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, 1998
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 Section12(g) of the Exchange Act:
Common Stock, without 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.
$196,499,637 aggregate market value as of March 9, 1999, 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: 16,937,600 shares of Common
Stock on March 9, 1999.
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, 1998. Part III is
incorporated by reference from the issuer's definitive proxy statement for the
annual meeting of shareholders to be held on May 19, 1999.
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CENTENNIAL BANCORP
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
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(Portions of Item 1 are incorporated by reference from Centennial
Bancorp's Annual Report to Shareholders)
Item 1. DESCRIPTION OF BUSINESS 4
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Item 2. DESCRIPTION OF PROPERTIES 38
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Item 3. LEGAL PROCEEDINGS 40
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF
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SECURITY HOLDERS 40
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PART II
(Items 5 through 9 are incorporated by reference from
Centennial Bancorp's Annual Report to Shareholders)
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
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AND RELATED SHAREHOLDER MATTERS 41
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Item 6. SELECTED FINANCIAL DATA 41
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS 41
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Item 7A. QUANTITATIVE AND QUALITATIVE
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DISCLOSURES ABOUT MARKET RISK 41
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41
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Item 9. CHANGES IN AND DISAGREEMENTS WITH
---------------------------------
ACCOUNTANTS ON ACCOUNTING AND
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FINANCIAL DISCLOSURE 41
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PART III
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(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 19, 1999)
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF BANCORP 42
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Item 11. EXECUTIVE COMPENSATION 42
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
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OWNERS AND MANAGEMENT 42
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Item 13. CERTAIN RELATIONSHIPS AND RELATED
---------------------------------
TRANSACTIONS 42
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
----------------------------------------
AND REPORTS ON FORM 8-K 43
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SIGNATURES 47
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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: (1) POTENTIAL DELAYS OR OTHER PROBLEMS IN
IMPLEMENTING BANCORP'S GROWTH AND EXPANSION STRATEGY; (2) THE ABILITY TO ATTRACT
NEW DEPOSITS AND LOANS; (3) INTEREST RATE FLUCTUATIONS; (4) COMPETITIVE FACTORS
AND PRICING PRESSURES; (5) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR
REGIONALLY; (6) CHANGES IN LEGAL AND REGULATORY REQUIREMENTS; (7) CHANGES IN
TECHNOLOGY; AND (8) YEAR 2000 PROBLEMS, AS WELL AS OTHER FACTORS DESCRIBED IN
THIS AND OTHER BANCORP REPORTS AND STATEMENTS, INCLUDING, BUT NOT LIMITED TO,
EXHIBIT 99.1, FILED AS PART OF THIS ANNUAL REPORT. SHOULD ONE OR MORE OF THE
FOREGOING RISKS MATERIALIZE, OR SHOULD BANCORP'S UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS OR OUTCOMES MAY VARY MATERIALLY FROM THOSE DESCRIBED
IN THE FORWARD-LOOKING STATEMENTS. 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.
Centennial Bancorp ("Bancorp") has 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.
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("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 100% common stock split declared in January 1998, a 5%
common stock split declared in July 1998, a 10% common stock split declared in
January 1999, and for various stock splits and stock dividends declared in prior
years.
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, 1998, based on total assets, Centennial Bank was the
10th largest bank of the 53 commercial banks maintaining offices in Oregon. At
that date, Centennial Bank had 14 branches: three in Eugene; one in adjacent
Springfield; two full-service and five limited-service branches in Portland,
Oregon; one each in Tigard and Beaverton, suburbs of Portland; and a branch in
Cottage Grove. Eugene and Springfield are at the southern end of the Willamette
Valley on Interstate 5, with Cottage Grove located approximately 20 miles
further south. Centennial Bank opened the Tigard office in 1994, acquired the
Cottage Grove office in 1994, and opened the Lloyd District office in Portland
in January 1997. The Tanasbourne Office in Beaverton opened in December 1997 in
temporary facilities and in September 1998 moved to its permanent location. The
Airport Road Office in Portland opened in August 1998.
In January 1999, Centennial Bank opened its fourth full- service branch
in the Eugene area, the Oakway Center Office.
In July 1997, Centennial Bank opened four limited-service branches in
the Portland metropolitan area. These limited-service branches were formerly
operated by Wells Fargo in retirement centers. Another limited-service
retirement center branch, formerly operated by Key Bank, opened in January 1998.
Centennial Bank offers a full array of deposit services and safety deposit boxes
during reduced hours to residents of the retirement centers.
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As a result of an agreement announced in August 1998, by year end
Centennial Bank also had placed 18 automated teller machines (ATMs) in Bi-Mart
stores located in Oregon and Washington. The ATMs give Centennial customers
increased access to automated banking in the Bank's growing market area.
In December 1998, Centennial Bank announced an agreement to purchase
Northwest National Bank's Hazel Dell branch located in Vancouver, Washington.
Centennial Bank has received regulatory approval for the transaction which is
expected to close in the Spring of 1999.
Also in December 1998, Centennial Bank announced plans to open a new
full-service branch in Salem, Oregon and has leased a site in the downtown Salem
area.
