Registrant)Date 11/25/02





/s/    Beth SandersBeth Sanders Chief Financial Officer (Principal Accounting Officer, and officer authorized to sign on behalf of the registrant)






















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Certification





I, Beth Sanders, certify that:





1.  I have reviewed this quarterly report on
Form 10-QSB of Centennial First Financial Services;





2.  Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly
report;





3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:





a)  designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;





b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5.  The
registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and





6.  The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.





Date:  November 12, 2002





/s/    Beth SandersExecutive Vice-President/Chief Financial Officer




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I, Timothy P. Walbridge, certify that:





1.  I have reviewed this quarterly report on Form 10-QSB of Centennial First Financial Services;





2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.  Based on my
knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;





4.  The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;





b)  evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5.  The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons performing the equivalent function):





a)  all
significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any
material weaknesses in internal controls; and





b)  any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls; and





6.  The registrants other
certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date:  November 25, 2002





/s/    Timothy P. WalbridgePresident and Chief Executive Officer







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