SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
-------------
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
---------- ----------
Commission File Number 0-10489
-----------
CENTENNIAL BANCORP
(Exact name of registrant as specified in its charter)
OREGON 93-0792841
(State of Incorporation) (I.R.S. Employer
Identification Number)
Benjamin Franklin Plaza
One S.W. Columbia Street, Suite 900
Portland, Oregon 97258
(Address of principal executive offices)
(Zip Code)
(503) 973-5556
(Registrant'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.
Yes /X/ No / /
<PAGE>
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of latest practicable date:
17,842,951 shares as of July 30, 1999.
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<PAGE>
CENTENNIAL BANCORP
FORM 10-Q
JUNE 30, 1999
INDEX
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Page
PART I - FINANCIAL INFORMATION Reference
- ------------------------------ ---------
Condensed Consolidated Balance Sheets as of 4
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Income for
the six months and the quarter ended
June 30, 1999 and 1998 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the six months
ended June 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8 - 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Overview 13 - 14
Material Changes in Financial Condition 14 - 15
Material Changes in Results of Operations 15 - 16
Market Risk 16
Liquidity and Capital Resources 17
Effects of the Year 2000 17 - 20
PART II - OTHER INFORMATION
- ---------------------------
Item 4 - Submission of Matters to a Vote
of Security Holders 21
Item 6 - Exhibits and Reports on Form 8-K. 21
Signatures 22
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<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents:
Cash and due from banks $ 33,832,243 $ 40,838,367
Federal funds sold 5,315,000 1,003,000
------------ ------------
Total cash and cash equivalents 39,147,243 41,841,367
Securities available-for-sale 56,854,987 76,793,378
Mortgage loans held for sale 18,432,524 11,039,045
Loans, net 502,637,862 416,524,430
Federal Home Loan Bank stock 5,274,400 5,083,700
Premises and equipment, net 14,350,561 12,613,321
Other assets 19,626,118 8,154,849
------------ ------------
$656,323,695 $572,050,090
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Demand $116,444,840 $102,714,344
Interest-bearing demand 236,045,773 204,032,594
Savings 33,650,936 18,483,765
Time 164,901,202 158,635,593
------------ ------------
Total deposits 551,042,751 483,866,296
Short-term borrowings 34,349,985 20,600,071
Accrued interest and other liabilities 2,038,949 3,866,582
------------ ------------
Total liabilities 587,431,685 508,332,949
Shareholders' equity:
Preferred stock -- --
Common stock, 17,833,636 shares issued and outstanding
(16,869,363 at December 31, 1998) 30,163,015 29,690,949
Retained earnings 39,522,026 33,517,242
Accumulated other comprehensive income/(loss) (793,031) 508,950
------------ ------------
Total shareholders' equity 68,892,010 63,717,141
------------ ------------
$656,323,695 $572,050,090
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $12,859,313 $10,966,568 $24,514,449 $20,981,826
Interest on investment securities 960,249 1,199,677 2,133,723 2,441,136
Other interest income 119,913 65,468 185,168 147,916
----------- ---------- ----------- -----------
Total interest income 13,939,475 12,231,713 26,833,340 23,570,878
INTEREST EXPENSE
Interest on deposits 3,987,722 3,629,420 7,650,584 7,006,488
Interest on short-term borrowings 248,808 93,208 419,126 180,746
Interest on long-term debt -- 117,522 -- 240,126
---------- ---------- ----------- -----------
Total interest expense 4,236,530 3,840,150 8,069,710 7,427,360
---------- ---------- ----------- -----------
NET INTEREST INCOME 9,702,945 8,391,563 18,763,630 16,143,518
Loan loss provision 600,000 300,000 1,100,000 600,000
---------- ---------- ----------- -----------
Net interest income after
loan loss provision 9,102,945 8,091,563 17,663,630 15,543,518
NONINTEREST INCOME
Service charges 363,340 295,570 685,210 568,098
Other 185,238 137,401 370,904 319,916
Net gains on sales of loans 278,427 425,153 653,783 730,891
Net gains on sales of investment securities 132,819 262,004 298,625 407,316
---------- ---------- ----------- -----------
Total noninterest income 959,824 1,120,128 2,008,522 2,026,221
NONINTEREST EXPENSE
