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 September 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:
17,853,097 shares as of October 29, 1999.
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<PAGE>
CENTENNIAL BANCORP
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
-----
Page
PART I - FINANCIAL INFORMATION Reference
- ------------------------------ ---------
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998. 4
Condensed Consolidated Statements of Income for
the nine months and the quarter ended
September 30, 1999 and 1998 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the nine months
ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 16 - 17
Effects of the Year 2000 17 - 19
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K. 20
Signatures 21
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<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents:
Cash and due from banks $ 34,372,618 $ 40,838,367
Federal funds sold 1,825,000 1,003,000
------------ ------------
Total cash and cash equivalents 36,197,618 41,841,367
Securities available-for-sale 60,733,350 76,793,378
Mortgage loans held for sale 6,095,711 11,039,045
Loans, net 536,677,822 416,524,430
Federal Home Loan Bank stock 5,370,700 5,083,700
Premises and equipment, net 14,666,310 12,613,321
Other assets 20,918,396 8,154,849
------------ ------------
$680,659,907 $572,050,090
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Demand $118,494,372 $102,714,344
Interest-bearing demand 249,203,070 204,032,594
Savings 30,773,186 18,483,765
Time 171,770,055 158,635,593
------------ ------------
Total deposits 570,240,683 483,866,296
Short-term borrowings 34,469,007 20,600,071
Accrued interest and other liabilities 4,288,434 3,866,582
------------ ------------
Total liabilities 608,998,124 508,332,949
Shareholders' equity:
Preferred stock -- --
Common stock, 17,853,097 shares issued and outstanding
(16,869,363 at December 31, 1998) 30,223,499 29,690,949
Retained earnings 42,623,984 33,517,242
Accumulated other comprehensive income/(loss) (1,185,700) 508,950
------------ ------------
Total shareholders' equity 71,661,783 63,717,141
------------ ------------
$680,659,907 $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 Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $14,248,120 $11,494,731 $38,762,569 $32,476,557
Interest on investment securities 950,018 1,092,436 3,083,741 3,533,572
Other interest income 75,588 446,038 260,756 593,954
----------- ---------- ----------- -----------
Total interest income 15,273,726 13,033,205 42,107,066 36,604,083
INTEREST EXPENSE
Interest on deposits 4,333,635 4,104,959 11,984,219 11,111,447
Interest on short-term borrowings 336,294 120,350 755,420 301,096
Interest on long-term debt -- 32,771 -- 272,897
---------- ---------- ----------- -----------
Total interest expense 4,669,929 4,258,080 12,739,639 11,685,440
---------- ---------- ----------- -----------
NET INTEREST INCOME 10,603,797 8,775,125 29,367,427 24,918,643
Loan loss provision 600,000 600,000 1,700,000 1,200,000
---------- ---------- ----------- -----------
Net interest income after
loan loss provision 10,003,797 8,175,125 27,667,427 23,718,643
NONINTEREST INCOME
Service charges 373,018 310,149 1,058,228 878,247
Other 197,213 155,032 568,117 474,948
Net gains on sales of loans 128,157 389,720 781,940 1,120,611
Net gains on sales of investment securities -- 192,569 298,625 599,885
---------- ---------- ----------- -----------
Total noninterest income 698,388 1,047,470 2,706,910 3,073,691
NONINTEREST EXPENSE
Salaries and employee benefits 3,462,172 3,172,377 10,082,870 9,557,532
Premises and equipment 895,413 669,206 2,421,966 1,950,741
Legal and professional 154,588 229,355 464,926 639,493
Advertising 227,016 165,223 586,130 501,753
Printing and stationery 135,658 94,567 398,928 320,397
Amortization of goodwill 174,847 21,447 314,405 64,341
Other 671,203 340,398 1,785,130 1,281,466
----------- ---------- ----------- -----------
Total noninterest expense 5,720,897 4,692,573 16,054,355 14,315,723
----------- ---------- ----------- -----------
Income before income taxes 4,981,288 4,530,022 14,319,982 12,476,611
Provision for income taxes 1,879,330 1,497,100 5,213,240 4,079,700
----------- ---------- ----------- -----------
NET INCOME $ 3,101,958 $ 3,032,922 $ 9,106,742 $ 8,396,911
=========== ========== =========== ===========
Earnings per common share:
Basic $ .17 $ .17 $ .51 $ .48
Diluted $ .17 $ .16 $ .49 $ .45
Weighted average common shares outstanding:
Basic 17,844,469 17,663,341 17,810,766 17,647,681
Diluted 18,475,706 18,439,855 18,452,371 18,487,256
</TABLE>
See accompanying notes.