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 $419 million at
December 31, 1997 to $484 million at December 31, 1998. Net loans and loans held
for sale increased from $337 million at December 31, 1997 to $428 million at
December 31, 1998.
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 $213.2 million, $111.6 million and $67.2 million of mortgages in
1998, 1997 and 1996, 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
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Mortgage Association and Federal Home Loan Mortgage Corporation approval to
service federally insured mortgage loans and began retaining servicing rights
for mortgage loans originated by Centennial Mortgage. During the third quarter
of 1997, management questioned the feasibility of in-house servicing of mortgage
loans and subsequently decided to contract with a third-party to perform the
servicing function for the loans in the servicing portfolio. Centennial Mortage
then again began selling mortgage loans with servicing rights released. Under
certain circumstances, Centennial Mortgage may be obligated to repurchase loans
sold in the secondary market.
Centennial Mortgage has two offices in Eugene, Oregon, and three
offices in the Portland, Oregon area. Its first Portland area office opened in
Lake Oswego in 1993. That office relocated to the Centennial Bank building in
Tigard, Oregon in 1995 but returned to Lake Oswego in April 1998 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 southeast
Portland in a leased facility. The Tanasbourne office opened in November 1998
and shares space with Centennial Bank in a new facility at the Tanasbourne Town
Center in Beaverton, Oregon. The second Eugene office opened in January 1999 and
shares leased space with the Oakway Center Office of Centennial Bank.
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.
HARDING FLETCHER
In 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 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.
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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, 1998:
Centennial Bancorp
Annual Report
to Shareholders
Page No.
-------------------
Investment securities 14
Loans and allowance for loan losses 15
Deposits 16
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 1998, 1997 and 1996, Bancorp's
average interest-earning assets were $483 million, $399 million and $323
million, respectively. During these same years, Bancorp's net interest margin
was 7.22%, 6.92% and 6.70%, respectively.
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table sets forth for 1998, 1997 and 1996 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.
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Year ended December 31, 1998 1997 1996
--------------------------------- ------------------------------- ------------------------------
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 264 $ 14 5.30% $ 6,924 $ 376 5.43% $ 10,872 579 5.33%
Investment securities --
taxable 48,554 3,096 6.38 41,933 2,791 6.66 48,088 3,220 6.70
Investment securities --
tax-exempt (2) 33,508 2,574 7.68 39,097 3,083 7.89 34,877 2,786 7.99
Federal funds sold 13,253 691 5.21 10,925 573 5.24 2,265 122 5.39
Loans and loans held for
sale (3) 387,914 44,348 11.43 299,976 34,329 11.44 226,965 26,299 11.59
------- ------- --------- ------- --------- -------
Total interest-earning
assets/interest income 483,493 50,723 10.49 398,855 41,152 10.32 323,067 33,006 10.22
Allowance for loan losses (3,882) (3,123) (2,237)
Cash and due from banks 28,351 27,552 20,274
Premises and equipment, net 11,407 9,790 9,339
Other assets 5,848 6,112 7,201
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Total assets $525,217 $439,186 $357,644
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Savings and interest-bearing
demand 211,896 6,889 3.25 $166,800 5,156 3.09 $128,611 4,440 3.45
Time deposits 145,387 8,185 5.63 129,756 7,299 5.63 100,549 5,208 5.18
Short-term borrowings 10,016 489 4.88 9,688 539 5.56 11,399 833 7.31
Long-term debt 5,945 273 4.59 10,000 572 5.72 16,443 887 5.39
-------- -------- -------- ------- -------- ------
Total interest-bearing
liabilities/
interest expense 373,244 15,836 4.24 316,244 13,566 4.29 257,002 11,368 4.42
Demand deposits 90,166 75,005 66,525
Other liabilities 5,095 2,001 2,617
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Total liabilities 468,505 393,250 326,144
Shareholders' equity 56,712 45,936 31,500
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Total liabilities and
shareholders' equity $525,217 $439,186 $357,644
======== ======== ========
Net interest income $34,887 $27,586 $21,638
======= ======= =======
Net interest spread (2) 6.25% 6.03% 5.80%
===== ===== =====
Net interest margin (2) 7.22% 6.92% 6.70%
Net interest income to
average shareholders'
equity 61.52% 60.05% 68.69%
Average interest-earning
assets to average
interest-bearing liabilities 130% 126% 126%
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(1) Average balances are based on daily averages and include nonaccrual loans.
(2) Interest income and average yield on tax-exempt securities, net interest spread and net interest margin
have been computed on a 34% tax-equivalent basis.
(3) Nonaccrual loans ($2,151,200, $1,032,600, and $994,600 in 1998, 1997 and 1996, respectively) have been
included in the computation of average loans and loans held for sale. Loan fees recognized, included in
interest income, totaled $6,855,866, $4,769,700 and $3,745,900 in 1998, 1997 and 1996, respectively.
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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.
