<PAGE>
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
/ / Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No fee required) for the period from
______________ to ______________
Commission File Number 000-29105
CENTENNIAL FIRST FINANCIAL SERVICES
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 91-1995265
Address: 218 East State Street, Redlands, CA 92373
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer: (1) filed all reports required to be filed by
Telephone: (909) 798-3611 Section 13 or 15(d) of the Securities Exchange Act
during the past 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 / /
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common stock, 672,744 shares (June
30, 2000)
Transitional Small Business Disclosure Format: Yes / / No /X/
<PAGE>
FORM 10-QSB CROSS REFERENCE INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
ITEM 1 Financial Statements 2-7
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-21
PART II
ITEM 1 Legal Proceedings 22
ITEM 2 Changes in Securities and Use of Proceeds 22
ITEM 3 Defaults Upon Senior Securities 22
ITEM 4 Submission of Matters to a Vote of Security Holders 22
ITEM 5 Other Information 22
ITEM 6 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23
Signatures 23-25
</TABLE>
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
Dollar amounts in thousands
2000 1999
---------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,929 $ 5,230
Federal funds sold 9,700 2,150
---------- ---------
Total cash and cash equivalents 17,629 7,380
Interest-bearing deposits in financial institutions 3,212 3,612
Investment securities, available for sale 7,492 7,793
Federal Home Loan Bank stock, at cost 210 210
Loans, net 55,006 52,382
Accrued interest receivable 431 378
Premises and equipment, net 1,842 1,690
Other assets 2,196 2,562
---------- ---------
Total assets $ 88,018 $ 76,007
========== =========
LIABILITIES
Deposits:
Noninterest-bearing $ 20,856 $ 18,135
Interest-bearing and NOW accounts 21,371 17,881
Savings 11,620 12,008
Time deposits $100,000 or greater 15,598 10,235
Other time deposits 11,388 10,881
---------- ---------
Total deposits 80,833 69,140
Accrued interest payable 372 242
Other liabilities 749 297
---------- ---------
Total liabilities 81,954 69,679
---------- ---------
Federal Home Loan Bank borrowings - - - -
---------- ---------
STOCKHOLDERS' EQUITY
Common stock, $4 stated value; authorized 10,000,000 shares, issued and
outstanding 672,744 and 677,028 shares
at June 30, 2000 and December 31, 1999, respectively 2,691 2,708
Additional paid-in capital 2,885 2,660
Retained earnings 705 1,165
Accumulated other comprehensive loss (217) (205)
---------- ---------
Total stockholders' equity 6,064 6,328
---------- ---------
Total liabilities and stockholders' equity $ 88,018 $ 76,007
========== =========
</TABLE>
- 2 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Dollars in thousands except for per share amounts
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 1,709 $ 1,212 $ 3,311 $ 2,308
Deposits in financial institutions 49 61 103 124
Federal funds sold 83 27 107 57
Investments 107 129 215 265
--------- --------- --------- ---------
Total interest income 1,948 1,429 3,736 2,754
--------- --------- --------- ---------
Interest expense:
Demand and savings deposits 178 144 354 292
Time deposits $100,000 or greater 176 122 316 207
Other time deposits 165 117 311 262
Interest expense on borrowed funds 29 - - 46 - -
--------- --------- --------- ---------
Total interest expense 548 383 1,027 761
--------- --------- --------- ---------
Net interest income 1,400 1,046 2,709 1,993
Provision for loan losses 470 45 580 90
--------- --------- --------- ---------
Net interest income after provision for loan losses 930 1,001 2,129 1,903
--------- --------- --------- ---------
Other income:
Customer service fees 142 90 274 164
Gain from sale of loans 116 29 181 68
Loss from sale of investment securities - - (2) - - (2)
Gain on sale of investment in BancData Solutions 906 - - 906 - -
Other income 75 86 148 179
--------- --------- --------- ---------
Total other income 1,239 203 1,509 409
--------- --------- --------- ---------
Other expenses:
Salaries and wages 543 429 1,000 804
Employee benefits 254 106 454 239
Net occupancy expense 103 90 188 169
Other operating expense 931 375 1,401 751
--------- --------- --------- ---------
Total other expenses 1,831 1,000 3,043 1,963
--------- --------- --------- ---------
Income before provision for income taxes 338 204 595 349
Provision for income taxes 118 65 201 103
--------- --------- --------- ---------
Net income $ 220 $ 139 $ 394 $ 246
========= ========= ========= =========
Basic earnings per share $ .33 $ .21 $ .58 $ .36
========= ========= ========= =========
Diluted earnings per share $ .29 $ .19 $ .52 $ .33
========= ========= ========= =========
</TABLE>
- 3 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Dollars in thousands
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
------ ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $ 2,669 $ 2,634 $ 501 $ 14 $ 5,818
Comprehensive income:
Net income - - - - 246 - - 246
Change in net unrealized gain
(loss) on investment securities
available for sale, after
tax effects - - - - - - (144) (144)
----------
Total comprehensive income 102
----------
Exercise of stock options 20 15 - - - - 35
