##### Table of Contents

---

---




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-QSB





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


For the quarterly period ended March 31, 2002





Commission file number: 000-29105





---




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)





(909) 798-3611


Issuers telephone number, including area code:





---




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.





Yesx

No ̈





The number of shares of Common Stock of the registrant outstanding as of April
19, 2002 was 1,144,649.





---

---



---

##### Table of Contents




TABLE OF CONTENTS





PAGEPART IITEM 1

Financial statements

3ITEM 2

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

10PART IIITEM 1

Legal Proceedings

25ITEM 2

Changes in Securities and Use of Proceeds

25ITEM 3

Defaults Upon Senior Securities

25ITEM 4

Submission of Matters to a Vote of Security Holders

25ITEM 5

Other Information

25ITEM 6

Exhibits and Reports on Form 8-K

26Signatures

27




---

##### Table of Contents




CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CONDITION





March 31, 2002 & December 31, 2001





2002

2001(unaudited)(Dollar amounts in thousands)ASSETSCash and due from banks

$
14,542

$
10,040Federal funds sold


15,318


7,503Total cash and cash equivalents


29,860


17,543Interest-bearing deposits in financial institutions


4,272


5,954Investment securities, available for sale


32,999


34,014Federal Home Loan Bank stock


496


396Loans, net


130,522


125,695Accrued interest receivable


902


932Premises and equipment, net


2,582


2,647Goodwill


4,180


4,180Cash surrender value of life insurance


3,263


3,213Other assets


960


3,452Total assets

$
210,036

$
198,026LIABILITIESDeposits:Noninterest-bearing

$
44,857

$
41,413Interest-bearing and NOW accounts


56,352


52,232Savings


19,279


17,340Time deposits $100,000 or greater


27,794


29,435Other time deposits


31,985


33,908Total deposits


180,267


174,328Accrued interest payable


225


223Long-term debt


3,600


3,500Borrowings from Federal Home Loan Bank


8,000


Other liabilities


2,297


4,703Total liabilities


194,389


182,754STOCKHOLDERS EQUITYCommon stock, $4 stated value; authorized 10,000,000 shares,issued and outstanding 1,144,649 and 1,144,440 sharesat March
31, 2002 and December 31, 2001, respectively


4,579


4,578Additional paid-in capital


8,386


8,386Retained earnings


2,622


2,196Accumulated other comprehensive income (loss)


60


112Total stockholders equity


15,647


15,272Total liabilities and stockholders equity

$
210,036

$
198,026







3




---

##### Table of Contents




CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF EARNINGS


Three Months Ended March 31, 2002 and 2001





2002

2001(unaudited)

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

$
2,842

$
1,930Deposits in financial institutions


60


73Federal funds sold


33


95Investments


409


133Total interest income


3,344


2,231Interest expense:Demand and savings deposits


90


290Time deposits $100,000 or greater


257


213Other time deposits


262


133Interest on borrowed funds


56


Total interest expense


665


636Net interest income


2,679


1,595Provision for loan losses


81


20Net interest income after provision for loan losses


2,598


1,575Other income:Customer service fees


172


141Gain from sale of loans


244


59Gain (loss) from sale of investment securities





1Other income


187


124Total other income


603


325Other expenses:Salaries and wages


1,060


755Employee benefits


322


136Net occupancy expense


331


247Other operating expense


837


491Total other expenses


2,550


1,629Income before provision for income taxes


651


271Provision for income taxes


225


89Net income

$
426

$
182Basic earnings per share

$
0.37

$
0.26Diluted earnings per share

$
0.37

$
0.25




4




---

##### Table of Contents




CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


Three Months Ended March
31, 2002 and 2001





Stock

Additional Paid-In Capital

Retained Earnings


Accumulated Other Comprehensive Income (Loss)


Total(Dollar amounts in thousands)BALANCE, DECEMBER 31, 2000

$
2,769

$
2,959

$
1,184


$
(42
)