Salaries and employee benefits 3,343,331 3,374,468 6,620,698 6,385,155
Premises and equipment 787,367 690,704 1,526,553 1,281,535
Legal and professional 178,900 218,966 310,338 410,138
Advertising 216,085 191,549 359,114 336,530
Printing and stationery 149,685 119,001 263,270 225,830
Other 643,515 450,075 1,253,485 983,962
----------- ---------- ----------- -----------
Total noninterest expense 5,318,883 5,044,763 10,333,458 9,623,150
----------- ---------- ----------- -----------
Income before income taxes 4,743,886 4,166,928 9,338,694 7,946,589
Provision for income taxes 1,698,860 1,354,200 3,333,910 2,582,600
------------ ----------- ------------ ------------
NET INCOME $ 3,045,026 $ 2,812,728 $ 6,004,784 $ 5,363,989
=========== ========== =========== ===========
Earnings per common share:
Basic $ .17 $ .16 $ .34 $ .30
Diluted $ .17 $ .15 $ .33 $ .29
Weighted average common shares outstanding:
Basic 17,817,427 17,650,873 17,793,635 17,639,723
Diluted 18,385,701 18,515,233 18,440,511 18,511,351
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Comprehensive Number of Common Retained Comprehensive Shareholders'
Income Shares Stock Earnings Income/(Loss) Equity
------ ------ ------ -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 14,515,676 $29,031,352 $22,082,696 $696,110 $51,810,158
Comprehensive Income:
Net Income $5,363,989 5,363,989 5,363,989
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities 283,446 283,446 283,446
Reclassification adjustment for net
gains on sales of securities included
in net income (407,316) (407,316) (407,316)
----------
Comprehensive Income $5,240,119
==========
Stock split (5%) 727,386 --
Stock options exercised 48,254 117,443 117,443
---------- ----------- ----------- -------- -----------
Balance at June 30, 1998 15,291,316 $29,148,795 $27,446,685 $572,240 $57,167,720
========== =========== =========== ======== ===========
Balance at December 31, 1998 16,869,363 $29,690,949 $33,517,242 $508,950 $63,717,141
Comprehensive Income:
Net Income $6,004,784 6,004,784 6,004,784
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities (1,003,356) (1,003,356) (1,003,356)
Reclassification adjustment for net
gains on sales of securities included
in net income (298,625) (298,625) (298,625)
----------
Comprehensive Income $4,702,803
==========
Stock split (5%) 843,468 --
Stock options exercised 120,805 295,447 295,447
Tax benefit of stock options exercised 176,619 176,619
---------- ----------- ----------- ---------- -----------
Balance at June 30, 1999 17,833,636 $30,163,015 $39,522,026 ($793,031) $68,892,010
=========== =========== =========== ========== ===========
</TABLE>
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<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net cash provided/(used) by operating activities ($12,687,419) $ 2,549,841
------------ ----------
Cash flows from investing activities:
Net increase in loans (87,174,322) (37,240,073)
Investment security purchases (6,125,598) (1,996,719)
Proceeds from investment securities:
Maturities 1,204,502 9,428,809
Sales 23,073,906 5,933,057
Purchases of premises and equipment (2,383,628) (1,602,839)
----------- -----------
Net cash used in investing activities (71,405,140) (25,477,765)
Cash flows from financing activities:
Net increase in deposits 67,176,455 29,442,533
Net increase (decrease) in short-term borrowings 13,749,914 (3,088,126)
Proceeds from issuance of common stock 472,066 117,443
----------- -----------
Net cash provided by financing activities 81,398,435 26,471,850
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,694,124) 3,543,926
Cash and cash equivalents at beginning of period 41,841,367 50,069,239
----------- -----------
Cash and cash equivalents at end of period $39,147,243 $53,613,165
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
CENTENNIAL BANCORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The interim condensed consolidated financial statements include the
accounts of Centennial Bancorp, a bank holding company ("Bancorp"), and its
wholly owned subsidiaries, Centennial Bank ("Bank") and Centennial Mortgage
Co. ("Mortgage Co."). The Bank is an Oregon state-chartered bank which
provides commercial banking services. Mortgage Co. originates residential
mortgage loans for resale in the secondary market as well as loans for
acquisition, development and construction of residential and commercial
properties.