--------- --------- --------- --------- ----------
BALANCE, JUNE 30, 1999 $ 2,689 $ 2,649 $ 747 $ (130) $ 5,955
========= ========= ========= ========= ==========
BALANCE, DECEMBER 31, 1999 $ 2,708 $ 2,660 $ 1,165 $ (205) $ 6,328
Comprehensive income:
Net income - - - - 394 - - 394
Change in net unrealized gain
(loss) on investment securities
available for sale, after
tax effects - - - - - - (12) (12)
----------
Total comprehensive income 382
----------
Stock and cash dividend 135 412 (584) - - (37)
Exercise of stock options 26 16 - - - - 42
Repurchase and retirement of
common stock (178) (203) (270) - - (651)
--------- --------- --------- --------- ----------
BALANCE, JUNE 30, 2000 $ 2,691 $ 2,885 $ 705 $ (217) $ 6,064
========= ========= ========= ========= ==========
(UNAUDITED)
</TABLE>
- 4 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
Dollars in thousands (UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 394 $ 246
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 142 110
Provision for loan losses 580 90
Gain from sale of loans (181) (68)
Loss on sale of investments - - 2
Gain from sale of investment in BancData Solutions (906) - -
Amortization of deferred loan fees (187) (70)
Deferred income tax benefit 24 19
Amortization of premiums on investment
securities available for sale 3 22
Amortization of premiums on investment
securities held to maturity - - 6
Increase in cash surrender value of life insurance (28) (66)
Decrease (increase) in assets:
Accrued interest receivable (53) (19)
Other assets 13 (47)
Increase (decrease) in liabilities:
Accrued interest payable 130 (88)
Other liabilities 452 (118)
---------- ----------
Net cash provided by operating activities 383 19
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in financial institutions 400 177
Net sales, maturities and (purchases) of available-for-sale securities 330 (3)
Purchases of Federal Home Loan Bank Stock - - (210)
Proceeds form sale of investment in BancData Solutions 1,219 - -
Net increase in loans (2,836) (7,199)
Additions to bank premises and equipment (294) (71)
---------- ----------
Net cash used in investing activities (1,181) (7,306)
---------- ----------
</TABLE>
- 5 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
Dollars in thousands (UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 5,823 $ 4,605
Net increase in time deposits 5,870 535
Proceeds from Federal Home Loan Bank borrowings - - - -
Cash dividends paid in lieu of fractional shares (3) - -
Cash dividends paid (34) - -
Payments to acquire common stock and stock options (651) - -
Proceeds from exercise of stock options 42 35
----------- ----------
Net cash provided by financing activities 11,047 5,175
----------- ----------
Net increase (decrease) in cash and cash equivalents 10,249 (2,112)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,380 11,305
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,629 $ 9,193
=========== ==========
SUPPLEMENTARY INFORMATION
Interest paid $ 897 $ 849
=========== ==========
Income taxes paid $ 179 $ 230
=========== ==========
</TABLE>
- 6 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated 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 included in the
Annual Report for the year ended December 31, 1999. 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 six months ended
June 30, 2000 may not be indicative of operating results for the
year ending December 31, 2000. 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 are as follows:
<TABLE>
<CAPTION>
In thousands Three Months Ended June 30,
---------------------------
2000 1999
<S> <C> <C>
Basic shares 696 702
Dilutive effect of stock options 55 54
Diluted shares 751 756
In thousands Six Months Ended June 30,
-------------------------
2000 1999
Basic shares 696 702
Dilutive effect of stock options 55 54
Diluted shares 751 756
</TABLE>
- 7 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Centennial First Financial Services (the "Company") is the holding company
for Redlands Centennial Bank in Redlands, California. This discussion focuses
primarily on the results of operations of the Company on a consolidated basis
for the six months ended June 30, 2000 and the financial condition of the
Company as of that date.
The following discussion presents information pertaining to the financial
condition and results of operations of the Company and its subsidiary and
should be read in conjunction with the financial statements and notes thereto
presented in this 10-QSB. Average balances, including balances used in
calculating certain financial ratios, are generally comprised of average
daily balances.
Certain matters discussed in this report are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Such risks and uncertainties include, but are not limited to, the competitive
environment and its impact on the Company's net interest margin, changes in
interest rates, asset quality risks, concentrations of credit and the
economic health of the San Bernardino Area and Southern California,
volatility of rate sensitive deposits, asset/liability matching risks, the
dilutive impact which might occur upon the issuance of new shares of common
stock and liquidity risks. Therefore, the matters set forth below should be
carefully considered when evaluating the Company's business and prospects.