1998 vs. 1997 1997 vs. 1996
Change in Change in
net interest income due to net interest income due to
------------------------------- --------------------------------
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Volume Rate Total Volume Rate Total
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(In thousands)
Interest income:
Balances due from banks $ (357) $ (5) $ (362) $ (212) $ 9 $ (203)
Investment securities -- taxable 431 (126) 305 (411) (18) (429)
Investment securities -- tax-exempt (435) (74) (509) 335 (38) 297
Federal funds sold 122 (4) 118 460 (9) 451
Loans 10,059 (40) 10,019 8,408 (378) 8,030
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Total interest income 9,820 (249) 9,571 8,580 (434) 8,146
------ ----- ------- ------ ------ ------
Interest expense:
Deposits:
Savings and interest-bearing
demand 1,430 303 1,733 1,249 (533) 716
Time880 5 885 1,578 513 2,091
Short-term borrowings 17 (67) (50) (110) (184) (294)
Long-term debt (209) (90) (299) (358) 43 (315)
------ ------ ------ ------ ------ ------
Total interest expense 2,118 151 2,269 2,359 (161) 2,198
------ ------ ------ ------ -----
Net interest income $7,702 $ (400) $7,302 $6,221 $ (273) $5,948
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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
185,000. The area's economy depends primarily upon U.S., state and local
governments, educational institutions, forest products, general manufacturing
(especially small manufacturing and high-technology industries), health care and
tourism. The U.S. government is the area's largest employer, closely followed by
PeaceHealth Corporation and the University of Oregon.
With four full-service and five limited-service offices opened since
1994, the Portland metropolitan area is an increasingly important secondary
market for Centennial Bank. The Portland metropolitan area has a diverse economy
and a population of approximately 1.25 million. The Portland area continues to
provide Centennial Bank with excellent growth opportunity and also allows
dilution of loan portfolio risk due to the economic diversity of 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. Its economy 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 up to $50 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
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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.
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:
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December 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Commercial and other $167,092 $149,047 $119,450 $ 78,564 $ 66,845
Real estate -- construction 151,164 89,120 66,244 44,003 29,337
Real estate -- mortgage 105,731 93,216 73,665 59,204 56,792
Installment 7,073 6,603 6,425 5,929 6,951
Lease financing 1,897 3,649 3,775 4,001 2,686
--------- --------- --------- --------- --------
Total loans and
loans held for sale 432,957 341,635 269,559 191,701 162,611
Less deferred loan fees (943) (1,010) (929) (611) (600)
Less allowance for loan
losses (4,451) (3,349) (2,600) (1,928) (1,700)
------- --------- --------- --------- ---------
Loans receivable, net $427,563 $337,276 $266,030 $189,162 $160,311
======== ======== ======== ======== ========
The following table presents the aggregate maturities of loans in each major category of Bancorp's loan
portfolio at December 31, 1998. Actual maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments.
Total
Due within Due after one but Due after loans by
Loan category one year within five years five years category
------------- -------- ----------------- ---------- ----------
(Dollars in
thousands)
Commercial $122,586 $29,985 $11,384 $163,955
Real estate -- construction 142,761 6,047 2,356 151,164
Real estate --mortgage 41,122 14,496 39,074 94,692
Installment 5,623 1,411 39 7,073
Loans held for sale -- -- 11,039 11,039
Lease financing 388 1,509 -- 1,897
Other 427 2,710 -- 3,137
Less deferred loan fees (682) (122) (139) (943)
----- ----- ----- --------
Total loans by maturity $312,225 $56,036 $63,753 $432,014
======== ======= ======= ========
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Of Bancorp's $119.8 million of loans that mature after one year, a
total of $112.1 million (93.6%) are fixed-rate loans, and a total of $7.7
million (6.4%) are variable-rate loans.
At December 31, 1998, $138 million of Bancorp's loans (approximately
32% of its loan portfolio) had fixed interest rates and $294 million
(approximately 68%) had variable interest rates.
COMMERCIAL LOANS
Commercial loans that are not secured 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, 1998, 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, 1998 were $163.9 million, compared to $147.1
million at December 31, 1997 and $116.8 million at December 31, 1996. Management
believes the increases in 1998 and 1997 were primarily the result of Centennial
Bank's business development program, the favorable Oregon economy and the
expansion of business through additional branch offices. Non-accrual loans in
this category totaled $776,000 at December 31, 1998 ($858,000 at December 31,
1997); there were no restructured loans at December 31, 1998 or 1997.
REAL ESTATE CONSTRUCTION LOANS
Construction loans represent Bancorp's second largest category of
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.
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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, 1998, real estate construction loans had increased to
$151.2 million from $89.1 million at December 31, 1997 and $66.2 million at
December 31, 1996. The increases were primarily attributable to strong growth in
commercial real estate construction lending resulting from an expansion of
Centennial Mortgage's business strategy. The December 31, 1998 non-accrual total
for this category was $2.3 million and was concentrated in loans to one
borrower. The borrower filed bankruptcy, and Centennial Bank has initiated legal
action to liquidate those loans. Management is regularly monitoring the related
collateral values which are currently considered adequate to support outstanding
balances. There were no restructured loans at December 31, 1998 in this
category. At December 31, 1997, there were no non-accrual or restructured loans
in this category.
