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 March 31, 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)
675 Oak Street
Eugene, Oregon 97401
(Address of principal executive offices)
(Zip Code)
(541) 342-3970
(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:
16,959,419 shares as of April 30, 1999.
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<PAGE>
CENTENNIAL BANCORP
FORM 10-Q
MARCH 31, 1999
INDEX
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Page
PART I - FINANCIAL INFORMATION Reference
- ------------------------------ ---------
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Income for
the three months ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the three months ended
March 31, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31,
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 17
Liquidity and Capital Resources 17 - 18
Effects of the Year 2000 18 - 20
PART II - OTHER INFORMATION
- ---------------------------
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>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents:
Cash and due from banks $ 28,257,590 $ 40,838,367
Federal funds sold 20,250,000 1,003,000
------------ ------------
Total cash and cash equivalents 48,507,590 41,841,367
Securities available-for-sale 60,898,918 76,793,378
Mortgage loans held for sale 6,719,743 11,039,045
Loans, net 426,856,570 416,524,430
Federal Home Loan Bank stock 5,180,800 5,083,700
Premises and equipment, net 12,658,361 12,613,321
Other assets 10,596,313 8,154,849
------------ ------------
$571,418,295 $572,050,090
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Demand $102,402,020 $102,714,344
Interest-bearing demand 203,169,256 204,032,594
Savings 27,271,060 18,483,765
Time 155,286,819 158,635,593
------------ ------------
Total deposits 488,129,155 483,866,296
Short-term borrowings 12,887,016 20,600,071
Accrued interest and other liabilities 3,469,679 3,866,582
------------ ------------
Total liabilities 504,485,850 508,332,949
Shareholders' equity:
Preferred stock -- --
Common stock, 16,953,404 issued and outstanding
(16,869,363 at December 31, 1998) 30,084,235 29,690,949
Retained earnings 36,477,000 33,517,242
Accumulated other comprehensive income 371,210 508,950
------------ ------------
Total shareholders' equity 66,932,445 63,717,141
------------ ------------
$571,418,295 $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
March 31,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $11,655,136 $10,015,258
Interest on investment securities 1,173,474 1,241,459
Other interest income 65,255 82,448
---------- ----------
Total interest income 12,893,865 11,339,165
INTEREST EXPENSE
Interest on deposits 3,662,862 3,377,068
Interest on short-term borrowings 170,318 87,538
Interest on long-term debt -- 122,604
---------- ----------
Total interest expense 3,833,180 3,587,210
---------- ----------
NET INTEREST INCOME 9,060,685 7,751,955
Loan loss provision 500,000 300,000
---------- ----------
Net interest income after loan loss provision 8,560,685 7,451,955
NONINTEREST INCOME
Service charges 321,870 272,528
Other 185,666 182,515
Net gains on sales of loans 375,356 305,738
Net gains on sales of securities 165,806 145,312
---------- ---------
Total noninterest income 1,048,698 906,093
NONINTEREST EXPENSES
Salaries and employee benefits 3,277,367 3,010,687
Premises and equipment 739,186 590,831
Legal and professional 131,438 191,172
Advertising 143,029 144,981
Printing and stationery 113,585 106,829
Other 609,970 533,887
---------- ----------
Total noninterest expenses 5,014,575 4,578,387
---------- ----------
Income before income taxes 4,594,808 3,779,661
Provision for income taxes 1,635,050 1,228,400
---------- ----------
NET INCOME $2,959,758 $2,551,261
========== ==========
Earnings per share of common stock:
Basic $ .18 $ .15
Diluted $ .17 $ .14
Weighted average shares outstanding:
Basic 16,923,408 16,789,001
Diluted 17,615,172 17,626,120
</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 Equity
------ ------ ----- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 16,765,606 $29,031,352 $22,082,696 $696,110 $51,810,158
Comprehensive Income:
Net Income $2,551,261 2,551,261 2,551,261
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities 48,326 48,326 48,326
Reclassification adjustment for
net gains on sales of securities
included in net income (98,086) (98,086) (98,086)
-----------
Comprehensive Income $2,501,501
===========
Stock options exercised 32,609 70,502 70,502
---------- ----------- ----------- -------- ------------
Balance at March 31, 1998 16,798,215 $29,101,854 $24,633,957 $646,350 $54,382,161
========== =========== =========== ======== ============
Balance at December 31, 1998 16,869,363 $29,690,949 $33,517,242 $508,950 $63,717,141
Comprehensive Income:
Net Income $2,959,758 2,959,758 2,959,758
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities (31,624) (31,624) (31,624)
Reclassification adjustment for
net gains on sales of securities
included in net income (106,116) (106,116) (106,116)
-----------
Comprehensive Income $2,822,018
===========
Stock options exercised 84,041 216,667 216,667
Tax benefit of stock options exercised 176,619 176,619
---------- ----------- ----------- -------- ------------
Balance at March 31, 1999 16,953,404 $30,084,235 $36,477,000 $371,210 $66,932,445
========== =========== =========== ======== ============
</TABLE>
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<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net cash provided by (used in) operating activities $5,060,713 $(3,038,051)
Cash flows from investing activities:
Net increase in loans (10,832,140) (17,835,109)
Investment security purchases -- (496,719)
Proceeds from investment securities:
Maturities 606,584 5,036,516
Sales 15,244,725 3,475,715
Purchases of premises and equipment (356,750) (556,489)
----------- ------------
Net cash provided by (used in) investing activities 4,662,419 (10,376,086)
Cash flows from financing activities:
Net increase in deposits 4,262,860 6,240,965
Net decrease in short-term borrowings (7,713,055) (2,333,433)
Proceeds from issuance of common stock 393,286 70,502
----------- -----------
Net cash provided by (used in) financing activities (3,056,909) 3,978,034
----------- -----------
Net increase (decrease) in cash and cash equivalents 6,666,223 (9,436,103)
Cash and cash equivalents at beginning of period 41,841,367 50,069,239
----------- -----------
Cash and cash equivalents at end of period $48,507,590 $40,633,136
=========== ===========
</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 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 with the 1999
presentation.
