UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
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
(Name of registrant as specified in its charter)
Oregon 93-0792841
(State of incorporation) I.R.S. Employer Identification No.)
675 Oak Street
Eugene, Oregon 97401
(Address of principal executive offices)
Registrant's telephone number: (541) 342-3970
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $2.00 par value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$209,070,000 aggregate market value as of March 25, 1998, based on the price at
which the stock was sold.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 14,543,909 shares of $2.00
par value Common Stock on March 25, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part II incorporate information by reference from the issuer's Annual
Report to Shareholders for the fiscal year ended December 31, 1997. Part III is
incorporated by reference from the issuer's definitive proxy statement for the
annual meeting of shareholders to be held on May 20, 1998.
<PAGE>
CENTENNIAL BANCORP
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
(Portions of Item 1 are incorporated by reference from
Centennial Bancorp's Annual Report to Shareholders)
Item 1. DESCRIPTION OF BUSINESS 4
-----------------------
Item 2. DESCRIPTION OF PROPERTY 36
-----------------------
Item 3. LEGAL PROCEEDINGS 37
-----------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 39
PART II
(Items 5, 6, 7 and 8 are incorporated by reference from
Centennial Bancorp's Annual Report to Shareholders)
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 40
Item 6. SELECTED FINANCIAL DATA 40
-----------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS 40
------------------------------------
Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 40
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 40
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 40
PART III
(Items 10 through 13 are incorporated by reference from
Centennial Bancorp's definitive proxy statement for the annual
meeting of shareholders to be held on May 20, 1998)
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT 41
Item 11. EXECUTIVE COMPENSATION 41
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 41
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 41
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 41
SIGNATURES 46
<PAGE>
PART I
------
THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS, WHICH ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS ANNUAL REPORT, THE
WORDS "ANTICIPATE," "BELIEVE" AND "EXPECT," AND WORDS OR PHRASES OF SIMILAR
IMPORT, ARE INTENDED TO 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: CHANGES IN GENERAL BUSINESS AND ECONOMIC
CONDITIONS, PARTICULARLY IN OREGON; CHANGES IN THE INTEREST RATE ENVIRONMENT;
COMPETITIVE FACTORS, CHANGES IN REGULATORY OR OTHER EXTERNAL FACTORS; AND OTHER
FACTORS LISTED FROM TIME TO TIME IN BANCORP'S SEC REPORTS, INCLUDING BUT NOT
LIMITED TO, EXHIBIT 99.1, FILED AS PART OF BANCORP'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996, 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.
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
GENERAL
Centennial Bancorp, an Oregon corporation, was organized under the name
Valley West Bancorp in 1981 to become a bank holding company. In 1982,
Centennial Bank and Valley State Bank, both Oregon state-chartered banks, merged
and continued business as Centennial Bank. Immediately following the merger,
Valley West Bancorp acquired all the common stock of Centennial Bank. In May
1990, Valley West Bancorp changed its name to Centennial Bancorp.
At December 31, 1997, Centennial Bancorp ("Bancorp") had two wholly owned
subsidiaries: Centennial Bank and Centennial Mortgage Co. ("Centennial
Mortgage"). From July 1993 until its sale in August 1995, Bancorp also owned
Harding Fletcher Co. ("Harding Fletcher"), a mortgage banking subsidiary. Unless
the context clearly suggests otherwise, references in this Annual Report on Form
10-K to "Bancorp" include Centennial Bancorp and its subsidiaries.
All share and per share information has been restated to give
retroactive effect to a two-for-one stock split declared in January 1998, and
for various stock splits and stock dividends declared in prior years.
<PAGE>
CENTENNIAL BANK
Centennial Bank is a full-service commercial bank organized under the
Oregon Bank Act. Centennial Bank provides a broad range of depository and
lending services to commercial, industrial, and agricultural enterprises,
financial institutions, governmental entities and individuals. Centennial Bank
directs its deposit-taking and lending activities primarily to the communities
in which its branches are located. Its primary marketing focus is on small- to
medium-sized businesses and on professionals in those communities. Centennial
Bank does not provide trust services.
At December 31, 1997, based on total assets, Centennial Bank was the
10th largest bank of the 51 commercial banks maintaining offices in Oregon. At
that date, Centennial Bank had twelve branches: three in Eugene; one in adjacent
Springfield; one full-service and four limited-service branches in Portland,
Oregon; one each in Tigard and Beaverton, suburbs of Portland; and a branch in
Cottage Grove formerly owned by Western Oregon Community Bank. An additional
branch acquired from Western Oregon Community Bank, located in Creswell, Oregon,
was closed in May 1996. Eugene and Springfield are at the southern end of the
Willamette Valley on Interstate 5, with Creswell and Cottage Grove located
approximately 12 and 20 miles further south, respectively. Centennial Bank
opened the Tigard office in August 1994 and acquired the two Western Oregon
Community Bank offices in December 1994. Centennial Bank opened the Lloyd
District office in Portland in January 1997, and the Tanasbourne office in
Beaverton in December 1997.
In July 1997, Centennial Bank announced the opening of four
limited-service branches in the Portland metropolitan area. These
limited-service branches were formerly operated by Wells Fargo in retirement
centers. Centennial Bank offers a full array of deposit services and safety
deposit boxes on a reduced hour basis to residents of the retirement centers.
At December 31, 1997, Centennial Bank held regulatory approvals for one
additional limited service branch at a retirement center in the Portland
metropolitan area. This office opened in January 1998.
Centennial Bank provides personalized, quality financial services to
its customers and believes this dedication to service has enabled it to maintain
a stable and relatively low-cost retail deposit base, while generating a
substantial volume of loans. Total deposits increased from $340 million at
December 31, 1996 to $419 million at December 31, 1997. Net loans and loans held
for sale increased from $226 million at December 31, 1996 to $337 million at
December 31, 1997.
<PAGE>
Deposit accounts at Centennial Bank are insured up to applicable limits
by the Federal Deposit Insurance Corporation (the "FDIC"). Centennial Bank is
not a member of the Federal Reserve System. It is a merchant depository for
MasterCard and VISA. Centennial Bank also offers tax-deferred annuities and
mutual funds through a contract arrangement with Financial Marketing Group, Inc.
of Portland, Oregon. Its revenues from this activity are not significant.
CENTENNIAL MORTGAGE
Centennial Mortgage began operations in 1987, originating conventional
and federally insured residential mortgage loans for sale in the secondary
market. Centennial Bank regularly provides interim financing, generally for 30
to 60 days, for loans originated by Centennial Mortgage. Centennial Mortgage
originated $111.6 million, $67.2 million and $30.0 million of mortgages in 1997,
1996 and 1995, respectively. Mortgage loans generally are sold without recourse.
Prior to 1996, mortgage loans were generally sold with no servicing rights
retained. However, during 1996, Centennial Bank obtained Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation approval to
service federally insured mortgage loans, and Centennial Bank began retaining
servicing rights for mortgage loans originated by Centennial Mortgage. During
the third quarter of 1997, management questioned the feasibility of servicing
mortgage loans and is studying whether to continue adding mortgage loans to its
servicing portfolio. Under certain circumstances, primarily defects in loan
documentation, Centennial Mortgage may be obligated to repurchase loans sold in
the secondary market.
Centennial Mortgage has one office in Eugene, Oregon, and opened an
office in Lake Oswego, Oregon, a Portland suburb, in 1993. That office relocated
to the Centennial Bank building in Tigard, Oregon in 1995. At December 31, 1997,
Centennial Mortgage intended to relocate to the Lake Oswego area to accommodate
the space needs of Centennial Bank at the Tigard location.
In December 1997, Centennial Mortgage opened an office in the Sunnyside
Road area of eastern Portland in a leased facility. Although it was considered
at the time, Centennial Mortgage has concluded not to open a branch in the Lloyd
District of Portland due to a shortage of qualified mortgage lending personnel.
Centennial Mortgage has a residential mortgage construction lending
department which establishes relationships with home builders in the
Eugene/Springfield and Portland-area markets and attempts to generate additional
permanent loan activity as the houses-under-construction are sold. Increases in
interest rates could adversely affect demand for construction lending, as well
as the ability of borrowers to sell the houses when completed, and thus could
adversely impact Centennial Mortgage's permanent mortgage lending activity.
<PAGE>
HARDING FLETCHER
In July 1993, Bancorp formed a subsidiary to acquire certain assets of
Harding Fletcher, a commercial mortgage banker. Harding Fletcher arranged
commercial real estate loans, which were funded by insurance companies and other
institutional investors. In August 1995, Bancorp sold substantially all of the
assets of Harding Fletcher for $741,000. During 1997, Bancorp accepted a
negotiated payoff of the receivable balance.
BANCORP CONSOLIDATED STATISTICAL INFORMATION
Bancorp incorporates by reference the following financial and
statistical information from its Annual Report to Shareholders for the year
ended December 31, 1997:
Centennial Bancorp
Annual Report
to Shareholders
Page No.
-------------------
Investment securities 14
Loans and reserve for loan losses 15
Deposits 6
NET INTEREST INCOME
For most financial institutions, including Bancorp, the primary
component of earnings is net interest income. Net interest income is the
difference between interest income, principally from loans and investment
securities portfolios, and interest expense, principally on customer deposits
and borrowings. Changes in net interest income result from changes in "volume,"
"spread" and "margin." Volume refers to the dollar level of interest-earning
assets and interest-bearing liabilities. Spread refers to the difference between
the yield on interest-earning assets and the cost of interest-bearing
liabilities. Margin refers to net interest income divided by interest-earning
assets and is influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities. During 1997, 1996 and 1995, Bancorp's
average interest-earning assets were $399 million, $323 million and $252
million, respectively. During these same years, Bancorp's net interest margin
was 6.92%, 6.70% and 6.66%, respectively.
<PAGE>
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table sets forth for 1997, 1996 and 1995 information with
regard to average balances of assets and liabilities, as well as total dollar
amounts of interest income from interest-earning assets and interest expense on
interest-bearing liabilities, resultant average yields or rates, net interest
income, net interest spread, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities for Bancorp.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
-------------------------------- ------------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average income or yield or Average income or yield or Average income or yield or
balance(1) expense rates balance(1) expense rates balance(1) expense rates
---------- --------- -------- ---------- --------- -------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS: (Dollars in thousands)
Interest-bearing deposits
with banks $ 6.924 $ 376 5.43% $ 10,872 $ 579 5.33% $ 5,971 $ 352 5.90%
Investment securities --
taxable 37,443 2,446 6.53 43,928 2,894 6.59 40,116 2,403 5.99
Investment securities --
tax-exempt (2) 43,587 3,428 7.86 39,037 3,112 7.97 24,159 1,827 7.56
Federal funds sold 10,925 573 5.24 2,265 122 5.39 5,618 317 5.64
Loans and loans held for
sale (3) 299,976 34,329 11.44 226,965 26,299 11.59 176,384 20,909 11.85
--------- ------- --------- ------- --------- -------
Total interest-earning
assets/interest income 398,855 41,152 10.32 323,067 33,006 10.22 252,248 25,808 10.23
Reserve for loan losses (3,123) (2,237) (1,824)
Cash and due from banks 27,552 20,274 16,975
Premises and equipment, net 9,790 9,339 8,477
Other assets 6,112 7,201 5,876
-------- -------- --------
Total assets $439,186 $357,644 $281,752
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Savings and interest-bearing
demand $166,800 5,156 3.09 $128,611 4,440 3.45 $107,983 3,352 3.10
Time deposits 129,756 7,299 5.63 100,549 5,208 5.18 71,912 4,146 5.77
Short-term borrowings 9,688 539 5.56 11,399 833 7.31 13,823 861 6.23
Long-term debt 10,000 572 5.72 16,443 887 5.39 9,200 645 7.01
-------- ------- -------- ------ -------- -------
Total interest-bearing
liabilities/interest
expense 316,244 13,566 4.29 257,002 11,368 4.42 202,918 9,004 4.44
Demand deposits 75,005 66,525 53,399
Other liabilities 2,001 2,617 2,133
-------- -------- --------
Total liabilities 393,250 326,144 258,450
Shareholders' equity 45,936 31,500 23,302
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $439,186 $357,644 $281,752
======== ======== ========
Net interest income $27,586 $21,638 $16,804
======= ======= =======
Net interest spread (2) 6.03% 5.80% 5.79%
===== ===== ====
Net interest margin (2) 6.92% 6.70% 6.66%
Net interest income to
average shareholders'
equity 60.05% 60.50% 72.11%
Average interest-earning
assets to average
interest-bearing liabilities 124% 126% 124%
- -----------------------
<FN>
(1)Average balances are based on daily averages and include nonaccrual loans.
(2)Average yield on nontaxable securities, net interest spread and net interest
margin have been computed on a 34% tax-equivalent basis.
(3)Nonaccrual loans ($1,032,600, $994,600 and $631,100 in 1997, 1996 and 1995,
respectively) have been included in the computation of average loans and
loans held for sale. Loan fees recognized, included in interest income,
totalled $4,769,700, $3,745,900 and $2,541,800 in 1997, 1996 and 1995,
respectively.
</FN>
</TABLE>
<PAGE>
ANALYSIS OF CHANGES IN INTEREST RATE DIFFERENTIAL
The following table shows the dollar amount of the increase (decrease)
in Bancorp's interest income and interest expense for the years indicated, on a
tax-equivalent basis, and attributes such dollar amounts to changes in volume
and changes in interest rates. Changes attributable to the combined effect of
volume and interest rate changes, which were immaterial, have been allocated
equally between interest rate and volume.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
Change in Change in
net interest income due to net interest income due to
-------------------------------- -----------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income:
Balances due from banks $ (212) $ 9 $ (203) $ 275 $ (48) $ 227
Investment securities -- taxable (425) (23) (448) 240 251 491
Investment securities -- tax-exempt 360 (44) 316 1,156 129 1,285
Federal funds sold 460 (9) 451 (185) (10) (195)
Loans 8,408 (378) 8,030 5,928 (538) 5,390
------ ------ ------ ------ ------- ------
Total interest income 8,591 (445) 8,146 7,414 (216) 7,198
------ ------ ------ ------ ------- ------
Interest expense:
Deposits:
Savings and interest-bearing
demand 1,249 (533) 716 676 412 1,088
Time1,578 513 2,091 1,567 (505) 1,062
Short-term borrowings (110) (184) (294) (164) 136 (28)
Long-term debt (358) 43 (315) 449 (207) 242
------ ------ ------ ------ ------ ------
Total interest expense 2,528 (164) 2,364 2,065 1,767 3,832
------ ------ ------ ------ ------ ------
Total interest expense 2,359 (161) 2,198 2,528 (164) 2,364
Net interest income $6,232 $ (284) $5,948 $4,886 $ (52) $4,834
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
MARKET AREAS
Centennial Bank's primary market area, with four well-established
branches, is the Eugene/Springfield area at the southern end of Oregon's
Willamette Valley. The populations of Eugene and Springfield total approximately
170,000. The area's economy depends primarily upon educational institutions,
U.S. and local government, forest products, general manufacturing (especially
small manufacturing and high-technology industries), health care and tourism.
The University of Oregon, located in Eugene, is the area's largest employer.
In August 1994, Centennial Bank opened a branch office in Tigard, a
suburb of Portland, Oregon, in January 1997 a branch office in the Lloyd
District of Portland and in December 1997 a branch office in the Tanasbourne
area of Beaverton, a suburb of Portland, Oregon. Centennial Bank also opened
four limited service branches in the Portland metropolitan area in 1997 (and one
in January 1998). The Portland metropolitan area has a diverse economy and a
population of approximately 1.3 million. Management believes the Portland
metropolitan area offers an opportunity to increase Bancorp's asset size and
business operations, and to provide diversification of risk in its loan
portfolio through the diversity of the economic market in the metropolitan area.
Centennial Bank also has a branch office in Cottage Grove, Oregon,
located approximately 20 miles south of Eugene and Springfield. The population
of Cottage Grove totals approximately 8,000. The economy similarly depends
primarily upon forest products, general manufacturing, agriculture and tourism.
LENDING ACTIVITIES
GENERAL
Bancorp provides a broad range of commercial and real estate lending
services. Currently, the primary focus of Bancorp's lending activities is to
provide commercial loans to small- to medium-sized businesses with annual
revenues typically up to $20 million, and to professionals. Most of Bancorp's
loans are made to customers in the trade areas served by branch offices.
Bancorp also makes construction loans and secured real estate loans,
most of which are sold in the secondary markets. Bancorp makes consumer loans,
primarily to accommodate existing customers, but does not actively pursue such
lending.
Bancorp strives to maintain sound loan underwriting standards with
written loan policies, conservative individual and branch limits and, depending
on the size of the commitment, reviews by Centennial Bank's Administrative Loan
and Asset/Liability committees. Underwriting standards are designed to achieve a
high-quality loan portfolio, compliance with lending regulations and the desired
mix of loan maturities and industry concentrations. Management further seeks to
minimize credit losses by closely monitoring the financial condition of its
borrowers and the value of collateral. In-house legal counsel assists in loan
documentation and collections.
<PAGE>
LOAN PORTFOLIO COMPOSITION
The following table sets forth information with respect to the
composition of Bancorp's loan portfolio (loans and loans held for sale) by type
of loan at December 31 for each of the last five years:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---------- ---------- --------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial and other $149,047 $119,450 $ 78,564 $ 66,845 $ 61,640
Real estate -- mortgage 93,216 73,665 59,204 56,792 44,253
Real estate -- construction 89,120 66,244 44,003 29,337 11,626
Installment 6,603 6,425 5,929 6,951 10,653
Lease financing 3,649 3,775 4,001 2,686 138
--------- --------- --------- -------- --------
Total loans and
loans held for sale 341,635 269,559 191,701 162,611 128,310
Less deferred loan fees (1,010) (929) (611) (600) (394)
Less reserve for loan
losses (3,349) (2,600) (1,928) (1,700) (1,514)
--------- --------- --------- -------- -------
Loans receivable, net $337,276 $266,030 $189,162 $160,311 $126,402
======== ======== ======== ======== ========
</TABLE>
<PAGE>
The following table presents the aggregate maturities of loans in each
major category of Bancorp's loan portfolio at December 31, 1997. Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments.
<TABLE>
<CAPTION>
Due after one Total
Due within but within Due after loans
Loan category one year five years five years by category
------------- -------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 84,548 $45,533 $16,971 $147,052
Real estate -- mortgage 19,031 31,383 37,217 87,631
Real estate --construction 71,635 15,516 1,969 89,120
Installment 4,872 1,561 170 6,603
Loans held for sale -- -- 5,585 5,585
Lease financing 531 3,118 -- 3,649
Other 543 1,364 88 1,995
Less deferred loan fees (536) (291) (183) (1,010)
-------- ------- ------- --------
Total loans by maturity $180,624 $98,184 $61,817 $340,625
======== ======= ======= ========
</TABLE>
Of Bancorp's $160 million of loans that mature after one year, a total
of $83.1 million (51.9%) are fixed-rate loans, and a total of $76.9 million
(48.1%) are variable-rate loans.
At December 31, 1997, $107 million of Bancorp's loans (approximately
31.5% of its loan portfolio) had fixed interest rates and $233 million
(approximately 68.5%) had variable interest rates.
COMMERCIAL LOANS
Commercial loans that are not collateralized by real estate represent
the largest category of Bancorp's loans. Bancorp's areas of emphasis include,
but are not limited to, loans to small- to medium-sized businesses and to
professionals. Bancorp provides a wide range of commercial business loans,
including lines of credit for working capital and term loans for the acquisition
of equipment and other purposes. Collateral generally includes equipment,
accounts receivable and inventory. Where warranted by the overall financial
condition of the borrower, loans may be made on an unsecured basis.
At December 31, 1997, approximately 71% of Bancorp's commercial loans
had floating or adjustable interest rates; the remaining 29% had fixed interest
rates. Operating lines of credit are payable on demand and subject to annual
renewal. Term loan maturities generally range from one to five years. Commercial
loans outstanding at December 31, 1997 were $147.1 million, compared to $116.8
million at December 31, 1996 and $78.3 million at December 31, 1995. Management
believes the increases in 1997 and 1996 were primarily a result of Centennial
<PAGE>
Bank's business development program and the opening of the branch office in
Tigard, Oregon in August 1994 and the Lloyd District office in Portland in
January 1997. Nonaccrual loans in this category totalled $858,000 at December
31, 1997 ($1.5 million at December 31, 1996); there were no restructured loans
at December 31, 1997 or 1996.
REAL ESTATE MORTGAGE LOANS
Real estate mortgage loans represent Bancorp's third largest category
of loans. Of the $87.6 million of real estate mortgage loans outstanding at
December 31, 1997, $35.1 million were made to commercial customers where the
collateral for the loans included the real estate occupied by the customers'
businesses. Therefore, many loans characterized as real estate mortgage loans
could be characterized as commercial loans that are collateralized by real
estate. Commercial real estate loans typically involve large loan balances to
single borrowers or groups of related borrowers. These borrowers may be more
sensitive to changes in economic conditions than are residential loan customers.
Real estate mortgage loans outstanding increased to $87.6 million at December
31, 1997 from $70.1 million at December 31, 1996 and $54.6 million at December
31, 1995. These increases were primarily a result of the favorable real estate
mortgage interest rate market available during 1997 and 1996, the demand for
housing in the market areas served by Bancorp and the expansion of Centennial
Mortgage's residential mortgage office in the Portland area. At December 31,
1997, nonaccrual loans in this category totalled $10,000 (none at December 31,
1996). At December 31, 1997 and 1996, there were no restructured loans in this
category.
At December 31, 1997, $56.1 million (or approximately 64%) of Bancorp's
real estate mortgage loans had fixed interest rates and $35.1 million (or
approximately 36%) had floating or adjustable interest rates. Maturities of the
real estate mortgage loans retained by Bancorp usually range from one to ten
years.
Bancorp's underwriting standards specify the following maximum
loan-to-value ratios for real estate loans: 90% for loans collateralized by
owner-occupied residences, 85% for other residential loans and for construction
loans, and 85% for commercial real estate loans. Management believes that
Bancorp's current real estate mortgage portfolio does not present a material
risk of loan losses.
Bancorp originates SBA real estate loans on owner-occupied properties
where the maturities may be up to 20 years, and the loan-to-value ratio may
reach 85% of appraised value or cost, whichever is lower. Up to 90% of the
amount of these loans is guaranteed or insured by an agency of the U.S.
