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, 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:
20,794,838 shares as of October 31, 2000.
2
<PAGE>
CENTENNIAL BANCORP
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
-----
Page
PART I - FINANCIAL INFORMATION Reference
------------------------------ ---------
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Income for
the nine months and the quarter ended
September 30, 2000 and 1999 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the nine months
ended September 30, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 6 - Exhibits and Reports on Form 8-K. 18
Signatures 19
3
<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents:
Cash and due from banks $ 33,923,798 $ 29,934,856
Federal funds sold 2,120,000 --
------------ ------------
Total cash and cash equivalents 36,043,798 29,934,856
Securities available for sale 58,607,377 59,358,757
Mortgage loans held for sale 6,013,988 6,155,343
Loans, net 686,481,665 587,507,784
Federal Home Loan Bank stock 5,739,100 5,468,800
Premises and equipment, net 15,633,281 15,911,497
Other assets 23,432,940 22,400,675
------------ ------------
$831,952,149 $726,737,712
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Demand $125,589,786 $106,113,028
Interest-bearing demand 240,482,166 246,690,606
Savings 69,716,114 33,320,788
Time 249,820,455 186,917,061
------------ ------------
Total deposits 685,608,521 573,041,483
Short-term borrowings 55,012,283 74,553,967
Accrued interest and other liabilities 5,915,499 4,813,501
------------ ------------
Total liabilities 746,536,303 652,408,951
Shareholders' equity:
Preferred stock -- --
Common stock, 20,793,738 shares issued and outstanding
(20,628,185 at December 31, 1999) 30,435,554 30,390,824
Retained earnings 56,002,997 45,624,007
Accumulated other comprehensive income/(loss) (1,022,705) (1,686,070)
------------ ------------
Total shareholders' equity 85,415,846 74,328,761
------------ ------------
$831,952,149 $726,737,712
============ ============
See accompanying notes.
4
</TABLE>
<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $19,596,916 $14,248,120 $55,199,160 $38,762,569
Interest on investment securities 922,697 950,018 2,796,800 3,083,741
Other interest income 18,620 75,588 35,524 260,756
----------- ---------- ----------- -----------
Total interest income 20,538,233 15,273,726 58,031,484 42,107,066
INTEREST EXPENSE
Interest on deposits 6,808,747 4,333,635 17,415,109 11,984,219
Interest on short-term borrowings 969,830 336,294 3,377,585 755,420
---------- ---------- ----------- -----------
Total interest expense 7,778,577 4,669,929 20,792,694 12,739,639
---------- ---------- ----------- -----------
NET INTEREST INCOME 12,759,656 10,603,797 37,238,790 29,367,427
Loan loss provision 1,050,000 600,000 2,550,000 1,700,000
---------- ---------- ----------- -----------
Net interest income after
loan loss provision 11,709,656 10,003,797 34,688,790 27,667,427
NONINTEREST INCOME
Service charges 376,190 373,018 1,121,987 1,058,228
Other 309,404 197,213 891,178 568,117
Net gains on sales of loans 172,300 128,157 567,529 781,940
Net gains on sales of investment securities -- -- -- 298,625
---------- ---------- ----------- -----------
Total noninterest income 857,894 698,388 2,580,694 2,706,910
NONINTEREST EXPENSE
Salaries and employee benefits 4,074,248 3,462,172 12,702,360 10,082,870
Premises and equipment 1,017,852 895,413 3,009,620 2,421,966
Legal and professional 201,402 154,588 538,002 464,926
Advertising 258,265 227,016 741,226 586,130
Data processing 154,870 150,471 551,771 418,573
Amortization of goodwill 172,107 174,847 516,321 314,405
Other 639,135 656,390 2,469,874 1,765,485
----------- ---------- ----------- -----------
Total noninterest expense 6,517,879 5,720,897 20,529,174 16,054,355
----------- ---------- ----------- -----------
Income before income taxes 6,049,671 4,981,288 16,740,310 14,319,982
Provision for income taxes 2,305,960 1,879,330 6,361,320 5,213,240
----------- ---------- ----------- -----------
NET INCOME $ 3,743,711 $ 3,101,958 $10,378,990 $ 9,106,742
=========== ========== =========== ===========
Earnings per common share:
Basic $ .18 $ .15 $ .50 $ .44
Diluted $ .18 $ .15 $ .49 $ .43
Weighted average common shares outstanding:
Basic 20,737,898 20,610,362 20,683,166 20,571,435
Diluted 21,161,500 21,339,440 21,178,237 21,312,489
See accompanying notes.