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<PAGE>
2. Securities Available-for-Sale
-----------------------------
Securities available-for-sale consisted of the following at March 31, 1999
and December 31, 1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
March 31, 1999:
U.S. Treasuries $ 1,399,254 $ 26,410 $ -- $ 1,425,664
U.S. Government
agencies 27,983,886 27,964 332,710 27,679,140
Obligations of
states and
political
subdivisions 24,995,488 875,739 -- 25,871,227
Corporate bonds 2,313,091 5,747 5,676 2,313,162
Mortgage-backed
securities 3,608,488 2,948 1,711 3,609,725
----------- -------- -------- -----------
Total $60,300,207 $938,808 $340,097 $60,898,918
=========== ======== ======== ===========
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:
March 31, December 31,
1999 1998
------------ ------------
Real estate -- mortgage $ 91,143,352 $ 94,692,594
Real estate -- construction 160,519,714 151,163,783
Commercial 169,294,137 163,954,595
Installment 6,500,760 7,073,011
Lease financing 1,425,960 1,896,609
Other 3,658,440 3,137,402
------------ ------------
432,542,363 421,917,994
Allowance for loan losses (4,923,316) (4,450,614)
Less deferred loan fees (762,477) (942,950)
------------ ------------
$426,856,570 $416,524,430
============ ============
Mortgage loans held for sale of $6,719,743 and $11,039,045 at March 31,
1999 and December 31, 1998, respectively, represent resdiential real estate
loans. These loans are recorded at cost which approximates market value.
Transactions in the allowance for loan losses were as follows for the three
months ended March 31:
1999 1998
----------- -----------
Balance at beginning of period $4,450,614 $3,348,914
Provision charged to operations 500,000 300,000
Recoveries 9,893 10,390
Loans charged off (37,191) (5,000)
---------- ----------
Balance at end of period $4,923,316 $3,654,304
========== ==========
At March 31, 1999 and December 31, 1998, Bancorp had 11 loans requiring a
specific valuation allowance in accordance with SFAS No. 114, as amended by
SFAS No. 118. The specific valuation allowance was $766,000 on loans with
remaining principal outstanding of $4,410,000 at March 31, 1999 ($563,000
and $5,218,000 at December 31, 1998). Each loan
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<PAGE>
with a current outstanding principal balance of less than $100,000 is
grouped into one homogenous pool when considering the valuation allowance.
At March 31, 1999 and December 31, 1998, the specific valuation allowance
for those loans was insignificant.
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 March 31, 1999 and December 31, 1998 were
approximately $2,967,000 and $3,841,000, respectively.
Loans past due 90 days or more on which Bancorp continued to accrue
interest were approximately $589,000 at March 31, 1999, and approximately
$1,043,000 at December 31, 1998. There were no loans on which the interest
rates or payment schedules were modified from their original terms to
accommodate a borrower's weakened financial position at March 31, 1999 or
December 31, 1998.
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<PAGE>
4. Short-Term Borrowings
---------------------
Short-term borrowings consisted of the following:
March 31, 1999 December 31, 1998
-------------- -----------------
Securities sold under
agreement to repurchase $12,887,016 $16,100,071
Federal funds purchased -- 4,500,000
------------ -----------
$12,887,016 $20,600,071
=========== ===========
5. Earnings per Share of Common Stock
----------------------------------
A reconcilement of the weighted average shares used to compute basic and
diluted earnings per share is as follows:
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Weighted average shares
outstanding -- basic 16,923,408 16,789,001
Incremental shares from
stock options 691,764 837,119
---------- ----------
Weighted average shares
outstanding -- diluted 17,615,172 17,626,120
========== ==========
The weighted average number of common shares outstanding reflects the
retroactive effect of stock splits and stock dividends.