The interim condensed consolidated financial statements are unaudited, but
include all adjustments, consisting only of normal accruals, which Bancorp
considers necessary for a fair presentation of the results of operations
for such interim periods.
All significant intercompany balances and transactions have been eliminated
in consolidation.
The interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements, including the notes
thereto, included in Bancorp's 1998 Annual Report to Shareholders.
Certain amounts for 1998 have been reclassified to conform to the 1999
presentation.
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<PAGE>
2. Securities Available-for-Sale
-----------------------------
Securities available-for-sale consisted of the following at
June 30, 1999 and December 31, 1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
June 30, 1999:
U.S. Treasuries $ 1,399,751 $ 9,620 $ 1,169 $ 1,408,202
U.S. Government
agencies 27,988,110 -- 1,105,200 26,882,910
Obligations of
states and
political
subdivisions 23,430,300 194,573 307,724 23,317,149
Corporate bonds 2,308,019 1,067 53,007 2,256,079
Mortgage-backed
securities 3,007,906 -- 17,259 2,990,647
----------- -------- -------- -----------
Total $58,134,086 $205,260 $1,484,359 $56,854,987
=========== ======== ========= ===========
December 31, 1998:
U.S. Treasuries $ 1,398,726 $ 36,190 $ -- $ 1,434,916
U.S. Government
agencies 39,479,940 116,050 333,250 39,262,740
Obligations of
states and
political
subdivisions 28,571,672 1,006,580 -- 29,578,252
Corporate bonds 2,304,968 13,059 6,749 2,311,278
Mortgage-backed
securities 4,217,462 1,330 12,600 4,206,192
----------- --------- -------- -----------
Total $75,972,768 $1,173,209 $352,599 $76,793,378
=========== ========== ======== ===========
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<PAGE>
3. Loans and Allowance for Loan Losses
-----------------------------------
The composition of the loan portfolio was as follows:
June 30, December 31,
1999 1998
------------ ------------
Real estate -- mortgage $110,912,403 $ 94,692,594
Real estate -- construction 176,586,638 151,163,783
Commercial 207,356,393 163,954,595
Installment 7,202,795 7,073,011
Lease financing 3,442,823 1,896,609
Other 3,600,369 3,137,402
------------ ------------
509,101,421 421,917,994
Allowance for loan losses (5,507,474) (4,450,614)
Less deferred loan fees (956,085) (942,950)
------------ ------------
$502,637,862 $416,524,430
============ ============
Loans held for sale of $18,432,524 and $11,039,045 at June 30, 1999 and
December 31, 1998, respectively, represent real estate mortgage loans.
These loans are recorded at cost which approximates market.
Transactions in the allowance for loan losses were as follows for the six
months ended June 30:
1999 1998
----------- -----------
Balance at beginning of period $4,450,614 $3,348,914
Provision charged to operations 1,100,000 600,000
Recoveries 32,897 28,271
Loans charged off (76,037) (41,817)
---------- ----------
Balance at end of period $5,507,474 $3,935,368
========== ==========
At June 30, 1999, Bancorp had 14 loans requiring a specific valuation
allowance in accordance with SFAS No. 114, as amended by SFAS No. 118 (11
loans at December 31, 1998). The specific valuation allowance was $850,000
on loans with remaining principal outstanding of $10,559,000 at June 30,
1999 ($563,000 and $5,218,000, respectively, at December 31, 1998). Each
loan with a current outstanding principal balance of less than $100,000 is
grouped into one homogenous pool when considering the valuation allowance.