Government. The guaranteed portion of these loans is typically sold to
<PAGE>
secondary-market investors. At December 31, 1997, the amount of the unguaranteed
portion of these loans retained by Bancorp was not material.
REAL ESTATE CONSTRUCTION LOANS
Bancorp makes construction loans to individuals and contractors to
construct single-family primary residences or second homes and, to a much lesser
extent, small multi-family residential projects. The construction loans
represent custom homes, pre-sold homes and homes that are not pre-sold. These
loans generally have maturities of six to nine months. Interest rates are
typically adjustable, although fixed-rate loans are also made under appropriate
conditions. Centennial Bank provides funding for all the construction loans
originated by Centennial Mortgage, and Centennial Mortgage provides monitoring
and reporting services on all construction loans made by Centennial Bank.
Construction financing is generally considered to involve a higher
degree of risk than long-term financing on improved, occupied real estate. The
risk of loss on construction loans depends largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If the
estimate of construction costs proves to be inaccurate, Bancorp might have to
advance funds beyond the amount originally committed to permit completion of the
project and to protect its security position. Bancorp might also be confronted,
at or prior to maturity of the loan, with a project with insufficient value to
ensure full repayment. Bancorp's underwriting, monitoring and disbursement
practices with respect to construction financing are intended to ensure that
sufficient funds are available to complete construction projects. Bancorp
endeavors to limit its risk through its underwriting procedures by using only
approved, qualified appraisers, by dealing only with qualified
builders/borrowers, and by closely monitoring the construction projects through
the process of completion and sale.
At December 31, 1997 and 1996, there were no nonaccrual loans or
restructured loans in this category.
INSTALLMENT LOANS
Bancorp does not actively solicit consumer loans, but makes such loans
primarily as a convenience to existing customers. Bancorp includes in its
installment loan category personal lines of credit, as well as consumer
installment loans (such as for automobile purchases). Consumer loans may be
collateralized or unsecured. Collections depend principally on the borrower's
financial condition or cash flow.
<PAGE>
Installment loans were $6.6 million at December 31, 1997 compared to
$6.4 million at December 31, 1996 and $5.9 million at December 31, 1995. These
modest levels of installment loans to individuals at the periods presented were
primarily due to Bancorp's focus on lending to businesses and professionals and
significant competition for consumer loans from the many credit unions, banks
and finance companies in the market areas served by Bancorp. At December 31,
1997, nonaccrual loans in this category totalled $5,000 (none at December 31,
1996). At December 31, 1997 and 1996, there were no restructured loans in this
category.
COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, Bancorp enters into various types
of transactions that include commitments to extend credit and standby letters of
credit as described in Note 9 of Notes to Consolidated Financial Statements of
Bancorp, which are incorporated by reference from Bancorp's 1997 Annual Report
to Shareholders. Bancorp applies the same credit standards to these commitments
as it uses in all its lending processes and has included these commitments in
its lending risk evaluations. Collateral for these commitments may include cash,
securities and/or real estate.
CREDIT AUTHORITY AND LOAN LIMITS
All Bancorp loans and other credit facilities are subject to credit and
collateral approval procedures and loan amount limitations. Individual loan
officers and branch managers have authority to approve loans in amounts up to
established limits, generally ranging from $25,000 to $50,000. Loans in excess
of branch limits, or not in conformance with credit or collateral criteria, are
reviewed by Centennial Bank's Administrative Loan Committee. The Asset/Liability
Committee, a majority of whom are nonofficer members of Centennial Bank's Board
of Directors, reviews loan applications over established Administrative Loan
Committee limits. All loans in excess of $25,000 to executive officers and
directors of Bancorp or any of its subsidiaries must be approved by the
Asset/Liability Committee and ratified by Centennial Bank's Board of Directors.
Under Oregon law, permissible loans from a financial institution to one
borrower are generally limited to 15% of the institution's aggregate paid-up and
unimpaired capital and surplus. At December 31, 1997, Centennial Bank's
permissible loan limit was $5.3 million (or $8.7 million if the loan is
collateralized by real estate).
Loan pricing decisions are based on an evaluation of risk, cost of
funds, operating and administrative costs, a reserve for loan losses, desired
profit margin and other factors. Loan risk is based in part on a risk rating
assigned to each loan. Bancorp uses a computerized pricing system that analyzes
a borrower's total contribution to net interest income.
<PAGE>
Centennial Bank sells loan participations to accommodate borrowers
whose financing needs exceed Centennial Bank's lending limits, and to diversify
risk. Centennial Bank occasionally purchases participations in loans from
correspondent banks. Centennial Bank's policies prohibit aggregate purchased
participations in excess of 10% of Centennial Bank's loan portfolio.
NONPERFORMING ASSETS
Nonperforming assets consist of loans past due 90 days or more,
nonaccrual loans, restructured loans and other real estate owned ("OREO"). The
following table sets forth information concerning Bancorp's nonperforming assets
at the end of each of the last five years:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Loans past due 90 days or more $ 402 $ 420 $ 645 $ 190 $ 186
Nonaccrual loans 873 1,480 478 693 881
Restructured loans -- -- -- -- --
----- ----- ----- ----- -----
Total nonperforming loans 1,275 1,900 1,123 883 1,067
Other real estate owned -- -- -- 392 221
----- ----- ----- ----- -----
Total nonperforming assets $1,275 $1,900 $1,123 $1,275 $1,288
===== ===== ===== ===== =====
Reserve for loans losses $3,349 $2,600 $1,928 $1,700 $1,514
Ratio of total nonperforming assets
to total assets .26% .47% .35% .49% .58%
Ratio of total nonperforming loans
to total loans .38% .71% .59% .54% .83%
Ratio of reserve for loan losses
to total nonperforming loans 263% 137% 172% 193% 142%
</TABLE>
- ----------
Bancorp's total nonperforming assets decreased by $625,000 in 1997 and
increased by $777,000 during 1996. Total nonperforming assets, as a percentage
of total assets, decreased to .26% at December 31, 1997 from .47% at December
31, 1996 and increased to .47% at December 31, 1996 from .35% at December 31,
1995. Nonperforming loans, as a percentage of total loans, decreased to .38% at
December 31, 1997 from .71% at December 31, 1996, which increased from .59% at
December 31, 1995.
The accrual of interest on a loan is discontinued when, in management's
judgment, the future collectibility of principal or interest is in doubt. Loans
placed on nonaccrual status may or may not be contractually past due at the time
<PAGE>
of such determination, and may or may not be secured. When a loan is placed on
nonaccrual status, Bancorp's policy is to reverse, and charge against current
income, interest previously accrued but uncollected. Interest subsequently
collected on such loans is credited to loan principal if, in the opinion of
management, full collectibility of principal is doubtful. If interest on
nonaccrual loans had been accrued, such income would have been $102,600 in 1997,
$117,500 in 1996 and $74,000 in 1995. No interest income was recognized on these
loans in 1997, 1996 and 1995.
Restructured loans are those for which concessions have been granted
due to the borrower's weakened financial condition or other factors. Such
concessions may include reduction of interest rates below rates otherwise
available to that borrower or deferral of interest or principal. Interest on
restructured loans is accrued at the restructured rate when it is anticipated
that no loss of original principal will occur. Bancorp had no restructured loans
at December 31, 1997 or 1996.
OREO consists of real estate acquired by Bancorp through foreclosure or
by a deed in lieu of foreclosure. Properties in OREO are carried at the lower of
fair market value (less anticipated selling costs) or the principal balance of
the related loan. Any excess of the loan balance over fair value of the property
is charged to the reserve for loan losses.
At December 31, 1997 and 1996, Bancorp held no OREO. At December 31,
1994, Bancorp's OREO consisted of one single-family dwelling with acreage in
Springfield, Oregon. At that date, the book value of the property was $392,000.
The property was sold during 1995 for a loss of $25,000.
ANALYSIS OF THE RESERVE FOR LOAN LOSSES
The reserve for loan losses represents management's estimate of the
losses inherent in the loan portfolio. The reserve is based primarily on
management's evaluation of the overall quality and risk characteristics of
Bancorp's loan portfolio, which is dependent upon numerous interrelated factors
including present nonperforming and delinquent loans, borrowers' perceived
abilities to repay, value of collateral, general and local economic conditions
and historical loan loss experience.
Centennial Bank's Asset/Liability Committee reviews the adequacy of the
reserve for loan losses quarterly. Although determination of the adequacy of the
reserve involves substantial subjective judgment based on the Committee's
analysis of the risk characteristics of the entire loan portfolio, the Committee
also uses three quantitative methods to analyze the adequacy of the reserve.
Under the first method, management assigns a specific percentage to each
nonperforming, substandard or doubtful loan in Bancorp's loan portfolio to
calculate a total amount of average anticipated loan losses.
<PAGE>
The second method uses the risk-weighted ratings (from one through
five) developed by the FDIC, with management assigning a percentage to the loans
in the various risk categories (using .0025% for loans in the lowest risk
category up to 50% for loans in the highest risk category) to calculate an
alternative amount of possible losses.
The third method is in accordance with the requirements of Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" ("SFAS 114"), which Bancorp adopted on January 1, 1995. Under SFAS
114, a loan is considered impaired based on current information and events if it
is probable that Bancorp will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. This policy is generally consistent with Bancorp's nonaccrual policy.
Bancorp also specifically examines all loans greater than $100,000 that are
identified on an internal watch list. Loans which are over 90 days contractually
delinquent and loans which have developed inherent problems prior to being 90
days delinquent may be considered impaired. An insignificant delay or shortfall
in the amount of payments is not an event that, when considered in isolation,
would automatically cause a loan to be considered impaired for purposes of SFAS
114. The measurement of impaired loans is generally based on the present value
of expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral.
The amounts calculated by the quantitative methods are then compared by
the Committee to the reserve for loan losses in evaluating the adequacy of the
reserve.
Management believes that Bancorp's reserve for loan losses is adequate
to cover anticipated losses and is in accordance with generally accepted
accounting principles. There can be no assurance, however, that management will
not decide to increase the reserve for loan losses or that regulators will not
require Bancorp to increase the reserve, either of which events could adversely
affect Bancorp's results of operations. Further, there can be no assurance that
Bancorp's actual loan losses will not exceed its reserve.
<PAGE>
The following table sets forth information regarding changes in
Bancorp's reserve for loan losses for each of the last five years:
<TABLE>
<CAPTION>
At or for the year ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans and loans held for sale
at year-end $340,625 $268,630 $191,090 $162,011 $127,916
======== ======== ======== ======== ========
Average loans and
loans held for sale $299,976 $226,965 $176,384 $139,672 $114,414
======== ======== ======== ======== ========
Reserve for loan losses,
beginning of year $ 2,600 $ 1,928 $ 1,700 $ 1,514 $ 1,078
Charge-offs:
Commercial and other (556) (89) (128) (108) (18)
Real estate -- construction -- -- -- -- --
Real estate -- mortgage -- -- -- (17) --
Installment (2) (20) (34) (22) (17)
-------- -------- ------- ------- -------
Total charge-offs (558) (109) (162) (147) (35)
-------- -------- ------- ------- -------
Recoveries:
Commercial and other 55 24 10 8 7
Real estate -- construction -- -- 3 -- 149
Real estate -- mortgage -- 20 7 -- --
Installment 2 2 20 10 5
-------- -------- ------- ------- -------
Total recoveries 57 46 40 18 161
-------- -------- ------- ------- -------
Net loans (charged off) recovered (501) (63) (122) (129) 126
Provision for loan losses 1,250 735 350 315 310
-------- -------- ------- ------- -------
Reserve for loan losses
at year-end $ 3,349 $ 2,600 $ 1,928 $ 1,700 $ 1,514
======== ======== ======= ======= =======
Ratio of net loans (charged off)
recovered to average
loans outstanding (.17)% (.03)% (.07)% (.09)% .11%
Ratio of reserve for loan losses
to loans at year-end .98% .97% 1.01% 1.05% 1.18%
</TABLE>
Anticipated loan losses are charged against the reserve for loan losses
when, in management's opinion, ultimate recovery is unlikely or when bank
examiners require a charge-off. As the actual amount of loss with respect to
specific loans is often dependent upon future events (including liquidation of
collateral), Bancorp cannot accurately predict precisely what losses, if any,
will be sustained with respect to specific loans. Historical experience has also
shown that, at any particular time, loan losses may exist in a loan portfolio
that have not yet been identified. For these reasons, although management
analyzes specific loans in determining the adequacy of its reserve for loan
losses, it does not normally allocate the reserve to specific groups or
<PAGE>
categories of loans. Management estimates, however, that the allocation of the
reserve for loan losses by loan category at the end of each of the last five
years was as set forth below:
<TABLE>
<CAPTION>
Amount of Loans in
reserve category as a
for percentage of
loan total gross
losses loans
----------- ---------------
(Dollars in thousands)
<S> <C> <C>
December 31, 1997
-----------------
Commercial and other $1,999 45.2%
Real estate -- mortgage 250 26.2
Real estate -- construction 1,000 26.6
Installment 50 2.0
Unallocated 50 --
------ ------
Total $3,349 100.0%
====== ======
December 31, 1996
-----------------
Commercial and other $1,500 46.5%
Real estate -- mortgage 250 26.5
Real estate -- construction 750 25.0
Installment 50 2.0
Unallocated 50 --
------ -----
Total $2,600 100.0%
====== =====
December 31, 1995
-----------------
Commercial and other $1,200 44.1%
Real estate -- mortgage 125 29.2
Real estate -- construction 520 23.5
Installment 35 3.2
Unallocated 48 --
------ -----
Total $1,928 100.0%
====== =====
December 31, 1994
-----------------
Commercial and other $1,000 42.8%
Real estate -- mortgage 125 34.9
Real estate -- construction 500 18.0
Installment 35 4.3
Unallocated 40 --
------ -----
Total $1,700 100.0%
====== =====
December 31, 1993
-----------------
Commercial and other $ 550 46.8%
Real estate -- mortgage 120 37.0
Real estate -- construction 115 9.1
Installment 35 7.1
Unallocated 696 --
------ -----
Total $1,516 100.0%
====== =====
</TABLE>
<PAGE>
The following table details the carrying value of Bancorp's impaired
loans, in accordance with SFAS 114, by type of loan as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
Net
Recorded Valuation Carrying
Amount Allowance Value
------ --------- -----
<S> <C> <C> <C>
December 31, 1997
-----------------
Commercial $ 718,000 $150,000 $568,000
========== ======== ========
December 31, 1996
-----------------
Commercial $1,412,000 $505,000 $907,000
========== ======== ========
</TABLE>
The above impaired loans were measured based on the fair value of the
loan's collateral. The allowance for loan losses for all other loans is
determined based on the methodology discussed above.
INVESTMENT ACTIVITIES
Bancorp's investment portfolio is comprised of U.S. government
securities, municipal securities, mortgage-backed securities, corporate bonds
and equity securities.
Bancorp's primary investment objectives are to maintain liquidity and
to generate after-tax profits consistent with the risk guidelines established by
the Board of Directors. At December 31, 1997 and 1996, Blount Investment Group
of Eugene, Oregon, advised Bancorp with respect to the investment portfolio.
Centennial Bank has extended loans to Blount Investment Group and its
affiliates. Such loans are made on terms, including interest rates and
collectibility, no more favorable to the borrowers than loans to other
borrowers.
All of the securities held in the investment portfolio were classified
as available-for-sale at December 31, 1997 and 1996. Those securities will be
sold as necessary to provide liquidity and to respond to interest rate changes.
Because these securities are carried at their market value, fluctuations in
interest rates could affect the carrying value of these securities and,
therefore, the reported shareholders' equity of Bancorp.
The following table provides the carrying values of Bancorp's
investment portfolio at the end of each of the last three years. See Note 2 of
Notes to Consolidated Financial Statements for more information about investment
securities held at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
------- ------- ------
(In thousands)
<S> <C> <C> <C>
U.S. Treasury securities $ 1,417 $ 1,405 $ 8,428
U.S. Government agencies 34,415 32,594 29,422
States and political subdivisions 39,434 39,135 23,845
Corporate bonds 2,301 2,249 2,300
Mortgage-backed securities 6,337 7,271 8,929
------- ------- -------
Total debt securities 83,904 82,654 72,924
Federal Home Loan Bank stock 4,711 4,366 4,040
------- ------- -------
Total investment securities $88,615 $87,020 $76,964
======= ======= =======
</TABLE>
<PAGE>
The following table provides the carrying values, principal amounts,
maturities and weighted average yields of Bancorp's investment securities at
December 31, 1997, all of which are classified as available-for-sale:
<TABLE>
<CAPTION>
Carrying
value Weighted
(fair market Principal average
Type and maturity value) amount yield(1)
----------------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasuries
Due within 1 year $ 499 $ 500 5.18%
Due after 1 but within 5 years 662 650 6.72
Due after 5 but within 10 years 256 250 5.85
----- -----
Total U.S. Treasuries 1,417 1,400 6.01
U.S. Government Agencies
Due after 1 but within 5 years 14,512 14,500 6.44
Due after 5 but within 10 years 19,903 20,000 6.74
------ ------
Total U.S. Government Agencies 34,415 34,500 6.61
States and political subdivisions
Due after 1 but within 5 years 6,093 5,970 7.78
Due after 5 but within 10 years 10,021 9,665 7.97
Due after 10 years 23,320 22,925 8.04
------ -------
Total states and political subdivisions 39,434 38,560 7.98
Corporate bonds
Due after 1 but within 5 years 471 450 6.31
Due after 5 but within 10 years 1,830 1,760 6.15
----- -----
Total corporate bonds 2,301 2,210 6.18
Mortgage-backed securities
(U.S. Government agencies) 6,337 6,388 5.65
----- -----
Total debt securities 83,904 83,058 7.15
Equity securities 4,711 4,711
----- -----
Total securities $88,615 $87,769
======= =======
- ------------
<FN>
(1) Weighted average yield on state and political subdivisions has been computed
on a 34% tax-equivalent basis.
</FN>
</TABLE>
<PAGE>
DEPOSITS
Centennial Bank offers a variety of accounts for depositors designed to
attract short-term and long-term deposits. These accounts include certificates
of deposit ("CDs"), savings accounts, money market accounts, checking and
negotiable order of withdrawal ("NOW") accounts and individual retirement
accounts. These accounts generally earn interest at rates established by
management based on competitive market factors and management's desire to
increase or decrease certain types or maturities of deposits. Centennial Bank
does not pay brokerage commissions to attract deposits.
Centennial Bank has developed a special account for customers age 50 or
older called the "50+ Account." The 50+ Account is designed to attract customers
in this age group who generally have higher than average deposits and favorable
ability to repay borrowings. Centennial Bank also markets to small- to
medium-sized businesses and to professionals in its commercial lending program.
These types of customers also create substantial deposits, resulting in low-cost
funds being available for Centennial Bank's lending activities. Management
believes that Centennial Bank's percentage of demand deposits (relative to total
deposits) is among the highest in Oregon.
The following table presents the average balances for each major
category of deposits and the weighted average interest rates paid for
interest-bearing deposits for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
Average Average Average
------- ------- -------
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 75,005 N/A $ 66,525 N/A $ 53,399 N/A
Interest-bearing demand 152,453 3.16% 114,445 3.61% 92,937 3.23%
Savings 14,347 2.36 14,166 2.15 15,046 2.34
CDs 129,756 5.63 100,549 5.18 71,912 5.77
-------- -------- --------
Total $371,561 3.35 $295,685 3.26 $233,294 4.17
======== ======== ========
</TABLE>
<PAGE>
The following table shows the dollar amount of CDs that had balances of
$100,000 or more at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
CDs $100,000 or over with remaining maturity:
Three months or less $20,937 $17,451
Over three months through twelve months 28,145 28,220
Over one year through three years 4,686 3,027
Over three years 118 111
------- -------
Total $53,886 $48,809
======= =======
</TABLE>
SHORT-TERM BORROWINGS
At December 31, 1997, Bancorp's short-term borrowings consisted of
securities sold under agreements to repurchase totalling $7.7 million.
Securities sold under agreements to repurchase generally range in duration from
one to eighty-nine days.
At December 31, 1996, Bancorp's short-term borrowings consisted of
securities sold under agreements to repurchase totalling $4.3 million and
advances from the Federal Home Loan Bank of Seattle totalling $8.0 million which
matured and were repaid in May 1997.
The following table sets forth certain information with respect to
short-term borrowings at December 31 and during each of 1997, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Amount outstanding at year-end $ 7,716 $12,316 $11,419
Weighted average interest rate at year-end 5.03% 5.78% 5.59%
Maximum amount outstanding at any
month-end during the year $ 18,321 $15,264 $16,458
Daily average amount outstanding during the year $ 9,688 $11,399 $13,823
Average weighted interest rate
during the year 5.56% 7.31% 6.23%
</TABLE>
<PAGE>
LONG-TERM DEBT
At December 31, 1997 and 1996, Bancorp's long-term debt consisted of
$10.0 million of funds advanced from the Federal Home Loan Bank of Seattle to
Centennial Bank. Interest on the debt is payable monthly at the rate of 6.14%.
The debt matures on August 6, 1998, and is collateralized by Federal Home Loan
Bank of Seattle stock, funds on deposit with the Federal Home Loan Bank of
Seattle, investments and loans.
During 1996, Bancorp's long-term debt also consisted of $9.2 million of
7.0% Convertible Redeemable Exchangeable Subordinated Debentures due May 1, 2004
(the "Debentures"). During 1996, Bancorp issued a call for redemption of the
Debentures. Holders of the Debentures voluntarily converted $9,163,000 of the
Debentures into 2,029,568 shares of Bancorp's common stock. The amount of debt
converted, net of unamortized issue costs, was credited to common stock and
additional paid-in-capital. Bancorp redeemed the remaining $37,000 of the
Debentures for cash.
RETURN ON EQUITY AND ASSETS
The following table sets forth Bancorp's return on daily average assets
and equity for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Net income $ 9,303 $ 6,514 $ 4,551
Average total assets 439,186 357,644 281,752
Return on average assets 2.12% 1.82% 1.62%
Net income $ 9,303 $ 6,514 $ 4,551
Average equity 45,936 31,500 23,302
Return on average equity 20.25% 20.68% 19.53%
Average total equity $ 45,936 $ 31,500 $ 23,302
Average total assets 439,186 357,644 281,752
Average total equity to assets ratio 10.46% 8.81% 8.27%
</TABLE>
CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board ("FASB") has issued several accounting
pronouncements which Bancorp has recently adopted or will be required to adopt
in future fiscal reporting periods.
