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, 2000
-------------
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:
20,682,290 shares as of July 31, 2000.
2
<PAGE>
CENTENNIAL BANCORP
FORM 10-Q
JUNE 30, 2000
INDEX
-----
Page
PART I - FINANCIAL INFORMATION Reference
------------------------------ ---------
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Income for
the six months and the quarter ended
June 30, 2000 and 1999 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the six months
ended June 30, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999 7
Notes to Condensed Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Overview 13
Material Changes in Financial Condition 14
Material Changes in Results of Operations 15
Market Risk 16
Liquidity and Capital Resources 16
Effects of the Year 2000 17
PART II - OTHER INFORMATION
---------------------------
Item 4 - Submission of Matters to a Vote
of Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 19
Signatures 20
3
<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents:
Cash and due from banks $ 40,800,148 $ 29,934,856
Federal funds sold 2,030,000 --
------------ ------------
Total cash and cash equivalents 42,830,148 29,934,856
Securities available-for-sale 58,228,607 59,358,757
Mortgage loans held for sale 6,937,535 6,155,343
Loans, net 668,049,344 587,507,784
Federal Home Loan Bank stock 5,646,900 5,468,800
Premises and equipment, net 15,838,932 15,911,497
Other assets 24,118,100 22,400,675
------------ ------------
$821,649,566 $726,737,712
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Demand $123,734,610 $106,113,028
Interest-bearing demand 250,856,098 246,690,606
Savings 51,290,967 33,320,788
Time 241,023,169 186,917,061
------------ ------------
Total deposits 666,904,844 573,041,483
Short-term borrowings 67,607,244 74,553,967
Accrued interest and other liabilities 6,230,438 4,813,501
------------ ------------
Total liabilities 740,742,526 652,408,951
Shareholders' equity:
Preferred stock -- --
Common stock, 20,653,092 shares issued and outstanding
(19,645,891 at December 31, 1999) 30,139,554 30,390,824
Retained earnings 52,259,286 45,624,007
Accumulated other comprehensive income/(loss) (1,491,800) (1,686,070)
------------ ------------
Total shareholders' equity 80,907,040 74,328,761
------------ ------------
$821,649,566 $726,737,712
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $18,668,493 $12,859,313 $35,602,244 $24,514,449
Interest on investment securities 928,168 960,249 1,874,103 2,133,723
Other interest income 9,611 119,913 16,904 185,168
----------- ----------- ----------- -----------
Total interest income 19,606,272 13,939,475 37,493,251 26,833,340
INTEREST EXPENSE
Interest on deposits 5,669,030 3,987,722 10,606,362 7,650,584
Interest on short-term borrowings 1,214,593 248,808 2,407,755 419,126
---------- ----------- ----------- -----------
Total interest expense 6,883,623 4,236,530 13,014,117 8,069,710
---------- ----------- ----------- -----------
NET INTEREST INCOME 12,722,649 9,702,945 24,479,134 18,763,630
Loan loss provision 750,000 600,000 1,500,000 1,100,000
---------- ----------- ----------- -----------
Net interest income after
loan loss provision 11,972,649 9,102,945 22,979,134 17,663,630
NONINTEREST INCOME
Service charges 366,982 363,340 745,797 685,210
Other 291,767 185,238 581,774 370,904
Net gains on sales of loans 198,909 278,427 395,229 653,783
Net gains on sales of investment securities -- 132,819 -- 298,625
---------- ----------- ----------- -----------
Total noninterest income 857,658 959,824 1,722,800 2,008,522
NONINTEREST EXPENSE
Salaries and employee benefits 4,454,597 3,343,331 8,628,112 6,620,698
Premises and equipment 1,012,261 787,367 1,991,768 1,526,553
Legal and professional 186,017 178,900 336,600 310,338
Advertising 251,843 216,085 482,961 359,114
Data Processing 219,003 148,351 396,901 268,102
Amortization of Goodwill 172,107 118,111 344,214 139,558
Other 1,084,620 526,738 1,830,739 1,109,095
----------- ----------- ----------- -----------
Total noninterest expense 7,380,448 5,318,883 14,011,295 10,333,458
----------- ----------- ----------- -----------
Income before income taxes 5,449,859 4,743,886 10,690,639 9,338,694
Provision for income taxes 2,069,140 1,698,860 4,055,360 3,333,910
------------ ------------ ------------ ------------
NET INCOME $ 3,380,719 $ 3,045,026 $ 6,635,279 $ 6,004,784
=========== =========== =========== ===========
Earnings per common share:
Basic $ .16 $ .15 $ .32 $ .29
Diluted $ .16 $ .14 $ .31 $ .28
Weighted average common shares outstanding:
Basic 20,666,028 20,579,127 20,655,500 20,551,648
Diluted 21,256,019 21,235,484 21,186,697 21,298,790
</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, 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