$
6,870Comprehensive income:Net income








182







182Change in net unrealized gain (loss) on investment securities available for sale, after tax effects












77



77Total comprehensive income
















259Cash dividend








(35
)






(35
)Exercise of stock options, including tax benefit


109


62










171BALANCE, MARCH 31, 2001 (unaudited)

$
2,878

$
3,021

$
1,331


$
35


$
7,265BALANCE, DECEMBER 31, 2001

$
4,578

$
8,386

$
2,196


$
112


$
15,272Comprehensive income:Net income








426







426Change in net unrealized gain on investment securities available for sale, after tax effects












(52
)


(52
)Total comprehensive income
















374Exercise of stock options


1













1BALANCE, MARCH 31, 2002 (unaudited)

$
4,579

$
8,386

$
2,622


$
60


$
15,647




5




---

##### Table of Contents




CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS





Three Months Ended March 31, 2002 and 2001





2002


2001(unaudited)


(unaudited)(Dollar amounts in thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
426


$
182Adjustments to reconcile net incometo net cash provided by operating activities:Depreciation and amortization


141



102Provision for loan losses


81



20Gain from sale of loans


(244
)


(59
)Amortization of deferred loan fees


(243
)


(92
)Amortization of excess purchase value of deposits


(16
)


Deferred income tax provision (benefit)


374



(216
)Amortization of premiums on investment securities available for sale


87



(33
)(Increase) decrease in cash surrender value of life insurance


(50
)


9Decrease (increase) in assets:Accrued interest receivable


30



22Other assets


2,134



(436
)Increase (decrease) in liabilities:Accrued interest payable


2



69Other liabilities


(2,406
)


(259
)Net cash provided by (used in) operating activities


316



(691
)CASH FLOWS FROM INVESTING ACTIVITIESNet decrease (increase) in interest-bearing deposits in financial institutions


1,682



(40
)Activity in available for sale securities:Net sales, maturities and (purchases)


876



423Purchases of Federal Home Loan Bank stock


(100
)


Net increase in loans


(4,421
)


(2,798
)Proceeds from sales of other real estate owned






14Additions to bank premises and equipment


(76
)


(502
)Net cash used in investing activities


(2,039
)


(2,903
)







6




---

##### Table of Contents




CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


Three Months Ended March 31,
2002 and 2001





2002


2001(unaudited)


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

$
9,503


$
7,213Net (decrease) increase in time deposits


(3,564
)


2,282Cash dividends






(35
)Proceeds from Federal Home Loan Bank borrowing


8,000



Proceeds from issuance of long-term debt


100



Proceeds from exercise of stock options


1



171Net cash provided by financing activities


14,040



9,631Net increase (decrease) in cash and cash equivalents


12,317



6,037CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


17,543



15,709CASH AND CASH EQUIVALENTS, END OF PERIOD

$
29,860


$
21,746SUPPLEMENTARY INFORMATIONInterest paid

$
663


$
567Income taxes paid

$



$
175







7




---

##### Table of Contents




CENTENNIAL FIRST FINANCIAL SERVICES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 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 in Centennial First Financial Services Corporations (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 months ended March 31, 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
March 31:2002

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

$
426

1,145

$
0.37

$
182

698

$
0.26Effect of dilutive shares:assumed exercise of outstanding options












25

$
0.01Diluted earnings per share

$
426

1,145

$
0.37

$
182

723

$
0.25




8




---

##### Table of Contents




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 March 31, 2002 and December 31, 2001, such commitments included approximately $86,000 and $394,000, respectively, of standby letters of credit and approximately $64,503,000 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.







9




---

##### Table of Contents




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, and Palomar Community Bank (Palomar) in Escondido, California. This discussion focuses primarily on the results of operations of the Company on a consolidated basis for the
three months ended March 31, 2002, and the financial condition of the Company as of that date.