SFAS NO. 125
Bancorp adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," on January 1, 1997 with no
material impact on its financial statements.
<PAGE>
SFAS NO. 129
In 1997, Bancorp adopted SFAS No. 129, "Disclosures of Information about Capital
Structure," which had no material impact on its financial statements.
SFAS NO. 130
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes requirements for disclosure of comprehensive income and
becomes effective for Bancorp for the year ending December 31, 1998.
Comprehensive income includes such items as foreign currency translation
adjustments and unrealized gains and losses on securities available-for-sale
that are currently being included as a component of shareholders' equity.
Bancorp does not expect this pronouncement to materially impact its financial
statements.
SFAS NO. 131
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires information about key
revenue-producing segments of an entity. A reconciliation of segment financial
information to amounts reported in the financial statements will be required.
SFAS No. 131 is effective for Bancorp in 1998 and it has not been determined if
additional disclosure is required.
COMPETITION
Commercial banking in Oregon is highly competitive with respect to both
loans and deposits. Centennial Bank competes principally with other commercial
banks, savings and loan associations, credit unions, mortgage companies, and
other financial institutions with respect to the scope and type of services
offered, interest rates paid on deposits and pricing of loans, among other
factors.
Many of these competitors have substantially greater resources than
Centennial Bank and have branches in more locations. Certain of these
competitors have larger lending capabilities due to their greater size, and
provide other services that Centennial Bank does not offer.
Centennial Bank competes for loans principally through the range and
quality of the services it provides. Centennial Bank believes its personal
service philosophy and its focus on small- to medium-sized businesses and on
professionals enables it to compete effectively with other financial
institutions for the loans and deposits it seeks. To serve customers whose
<PAGE>
borrowing requirements exceed its lending limits, Centennial Bank arranges
participations with other lenders.
During the past several years, many financial institutions in Oregon
have merged or consolidated. Management believes that, in many cases, the
acquiring institutions have shifted the focus of the acquired banks away from
the small- to medium-sized businesses that are at the core of Bancorp's
marketing efforts. Bancorp intends to capitalize on this banking environment.
EMPLOYEES
Centennial Bancorp has no employees other than its executive officers,
who are also employees of Centennial Bank. At December 31, 1997, Centennial Bank
and Centennial Mortgage had 187 and 44 full-time equivalent employees,
respectively. Bancorp places a high priority on selective hiring and development
of staff. Staff development involves training in customer service, marketing and
regulatory compliance. Bancorp has adopted extensive incentive programs for
employees that focus and are dependent on the achievement of certain of
Bancorp's financial, service and marketing goals.
None of Bancorp's employees is covered by collective bargaining
agreements, and management believes that Bancorp's relationship with its
employees is good.
SUPERVISION AND REGULATION
Bancorp and Centennial Bank are extensively regulated under federal and
Oregon law. These laws and regulations are primarily intended to protect
depositors and the deposit insurance fund, not shareholders of Bancorp. The
following information is qualified in its entirety by reference to applicable
statutory and regulatory provisions. Any change in applicable laws, regulations
or regulatory policies may have a material effect on the business, operations
and prospects of Bancorp and its subsidiaries.
CENTENNIAL BANCORP
GENERAL
Bancorp is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and is subject to regulation,
supervision and examination by the Board of Governors of the Federal Reserve
System (the "FRB"). Bancorp is required to file an annual report and such other
reports as the FRB may require.
<PAGE>
ACQUISITIONS
As a bank holding company, Bancorp is required to obtain the prior
approval of the FRB before acquiring direct or indirect ownership or control of
more than 5% of the voting shares of a bank or bank holding company. The FRB may
not approve any acquisition, merger or consolidation that would have a
substantial anti-competitive result, unless the anti-competitive effects of the
proposed transaction are outweighed by a greater public interest in meeting the
needs and convenience of the public. The FRB also considers managerial, capital
and other financial factors in acting on acquisition or merger applications.
Bancorp also is required to obtain the prior approval of the Director of the
Oregon Department of Consumer and Business Services (the "Oregon Director")
before acquiring direct or indirect ownership or control of 25% or more of the
voting shares of an Oregon state-chartered bank or bank holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") allows adequately capitalized and managed bank
holding companies to acquire banks in any state. Such acquisitions must comply
with any applicable state law requiring a bank to be in existence for a minimum
period of time before the acquisition. Oregon law allows such acquisitions with
respect to banks that have been providing banking services for at least three
years. Therefore, Bancorp and Centennial Bank could be acquired by a bank
holding company located outside Oregon following receipt of necessary regulatory
approvals. Under the Interstate Banking Act, Bancorp could acquire banks or bank
holding companies in other states.
PERMISSIBLE ACTIVITIES
A bank holding company may not engage in, or acquire direct or indirect
control of more than 5% of the voting shares of any company engaged in, a
nonbanking activity, unless the activity has been determined by the FRB to be
closely related to banking or managing banks. The FRB has identified certain
nonbanking activities in which a bank holding company may engage with notice to,
or prior approval by, the FRB. Management believes that all activities conducted
by Centennial Mortgage are permitted nonbanking activities.
CAPITAL ADEQUACY
The federal bank regulatory agencies monitor the capital adequacy of
bank holding companies and have adopted risk-based capital adequacy guidelines
to evaluate bank holding companies and banks. If an institution's capital falls
below the minimum levels established by these guidelines, the bank holding
<PAGE>
company may be denied approval to acquire or establish additional banks or
nonbank businesses. The guidelines require a minimum ratio of total capital to
risk-weighted assets of 8%. At December 31, 1997, Bancorp's ratio of total
capital to risk-weighted assets was 12.9%.
The FRB also uses a leverage ratio to evaluate the capital adequacy of
bank holding companies. The leverage ratio applicable to Bancorp requires the
ratio of "Tier 1" capital (generally, tangible common stockholders' equity,
perpetual preferred stock and minority interests in consolidated subsidiaries)
to adjusted average total assets to be not less than 3% and up to 5% or higher
depending on Bancorp's general capital condition. Bancorp's leverage ratio at
December 31, 1997 was 10.6%.
If Bancorp fails to meet capital guidelines, the FRB may institute
appropriate supervisory or enforcement actions. As discussed below, Centennial
Bank is also subject to capital adequacy requirements. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), Bancorp could be
required to guarantee the capital restoration plan of Centennial Bank, should
Centennial Bank become undercapitalized. In addition, the Oregon Director has
the authority to require Bancorp to contribute additional capital to Centennial
Bank if its capital becomes impaired.
CENTENNIAL BANK
GENERAL
Centennial Bank is an Oregon state-chartered bank, the deposits of
which are insured by the FDIC. Accordingly, Centennial Bank files financial and
other reports periodically with, and is regularly examined by, both the Oregon
Director and the FDIC. Centennial Bank is not a member of the Federal Reserve
System.
PERMISSIBLE ACTIVITIES
Under FDICIA, no state bank may engage in any activity not permitted
for national banks, unless the institution complies with applicable capital
requirements and the FDIC determines that the activity poses no significant risk
to the insurance fund. This limitation should not affect Centennial Bank, since
management believes that Centennial Bank is not presently involved in any such
activities.
<PAGE>
BRANCHING AND ACQUISITIONS
Banks are permitted to conduct business through branches after
application to and approval of the FDIC and the Oregon Director, if they make
certain findings regarding the financial history and condition of the bank and
the appropriateness of the branch in the community to be served. Centennial Bank
currently has thirteen branches, the most recent of which opened in January
1998.
Acquisitions of Oregon banks and bank holding companies by out-of-state
banks, holding companies and other financial institutions are permitted if the
bank being acquired has been providing banking services for a period of at least
three years prior to the effective date of the acquisition and upon receipt of
the approval of the Oregon Director. Other conditions set forth in Oregon law
also must be satisfied. Approval of the FRB and/or the FDIC is also required.
The Interstate Banking Act permits banks to merge with banks across
state lines, thereby creating out-of-state branches, without regard to whether
such transactions are prohibited under the law of any state. Oregon permits
interstate bank mergers. Banks are able to establish branches in other states
only through interstate mergers, as described above, unless the state where the
branch is proposed to be opened has opted in to DE NOVO interstate branching.
Oregon has not opted in to DE NOVO branching.
COMMUNITY REINVESTMENT ACT
Enacted in 1977, the federal Community Reinvestment Act (the "CRA") has
become increasingly important to financial institutions, including their holding
companies. The CRA allows regulators to reject an application to make an
acquisition or establish a branch unless the applicant has performed
satisfactorily under the CRA. Citizens and interest groups have standing before
the FRB to assert noncompliance with the CRA. Satisfactory performance means
adequately meeting the credit needs of the communities the applicant serves,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution. The applicable federal regulators now
regularly conduct CRA examinations to assess the performance of financial
institutions. Centennial Bank has received satisfactory ratings in its most
recent CRA examinations.
TRANSACTIONS WITH AFFILIATES
Centennial Bank is subject to certain FRB restrictions on transactions
among related parties. Section 23A of the Federal Reserve Act limits the amount
of certain transactions, including loans to and investments in affiliates of
Centennial Bank, requires certain levels of collateral for such loans, and
<PAGE>
limits the amount of advances to third parties that may be collateralized by the
securities of Bancorp or its subsidiaries.
Section 23B of the Federal Reserve Act requires that certain
transactions between Centennial Bank and its affiliates must be on terms
substantially the same, or at least as favorable to Centennial Bank, as those
prevailing at the time for comparable transactions with or involving
nonaffiliated companies or, in the absence of comparable transactions, on terms
and under circumstances, including credit standards, that in good faith would be
offered to or would apply to nonaffiliated companies.
In addition, Section 22(h) of the Federal Reserve Act requires that the
aggregate amount of an institution's loans to officers, directors and principal
shareholders (and their affiliates) is limited to the amount of its unimpaired
capital and surplus, unless the FDIC determines that a lesser amount is
appropriate.
A violation of any of the foregoing restrictions may result in the
assessment of civil fines on a bank or a person participating in the conduct of
the affairs of such bank or the imposition of a cease and desist order.
DIVIDEND RESTRICTIONS
Dividends paid by Centennial Bank provide substantially all Bancorp's
cash flow. Under federal law, prior to the declaration of any dividend by
Centennial Bank, the approval of the principal regulator is required if the
total of all dividends declared in any calendar year exceeds the total of
Centennial Bank's net profits for that year combined with its retained net
profits for the preceding two years. In addition, FDICIA provides that a bank
cannot pay a dividend if it will cause the bank to be "undercapitalized." Oregon
law imposes the following limitations on the payment of dividends by Oregon
state-chartered banks: (i) no dividends may be paid that would impair capital;
(ii) until the surplus fund of a bank is equal to 50% of its paid-in capital, no
dividends may be declared unless there has been carried to the surplus account
at least 20% of the bank's net profits for the dividend period; (iii) dividends
cannot be greater than net undivided profits minus losses, certain bad debts,
certain charged-off assets or depreciation and accrued expenses, interest and
taxes; and (iv) if the surplus fund does not exceed 50% of paid-up capital and a
further reduction in the surplus occurs due to losses, dividends cannot be
declared or paid in excess of 50% of net earnings until the surplus fund is
restored to at least the amount from which the surplus was originally reduced.
At December 31, 1997, $10.1 million was available for declaration of dividends
by Centennial Bank to Bancorp without prior regulatory approval.
<PAGE>
EXAMINATIONS
The FDIC and the Oregon Director periodically examine and evaluate
state-chartered banks. Based upon such evaluations, the examining regulator may
revalue the assets of an insured institution and require that it charge off or
reduce the carrying value of specific assets or establish specific reserves to
compensate for the difference between the value determined by the regulator and
the book value of such assets.
CAPITAL ADEQUACY
Federal regulations establish minimum requirements for the capital
adequacy of depository institutions. The regulators may establish higher minimum
requirements if, for example, a bank has previously received special attention
or has a high susceptibility to interest rate risk. Banks with capital ratios
below the required minimums are subject to certain administrative actions,
including prompt corrective action, the termination of deposit insurance upon
notice and hearing, or a temporary suspension of insurance without a hearing.
The federal risk-based capital guidelines for banks require a ratio of
Tier 1 or core capital to total risk-weighted assets of 4% and a ratio of total
capital to total risk-weighted assets of 8%. The leverage capital guidelines
require that banks maintain Tier 1 capital of no less than 5% of total adjusted
assets, except in the case of certain highly rated banks for which the minimum
requirement is 3% of total adjusted assets. At December 31, 1997, Centennial
Bank's leverage ratio, Tier 1 capital to risk-weighted assets ratio and total
risk-based capital to risk-weighted assets ratio were 9.5%, 10.8% and 11.7%,
respectively.
FDICIA requires federal banking regulators to take "prompt corrective
action" with respect to a capital-deficient institution, including requiring a
capital restoration plan and restricting certain growth activities of the
institution. Bancorp could be required to guarantee any such capital restoration
plan required of Centennial Bank. Bancorp's maximum liability under such
guarantee would be the lesser of 5% of Centennial Bank's total assets at the
time it became undercapitalized or the amount necessary to bring Centennial Bank
into compliance with the capital plan.
Under Oregon law, the Oregon Director has the authority to require the
shareholders of an Oregon state-chartered bank (Bancorp, in the case of
Centennial Bank) to contribute additional capital to the bank if its capital
becomes impaired. The capital of a bank is impaired under Oregon law when the
value of the bank's assets is insufficient to pay its liabilities plus the
amount of its paid-up capital stock.
As an institution's capital decreases, the powers of the federal
regulators increase, which can include mandated capital-raising activities,
restrictions on interest rates paid, restrictions on transactions with
affiliates, and removal of management. In addition, an institution generally is
prohibited from paying dividends or management fees to control persons if the
institution would be undercapitalized after any such payment.
<PAGE>
Pursuant to FDICIA, regulations were adopted defining five capital levels:
well capitalized, adequately capitalized, undercapitalized, severely
undercapitalized and critically undercapitalized. Under the regulations,
Centennial Bank is considered "well capitalized."
INTERNAL OPERATING REQUIREMENTS
In 1993, federal regulators adopted regulations addressing, among other
things: (i) internal controls, information systems and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure;
(v) asset growth; (vi) ratio of classified assets to capital; (vii) minimum
earnings; and (viii) compensation and benefit standards for management
officials. These regulations add further to the cost of compliance and impose
record-keeping requirements on Centennial Bank and Bancorp.
The consumer lending activities of Centennial Bank are also regulated
by numerous laws and regulations which impose disclosure requirements, prohibit
discrimination based on race, sex, age, marital status and other specified
classifications and impose other restrictions on credit and collection
practices.
REAL ESTATE LENDING EVALUATIONS
Federal regulators have adopted uniform standards for evaluating loans
secured by real estate or made to finance improvements to real estate. Banks are
required to establish and maintain written internal real estate lending policies
consistent with safe and sound banking practices and appropriate to the size of
the institution and the nature and scope of its operations. The regulations
establish loan-to-value ratio limitations on real estate loans, which are equal
to or higher than the loan-to-value limitations established by Centennial Bank
and Centennial Mortgage.
DEPOSIT INSURANCE PREMIUMS
The FDIC has adopted regulations establishing a risk-based deposit
insurance premium schedule. In July 1995, Centennial Bank's assigned risk
assessment classification was reduced from $.23 to $.04 per $100 of insured
deposits. Effective January 1, 1996, Centennial Bank's risk assessment
classification was further reduced to $.00, so Centennial Bank paid a minimum
annual payment of $2,000 during 1996. Each of these risk assessment
classifications was the lowest possible classification at the time.
Classifications are reviewed semiannually. In addition, the FDIC has the power
to impose special assessments to cover the cost of borrowings from the U.S.
Treasury, the Federal Financing Bank, and Bank Insurance Fund member banks.
The Deposit Insurance Funds Act of 1996 ("Funds Act") eliminated the
statutorily-imposed minimum assessment amount effective January 1, 1997. The
Funds Act also authorizes assessments on Bank Insurance Fund-assessable deposits
(such as the Centennial Bank deposits) and stipulates that the rate of
assessment must equal one-fifth the Financing Corporation assessment rate that
is applied to deposits assessable by the Savings Association Insurance Fund. The
Financing Corporation assessment rate for Bank Insurance Fund-assessable
deposits is 1.296 basis points. The additional assessment authorized by the
Funds Act increased Bancorp's FDIC insurance assessment expense in 1997 by
$45,000.
<PAGE>
CENTENNIAL MORTGAGE
Centennial Mortgage is, by definition of the Department of Housing and
Urban Development, a nonsupervised lender. Because Centennial Mortgage is a
member of Bancorp's consolidated group, its accounts and activities are reviewed
by the FRB in conjunction with its periodic examinations of Bancorp. Centennial
Mortgage, like Centennial Bank, is indirectly affected by the monetary policies
of the FRB, which may have a material adverse effect on its business and
earnings.
Oregon law requires the licensing of certain persons engaging in
mortgage brokering transactions. Centennial Mortgage is exempt from these
requirements as a wholly owned subsidiary of a regulated bank holding company.
CHANGING REGULATORY STRUCTURE
The laws and regulations affecting banks and bank holding companies are
in a state of flux. The rules and the regulatory agencies in this area have
changed significantly over recent years, and there is reason to expect that
similar changes will occur in the future. It is difficult to predict the outcome
of these changes. The Clinton Administration has announced a program to reduce
the regulatory burden on banks and to streamline and consolidate regulatory
oversight. However, the scope and effect of this program are not yet known. In
addition, substantial revisions to the Oregon Bank Act have been proposed.
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased authority of federal agencies to regulate the activities
of federal and state banks and their holding companies. The FRB, the FDIC and
the Oregon Director have extensive enforcement authority to police unsafe or
unsound practices by depository institutions and their holding companies and to
penalize them for violating applicable laws and regulations. FDICIA and other
laws have expanded the agencies' authority in recent years, and the agencies
have not yet fully tested the limits of their powers.
EFFECT OF ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policies
of the FRB, have a significant effect on the operating results of bank holding
companies and their subsidiaries. Among the means available to the FRB to affect
the money supply are open-market operations in U.S. Government securities,
changes in the discount rate on member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
FRB monetary policies have materially affected the operating results of
commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of Bancorp and its subsidiaries cannot be
predicted.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
Bancorp's main offices are located at 675 Oak Street, Eugene, Oregon,
in a four-floor facility (approximately 35,000 square feet) owned by Centennial
Bank. Construction of the office building was completed in June 1993. Bancorp
and Centennial Bank occupy the lower two floors and the fourth floor of the
building. Centennial Bank has entered into five-year leases with two tenants for
a total of approximately 6,250 square feet of the building's third floor.
Centennial Bank is retaining for future use the remaining approximate 2,500
square feet of available space on the third floor.
In February 1994, Bancorp entered into a long-term ground lease in
Tigard, Oregon, a suburb of Portland, where Centennial Bank has a branch office.
The ground lease has an initial term of 50 years and is renewable for two
additional 10-year periods. Bancorp made lease payments of $6,667 per month in
1997. Construction of a three-story office building was completed in June 1995
at a cost of $2.9 million. Centennial Bank occupies the first floor and part of
the second floor, while Centennial Mortgage occupies the remainder of the second
floor. The third floor of the building was leased to another company effective
January 1996 pursuant to a five-year lease. At December 31, 1997, Centennial
Mortgage was seeking other space to lease to accommodate Centennial Bank's space
needs.
In July 1997, Centennial Bank completed its purchase of a $1.2 million
parcel of land in the Tanasbourne area of Hillsboro, Oregon, a suburb of
Portland. Centennial Bank opened a branch facility in temporary quarters at the
site during construction of the permanent facility, which is projected to cost
$2,2 million. At December 31, 1997, Centennial Bank had expended $316,000 of the
projected building cost. The permanent facility is currently under construction
and is scheduled for completion in July 1998.
Effective January 1, 1997, Centennial Bank entered into a lease for
approximately 3,200 square feet of an existing building in the Lloyd District
area of Portland, Oregon. The lease has an initial term of two years and is
renewable for one additional two-year period. Lease payments of $4,305 per month
began in January 1997.
Centennial Bank owns three other branch facilities and leases one
branch facility with annual lease payments of $75,500 in 1997. In addition,
Centennial Bank also entered into leases for the four limited-service facilities
with total lease payments of $14,250 in 1997, which will total $37,500 in 1998.
Centennial Bank also leases certain storage facilities with annual lease
payments of $10,100 in 1997.
<PAGE>
Centennial Mortgage's offices are located in leased facilities.
Centennial Mortgage's Eugene office is located in a building formerly owned by
Centennial Bank which was sold to a third party in August 1994. Centennial
Mortgage paid lease payments of $74,900 to the new building owner in 1997.
Centennial Mortgage also leases office space for its Portland-area office from
Centennial Bank. Centennial Mortgage entered into a lease during 1997 for its
Sunnyside Road office and paid $5,300 in lease payments during 1997. Mortgage
Co. will pay $32,000 for the Sunnyside Road office lease in 1998.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Periodically, and in the ordinary course of business, various claims
and lawsuits are brought by and against Bancorp, such as claims to enforce
liens, condemnation proceedings on properties in which Bancorp holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to Bancorp's business.
As of the date of this report, Bancorp was not a party to any legal
proceedings it believed to be material other than the following actions:
Galen Ritchie Enterprises, Inc., et al v. Centennial Bank, Case No.
16-96-03603, and Centennial Bank v. Galen Ritchie Enterprises, Inc., et al, Case
No. 16-96-04958. On March 9, 1998, a verdict was rendered in favor of Centennial
Bank in both cases involving Galen Ritchie Enterprises, Inc. ("GRE"), directing
that (I) GRE take nothing on their claim of damages in excess of $2,000,000 on
theories of breach of contract, fraud, rescission and reformation of loan
agreements and (ii) Centennial Bank collect judgment against GRE and individual
guarantors under a promissory note and collateral given thereunder in an amount
exceeding $710,000. As of the date of this report, the judgment is not final and
is subject to appeal.
Centennial Bank v. Laughing Cavalier, Inc., et al., Washington County
Circuit Court Case No. C970863CV. In August 1997, Centennial Bank commenced an
action against the Laughing Cavalier, Inc. on a Promissory Note and seeking
possession and foreclosure of the collateral for the Loan, which consisted of
the business assets of the Laughing Cavalier, a restaurant and bar in Gresham,
Oregon. The loan is subject to a 75% SBA guarantee.