========== =========== =========== ========= ===========
Balance at December 31, 1999 19,645,891 $30,390,824 $45,624,007 $(1,686,070) $74,328,761
Comprehensive Income:
Net Income
Other comprehensive income, net of tax: $6,635,279 $6,635,279 $6,635,279
Unrealized gain/(Loss) on available-
for sale securities 194,270 194,270 194,270
----------
$4,829,549
Stock split (5%) 983,480
Stock repurchases (51,700) (490,329) (490,329)
Stock options exercised 75,421 158,337 158,337
Tax benefit of stock options exercised 80,722 80,722
---------- ----------- ----------- --------- -----------
Balance at June 30, 2000 20,653,092 $30,139,554 $52,259,286 (1,491,800) $80,907,040
========== =========== =========== ========= ===========
</TABLE>
6
<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
------------ -----------
<S> <C> <C>
Net cash provided/(used) by operating activities $ 7,157,536 $(12,510,800)
----------- -----------
Cash flows from investing activities:
Net increase in loans (82,041,560) (87,174,322)
Investment security purchases -- (6,125,598)
Proceeds from investment securities:
Maturities 1,955,368 1,204,502
Sales -- 23,073,906
Purchases of premises and equipment (760,698) (2,383,628)
----------- ----------
Net cash used in investing activities (80,846,890) (71,405,140)
Cash flows from financing activities:
Net increase in deposits 93,863,361 67,176,455
Net increase (decrease) in short-term borrowings (6,946,723) 13,749,914
Proceeds from issuance of common stock 158,337 295,447
Repurchases of common stock (490,329) --
----------- -----------
Net cash provided by financing activities 86,584,646 81,221,816
----------- -----------
Net increase (decrease) in cash and cash equivalents 12,895,292 (2,694,124)
Cash and cash equivalents at beginning of period 29,934,856 41,841,367
----------- -----------
Cash and cash equivalents at end of period $42,830,148 $39,147,243
=========== ===========
</TABLE>
See accompanying notes.
7
<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. The Mortgage Co. provides a variety
of residential and commercial real estate financing services.
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 1999 Annual Report to Shareholders.
Certain amounts for 1999 have been reclassified to conform to the 2000
presentation.
8
<PAGE>
2. Securities Available-for-Sale
-----------------------------
Securities available-for-sale consisted of the following at June 30, 2000
and December 31, 1999:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
June 30, 2000:
U.S. Treasuries $ 951,572 $ 1,635 $ 6,445 $ 946,762
U.S. Government
agencies 27,989,416 -- 1,515,870 26,473,546
Obligations of
states and
political
subdivisions 28,476,913 50,248 852,568 27,674,593
Corporate bonds 2,073,202 -- 92,950 1,980,252
Mortgage-backed
securities 629,824 -- 9,330 620,494
Equity securities 513,260 20,370 670 532,960
----------- -------- ---------- -----------
Total $60,634,187 $ 72,253 $2,477,833 $58,228,607
=========== ======== ========== ===========
December 31, 1999:
U.S. Treasuries $ 1,400,808 $ 4,759 $ 6,325 $ 1,399,242
U.S. Government
agencies 27,988,761 -- 1,454,349 26,534,412
Obligations of
states and
political
subdivisions 28,468,534 79,235 1,232,228 27,315,541
Corporate bonds 2,284,118 120 79,123 2,205,115
Mortgage-backed
securities 1,936,017 -- 31,570 1,904,447
----------- ---------- ---------- -----------
Total $62,078,238 $ 84,114 $2,803,595 $59,358,757
=========== ========== ========== ===========
9
<PAGE>
3. Loans and Allowance for Loan Losses
-----------------------------------
The composition of the loan portfolio was as follows:
June 30, December 31,
2000 1999
------------ ------------
Real estate -- mortgage $146,564,936 $129,220,429
Real estate -- construction 262,103,841 227,387,353
Commercial 249,052,922 219,588,355
Installment 8,922,051 8,409,380
Lease financing 4,472,517 4,867,834
Other 4,401,990 4,198,940
------------ ------------
675,518,257 593,672,291
Allowance for loan losses (7,468,913) (6,164,507)
------------ ------------
$668,049,344 $587,507,784
============ ============
Transactions in the allowance for loan losses were as follows for the six
months ended June 30:
2000 1999
---------- ----------
Balance at beginning of period $6,164,507 $4,450,614
Provision charged to operations 1,500,000 1,100,000
Recoveries 27,375 32,897
Loans charged off (222,969) (76,037)
---------- ----------
Balance at end of period $7,468,913 $5,507,474
========== ==========
At June 30, 2000 and December 31, 1999, Bancorp had approximately
$8,514,000 and $5,833,000, respectively, in impaired loans. The specific
valuation allowance related to these loans was approximately $774,000 and
$465,000 at June 30, 2000 and December 31, 1999, respectively.