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 subsidiaries. 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 $426,000 or $0.37 per basic share and $0.37 per diluted share for the first quarter of 2002. This compares to net income of $182,000, or $0.26 per
basic share and $0.25 per diluted share for the same period in 2001. Consolidated financial statements as of and for the period ended March 31, 2001 only include income from Redlands. Consolidated financial statements as of and for the period ended
March 31, 2002 include income from both Redlands and Palomar. The acquisition of Palomar, which was consummated on August 17, 2001, has contributed to the increase in net income for the first three months of 2002. The increase in the number of loans
booked by the Company during the first quarter of 2002 has continued to positively impact the Companys earnings.





Return
on average assets and return on average equity for the first quarter of 2002 was 0.84% and 11.03% respectively, as compared to 0.73% and 10.14% respectively, for the same period in 2001. The increase in return on average assets and return on average
equity is due to the Company having record quarterly earnings in the first quarter of 2002.





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




10




---

##### Table of Contents




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 three months ended March 31, 2002, net interest income before the provision for loan losses was $2.7 million. This represented an increase of
$1.1 million, or 68.8%, over net interest income of $1.6 million for the three months ended March 31, 2001. The increase in net interest income for the first three 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 in the first quarter of 2002. Total interest earning assets averaged $175.3 million for the first three months of 2002. This represented an increase of $90.7 million, or
107.2%, compared to total interest earning assets of $84.6 million for the first three 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 6.12%
for the first three months ended March 31, 2002, compared to 7.54% for the same period of 2001. Lower yields on average earning assets, especially for variable rate loans, as well as a change in the mix of earning assets was another contributor to
the decrease in the net interest margin. The Companys Prime rate was 8.50% during the first quarter of 2001, compared to 4.75% for the first quarter of 2002. Average loans as a percentage of net average earning assets for the first three
months of 2002 decreased from 74.5% to 72.9% compared to the same period last year, while investments as a percentage of total average earning assets increased to 19.6% at March 31, 2002 from 11.4% at March 31, 2001. Loans typically generate higher
yields than investments.





The yield on average interest earning assets decreased in the first quarter of 2002 to 7.64% from
10.55% in the first quarter of 2001. The decrease in the yield on average earning assets resulted from a market in which lower interest rates prevailed in the first 3 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 quarter of 2002, compared to having only loans from Redlands in the first
quarter of 2001, caused a decrease in the yield of average loans. 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 8.88% for the
three months ended March 31, 2002, as compared to 12.26% for the first three months of 2001.





The cost of average
interest-bearing liabilities, including deposits and borrowed funds, decreased to 1.48% for the three months ended March 31, 2002, compared to a cost of 2.80% for the first three months of 2001. The decrease is a result of a lower interest rate
environment in the first quarter of 2002 compared to the first quarter of 2001. The cost of average interest-bearing deposits was 1.88% for the first three months of 2002 as compared to 3.84% for the first three months of 2001. The cost of borrowed
funds was 5.16% for the three months ended March 31, 2002. There were no borrowed funds in the three months ended March 31, 2001. The Company




11




---

##### Table of Contents




will continue to show interest expense as a result of funds borrowed in order to complete the acquisition of Palomar
Community Bank in August 2001.





The Company reported total interest income of $3.3 million for the three months ended March 31,
2002, which represented an increase of $1.1 million, or 50.0%, over total interest income of $2.2 million for the three months ended March 31, 2001. Interest expense totaled $665 thousand for the three months ended March 31, 2002, which represented
an increase of $29 thousand, or 4.6%, over total interest expense of $636 thousand for the three months ended March 31, 2001, and is principally the result of interest expense from long-term borrowings in the first quarter of 2002. The Company had
no such borrowings in the first quarter of 2001.