Following repossession of the collateral, those assets were sold at a
net price, including expenses, of $11,524 which was applied to the loan. The
loan is also secured by a second Trust Deed on the personal residence of Stephen
and Nancy Bateman, two of the Guarantors for the Loan. Default Orders were
entered against the Borrower and all other Defendants, except Stephen and Nancy
<PAGE>
Bateman. The Batemans filed an Answer and Counterclaim seeking recovery of
damages against Centennial Bank of $200,000 under theories of breach of implied
covenant of good faith and fair dealing, and misrepresentation by Centennial
Bank. Centennial Bank gave notice of those claims under its Lender Liability
Policy its insurer. Centennial Bank has demanded arbitration of those disputes
pursuant to the Loan agreements, and an order referring those claims to
arbitration has been entered in the case. Centennial Bank has retained legal
counsel. Centennial Bank's insurer is actively involved in the defense of the
Bateman claims, operating under a full reservation of rights.
Given the size and nature of the claims brought by the Batemans,
management of Centennial Bank believes that it is unlikely that Centennial Bank
has any material exposure for uninsured loss on the Bateman claim in excess of
the $40,000 retention payable on its insurance policy, which also applies to
out-of-pocket expenses for attorney fees and defense costs incurred by
Centennial Bank. In addition, any award in favor of the Batemans, either by
settlement or trial, would probably be first offset against the deficiency on
the guarantee liability payable by the Batemans to Centennial Bank.
Employee Claim. On January 9, 1998, Centennial Bank received a letter
from an attorney on behalf of a terminated employee. In that letter, the
employee asserts claims against Centennial Bank and two employees for unjust
enrichment and age discrimination. The indicated damage request with respect to
Centennial Bank is a total of $1,600,000 consisting of $100,000 economic loss,
$500,000 emotional distress and $1,000,000 punitive damages. The claim is under
investigation. Centennial Bank has given notice of the claim to its insurer and
retained legal counsel to defend the claim. No litigation has been filed. A
mediation session has been scheduled for April 28, 1998, the outcome of which is
not expected to have a material effect on the financial position of the Company.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Centennial Bancorp held a special meeting of shareholders on October
29, 1997. At the meeting, a proposal to amend Bancorp's Restated Articles of
Incorporation to increase the number of authorized shares of Common Stock from
10 million to 50 million shares was approved. Out of 7,224,355 shares of Common
Stock entitled to vote at the meeting, 5,825,412 shares of Common Stock were
represented at the meeting, either in person by the holders of such shares or by
proxy. Voting on the proposal was as follows:
For Against Abstain
--- ------- -------
Number of shares 5,467,969 306,226 51,217
<PAGE>
PART II
-------
The information called for by Items 5, 6, 7 and 8 of Part II is
included in Centennial Bancorp's Annual Report to Shareholders for the year
ended December 31, 1997, and is incorporated herein by reference as follows:
Centennial Bancorp
Annual Report
to Shareholders
Page No.
-----------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS 42
----------------------------------
ITEM 6. SELECTED FINANCIAL DATA 4
----------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 30 - 41
-----------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 36 - 40
-----------------------------------
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 6 - 29
-----------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
-----------------------------------
None.
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information called for by this item will be contained in
Centennial Bancorp's definitive proxy statement for the annual
meeting of shareholders to be held on May 20, 1998, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information called for by this item will be contained in
Centennial Bancorp's definitive proxy statement for the annual
meeting of shareholders to be held on May 20, 1998, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information called for by this item will be contained in
Centennial Bancorp's definitive proxy statement for the annual
meeting of shareholders to be held on May 20, 1998, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information called for by this item will be contained in
Centennial Bancorp's definitive proxy statement for the annual
meeting of shareholders to be held on May 20, 1998, and is
incorporated herein by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
--------------------------------------------------------
(a) The following documents are filed as part of this Annual Report on Form
10-K.
(1) Financial Statements.
The financial statements required in this Annual Report are
listed below and are included in Centennial Bancorp's Annual
Report to Shareholders for the year ended December 31, 1997,
and are incorporated herein by reference:
<PAGE>
<TABLE>
<CAPTION>
Annual
Report to
Shareholders
Page Number
-----------
<S> <C>
Report of Independent Accountants 5
Consolidated balance sheets at
December 31, 1997 and 1996 6
For the three years ended December 31, 1997
Consolidated statements of income 7
Consolidated statements of
shareholders' equity 8
Consolidated statements of cash flows 9 - 10
Notes to consolidated financial statements 11 - 29
</TABLE>
(2) Financial Statement Schedules.
All financial statement schedules are omitted since the
required information is not present or not present in amounts
sufficient to require submission of the schedule or because
the information required is included in the consolidated
financial statements or notes thereto.
(3) Exhibits.
3.1 Articles of Incorporation, as restated and amended
(filed as Exhibit 3.1 to registrant's Form 10-Q
Report for the quarter ended June 30, 1990, and
incorporated herein by reference)
3.2 Bylaws, as restated (filed as Exhibit 3.2 to
registrant's Form 10-K Report for the year ended
December 31, 1992, and incorporated herein by
reference)
10.1* Registrant's 1993 Incentive Stock Option Plan,
restated as of April 13, 1994 (filed as Exhibit B to
registrant's Proxy Statement for the 1994 annual
shareholder meeting, filed April 29, 1994, and
incorporated herein by reference)
<PAGE>
10.2* Form of Stock Option Agreement entered into between
registrant and certain employees pursuant to
registrant's 1993 Incentive Stock Option Plan (filed
as Exhibit 10.2 to registrant's Registration
Statement on SB-2, filed March 28, 1994, and
incorporated herein by reference)
10.3* Employment Agreement dated October 1, 1995, between
Richard C. Williams and registrant (filed as Exhibit
10.3 to registrant's Form 10-K for the year ended
December 31, 1995, and incorporated herein by
reference)
10.4* Registrant's Nonemployee Director's Stock Option
Plan (filed as Exhibit 10.2 to registrant's Form
10-K Report for the year ended December 31, 1991,
and incorporated herein by reference)
10.5* Form of Stock Option Agreement entered into between
registrant and certain nonemployee directors
pursuant to registrant's Nonemployee Director's
Stock Option Plan (filed as Exhibit 10.5 to
registrant's Registration Statement on SB-2, filed
March 28, 1994, and incorporated herein by
reference)
10.6* Registrant's 1993 Stock Option Plan for Nonemployee
Directors, restated as of April 13, 1994 (filed as
Exhibit A to registrant's Proxy Statement for the
1994 annual shareholder meeting, filed April 29,
1994, and incorporated herein by reference)
10.7* Form of Stock Option Agreement entered into between
registrant and certain nonemployee directors
pursuant to registrant's 1993 Stock Option Plan for
Nonemployee Directors (filed as Exhibit 10.7 to
registrant's Registration Statement on SB-2, filed
March 28, 1994, and incorporated herein by
reference)
10.8* Deferred Compensation Agreement between Centennial
Bank and Ron R. Peery (filed as Exhibit 10.3 to
registrant's Form 10-Q Report for the quarter ended
June 30, 1989, and incorporated herein by reference)
<PAGE>
10.9* Restated 1995 Stock Incentive Plan
10.10* Nonstatutory (Nonqualified) Stock Option Agreement
dated November 22, 1995, between registrant and
Richard C. Williams (filed as Exhibit 10.10 to
registrant's Form 10-K for the year ended December
31, 1995, and incorporated herein by reference)
10.11 Ground Lease, dated as of February 10, 1994, between
registrant and Pacific Realty Associates, L.P.
(filed as Exhibit 10.10 to registrant's Registration
Statement on SB-2, filed March 28, 1994, and
incorporated herein by reference)
10.12 Advances, Security and Deposit Agreement, dated May
28, 1991, between Centennial Bank and the Federal
Home Loan Bank of Seattle (filed as Exhibit 10.11 to
registrant's Registration Statement on SB-2, filed
March 28, 1994, and incorporated herein by
reference)
10.13* Centennial Bank Deferred Compensation Plan, dated
effective January 1, 1996
10.14* Participation Agreement for use with Centennial Bank
Deferred Compensation Plan
10.15* Form of Incentive Stock Option Agreement entered
into between registrant and certain officers and
employees pursuant to registrant's Restated 1995
Stock Incentive Plan
10.16* Form of Nonstatutory Stock Option Agreement entered
into between registrant and its nonemployee
directors pursuant to registrant's Restated 1995
Stock Incentive Plan
10.17* Employment Agreement dated July 29, 1997 between
Thaddeus (Ted) Winnowski and Centennial Bank (filed
as Exhibit 10.17 to registrant's Form 10-Q Report
for the quarter ended September 30, 1997, and
incorporated herein by reference)
10.18* First Amendment to Employment Agreement dated
December 1, 1997, between Richard C. Williams and
registrant
11.1 Earnings per Share Computation
<PAGE>
13.1 Portions of 1996 Annual Report to Shareholders
(which are incorporated by reference in this Form
10-K Annual Report)
20.1 Portions of definitive proxy statement for 1997
annual shareholder meeting (to be filed with the
Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this
Annual Report)
21.1 Subsidiaries of registrant (filed as Exhibit 21.1 to
registrant's Form 10-K for the year ended December
31, 1995, and incorporated herein by reference)
23.1 Consent of Coopers & Lybrand L.L.P., Independent
Accountants
24.1 Power of Attorney dated March 4, 1998 appointing
Thaddeus (Ted) R. Winnowski and Michael J. Nysingh,
individually, attorneys-in-fact for Richard C.
Williams
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for
September 30, 1997
27.3 Restated Financial Data Schedule for
June 30, 1997
27.4 Restated Financial Data Schedule for
March 31, 1997
27.5 Restated Financial Data Schedule for
December 31, 1996
27.6 Restated Financial Data Schedule for
September 30, 1996
27.7 Restated Financial Data Schedule for
June 30, 1996
27.8 Restated Financial Data Schedule for
March 31, 1996
27.9 Restated Financial Data Schedule for
December 31, 1995
99.1 Safe Harbor for Forward-Looking Statements under
Private Securities Litigation Reform Act of 1995:
Certain Cautionary Statements (filed as Exhibit 99.1
of registrant's Form 10-K Report for the year ended
December 31, 1996, and incorporated herein by
reference)
- ---------------
* Management contract or compensatory plan or arrangement.
Upon written request to Michael J. Nysingh, Chief Financial Officer,
Centennial Bancorp, Post Office Box 1560, Eugene, Oregon, 97440, shareholders
will be furnished a copy of any exhibit, upon payment of $.25 per page, which
represents Centennial Bancorp's reasonable expenses in furnishing the exhibit
requested.
(b) Reports on Form 8-K. Centennial Bancorp did not file any
reports on Form 8-K during the last quarter of the fiscal year
ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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: March 25 , 1998 By Richard C.Williams*
-------------------------
Richard C. Williams,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER AND
DIRECTOR
DATED: March 25 , 1998 By Richard C. Williams*
--------------------------
Richard C. Williams, President,
Chief Executive Officer and Director
CHIEF FINANCIAL OFFICER
DATED: March 25 , 1998 By /s/ Michael J. Nysingh
-------------------------
Michael J. Nysingh
Chief Financial Officer
DIRECTORS:
DATED: March 27 , 1998 By /s/ Dan Giustina
---------------------------
Dan Giustina, Director
DATED: March , 1998 By
---- ---------------------------
Cordy H. Jensen, Director
DATED: March 25 , 1998 By /s/ Robert L. Newburn
-----------------------------
Robert L. Newburn, Director
DATED: March 26 , 1998 By /s/ Brian B. Obie
------------------------------
Brian B. Obie, Director
DATED: March 25, 1998 By /s/ Ted Winnowski
------------------------------
Ted Winnowski, Director
DATED: March 25, 1998 *By /s/ Ted Winnowski
-------------------------------
Ted Winnowski, Attorney-in-fact
for Richard C. Williams
<PAGE>
EXHIBIT INDEX
-------------
Exhibit*
- --------
10.18 First Amendment to Employment Agreement dated December 1, 1997
between Richard C. Williams and the registrant
11.1 Earnings per Share Computation
13.1 Portions of 1997 Annual Report to Shareholders, which are
incorporated by reference in this Form 10-K
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants
24.1 Power of Attorney dated March 4, 1998 appointing Thaddeus (Ted) R.
Winnowski and Michael J. Nysingh, individually, attorneys-in-fact
for Richard C. Williams
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for September 30, 1997
27.3 Restated Financial Data Schedule for June 30, 1997
27.4 Restated Financial Data Schedule for March 31, 1997
27.5 Restated Financial Data Schedule for December 31, 1996
27.6 Restated Financial Data Schedule for September 30, 1996
27.7 Restated Financial Data Schedule for June 30, 1996
27.8 Restated Financial Data Schedule for March 31, 1996
27.9 Restated Financial Data Schedule for December 31, 1995
- ------------------------------------
* See Item 14(a)(3) of this Annual Report for a list of all exhibits, including
those incorporated by reference.
- --------------------------------------------------------------------------------
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
- --------------------------------------------------------------------------------
PARTIES: CENTENNIAL BANCORP ("Company")
RICHARD C. WILLIAMS ("Executive").
EFFECTIVE DATE: December 1, 1997
- --------------------------------------------------------------------------------
This First Amendment is made in respect of the following facts:
A. The parties entered into an Employment Agreement dated
October 1, 1995 (the "Agreement") respecting Executive's
employment by Company for a term ending December 31,
2001.
B. The parties have agreed to amend the Agreement as
provided in and subject to the conditions stated in this
First Amendment.
AGREEMENT:
Section 3.1.3 of the Agreement is amended to provide as follows:
3.1.3 $300,000 for the year beginning December 1, 1997 and
ending November 30, 1998, and amounts approved by
Company's board of directors for periods after
November 30, 1998, but not less than $300,000 for
each 12 months.
The following Sections 7.3 and 7.4 are added to the Agreement:
7.3 UPON OR FOLLOWING CHANGE IN CONTROL. In the event of any Change
in Control (as defined in Section 7.3.3) of Company or Bank,
Company and Executive shall each have the elective right to
terminate the Employment Period, effective at the closing of the
event resulting in the Change in Control.
7.3.1 TERMINATION UPON CHANGE IN CONTROL. If the
Employment Period is so terminated upon a Change in
Control, Company's only obligations to Executive
shall be: (a) to pay a lump-sum cash payment in an
amount equal to two and one-half (2.5) times
Executive's "Final Compensation," being the greater
of: (i) Executive's Base Salary and Cash Bonus for
the most recently ended calendar year, or (ii)
Executive's Base Salary for the current calendar
year; (b) to pay Deferred Compensation; (c) to
provide Post-Retirement Medical Coverage as
<PAGE>
described in Section 6.2; and (d) to provide
Employee Group Benefits until December 31, 2001;
provided, however, Company's obligation to provide
Employee Group Benefits to Executive shall exist
only so long as Executive meets the eligibility
requirements for participation in the insurance,
plans and programs maintained or provided by Company
for its employees or executive officers generally.
Company shall be obligated to use its best efforts
to maintain Executive's eligibility to participate
in such insurance, plans and programs.
7.3.2 TERMINATION FOLLOWING A CHANGE IN CONTROL. If the
Employment Period is not so terminated upon a Change
in Control, then any subsequent termination of the
Employment Period shall be governed by the other
provisions of this Agreement; provided, however, if
the Employment Period continues after a Change in
Control, and if the Employment Period is
subsequently terminated other than by reason of
Executive's death or disability (by either Company
or Executive, with or without cause or good reason)
within 36 months after the Change in Control and
before December 31, 2001, then Company shall pay to
Executive a lump-sum cash payment in an amount equal
to two and one-half (2.5) times Executive's Final
Compensation, and shall pay or provide the other
amounts and benefits described in subsections (b),
(c), and (d) of Section 7.3.1.
7.3.3 DEFINITION OF "CHANGE IN CONTROL". For purposes of
this Agreement, "Change in Control" shall occur if
during the Employment Period:
(a) Any individual, entity or group, within the
meaning of Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than Company or Bank, any
trustee or other fiduciary holding securities
under an employee benefit plan of Company or
Bank, or any corporation owned, directly or
indirectly, by the stockholders of Company or
Bank in substantially the same proportions as
their ownership of stock of Company or Bank), is
or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or
indirectly, or securities representing thirty
percent (30%) or more of the combined voting
power of Company's or Bank's then outstanding
voting securities; or
(b) Company or Bank effects a merger,
consolidation, share exchange or other corporate
reorganization of Company or Bank with any other
corporation, other than (i) a merger,
consolidation, share exchange or other corporate
reorganization which would result in the voting
securities of Company or Bank outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the surviving
entity) more than seventy percent (70%) of the
combined voting power of the voting securities of
Company or Bank or such surviving entity
outstanding immediately after such merger,
consolidation, share exchange or other corporate
reorganization, or (ii) a merger, consolidation,
share exchange or other corporate reorganization
effected to implement a recapitalization of
Company or Bank (or similar transaction) in which
no individual, entity or group acquires more than
thirty percent (30%) of the combined voting power
of Company's or Bank's then outstanding voting
securities; or
<PAGE>
(c) Company or Bank effects complete liquidation
of Company or Bank or the sale or disposition of
all or substantially all of Company's or Bank's
assets.
7.3.4 LIMITATIONS ON CHANGE IN CONTROL PAYMENTS. In the
event that any payment or benefit to be received by
Executive in connection with a Change in Control of
Company or Bank, whether payable pursuant to the
terms of this Agreement or any other plan,
arrangement or agreement with Company, would not be
deductible (in whole or in part) as a result of
Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), the payment under Section
7.3.1 shall be reduced until Section 280G of the
Code does not limit the deductibility of the
payment. If the payment under Section 7.3.1 is
completely eliminated on account of the preceding
sentence, no other payments or benefits shall be
reduced, even if such payments or benefits are
non-deductible as a result of Section 280G. For this
purpose, (1) no payment or benefit, which Executive
has effectively waived in writing prior to the date
of payment, shall be taken into account; (2) no
portion of any payment or benefit which, in the
opinion of tax counsel selected by Company's
independent auditors and acceptable to Executive,
does not constitute a "parachute payment" within the
meaning of Section 280G(b)(2) of the Code shall be
taken into account; (3) the payment under Section
7.3.1 shall be reduced only to the extent necessary
so that such payment, together with all other
compensation paid by Company to Executive,
represents reasonable compensation for services
actually rendered within the meaning of Section
280G(b)(4) of the Code, in the opinion of such tax
counsel; and (4) the value of any non-cash benefit
or any deferred payment or benefit shall be
determined by Company's independent auditors in
accordance with the principles of Section 280G(d)(3)
and (4) of the Code.
Section 9.4.3 of the Agreement is entirely deleted, and shall be of no further
effect.
EFFECT OF AMENDMENT
Except as expressly modified by this First Amendment, all terms, conditions, and
provisions of the Agreement, and all rights and obligations of the parties
thereunder, shall continue in full force and effect.
<PAGE>
LEGAL COUNSEL AND EXPENSES
The parties acknowledge and agree that: (a) the law firm of Gleaves Swearingen
Larsen Potter Scott & Smith LLP ("GSLPSS") has acted as legal counsel to
Company, Bank, and Executive, respectively, on various matters in the past; (b)
GSLPSS represents Executive only, and not Company or Bank, in connection with
this First Amendment; (c) neither Company nor Bank has sought or relied on any
advice from GSLPSS in connection with the Agreement or this First Amendment; (d)
prior to executing this First Amendment, Company and Bank have obtained and
relied upon review by, and advice from their general legal counsel, Tonkon Torp
Galen Marmaduke & Booth, concerning Company's and Bank's rights and obligations
under the Agreement as modified by this First Amendment. Company shall reimburse
Executive the amount of legal fees incurred by Executive in having this First
Amendment prepared by GSLPSS.
NOTICES TO EXECUTIVE
Section 17 of the Agreement is amended to provide that, until changed in the
manner provided in the Agreement, Executive's address for receiving any notice
under the Agreement shall be: Richard C. Williams, 3336 Bardell Avenue, Eugene,
Oregon 97401.
EXECUTION
The parties have executed this First Amendment to be effective at the date
appearing in the caption on page 1.
COMPANY EXECUTIVE
CENTENNIAL BANCORP
By /s/ Cordy H. Jensen /s/ Richard C. Williams
- -------------------------- ----------------------------
Cordy H. Jensen Richard C. Williams
Director and Secretary
<TABLE>
<CAPTION>
EXHIBIT 11.1
CENTENNIAL BANCORP
COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31,
---------------------------------------------
1997 1996 1995
---------- --------- -----------
<S> <C> <C> <C>
Reconciliation of Income
Net income - basic $9,303,363 $6,514,288 $4,551,318
Income impact of assumed conversion of
Convertible Debentures, net of taxes -- 363,358 430,643
---------- ---------- ----------
Income available to common
shareholders - diluted $9,303,363 $6,877,646 $4,981,961
========== ========== ==========
Reconciliation of Basic and Diluted Shares
Weighted average shares outstanding 14,433,906 12,423,451 11,447,440
Incremental shares from stock options
issued 647,324 489,933 513,110
Incremental shares from assumed
conversion of Convertible Debentures -- 1,831,029 2,494,898
---------- --------- ----------
Weighted average shares outstanding -
diluted 15,081,230 14,744,413 14,455,448
========== ========== ==========
</TABLE>
Centennial Bancorp ("Bancorp") is a bank holding company, which provides
commercial and consumer banking services through its subsidiary Centennial Bank,
and residential mortgage brokering services through its subsidiary Centennial
Mortgage Co.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Bancorp (in thousands
of dollars, except per share amounts). All share and per share information has
been restated to give retroactive effect to a stock split declared in January
1998, and for various stock splits and stock dividends declared in prior years.