It is Bancorp's policy to place loans on nonaccrual status when repayment
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
June 30, 2000 and December 31, 1999 were approximately $5,372,000 and
$579,000, respectively. The increase in nonaccrual totals since year-end
was concentrated in two accounts. Both are subject to well-defined
repayment plans and are considered adequately secured by real-estate
collateral.
Loans past due 90 days or more on which Bancorp continued to
10
<PAGE>
accrue interest were approximately $1,915,000 at June 30, 2000, and
approximately $2,163,000 at December 31, 1999. Bancorp had no restructured
loans at June 30, 2000 or December 31, 1999.
4. Short-Term Borrowings
---------------------
Short-term borrowings consisted of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Securities sold under
agreement to repurchase $ 1,762,244 $ 8,213,967
Federal funds purchased 12,900,000 19,600,000
FHLB cash management
advance program 29,045,000 25,740,000
FHLB borrowings under
promissory notes 23,900,000 21,000,000
------------ -----------
$67,607,244 $74,553,967
=========== ===========
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
--------------------------
2000 1999
---------- ----------
Weighted average shares
outstanding - basic 20,666,028 20,579,127
Additional shares from
stock options 589,991 656,357
---------- ----------
Weighted average shares
outstanding - diluted 21,256,019 21,235,484
========== ==========
Six Months Ended June 30
------------------------
2000 1999
---------- ----------
Weighted average shares
outstanding - basic 20,655,500 20,551,648
Additional shares from
stock options 531,197 747,142
---------- ----------
Weighted average shares
outstanding - diluted 21,186,697 21,298,790
========== ==========
11
<PAGE>
The weighted average number of common shares outstanding used to calculate
earnings per share of common stock and the number of shares outstanding in
the accompanying condensed consolidated statements of changes in
shareholders' equity reflects the retroactive effect of stock splits and
stock dividends, including a 5% split declared July 19, 2000 for
shareholders of record as of July 31, 2000.
12
<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 THAT 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, BUT ARE NOT LIMITED TO, THE FOLLOWING: (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, THAT COULD RESULT IN INCREASED LOAN LOSSES; (6)
CHANGES IN LEGAL AND REGULATORY REQUIREMENTS; AND (7) CHANGES IN TECHNOLOGY, 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, 1999, 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 Portland, Oregon and
Eugene, Oregon metropolitan markets. Unless the context clearly suggests
otherwise, references in this Quarterly Report to "Bancorp" include Centennial
Bancorp and its subsidiaries.
At June 30, 2000, Centennial Bank operated 15 full-service and five
limited-service branches, including the new full-service Mill Plain Office in
Vancouver, Washington, which opened in February 2000.
At March 31, 2000, Centennial Mortgage had two Eugene and two Portland-area
offices.
13
<PAGE>
Bancorp reported net income of $6.6 million, or $.32 per common share
(basic), for the six months ended June 30, 2000. This represented a 10.5%
increase in net income as compared to $6.0 million, or $.29 per common share,
for the six months ended June 30, 1999. Net income of $3.4 million, or $.16 per
common share, for the quarter ended June 30, 2000 represented an 11.0% increase
in net income as compared to $3.0 million, or $.15 per common share, for the
quarter ended June 30, 1999. The increased earnings during the six months and
the quarter ended June 30, 2000 primarily reflect the expansion of Bancorp's
interest-earning assets and increased net interest income. At June 30, 2000,
Bancorp recognized a 25.2% increase in total assets and a 25.9% increase in
interest-earning assets as compared to June 30, 1999.
MATERIAL CHANGES IN FINANCIAL CONDITION
---------------------------------------
Material changes in financial condition for the six months ended June 30,
2000 included continuing strong loan and deposit growth, increased cash balances
and a decrease in short-term borrowings.