-5-
<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 $8,396,911 8,396,911 8,396,911
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities 554,619 554,619 586,420
Reclassification adjustment for net
gains on sales of securities included
in net income (371,929) (371,929) (403,730)
----------
Comprehensive Income $8,579,601
==========
Stock split (5%) 727,386 --
Stock options exercised 73,807 197,020 197,020
---------- ----------- ----------- -------- -----------
Balance at September 30, 1998 15,316,869 $29,228,372 $30,479,607 $878,800 $60,586,779
========== =========== =========== ======== ===========
Balance at December 31, 1998 16,869,363 $29,690,949 $33,517,242 $508,950 $63,717,141
Comprehensive Income:
Net Income $9,106,742 9,106,742 9,106,742
Other comprehensive income, net of tax:
Unrealized gain/(loss) on available-
for-sale securities (1,509,502) (1,509,502) (1,509,502)
Reclassification adjustment for net
gains on sales of securities included
in net income (185,148) (185,148) (185,148)
----------
Comprehensive Income $7,412,092
==========
Stock split (5%) 843,468 --
Stock options exercised 140,266 355,931 355,931
Tax benefit of stock options exercised 176,619 176,619
---------- ----------- ----------- ------------ -----------
Balance at September 30, 1999 17,853,097 $30,223,499 $42,623,984 ($1,185,700) $71,661,783
========== =========== =========== ============ ===========
</TABLE>
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<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 4,976,666 $ 2,685,604
----------- ----------
Cash flows from investing activities:
Net increase in loans (121,891,128) (72,297,925)
Investment security purchases (11,196,470) (31,984,219)
Proceeds from investment securities:
Maturities 1,761,521 20,300,918
Sales 23,073,906 11,754,232
Purchases of premises and equipment (3,144,117) (3,164,386)
----------- ----------
Net cash used in investing activities (111,396,288) (75,391,380)
Cash flows from financing activities:
Net increase in deposits 86,374,387 62,829,575
Net increase in short-term borrowings 13,868,936 8,457,663
Payment of long-term debt -- (10,000,000)
Proceeds from issuance of common stock 532,550 197,020
----------- -----------
Net cash provided by financing activities 100,775,873 61,484,258
----------- -----------
Net decrease in cash and cash equivalents (5,643,749) (11,221,518)
Cash and cash equivalents at beginning of period 41,841,367 50,069,239
----------- -----------
Cash and cash equivalents at end of period $36,197,618 $38,847,721
=========== ===========
</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 September 30,
1999 and December 31, 1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
September 30, 1999:
U.S. Treasuries $ 1,400,304 $ 10,541 -- $ 1,410,845
U.S. Government
agencies 27,988,761 1,260 $1,154,080 26,835,941
Obligations of
states and
political
subdivisions 28,504,873 139,661 840,451 27,804,083
Corporate bonds 2,302,726 1,010 46,280 2,257,456
Mortgage-backed
securities 2,448,855 -- 23,830 2,425,025
----------- -------- --------- -----------
Total $62,645,519 $152,472 $2,064,641 $60,733,350
=========== ======== ========= ===========
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:
September 30, December 31,
1999 1998
------------ ------------
Real estate -- mortgage $124,068,103 $ 94,692,594
Real estate -- construction 191,649,211 151,163,783
Commercial 211,815,980 163,954,595
Installment 7,473,405 7,073,011
Lease financing 4,130,701 1,896,609
Other 4,516,523 3,137,402
------------ ------------
543,653,923 421,917,994
Allowance for loan losses (5,847,234) (4,450,614)
Less deferred loan fees (1,128,867) (942,950)
------------ ------------
$536,677,822 $416,524,430
============ ============
Loans held for sale of $6,095,711 and $11,039,045 at September 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 nine
months ended September 30:
1999 1998
----------- -----------
Balance at beginning of period $4,450,614 $3,348,914
Provision charged to operations 1,700,000 1,200,000
Recoveries 47,365 32,237
Loans charged off (350,745) (426,914)
---------- ----------
Balance at end of period $5,847,234 $4,154,237
========== ==========
At September 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 $824,000
on loans with remaining principal outstanding of $10,813,000 at September
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 September 30, 1999 and December 31, 1998, the specific valuation
allowance for these smaller loans was insignificant. The increase in the
specific valuation allowance at September 30, 1999 was primarily
attributable to two borrowers for which the specific valuation allowance
was $236,000 on loans with remaining principal outstanding of $6,829,000.