Bancorp has never declared or paid cash dividends to shareholders.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 40,104 $ 32,058 $ 25,274 $ 19,474 $ 14,849
Interest expense 13,566 11,368 9,004 5,172 4,102
-------- -------- -------- -------- --------
Net interest income 26,538 20,690 16,270 14,302 10,747
Loan loss provision 1,250 735 350 316 310
Net income 9,303 6,514 4,551 3,502 2,763
Total assets 492,573 407,186 317,464 257,326 220,760
Total deposits 419,282 339,955 267,880 216,320 192,112
Short-term borrowings 7,716 12,316 11,419 11,840 300
Long-term debt 10,000 10,000 9,200 9,200 6,989
Shareholders' equity 51,810 41,346 26,390 19,205 17,420
Earnings per common share:
Basic $ .64 $ .52 $ .40 $ .31 $ .27
Diluted .62 .47 .34 .28 .23
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ----------------------------------
The Board of Directors and Shareholders of
Centennial Bancorp:
We have audited the accompanying consolidated balance sheets of Centennial
Bancorp and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Centennial Bancorp
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Eugene, Oregon
January 22, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, 1997 1996
------------- ------------
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and due from banks $ 26,269,239 $ 26,827,505
Federal funds sold 23,800,000 11,570,000
------------ ------------
Total cash and cash equivalents 50,069,239 38,397,505
Securities available-for-sale 83,904,253 82,654,422
Loans held for sale 5,584,947 3,537,996
Loans receivable, net 331,691,399 262,491,991
Federal Home Loan Bank stock 4,711,100 4,365,800
Premises and equipment, net 10,486,892 9,346,825
Other assets 6,125,581 6,391,065
------------ ------------
Total assets $492,573,411 $407,185,604
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand $ 97,262,856 $ 74,350,639
Interest-bearing demand 173,583,239 130,659,749
Savings 13,751,676 13,746,547
Time 134,684,313 121,198,310
------------ ------------
Total deposits 419,282,084 339,955,245
Short-term borrowings 7,715,783 12,315,583
Accrued interest and other liabilities 3,765,386 3,568,917
Long-term debt 10,000,000 10,000,000
------------ ------------
Total liabilities 440,763,253 365,839,745
------------ ------------
Commitments and contingencies (Note 10)
Shareholders' Equity:
Preferred stock -- --
Common stock, 14,515,676 and 6,535,447
issued and outstanding in 1997 and 1996,
respectively 29,031,352 13,070,894
Additional paid-in capital -- 11,137,171
Retained earnings 22,082,696 17,171,984
Unrealized gains (losses) on securities
available-for-sale, net 696,110 (34,190)
------------ ------------
Total shareholders' equity 51,810,158 41,345,859
------------ ------------
Total liabilities and shareholders' equity $492,573,411 $407,185,604
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans, including fees $34,329,126 $26,298,655 $20,908,425
Securities:
Taxable 2,445,547 2,894,436 2,403,376
Exempt from Federal income taxes 2,034,551 1,838,858 1,037,272
Dividends on FHLB stock 345,538 325,593 255,704
Deposits with banks 376,499 578,948 352,229
Federal funds sold 572,789 121,804 317,162
----------- ----------- -----------
Total interest income 40,104,050 32,058,294 25,274,168
----------- ----------- -----------
Interest expense:
Deposits:
Savings and interest-bearing demand 5,155,632 4,440,175 3,352,248
Time 7,298,741 5,207,755 4,145,754
Long-term debt 572,673 832,666 644,970
Short-term borrowings 538,947 887,641 861,484
----------- ----------- -----------
Total interest expense 13,565,993 11,368,237 9,004,456
----------- ----------- -----------
Net interest income 26,538,057 20,690,057 16,269,712
Loan loss provision 1,250,000 735,000 350,000
----------- ----------- -----------
Net interest income after loan
loss provision 25,288,057 19,955,057 15,919,712
----------- ----------- -----------
Noninterest income:
Service charges 1,065,267 959,333 904,813
Loan servicing fees 77,814 89,444 329,712
Other 975,269 417,678 572,929
Net gains on sale of loans 908,068 623,240 404,027
Net gains on sale of securities 168,716 6,595 65,895
----------- ----------- -----------
Total noninterest income 3,195,134 2,096,290 2,277,376
----------- ----------- -----------
Noninterest expense 14,851,028 12,400,159 11,503,970
----------- ----------- -----------
Income before income taxes 13,632,163 9,651,188 6,693,118
Provision for income taxes 4,328,800 3,136,900 2,141,800
----------- ----------- -----------
Net income $ 9,303,363 $ 6,514,288 $ 4,551,318
=========== =========== ===========
Earnings per share of common stock:
Basic $ .64 $ .52 $ .40
=========== =========== ===========
Diluted $ .62 $ .47 $ .34
=========== =========== ===========
Weighted average common shares outstanding:
Basic 14,433,906 12,423,451 11,447,440
Diluted 15,081,230 14,744,413 14,455,448
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Additional Gains Total
Number Paid-in Retained (Losses) on Shareholders'
of Shares Amount Capital Earnings Securities Equity
--------- ------ ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 3,974,225 $ 7,948,450 $ 7,067,963 $ 6,106,378 $(1,917,460) $19,205,331
Stock split (5%) 200,950 401,900 (401,900) -- -- --
Stock options exercised 53,125 106,250 (19,333) -- -- 86,917
Tax benefit of stock options
exercised -- -- 28,334 -- -- 28,334
Stock split (10%) 422,830 845,660 (845,660) -- -- --
Change in net unrealized loss -- -- -- -- 2,518,160 2,518,160
Net income -- -- -- 4,551,318 -- 4,551,318
--------- ----------- ----------- ---------- --------- -----------
Balances, December 31, 1995 4,651,130 9,302,260 5,829,404 10,657,696 600,700 26,390,060
Stock split (5%) 249,087 498,174 (498,174) -- -- --
Stock options exercised 118,568 237,136 109,261 -- -- 346,397
Tax benefit of stock options
exercised -- -- 229,743 -- -- 229,743
Conversion of convertible
debentures 922,531 1,845,062 6,655,199 -- -- 8,500,261
Stock split (10%) 594,131 1,188,262 (1,188,262) -- -- --
Change in net unrealized gain -- -- -- -- (634,890) (634,890)
Net income -- -- -- 6,514,288 -- 6,514,288
--------- ----------- ----------- ---------- ---------- -----------
Balances, December 31, 1996 6,535,447 13,070,894 11,137,171 17,171,984 (34,190) 41,345,859
Stock split (10%) 655,664 1,311,328 (1,311,328) -- -- --
Stock options exercised 66,727 133,454 267,490 -- -- 400,944
Tax benefit of stock options
exercised -- -- 29,692 -- -- 29,692
Stock split (100%) 7,257,838 14,515,676 (10,123,025) (4,392,651) -- --
Change in net unrealized loss -- -- -- -- 730,300 730,300
Net income -- -- -- 9,303,363 -- 9,303,363
--------- ----------- ----------- ----------- ---------- -----------
Balances, December 31, 1997 14,515,676 $29,031,352 $ -- $22,082,696 $ 696,110 $51,810,158
========== =========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,303,363 $ 6,514,288 $ 4,551,318
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net gain on sales of
securities and loans (1,076,784) (629,835) (469,922)
Stock dividends on FHLB stock (345,300) (325,400) (255,704)
Loan loss provision 1,250,000 735,000 350,000
Loans charged off, net 500,739 63,719 121,758
Deferred income taxes (113,702) (310,024) (41,473)
Depreciation and amortization 1,329,421 1,167,936 978,755
Originations of loans for sale (111,645,075) (67,258,899) (30,160,973)
Proceeds from sale of loans 110,506,192 68,853,519 27,744,875
Changes in assets and liabilities:
Accrued interest receivable (309,233) (772,870) (709,087)
Other assets 611,393 (557,129) (220,380)
Other liabilities (230,165) 1,454,091 1,771,352
------------ ----------- -----------
Net cash provided by
operating activities 9,780,849 8,934,396 3,660,519
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Maturities 8,009,362 4,968,520 10,405,612
Purchases (28,385,904) (22,037,443) (30,410,092)
Proceeds from sales 20,463,409 6,302,328 6,165,340
Net increase in loans (70,950,147) (78,638,171) (26,502,882)
Purchases of premises and equipment (2,373,818) (1,165,309) (3,387,116)
Sales of premises and equipment -- 30,915 49,985
Sale of Harding Fletcher Co. -- -- 155,131
----------- ----------- -----------
Net cash used in
investing activities (73,237,098) (90,539,160) (43,524,022)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 79,326,839 72,074,953 51,560,492
Net change in short-term borrowings (4,599,800) 896,460 (420,485)
Proceeds from long-term debt -- 10,000,000 --
Payments on long-term debt -- (37,000) --
Proceeds from exercise of stock options 400,944 346,397 86,917
----------- ----------- -----------
Net cash provided by financing
activities 75,127,983 83,280,810 51,226,924
----------- ----------- -----------
Net increase in cash and
cash equivalents 11,671,734 1,676,046 11,363,421
Cash and cash equivalents at
beginning of year 38,397,505 36,721,459 25,358,038
----------- ----------- -----------
Cash and cash equivalents at end of year $50,069,239 $38,397,505 $36,721,459
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Disclosures of Cash Flow Information:
<S> <C> <C> <C>
Noncash investing and financing activities:
Conversion of debentures to
common stock $ -- $ 9,163,000 $ --
Net costs attributable to
debentures converted -- (662,301) --
Cash paid in lieu of issuance of
fractional shares -- (438) --
Sale of Harding Fletcher Co.:
Cash received at closing $ -- $ -- $ 150,000
Proration of expenses -- -- 5,131
Change in net unrealized gains (losses)
on securities available-for-sale,
net of income taxes $ 730,300 $ (634,890) $ 2,518,160
Cash paid during the year for:
Interest on deposits and
other borrowings $13,423,000 $11,316,000 $8,708,000
Income taxes 4,414,000 3,413,000 1,565,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- -- ------------------------------------------
Consolidation
- -------------
The consolidated financial statements include the accounts of Centennial Bancorp
("Bancorp"), a bank holding company, and its wholly-owned subsidiaries,
Centennial Bank (the "Bank") and Centennial Mortgage Co. ("Centennial
Mortgage"). The Bank provides commercial financing, banking and other services,
and Centennial Mortgage provides residential mortgage brokering services. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Basis of Presentation
- ---------------------
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and prevailing practices within the
banking industry. In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet, and revenues and
expenses for the period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from or deposited with banks, interest-bearing balances due
from banks, and federal funds sold. Generally, federal funds are sold for
one-day periods.
Bancorp is required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve balance in the form of cash. Bancorp's
required reserve balance at December 31, 1997 was approximately $9,543,000,
which was met by holding approximately $2,351,000 in the form of cash and by
depositing approximately $7,192,000 with the Federal Reserve Bank.
Securities Available For Sale
- -----------------------------
Securities available-for-sale are held for indefinite periods of time and may be
sold in response to movements in market interest rates, changes in the maturity
mix of bank assets and liabilities or demand on liquidity. Bancorp has
classified all investment securities as available-for-sale, which are stated at
fair value. Unrealized gains and losses on these securities are excluded from
earnings and are reported as a separate component of shareholders' equity, net
of related taxes.
Interest income on debt securities is included in income using the level yield
method. Gains and losses on sales of securities are recognized on a specific
identification basis.
Loans Held For Sale
- -------------------
Centennial Mortgage's activities include origination of conventional and
federally insured residential mortgage loans for resale in the secondary market.
Mortgage loans are sold without recourse.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized by charges to income through a valuation
allowance.
<PAGE>
Loans Receivable
- ----------------
Loans receivable are reported at their outstanding principal less the allowance
for loan losses and deferred loan fees.
Loan origination fees, net of origination costs, are deferred and recognized as
a component of interest income.
The accrual of interest on impaired loans is discontinued when repayment of
principal and interest is doubtful. When interest accrual is discontinued, all
unpaid accrued interest is reversed and interest income is recognized as cash
payments are received.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. As a result of changing conditions,
such as greater than anticipated growth in Bancorp's loans receivable, it is
possible that the allowance for loan losses could change in the near term.
Federal Home Loan Bank Stock
- ----------------------------
The Bank's investment in Federal Home Loan Bank ("FHLB") stock is carried at par
value, which reasonably approximates fair value. As a member of the FHLB system,
Bancorp maintains a minimum level of investment in FHLB stock based on specific
percentages of its outstanding mortgages, total assets or FHLB advances. At
December 31, 1997, Bancorp's minimum required investment was $1,471,700. Request
for stock redemptions of any investment in excess of the minimum level are at
the discretion of the FHLB.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of the assets. Estimated useful lives are 30 to 40 years
for buildings, 3 to 10 years for furniture and equipment, and up to the lease
term for leasehold improvements.
Goodwill
- --------
Goodwill is the excess of the cost over fair value of net assets acquired in
business combinations. It is amortized on the straight-line method over 20
years. When factors indicate goodwill should be evaluated for possible
impairment, Bancorp uses an estimate of the undiscounted cash flow of the
related business over the remaining life of the goodwill in measuring whether
the carrying amount of goodwill is impaired.
Earnings per Common Share
- -------------------------
In 1997, Bancorp adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," which establishes a new standard for computing
and presenting earnings per share.
SFAS No. 128 requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding for the period. SFAS No. 128 also
requires a reconciliation of basic and fully-diluted earnings per share (see
Note 16). Prior period earnings-per-share data has been restated in accordance
with SFAS No. 128.
The weighted average number of common shares outstanding reflects the effect of
stock splits and stock dividends.
<PAGE>
Financial Accounting Standards Board
- ------------------------------------
The Financial Accounting Standards Board ("FASB") has issued several accounting
pronouncements which Bancorp has recently adopted or will be required to adopt
in future fiscal reporting periods.
SFAS NO. 125
Bancorp adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," on January 1, 1997 with no
material impact on its financial statements.
SFAS NO. 129
In 1997, Bancorp adopted SFAS No. 129, "Disclosures of Information about Capital
Structure," which had no material impact on its financial statements.
SFAS NO. 130
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes requirements for disclosure of comprehensive income and
becomes effective for Bancorp for the year ending December 31, 1998.
Comprehensive income includes such items as foreign currency translation
adjustments and unrealized gains and losses on securities available-for-sale
that are currently being included as a component of shareholders' equity.
Bancorp does not expect this pronouncement to materially affect its financial
statements.
SFAS NO. 131
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires information about key
revenue-producing segments of an entity. A reconciliation of segment financial
information to amounts reported in the financial statements will be required.
SFAS No. 131 is effective for Bancorp in 1998 and it has not been determined if
additional disclosure is required.
Reclassifications
- -----------------
Certain amounts for 1996 and 1995 have been reclassified to conform with the
1997 presentation in the consolidated financial statements. Net income was not
affected by these reclassifications.
<PAGE>
2. Securities Available-for-Sale
- --------------------------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury securities $ 1,400,117 $ 19,156 $ 1,806 $ 1,417,467
U.S. Government agencies 34,376,690 81,319 43,414 34,414,595
States and
subdivisions 38,293,630 1,145,056 4,590 39,434,096
Corporate bonds 2,324,578 3,463 27,353 2,300,688
Mortgage-backed securities 6,386,493 92 49,179 6,337,406
----------- ---------- ---------- -----------
Total $82,781,508 $1,249,086 $ 126,342 $83,904,253
=========== ========== ========== ===========
December 31, 1996:
U.S. Treasury securities $ 1,399,011 $ 19,068 $ 13,098 $ 1,404,981
U.S. Government agencies 32,841,843 48,510 296,620 32,593,733
States and political
subdivisions 38,730,588 736,885 332,135 39,135,338
Corporate bonds 2,343,083 -- 93,930 2,249,153
Mortgage-backed securities 7,395,017 759 124,559 7,271,217
----------- ---------- ---------- -----------
Total $82,709,542 $ 805,222 $ 860,342 $82,654,422
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Amortized Approximate
Contractual maturities at December 31, 1997 Cost Fair Value
---------- ----------
<S> <C> <C>
Due in 1 year or less $ 1,011,942 $ 1,009,161
Due after 1 through 5 years 22,662,352 22,822,740
Due after 5 through 10 years 35,860,617 36,221,637
Due after 10 years 23,246,597 23,850,715
----------- -----------
Total $82,781,508 $83,904,253
=========== ===========
</TABLE>
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
At December 31, 1997, securities with a fair value of approximately $13,538,000
were pledged to collateralize public deposits, and securities with a fair value
of approximately $5,586,000 were pledged to collateralize short-term borrowings.
Proceeds from sales of investment securities and gross realized gains and losses
on those sales were as follows:
<TABLE>
<CAPTION>
Proceeds
from Gross Gross Net Gains
Sales of Realized Realized on Sales of
Securities Gains Losses Securities
---------- ----- ------ ----------
<S> <C> <C> <C> <C>
1997 $20,463,409 $191,291 $(22,575) $168,716
1996 6,302,328 23,100 (16,505) 6,595
1995 6,165,340 78,348 (12,453) 65,895
</TABLE>
<PAGE>
3. Loans Receivable, Net
- ------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
-----------------------------------
<S> <C> <C>
Real estate--mortgage $ 87,631,611 $ 70,126,798
Real estate--construction 89,119,688 66,243,687
Commercial 147,052,433 116,815,814
Installment loans to individuals 6,602,690 6,425,215
Lease financing 3,648,728 3,774,748
Other 1,994,689 2,634,659
------------ ------------
336,049,839 266,020,921
Allowance for loan losses (3,348,914) (2,599,653)
Less deferred loan fees (1,009,526) (929,277)
------------ ------------
$331,691,399 $262,491,991
============ ============
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $2,599,653 $1,928,372 $1,700,130
Provision for losses 1,250,000 735,000 350,000
Recoveries 57,210 46,060 40,133
Loans charged off (557,949) (109,779) (161,891)
---------- ---------- ----------
Balance at end of year $3,348,914 $2,599,653 $1,928,372
========== ========== ==========
</TABLE>
At December 31, 1997 and 1996, two loans required a specific valuation allowance
in accordance with SFAS No. 114, as amended by SFAS No. 118. The specific
valuation allowance is $150,000 on loans with remaining principal outstanding of
$718,000 at December 31, 1997 ($300,000 and $1,100,000, respectively, at
December 31, 1996). Each loan with a current principal outstanding of less than
$100,000 is grouped into one homogenous pool when considering the valuation
allowance. No specific valuation allowance was deemed necessary for loans in
this group of smaller loans.
Loans on nonaccrual status at December 31, 1997 were approximately $873,000
($1,480,000 at December 31, 1996). Interest income which would have been
realized on nonaccrual loans if they had remained current was approximately
$102,600, $117,500 and $74,000 during 1997, 1996 and 1995, respectively. Loans
contractually past due 90 days or more on which Bancorp continued to accrue
interest at December 31, 1997 were approximately $402,000 ($420,000 at December
31, 1996).
Bancorp is located and conducts substantially all of its business within Lane
County, Oregon, and the greater Portland metropolitan area. Bancorp's credit
policies require an evaluation of each borrower's creditworthiness on a
case-by-case basis. Collateral consists of real and personal property. At the
discretion of management, personal guarantees of the borrower may be obtained in
addition to the collateral. The ultimate collectibility of a substantial portion
of Bancorp's loan portfolio is susceptible to adverse changes in local market
conditions. The loan portfolio is diversified among industry groups and does not
contain a direct concentration of loans to a single industry which exceeds 10%
of the portfolio. It is management's opinion that the allowance for loan losses
is adequate to absorb known and inherent risks in the loan portfolio. However,
actual results may differ from estimates in the near term.
<PAGE>
4. Premises and Equipment
- -------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
----------------------------------
<S> <C> <C>
Land $ 1,769,388 $ 594,388
Buildings and improvements 8,588,219 8,142,570
Furniture and equipment 5,869,773 5,124,224
----------- -----------
16,227,380 13,861,182
Less accumulated depreciation and amortization (5,740,488) (4,514,357)
----------- -----------
Net premises and equipment $10,486,892 $ 9,346,825
=========== ===========
</TABLE>
5. Other Assets
- ---------------
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
Accrued interest receivable $3,618,596 $3,309,363
Goodwill, net 368,042 453,830
Deferred tax asset 274,038 607,900
Other 1,864,905 2,019,972
---------- ----------
$6,125,581 $6,391,065
========== ==========
</TABLE>
6. Deposits
- -----------
At December 31, the scheduled maturities and weighted average cost of time
deposits with a minimum denomination of $100,000 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- ---------------------------
Weighted Weighted
Average Average
Balance Cost Balance Cost
------- ---- ------- ----
<S> <C> <C> <C> <C>
Less than 3 months $20,937,279 5.48% $17,450,681 5.40%
Over 3 months but less than 1 year 28,144,585 5.81 28,220,184 5.86
Over 1 year but less than 5 years 4,686,196 6.27 3,026,905 6.36
More than 5 years 117,997 5.95 111,371 5.95
----------- -----------
$53,886,057 5.72 $48,809,141 5.73
=========== ===========
</TABLE>
7. Short-term Borrowings
- ------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
----------------------------------
<S> <C> <C>
Advances from FHLB, collateralized by FHLB
stock, funds on deposit with the FHLB,
investments and loans; interest at 5.79% $ -- $ 8,000,000
Securities sold under agreement to repurchase 7,715,783 4,315,583
----------- -----------
$ 7,715,783 $12,315,583
=========== ===========
</TABLE>
<PAGE>
Bancorp had available a credit facility from the FHLB in the amount of
$21,443,250 at December 31, 1997 ($39,512,800 at December 31, 1996) at
prevailing market interest rates. In addition, Bancorp maintains federal funds
lines with correspondent banks as a backup source of liquidity. At December 31,
1997 and 1996, Bancorp had $24,000,000 of federal funds lines available to draw
against on an uncollateralized basis.
Securities sold under agreement to repurchase are due on demand, but generally
range in duration from one to eighty-nine days. The interest payable on such
borrowings was 5.03% and 5.75% at December 31, 1997 and 1996, respectively.
8. Long-term Debt
- -----------------
At December 31, 1997 and 1996, Bancorp's long-term debt consisted of a
$10,000,000 Bank advance from FHLB maturing August 6, 1998, with monthly
interest payments at 6.14%, collateralized by FHLB stock, funds on deposit with
the FHLB, investments and loans.
During 1996, Bancorp's long-term debt also consisted of $9,200,000 of 7.0%
Convertible Debentures. Bancorp issued a call for redemption on December 23,
1996 of the Debentures. Holders of the Debentures voluntarily converted
$9,163,000 of the Debentures into shares of Bancorp's common stock. Bancorp
redeemed the remaining $37,000 of the Debentures for cash.