At June 30, 2000, total assets of $821.6 million represented a 13.1%
increase from the $726.7 million total at December 31, 1999. Loans and loans
held for sale of $675.0 million at June 30, 2000 increased $81.3 million, or
13.7%, as compared to $593.7 million at December 31, 1999, mainly due to
commercial and real estate loan growth.
Cash and cash equivalents, including cash and due from banks and federal
funds sold, increased $12.9 million to $42.8 million at June 30, 2000 as
compared to $29.9 million at December 31, 1999. Cash and due from banks can
fluctuate significantly on a daily basis due to normal loan and deposit
activity, funds transfers and inter-bank clearing of cash items. Federal funds
sold represent excess funds, which are sold overnight to other financial
institutions, and their levels can also fluctuate significantly on a daily
basis.
Total deposits increased $93.9 million, or 16.4%, to $666.9 million at June
30, 2000 as compared to December 31, 1999. The majority of the increase occurred
in time deposits and was primarily due to more aggressive pricing and marketing.
Savings and demand deposit totals also increased significantly during the
period. The new "Ultra Rate Fund" savings account was introduced during the
second quarter, and the rapid growth of those deposit totals accounted for most
of the increase in the savings category.
Bancorp's deposit growth during the first six months of 2000 not only
funded continued substantial loan growth but also allowed a $7.0 million
decrease in short-term borrowings to $67.6 million
14
<PAGE>
at June 30, 2000 as compared to $74.6 million at December 31, 1999.
All other changes in asset and liability categories during the first six
months of 2000 were comparatively modest.
As a result of Bancorp's strong earnings performance for the six months
ended June 30, 2000, shareholders' equity grew to $80.9 million, a $6.6 million
increase over December 31, 1999.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
-----------------------------------------
Primarily due to continuing loan growth, total interest income increased
$10.7 million (or 39.7%) for the six months and $5.7 million (or 40.6%) for the
quarter ended June 30, 2000 as compared to the same periods in 1999.
Total interest expense increased $4.9 million (or 61.3%) for the six months
and $2.6 million (or 62.5%) for the quarter ended June 30, 2000 as compared to
the same 1999 periods. These increases were mainly due to the growth of
interest-bearing deposits and substantially higher levels of short-term
borrowings.
The increase in interest earned, partially offset by the increase in
interest paid, allowed Bancorp's net interest income to increase by $5.7 million
(or 30.5%) for the six-month period, and $3.0 million (or 31.1%) for the second
quarter of 2000, over the comparable periods in 1999.
For the six- and three-month periods ended June 30, 2000, Bancorp charged
loan loss provisions of $1.5 million and $750,000, respectively, as compared to
$1.1 million and $600,000 for the same periods in 1999. The increase in the loss
provisions were primarily due to the assumed or "inherent" risk of Bancorp's
growing loan totals.
At June 30, 2000, Bancorp's allowance for loan losses was $7.5 million, as
compared to $6.2 million and $5.5 million at December 31, 1999 and June 30,
1999, 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 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 $286,000 (or 14.2%) for the six months and
$102,000 (or 10.6%) for the quarter ended June 30, 2000 as compared to the same
1999 periods. The decreases partly resulted from lower gains on sales of loans.
In addition, the
15
<PAGE>
1999 periods included gains on investment securities sales. No investment
securities were sold during the first six months of 2000.
Noninterest expense increased $3.7 million (or 35.6%) for the six months
and $2.1 million (or 38.8%) for the quarter ended June 30, 2000 as compared to
the same 1999 periods. The increases, mainly in salaries and benefits, premises
and equipment costs, goodwill amortization and other expenses, were primarily
the result of Bancorp's growth and expansion.
The provision for income taxes increased $721,000 and $370,000,
respectively, for the six months and the quarter ended June 30, 2000,
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 primary market risk is the interest rate risk associated with
its investing, lending, deposit and borrowing activities. Other types of market
risk, such as foreign currency exchange rate risk and commodity price risk, are
not part of Bancorp's normal business activities. Management actively monitors
and manages Bancorp's interest rate risk with the overall objective of achieving
satisfactory and consistent profitability while maintaining interest rate
sensitivity within formal policy guidelines established by the Board of
Directors.
Bancorp did not experience a material change in market risk at June 30,
2000 as compared to December 31, 1999.
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. Currently, the Bank's main sources of
liquidity are customer deposits, short-term borrowings, loan repayments, sales
of loans and net cash provided by operating activities. Although sales of
investment securities were a significant funding source in 1999, the investment
portfolio is currently a less effective source of immediate liquidity due to
unrealized losses resulting from recent interest rate increases. 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.