The amounts owed by one of these borrowers, which had a specific allowance
of $125,000 and principal outstanding of $2,500,000 as of September 30,
1999, was paid in full subsequent to quarter end.
It is Bancorp's policy to place loans on nonaccrual status whenever
collection in full of principal and interest 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 September 30, 1999 and December 31, 1998 were
approximately $998,000 and $3,841,000, respectively.
Loans past due 90 days or more on which Bancorp continued to accrue
interest were approximately $2,278,000 at September 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 September
30, 1999 or December 31, 1998.
4. Short-Term Borrowings
---------------------
Short-term borrowings consisted of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Securities sold under
agreement to repurchase $12,519,007 $16,100,071
Federal funds purchased 21,950,000 4,500,000
------------ -----------
$34,469,007 $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 September 30
-------------------------------
1999 1998
---------- ----------
Weighted average shares
outstanding - basic 17,844,469 17,663,341
Additional shares from
stock options 631,237 776,514
---------- ----------
Weighted average shares
outstanding - diluted 18,475,706 18,439,855
========== ==========
Nine Months Ended September 30
------------------------------
1999 1998
---------- ----------
Weighted average shares
outstanding - basic 17,810,766 17,647,681
Additional shares from
stock options 641,605 839,575
---------- ----------
Weighted average shares
outstanding - diluted 18,452,371 18,487,256
========== ==========
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. STATEMENTS WHICH EXPRESSLY OR IMPLICITLY PREDICT
FUTURE RESULTS, PERFORMANCE OR EVENTS ARE FORWARD-LOOKING. IN ADDITION, THE
WORDS "ANTICIPATE," "BELIEVE," "INTEND," "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 September 30, 1999, Centennial Bank operated 13 full-service and five
limited-service branches, including two new full-service Oregon branches opened
during July in downtown Portland and downtown Salem. The Bank opened another new
full-service branch in Clackamas, Oregon on November 1. At quarter end, the Bank
had a total of three commercial lending offices with locations in Eugene,
southwest Portland and the new downtown
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<PAGE>
Portland office which opened in July. Bancorp plans to open another
Portland-area commercial lending office at the new Clackamas, Oregon location.
At September 30, 1999, Centennial Mortgage had three Portland and two
Eugene offices.
Centennial Bancorp reported net income of $9.1 million, or $.51 per share
(basic), for the nine months ended September 30, 1999. This represented an 8.5%
increase in net income and a 6.3% increase in earnings per share (basic), as
compared to $8.4 million, or $.48 per share, for the nine months ended September
30, 1998. Net income of $3.1 million, or $.17 per share, for the quarter ended
September 30, 1999 represented a 2.3% increase in net income and stable earnings
per share (basic), as compared to $3.0 million, or $.17 per share, for the
quarter ended September 30, 1998. The increased earnings during the nine months
and the quarter ended September 30, 1999 primarily reflect the expansion of
Bancorp's interest-earning assets and increased net interest income. At
September 30, 1999, Bancorp recognized a 20.6% increase in total assets and an
18.9% increase in interest-earning assets as compared to September 30, 1998.
MATERIAL CHANGES IN FINANCIAL CONDITION
- ---------------------------------------
Material changes in financial condition for the nine months ended September
30, 1999 included strong loan growth, a significant increase in other assets,
and the funding support provided by increased deposits, short-term borrowings,
sales of investment securities, and net income.
At September 30, 1999, total assets were $680.7 million, representing an
increase of 19.0%, or $108.7 million, over total assets of $572 million at
December 31, 1998. Loans and loans held for sale increased $115.2 million as
compared to December 31, 1998, mainly due to increases in commercial, real
estate mortgage and construction loan totals.
During the nine-month period, Bancorp's investment portfolio totals
decreased $16.1 million as available-for-sale securities were sold to help
support loan growth.
At September 30, 1999, other assets totaled $20.9 million, a $12.7 million
increase when compared to December 31, 1998. The increase primarily resulted
from $9.0 million of goodwill associated with the acquisition of the Bank's
Hazel Dell Office, which is being amortized over 15 years.
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<PAGE>
Total deposits increased $86.4 million, or 17.9%, to $570.2 million at
September 30, 1999 as compared to December 31, 1998. The increase was
concentrated in interest-bearing demand deposits.
At September 30, 1999, short-term borrowings totaled $34.5 million, a $13.9
million increase when compared with totals at December 31, 1998. The increase
helped to fund Bancorp's asset growth.