9. Financial Instruments
- ------------------------
In the ordinary course of business, Bancorp enters into various transactions
which include commitments to extend credit and standby letters of credit that
are not included in the accompanying balance sheets. Bancorp applies the same
credit standards to these commitments as it uses in all its lending processes
and includes these commitments in its lending risk evaluations. Bancorp has no
commitments to extend credit at below-market interest rates.
Commitments to extend credit at December 31 were as follows:
1997 1996
------------ -----------
Commitments to extend credit $151,591,000 $84,263,000
Standby letters of credit 4,048,000 3,111,000
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates but may be terminated by Bancorp if certain conditions of the contract are
violated. Although subject to drawdown, many of these commitments are expected
to expire or terminate without funding. Therefore, the total commitment amounts
do not necessarily represent future cash requirements. Collateral relating to
these commitments varies, but may include cash, securities and real estate.
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Credit risk arises in
these transactions from the possibility that a customer may not be able to repay
Bancorp upon default of performance. Collateral for standby letters of credit is
based on an individual evaluation of each customer's creditworthiness, but may
include cash, securities and real estate.
<PAGE>
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 50,069,000 $ 50,069,000 $ 38,398,000 $ 38,398,000
Available-for-sale
securities 83,904,000 83,904,000 82,654,000 82,654,000
Loans and loans held
for sale 340,625,000 356,811,000 268,630,000 269,696,000
FHLB stock 4,711,000 4,711,000 4,366,000 4,366,000
Financial liabilities:
Deposits $419,282,000 $419,365,000 $339,955,000 $340,856,000
Short-term borrowings 7,716,000 7,716,000 12,316,000 12,316,000
Long-term debt 10,000,000 10,000,000 10,000,000 10,000,000
</TABLE>
Fair Value of Financial Instruments
- -----------------------------------
The following methods and assumptions were used by management to estimate the
fair value of each class of financial instrument for which it is practicable to
estimate that value. The resulting estimates of fair value require subjective
judgments and are approximate. Changes in the following methodologies and
assumptions could significantly affect the estimates:
CASH AND CASH EQUIVALENTS. The carrying amount is a reasonable estimate of fair
value.
SECURITIES AVAILABLE-FOR-SALE. The fair value is based on quoted market prices.
LOANS HELD FOR SALE. The fair value represents the anticipated proceeds from
sale of the loans.
LOANS RECEIVABLE. The fair value of fixed-rate loans is estimated by discounting
the future cash flows using the current rates for similar loans. Variable rate
loans have carrying amounts which are a reasonable estimate of fair value.
FEDERAL HOME LOAN BANK STOCK. The fair value approximates cost due to the
limited market for the asset.
DEPOSITS. The fair value of time deposits is estimated using the interest rates
currently offered for similar deposits. The fair value of other deposits is the
carrying amount which is payable on demand.
SHORT-TERM BORROWINGS. The carrying amount is a reasonable estimate of fair
value.
LONG-TERM DEBT. Fair value is based on quoted market prices or estimated by
discounting the future cash outflows using current rates for similar debt.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. Commitments to extend credit and
letters of credit are the principal off-balance-sheet financial instruments. The
fair value of these commitments, based on fees currently charged for similar
commitments, is not material.
<PAGE>
10. Commitments and Contingencies
- --- -----------------------------
Leases:
Bancorp leases certain land and facilities under noncancelable operating leases,
generally for terms of 5 to 50 years with renewal options. Rent expense for
these and other operating leases was approximately $343,000, $292,900 and
$393,600 in 1997, 1996 and 1995, respectively. Future minimum lease payments
under these noncancelable operating leases as of December 31, 1997 are as
follows:
1998 $ 360,200
1999 281,900
2000 223,600
2001 203,900
2002 157,200
Later years 5,667,200
----------
Total minimum lease payments $6,894,000
==========
Legal Matters:
In the ordinary course of business, litigation arises from normal banking
activities, the ultimate outcome of which, in the opinion of management, will
not have a material adverse effect on Bancorp's consolidated financial position,
results of operations or cash flows.
11. Noninterest Expense
- --- -------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Salaries and employee benefits $ 9,552,513 $ 7,688,182 $ 6,457,661
Premises and equipment 2,049,771 1,825,632 1,643,309
Data processing 251,077 171,691 166,328
Legal and professional 742,165 571,907 550,756
Insurance 67,874 64,840 324,086
Communications 333,640 288,763 295,408
Advertising 489,315 486,313 353,430
Printing and stationery 415,173 315,399 291,111
Write-down of assets to net
realizable value -- -- 275,000
Other 949,500 987,432 1,146,881
----------- ----------- ----------
Total noninterest expense $14,851,028 $12,400,159 $11,503,970
=========== =========== ===========
</TABLE>
<PAGE>
12. Income Taxes
- --- ------------
The provision for income taxes was comprised of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
Currently payable:
Federal $3,903,417 $2,756,513 $1,963,173
State 539,085 690,411 220,100
Deferred (benefit) (113,702) (310,024) (41,473)
---------- ---------- ----------
$4,328,800 $3,136,900 $2,141,800
========== ========== ==========
</TABLE>
The effective tax rate of the provision for income taxes varies from the federal
income tax statutory rate for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Expected federal income tax provision
at 34% $4,634,935 $3,281,407 $2,275,700
State income tax, net of federal
income tax effect 342,880 420,406 291,600
Tax exempt interest income (679,305) (609,604) (343,400)
Other, net 30,290 44,691 (82,100)
---------- ---------- ----------
$4,328,800 $3,136,900 $2,141,800
========== ========== ==========
</TABLE>
Deferred tax assets and liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
Nonqualified benefit plans $ 528,434 $ 474,628
Allowance for loan losses 919,243 631,826
Net unrealized losses on securities
available-for-sale -- 20,930
Leases 86,132 68,298
Other, net 37,338 64,878
----------- ----------
Total deferred tax assets 1,571,147 1,260,560
Deferred tax liabilities:
Loan servicing rights 119,692 --
FHLB stock 552,307 419,758
Excess tax over book depreciation 57,899 60,946
Purchased companies 28,256 31,179
Deferred loan expense 12,686 67,128
Net unrealized gains on securities
available-for-sale 426,634 --
Other, net 99,635 73,649
----------- ----------
Total deferred tax liabilities 1,297,109 652,660
----------- ----------
Net deferred tax asset $ 274,038 $ 607,900
============ ==========
Bancorp's provision for income taxes for 1997, 1996 and 1995 included $57,400, $2,200 and $21,600, respectively, related
to gains on sales of investment securities.
</TABLE>
<PAGE>
13. Transactions with Related Parties
- --- ---------------------------------
Activity with respect to loans receivable from directors and their affiliates
and executive officers of Bancorp and subsidiaries was as follows:
1997 1996
----------- ----------
Balance at January 1 $ 6,071,441 $ 4,930,420
Additions or renewals 9,239,098 5,200,303
Amounts collected or renewed (4,949,830) (4,059,282)
----------- ----------
Balance at December 31 $10,360,709 $ 6,071,441
=========== ===========
In addition, approximately $3,921,800 of commitments to extend credit to
directors and officers were outstanding at December 31, 1997 ($1,801,600 at
December 31, 1996), and are included as part of commitments in Note 9.
14. Stock Options
- --- -------------
Bancorp has two Nonemployee Director Stock Option Plans ("Director Plans") -
1988 and 1993, and two Incentive Stock Option Plans ("Incentive Plans") - 1983
and 1993, and a 1995 Stock Incentive Plan ("Option Plan").
Director Plans
- --------------
Under the Director Plans, shares of common stock are reserved for issuance at
their fair market value at the date of grant to nonemployee directors of Bancorp
and its subsidiaries. Options generally become exercisable as to one-third of
the option for each year of subsequent service. Options expire ten years after
the date of grant and are subject to earlier expiration in the event an optionee
ceases to be a director. At December 31, 1997, options covering 228,122 shares
were outstanding under the Director Plans, 205,616 being exercisable at December
31, 1997. At December 31, 1997, 320,332 shares were reserved under the Director
Plans, including 92,210 shares available for future grant under the 1993
Director Plan. Options granted to directors have been under the 1993 Director
Plan or the 1995 Option Plan since June 1994 when the 1988 Director Plan was
discontinued.
Incentive Plans
- ---------------
Under the Incentive Plans for key management, officers may be granted options to
purchase shares of common stock at their fair market value at the date of grant.
Options expire ten years after the date of grant and are subject to earlier
expiration in the event an optionee ceases to be an employee. Options vest in
accordance with the vesting schedule set at the time the options are granted,
which is usually 20% for each year subsequent to the year of grant. At December
31, 1997, options covering 400,830 shares were outstanding and 401,572 shares
were reserved under the 1993 Incentive Plan, including 742 shares available for
future grant. Options covering 315,698 shares outstanding under the 1993
Incentive Plan were exercisable at December 31, 1997.
Option Plan
- -----------
Under the Option Plan, 387,020 shares are reserved for issuance to employees,
directors or consultants as incentive stock options, nonstatutory stock options
or restricted stock awards with 87,204 shares available for future grant at
December 31, 1997. The exercise price for incentive stock options must be no
less than the fair market value of the underlying shares on the date of grant.
The exercise price of nonstatutory stock options and the price to be paid for
restricted stock will be established by a committee of the Board of Directors.
Incentive stock options may only be granted to employees. The duration of
options granted will be established by a committee of the Board of Directors;
however, the maximum term of incentive stock options is ten years. At December
31, 1997, 133,984 of the 299,816 options outstanding under the Option Plan were
exercisable.
<PAGE>
Transactions involving option activity is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
Option Shares: of Shares Price of Shares Price of Shares Price
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 1,038,502 $3.45 1,175,458 $2.36 1,160,998 $1.82
Granted 43,780 $6.87 163,346 $7.09 225,702 $4.01
Expired (15,824) -- -- -- (55,914) --
Exercised (137,690) $2.91 (300,302) $1.15 (155,328) $1.79
-------- -------- --------
Outstanding, December 31 928,768 $3.79 1,038,502 $3.45 1,175,458 $2.36
======== ========= ==========
Exercisable at year-end 655,298 $3.19 661,156 $3.25 386,966 $2.09
</TABLE>
The following table summarizes information about Bancorp's stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- --------------------------------------
Weighted Average Weighted
Range of -------------------------- Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
----- ----------- ---- ----- ----------- -----
(Years)
<S> <C> <C> <C> <C> <C>
Under $4.00 562,402 5.82 $ 2.86 506,098 $2.83
$4.01 - $8.00 344,366 10.73 4.80 149,200 4.42
$8.01 - $12.00 22,000 9.67 11.90 -- --
------- ---- ----- ------- -----
928,768 7.73 $ 3.79 655,298 $3.19
======= ====== ======= =====
</TABLE>
No compensation cost has been recognized for the options issued under the stock
option plans. Bancorp adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Had compensation cost been determined
based on the fair value of the options at the date of grant consistent with the
provisions of SFAS No. 123, Bancorp's pro forma net income and pro forma
earnings per share would have been as follows:
1997 1996
-------- ------
Net income - as reported $9,303,363 $6,514,288
Net income - pro forma $9,205,469 $6,457,978
Earnings per share - as reported $ .64 $ .52
Earnings per share - pro forma $ .64 $ .51
<PAGE>
The pro forma effect on net income for 1997 and 1996 is not representative of
the pro forma effect in future years because compensation expense related to
grants made prior to 1995 and which vest in subsequent years is not considered.
For purposes of the above pro forma information, the fair value of each option
grant was estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
1997 1996
------- ------
Risk-free interest rate 6.25% 6.65%
Expected life (in years) 7.25 7.25
Expected volatility 29.37% 29.35%
Expected dividend yield 0.00% 7.50%
<PAGE>
15. Shareholders' Equity
- --- --------------------
Preferred Stock
At December 31, 1997 and 1996, Bancorp had 10,000,000 shares of authorized but
unissued $5.00 par value preferred stock, which is comprised of 5,000,000 shares
each of voting and nonvoting stock.
Common Stock
At December 31, 1997, Bancorp had 50,000,000 shares of authorized $2.00 par
value common stock (10,000,000 shares of authorized $2.00 par value common stock
at December 31, 1996).
Stock Splits
On January 21, 1998, the Board of Directors declared a 2-for-1 stock split,
payable February 20, 1998, in the form of a distribution of one additional share
of the Bancorp's common stock for each share owned by shareholders of record at
the close of business on January 30, 1998. The stock split resulted in the
issuance of 7,257,838 additional shares of common stock from authorized but
unissued shares which has been recorded in 1997. Per share data in 1997 and
prior periods reflect the effect of this split.
16. Effect of Dilutive Securities on Earnings Per Share
- --- ---------------------------------------------------
During 1997, Bancorp implemented SFAS No. 128 "Earnings per Share." A
reconciliation of the basic and diluted per-share computations for income from
continuing operations is as follows:
<TABLE>
<CAPTION>
Reconciliation of Income 1997 1996 1995
- ------------------------ ---------- ----------- -----------
<S> <C> <C> <C>
Net income--basic $9,303,363 $6,514,288 $4,551,318
Income impact of assumed conversion of
Convertible debentures, net of taxes -- 363,358 430,643
---------- ----------- ----------
Income available to common
shareholders--diluted $9,303,363 $6,877,646 $4,981,961
========== ========== ==========
Reconciliation of Basic and Diluted Shares
- ------------------------------------------
Weighted average shares outstanding 14,433,906 12,423,451 11,447,440
Incremental shares from stock options
issued 647,324 489,933 513,110
Incremental shares from assumed
conversion of Convertible Debentures -- 1,831,029 2,494,898
---------- ---------- ---------
Weighted average shares
outstanding--diluted 15,081,230 14,744,413 14,455,448
========== ========== ==========
</TABLE>
<PAGE>
17. Employee Benefit Plan
- --- ---------------------
The Bank has an employee savings plan (401(k)) and profit sharing plan which
covers all full-time employees over age 21 with one year of service. The
employee savings plan allows employees to contribute between 2% to 15% of their
salary on a tax deferred basis. For 1997, 1996 and 1995, the Bank matched 75% of
employee contributions up to 6% of their salary. The Bank matching contributions
are determined annually by the Board of Directors. In addition to the matching
contributions, the Bank also makes discretionary contributions to the profit
sharing plan. The Bank's policy is to fund contributions as accrued. The Bank's
contributions to the employee savings plan was $350,000 for 1997 ($300,000 for
1996 and $200,000 for 1995).
18. Regulatory Matters
- --- ------------------
Dividends:
The Bank, as a state-chartered bank, is prohibited from declaring or paying any
dividend in an amount greater than undivided profits. At December 31, 1997,
$10,226,400 was available from the Bank for the payment of dividends to Bancorp
without prior regulatory approval.
Bancorp and the Bank are subject to the regulations of certain federal and state
agencies, and receive periodic examinations by those regulatory authorities.
Regulatory Capital:
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets (all as defined in the regulation). Management
believes, as of December 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 11, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
institution's category.
<PAGE>
The Bank's capital amounts and ratios are presented in the table below:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provisions
------ -------- ----------
Amount Ratio Ratio Ratio
------ ----- ----- -----
As of December 31, 1997:
<S> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) $48,544,000 11.7% 8.0% 10.0%
Tier I Capital
(to Risk-Weighted Assets) $45,195,000 10.8% 4.0% 6.0%
Tier I Capital
(to Average Assets) $45,195,000 9.5% 4.0% 5.0%
As of December 31, 1996:
Total Capital
(to Risk-Weighted Assets) $43,444,600 13.2% 8.0% 10.0%
Tier I Capital
(to Risk-Weighted Assets) $40,844,900 12.4% 4.0% 6.0%
Tier I Capital
(to Average Assets) $40,844,900 10.2% 4.0% 5.0%
</TABLE>
<PAGE>
19. Parent Company Financial Information
- --- ------------------------------------
Condensed financial information for Centennial Bancorp (Parent Company only) is
presented below:
<TABLE>
<CAPTION>
Condensed Balance Sheets (Unconsolidated)
December 31, 1997 1996
---------- ---------
Assets
- ------
<S> <C> <C>
Cash, deposited with the Bank $ 4,099,530 $ 3,795,814
Equipment, net 80,572 59,652
Deferred tax asset 440,804 422,181
Other assets 660,880 1,443,343
Investment in subsidiaries at cost plus
equity in earnings 47,523,635 36,881,427
----------- -----------
Total assets $52,805,421 $42,602,417
=========== ===========
Liabilities and Shareholders' Equity
Accrued liabilities $ 995,263 $ 1,256,558
Shareholders' equity 51,810,158 41,345,859
----------- -----------
Total liabilities and shareholders' equity $52,805,421 $42,602,417
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income (Unconsolidated)
Years ended December 31, 1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Income:
Other income $ 8,007 $ 3,829 $ 385,809
Gain on sale of investments -- -- 44,272
Other interest income from
the subsidiaries 149,995 232,648 543,259
---------- ---------- ----------
158,002 236,477 973,340
---------- ---------- ----------
Expense:
Salaries and employee benefits 567,313 459,420 1,078,378
Interest expense -- 586,059 694,643
Other 366,259 298,995 631,105
---------- ---------- ----------
933,572 1,344,474 2,404,126
---------- ---------- ----------
Loss before income tax benefit and
equity in undistributed earnings
of subsidiaries (775,570) (1,107,997) (1,430,786)
Income tax benefit 157,399 393,954 542,605
---------- ---------- ----------
Loss before equity in undistributed
earnings of subsidiaries (618,171) (714,043) (888,181)
Equity in undistributed earnings
of subsidiaries 9,921,534 7,228,331 5,439,499
---------- ---------- ----------
Net income $9,303,363 $6,514,288 $4,551,318
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows (Unconsolidated)
Years ended December 31, 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,303,363 $ 6,514,288 $ 4,551,318
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH USED BY OPERATING ACTIVITIES:
Gain on sale of securities -- -- (44,272)
Depreciation and amortization 98,570 99,168 99,168
Undistributed earnings
of subsidiaries (9,921,534) (7,228,331) (5,439,499)
Deferred tax benefit (18,623) (147,889) (51,636)
Changes in assets and liabilities:
change in other assets 710,290 126,869 (387,457)
Change in accrued interest and
other liabilities (261,295) (107,708) 412,261
----------- ----------- -----------
Net cash used in
operating activities (89,229) (743,603) (860,117)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities -- -- 498,377
Proceeds from sale of Harding Fletcher -- -- 155,131
Purchases of equipment (7,999) -- --
Proceeds from sale of equipment -- 9,819 --
Payments received from subsidiaries, net -- -- 398,676
----------- ----------- -----------
Net cash provided by (used in)
investing activities (7,999) 9,819 1,052,184
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt -- (37,000) --
Proceeds from exercise of stock options 400,944 346,397 86,917
----------- ----------- -----------
Net cash provided by
financing activities 400,944 309,397 86,917
----------- ----------- -----------
Net increase (decrease) in cash 303,716 (424,387) 278,984
Cash at beginning of year 3,795,814 4,220,201 3,941,217
----------- ----------- -----------
Cash at end of year $ 4,099,530 $ 3,795,814 $ 4,220,201
=========== =========== ===========
Noncash investing activity:
Conversion of debentures to
common stock $ -- $ 9,163,000 $ --
Net costs attributable to
debentures converted -- (662,301) --
Cash paid in lieu of issuance of
fractional shares -- (438) --
----------- ----------- -----------
$ -- $ 8,500,261 $ --
=========== =========== ===========
Change in net unrealized gain (loss)
on securities available-for-sale:
Bancorp $ -- $ -- $ 3,770
The Bank 730,300 (634,890) 2,514,390
</TABLE>
For purposes of reporting cash flows, cash represents amounts due from banks.
Bancorp paid approximately none, $641,500 and $652,900 in interest on borrowings
in 1997, 1996 and 1995, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WHEN USED IN THE FOLLOWING DISCUSSION, THE WORD "EXPECTS" AND OTHER SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH ARE MADE
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED. SPECIFIC RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED
TO, GENERAL BUSINESS AND ECONOMIC CONDITIONS. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. CENTENNIAL BANCORP UNDERTAKES NO OBLIGATION TO PUBLISH REVISED
FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF.
HIGHLIGHTS
Centennial Bancorp reported net income of $9.3 million, or $.64 per share,
in the year ended December 31, 1997. This represented a 42.8% increase in net
income, as compared to $6.5 million, or $.52 per share, in 1996. Net income in
1996 represented a 43.1% increase from 1995's net income of $4.6 million, or
$.40 per share. The return on average assets was 2.12% in 1997 compared to 1.82%
in 1996 and 1.62% in 1995. The increased earnings for 1997, and 1996 primarily
reflect increased net interest income due to the expansion of Bancorp's
interest-earning assets each year.
At December 31, 1997, total assets increased $85.4 million to $492.6
million. This increase represented a 21.0% increase over total assets at
December 31, 1996. Earning assets at December 31, 1997 represented 92.0% of
total assets, which represented an increase over December 31, 1996 when earning
assets were 90.2% of total assets.
During 1997, the Bank opened two additional full-service branches in the
Portland metropolitan area. A branch office opened in January 1997 in the Lloyd
Center District in a leased facility. The Bank finalized the purchase of
property for a branch in the Tanasbourne area of Hillsboro, and opened the
office in a temporary facility at the site.
Construction of the permanent facility is scheduled to be completed in July
1998.
Also during 1997, the Bank opened five branches in Portland area retirement
centers, when other banks determined the offices no longer fit their business
strategies. The Bank offers deposit services to the residents of the facilities.
At December 31, 1997, the Bank was in the process of opening two additional
retirement center branches in the Portland area.
During 1997, Mortgage Co. opened a mortgage loan office in the Sunnyside
area of Portland, and intends to open an office in the Bank's Tanasbourne branch
in Hillsboro upon completion of the permanent facility.
NET INTEREST INCOME
For most financial institutions, including Bancorp, the primary component
of earnings is net interest income. Net interest income is the difference
between interest income, principally from loans and investment securities
portfolios, and interest expense, principally on customer deposits and
borrowings. Changes in net interest income result from changes in "volume,"
"spread" and "margin." Volume refers to the dollar level of interest-earning
assets and interest-bearing liabilities. Spread refers to the difference between
the yield on interest-earning assets and the cost of interest-bearing
liabilities. Margin refers to net interest income divided by interest-earning
assets and is influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities. During 1997, 1996 and 1995, Bancorp's
average interest-earning assets were $399 million, $323 million and $252
million, respectively. During these same years, Bancorp's net interest margin
was 6.92%, 6.70% and 6.66%, respectively.