16
<PAGE>
The Bank maintains, on an unsecured basis, federal funds lines with
correspondent banks as a back-up source of temporary liquidity. At June 30, 2000
the Bank had federal funds lines totaling $58 million with $12.9 million
outstanding.
The Bank also maintains a cash management advance line of credit with the
Federal Home Loan Bank of Seattle which allows temporary borrowings for
liquidity. At June 30, 2000, the line was fully utilized with $29.0 million
outstanding.
At June 30, 2000, Bancorp's Tier 1 and total risk-based capital ratios
under the Federal Reserve Board's ("FRB") risk-based capital guidelines were
9.02% and 9.93%, respectively. The FRB's minimum risk-based capital ratio
guidelines for Tier 1 and total capital are 4% and 8%, respectively.
At June 30, 2000, Bancorp's capital-to-assets ratio under leverage ratio
guidelines was 9.39%. The FRB's current minimum leverage capital ratio guideline
is 3%.
During the first quarter of 2000, Bancorp's Board of Directors approved a
stock repurchase program authorizing the repurchase of up to 5% of outstanding
shares over a two-year period. At June 30, 2000, a total of 51,700 shares had
been purchased at a cost of approximately $490,000.
EFFECTS OF THE YEAR 2000
------------------------
Some computers and computer software programs are unable 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.
Bancorp is heavily reliant on computers to account for customer records and
transactions, as well as operating performance. To date, Bancorp has not, nor to
management's knowledge has any third party vendor or service provider on which
Bancorp relies, experienced any material problems related to the Year 2000.
However, Bancorp cannot determine if it will be subject to Year 2000
compliance problems in the future, or if Year 2000 problems have arisen that
management has failed to detect.
Bancorp will continue to monitor its business applications and maintain
contact with significant third parties to resolve any Year 2000 problems that
may arise in the future. 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 Bancorp's operations.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Centennial Bancorp commenced its annual meeting of shareholders on April
26, 2000; the meeting was adjourned to May 17, 2000 when the vote was tallied.
At the meeting, Dan Giustina, Cordy H. Jensen, Robert L. Newburn, Brian B. Obie,
Richard C. Williams and Ted R. Winnowski 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 11,487,832 67,519
Cordy H. Jensen 11,480,999 74,352
Robert L. Newburn 11,485,051 70,300
Brian B. Obie 11,479,482 75,869
Richard C. Williams 11,016,030 539,321
Ted R. Winnowski 11,014,933 540,418
Item 5. Other Information
--------------------------
In May 2000, Richard C. Williams, who had served as Bancorp's President and
Chief Executive Officer since its formation in 1981, became the Chairman of
Bancorp's Board of Directors. At that time, Ted R. Winnowski, the current
President and Chief Executive Officer of Bank, assumed the additional role of
President and Chief Executive Officer of Bancorp. Mr. Williams succeeded Brian
B. Obie, President and Chief Executive Officer of Obie Media Corporation, who
had served as the Chairman of Bancorp's Board since 1981. Mr. Obie will continue
to serve on the Boards of Directors of both Bancorp and Bank.
Also in May 2000, Bancorp and Mr. Williams amended his Employment
Agreement, to increase the amount of deferred compensation payable to him, so
his total deferred compensation is 14 times his base salary (or approximately
$4.5 million), an increase from 8.4 times his base salary (or approximately $2.7
million). Because the amendment also increased the period during which the
deferred compensation will be paid (from 12 years to 20 years), the annual
payments pursuant to the amended agreement (initially, $175,000 per year) are
essentially the same as before the amendment. However, the amendment also
requires Bancorp, on an annual basis, to increase (but not decrease) all
remaining, unpaid deferred compensation to reflect any cost-of-living increase
during the prior year. Bancorp pays no interest on the deferred compensation.
Bancorp began making payments of deferred
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compensation to Mr. Williams under the amended agreement in July 2000.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
10 Second Amendment to Employment Agreement, dated
May 5, 2000, amending the Employment Agreement,
dated October 1, 1995, between Bancorp and Richard
C. Williams
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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 10, 2000 /s/ Ted R. Winnowski
-----------------------------------
Ted R. Winnowski
President & Chief Executive Officer
Dated: August 10, 2000 /s/ Michael J. Nysingh
-----------------------------------
Michael J. Nysingh
Chief Financial Officer
20