For additional information concerning these risks and uncertainties, please
refer to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
OVERVIEW
EARNINGS SUMMARY
The Company reported net income of $220,000, or $0.33 per share basic and
$0.29 per share diluted, for the second quarter of 2000. This compares to net
income of $139,000, or $0.21 per share basic and $0.19 per share diluted, for
the same period in 1999.
For the six months ended June 30, 2000, the Company reported net income
$394,000, or $0.58 per share basic and $0.52 per share diluted. This compares
to net income of $246,000, or $0.36 per share basic and $0.33 per share
diluted for the same period in 1999. Growth in average loans as a percentage
of earning assets continued to positively impact the net interest margin
during the three and six months ended June 30, 2000. Additionally, the
Company's earnings were assisted by the sale of its investment in its service
bureau, BancData Solutions, during the first part of April 2000.
Return on average assets and return on average equity for the second quarter
of 2000 were 1.07% and 14.24%, respectively, as compared to 0.58% and 6.81%,
respectively, for the same period of 1999. Return on average assets and
return on average equity for the six months ended June 30, 2000 were 0.98%
and 12.90%, respectively, as compared to 0.71% and 8.28% for the same period
of 1999.
- 8 -
<PAGE>
LOANS HELD FOR INVESTMENT
Net loans held for investment increased by $2.6 million, or 5.0%, during the
first six months of 2000 as demand for commercial, real estate construction
and development loans increased. The following table sets forth the amount of
total loans outstanding by category as of the dates indicated (dollar amounts
in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------- -------------------
<S> <C> <C> <C> <C>
Real estate loans
Construction and development $ 16,555 29.43% $ 15,248 28.70%
Mortgage loans 13,907 24.72% 12,533 23.60%
Commercial loans 19,325 34.36% 18,686 35.10%
Automobile loans 2,325 4.13% 2,468 4.60%
Indirect loans 1,357 2.41% 1,845 3.50%
Equity loans 1,281 2.28% 876 1.60%
Consumer and other loans 1,497 2.67% 1,531 2.90%
-------- ------- -------- ------
56,247 100.00% 53,187 100.00%
Unearned income (374) (224)
Allowance for loan losses (867) (581)
-------- --------
$ 55,006 $ 52,382
======== ========
</TABLE>
In the normal practice of extending credit, the Company accepts real estate
collateral on loans that have primary sources of repayment from commercial
operations. The total amount of loans secured by real estate equaled $35
million, or 62.2% of the total portfolio as of June 30, 2000. Due to the
Company's limited marketing area, its real estate collateral is primarily
concentrated in the San Bernardino Area and Southern California. The Company
believes that its prudent underwriting standards for real estate secured
loans provide an adequate safeguard against declining real estate prices that
may affect a borrower's ability to liquidate the property and repay the loan.
However, no assurance can be given that real estate values will not decline
and impair the value of the security for loans held by the Company.
The Company focuses its portfolio lending on commercial, real estate, and
construction loans. The performance of commercial loans is generally
dependent upon future cash flows from business operations including the sale
of products, merchandise and services. The successful completion or operation
of real estate projects is dependent upon future sales. Risks attributable to
such loans can be significantly increased, often to a greater extent than
other loans, by regional economic factors and real estate prices.
- 9 -
<PAGE>
NONPERFORMING ASSETS
The Company carefully monitors the quality of its loan portfolio and the
factors that affect it, including regional economic conditions, employment
stability, and real estate values. The accrual of interest on loans is
discontinued when the payment of principal or interest is considered to be in
doubt, or when a loan becomes contractually past due by 90 days or more with
respect to principal or interest, except for loans that are well secured and
in the process of collection.
As of June 30, 2000, the Company had non-performing assets in the amount of
$422,000 of which $295,000 were loans guaranteed by the Small Business
Administration. The Company had no loans 90 days or more past due and still
accruing at June 30, 2000. The following table sets forth the balance of
non-performing assets as of the dates indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Nonaccrual loans $ 422 $ 61
Loans 90 days or more past due
and still accruing - - 215
------ ------
$ 422 $ 276
====== ======
As a percent of total loans 0.75% 0.52%
As a percent of total assets 0.48% 0.36%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses ("ALL"), which is reduced
by credit losses and increased by credit recoveries, and provisions to the
ALL charged against operations. Provisions to the ALL and the total of the
ALL are based, among other factors, upon the Company's credit loss
experience, current and projected economic conditions, the performance of
loans within the portfolio, evaluation of loan collateral value, and the
prospects or worth of respective borrowers and guarantors.