<PAGE>
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
<TABLE>
<CAPTION>
The following table sets forth for 1997, 1996 and 1995 information with
regard to average balances of assets and liabilities, as well as total dollar
amounts of interest income from interest-earning assets and interest expense on
interest-bearing liabilities, resultant average yields or rates, net interest
income, net interest spread, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities for Bancorp.
Year ended December 31, 1997 1996 1995
-------------------------------- ------------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average income or yield or Average income or yield or Average income or yield or
balance(1) expense rates balance(1) expense rates balance(1) expense rates
---------- --------- -------- ---------- --------- -------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS: (Dollars in thousands)
Interest-bearing deposits
with banks $ 6.924 $ 376 5.43% $ 10,872 $ 579 5.33% $ 5,971 $ 352 5.90%
Investment securities --
taxable 37,443 2,446 6.53 43,928 2,894 6.59 40,116 2,403 5.99
Investment securities --
tax-exempt (2) 43,587 3,428 7.86 39,037 3,112 7.97 24,159 1,827 7.56
Federal funds sold 10,925 573 5.24 2,265 122 5.39 5,618 317 5.64
Loans and loans held for
sale (3) 299,976 34,329 11.44 226,965 26,299 11.59 176,384 20,909 11.85
--------- ------- --------- ------- --------- -------
Total interest-earning
assets/interest income 398,855 41,152 10.32 323,067 33,006 10.22 252,248 25,808 10.23
Reserve for loan losses (3,123) (2,237) (1,824)
Cash and due from banks 27,552 20,274 16,975
Premises and equipment, net 9,790 9,339 8,477
Other assets 6,112 7,201 5,876
-------- -------- --------
Total assets $439,186 $357,644 $281,752
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Savings and interest-bearin
demand $166,800 5,156 3.09 $128,611 4,440 3.45 $107,983 3,352 3.10
Time deposits 129,756 7,299 5.63 100,549 5,208 5.18 71,912 4,146 5.77
Short-term borrowings 9,688 539 5.56 11,399 833 7.31 13,823 861 6.23
Long-term debt 10,000 572 5.72 16,443 887 5.39 9,200 645 7.01
-------- ----- -------- ------ -------- -------
Total interest-bearing
liabilities/interest
expense 316,244 13,566 4.29 257,002 11,368 4.42 202,918 9,004 4.44
Demand deposits 75,005 66,525 53,399
Other liabilities 2,001 2,617 2,133
-------- -------- --------
Total liabilities 393,250 326,144 258,450
Shareholders' equity 45,936 31,500 23,302
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $439,186 $357,644 $281,752
======== ======== ========
Net interest income $27,586 $21,638 $16,804
======= ======= =======
Net interest spread (2) 6.03% 5.80% 5.79%
===== ===== ====
Net interest margin (2) 6.92% 6.70% 6.66%
Net interest income to
average shareholders'
equity 60.05% 60.50% 72.11%
Average interest-earning
assets to average
interest-bearing liabilities 124% 126% 124%
- -----------------------
<FN>
(1)Average balances are based on daily averages and include nonaccrual loans.
(2)Average yield on nontaxable securities, net interest spread and net interest
margin have been computed on a 34% tax-equivalent basis.
(3)Nonaccrual loans ($1,032,600, $994,600 and $631,100 in 1997, 1996 and 1995,
respectively) have been included in the computation of average loans and
loans held for sale. Loan fees recognized, included in interest income,
totalled $4,769,700, $3,745,900 and $2,541,800 in 1997, 1996 and 1995,
respectively.
</FN>
</TABLE>
<PAGE>
ANALYSIS OF CHANGES IN INTEREST RATE DIFFERENTIAL
The following table shows the dollar amount of the increase (decrease)
in Bancorp's interest income and interest expense for the years indicated, on a
tax-equivalent basis, and attributes such dollar amounts to changes in volume
and changes in interest rates. Changes attributable to the combined effect of
volume and interest rate changes, which were immaterial, have been allocated
equally between interest rate and volume.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
Change in Change in
net interest income due to net interest income due to
-------------------------------- -----------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income:
Balances due from banks $ (212) $ 9 $ (203) $ 275 $ (48) $ 227
Investment securities -- taxable (425) (23) (448) 240 251 491
Investment securities -- tax-exempt 360 (44) 316 1,156 129 1,285
Federal funds sold 460 (9) 451 (185) (10) (195)
Loans 8,408 (378) 8,030 5,928 (538) 5,390
------ ------ ------ ------ ------- ------
Total interest income 8,591 (445) 8,146 7,414 (216) 7,198
------ ------ ------ ------ ------- ------
Interest expense:
Deposits:
Savings and interest-bearing
demand 1,249 (533) 716 676 412 1,088
Time1,578 513 2,091 1,567 (505) 1,062
Short-term borrowings (110) (184) (294) (164) 136 (28)
Long-term debt (358) 43 (315) 449 (207) 242
------- ----- ------- ------ ------ ------
Total interest expense 2,528 (164) 2,364 2,065 1,767 3,832
------ ----- ------ ------ ------ ------
Total interest expense 2,359 (161) 2,198 2,528 (164) 2,364
Net interest income $6,232 $ (284) $5,948 $4,886 $ (52) $4,834
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NET INTEREST INCOME
Bancorp's net interest income increased to $27.6 million, on a
tax-equivalent basis, in 1997 as compared to $21.6 million in 1996 and $16.8
million in 1995. During 1997, average interest-earning assets increased to $399
million as compared to average interest-earning assets of $323 million in 1996
and $252 million in 1995. At the same time, average interest-bearing liabilities
increased to $316 million in 1997 from $257 million in 1996 and $203 million in
1995. Because the increases in average interest-earning assets were greater than
the increases in average interest-bearing liabilities in 1997 and 1996, Bancorp
recognized increases in net interest income.
The average yield earned on interest-earning assets increased by .10%
(10 basis points) in 1997, while the average rate paid on interest-bearing
liabilities decreased by .13% (13 basis points). Because of the increase in the
average yield earned on interest-earning assets and the decrease in the average
rate paid on interest-bearing liabilities, Bancorp experienced an increase in
net interest margin in 1997 as compared to 1996. The increase in net interest
margin in 1997 served to increase Bancorp's net interest income.
During 1997 and 1996, Bancorp increased its interest-bearing deposits
and long-term debt in anticipation of strong loan demand expected in Bancorp's
markets. The increase in interest-bearing deposits was brought about by offering
more competitive rates for certain deposits. Long-term debt increased in 1996
when the Bank borrowed $10 million from the Federal Home Loan Bank of Seattle.
During 1997 and 1996, Bancorp experienced a relatively stable interest
rate environment with rates declining modestly from the rates experienced during
1995. A significant portion of Bancorp's loans are immediately repricable upon a
change in interest rates (68% and 65% of outstanding loans at December 31, 1997
and 1996, respectively). This provides a benefit to Bancorp in a rising interest
rate market, but is a detriment to earnings in a falling interest rate market
until the market stabilizes. An increase in the volume of loans can mitigate the
negative effects of a falling interest rate market.
Centennial Mortgage has a residential mortgage construction lending
department which establishes relationships with home builders in the
Eugene/Springfield and Portland-area markets and generates additional permanent
loan activity as the houses-under-construction are sold. Recognizing the risks
associated with construction lending, management has established a detailed
approval process for builder lines of credit and has implemented a continuing
review of construction in progress to monitor construction loan activity.
Increases in interest rates could adversely affect demand for construction
lending, as well as the ability of borrowers to sell the houses when completed,
and also could impact Centennial Mortgage's permanent mortgage lending activity.
PROVISION FOR LOAN LOSSES
Management's policy is to maintain an adequate reserve for loan losses.
In 1997, Bancorp charged a $1,250,000 loan loss provision to income, as compared
to $735,000 in 1996 and $350,000 in 1995. The larger loan loss provisions in
1997 and 1996 reflect the larger amounts of loans outstanding each year. In
1997, loan charge-offs, net of recoveries were $501,000, as compared to loan
charge-offs, net of recoveries of $64,000 in 1996 and $122,000 in 1995. The
relatively larger amount of loan charge-offs in 1997 was primarily due to the
write-down of two loans to management's estimate of the net realizable value of
the loans.
Bancorp's reserve for loan losses was $3.3 million at December 31,
1997, as compared to $2.6 million at December 31, 1996 and $1.9 million at
December 31, 1995. The ratio of the reserve for loan losses to total
nonperforming loans was 263%, 137% and 172% at December 31, 1997, 1996 and 1995,
respectively.
<PAGE>
Management attributes the relatively low levels of loans charged off,
net of recoveries, during 1997, 1996 and 1995 to the loan approval processes and
monitoring systems implemented in prior years. Management continues its efforts
to collect amounts previously charged off and to originate new loans of high
quality.
NONINTEREST INCOME
Noninterest income increased $1.1 million to $3.2 million in 1997 as
compared to 1996, and decreased $181,000 to $2.1 million in 1996 as compared to
1995. The increase in noninterest income in 1997 was primarily attributable to
increases in other noninterest income (as described below), and increased gains
recognized on sales of loans and sales of investment securities. The decrease in
noninterest income in 1996 was primarily attributable to decreases in loan
servicing fees, other noninterest income and gains recognized on sales of
investment securities, which were offset in part by an increase in gains
recognized on sales of residential mortgage loans.
During 1997, Bancorp received a $650,000 settlement payment for
litigation the Bank brought against its former legal counsel. This settlement
receipt accounted for the increase in other noninterest income recognized during
1997 as compared to 1996. Bancorp experienced a decrease of $160,000 in other
noninterest income in 1996 as compared to 1995. The largest components of the
decrease in 1996 were the non-recurrence of both a $40,000 gain recognized on
the sale of a Bank department and a $64,000 gain recognized on the sale of a
Bancorp subsidiary in 1995.
Bancorp increased gains on sales of loans by $285,000 in 1997 as
compared to 1996, and $219,000 in 1996 as compared to 1995. These increases were
primarily due to increases in residential mortgage loans originated through
Mortgage Co. which are subsequently sold to third-party investors.
Bancorp also recognized an increase in gains on sales of investment
securities during 1997 as compared to 1996. Bancorp liquidated approximately
$20.5 million of securities available-for-sale, primarily to repurchase shorter
term securities to reduce the average life of its securities portfolio. Gains on
sales of investment securities decreased modestly during 1996 as compared to
1995 due to the relatively low level of securities sales during 1996.
NONINTEREST EXPENSE
Noninterest expense increased $2.5 million to $14.9 million in 1997 as
compared to 1996, and increased $896,000 to $12.4 million in 1996 as compared to
1995. These increases were primarily attributable to increases in salaries and
employee benefits and premises and equipment. The increase in 1996 as compared
to 1995 was also attributable to an increase in advertising, but was offset in
part by decreases in insurance expenses and other noninterest expenses.
Salaries and employee benefits increased $1.9 million to $9.6 million
in 1997 as compared to 1996, and increased $1.2 million to $7.7 million in 1996
as compared to 1995. These increases were primarily due to additions to staff to
accommodate Bancorp's increased operations.
Premises and equipment expense increased $224,000 to $2.0 million in
1997 as compared to 1996, and increased $182,000 to $1.8 million in 1996 as
compared to 1995. The increases in 1997 and 1996 were due to the increasing
number of branch locations of the Bank and Mortgage Co. during both years.
Data processing expense increased $79,000 to $251,000 in 1997 as
compared to 1996, and increased $5,000 to $172,000 in 1996 as compared to 1995.
These increases in data processing expense were also primarily attributable to
the additional branch locations of the Bank and Mortgage Co.
<PAGE>
Legal and professional fees increased $170,000 to $742,000 in 1997 as
compared to 1996, and increased $21,000 to $572,000 in 1996 as compared to 1995.
The increase in legal and professional fees incurred during 1997 was due in part
to ongoing litigation in the normal course of Bancorp's business, and in part to
fees charged for personnel acquisition services.
Insurance expenses increased $3,000 in 1997, but decreased $259,000 to
$65,000 in 1996 as compared to 1995. The decrease experienced in 1996 was due to
an assessment rate reduction on Federal Deposit Insurance coverage.
Advertising expenses increased $3,000 in 1997 and $133,000 in 1996 as
compared to 1996 and 1995, respectively. The 1996 increase was due to an
increase in Bancorp's advertising budget, primarily to promote its expanding
presence in the Portland-area market. Bancorp's 1997 advertising budget was the
same as 1996.
Other noninterest expense decreased $38,000 to $950,000 in 1997 as
compared to 1996, and decreased $159,000 to $987,000 in 1996 as compared to
1995. The decrease experienced in 1996 was due to an insurance recovery
received.
ASSET/LIABILITY MANAGEMENT
Bancorp's results of operations depend substantially on its net
interest income and management's ability to manage certain risks. Interest
income and interest expense are affected by general economic conditions and by
competition in the marketplace.
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.
The purpose of Bancorp's asset/liability management program is to
provide stable net interest income growth by protecting Bancorp's earnings from
undue interest rate risk. Exposure to interest rate risk arises from volatile
interest rates, changes in the mix of assets (principally loans and investment
portfolio securities) and liabilities (principally deposits) and maturities and
repricing schedules of assets and liabilities. Assets and liabilities are
described as rate sensitive when they can be repriced (i.e., changed in rate)
within a given time period. The difference between the amount of
interest-rate-sensitive assets and interest-rate-sensitive liabilities is
referred to as the interest-rate-sensitive "GAP" for any given period of time.
If an equal amount of assets and liabilities can be repriced during a specific
period of time, the financial institution is said to be in a balanced
rate-sensitivity position. A balanced position generally may be expected to
result in less volatile swings in net interest income.
Rising and falling interest rate environments can have various effects
on a lender's net interest income, depending on the interest rate GAP, the
relative changes in interest rates that occur when assets and liabilities are
repriced, unscheduled repayments of loans, early withdrawals of deposits and
other factors. As a general rule, in periods of falling interest rates, lenders
with positive interest rate GAPs (i.e., those having more
interest-rate-sensitive assets than liabilities) are more susceptible to a
decline in net interest income. In periods of rising interest rates, lenders
with negative interest rate GAPs (i.e., those having more
interest-rate-sensitive liabilities than assets) are more likely to experience
declines in net interest income.
Management's objectives are to control interest rate risk and to
achieve predictable and consistent growth in net interest income. Management
<PAGE>
meets regularly to monitor the composition of the balance sheet, to assess
current and projected interest rate trends and to formulate strategies
consistent with established objectives. Management attempts to limit exposure to
interest rate risk by maintaining a balance sheet posture such that annual net
interest income is not significantly affected by market fluctuations in interest
rates. Bancorp uses simulation modeling to measure the effects of varying
interest rate scenarios and balance sheet strategies on net interest income.
The following table sets forth the dollar amount of maturing
interest-earning assets and interest-bearing liabilities at December 31, 1997,
and the difference between them for the maturing or repricing periods indicated.
The amounts in the table are derived from Bancorp's internal data and, although
the information may be useful as a general measure of interest rate risk, the
data could be significantly affected by external factors such as prepayments of
loans or early withdrawals of deposits. Such factors may greatly influence the
timing and extent of actual repricing of interest-earning assets and
interest-bearing liabilities. Decay rates have not been used as all savings and
interest-bearing demand deposits have been assumed to reprice within three
months. Management does not consider savings and interest-bearing demand
deposits to be interest-rate-sensitive. Excluding those accounts, Bancorp's
variable-rate assets exceed variable-rate liabilities, and its fixed-rate assets
exceed fixed-rate liabilities.
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
Amount maturing or repricing within:
------------------------------------
Three
Less than months to
three less than One to Over five
months one year five years years Total
------ -------- ---------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate loans $ 11,343 $ 12,915 $39,380 $43,689 $107,327
Variable-rate loans 225,044 2,866 5,388 -- 233,298
Investment securities -- 1,009 22,823 60,072 83,904
Federal Home Loan Bank stock 4,711 -- -- -- 4,711
Other interest-earning assets 23,800 -- -- -- 23,800
-------- -------- ------- ------- --------
Total interest-earning assets 264,898 16,790 67,591 103,761 453,040
Cash and due from banks 26,269
Other noninterest-earning assets 13,264
Total assets $492,573
Interest-bearing liabilities:
Savings and interest-bearing demand
deposits $187,335 -- -- -- $187,335
Certificates of deposit of
$100,000 or more 21,043 28,039 4,804 -- 53,886
Other time accounts 17,213 54,902 8,638 45 80,798
Short-term borrowings 7,716 -- -- -- 7,716
Long-term debt -- 10,000 -- -- 10,000
-------- -------- ------- ------- --------
Total interest-bearing liabilities 233,307 92,941 13,442 45 339,735
Other noninterest-bearing liabilities 101,028
Shareholders' equity 51,810
Total liabilities and shareholders'
equity $492,573
========
Interest rate GAP $ 31,591 $(76,151) $ 54,149 $103,716
======== ======== ======== ========
Cumulative interest rate GAP $ 31,591 $(44,560) $ 9,589 $113,305
======== ======== ======== ========
GAP ratio (GAP/total assets) 6.41% (15.46)% 10.99% 21.06%
Cumulative GAP ratio 6.41% (9.05)% 1.95% 23.00%
</TABLE>
The estimated fair market value of each class of financial instrument is
presented in Note 9 of the accompanying audited financial statements.
Bancorp performs certain computations to estimate the impact of changing
interest rates on the current portfolio. These computations assume hypothetical
interest rate changes based on numerous assumptions and should not be relied
upon as indicative of actual results. The following table represents the
estimated impacts of a parallel shift in rates at December 31, 1997:
<PAGE>
<TABLE>
<CAPTION>
Current
Change in Rates Of Fair Change in Rates Of
------------------ ------------------
Minus 2% Minus 1% Value Plus 1% Plus 2%
-------- -------- ----- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 50,069 $ 50,069 $ 50,069 $ 50,069 $ 50,069
Available-for-sale securities 88,831 86,117 83,904 81,171 78,937
Loans and loans held for sale 368,169 362,403 356,811 351,386 346,122
Federal Home Loan Bank stock 4,711 4,711 4,711 4,711 4,711
Financial liabilities:
Deposits 423,054 421,189 419,365 417,582 415,839
Short-term borrowings 7,716 7,716 7,716 7,716 7,716
Long-term debt 10,000 10,000 10,000 10,000 10,000
</TABLE>
Historically, with the exception of securities sold under agreement to
repurchase, Bancorp has not engaged in derivative activities. Such securities
have only been sold to a limited number of private corporate clients that meet
management's credit risk policies associated with originating and controlling
the risks of these transactions. Bancorp does not engage in any trading or
speculative derivative activities.
The following table presents the aggregate maturities of loans in each major
category of Bancorp's loan portfolio at December 31, 1997. Actual maturities may
differ from the contractual maturities shown below as a result of renewals and
prepayments.
<TABLE>
<CAPTION>
Due
---------------------------------------
After one Total
Within but within After loans by
Loan category one year five years five years category
- ------------- -------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 84,548 $45,533 $16,971 $147,052
Real estate -- mortgage 19,031 31,383 37,217 87,631
Real estate -- construction 71,635 15,516 1,969 89,120
Installment 4,872 1,561 170 6,603
Loans held for sale -- -- 5,585 5,585
Lease financing 531 3,118 -- 3,649
Other 543 1,364 88 1,995
Less deferred loan fees (536) (291) (183) (1,010)
------- ------- ------- ---------
Total loans by maturity $180,624 $98,184 $61,817 $340,625
======== ======= ======= =========
</TABLE>
<PAGE>
Bancorp has $160 million of loans that mature after one year, consisting
of fixed-rate loans aggregating $83.1 million (51.9%) and variable-rate loans
aggregating $76.9 million (48.1%).
At December 31, 1997, $107 million of Bancorp's loans (approximately 31.5%
of Bancorp's loan portfolio) had fixed interest rates and $233 million
(approximately 68.5%) had variable interest rates.
PROVISION FOR INCOME TAXES
Bancorp's provision for income taxes was $4.3 million in 1997, $3.1
million in 1996 and $2.1 million in 1995. Bancorp's effective tax rates for
financial reporting were 31.8% in 1997, 32.5% in 1996 and 32.0% in 1995. The
effective tax rate varies from the federal statutory rate of 34% primarily
because of nontaxable interest income and state income taxes. See Note 12 of
Notes to Consolidated Financial Statements.
LIQUIDITY AND SOURCES OF FUNDS
Bancorp's primary sources of funds are customer deposits, sales and
maturities of investment securities, loan sales, loan repayments, net income and
the use of federal funds markets. 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's deposits increased to $419 million at December 31, 1997 from
$340 million at December 31, 1996 and $268 million at December 31, 1995,
primarily because of an ongoing business development program, and expansion of
the Bank's presence in the Portland-area market.
Net loans and loans held for sale increased to $337 million at December
31, 1997 from $266 million at December 31, 1996 and $189 million at December 31,
1995. These increases were primarily due to the Bank's business development
activities and a real estate construction program initiated by Centennial
Mortgage in 1994.
The Bank maintains federal funds lines with correspondent banks as a
backup source of temporary liquidity. At December 31, 1997, the Bank had $24
million of federal funds lines available ($16 million at December 31, 1996) to
draw against on an uncollateralized basis. No borrowings were outstanding under
the federal funds lines at those dates.
The Bank also maintains a cash management credit facility from the FHLB.
The credit facility is based upon the Bank's holdings of specified housing
finance related assets, and is limited to 10% of the Bank's assets, measured on
a quarterly basis. At December 31, 1997, the Bank had $21.4 million of credit
available from the FHLB ($39.5 million at December 31, 1996). The decrease in
the Bank's credit facility at December 31, 1997 from the level held at December
31, 1996 was due to the Bank's decrease in specified housing finance related
assets during 1997. The credit facility is collateralized by the FHLB stock
owned by the Bank and by all its other assets.
Bancorp's long-term debt ($10.0 million at December 31, 1997), will mature
August 6, 1998. Management intends to borrow a like amount on similar terms
prior to maturity of the long-term debt.
Management anticipates that Bancorp will continue to rely on customer
deposits, sales and maturities of investment securities, loan sales, loan
repayments, retained earnings and federal funds markets to provide liquidity.
Although deposit balances have shown historical growth, such balances may be
influenced by changes in the banking industry, interest rates available on other
investments, general economic conditions, competition and other factors.