All other changes in asset and liability categories during the nine-month
period were comparatively modest.
September 30, 1999 shareholders' equity was $71.7 million, a $7.9 million,
or 12.5%, increase over December 31, 1998. The increase was produced by net
income and stock option exercises and was partially offset by unrealized losses
on available-for-sale securities caused by increases in market interest rates.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
- -----------------------------------------
Primarily due to continuing loan growth, total interest income increased
$5.5 million (or 15.0%) for the nine months and $2.2 million (or 17.2%) for the
quarter ended September 30, 1999 as compared to the same periods in 1998.
Total interest expense increased $1.1 million (or 9.0%) for the nine months
and $412,000 (or 9.7%) for the quarter ended September 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, partially offset by the increases in
interest paid, allowed Bancorp's net interest income to increase by $4.4 million
(or 17.9%) for the nine-month period, and $1.8 million (or 20.8%) for the third
quarter of 1999, over the comparable periods in 1998.
For the nine- and three-month periods ended September 30, 1999, Bancorp
charged loan loss provisions of $1.7 million and $600,000, respectively, as
compared to $1.2 million and $600,000 for the same periods in 1998. The increase
in loss provision was primarily due to increasing loan totals.
At September 30, 1999, Bancorp's allowance for loan losses was $5.8
million, as compared to $4.5 million and $4.2 million at December 31, 1998 and
September 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 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 $366,000 (or 11.9%) for the nine months and
$349,000 (or 33.3%) for the quarter ended September 30, 1999 as compared to the
same 1998 periods. The decreases reflected lower gains on sales of loans and
securities, primarily the result of rising interest rates, and were partially
offset by the increased service charge and fee income associated with Bancorp's
growing volume of deposit accounts and customer transactions.
Noninterest expense increased $1.7 million (or 12.1%) for the nine months
and $1.0 million (or 21.9%) for the quarter ended September 30, 1999 as compared
to the same 1998 periods. These increases, primarily in salaries and employee
benefits, premises and equipment expense and goodwill amortization, were mainly
the result of Bancorp's continuing growth and expansion.
The provision for income taxes increased for the nine months and the
quarter ended September 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 September
30, 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
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<PAGE>
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 September 30, 1999, the cash
management advance line was unused.
At September 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 9.3% 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 September 30, 1999, Bancorp's capital-to-assets ratio under leverage
ratio guidelines was approximately 9.7%. The FRB's current minimum leverage
capital ratio guideline is 4%.
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
-17-
<PAGE>
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.
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.
-18-
<PAGE>
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 nine months ended September 30, 1999, expenditures totaled
approximately $56,000. Management believes the amount budgeted will exceed
expenditures for 1999. 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 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 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.
-19-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
-20-
<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: November 10, 1999 /s/ Richard C. Williams
-----------------------------------
Richard C. Williams
President & Chief Executive Officer
Dated: November 10, 1999 /s/ Michael J. Nysingh
-----------------------------------
Michael J. Nysingh
Chief Financial Officer
-21-
<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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 34,372,618
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,825,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,733,350
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 542,525,056
<ALLOWANCE> 5,847,234
<TOTAL-ASSETS> 680,659,907
<DEPOSITS> 570,240,683
<SHORT-TERM> 34,469,007
<LIABILITIES-OTHER> 4,288,434
<LONG-TERM> 0
0
0
<COMMON> 30,223,499
<OTHER-SE> 41,438,284
<TOTAL-LIABILITIES-AND-EQUITY> 680,659,907
<INTEREST-LOAN> 38,762,569
<INTEREST-INVEST> 3,083,741
<INTEREST-OTHER> 260,756
<INTEREST-TOTAL> 42,107,066
<INTEREST-DEPOSIT> 11,984,219
<INTEREST-EXPENSE> 12,739,639
<INTEREST-INCOME-NET> 29,367,427
<LOAN-LOSSES> 1,700,000
<SECURITIES-GAINS> 298,625
<EXPENSE-OTHER> 16,054,355
<INCOME-PRETAX> 14,319,982
<INCOME-PRE-EXTRAORDINARY> 9,106,742
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,106,742
<EPS-BASIC> .51
<EPS-DILUTED> .49
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 998,000
<LOANS-PAST> 2,278,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,450,614
<CHARGE-OFFS> 350,745
<RECOVERIES> 47,365
<ALLOWANCE-CLOSE> 5,847,234
<ALLOWANCE-DOMESTIC> 5,847,234
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> INFORMATION NOT CALCULATED FOR INTERIM REPORTS.
</FN>
</TABLE>