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<PAGE>
At June 30, 1999 and December 31, 1998, the specific valuation allowance
for these smaller loans was insignificant. The increase in the specific
valuation allowance at June 30, 1999 was primarily attributable to two
borrowers for which the specific valuation allowance was $300,000 on loans
with remaining principal outstanding of $6,821,000.
It is Bancorp's policy to place loans on nonaccrual status whenever the
collection of all or a part of the principal balance is in doubt. Loans
placed on nonaccrual status may or may not be contractually past due at the
time of such determination, and may or may not be secured by collateral.
Loans on nonaccrual status at June 30, 1999 and December 31, 1998 were
approximately $1,390,000 and $3,841,000, respectively.
Loans past due 90 days or more on which Bancorp continued to accrue
interest were approximately $964,000 at June 30, 1999, and approximately
$1,043,000 at December 31, 1998. There were no loans on which the interest
rate or payment schedule were modified from their original terms to
accommodate a borrower's weakened financial position at June 30, 1999 or
December 31, 1998.
4. Short-Term Borrowings
---------------------
Short-term borrowings consisted of the following:
June 30, 1999 December 31, 1998
------------- -----------------
Securities sold under
agreement to repurchase $ 6,949,985 $16,100,071
Federal funds purchased 17,400,000 4,500,000
Federal Home Loan Bank 10,045,671 --
------------ -----------
$34,395,656 $20,600,071
=========== ===========
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<PAGE>
5. Earnings per Share of Common Stock
----------------------------------
A reconciliation of the weighted average shares used to compute basic and
diluted earnings per share is as follows:
Three Months Ended June 30
--------------------------
1999 1998
----------- -----------
Weighted average shares
outstanding - basic 17,817,427 17,650,873
Additional shares from
stock options 568,274 864,360
---------- ----------
Weighted average shares
outstanding - diluted 18,385,701 18,515,233
========== ==========
Six Months Ended June 30
------------------------
1999 1998
---------- ----------
Weighted average shares
outstanding - basic 17,793,635 17,639,723
Additional shares from
stock options 646,876 871,628
---------- ----------
Weighted average shares
outstanding - diluted 18,440,511 18,511,351
========== ==========
The weighted average number of common shares outstanding reflects the
retroactive effect of stock splits and stock dividends including a 5% stock
split declared July 21, 1999 for shareholders of record as of July 30,
1999.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, WHICH
ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. STATEMENTS WHICH EXPRESSLY OR IMPLICITLY PREDICT
FUTURE RESULTS, PERFORMANCE OR EVENTS ARE FORWARD-LOOKING. IN ADDITION, THE
WORDS "ANTICIPATE," "BELIEVE," "INTEND," AND "EXPECT" AND SIMILAR EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE ANTICIPATED. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE: (1) POTENTIAL DELAYS OR OTHER PROBLEMS IN IMPLEMENTING
BANCORP'S GROWTH AND EXPANSION STRATEGY; (2) THE ABILITY TO ATTRACT NEW DEPOSITS
AND LOANS; (3) INTEREST RATE FLUCTUATIONS; (4) COMPETITIVE FACTORS AND PRICING
PRESSURES; (5) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY; (6)
CHANGES IN LEGAL AND REGULATORY REQUIREMENTS; (7) CHANGES IN TECHNOLOGY; AND (8)
YEAR 2000 PROBLEMS, AS WELL AS OTHER FACTORS DESCRIBED IN THIS AND OTHER BANCORP
REPORTS AND STATEMENTS, INCLUDING, BUT NOT LIMITED TO, EXHIBIT 99.1 TO BANCORP'S
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, WHICH IS INCORPORATED HEREIN BY
REFERENCE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. BANCORP DOES
NOT INTEND TO UPDATE ITS FORWARD-LOOKING STATEMENTS.