Borrowings may be used on a short-term basis to compensate for reductions in
other sources of funds. Borrowings may also be used on a longer-term basis to
support expanded lending activities and to match the maturity or repricing
intervals of assets. The sources of such funds would likely be federal funds
purchased and borrowings from the FHLB, as discussed above.
<PAGE>
CAPITAL RESOURCES
Total shareholders' equity increased to $51.8 million at December 31, 1997
from $41.3 million at December 31, 1996 and $26.4 million at December 31, 1995.
Total shareholders' equity was increased during 1997 not only by net income, but
also by the effects of stock options exercised ($430,600). Shareholders' equity
(Tier I capital) was 9.5% of average assets in 1997 as compared to 10.2% in 1996
and 8.3% in 1995.
EFFECTS OF INFLATION AND CHANGING PRICES
The primary impact of inflation on Bancorp's operations is increased
operating overhead. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant effect on a financial
institution's performance than the effects of general inflation. Interest rates
are affected by inflation, but neither the timing nor the magnitude of interest
rate fluctuations coincides with changes in an inflation index.
For these reasons, management believes that references to other
information regarding interest rates earned and paid, interest-earning assets
and interest-bearing liabilities will be of greater assistance than
inflation-adjusted presentations in understanding Bancorp's ability to react to
changing interest rates and inflationary trends.
EFFECTS OF 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.
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 all issues related to the Year 2000. In addition,
management organized and sponsored seminars for community attendance in the
Eugene and Portland-area markets to elevate public awareness of the potential of
Year 2000 problems.
To date, Bancorp's Year 2000 task force has identified all computer
hardware and software utilized 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 a computer consultant to
assist with testing of all computer hardware and software and testing has
already begun. It is anticipated that computer hardware and software testing
will continue through the year 1999 to ensure that all systems are fully
compliant.
Management of Bancorp has also required that lending personnel ascertain
borrowing clients' awareness and intent to timely comply with the Year 2000.
At the present time, management has budgeted $100,000 for Year 2000
compliance expenses for the year 1998, and believes that its efforts to comply
with the Year 2000, and the effects of the Year 2000, will not have a material
effect on operations.
<PAGE>
FORM 10-K
Copies of Bancorp's annual report on From 10-K required to be filed with
the Securities and Exchange Commission under the Securities Exchange Act of 1934
are available to shareholders at no charge upon written request to : Michael J.
Nysingh, Chief Financial Officer, Centennial Bancorp, P.O. Box 1560, Eugene,
Oregon 97440. Copies of Bancorp's material filed with the Securities and
Exchange Commission can also be accessed via the Internet at "www.sec.gov."
MARKET FOR COMMON STOCK
Bancorp's Common Stock is quoted on the Nasdaq National Market under the
symbol "CEBC."
The following table sets forth the high and low bid prices for the Common
Stock on the Nasdaq National Market for the last two years:
High Low
---- ---
Year ended December 31, 1997:
First quarter $ 7.84 $ 6.51
Second quarter 12.39 7.73
Third quarter 15.38 11.36
Fourth quarter 15.16 12.62
Year ended December 31, 1996:
First quarter $ 5.02 $ 4.53
Second quarter 5.90 4.72
Third quarter 5.37 5.12
Fourth quarter 6.61 5.48
At February 27, 1998, Bancorp had 14,538,682 shares of Common Stock
outstanding held by 1,219 shareholders of record.
Bancorp has never declared or paid cash dividends to shareholders and has
no intention to do so in the forseeable future.
<PAGE>
Quarterly Financial Data
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Total
- ----------------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Interest income $8,940 $9,585 $10,333 $11,246 $40,104
Interest expense 3,054 3,274 3,596 3,642 13,566
----- ----- ----- ----- ------
Net interest income 5,886 6,311 6,737 7,604 26,538
Loan loss provision 800 150 150 150 1,250
Income before income taxes 3,113 3,199 3,611 3,709 13,632
Net income 2,101 2,159 2,437 2,606 9,303
Earnings per share:
Basic $ .14 $ .15 $ .17 $ .18 $ .64
Diluted $ .14 $ .15 $ .16 $ .17 $ .62
1996
- -----------------
Interest income $7,079 $7,628 $8,361 $ 8,990 $32,058
Interest expense 2,456 2,646 3,014 3,252 11,368
----- ----- ----- ----- ------
Net interest income 4,623 4,982 5,347 5,738 20,690
Loan loss provision 150 135 300 150 735
Income before income taxes 2,153 2,320 2,459 2,719 9,651
Net income 1,453 1,566 1,660 1,835 6,514
Earnings per share:
Basic $ .12 $ .13 $ .13 $ .14 $ .52
Diluted $ .11 $ .11 $ .12 $ .13 $ .47
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in each of the Registration
Statements of Centennial Bancorp's Incentive Stock Option Plan on Form S-8 and
Centennial Bancorp's Nonemployee Directors Stock Ownership Plan on Form S-8 of
our report dated January 22, 1998, on our audits of the consolidated financial
statements of Centennial Bancorp and subsidiaries as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
which report is incorporated by reference in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Eugene, Oregon
March 20, 1998
POWER OF ATTORNEY
Know all by these presents, that the undersigned, Richard C.
Williams, hereby constitutes and appoints each of Thaddeus (Ted) R. Winnowski
and Michael J. Nysingh, signing singly, the undersigned's true and lawful
attorney-in-fact to:
1. Execute for and on behalf of the undersigned, in the
undersigned's capacity as an officer and/or director of Centennial Bancorp, an
Oregon Corporation (the "Company"), Forms 10-K, 10-Q and/or 8-K, and any
amendments thereto, in accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934 and the rules and regulations thereunder.
2. Do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and execute any such
Form 10-K, 10-Q or 8-K, and any amendments thereto, and timely file such forms
and amendments with the United States Securities and Exchange Commission and any
stock exchange or similar authority.
3. Take any other action of any type whatsoever in connection
with the foregoing which, in the opinion of such attorney-in-fact, may be of
benefit to, in the best interest of, or legally required by, the undersigned, it
being understood that the documents executed by such attorney-in-fact on behalf
of the undersigned pursuant to this Power of Attorney shall be in such form and
shall contain such terms and conditions as such attorney-in-fact may approve in
such attorney-in-fact's discretion.
The undersigned hereby grants to each such attorney-in-fact
full power and authority to do and perform any and every act and thing
whatsoever requisite, necessary or proper to be done in the exercise of any of
the rights and powers herein granted, as fully to all intents and purposes and
the undersigned might or could do if personally present, with full power of
substitution or revocation, hereby ratifying and confirming all that such
attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall
lawfully do or cause to be done by virtue of this power of attorney and the
rights and powers herein granted. The undersigned acknowledges that the
foregoing attorneys-in-fact are serving in such capacity at the request of the
undersigned.
The undersigned agrees that each such attorney-in-fact herein
may rely entirely on information furnished orally or in writing by the
undersigned to such attorney-in-fact. The undersigned also agrees to indemnify
and hold harmless the Company and each such attorney-in-fact against any losses,
claims, damages or liabilities (or actions in these respects) that arise out of
or are based upon any untrue statement or omission of necessary facts in the
information provided by the undersigned to such attorney-in-fact for purposes of
executing, acknowledging, delivering or filing Forms 10-K, 10-Q and 8-K
(including amendments thereto) and agrees to reimburse the Company and such
attorney-in-fact for any legal or other expenses reasonably incurred in
connection with investigating or defending against any such loss, claim, damage,
liability or action.
<PAGE>
This Power of Attorney shall remain in full force and effect
until the undersigned is no longer required to sign Forms 10-K, 10-Q and 8-K,
and amendments thereto, on behalf of the Company, unless earlier revoked by the
undersigned in a signed writing delivered to the foregoing attorneys-in-fact.
IN WITNESS WHEREOF, the undersigned has caused this Power of
Attorney to be executed as of this 4th day of March, 1998.
/s/ Richard C. Williams
------------------------
Richard C. Williams
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 19976 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 26,269,239
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,904,253
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 335,040,313
<ALLOWANCE> 3,348,914
<TOTAL-ASSETS> 492,573,411
<DEPOSITS> 419,282,084
<SHORT-TERM> 7,715,783
<LIABILITIES-OTHER> 3,765,386
<LONG-TERM> 10,000,000
0
0
<COMMON> 29,031,352
<OTHER-SE> 22,778,806
<TOTAL-LIABILITIES-AND-EQUITY> 492,573,411
<INTEREST-LOAN> 34,329,126
<INTEREST-INVEST> 4,825,636
<INTEREST-OTHER> 949,288
<INTEREST-TOTAL> 40,104,050
<INTEREST-DEPOSIT> 12,454,373
<INTEREST-EXPENSE> 13,565,993
<INTEREST-INCOME-NET> 26,538,057
<LOAN-LOSSES> 1,250,000
<SECURITIES-GAINS> 168,716
<EXPENSE-OTHER> 14,851,028
<INCOME-PRETAX> 13,632,163
<INCOME-PRE-EXTRAORDINARY> 9,303,363
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,303,363
<EPS-PRIMARY> .64<F1>
<EPS-DILUTED> .62<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 873,000
<LOANS-PAST> 402,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,599,653
<CHARGE-OFFS> 557,949
<RECOVERIES> 57,210
<ALLOWANCE-CLOSE> 3,348,914
<ALLOWANCE-DOMESTIC> 3,348,914
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEBRUARY 20, 1998 IN FORM OF 100% STOCK DIVIDEND
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 30,470,873
<INT-BEARING-DEPOSITS> 3,500,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 84,430,094
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 330,120,139
<ALLOWANCE> 3,179,472
<TOTAL-ASSETS> 471,997,983
<DEPOSITS> 401,938,204
<SHORT-TERM> 8,203,543
<LIABILITIES-OTHER> 3,010,721
<LONG-TERM> 10,000,000
0
0
<COMMON> 14,456,446
<OTHER-SE> 34,389,069
<TOTAL-LIABILITIES-AND-EQUITY> 471,997,983
<INTEREST-LOAN> 24,573,993
<INTEREST-INVEST> 3,544,781
<INTEREST-OTHER> 740,536
<INTEREST-TOTAL> 28,859,310
<INTEREST-DEPOSIT> 9,040,636
<INTEREST-EXPENSE> 9,924,411
<INTEREST-INCOME-NET> 18,934,899
<LOAN-LOSSES> 1,100,000
<SECURITIES-GAINS> 34,324
<EXPENSE-OTHER> 10,422,084
<INCOME-PRETAX> 9,922,879
<INCOME-PRE-EXTRAORDINARY> 6,697,479
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,697,479
<EPS-PRIMARY> .46<F1>
<EPS-DILUTED> .45<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 777,000
<LOANS-PAST> 1,248,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,599,653
<CHARGE-OFFS> 557,533
<RECOVERIES> 37,352
<ALLOWANCE-CLOSE> 3,179,472
<ALLOWANCE-DOMESTIC> 3,179,472
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEB 20, 1998 IN FORM OF 100% STOCK DIVIDEND AND
THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF COMPUTING AND
PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 29,662,215
<INT-BEARING-DEPOSITS> 13,653,000
<FED-FUNDS-SOLD> 10,330,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,994,042
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 281,967,827
<ALLOWANCE> 3,119,703
<TOTAL-ASSETS> 430,901,743
<DEPOSITS> 368,500,043
<SHORT-TERM> 3,843,754
<LIABILITIES-OTHER> 2,660,190
<LONG-TERM> 10,000,000
0
0
<COMMON> 14,424,618
<OTHER-SE> 31,473,138
<TOTAL-LIABILITIES-AND-EQUITY> 430,901,743
<INTEREST-LOAN> 15,803,979
<INTEREST-INVEST> 2,380,160
<INTEREST-OTHER> 341,556
<INTEREST-TOTAL> 18,525,695
<INTEREST-DEPOSIT> 5,677,681
<INTEREST-EXPENSE> 6,327,920
<INTEREST-INCOME-NET> 12,197,775
<LOAN-LOSSES> 950,000
<SECURITIES-GAINS> 29,309
<EXPENSE-OTHER> 6,752,713
<INCOME-PRETAX> 6,312,232
<INCOME-PRE-EXTRAORDINARY> 4,260,732
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,260,732
<EPS-PRIMARY> .29<F1>
<EPS-DILUTED> .29<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 795,000
<LOANS-PAST> 351,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,599,653
<CHARGE-OFFS> 443,149
<RECOVERIES> 13,199
<ALLOWANCE-CLOSE> 3,119,703
<ALLOWANCE-DOMESTIC> 3,119,703
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEB 20, 1998 IN FORM OF 100% STOCK DIVIDEND AND
THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF COMPUTING AND
PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 24,197,925
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70,037,757
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 285,665,907
<ALLOWANCE> 3,370,625
<TOTAL-ASSETS> 410,439,377
<DEPOSITS> 340,204,278
<SHORT-TERM> 13,180,486
<LIABILITIES-OTHER> 3,982,268
<LONG-TERM> 10,000,000
0
0
<COMMON> 13,102,836
<OTHER-SE> 29,969,509
<TOTAL-LIABILITIES-AND-EQUITY> 410,439,377
<INTEREST-LOAN> 7,638,396
<INTEREST-INVEST> 1,207,776
<INTEREST-OTHER> 94,368
<INTEREST-TOTAL> 8,940,540
<INTEREST-DEPOSIT> 2,702,020
<INTEREST-EXPENSE> 3,054,067
<INTEREST-INCOME-NET> 5,886,473
<LOAN-LOSSES> 800,000
<SECURITIES-GAINS> 29,309
<EXPENSE-OTHER> 3,137,630
<INCOME-PRETAX> 3,113,270
<INCOME-PRE-EXTRAORDINARY> 2,101,470
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,101,470
<EPS-PRIMARY> .14<F1>
<EPS-DILUTED> .14<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 1,238,000
<LOANS-PAST> 680,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,599,653
<CHARGE-OFFS> 30,351
<RECOVERIES> 1,323
<ALLOWANCE-CLOSE> 3,370,625
<ALLOWANCE-DOMESTIC> 3,370,625
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEB 20, 1998 IN FORM OF 100% STOCK DIVIDEND AND
THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF COMPUTING AND
PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,827,505
<INT-BEARING-DEPOSITS> 11,570,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,654,422
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 265,091,644
<ALLOWANCE> 2,599,653
<TOTAL-ASSETS> 407,185,604
<DEPOSITS> 339,955,245
<SHORT-TERM> 12,315,583
<LIABILITIES-OTHER> 3,568,917
<LONG-TERM> 10,000,000
0
0
<COMMON> 13,070,894
<OTHER-SE> 28,274,965
<TOTAL-LIABILITIES-AND-EQUITY> 407,185,604
<INTEREST-LOAN> 26,298,655
<INTEREST-INVEST> 5,058,887
<INTEREST-OTHER> 700,752
<INTEREST-TOTAL> 32,058,294
<INTEREST-DEPOSIT> 9,647,930
<INTEREST-EXPENSE> 11,368,237
<INTEREST-INCOME-NET> 20,690,057
<LOAN-LOSSES> 735,000
<SECURITIES-GAINS> 6,595
<EXPENSE-OTHER> 12,400,159
<INCOME-PRETAX> 9,651,188
<INCOME-PRE-EXTRAORDINARY> 6,514,288
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,514,288
<EPS-PRIMARY> .52<F1>
<EPS-DILUTED> .47<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 1,480,000
<LOANS-PAST> 420,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,928,372
<CHARGE-OFFS> 109,779
<RECOVERIES> 46,060
<ALLOWANCE-CLOSE> 2,599,653
<ALLOWANCE-DOMESTIC> 2,599,653
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEB 20, 1998 IN FORM OF 100% STOCK DIVIDEND AND
THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF COMPUTING AND
PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,476,604
<INT-BEARING-DEPOSITS> 12,925,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 84,657,835
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 246,880,693
<ALLOWANCE> 2,504,970
<TOTAL-ASSETS> 386,522,759
<DEPOSITS> 322,579,860
<SHORT-TERM> 11,205,757
<LIABILITIES-OTHER> 3,712,668
<LONG-TERM> 17,324,000
0
0
<COMMON> 10,367,162
<OTHER-SE> 21,333,312
<TOTAL-LIABILITIES-AND-EQUITY> 386,522,759
<INTEREST-LOAN> 18,872,009
<INTEREST-INVEST> 3,743,115
<INTEREST-OTHER> 453,674
<INTEREST-TOTAL> 23,068,798
<INTEREST-DEPOSIT> 6,841,053
<INTEREST-EXPENSE> 8,116,358
<INTEREST-INCOME-NET> 14,952,440
<LOAN-LOSSES> 585,000
<SECURITIES-GAINS> 6,595
<EXPENSE-OTHER> 9,014,150
<INCOME-PRETAX> 6,931,366
<INCOME-PRE-EXTRAORDINARY> 4,678,666
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,678,666
<EPS-PRIMARY> .38<F1>
<EPS-DILUTED> .34<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 1,463,000
<LOANS-PAST> 1,182,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,928,372
<CHARGE-OFFS> 48,082
<RECOVERIES> 39,680
<ALLOWANCE-CLOSE> 2,504,970
<ALLOWANCE-DOMESTIC> 2,504,970
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEB 20, 1998 IN FORM OF 100% STOCK DIVIDEND AND
THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF COMPUTING AND
PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 19,364,011
<INT-BEARING-DEPOSITS> 2,910,000
<FED-FUNDS-SOLD> 245,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,789,825
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 226,137,142
<ALLOWANCE> 2,209,008
<TOTAL-ASSETS> 347,063,713
<DEPOSITS> 288,273,209
<SHORT-TERM> 18,894,671
<LIABILITIES-OTHER> 3,376,342
<LONG-TERM> 7,721,000
0
0
<COMMON> 9,760,704
<OTHER-SE> 19,037,787
<TOTAL-LIABILITIES-AND-EQUITY> 347,063,713
<INTEREST-LOAN> 11,982,880
<INTEREST-INVEST> 2,495,795
<INTEREST-OTHER> 228,784
<INTEREST-TOTAL> 14,707,459
<INTEREST-DEPOSIT> 4,264,389
<INTEREST-EXPENSE> 5,101,944
<INTEREST-INCOME-NET> 9,605,515
<LOAN-LOSSES> 285,000
<SECURITIES-GAINS> 6,595
<EXPENSE-OTHER> 5,861,882
<INCOME-PRETAX> 4,472,210
<INCOME-PRE-EXTRAORDINARY> 3,018,810
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,018,810
<EPS-PRIMARY> .25<F1>
<EPS-DILUTED> .22<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 1,099,000
<LOANS-PAST> 379,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,928,372
<CHARGE-OFFS> 9,086
<RECOVERIES> 4,722
<ALLOWANCE-CLOSE> 2,209,008
<ALLOWANCE-DOMESTIC> 2,209,008
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEB 20, 1998 IN FORM OF 100% STOCK DIVIDEND AND
THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF COMPUTING AND
PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 19,206,393
<INT-BEARING-DEPOSITS> 9,940,000
<FED-FUNDS-SOLD> 10,860,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,930,955
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 199,294,678
<ALLOWANCE> 2,076,058
<TOTAL-ASSETS> 345,280,449
<DEPOSITS> 286,569,732
<SHORT-TERM> 19,789,524
<LIABILITIES-OTHER> 3,096,910
<LONG-TERM> 8,905,000
0
0
<COMMON> 9,432,604
<OTHER-SE> 17,486,679
<TOTAL-LIABILITIES-AND-EQUITY> 345,280,449
<INTEREST-LOAN> 5,717,286
<INTEREST-INVEST> 1,205,873
<INTEREST-OTHER> 156,497
<INTEREST-TOTAL> 7,079,656
<INTEREST-DEPOSIT> 2,061,156
<INTEREST-EXPENSE> 2,456,348
<INTEREST-INCOME-NET> 4,623,308
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,818,542
<INCOME-PRETAX> 2,152,518
<INCOME-PRE-EXTRAORDINARY> 2,152,518
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,452,918
<EPS-PRIMARY> .12<F1>
<EPS-DILUTED> .11<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 454,000
<LOANS-PAST> 1,174,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,928,372
<CHARGE-OFFS> 5,208
<RECOVERIES> 2,894
<ALLOWANCE-CLOSE> 2,076,058
<ALLOWANCE-DOMESTIC> 2,076,058
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEB 20, 1998 IN FORM OF 100% STOCK DIVIDEND AND
THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF COMPUTING AND
PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL
BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 21,991,459
<INT-BEARING-DEPOSITS> 6,000,000
<FED-FUNDS-SOLD> 8,730,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,923,942
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 186,517,192
<ALLOWANCE> 1,928,372
<TOTAL-ASSETS> 317,463,715
<DEPOSITS> 267,880,292
<SHORT-TERM> 11,419,123
<LIABILITIES-OTHER> 2,574,240
<LONG-TERM> 9,200,000
0
0
<COMMON> 9,302,260
<OTHER-SE> 17,087,800
<TOTAL-LIABILITIES-AND-EQUITY> 317,463,715
<INTEREST-LOAN> 20,908,425
<INTEREST-INVEST> 3,696,352
<INTEREST-OTHER> 669,391
<INTEREST-TOTAL> 25,274,168
<INTEREST-DEPOSIT> 7,498,002
<INTEREST-EXPENSE> 9,004,456
<INTEREST-INCOME-NET> 16,269,712
<LOAN-LOSSES> 350,000
<SECURITIES-GAINS> 65,895
<EXPENSE-OTHER> 11,503,970
<INCOME-PRETAX> 6,693,118
<INCOME-PRE-EXTRAORDINARY> 4,551,318
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,551,318
<EPS-PRIMARY> .40<F1>
<EPS-DILUTED> .34<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 478,000
<LOANS-PAST> 645,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,700,130
<CHARGE-OFFS> 161,891
<RECOVERIES> 40,133
<ALLOWANCE-CLOSE> 1,928,372
<ALLOWANCE-DOMESTIC> 1,928,372
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>REFLECTS STOCK SPLIT PAID FEB 20, 1998 IN FORM OF 100% STOCK DIVIDEND AND
THE ADOPTION IN FOURTH QUARTER 1997 OF FAS 128, A NEW STANDARD OF COMPUTING AND
PRESENTING BOTH BASIC AND DILUTED NET INCOME PER SHARE.
</FN>
</TABLE>