REAL ESTATE MORTGAGE LOANS
Real estate mortgage loans represent Bancorp's third largest category
of loans. Of the $94.7 million of real estate mortgage loans outstanding at
December 31, 1998, $73.2 million consisted of income property loans and
commercial loans secured by real estate, primarily the borrowers' business
property. Income property loans and commercial loans secured by real estate
typically involve large balances to single borrowers or groups of related
borrowers. These borrowers may be more sensitive to changes in economic
conditions than residential mortgage loan customers. Real estate mortgage loans
14
<PAGE>
outstanding increased to $94.7 million at December 31, 1998 from $87.6 million
at December 31, 1997 and $70.1 million at December 31, 1996. These increases
were primarily the result of favorable mortgage interest rates, the demand for
housing in the market areas served by Bancorp, the expansion of Centennial
Mortgage business through additional branch offices, as well as the factors
contributing to commercial loan growth cited above. At December 31, 1998,
non-accrual loans in this category totaled $726,000 ($10,000 at December 31,
1997). At December 31, 1998 and 1997, there were no restructured loans in this
category.
At December 31, 1998, $52 million (or approximately 54.9%) of Bancorp's
real estate mortgage loans had fixed interest rates and $42.7 million (or
approximately 45.1%) 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 secured 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 90% of appraised value or cost, whichever is lower. Up to 75% 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
secondary-market investors. At December 31, 1998, the amount of the
non-guaranteed portion of these loans retained by Bancorp was not material.
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
secured or unsecured. Collections depend principally on the borrower's financial
condition or cash flow.
Installment loans were $7.1 million at December 31, 1998 compared to
$6.6 million at December 31, 1997 and $6.4 million at December 31, 1996. These
modest levels of installment loans to individuals were primarily due to
Bancorp's focus on lending to businesses and professionals and significant
15
<PAGE>
competition for consumer loans from the many credit unions, banks and finance
companies in the market areas served by Bancorp. At December 31, 1998, there
were no non-accrual loans in this category ($5,000 at December 31, 1997). At
December 31, 1998 and 1997, 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 8 to Bancorp's Consolidated Financial Statements,
which are incorporated by reference from Bancorp's 1998 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,
accounts receivable, inventory, equipment, 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 non-officer directors of Centennial Bank,
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, 1998, Centennial Bank's
permissible loan limit was $5.25 million (or $8.75 million if the loan was
secured by a first lien on real estate).
Loan pricing decisions are based on an evaluation of risk, cost of
funds, operating and administrative costs, an allowance 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.
16
<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.
NON-PERFORMING ASSETS
Non-performing assets consist of loans past due 90 days or more,
non-accrual loans, restructured loans and other real estate owned ("OREO"). The
following table sets forth information concerning Bancorp's non-performing
assets at the end of each of the last five years:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Non-performing loans:
Loans past due 90 days or more $1,043 $ 402 $ 420 $ 645 $ 190
Non-accrual loans 3,841 873 1,480 478 693
Restructured loans -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans 4,884 1,275 1,900 1,123 883
Other real estate owned 105 -- -- -- 392
------ ------ ------ ------ ------
Total non-performing assets $4,989 $1,275 $1,900 $1,123 $1,275
====== ====== ====== ====== ======
Allowance for loans losses $4,451 $3,349 $2,600 $1,928 $1,700
Ratio of total non-performing assets
to total assets .87% .26% .47% .35% .49%
Ratio of total non-performing loans
to total loans 1.13% .38% .71% .59% .54%
Ratio of allowance for loan losses
to total non-performing loans 91% 263% 137% 172% 193%
- - ----------
</TABLE>
Bancorp's total non-performing assets increased by $3.7 million during
1998 and decreased by $625,000 during 1997. Total non-performing assets, as a
percentage of total assets, increased to .87% at December 31, 1998 from .26% at
December 31, 1997 and .47% at December 31, 1996. Non-performing loans, as a
percentage of total loans, increased to 1.13% at December 31, 1998 from .38% at
December 31, 1997 and .71% at December 31, 1996.
The accrual of interest on a loan is discontinued when, in management's
judgment, the future collection of principal or interest is in doubt. Loans
placed on non-accrual status may or may not be contractually past due at the
time of such determination, and may or may not be secured. When a loan is placed
17
<PAGE>
on non-accrual 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 collection of principal is doubtful. If interest on
non-accrual loans had been accrued, such income would have been $272,600 in
1998, $102,600 in 1997 and $117,500 in 1996. Total interest income of $141,600
was recognized on non-accrual loans during 1998; no such income was recognized
in 1997 and 1996.
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, 1998, 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
net realizable value or the principal balance of the related loan. Any excess of
the loan balance over fair value of the property is charged to the allowance for
loan losses. At December 31, 1998, OREO totaled $105,400 and consisted of one
property. At December 31, 1997 and 1996, Bancorp held no OREO.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of the
losses inherent in the loan portfolio. The allowance 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 non-performing 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
allowance for loan losses quarterly. Although determination of the adequacy of
the allowance 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 allowance.
Under the first method, management assigns a specific percentage to each
non-performing, substandard or doubtful loan in Bancorp's loan portfolio to
calculate a total amount of average anticipated loan losses.
18
<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 non-accrual
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 allowance for loan losses in evaluating the adequacy of the
allowance.
Management believes that Bancorp's allowance 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 allowance for loan losses or that
regulators will not require Bancorp to increase the allowance, 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
allowance.
