10-Q 1 d26446_f10q.txt QUARTERLY REPORT 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, 2001 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 St., Suite 900 Portland, Oregon 97258 (Address of principal executive offices) (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: 22,938,213 shares as of August 2, 2001. -1- CENTENNIAL BANCORP FORM 10-Q JUNE 30, 2001 INDEX

-2- CENTENNIAL BANCORP CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

See accompanying notes -3- CENTENNIAL BANCORP CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

See accompanying notes. -4-

See accompanying notes. -5- CENTENNIAL BANCORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes. -6- 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 subsidiary, Centennial Bank ("Bank"). Effective May 31, 2001, Centennial Mortgage Co., a wholly-owned subsidiary at that date, was merged into the Bank. All significant intercompany balances and transactions have been eliminated in consolidation. The interim condensed consolidated financial statements are prepared by Bancorp without audit and in conformity with accounting principles generally accepted in the United States for interim financial statements. Accordingly, certain financial information and footnotes have been condensed or omitted. In management's opinion, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for a fair presentation of the results for the interim period presented. These financial statements should be read in conjunction with the consolidated financial statements, including the notes thereto, included in Bancorp's 2000 Annual Report to Shareholders. Certain amounts for 2000 have been reclassified to conform to the 2001 presentation. 2. Securities Available-for-Sale Securities available-for-sale consisted of the following at June 30, 2001 and December 31, 2000:

-7- 3. Loans and Allowance for Loan Losses The composition of the loan portfolio was as follows: June 30, December 31, 2001 2000 ------------ ------------ Real estate - mortgage $147,172,105 $147,737,507 Real estate - construction 236,614,083 261,726,951 Commercial 256,807,369 273,866,755 Installment 10,001,198 9,379,311 Lease financing 3,746,591 4,606,838 Other 2,305,795 5,562,841 ------------ ------------ 656,647,141 702,880,203 Allowance for loan losses (10,210,914) (9,150,348) ------------ ------------ $646,436,227 $693,729,855 ============ ============ Transactions in the allowance for loan losses were as follows for the six months ended June 30: 2001 2000 ----------- ---------- Balance at beginning of period $ 9,150,348 $6,164,507 Provision charged to operations 1,925,000 1,500,000 Recoveries 44,640 27,375 Loans charged off (909,074) (222,969) ----------- ---------- Balance at end of period $10,210,914 $7,468,913 =========== ========== At June 30, 2001 and December 31, 2000, Bancorp had approximately $25,903,000 and $15,367,000, respectively, in impaired loans. The specific valuation allowance related to these loans was approximately $3,503,000 and $2,253,000 at June 30, 2001 and December 31, 2000, 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, 2001 and December 31, 2000 were approximately $7,771,000 and $7,268,000, respectively. Loans past due 90 days or more on which Bancorp continued to accrue interest were approximately $49,000 at June 30, 2001, and approximately $529,000 at December 31, 2000. Bancorp had no restructured loans at June 30, 2001 or December 31, 2000. -8- 4. Short-Term Borrowings Short-term borrowings consisted of the following: June 30, December 31, 2001 2000 ---------- ----------- Securities sold under agreement to repurchase $3,593,556 $ 4,134,083 Federal funds purchased -- 9,000,000 FHLB cash management advance program -- 22,600,000 FHLB borrowings under promissory notes 4,400,000 23,900,000 ---------- ----------- $7,993,556 $59,634,083 ========== =========== 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 -------------------------- 2001 2000 ---------- ---------- Weighted average shares outstanding - basic 24,076,801 23,869,262 Additional shares from stock options 565,441 681,440 ---------- ---------- Weighted average shares outstanding - diluted 24,642,242 24,550,702 ========== ========== Six Months Ended June 30 ------------------------ 2001 2000 ---------- ---------- Weighted average shares outstanding - basic 24,066,406 23,857,103 Additional shares from stock options 546,882 613,532 ---------- ---------- Weighted average shares outstanding - diluted 24,613,288 24,470,635 ========== ========== 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 21-for-20 (5%) stock split declared July 18, 2001 for shareholders of record as of July 31, 2001. 6. Adoption of New Accounting Standards In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as a replacement for SFAS No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral, but it carries over most of the provisions of SFAS No. 125 without change. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Bancorp's adoption of SFAS No. 140 did not have a material effect on its financial position or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." These statements make significant changes to the accounting for business -9- combinations and goodwill. SFAS No. 141 eliminates the pooling-of-interests method of accounting and requires that the purchase method of accounting be used for business combinations initiated after June 30, 2001. SFAS No. 142 discontinues the practice of amortizing goodwill and requires that goodwill be continually evaluated for impairment and be written-down when appropriate. Other intangible assets with a determinable useful life will continue to be amortized over future periods. Goodwill previously recorded by Bancorp will be affected upon adoption of SFAS No. 142 on January 1, 2002. Application of the non-amortization provisions of the statement will eliminate Bancorp's future amortization of goodwill. In addition, during 2002, Bancorp will perform the first of the required impairment tests of goodwill. Management has not yet determined what the effect of these impairment tests will be on its financial position or results of operations. -10- 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, 2000, 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 these forward-looking statements. Overview Centennial Bancorp, an Oregon corporation, was organized in 1981 as a bank holding company and has one wholly-owned subsidiary, Centennial Bank ("Bank"). Effective May 31, 2001, Centennial Mortgage Co., a wholly-owned subsidiary at that date, was merged into the Bank. Bancorp primarily serves the Portland, Oregon and Eugene, Oregon markets. Unless the context clearly suggests otherwise, references to "Bancorp" include Centennial Bancorp and the Bank. At June 30, 2001, Centennial Bank operated 15 full-service and six limited-service branches, including eight full-service and six limited-service branches in the Portland area, four full-service branches in Eugene, and one full-service branch each in Springfield, Salem and Cottage Grove, Oregon. At June 30, 2001, the Bank also operated seven commercial banking centers located in full-service branches, including five in the Portland area, one in Eugene and one in Salem, Oregon. In addition, the Bank also operated five mortgage offices, including two in the Portland area, two in Eugene and one in Salem. Bancorp reported net income of $6.8 million, or $.28 per common share (basic), for the six months ended June 30, 2001. This represented a 2.8% increase in net income as compared to $6.6 million, or $.28 per common share (basic), for the six months ended June 30, 2000. Net income of $3.2 million, or $.13 per common share, for the quarter ended June 30, 2001 represented a 6.2% decrease in net income as compared to $3.4 million, or $.14 per common share, for the quarter ended June 30, 2000. The increased earnings during the six months ended June 30, 2001 primarily reflect a higher level of non-interest income. At June 30, 2001, Bancorp recognized a 3.9% increase in total assets and a 10.6% increase in interest-earning assets as compared to June 30, 2000. On July 18, 2001, Bancorp declared a quarterly cash dividend of $0.03 per share, payable on August 15, 2001 to shareholders of record on July 31, 2001. In addition, a 21-for-20 (5%) stock split was declared July 18, 2001 for shareholders of record as of July 31, 2001. 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 the stock split. Material Changes In Financial Condition Material changes in financial condition for the six months ended June 30, 2001 included increased cash and cash equivalents and securities available-for sale, reduced loan totals, increased deposits, a substantial reduction in short-term borrowings and continued earnings-driven equity growth. -11- At June 30, 2001, total assets of $853.5 million represented a 0.1% increase from the $853.0 million total at December 31, 2000. Loans and loans held for sale of $657.2 million at June 30, 2001 decreased $47.4 million, or 6.7%, as compared to $704.6 million at December 31, 2000, mainly due to slowing commercial loan activity, and the permanent placement and participation sales of commercial real estate loans. Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, increased $28.2 million to $71.2 million at June 30, 2001 as compared to $43.0 million at December 31, 2000. The increase was primarily in federal funds sold, and resulted from cash flows made available by a reduction in loans and an increase in deposits. In addition, 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. Securities available-for-sale increased $18.2 million, or 30.1%, to $78.5 million at June 30, 2001 as compared to December 31, 2000. The increase was again substantially due to the investment of available funds from the reduction in loans and the increase in deposits. Total deposits increased $45.5 million, or 6.5%, to $742.0 million at June 30, 2001 as compared to December 31, 2000. The increase was centered in savings accounts and demand deposits. Savings deposit totals increased primarily due to the balance fluctuations typical of certain escrow accounts, while continued marketing efforts appeared responsible for most of the growth in demand deposits. For the six-month period, increased deposits and lower loan levels not only contributed to the increased federal funds sold and securities available-for-sale balances discussed previously, but also allowed a $51.6 million decrease in short-term borrowings to $8.0 million at June 30, 2001 as compared to $59.6 million at December 31, 2000. Remaining asset and liability category changes during the first six months of 2001 were comparatively modest. June 30, 2001 shareholders' equity was $97.5 million, a $7.4 million increase over December 31, 2000. The increase resulted from continued strong earnings, unrealized gains on available-for-sale securities and the exercise of stock options. Material Changes In Results Of Operations As a result of substantial loan growth in the first quarter of 2001, as compared to the first quarter of 2000, total interest income increased $1.0 million (or 2.8%) for the six months ended June 20, 2001 as compared to the same period in 2000. However, because of slowing loan activity, and the permanent placement and participation sales of commercial real estate loans, total interest income for the quarter ended June 30, 2001 decreased $1.1 million (or 5.4%) as compared to the same period in 2000. Total interest expense increased $1.6 million (or 11.9%) for the six months ended June 30, 2001 as compared to the same period in 2000, and decreased $189,000 (or 2.7%) for the quarter ended June 30, 2001 as compared to the same period in 2000. The increase during the six-month period was due to the growth of interest-bearing deposits and the higher rates paid on those deposits; the decrease in the three-month period was due to the reduction of short-term borrowings and the repricing of certain interest-bearing deposit accounts as they matured. The increase in interest expense, partially offset by the increase in interest earned, caused Bancorp's net interest income to decrease by $511,000 (or 2.1%) for the six-month period ended June 30, 2001, over the comparable period in 2000, and to decrease $869,000 (or 6.8%) for the quarter ended June 30, 2001, compared to the quarter ended June 30, 2000. For the six- and three-month periods ended June 30, 2001, Bancorp charged loan loss provisions of $1.9 million and $975,000, respectively, as compared to $1.5 million and $750,000 for the same periods in 2000. -12- Although loan totals decreased during the six-month period ended June 30, 2001, the loss provision for the six months was consistent with the increase in the specific valuation allowance related to impaired loans. At June 30, 2001, Bancorp's allowance for loan losses was $10.2 million, as compared to $9.2 million and $7.5 million at December 31, 2000 and June 30, 2000, 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. In response to a slowing economy and a corresponding increase in impaired loans, Bancorp management has been increasing the allowance for loan losses. Loans are actively managed to minimize loss potential, and current expectations are that actual charge-offs will not have a material adverse effect on Bancorp's financial condition or results of operations. The allowance is based on estimates, and actual losses may vary from those currently estimated. Noninterest income increased $1.2 million (or 71.1%) for the six months and $692,000 (or 80.7%) for the quarter ended June 30, 2001 as compared to the same 2000 periods. The increase was due to several factors, including the increasing service charge income produced by Bancorp's growing deposit base, the business development and additional fee income generated by Bancorp's new Merchant Banking Group, higher gains on sales of loans as the volume of new loans increased with falling rates, and gains realized on sales of investment securities. As a result of continuing emphasis on expense control, noninterest expense for the six-month period ended June 30, 2001 was consistent with the comparable period in 2000. For the quarter ended June 30, 2001, noninterest expense decreased by $137,000 as compared to the quarter ended June 30, 2000. The provision for income taxes increased $101,000 and decreased $57,000, for the six months and the quarter ended June 30, 2001, respectively, compared to the comparable periods ended June 30, 2000. The fluctuations were commensurate with changes in Bancorp's 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, do not materially affect or 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, 2001 as compared to December 31, 2000, as the overall portfolio remained asset sensitive, which will generally enhance earnings when interest rates rise but erodes earnings when interest rates fall. The investment securities purchase and sale activity during the past six months was primarily intended to reposition the investment portfolio as a part of management's plan to reduce Bancorp's overall interest rate sensitivity. Liquidity And Capital Resources The 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, sales and repayments of investment securities, 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. The Bank maintains, on an unsecured basis, federal funds lines with correspondent banks as a back-up source of temporary liquidity. At June 30, 2001, the Bank had federal funds lines totaling $49.0 million, which was unused. The Bank also maintains a cash management advance line of credit with the Federal Home Loan Bank of -13- Seattle, which allows temporary borrowings for liquidity. At June 30, 2001, the line was unused and had a borrowing limit of $45.3 million. In addition, the Bank has a secured line of credit at the Federal Reserve Bank discount window, which, as June 30, 2001, was unused and had a borrowing limit of $35.0 million. Bancorp's Tier 1 capital ratio and total risk-based capital ratio under the Federal Reserve Board's ("FRB") risk-based capital guidelines, and Bancorp's capital-to-assets ratio under leverage ratio guidelines, were as follows. June 30, Minimum 2001 Guidelines ------------- ---------- Tier 1 capital ratio 11.53% 4% Total risk-based capital ratio 12.79% 8% Capital-to-assets ratio 10.62% 3% In January 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. During 2000, Bancorp repurchased 62,700 shares of common stock at a cost of approximately $490,000. No shares were repurchased during the first six months of 2001. On July 18, 2001, Bancorp declared a quarterly cash dividend of $0.03 per share, payable on August 15, 2001 to shareholders of record on July 31, 2001. In addition, a 21-for-20 (5%) stock split was declared July 18, 2001 for shareholders of record as of July 31, 2001. -14- PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Centennial Bancorp held its annual meeting of shareholders on May 2, 2001. 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 For Votes Withheld ---------- -------------- Dan Giustina 20,300,770 100,066 Cordy H. Jensen 20,294,629 106,207 Robert L. Newburn 20,296,231 104,605 Brian B. Obie 20,205,462 195,374 Richard C. Williams 20,256,799 144,037 Ted R. Winnowski 19,776,608 624,228 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.21* Form of Severance Agreement dated as of May 15, 2001 between certain executive officers of Centennial Bancorp (b) Reports on Form 8-K None * Management contract or compensatory plan or arrangement. -15- 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, 2001 /s/ Ted R. Winnowski ------------------------------------- Ted R. Winnowski President & Chief Executive Officer Dated: August 10, 2001 /s/ Neal T. McLaughlin ------------------------------------- Neal T. McLaughlin Executive Vice President & Chief Financial Officer -16-

CENTENNIAL BANCORP 10-Q