OVERVIEW
- --------
Centennial Bancorp, an Oregon corporation, was organized in 1981 as a bank
holding company and has two wholly owned subsidiaries: Centennial Bank and
Centennial Mortgage Co. Bancorp primarily serves the Eugene, Oregon and
Portland, Oregon markets.
At June 30, 1999, Centennial Bank operated 11 full-service and five
limited-service branches, including the new full-service Hazel Dell Office in
Vancouver, Washington which was acquired from Northwest National Bank in April
1999 and began operating May 3, 1999 as the Bank's first branch in the state of
Washington. During July 1999, two new full-service branches in Oregon opened for
business in downtown Portland and downtown Salem. At quarter end, the Bank had
two commercial lendingoffices, one each in Eugene and Southwest Portland. A
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<PAGE>
third commercial lending office located in the new downtown Portland branch
opened during July. Bancorp has also announced plans to open a new
full-service branch and a new commercial lending office in Clackamas, Oregon.
At June 30, 1999, Centennial Mortgage had three Portland and two Eugene
offices.
Centennial Bancorp reported net income of $6.0 million, or $.34 per share
(basic), for the six months ended June 30, 1999. This represented an 11.9%
increase in net income and a 13.3% increase in earnings per share (basic), as
compared to $5.4 million, or $.30 per share, for the six months ended June 30,
1998. Net income of $3.0 million, or $.17 per share, for the quarter ended June
30, 1999 represented an 8.3% increase in net income and a 6.3% increase in
earnings per share (basic), as compared to $2.8 million, or $.16 per share, for
the quarter ended June 30, 1998. The increased earnings during the six months
and the quarter ended June 30, 1999 primarily reflect the expansion of Bancorp's
interest-earning assets and increased net interest income. At June 30, 1999,
Bancorp recognized a 25.2% increase in total assets and a 25.5% increase in
interest-earning assets as compared to June 30, 1998.
MATERIAL CHANGES IN FINANCIAL CONDITION
- ---------------------------------------
Material changes in financial condition for the six months ended June 30,
1999 included an increase in total assets, primarily in loans, loans held for
sale and goodwill. Asset growth was funded by deposit increases, short-term
borrowings, sales of investment securities and net income.
At June 30, 1999, total assets were $656 million, representing an increase
of 14.7%, or $84.3 million, over total assets of $572 million at December 31,
1998. Loans and loans held for sale increased $93.5 million as compared to
December 31, 1998, mainly due to increases in commercial, real estate
construction and development, and residential mortgage loan activity.
During the six-month period, Bancorp's investment portfolio totals
decreased $19.9 million as available-for-sale securities were sold to help fund
overall asset growth.
At June 30, 1999, other assets totaled $19.6 million, an $11.5 million
increase when compared to December 31, 1998. The increase primarily resulted
from $9.0 million of goodwill associated with the acquisition of the Hazel Dell
Office, which is being amortized over 15 years.
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<PAGE>
Total deposits increased $67.2 million, or 13.8%, to $551 million at June
30, 1999 as compared to December 31, 1998. The increase was concentrated in the
demand, interest-bearing demand and savings account categories.
At June 30, 1999, short-term borrowings totaled $34.3 million, a $13.7
million increase when compared with totals at December 31, 1998. The increase
helped to fund Bancorp's strong second quarter asset growth.
All other changes in asset and liability categories during the first six
months of 1999 were comparatively modest.
June 30, 1999 shareholders' equity was $68.9 million, a $5.2 million
increase over December 31, 1998. The increase resulted from net income and stock
option exercises and was partially offset by unrealized losses on
available-for-sale securities resulting from increases in market interest rates.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
- -----------------------------------------
Primarily due to continuing loan growth, total interest income increased
$3.3 million (or 13.8%) for the six months and $1.7 million (or 14.0%) for the
quarter ended June 30, 1999 as compared to the same periods in 1998.
Total interest expense increased $642,000 (or 8.6%) for the six months and
$396,000 (or 10.3%) for the quarter ended June 30, 1999 as compared to the same
1998 periods. These increases were mainly due to the growth of interest-bearing
deposits.