5
</TABLE>
<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 20,458,319 $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 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 options exercised 162,007 355,931 355,931
Tax benefit of stock options exercised 176,619 176,619
---------- ----------- ----------- ---------- -----------
Balance at September 30, 1999 20,620,326 $30,223,499 $42,623,984 $1,185,700 $71,661,783
========== =========== =========== ========== ===========
Balance at December 31, 1999 20,628,185 $30,390,824 $45,624,007 $(1,686,070) $74,328,761
Comprehensive Income:
Net Income $10,378,990 10,378,990 10,378,990
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities 663,365 663,365 663,365
-----------
Comprehensive Income $11,042,355
===========
Stock repurchases (54,285) (490,329) (490,329)
Stock options exercised 219,838 454,337 454,337
Tax benefit of stock options exercised 80,722 80,722
---------- ----------- ----------- ------------ -----------
Balance at September 30, 2000 20,793,738 $30,435,554 $56,002,997 $(1,022,705) $85,415,846
========== =========== =========== ============ ===========
6
</TABLE>
<PAGE>
CENTENNIAL BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $13,793,384 $ 5,153,285
---------- -----------
Cash flows from investing activities:
Net increase in loans (101,523,881) (121,891,128)
Investment security purchases (500,000) (11,196,470)
Proceeds from investment securities:
Maturities 2,332,466 1,761,521
Sales -- 23,073,906
Purchases of premises and equipment (982,389) (3,144,117)
----------- -----------
Net cash used in investing activities (100,673,804) (111,396,288)
Cash flows from financing activities:
Net increase in deposits 112,567,038 86,374,387
Net increase/(decrease) in short-term borrowings (19,541,684) 13,868,936
Proceeds from issuance of common stock 454,337 355,931
Repurchases of common stock (490,329) --
----------- -----------
Net cash provided by financing activities 92,989,362 100,599,254
----------- -----------
Net increase/(decrease) in cash and cash equivalents 6,108,942 (5,643,749)
Cash and cash equivalents at beginning of period 29,934,856 41,841,367
----------- -----------
Cash and cash equivalents at end of period $36,043,798 $36,197,618
=========== ===========
See accompanying notes.
7
</TABLE>
<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 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 September 30,
2000 and December 31, 1999:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
September 30, 2000:
U.S. Treasuries $ 951,614 $ 557 $ 2,342 $ 949,829
U.S. Government
agencies 27,990,097 -- 1,207,807 26,782,290
Obligations of
states and
political
subdivisions 28,481,103 89,174 480,651 28,089,626
Corporate bonds 2,067,574 -- 60,694 2,006,880
Mortgage-backed
securities 252,698 -- 4,376 248,322
Equity securities 513,260 20,370 3,200 530,430
----------- -------- ---------- -----------
Total $60,256,346 $110,101 $1,759,070 $58,607,377
=========== ======== ========== ===========
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:
September 30, December 31,
2000 1999
------------ ------------
Commercial $271,658,933 $219,588,355
Real estate -- construction 261,204,311 227,387,353
Real estate -- mortgage 143,677,442 129,220,429
Installment 9,176,122 8,409,380
Lease financing 5,000,766 4,867,834
Other 4,222,929 4,198,940
------------ ------------
694,940,503 593,672,291
Allowance for loan losses (8,458,838) (6,164,507)
------------ ------------
$686,481,665 $587,507,784
============ ============
Transactions in the allowance for loan losses were as follows for the nine
months ended September 30:
2000 1999
---------- ----------
Balance at beginning of period $6,164,507 $4,450,614
Provision charged to operations 2,550,000 1,700,000
Recoveries 31,705 47,365
Loans charged off (287,374) (350,745)
---------- ----------
Balance at end of period $8,458,838 $5,847,234
========== ==========
At September 30, 2000 and December 31, 1999, Bancorp had approximately
$10,241,000 and $5,833,000, respectively, in impaired loans. The specific
valuation allowance related to these loans was approximately $1,157,000 and
$465,000 at September 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
September 30, 2000 and December 31, 1999 were approximately $3,434,000 and
$579,000, respectively.