The following table 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 March 31,2002


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

$
7,657

$
33

1.72
%

$
7,165

$
95

5.30
%Interest-bearing deposits in financial institutions


5,331


60

4.52
%


4,794


73

6.09
%Investment securities:Taxable


30,303


360

4.76
%


5,947


93

6.26
%Non-taxable


4,103


49

4.76
%


3,676


40

4.35
%Total investments


47,394


502

4.24
%


21,582


301

5.58
%Loans


127,935


2,842

8.88
%


62,986


1,930

12.26
%Total average interestearning assets

$
175,329

$
3,344

7.64
%

$
84,568

$
2,231

10.55
%INTEREST-BEARING LIABILITIES:Demand deposits

$
49,411







$
24,528




Interest-bearing demand deposits


13,457

$
7

0.20
%


8,825

$
26

1.18
%Money market deposits


34,859


61

0.68
%


25,627


218

.40
%Savings deposits


17,979


22

0.48
%


7,751


45

2.32
%Time deposits of $100,000 or more


29,133


257

3.52
%


14,443


218

6.04
%Time deposits under $100,000


32,932


262

3.20
%


9,595


129

5.38
%Total average interest- bearing liabilities

$
128,360

$
609

1.88
%

$
66,241

$
636

3.84
%Other borrowings


4,341


56

5.16
%







Total average deposits and other borrowings

$
182,112

$
665

1.48
%

$
90,769

$
636

2.80
%Average rate excluding demand deposits







2.00
%







3.84
%Net interest income




$
2,679







$
1,595Net interest margin







6.12
%







7.54
%




12




---

##### Table of Contents




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





Quarter EndedMarch 31, 2002 Comparedto Quarter Ended March 31, 2001Increase (Decrease) Due
toVolume

Rate


Total(Dollars in thousands)INCREASE (DECREASE) ININTEREST INCOMEFederal funds sold

$
26

$
(88
)

$
(62
)Interest-bearing deposits in financial institutions


33


(46
)


(13
)Investment securities:Taxable


1,520


(1,253
)


267Non-Taxable


19


(10
)


9Loans


7,950


(7,038
)


912Total

$
9,548

$
(8,435
)

$
1,113INCREASE (DECREASE) ININTEREST EXPENSEInterest bearing demand deposits

$
54

$
(73
)

$
(19
)Money market deposits


314


(471
)


(157
)Savings deposits


237


(260
)


(23
)Time deposits of $100,000 or more


887


(848
)


39Time deposits under $100,000


1,251


(1,118
)


133Other borrowers





56



56Total

$
2,743

$
(2,714
)

$
29TOTAL CHANGE INNET INTEREST INCOME

$
6,805

$
(5,721
)

$
1,084





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 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.




13




---

##### Table of Contents




For the quarter ended March 31, 2002, the provision for loan losses increased by 305% or
$61,000 to $81,000, compared to $20,000 in the prior years same quarter. 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.





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





Three months ended March 31,2002


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

$    1,460


$     868Loans charged off:Real estate




Commercial




Consumer

8


23Lease financing




Credit card and related accounts

1


1Total loans charged off

9


24RecoveriesReal estate




Commercial

2


Consumer

4


1Credit card and related accounts




Total recoveries

6


1Net (charge-offs) recoveries

(3
)

(23
)Provision charged to operations

81


20Allowance for loan losses balance, end of period

$    1,538


$     865Loans outstanding at end of period, net of unearned interest income

$132,060


$62,565Average loans outstanding for the period

$121,881


$62,986Ratio of net loans charged off (recovered) to average loans outstanding

.00
%

.04
%Ratio of allowance for loan losses to loans at end of period

1.16
%

1.38
%




14




---

##### Table of Contents




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





March 31, 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

$
239

31
%

$
200

30
%Real estate-mortgage


361

38
%


430

39
%Commercial loans


693

24
%


571

24
%Automobile


57

2
%


69

2
%Indirect


0

0
%


0

0
%Equity loans


21

3
%


25

3
%Consumer & other


35

2
%


45

2
%Not allocated


132





120Total allowance for loan loss

$
1,538

100
%

$
1,460

100
%Total loans

$
132,060




$
127,155


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, other fee oriented products and services, gain or loss on
sale of securities or other real estate owned, increases in the cash surrender value of life insurance, and other miscellaneous sources of income.