The increases in interest earned, offset in part by the increases in
interest paid, allowed Bancorp's net interest income to increase by $2.6 million
(or 16.2%) for the six-month period, and $1.3 million (or 15.6%) for the second
quarter of 1999, over the comparable periods in 1998.
For the six- and three-month periods ended June 30, 1999, Bancorp charged
loan loss provisions of $1.1 million and $600,000, respectively, as compared to
$600,000 and $300,000 for the same periods in 1998. The increase in loss
provision was primarily due to increasing loan totals.
At June 30, 1999, Bancorp's allowance for loan losses was $5.5 million, as
compared to $4.5 million and $3.9 million at December 31, 1998 and June 30,
1998, respectively. Management believes that the allowance is adequate for
potential loan losses, based on management's assessment of various factors,
including present delinquent and non-performing loans, past
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<PAGE>
history of industry loan loss experience, and present and anticipated future
economic trends impacting the areas and customers served by Bancorp. The
allowance is based on estimates, and actual losses may vary from those currently
estimated.
Noninterest income decreased nominally for the six months and $160,000 (or
14.3%) for the quarter ended June 30, 1999 as compared to the same 1998 periods.
The decreases reflected lower gains on sales of loans and securities and were
partially offset by increased service charge income on deposit accounts.
Increasing mortgage interest rates reduced loan sale gains while a greater
volume of deposit accounts and transactions produced the increase in service
charge income.
Noninterest expense increased $710,000 (or 7.4%) for the six months and
$274,000 (or 5.4%) for the quarter ended June 30, 1999 as compared to the same
1998 periods. These increases were primarily due to increased salary, employee
benefit, and fixed asset expenses resulting from Bancorp's continuing growth and
expansion. In addition, approximately $97,000 of the increase for the six months
and quarter ended June 30, 1999 was due to amortization of goodwill associated
with the acquisition of the Hazel Dell branch.
The provision for income taxes increased for the six months and the quarter
ended June 30, 1999, commensurate with Bancorp's increased pre-tax income.
MARKET RISK
- -----------
Market risk is the risk of loss from adverse changes in market prices and
rates. Bancorp's market risk arises principally from interest rate risk in its
lending, deposit and borrowing activities. Management actively monitors and
manages its interest rate risk exposure. Although Bancorp manages other risks,
as in credit quality and liquidity risk, in the normal course of business,
management considers interest rate risk to be a significant market risk which
could have the largest material effect on Bancorp's financial condition and
results of operations. Other types of market risks, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course
of Bancorp's business activities.
Bancorp did not experience a material change in market risk at June 30,
1999 as compared to December 31, 1998.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Bancorp's principal subsidiary, Centennial Bank, has adopted policies to
maintain a relatively liquid position to enable it to respond to changes in the
Bank's needs and financial environment. Generally, the Bank's major sources of
liquidity are customer deposits, sales and maturities of investment securities,
the use of federal funds markets and other short-term borrowings, and net cash
provided by operating activities. Scheduled loan repayments are a relatively
stable source of funds, while deposit inflows and unscheduled loan prepayments,
which are influenced by general interest rate levels, interest rates available
on other investments, competition, economic conditions and other factors, are
not.
Along with federal funds lines, the Bank maintains a cash management
advance line of credit with the Federal Home Loan Bank, Seattle, Washington,
which allows temporary borrowings for liquidity. At June 30, 1999, Bancorp had
$10.0 million in borrowings outstanding from the Federal Home Loan Bank of
Seattle under the cash management advance line.
At June 30, 1999, Bancorp's Tier 1 and total risk-based capital ratios
under the Federal Reserve Board's ("FRB") risk-based capital guidelines were
approximately 9.2% and 10.1%, respectively. The FRB's minimum risk-based capital
ratio guidelines for Tier 1 and total capital are 4% and 8%, respectively.
At June 30, 1999, Bancorp's capital-to-assets ratio under leverage ratio
guidelines was approximately 10.1%. The FRB's current minimum leverage capital
ratio guideline is 3%.