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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. WHEN USED IN THIS QUARTERLY REPORT, THE WORDS
"ANTICIPATE," "BELIEVE," AND "EXPECT," AND WORDS OR PHRASES OF SIMILAR IMPORT,
ARE INTENDED TO 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 March 31, 1999, Centennial Bank operated 10 full-service and five
limited-service branches, including the new full-service Oakway Center Office in
Eugene, which opened in January 1999. Acquisition of Northwest National Bank's
Hazel Dell branch in Vancouver, Washington was completed on April 30, 1999.
Bancorp has also announced plans to open two new full-service Oregon branches to
be located in Clackamas and Salem. As a result of Bancorp's recent
reorganization along functional lines, at
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<PAGE>
quarter end the Bank had two new Commercial Banking Center offices, one in
Eugene and the other in southwest Portland.
At March 31, 1999, Centennial Mortgage had five offices including the new
Oakway Center Office in Eugene, which is adjacent to the new Bank branch at that
location.
Bancorp reported net income of $3.0 million, or $.18 per share, for the
three months ended March 31, 1999. This represented a 16% increase in net income
as compared to $2.6 million, or $.15 per share, for the three months ended March
31, 1998. The increased earnings reflected primarily the expansion of Bancorp's
interest-earning assets and increased net interest income. At March 31, 1999,
Bancorp recognized a 14% increase in total assets and a 16% increase in
interest-earning assets as compared to March 31, 1998.
MATERIAL CHANGES IN FINANCIAL CONDITION
- ---------------------------------------
For the three-month period ended March 31, 1999, total assets as well as
total liabilities and shareholders' equity were essentially unchanged from
fiscal year end December 31, 1998. However, increases were noted in loans, cash
and cash equivalents, and other assets which were offset by decreases in
mortgage loans held for sale and the liquidation of certain assets held in the
investment securities portfolio. A reduction of short-term debt was offset by
deposit growth and increased shareholders' equity.
At March 31, 1999, total assets of $571.4 million represented a decrease
from the $572.1 million total at December 31, 1998. Bancorp recognized a $10.3
million increase in net loans as compared to December 31, 1998 as a result of
commercial and real estate construction loan growth. Mortgage loans held for
sale decreased $4.3 million from year end 1998, primarily due to reduced
refinancing activity and normal seasonal slowing.
A strong surge in business savings deposits near quarter end caused a
substantial increase in federal funds sold, resulting in a $6.7 million net
overall increase in cash and cash equivalents at March 31, 1999 as compared to
December 31, 1998. Federal funds sold represents excess funds which are sold
overnight to other financial institutions. Their levels can fluctuate
significantly on a daily basis due to Bancorp's cash flows.
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<PAGE>
During the quarter, Bancorp's investment portfolio totals decreased $15.9
million as available-for-sale securities were sold for liquidity maintenance
prior to the deposit surge at quarter end.
For the three-month period, other assets, primarily other real estate owned
(OREO), increased $2.4 million to $10.6 million as compared to $8.2 million at
year end 1998. The OREO increase mainly involved the loans and real estate
collateral of one borrower, and management does not believe the increase is
reflective of general loan portfolio trends.
Despite the surge at quarter end, total deposits increased only $4.3
million during the quarter ended March 31, 1999. In most prior years, Bancorp
has experienced a modest increase or a decrease in deposits during all or part
of the first quarter of the year, with deposit activity increasing significantly
the remainder of each year. Management believes that Bancorp's modest deposit
increase during the first quarter of 1999 is consistent with Bancorp's
historical patterns.
At March 31, 1999, short-term borrowings totaled $12.9 million, a $7.7
million decrease when compared with totals at December 31, 1998. This decrease
in borrowing was related to the previously mentioned quarter end deposit surge
as the Bank changed from a net borrower to a net lender of short-term funds.
Remaining asset and liability category changes during the first quarter of
1999 were comparatively modest.
March 31, 1999 shareholders' equity was $66.9 million, a $3.2 million
increase over December 31, 1998. The increase resulted from net income and
stock option exercises.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
- -----------------------------------------
Total interest income increased $1.6 million (or 13.7%) during the three
months ended March 31, 1999 as compared to the same period in 1998. This
increase was due to increased overall loan totals during the first quarter of
1999 as compared to the first quarter of 1998.
Total interest expense increased $246,000 (or 6.9%) for the three months
ended March 31, 1999 as compared to the same period
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<PAGE>
in 1998. This increase was due to higher levels of interest-bearing deposits
held during the first quarter of 1999 as compared to the first quarter of 1998.