19
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth information regarding changes in Bancorp's allowance for loan losses
for each of the last five years:
At or for the year ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Loans and loans held for sale
at year-end $432,015 $340,625 $268,630 $191,090 $162,011
======== ======== ======== ======== ========
Average loans and
loans held for sale $387,914 $299,976 $226,965 $176,384 $139,672
======== ======== ======== ======== ========
Allowance for loan losses,
beginning of year $ 3,349 $ 2,600 $ 1,928 $ 1,700 $ 1,514
Charge-offs:
Commercial and other (370) (556) (89) (128) (108)
Real estate -- construction -- -- -- -- --
Real estate -- mortgage -- -- -- -- (17)
Installment (82) (2) (20) (34) (22)
-------- -------- -------- ------- -------
Total charge-offs (452) (558) (109) (162) (147)
-------- -------- -------- ------- -------
Recoveries:
Commercial and other 43 55 24 10 8
Real estate -- construction -- -- -- 3 --
Real estate -- mortgage -- -- 20 7 --
Installment 11 2 2 20 10
--------- --------- -------- ------- -------
Total recoveries 54 57 46 40 18
--------- --------- -------- ------- -------
Net loans charged off (398) (501) (63) (122) (129)
Provision for loan losses 1,500 1,250 735 350 315
--------- -------- -------- ------- -------
Allowance for loan losses
at year-end $ 4,451 $ 3,349 $ 2,600 $ 1,928 $ 1,700
======== ======== ======== ======= =======
Ratio of net loans charged off to average
loans outstanding (.10)% (.17)% (.03)% (.07)% (.09)%
Ratio of allowance for loan losses
to loans at year-end 1.04% .98% .97% 1.01% 1.05%
</TABLE>
Anticipated loan losses are charged against the allowance 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 allowance for loan
losses, it does not normally allocate the allowance to specific groups or
categories of loans. Management estimates, however, that the allocation of the
20
<PAGE>
allowance 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
allowance category as a
for percentage of
loan total gross
losses loans
---------- -------------
<S> <C> <C>
(Dollars in thousands)
December 31, 1998
Commercial and other $2,701 39.1%
Real estate -- construction 1,350 34.9
Real estate -- mortgage 275 24.4
Installment 75 1.6
Unallocated 50 --
------ ------
Total $4,451 100.0%
====== ======
December 31, 1997
Commercial and other $1,999 45.2%
Real estate -- construction 1,000 26.6
Real estate -- mortgage 250 26.2
Installment 50 2.0
Unallocated 50 --
------- ------
Total $3,349 100.0%
====== ======
December 31, 1996
Commercial and other $1,500 46.5%
Real estate -- construction 750 25.0
Real estate -- mortgage 250 26.5
Installment 50 2.0
Unallocated 50 --
------ -----
Total $2,600 100.0%
====== =====
December 31, 1995
Commercial and other $1,200 44.1%
Real estate -- construction 520 23.5
Real estate -- mortgage 125 29.2
Installment 35 3.2
Unallocated 48 --
------ -----
Total $1,928 100.0%
====== =====
December 31, 1994
Commercial and other $1,000 42.8%
Real estate -- construction 500 18.0
Real estate -- mortgage 125 34.9
Installment 35 4.3
Unallocated 40 --
------ -----
Total $1,700 100.0%
====== =====
</TABLE>
21
<PAGE>
The following table details the carrying value of Bancorp's impaired loans,
in accordance with SFAS 114, by type of loan at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Net
Recorded Valuation Carrying
Amount Allowance Value
------ --------- -----
<S> <C> <C> <C>
December 31, 1998
-----------------
Commercial $1,853,500 $187,100 $1,666,400
Real Estate -- construction 2,791,000 290,000 2,501,000
Real Estate -- mortgage 762,600 87,900 674,700
Consumer 23,200 200 23,000
--------- ------- --------- ----------
Total $5,430,300 $565,200 $4,865,100
========== ======== ==========
December 31, 1997
-----------------
Commercial $ 718,000 $150,000 $568,000
========== ======== ========
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.
</TABLE>
22
<PAGE>
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, 1998 and 1997, 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, 1998 and 1997. 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 to
Bancorp's Consolidated Financial Statements for more information about
investment securities held at December 31, 1998, 1997 and 1996.