EFFECTS OF THE YEAR 2000
- ------------------------
The Year 2000 may pose unique challenges to all businesses due to the
inability of some computers and computer software programs to accurately
recognize, for years after 1999, dates which are often expressed as a two digit
number. This inability to recognize date information accurately could
potentially affect computer operations and calculations, or could cause computer
systems to not operate at all.
The federal banking regulators have issued several statements providing
guidance to financial institutions on the steps the regulators expect financial
institutions to take to become Year 2000 compliant. Bancorp's Year 2000 programs
are designed to comply with this guidance. Each of the federal banking
regulators is also examining the financial institutions under its
-17-
<PAGE>
jurisdiction to assess each institution's compliance with the outstanding
guidance. If an institution's progress in addressing the Year 2000 problem is
deemed by its primary federal regulator to be less than satisfactory, the
institution will be required to enter into a memorandum of understanding with
the regulator which will, among other things, require the institution to
promptly develop and submit an acceptable plan for becoming Year 2000 compliant
and to provide periodic reports describing the institution's progress in
implementing the plan. Failure to satisfactorily address the Year 2000 problem
may also expose a financial institution to other forms of enforcement action
that its primary federal regulator deems appropriate to address the deficiencies
in the institution's Year 2000 remediation program.
Bancorp is heavily reliant on computers for accounting for customer records
and transactions, as well as operating performance. Recognizing the risks of the
Year 2000 problem, management organized a task force in early 1997 to identify
and address the issues related to the Year 2000. Also, in order to elevate
public awareness of the potential for Year 2000 problems, management organized
and sponsored community seminars and conducted periodic speaking engagements in
both the Eugene- and Portland-area markets. Bancorp also included Year 2000
updates in customer statements.
To date, Bancorp's Year 2000 task force has identified the internal
computer hardware and software utilized by Bancorp, as
well as mechanical systems which may be dependent upon computer components, and
contacted vendors seeking their certification of Year 2000 compliance (Bancorp
does not utilize any proprietary computer hardware or software). The task force
has retained computer consultants to assist with testing of computer hardware
and software. The testing process was completed on schedule according to
regulatory guidelines. Results to date indicate systems are compliant.
Additional testing may continue through year end 1999 to ensure systems
compliance to the maximum extent possible.
Management of Bancorp has also required that lending personnel determine
loan customer awareness and intent to timely achieve Year 2000 compliance.
Bancorp's credit risk associated with borrowers may increase to the extent
borrowers fail to adequately address their Year 2000 issues. As a result, there
may be increases in problem loans and credit losses in future years. In
addition, because of the possible effects on Bancorp's cash needs and liquidity,
management has interviewed selected significant deposit customers to determine
their Year 2000 compliance efforts and anticipated potential cash requirements
due to the Year 2000 problem.
-18-
<PAGE>
Bancorp's inquiry of each of its material vendors, borrowers and depositors
has not disclosed that any such person has failed to adequately address the Year
2000 issue. Notwithstanding Bancorp's efforts, there can be no assurance that
these or other third parties significant to Bancorp's operations will adequately
address such issue.
During 1998, management budgeted $100,000 and spent $74,000 for Year 2000
compliance costs. The 1999 budget for such costs is $200,000 (reduced from
$300,000). For the six months ended June 30, 1999, expenditures totaled $50,000.
Bancorp has recognized no Year 2000 equipment impairment writedowns to date and
does not anticipate that any will be incurred.
Management believes that its efforts to achieve Year 2000 compliance and
the impact of the Year 2000 problem will not have a material effect on
operations. Although Bancorp believes the actions being taken at this time are
suitable and appropriate to address the Year 2000 issue, there can be no
assurance that such measures will be sufficient or that Year 2000 issues will
not have an adverse impact, at least temporarily, on operations. Specific
factors which could affect Bancorp's ability to address Year 2000 issues include
the ability to locate and correct all relevant systems, the ability of
consultants to complete their testing on schedule, the compliance of third-party
vendors and service providers upon whom Bancorp relies, and similar
uncertainties.