In determining the adequacy of its ALL and after carefully analyzing each
loan individually, the Company segments its loan portfolio into pools of
homogeneous loans that share similar risk factors. Each pool is given a risk
assessment factor that largely reflects the expected future losses from each
category. These risk assessment factors change as economic conditions shift
and actual loan losses are recorded. As of June 30, 2000, the ALL of
$867,000, or 1.54% of total loans was determined by management to be adequate
against foreseeable future losses. No assurance can be given that
non-performing loans will not increase or that future losses will not exceed
the amount of the ALL.
- 10 -
<PAGE>
ALLOWANCE FOR LOAN LOSSES (Continued)
The following table summarizes, for the periods indicated, loan balances at
the end of each period and average balances during the period, changes in the
ALL arising from credit losses, recoveries of credit losses previously
incurred, additions to the ALL charged to operating expense, and certain
ratios relating to the ALL (dollar amounts in thousands):
<TABLE>
<CAPTION>
At and for the
Six Months At and for the
Ended Year Ended
June 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
BALANCES:
Average loans during the period $ 56,607 $ 46,978
Loans at end of period 56,247 53,186
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period 581 433
-------- --------
Actual credit losses:
Commercial (294) (13)
Consumer (9) (83)
-------- --------
Total (303) (96)
-------- --------
Actual credit recoveries:
Commercial - - 14
Consumer 9 5
-------- --------
Total 9 19
-------- --------
Net credit (losses) recoveries (294) (77)
Provision charged to expense 580 225
-------- --------
Balance at end of period $ 867 $ 581
======== ========
RATIOS:
Net credit losses (recoveries) to average loans (0.52%) 0.16%
Allowance for loan losses to loans at end of period 1.53% 1.09%
Net credit losses (recoveries) to beginning of
period allowance for loan losses 50.60% 17.78%
</TABLE>
The Company provided $470,000 to the allowance for loan losses during the
second quarter of 2000 as compared to $45,000 made during the second quarter
of 1999. For the six months ended June 30, 2000, the allowance for loan
losses was $580,000 as compared to $90,000 during the same period of 1999.
The provisions during the second quarter of 2000 and the six months ended
June 30, 2000 were recorded as a prudent measure, based upon growth in the
loan portfolio.
- 11 -
<PAGE>
ALLOWANCE FOR LOAN LOSSES (Continued)
The following table sets forth the allocation of the ALL as of the dates
indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------------- -------------------------
% of Category % of Category
to Total to Total
ALL Loans ALL Loans
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Commercial loans $ 298 34.37% $ 304 52.33%
Real estate loans 469 54.09% 204 35.11%
Consumer loans 59 6.81% 73 12.56%
Not allocated 41 4.73% -- 0.00%
------ ------- ------ -------
$ 867 100.00% $ 581 100.00%
====== ======= ====== =======
</TABLE>
The ALL is available to absorb losses from all loans, although allocations
have been made for certain loans and loan categories. The allocation of the
ALL as shown above should not be interpreted as an indication that
charge-offs in future periods will occur in these amounts or proportions, or
that the allocation indicates future charge-off trends. In addition to the
most recent analysis of individual loans and pools of loans, management's
methodology also places emphasis on historical loss data, delinquency and
non-accrual trends by loan classification category and expected loan
maturity. This analysis, management believes, identifies potential losses
within the loan portfolio and therefore results in allocation of a large
portion of the allowance to specific loan categories.
INVESTMENTS
The following tables set forth the amortized cost and approximate market
value of investment securities as of the dates indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
June 30, 2000
---------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities $ 3,383 $ -- $ 88 $ 3,295
Obligations of states and local governments 4,015 -- 217 3,798
U.S. Treasury Obligations 404 -- 5 399
Federal Home Loan Bank stock 210 -- -- 210
--------- ------ ------- --------
$ 8,012 $ -- $ 310 $ 7,702
========= ====== ======= ========
</TABLE>
- 12 -
<PAGE>
INVESTMENTS (Continued)
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities $ 3,722 $ -- $ 81 $ 3,641
Obligations of states and local governments 4,011 -- 258 3,753
U.S. Treasury Obligations 405 -- 6 399
Federal Home Loan Bank stock 210 -- -- 210
--------- ------ ------- --------
$ 8,348 $ -- $ 345 $ 8,003
========= ====== ======= ========
</TABLE>
DEPOSITS/OTHER BORROWINGS
Total consolidated deposits increased by $11.7 million or 16.9% during the
six months ended June 30, 2000.