Other operating income totaled $603,000 for the three months ended March 31, 2002. This represented an increase of $278,000, or 85.5%, from other operating income of $325,000 for the three months ended March 31, 2001.
The increase was primarily the result of increases in the amount of customer service fees collected, and an increase in the volume of loans sold.




15




---

##### 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 a percentage of average assets:





Three months ended March 31,2002


2001Amount


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

$
172


$
141Gain from sale of loans


244



59Gain (loss) from sale ofInvestment securities






1Loan servicing fees


80



42Other income


107



83Total other income

$
603


$
325Three months ended March 31,2002


2001Amount


AmountAS PERCENT OF AVERAGE ASSETS(ANNUALIZED):Customer service fees


0.34
%


0.72
%Gain from sale of loans


0.49
%


0.30
%Gain (loss) from sale ofInvestment securities






0.00
%Loan servicing fees


0.16
%


0.21
%Other income


0.21
%


0.42
%1.20
%


1.65
%





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, stationary
and supplies, deposit insurance, promotional, other real estate owned, and misc. expenses). Other operating expenses totaled $2,550,000 for the three months ended March 31, 2002. This represented an increase of $921,000, or 56.5%, over other
operating expenses of $1,629,000 for the three months ended March 31, 2001. The increase in non-interest expense is due to the acquisition of Palomar Community Bank, as well as increases in professional fees and salaries, wages and employee
benefits.




16




---

##### 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 average assets:





Three months ended March 31,2002


2001Amount


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

$
1,382


$
891Net occupancy expense


331



247Marketing


45



29Data processing fees


137



71Professional fees


337



112Postage, telephone, supplies


126



107Directors fees


40



30Other operating expense


152



142Total other expenses

$
2,550


$
1,629Three months ended March 31,2002


2001Amount


AmountAS PERCENT OF AVERAGE ASSETS(ANNUALIZED):Salaries, wages, andemployee benefits


2.75
%


4.53
%Net occupancy expense


0.66
%


1.26
%Marketing


0.09
%


0.15
%Data processing fees


0.27
%


0.36
%Professional fees


0.67
%


0.57
%Postage, telephone, supplies


0.25
%


0.55
%Directors fees


0.08
%


0.15
%Other operating expense


0.30
%


0.72
%Total other expenses


5.07
%


8.29
%





FINANCIAL CONDITION





GENERAL





The Companys total assets reached a record level of $210 million at March
31, 2002, an increase of 6.0% or $12 million, compared to total assets of $198 million at December 31, 2001. Total deposits at March 31, 2002 reached a record level of $180.3 million, an increase of 3.4% or $6 million over total deposits at December
31, 2001. Total loans, net of the allowance for loan losses and unearned income increased 3.8%, or $4.8 million to a total of $130.5 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 loans at March 31, 2002 were $132.5 million, representing a 3.8% increase over total loans at December 31, 2001 of $127.6 million. The Companys lending focus is on commercial, real estate, and construction
loans. These types of loans make up 93% of the 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.




17




---

##### Table of Contents




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:





March 31, 2002


December 31, 2001Amount


%


Amount


%(Dollars in thousands)Real estate loansConstruction and development

$
42,843


31
%

$
37,950


30
%Mortgage loans


49,774


38
%


49,127


39
%Commercial loans


31,298


24
%


30,581


24
%Automobile loans


2,062


2
%


2,362


2
%Indirect loans


465


0
%


583


0
%Equity loans


3,966


3
%


4,759


3
%Consumer and other loans


2,109


2
%


2,198


2
%Total loans


132,517


100
%


127,560


100
%Less unearned income


(457
)





(405
)Less allowance for loans losses


(1,538
)





(1,460
)Net loans

$
130,522





$
125,695





Non-performing assets





Centennial Firsts policy is to recognize interest income on an accrual basis unless the full collectibles of principal and interest is uncertain. Loans that are delinquent 90 days
or more, unless well secured and in the process of collection, are placed on nonaccrual status on a cash basis and previously accrued, but uncollected interest, is reversed against income. Thereafter, income is recognized only as it is collected.
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 March 31, 2002 were $238,000 compared to $241,000 at December 31, 2001, representing .18% and .19% of gross loans at March 31,
2002 and December 31, 2001.