The increase in interest earned, partially offset by the increase in
interest expense, served to increase Bancorp's net interest income by $1.3
million (or 16.9%) over the first quarter of 1998.
During the three months ended March 31, 1999, Bancorp charged a $500,000
loan loss provision to operations as compared to $300,000 during the three
months ended March 31, 1998. The increase in loss provision was primarily due to
Bancorp's increasing loan totals.
At March 31, 1999, Bancorp's allowance for loan losses was $4.9 million, as
compared to $4.5 million and $3.7 million at December 31, 1998 and March 31,
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 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 increased $142,600 for the three months ended March 31,
1999 as compared to the same period in 1998. This increase was primarily
attributable to higher gains on sales of loans and securities, and increased
service charge income on deposit accounts.
Noninterest expense increased $436,200 during first quarter 1999 as
compared to first quarter 1998. The increase primarily resulted from Bancorp's
general business growth and expansion, and mostly consisted of a $266,700
increase in salaries and benefits, and a $148,400 increase in premises and
equipment expenditures.
At March 31, 1999, the provision for income taxes was $1.6 million, an
increase of $406,700 over the provision at March 31, 1998 and primarily resulted
from Bancorp's increased pre-tax income.
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<PAGE>
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 March 31,
1999 as compared to December 31, 1998.
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 available-for-sale
securities, the use of federal funds markets 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 ("FHLB") in Seattle,
Washington, which allows temporary borrowings for the Bank's liquidity needs. At
March 31, 1999, the Bank did not have any borrowings outstanding with the FHLB.
At March 31, 1999, Bancorp's Tier 1 and total risk-based capital ratios
under the Federal Reserve Board's ("FRB") risk-based capital guidelines were
approximately 11.5% and 12.4%, respectively. The FRB's minimum risk-based
capital ratio guidelines for Tier 1 and total capital are 4% and 8%,
respectively.
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<PAGE>
At March 31, 1999, Bancorp's capital-to-assets ratio under leverage ratio
guidelines was approximately 11.6%. 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 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, conducted periodic speaking engagements, and
included updates in customer statements in both the Eugene and Portland-area
markets.
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<PAGE>
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 is on schedule and expected to be completed by
June 30, 1999. Results to date indicate systems are compliant. Management
anticipates that testing will be completed according to regulatory guidelines.
Additional testing may continue through year end 1999 to ensure continued
systems compliance to the maximum extent possible.
Management of Bancorp has also required that lending personnel ascertain
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.
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 (recently reduced
from $300,000). For the three months ended March 31, 1999, expenditures totaled
$29,000. 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
-19-
<PAGE>
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 is preparing 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 are expected to be substantially completed for critical
business operations by June 30, 1999. 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 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.
The disclosure contained in this Quarterly Report as well as the
information in reports previously filed by Bancorp with the Securities and
Exchange Commission regarding Bancorp's Year 2000 readiness are designated as
Year 2000 readiness disclosures under the Year 2000 Information and Readiness
Disclosure Act.
-20-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits
27 Financial Statement 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: May 14, 1999 /s/ Richard C. Williams
-----------------------------------
Richard C. Williams
President & Chief Executive Officer
Dated: May 14, 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 MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 28,257,590
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,250,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,898,918
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 431,779,886
<ALLOWANCE> 4,923,316
<TOTAL-ASSETS> 571,418,295
<DEPOSITS> 488,129,155
<SHORT-TERM> 12,887,016
<LIABILITIES-OTHER> 3,469,679
<LONG-TERM> 0
0
0
<COMMON> 30,084,235
<OTHER-SE> 36,848,210
<TOTAL-LIABILITIES-AND-EQUITY> 571,418,295
<INTEREST-LOAN> 11,655,136
<INTEREST-INVEST> 1,173,474
<INTEREST-OTHER> 65,255
<INTEREST-TOTAL> 12,893,865
<INTEREST-DEPOSIT> 3,662,862
<INTEREST-EXPENSE> 3,833,180
<INTEREST-INCOME-NET> 9,060,685
<LOAN-LOSSES> 500,000
<SECURITIES-GAINS> 165,806
<EXPENSE-OTHER> 5,014,575
<INCOME-PRETAX> 4,594,808
<INCOME-PRE-EXTRAORDINARY> 2,959,758
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,959,758
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 2,967,403
<LOANS-PAST> 588,595
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,450,614
<CHARGE-OFFS> 37,191
<RECOVERIES> 9,893
<ALLOWANCE-CLOSE> 4,923,316
<ALLOWANCE-DOMESTIC> 4,923,316
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> INFORMATION NOT CALCULATED FOR INTERIM REPORTS.
</FN>
</TABLE>