Rates paid on deposits increased during the six months ended June 30, 2000
contributing to the increase in the cost of funds of interest bearing
deposits to 3.66% during the six months ended June 30, 2000 from 3.29% for
the year ended December 31, 1999. The following table summarizes the
distribution of average deposits and the average rates paid for the periods
indicated (dollar amount in thousands):
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
------------------------- -------------------------
Average Average Average Average
Balance Rate Balance Rate
----------- -------- ----------- -------
<S> <C> <C> <C> <C>
Interest Bearing Liabilities:
Demand deposits $ 18,243 -- $ 15,059 --
----------- -----------
Interest bearing demand deposits 9,785 1.14% 9,578 1.13%
Money market deposits 9,984 3.25% 6,375 2.76%
Savings deposits 10,215 2.66% 11,308 2.72%
Time deposits of $100,000 or more 11,663 5.42% 7,120 4.78%
Time deposits under $100,000 11,902 5.23% 11,621 4.99%
----------- -----------
Total interest-bearing deposits 53,549 3.66% 46,002 3.29%
----------- -----------
$ 71,792 2.73% $ 61,061 2.48%
=========== ===========
</TABLE>
- 13 -
<PAGE>
DEPOSITS/OTHER BORROWINGS (Continued)
The following table sets forth the time remaining to maturity of the
Company's time deposits in amounts of $100,000 or more (in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Three months or less $ 7,972 $ 3,183
After three months to six months 4,035 1,048
After six months to one year 3,491 5,904
After one year 100 100
---------- ----------
Total $ 15,598 $ 10,235
========== ==========
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME/NET INTEREST MARGIN
Net interest income for the quarter ended June 30, 2000 was $1,400,000, an
increase of 33.8% over the net interest income of $1,046,000 during the same
period of 1999. Net interest income for the six months ended June 30, 2000
was $2,709,000, an increase of 35.9% over net income of $1,993,000 during the
same period of 1999. The increase was primarily due to the growth in average
loans, largely due to improved economic conditions in the Company's market
areas.
The following table sets forth average assets, liabilities, and shareholders'
equity; the amount of interest income or 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 (dollar amounts
in thousands):
<TABLE>
<CAPTION>
Quarter Ended June 30,
----------------------------------------------------------------------
2000 1999
--------------------------------- ----------------------------------
Interest Average Interest Average
Average Earned/ Interest Average Earned/ Interest
Balance Paid Rate Balance Paid Rate
--------- --------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 5,339 $ 83 6.22 $ 2,443 $ 27 4.42
Interest-bearing deposits in
financial institutions 3,257 49 6.02 3,960 61 6.16
Investment securities 7,559 107 5.66 9,634 129 5.36
--------- --------- ---------- --------
Total investments 16,155 239 5.92 16,037 217 5.41
Loans 56,607 1,709 12.08 45,212 1,212 10.72
--------- --------- ---------- --------
Total interest earning assets $ 72,762 $ 1,948 10.71 $ 61,249 $ 1,429 9.33
========= ========= ========== ========
</TABLE>
- 14 -
<PAGE>
NET INTEREST INCOME/NET INTEREST MARGIN (Continued)
<TABLE>
<CAPTION>
Quarter Ended June 30,
---------------------------------------------------------------------
2000 1999
-------------------------------- ---------------------------------
Interest Average Interest Average
Average Earned/ Interest Average Earned/ Interest
Balance Paid Rate Balance Paid Rate
--------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Bearing Liabilities:
Demand deposits $ 18,127 $ -- -- $ 16,300 $ -- --
--------- --------- ---------- --------
Interest bearing demand deposits 10,308 30 1.16 10,070 27 1.07
Money market deposits 9,919 82 3.31 7,222 50 2.77
Savings deposits 9,726 66 2.71 10,488 67 2.56
Time deposits of $100,000 or more 12,575 176 5.60 9,039 122 5.40
Time deposits under $100,000 12,408 165 5.32 11,000 117 4.25
--------- --------- ---------- --------
Total deposits 54,936 519 3.78 47,819 383 3.20
--------- --------- ---------- --------
Other borrowings 1,934 29 6.00 -- -- --
--------- --------- ---------- --------
Total deposits and other
borrowings $ 74,997 $ 548 2.92 $ 64,119 $ 383 2.39
========= ========= ========== ========
Net interest income $ 1,400 $ 1,046
========= ==========
Net interest margin 7.79 6.94
====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------
2000 1999
-------------------------------- ---------------------------------
Interest Average Interest Average
Average Earned/ Interest Average Earned/ Interest
Balance Paid Rate Balance Paid Rate
--------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 3,548 $ 107 6.03 $ 2,655 $ 57 4.29
Interest-bearing deposits in
financial institutions 3,420 103 6.02 4,042 124 6.14
Investment securities 7,230 215 5.95 9,789 265 5.41
--------- --------- ---------- --------
Total investments 14,198 425 5.99 16,486 446 5.41
Loans 56,076 3,311 11.81 43,011 2,308 10.73
--------- --------- ---------- --------