December 31,
-------------------------------------
1998 1997 1996
------- ------- --------
(In thousands)
U.S. Treasury securities $ 1,435 $ 1,417 $ 1,405
U.S. Government agencies 39,263 34,415 32,594
States and political subdivisions 29,578 39,434 39,135
Corporate bonds 2,311 2,301 2,249
Mortgage-backed securities 4,206 6,337 7,271
------- ------- --------
Total debt securities 76,793 83,904 82,654
Federal Home Loan Bank stock 5,084 4,711 4,366
------- ------- --------
Total investment securities $81,877 $88,615 $87,020
======= ======= ========
23
<PAGE>
The following table provides the carrying values, principal amounts,
maturities and weighted average yields of Bancorp's investment securities at
December 31, 1998, all of which are classified as available-for-sale:
<TABLE>
<CAPTION>
Weighted
Carrying value Principal average
Type and maturity (fair market value) amount yield(1)
----------------- ------------------- ------ --------
<S> <C> <C> <C>
(Dollars in thousands)
U.S. Treasuries
Due within 1 year -- --
Due after 1 but within 5 years $ 1,435 $ 1,399 6.17%
Due after 5 but within 10 years -- --
------- ------- ------
Total U.S. Treasuries 1,435 1,399 6.17
U.S. Government agencies
Due after 1 but within 5 years 21,501 21,495 5.98
Due after 5 but within 10 years 17,762 17,985 6.12
------ ------
Total U.S. Government agencies 39,263 39,480 6.04
States and political subdivisions
Due after 1 but within 5 years 7,013 6,774 7.65
Due after 5 but within 10 years 7,098 6,810 7.88
Due after 10 years 15,467 14,988 7.69
------ ------
Total states and political subdivisions 29,578 28,572 7.72
Corporate bonds
Due after 1 but within 5 years 2,050 2,046 6.20
Due after 5 but within 10 years 261 259 6.08
------ ----- -----
Total corporate bonds 2,311 2,305 6.18
Mortgage-backed securities 4,206 4,217 5.65
----- -----
(U.S. Government agencies)
Total debt securities 76,794 75,973 6.66
Federal Home Loan Bank Stock 5,084 5,084
----- -----
Total securities $81,877 $81,057
======= =======
- - ------------
(1) Weighted average yield on state and political subdivisions has been computed on a 34% tax-equivalent basis.
</TABLE>
24
<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
interest checking 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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------
Average Average Average
------- ------- -------
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Noninterest-bearing demand $ 90,166 N/A $ 75,005 N/A $ 66,525 N/A
Interest-bearing demand 192,356 3.30% 152,453 3.16% 114,445 3.61%
Savings 19,540 2.79 14,347 2.36 14,166 2.15
CDs 145,387 5.63 129,756 5.63 100,549 5.18
------- -------- --------
Total $447,449 3.37 $371,561 3.35 $295,685 3.26
======== ======== ========
</TABLE>
25
<PAGE>
The following table shows the dollar amount of CDs that had balances of
$100,000 or more at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
----------- ------ ----------
1998 1997
----------- ----------
<S> <C> <C>
(In thousands)
CDs $100,000 or over with remaining maturity:
Three months or less $15,985 $20,937
Over three months through twelve months 39,437 28,145
Over one year through three years 5,161 4,686
Over three years 118
------- -------
125
Total $60,708 $53,886
======= =======
</TABLE>
SHORT-TERM BORROWINGS
At December 31, 1998, Bancorp's short-term borrowings consisted of
securities sold under agreements to repurchase totaling $16.1 million and
federal funds purchased totaling $4.5 million. Securities sold under agreement
to repurchase are due on demand, but generally range in duration from one to
eighty-nine days.
At December 31, 1997, Bancorp's short-term borrowings consisted of
securities sold under agreements to repurchase totaling $7.7 million.
At December 31, 1996, Bancorp's short-term borrowings consisted of
securities sold under agreements to repurchase totaling $4.3 million and
advances from the Federal Home Loan Bank of Seattle totaling $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 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
(Dollars in thousands)
Amount outstanding at year-end $20,600 $ 7,716 $12,316
Weighted average interest rate at year-end 4.55% 5.03% 5.78%
Maximum amount outstanding at any month-end during the year $20,500 $18,321 $15,264
Daily average amount outstanding during the year $10,016 $ 9,688 $11,399
Average weighted interest rate during the year 4.88% 5.56% 7.31%
</TABLE>
26
<PAGE>
LONG-TERM DEBT
At December 31, 1998, Bancorp had no 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 was payable monthly at the rate of 6.14%.
The debt matured and was paid August 6, 1998. The loan was secured 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 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
(Dollars in thousands)
Net income $ 11,435 $ 9,303 $ 6,514
Average total assets 525,217 439,186 357,644
Return on average assets 2.18% 2.12% 1.82%
Net income $ 11,435 $ 9,303 $ 6,514
Average equity 56,712 45,936 31,500
Return on average equity 20.16% 20.25% 20.68%
Average total equity $ 56,712 $ 45,936 $ 31,500
Average total assets 525,217 439,186 357,644
Average total equity to assets ratio 10.80% 10.46% 8.81%
</TABLE>
27
<PAGE>
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. 130
Beginning in the year ended December 31, 1998, Bancorp retroactively
adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 established standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Accordingly, any unrealized gains or
losses on available-for-sale securities are recognized as a component of
comprehensive income.
SFAS NO. 131
Beginning in the year ended December 31, 1998, Bancorp retroactively
adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131, in general, requires that a public business
enterprise report financial and descriptive information about its material
reportable operating segments and also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by key management
personnel in deciding how to allocate resources and in assessing performance.
Management believes that, based on the materiality standards of SFAS
131, Bancorp primarily operates in one business segment. In addition, the
related disclosures of SFAS 131 are included within Bancorp's Consolidated
Financial Statements and Notes as applicable.
SFAS NO. 132
Beginning in the year ended December 31, 1998, Bancorp retroactively
adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of SFAS Nos. 87, 88 and 106" (SFAS 132).