Loans past due 90 days or more on which Bancorp continued to accrue
interest totalled approximately $5,768,000 at September 30, 2000, and
approximately $2,163,000 at December 31, 1999.
The increase in non-performing and impaired loan totals since
10
<PAGE>
year-end was concentrated in two accounts. Both involve
real-estate collateral which is in the process of foreclosure and
liquidation.
Bancorp had no restructured loans at September 30, 2000 or December 31,
1999.
4. Short-Term Borrowings
---------------------
Short-term borrowings consisted of the following:
September 30, 2000 December 31, 1999
------------------ -----------------
FHLB cash management
advance program $26,800,000 $25,740,000
FHLB borrowings under
promissory notes 23,900,000 21,000,000
Securities sold under
agreement to repurchase 4,312,283 8,213,967
Federal funds purchased -- 19,600,000
----------- -----------
$55,012,283 $74,553,967
=========== ===========
11
<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
-------------------------------
2000 1999
---------- ----------
Weighted average shares
outstanding - basic 20,737,898 20,610,362
Additional shares from
stock options 423,602 729,078
---------- ----------
Weighted average shares
outstanding - diluted 21,161,500 21,339,440
========== ==========
Nine Months Ended September 30
------------------------------
2000 1999
---------- ----------
Weighted average shares
outstanding - basic 20,683,166 20,571,435
Additional shares from
stock options 497,071 741,054
---------- ----------
Weighted average shares
outstanding - diluted 21,178,237 21,312,489
========== ==========
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 balance sheets and statements of
changes in shareholders' equity reflect the retroactive effect of stock
splits and stock dividends.
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 September 30, 2000, Centennial Bank operated 15 full-service and five
limited-service branches, and Centennial Mortgage operated five offices
including the new Salem office which opened during July.
Centennial Bancorp reported net income of $10.4 million, or $.50 per share
(basic), for the nine months ended September 30, 2000. This represented an 14.0%
increase in net income and a 13.6% increase in earnings per share (basic), as
compared to $9.1
13
<PAGE>
million, or $.44 per share, for the nine months ended September 30, 1999. Net
income of $3.7 million, or $.18 per share, for the quarter ended September 30,
2000 represented a 20.7% increase in net income and 20.0% increase in earnings
per share (basic), as compared to $3.1 million, or $.15 per share, for the
quarter ended September 30, 1999. The increased earnings during the nine months
and the quarter ended September 30, 2000 primarily reflect the growth in
Bancorp's loan portfolio and the related increase in net interest income. At
September 30, 2000, Bancorp recognized a 22.2% increase in total assets and an
24.5% increase in interest-earning assets as compared to September 30, 1999.
MATERIAL CHANGES IN FINANCIAL CONDITION
---------------------------------------
Material changes in financial condition for the nine months ended
September 30, 2000 included continuing strong loan, deposit and equity growth,
substantially decreased short-term borrowings and increased cash balances.
At September 30, 2000, total assets of $832.0 million represented a 14.5%
increase from the $726.7 million total at December 31, 1999. Loans and loans
held for sale of $692.5 million at September 30, 2000 increased $98.8 million,
or 16.6%, as compared to $593.7 million at December 31, 1999, mainly due to
growth of commercial and real estate construction loan totals.
Cash and cash equivalents, including cash and due from banks and federal
funds sold, increased $6.1 million to $36.0 million at September 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 represents excess funds, which are sold overnight to other financial
institutions, and those amounts can also fluctuate significantly on a daily
basis.
Total deposits increased $112.6 million, or 19.7%, to $685.6 million at
September 30, 2000 as compared to $573.0 million at December 31, 1999. The
majority of the increase occurred in savings and time deposits and was primarily
the result of more aggressive pricing and marketing.