Total interest earning assets $ 70,274 $ 3,736 10.63 $ 59,497 $ 2,754 9.26
========= ========= ========== ========
</TABLE>
- 15 -
<PAGE>
NET INTEREST INCOME/NET INTEREST MARGIN (Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------
2000 1999
-------------------------------- ----------------------------------
Interest Average Interest Average
Average Earned/ Interest Average Earned/ Interest
Balance Paid Rate Balance Paid Rate
--------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Bearing Liabilities:
Demand deposits $ 18,243 $ -- -- $ 15,610 $ -- --
--------- --------- ---------- --------
Interest bearing demand deposits 9,785 56 1.14 9,825 54 1.10
Money market deposits 9,984 162 3.25 6,801 94 2.76
Savings deposits 10,215 136 2.66 10,896 144 2.64
Time deposits of $100,000 or more 11,663 316 5.42 11,353 207 3.65
Time deposits under $100,000 11,902 311 5.23 8,040 262 6.52
--------- --------- ---------- --------
Total deposits 53,549 981 3.66 46,915 761 3.24
--------- --------- ---------- --------
Other borrowings 1,525 46 6.03 -- -- --
--------- --------- ---------- --------
Total deposits and other
borrowings $ 73,317 $ 1,027 2.80 $ 62,525 $ 761 2.43
========= ========= ========== ========
Net interest income $ 2,709 $ 1,993
========= ========
Net interest margin 7.83 6.82
====== ======
</TABLE>
The net interest margin increased to 7.79% during the second quarter of 2000
from 6.94% in the same quarter of 1999. For the six months ended June 30, 2000,
the net interest margin increased to 7.83% from 6.82% during the same period of
1999. The increase in both periods was primarily attributable to growth in
average loans as a percentage of earning assets. The increase in average loans
was largely due to the improved economic conditions in the Company's market
areas.
The following table presents the dollar amount of changes in interest earned and
interest paid for each major category of interest-earning asset and
interest-bearing liability and the amount of change attributable to average
balances (volume) fluctuations and average rate fluctuations. The variance
attributable to both balance and rate fluctuations is allocated to a combined
rate/volume variance (dollar amounts in thousands):
-16-
<PAGE>
NET INTEREST INCOME/NET INTEREST MARGIN (Continued)
<TABLE>
<CAPTION>
Quarter Ended June 30, 2000 Compared to
Quarter Ended June 30, 1999
---------------------------------------------------------------
Increase (decrease) due to change in:
---------------------------------------------------------------
Average Average Average Rate/
Volume Rate Volume Total
---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME
Federal funds sold $ 302 $ 44 $ (290) 56
Interest-bearing deposits in
financial institutions (5) (2) (5) (12)
Investment securities 24 38 (84) (22)
Loans (528) 1,109 (84) 497
--------- --------- ------- --------
Total (207) 1,189 (463) 519
--------- --------- ------- --------
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest bearing demand deposits 11 18 (27) 2
Money market deposits -- 19 13 32
Savings deposits (2) 54 (53) (1)
Time deposits of $100,000 or more (103) (20) 177 54
Time deposits under $100,000 266 218 (435) 49
Other borrowings -- -- 29 29
--------- --------- ------- --------
Total 172 289 (296) 165
--------- --------- ------- --------
TOTAL CHANGE IN NET INTEREST INCOME $ (379) $ 900 $ (167) $ 354
========= ========= ======= ========
</TABLE>
-17-
<PAGE>
NET INTEREST INCOME/NET INTEREST MARGIN (Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999
--------------------------------------------------------------
Increase (decrease) due to change in:
--------------------------------------------------------------
Average Average Average Rate/
Volume Rate Volume Total
--------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME
Federal funds sold $ 256 $ 64 $ (270) $ 50
Interest-bearing deposits in
financial institutions (44) (7) 30 (21)
Investment securities (111) (20) 81 (50)
Loans 763 451 (211) 1,003
--------- --------- ------- --------
Total 864 488 (370) 982
--------- --------- ------- --------
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest bearing demand deposits (3) 3 2 2
Money market deposits 110 31 (73) 68
Savings deposits (14) (1) 7 (8)
Time deposits of $100,000 or more 93 26 (10) 109
Time deposits under $100,000 250 51 (252) 49
Other borrowings - - - - 46 46
--------- --------- ------- --------
Total 436 110 (280) 266
--------- --------- ------- --------
TOTAL CHANGE IN NET INTEREST INCOME $ 428 $ 378 $ (90) $ 716
========= ========= ======= ========
</TABLE>
NONINTEREST INCOME
The following table summarizes non-interest income for the periods indicated and
expresses the amounts as a percentage of average assets (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Components of Noninterest Income
Gain on sale of loans $ 32 $ 29 $ 181 $ 68
Service fees on deposit accounts 142 90 274 164
Loan Servicing fees 16 18 39 32
Gain on Sale of BancData Solutions 906 -- 906 --
Other 144 66 109 145
--------- --------- --------- ---------
$ 1,240 $ 203 $ 1,509 $ 409
========= ========= ========= =========