Management believes that a reasonably likely worst case scenario as to the
effect on Bancorp of the Year 2000 compliance issue is that one or more
significant third parties fail to become Year 2000 compliant and disrupt the
Company's operations. It is not possible to quantify the potential impact of any
such disruption at this time.
Bancorp has prepared contingency plans to minimize disruption to its
operations due to Year 2000 issues. Included are plans to insulate critical
business operations and develop alternatives to mitigate potential effects of
critical third parties whose own failure to properly address Year 2000 issues
may adversely impact Bancorp operations. Alternative strategies and contingency
plans for liquidity and cash are also included as part of such plans. The
contingency plans for critical business operations were completed during the
second quarter as anticipated. Review and validation of these plans will
continue through the remainder of 1999. There can be no assurance that any such
plans will fully mitigate any failures or problems.
The forward-looking statements contained herein with regard to the timing
and overall cost estimates of Bancorp's efforts to address the Year 2000 problem
are based upon Bancorp's experience thus far in this effort. Should Bancorp
encounter unforeseen
-19-
<PAGE>
difficulties either in the continuing review of its computerized systems, their
ultimate remediation, or the response of parties with which it does business or
from which it obtains services, the actual results could vary significantly from
the estimates contained in these forward-looking statements.
-20-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
Centennial Bancorp held its annual meeting of shareholders on May 19, 1999.
At the meeting, Dan Giustina, Cordy H. Jensen, Robert L. Newburn, Brian B. Obie,
Ted Winnowski and Richard C. Williams were reelected to the Board of Directors
for one-year terms. Voting on the election of directors was as follows:
Votes Votes
For Withheld
---------- --------
Dan Giustina 14,094,921 57,514
Cordy H. Jensen 14,096,188 56,247
Robert L. Newburn 14,092,725 59,710
Brian B. Obie 14,088,759 63,676
Ted Winnowski 14,091,891 60,544
Richard C. Williams 14,091,940 60,495
There were no abstentions or broker non-votes with respect to the election of
directors.
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
-21-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTENNIAL BANCORP
Dated: August 5, 1999 /s/ Richard C. Williams
-----------------------------------
Richard C. Williams
President & Chief Executive Officer
Dated: August 9, 1999 /s/ Michael J. Nysingh
-----------------------------------
Michael J. Nysingh
Chief Financial Officer
-22-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS QUARTERLY REPORT ON
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 33,832,243
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,315,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,854,987
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 508,145,336
<ALLOWANCE> 5,507,474
<TOTAL-ASSETS> 656,323,695
<DEPOSITS> 551,042,751
<SHORT-TERM> 34,349,985
<LIABILITIES-OTHER> 2,038,949
<LONG-TERM> 0
0
0
<COMMON> 30,163,015
<OTHER-SE> 38,728,995
<TOTAL-LIABILITIES-AND-EQUITY> 656,323,695
<INTEREST-LOAN> 24,514,449
<INTEREST-INVEST> 2,133,723
<INTEREST-OTHER> 185,168
<INTEREST-TOTAL> 26,833,340
<INTEREST-DEPOSIT> 7,650,584
<INTEREST-EXPENSE> 8,069,710
<INTEREST-INCOME-NET> 18,763,630
<LOAN-LOSSES> 1,100,000
<SECURITIES-GAINS> 298,625
<EXPENSE-OTHER> 10,333,458
<INCOME-PRETAX> 9,338,694
<INCOME-PRE-EXTRAORDINARY> 6,004,784
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,004,784
<EPS-BASIC> .34
<EPS-DILUTED> .33
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 1,390,000
<LOANS-PAST> 964,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,450,614
<CHARGE-OFFS> 76,037
<RECOVERIES> 32,897
<ALLOWANCE-CLOSE> 5,507,474
<ALLOWANCE-DOMESTIC> 5,507,474
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> INFORMATION NOT CALCULATED FOR INTERIM REPORTS.
</FN>
</TABLE>