SFAS 132 revises and standardizes employers' disclosures about pension and other
postretirement benefit plans. SFAS 132 did not materially affect the disclosures
in Bancorp's Consolidated Financial Statements and Notes.
28
<PAGE>
SFAS NO. 133
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), was issued. SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. At December 31,
1998, Bancorp had no derivative instruments or hedging activities.
SFAS NO. 134
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" (SFAS 134), was issued. SFAS 134 is effective for
the first fiscal quarter beginning after December 15, 1998. At December 31,
1998, Bancorp had not entered into any transaction to which SFAS 134 would
apply.
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
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.
29
<PAGE>
EMPLOYEES
Centennial Bancorp has no employees other than its executive officers,
who are also employees of Centennial Bank. At December 31, 1998, Centennial Bank
and Centennial Mortgage had 188 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.
ACQUISITIONS
As a bank holding company, Bancorp is required to obtain the prior
approval of the FRB before: (1) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company, if after such
acquisition, Bancorp would own or control, directly or indirectly, more than 5%
of the voting shares of the bank or bank holding company; (2) merging or
30
<PAGE>
consolidating with another bank holding company; or (3) acquiring substantially
all of the assets of any other bank. 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
non-banking activity, unless the activity has been determined by the FRB to be
closely related to banking or managing banks. The FRB has identified certain
non-banking 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 non-banking 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
31
<PAGE>
company may be denied approval to acquire or establish additional banks or
non-bank businesses. The guidelines require a minimum ratio of total capital to
risk-weighted assets of 8%. At December 31, 1998, Bancorp's ratio of total
capital to risk-weighted assets was 12.02%.
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, 1998 was 10.9%.
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.
32
<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 15 branches, the most recent of which opened in February 1999.
Centennial Bank has received regulatory approval to open a branch in Salem,
Oregon and to acquire Northwest National Bank's Hazel Dell branch, which will be
Centennial Bank's first branch in the state of Washington.
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.
33
<PAGE>
TRANSACTIONS WITH AFFILIATES
Centennial Bank is subject to certain FRB restrictions on transactions
among related parties. 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 limits the
amount of advances to third parties that may be collateralized by the securities
of Bancorp or its subsidiaries.
The Federal Reserve Act also requires that certain transactions between
Centennial Bank and its affiliates to 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, 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." Under
Oregon law, Centennial Bank is subject to restrictions on the payment of cash
dividends to its shareholders (i.e., to Bancorp). An Oregon state-chartered bank
may not pay a cash dividend in an amount greater than the bank's net unreserved
retained earnings, after first deducting (1) to the extent not already charged
against earnings or reflected in a reserve, all bad debts, which are debts on
34
<PAGE>
which interest is unpaid and past due at least six months; (2) all other assets
charged off as required by the Oregon Director or a state or federal examiner;
and (3) all accrued expenses, interest and taxes of the bank. At December 31,
1998, $21.1 million was available for declaration of dividends by Centennial
Bank to Bancorp without prior regulatory approval.
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 a specific allowance
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, 1998, Centennial
Bank's leverage ratio, Tier 1 capital to risk-weighted assets ratio and total
risk-based capital to risk-weighted assets ratio were 9.8%, 10.1% and 10.9%,
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
35
<PAGE>
time it became undercapitalized or the amount necessary to bring Centennial Bank
into compliance with the capital plan.
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.
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: (1) internal controls, information systems and internal audit systems;
(2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5)
asset growth; (6) ratio of classified assets to capital; (7) minimum earnings;
and (8) 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 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.
36
<PAGE>
DEPOSIT INSURANCE PREMIUMS
The FDIC has adopted regulations establishing a risk-based deposit
insurance premium schedule. Effective January 1, 1996, Centennial Bank's risk
assessment classification was reduced to $.00, so Centennial Bank paid a minimum
annual payment of $2,000 during 1996. This risk assessment classification 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 to $50,000 and
$45,000 in 1998 and 1997, respectively.
CENTENNIAL MORTGAGE
Centennial Mortgage is, by definition of the Housing and Urban
Development, a non-supervised 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
37
<PAGE>
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.
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.
ITEM 2. DESCRIPTION OF PROPERTIES
-------------------------
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 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.
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<PAGE>
Centennial Bank is retaining for future use the remaining approximate 2,500
square feet of available space on the third floor.
In 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 1998.
Construction of a three-story office building was completed in 1995 at a cost of
$2.9 million. Centennial Bank occupies the first and second floors of the
building. The third floor was leased to another company effective January 1996
pursuant to a five-year lease.
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. A temporary branch facility opened at the site during construction of
the permanent facility which was completed August 1998 at a cost of $2.3
million. Centennial Bank also owns three other full-service branch facilities.
In March 1998, Centennial Bank entered into a lease for approximately
8,000 square feet of space in the Oakway Center Office building for the new
Oakway Center branch. The lease has a ten-year term with initial base payments
of $13,180 per month increasing by $400 per month annually thereafter.