18




---

##### Table of Contents




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





March 312002


December 312001(Dollars in thousands)Loans on nonaccrual status

$
238


$
241Loans past due greater than 90 days






Total nonperforming assets

$
238


$
241Allowance for loan losses

$
1,538


$
1,460Ratio of total nonperforming assets(1)to total loans


.18
%


.19
%Ratio of allowance for loanlosses to total nonperforming assets


646.21
%


605.09
%Ratio of non-performing loans tototal loans


.18
%


.19
%


---

|(1) |  | Consists entirely of nonperforming loans. The Company had no OREO as of March 31, 2002 or December 31, 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------




ALLOWANCE FOR LOAN LOSSES





The allowance for loan
losses totaled $1,538,000 at March 31, 2002, compared to $1,460,000 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 three months ended March 31, 2002 is due to $9,000 of loans charged off, $6,000 of recoveries, and $81,000 charged to operations. (See Provision for Loan Losses)





The allowance for loan losses is increased by the provision for loan losses and decreased by charge-offs, less 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 significantly adversely affected, if circumstances differ substantially from the assumptions used in making the final
determination.




19




---

##### Table of Contents




The allowance for loan losses as a percentage of total loans outstanding as of March 31, 2002
was 1.16%, as compared to 1.38% as of March 31, 2001. Net loan charge-offs during the first quarter of 2002 approximated $3,000, which is a negligible amount of average total loans, compared to $23,000 or 0.04% during the same period in 2001. The
Company maintains the allowance for loan losses at a level management feel 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.





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 March 31, 2002 and December 31, 2001, 100% of the investment securities
owned by the Company were classified as Available for Sale. At March 31, 2002, Centennial Firsts investment portfolio at fair value consisted of $27.6 million in mortgage-backed securities, $4.5 million in municipal bonds, $583,000
of marketable equity securities, and $261,000 in U.S. Treasury obligations compared to $28.7 million, $4.5 million, $487,000, and $264,000, respectively at December 31, 2001. The slight decrease in the Companys investment portfolio is 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 $4.3 million at March 31, 2002 versus $5.9 million at December 31, 2001. Overnight federal funds sold totaled $15.3 million at March 31,
2002, versus $7.5 million at December 31, 2001.




20




---

##### Table of Contents




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





March 31, 2002Amortized Cost

Unrealized Gains

Unrealized Losses

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

$
27,417

$
277

$
90

$
27,604Obligations of States and Local Governments


4,620


2


71


4,551Marketable Equity Securities


573


10





583U.S. Treasury Obligations


259


2





261$
32,869

$
291

$
161

$
32,999December 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 increased $6.0 million, or 3.4%, to a record level of $180.3 million at March 31, 2002 from $174.3 million at December 31, 2001. Noninterest-bearing demand deposits at March 31, 2002, were $44.8
million, an increase of $3.4 million, or 8.2% from the amount at December 31, 2001 of $41.4 million. Interest bearing and NOW accounts increased 8.0%, or $4.2 million to $56.4 million at March 31, 2002 from $52.2 million at December 31, 2001.
Savings and time deposits decreased 2.0%, or $1.6 million to $79.1 million at March 31, 2002 from $80.7 million at December 31, 2001. The increase in deposits in the first quarter of 2001 is due to growth in our customer base.





Due mainly to lowered interest rates in 2001, the average rate paid on time deposits was significantly lowered in the first quarter of 2002
with the average rate paid on time deposits of $100,000 or more lowered from 4.94% for the year ended December 31, 2001 to 3.52% for the quarter ended March 31, 2002, and the average rate on time deposits under $100,000 lowered from 4.11% for the
year ended December 31, 2001 to 3.20% for the quarter ended March 31, 2002.