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
NONINTEREST INCOME (Continued)
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
As a percent of average assets (annualized)
Gain on sale of loans .16% .17% .45% .20%
Service fees on deposit accounts .71% .52% .68% .48%
Loan servicing fees .08% .10% .10% .09%
Gain on Sale of BancData Solutions 4.50% 0% 2.25% 0%
Other .71% .39% .27% .42%
-------- -------- -------- --------
6.16% 1.18% 3.75% 1.19%
======== ======== ======== ========
</TABLE>
NONINTEREST EXPENSES
The following table summarizes non-interest expenses and the associated ratios
to average assets for the periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Components of noninterest expense
Salaries $ 543 $ 429 $ 1,000 $ 804
Employee benefits 254 106 454 239
Occupancy expense 50 49 87 89
Furniture and equipment expense 53 41 101 80
Professional services 553 129 687 249
Stationary and supplies 29 19 64 45
Promotional expenses 20 14 40 32
Data processing fees 113 105 230 217
Regulatory assessments 8 3 15 10
Other 208 105 365 198
--------- --------- --------- ---------
Total other expenses $ 1,831 $ 1,000 $ 3,043 $ 1,963
========= ========= ========= =========
As a percent of average assets (annualized)
Salaries 2.70% 2.49% 2.48% 2.33%
Employee benefits 1.26% .61% 1.13% .69%
Occupancy expense .25% .28% .21% .26%
Furniture and equipment expense .26% .24% .25% .23%
Professional services 2.75% .75% 1.71% .72%
Stationary and supplies .14% .11% .16% .13%
Promotional expenses .10% .08% .10% .09%
Data processing fees .56% .61% .57% .63%
Regulatory assessments .04% .02% .04% .03%
Other 1.03% .61% .91% .58%
-------- -------- -------- --------
9.09% 5.80% 7.56% 5.69%
======== ======== ======== ========
</TABLE>
-19-
<PAGE>
LIQUIDITY
Liquidity is the Company's ability to absorb fluctuations in deposits while
simultaneously providing for the credit needs of its borrowers. The objective in
liquidity management is to balance the sources and uses of funds. Primary
sources of liquidity for the Company include payments of principal and interest
on loans and investments, proceeds from the sale or maturity of loans and
investments, growth in deposits, and other borrowings. The Company holds
overnight federal funds as a cushion for temporary liquidity needs. During the
six months ended June 30, 2000 federal funds sold averaged $3.5 million, or 4.4%
of total assets. In addition to its federal funds, the Company maintains various
lines of credit with correspondent banks, and the Federal Home Loan Bank of San
Francisco.
At June 30, 2000, the Company had cash, time deposits with banks, federal funds
sold, and un-pledged investment securities of approximately $17.2 million, or
20.0% of total assets. This represented all available liquid assets.
Several methods are used to measure liquidity. One method is to measure the
balance between loans and deposits (gross loans divided by total deposits). In
general, the closer this ratio is to 100%, the more reliant an institution
becomes on its illiquid loan portfolio to absorb temporary fluctuations in
deposit levels. At June 30, 2000, the loan-to-deposit ratio was 68.0% as
compared to 75.7% at December 31, 1999.
As of June 30, 2000, the Company had no material commitments that were expected
to adversely impact liquidity.
ASSET/LIABILITY MANAGEMENT
The purpose for asset/liability management is to provide stable net interest
income growth by protecting the Bank's earnings from undue interest rate risk.
The Bank 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 relationships between interest rate risk, liquidity,
market risk and capital adequacy. The Bank gives priority to liquidity concerns
followed by capital adequacy, then interest rate risk and market risk in the
investment portfolio. The policy of the Bank will be to control the exposure of
the Bank's 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 Bank 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 Bank for
analytical purposes. Therefore, changes in market rates of interest will
generally impact on the Bank's net interest income and net interest margin for
long or short periods of time.
- 20 -
<PAGE>
ASSET/LIABILITY MANAGEMENT (Continued)
The Bank 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 bank's net interest margin based on the bank's actual repricing
over a one year period, assuming that maturities are reinvested in instruments
identical to those maturing during the period. At June 30, 2000, assuming the
effect of a 2% increase or decrease in prevailing market interest rates, the
increase in economic value of equity was approximately $5,071,000 and
$7,276,000, respectively. This represents a net economic value ratio of 11.82%
and 13.79%, respectively, as compared to the Bank's net economic value ratio of
6.76% at June 30, 2000. The net portfolio value ratio represents the effect of a
2% increase or decrease in prevailing market interest rates of total
stockholders equity divided by total assets. These forecasted results fall
within the Bank's asset/liability policy guidelines of 7% to 20%.
