-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F5v5G5hDpJq0qJiFfyOruPMSOHpzWyuYNfpcdzZ0hWKRUp0Ozd0Oo0+rhojeG1Y6 WVgXoOdRTgQVv8jAs4iE6A== 0000910117-99-000118.txt : 19991117 0000910117-99-000118.hdr.sgml : 19991117 ACCESSION NUMBER: 0000910117-99-000118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL BANCORP CENTRAL INDEX KEY: 0000702430 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 930792841 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10489 FILM NUMBER: 99751321 BUSINESS ADDRESS: STREET 1: 675 OAK ST CITY: EUGENE STATE: OR ZIP: 97401 BUSINESS PHONE: 5033423970 MAIL ADDRESS: STREET 1: 675 OAK STREET CITY: EUGENE STATE: OR ZIP: 97401 FORMER COMPANY: FORMER CONFORMED NAME: VALLEY WEST BANCORP DATE OF NAME CHANGE: 19900812 10-Q 1 PERIOD ENDED SEPTEMBER 30, 1999 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 / / 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. -2- 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 -3- CENTENNIAL BANCORP CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------- ------------- 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 ============ ============
See accompanying notes. -4- CENTENNIAL BANCORP CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- 1999 1998 1999 1998 ---------- ----------- ----------- ---------- 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
See accompanying notes. -5-
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 ------ ------ ------ -------- ------------- ------ 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 ========== =========== =========== ============ ===========
-6- CENTENNIAL BANCORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, -------------------------- 1999 1998 ------------ ------------ 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 =========== ===========
See accompanying notes. -7- 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. -8- 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 =========== ========== ======== =========== -9- 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. -10- 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 =========== =========== -11- 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. -12- 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 -13- 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. -14- 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 -15- 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 -16- 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- 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- 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- 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- 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- EX-27 2 ART. 9 FDS FOR 2ND QUARTER 10-Q
9 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. 9-MOS DEC-31-1999 SEP-30-1999 34,372,618 0 1,825,000 0 60,733,350 0 0 542,525,056 5,847,234 680,659,907 570,240,683 34,469,007 4,288,434 0 0 0 30,223,499 41,438,284 680,659,907 38,762,569 3,083,741 260,756 42,107,066 11,984,219 12,739,639 29,367,427 1,700,000 298,625 16,054,355 14,319,982 9,106,742 0 0 9,106,742 .51 .49 0 998,000 2,278,000 0 0 4,450,614 350,745 47,365 5,847,234 5,847,234 0 0 INFORMATION NOT CALCULATED FOR INTERIM REPORTS.
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