21




---

##### Table of Contents




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





Three Months Ended March 31, 2002


Year Ended December 31, 2001Average Balance

Average Rate


Average Balance

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

$
49,411




$
36,050

Interest-bearing demand deposits


13,457

0.20
%


17,455

0.45
%Money market deposits


34,859

0.68
%


37,429

2.00
%Savings deposits


17,979

0.48
%


14,554

1.41
%Time deposits of $100,000 or more


29,133

3.52
%


25,211

4.94
%Time deposits under $100,000


32,932

3.20
%


36,489

4.11
%Total interest-bearing deposits


128,360

1.88
%

$
131,138

2.11
%$
177,771

0.34
%

$
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 March 31, 2002 and December 31, 2001:





As of March 31, 2002

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

$
12,152

$
14,035Over three through twelve months


15,339


14,374Over one year to three years


200


924Over three years


103


102Total

$
27,794

$
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 liquidity needs. During the three months ended March 31, 2002, federal funds sold
averaged $7.7




22




---

##### Table of Contents

million, or 3.8% of total average assets compared to $7.2 million or 7.2% of total average assets at March 31, 2001. Redlands and Palomar also maintain
borrowing arrangements with several correspondent banks.





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





As of March 31, 2002


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

$
14,522


$
10,040Federal funds sold


15,318



7,503Interest earning deposits


4,272



5,954Unpledged securities


25,984



31,377Total liquid assets

$
60,096


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


28.61
%


27.71
%Ending deposits(2)


33.34
%


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 Redlands and
Palomars earnings from undue interest rate risk. Redlands and Palomar expect 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. Redlands and Palomar give priority to liquidity concerns followed by capital adequacy,
then interest rate risk and market risk in the investment portfolio. Redlands and Palomar hold to the policy of controlling 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
Banks 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 Banks for analytical purposes. Therefore, changes in market rates can
generally impact Redlands and Palomar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. 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 margin based on actual repricing over a one year period,




23




---

##### Table of Contents

assuming that maturities are reinvested in instruments identical 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 March 31, 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 March 31, 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 March 31, 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.





As of March 31, 2002, the Company was
within an acceptable range of changes in the net interest margin, set by its own internal policies.





CAPITAL ADEQUACY GUIDELINES





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 subsidiaries 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.




24




---

##### Table of Contents




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





At December 31, 2001Centennial First Financial Services


Redlands Centennial Bank


Palomar Community Bank


Minimum Necessary to be Well Capitalized


Minimum Necessary to be Adequately CapitalizedTotal risk-based capital ratio

11.25
%

11.07
%

14.10
%

10.0
%

8.0
%Tier 1 risk-based capital ratio

8.50
%

9.82
%

12.85
%

6.0
%

4.0
%Leverage ratio

5.76
%

6.60
%

8.83
%

5.0
%

4.0
%





PART IIOTHER INFORMATION





ITEM 1.Legal Proceedings





The response to this item required by Item 103 of regulation S-B incorporates by reference the
information under 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





The response to this item incorporates by reference the information under the caption Recent
developments on page 4 of the Companys form 10-KSB filed on March 29, 2002.




25




---

##### Table of Contents




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,
1999.3.1

Articles of Incorporation. Filed as exhibit to Form S-4 dated October 20, 1999.3.2

Bylaws. Filed as exhibit to Form S-4 dated October 20, 1999.10.1

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 Stock Option Plan, dated September 21, 2001.Filed as exhibit to Definitive Proxy Statement (Schedule 14A), dated April 3, 2002.10.16

Palomar Community Bank lease, dated April 15, 1987.





(B)    REPORTS ON FORM 8-K





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




26




---

##### Table of Contents




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)By:

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





Date May 13, 2002




27