The Company has no sources of revenues or liquidity other than dividends, tax
equalization payments or management fees from the Bank. The ability of the Bank
to pay such items to the Company is subject to limitations under state and
Federal law.
CAPITAL RESOURCES
The principal source of capital for the Company is and will continue to be the
retention of operating profits. The ratios of average equity to average assets
for the periods indicated are set forth below.
Six Months Ended Six Months Ended
June 30, 2000 December 31, 1999
--------------- -----------------
7.58% 8.48%
Regulatory authorities have issued guidelines to implement risk-based capital
requirements. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. Total capital is classified into two
components: Tier 1 (primarily shareholder's equity) and Tier 2 (supplementary
capital including allowance for possible credit losses, certain preferred stock,
eligible subordinated debt, and other qualifying instruments). The guidelines
require that total capital be 8% of risk-based assets, of which at least 4% must
be Tier 1 capital. As of June 30, 2000, the Company's total capital ratio was
11.13% and its Tier 1 capital ratio was 9.72%. In addition, the Company, under
the guidelines established for adequately capitalized institutions, must also
maintain a minimum leverage ratio (Tier 1 capital divided by total assets) of
4%. As of June 30, 2000, the Company's leverage ratio was 7.14%. It is the
Company's intention to maintain risk-based capital ratios at levels
characterized as "well-capitalized" for banking organizations: Tier 1 risk-based
capital of 6 percent or above and total risk-based capital at 10 percent or
above.
- 21 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on April 27,
2000. A quorum was established with the presence of 515,027 shares out of
672,387 shares of common stock outstanding. The following matters were voted
upon at the annual meeting with the voting results as indicated:
Proposal 1. - The bylaws of the Company were amended to increase the range of
the Board of Directors from three to five directors, to six to eleven directors.
There were 498,199 votes cast for the proposal, 8,257 votes cast against the
proposal and 8,571 abstentions.
Proposal 2. - The following persons were elected as directors:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C> <C>
Bruce J. Bartells 513,006 2,021
Carole H. Beswick 513,006 2,021
Irving M. Feldkamp, III 513,006 2,021
Larry Jacinto 513,006 2,021
Ronald J. Jeffrey 513,006 2,021
William A. McCalmon 513,006 2,021
Patrick J. Meyer 513,006 2,021
Douglas C. Spencer 513,006 2,021
Douglas F. Welebir 513,006 2,021
</TABLE>
Proposal 3. - The Articles of Incorporation of the Company were amended to allow
the Board of Directors to consider certain non-monetary factors when evaluating
certain transactions. There were 423,588 votes cast for the proposal, 5,204
votes cast against the proposal and 2,021 abstentions.
Proposal 4. - The bylaws of the Company were amended to establish a mandatory
retirement age for directors of 70. There were 395,195 votes cast for the
proposal, 26,289 votes cast against the proposal and 9,329 abstentions.
ITEM 5. OTHER INFORMATION
- 22 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
ITEM DESCRIPTION
---- -----------
<S> <C>
2 Plan of Reorganization and Agreement of Merger
Dated December 1, 1999
Filed as exhibit to Form S-4 dated October 20, 1999
3(i) Articles of Incorporation
Filed as exhibit to Form S-4 dated October 20, 1999
3(ii) Bylaws
Filed as exhibit to Form S-4 dated October 20, 1999
10(i) Plan document for the Redlands Centennial Bank Employee Stock Ownership Plan
10(ii)(A) 1. Employment Contract of Douglas C. Spencer, dated September 10, 1997
Filed as exhibit to Form S-4 dated October 20, 1999
2. Salary Continuation Agreement of Douglas C. Spencer, dated
March 17, 1998 Filed as exhibit to Form S-4 dated October 20, 1999
3. Employment Agreement of Roy D. Lewis, dated March 20,
1998 Filed as exhibit to Form S-4 dated October 20, 1999
4. Employment Agreement of Anne E. Sanders, dated March 20, 1998
Filed as exhibit to Form S-4 dated October 20, 1999
5. Redlands Centennial Bank 1990 Stock Option Plan and Addendums
Filed as exhibit to Form S-4 dated October 20, 1999
27 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the first and second quarter of
2000.
SIGNATURES
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: /s/ Beth Sanders
-----------------------------------------
Beth Sanders
Chief Financial Officer
(Principal Accounting Officer and officer
authorized to sign on behalf of the
registrant)
- 23 -