For the nine-month period, strong deposit and equity growth not only funded
continued substantial loan growth but also allowed a $19.6 million decrease in
short-term borrowings to $55.0 million at September 30, 2000 as compared to
$74.6 million at December 31, 1999.
All other changes in asset and liability categories during the nine-month
period were comparatively modest.
14
<PAGE>
As a result of Bancorp's strong earnings performance for the nine months
ended September 30, 2000, shareholders' equity grew to $85.4 million, an $11.1
million increase over December 31, 1999.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
-----------------------------------------
Primarily due to continuing loan growth, total interest income increased
$15.9 million (or 37.8%) for the nine months and $5.3 million (or 34.5%) for the
quarter ended September 30, 2000 as compared to the same periods in 1999.
Total interest expense increased $8.1 million (or 63.2%) for the nine
months and $3.1 million (or 66.6%) for the quarter ended September 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 increases in interest earned, partially offset by the increases in
interest paid, allowed Bancorp's net interest income to increase by $7.9 million
(or 26.8%) for the nine-month period, and $2.2 million (or 20.3%) for the third
quarter of 2000, over the comparable periods in 1999.
For the nine- and three-month periods ended September 30, 2000, Bancorp
charged loan loss provisions of $2.6 million and $1.1 million, respectively, as
compared to $1.7 million and $600,000 for the same periods in 1999. The
increases in the loss provisions were primarily due to the specifically
identified and "inherent" risks of Bancorp's growing loan totals.
At September 30, 2000, Bancorp's allowance for loan losses was $8.5
million, as compared to $6.2 million and $5.8 million at December 31, 1999 and
September 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 $126,000 (or 4.7%) for the nine months ended
September 30, 2000 and increased $160,000 (or 22.8%) for the quarter ended
September 30, 2000 as compared to the same 1999 periods. The year-to-date
decrease resulted partially from lower gains on sales of loans in 2000. In
addition, the 1999 period included gains on investment securities sales. No
investment securities were sold during the nine-month period in 2000.
Noninterest income increased for the quarter primarily due to higher gains on
sales of loans and increased fee income from merchant services and wire transfer
activity.
15
<PAGE>
Noninterest expense increased $4.5 million (or 27.9%) for the nine months
and $797,000 (or 13.9%) for the quarter ended September 30, 2000 as compared to
the same 1999 periods. The increases, centered in staffing and fixed-asset
expenses, were mainly the result of Bancorp's growth and rising employee costs.
The provision for income taxes increased $1.1 million and $427,000,
respectively, for the nine months and the quarter ended September 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
September 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.
The Bank maintains, on an unsecured basis, federal funds lines with
correspondent banks as a back-up source of temporary liquidity. At September 30,
2000, the Bank had federal funds lines totaling $44.0 million with no borrowings
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 September 30, 2000, the line limit
16
<PAGE>
was $29.0 million with $26.8 million outstanding. In addition, the Bank has a
$35.0 million secured line of credit at the Federal Reserve Bank discount
window, which was not used during the third quarter of 2000.
At September 30, 2000, Bancorp's Tier 1 and total risk-based capital ratios
under the Federal Reserve Board's ("FRB") risk-based capital guidelines were
9.47% and 10.50%, respectively. The FRB's minimum risk-based capital ratio
guidelines for Tier 1 and total capital are 4% and 8%, respectively.
At September 30, 2000, Bancorp's capital-to-assets ratio under leverage
ratio guidelines was 9.59%. 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 September 30, 2000, a total of 54,285 shares
had been purchased at a cost of approximately $490,000.
EFFECTS OF THE YEAR 2000
------------------------
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 computer or computer software 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 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 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 6, 2000, Bancorp filed a Form 8-K, which updated the description
of its common stock.
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SIGNATURES
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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 8, 2000 /s/ Ted R. Winnowski
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Ted R. Winnowski
President & Chief Executive Officer
Dated: November 7, 2000 /s/ Michael J. Nysingh
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Michael J. Nysingh
Chief Financial Officer
19