In August 1998, Centennial Bank entered into a lease for approximately
3,500 square feet of the One Airport Center building for the new Airport Road
Office in Portland, Oregon. The lease has an initial term of five years and is
renewable for two additional three-year periods. Lease payments were $5,808 per
month in 1998.
Centennial Bank leases facilities for two other full-service branch
offices with lease payments totaling $10,328 per month in 1998. In addition, the
Bank leases space for five limited-service retirement center offices with lease
payments totaling $3,125 per month in 1998. Centennial Bank also has storage and
parking leases with payments totaling $1,906 per month in 1998.
In January 1998, Centennial Mortgage entered into a lease for
approximately 6,650 square feet of space in the Kruse Woods III office building
for its Portland Office. The building is located in Lake Oswego, Oregon, a
Portland suburb. The lease has a six-year term and initial base payments of
$13,581 per month with scheduled increases to a maximum of $15,521 per month
39
<PAGE>
beginning in year five. Centennial Mortgage also has leases for its Eugene and
Sunnyside (Clackamas, Oregon) offices with lease payments totaling $8,986 per
month 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, clams involving the making and servicing of real property loans, and
other issues incident to Bancorp's business.
As of the date of this Annual Report, Bancorp was not a party to any
legal proceedings management believes are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
40
<PAGE>
PART II
The information called for by Items 5, 6, 7, 7A, 8 and 9 of Part II is
included in Centennial Bancorp's Annual Report to Shareholders for the year
ended December 31, 1998, and is incorporated herein by reference as follows:
<TABLE>
<CAPTION>
Centennial Bancorp
Annual Report
to Shareholders
Page No.
-----------------
<S> <C> <C>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
----------------------------------
STOCK AND RELATED SHAREHOLDER
-----------------------------
MATTERS 47
-------
ITEM 6. SELECTED FINANCIAL DATA 2
-----------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND
---------------------------
ANALYSIS OF FINANCIAL CONDITION
-------------------------------
AND RESULTS OF OPERATIONS 32 - 45
-------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE
-----------------------------
DISCLOSURES ABOUT MARKET RISK 40 - 41
------------------------------
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 3 - 31
------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
---------------------------------
ACCOUNTANTS ON ACCOUNTING AND
-----------------------------
FINANCIAL DISCLOSURE 46
--------------------
</TABLE>
41
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF BANCORP
-------------------------------------------
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 19, 1999, 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 19, 1999, 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 19, 1999, 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 19, 1999, and is
incorporated herein by reference.
42
<PAGE>
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, 1998,
and are incorporated herein by reference:
<TABLE>
<CAPTION>
Annual
Report to
Shareholders
Page Number
-----------
<S> <C>
Report of Independent Accountants 3
Consolidated balance sheets at
December 31, 1998 and 1997 4
For the three years ended December 31, 1998
Consolidated statements of income 5
Consolidated statements of
shareholders' equity 6 - 7
Consolidated statements of cash flows 8 - 9
Notes to consolidated financial statements 10 - 31
</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 Restated Articles of Incorporation
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)
43
<PAGE>
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)
10.2* 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)
10.3* 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)
10.4* 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)
10.5* Restated 1995 Stock Incentive Plan (filed as
Exhibit 10.9 to registrant's Form 10-K for the
year ended December 31, 1996, and incorporated
herein by reference)
10.6* 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)
10.7 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)
44
<PAGE>
10.8 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)
10.9* Centennial Bank Deferred Compensation Plan, dated
effective January 1, 1996 (filed as Exhibit 10.13
to registrant's Form 10-K for the year ended
December 31, 1996, and incorporated herein
by reference)
10.10* Participation Agreement for use with
Centennial Bank Deferred Compensation Plan
(filed as Exhibit 10.14 to registrant's Form
10-K for the year ended December 31, 1996,
and incorporated herein by reference)
10.11* 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)
10.12* 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)
10.13* First Amendment to Employment Agreement
dated December 1, 1997, between Richard C.
Williams and registrant (filed as Exhibit
10.18 to registrant's Form 10-K for the year
ended December 31, 1997, and incorporated
herein by reference)
11.1 Earnings per Share Computation
13.1 Portions of 1998 Annual Report to Shareholders
(which are incorporated by reference in this
Form 10-K Annual Report)
16.1 Letter dated November 5, 1998 from
PricewaterhouseCoopers LLP to the Securities and
Exchange Commission (filed as Exhibit 16 to
registrant's Form 8-K Report filed November 5,
1998 and incorporated herein by reference)
45
<PAGE>
20.1 Portions of definitive proxy statement for 1999
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 Symonds, Evans & Larson, P.C.,
Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP,
Independent Accountants
27.1 Financial Data Schedule as of December 31, 1998
99.1 Safe Harbor for Forward-Looking Statements under
Private Securities Litigation Reform Act of
1995: Certain Cautionary Statements
- - ---------------
* 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) On November 5, 1998 Bancorp filed Form 8-K to report a change of
independent accountant effective October 30, 1998.
46
<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, 1999 By /s/ 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, 1999 By /s/ Richard C. Williams
---- ------------------------------------
Richard C. Williams, President,
Chief Executive Officer and Director
CHIEF FINANCIAL OFFICER
DATED: March 26 , 1999 By /s/ Michael J. Nysingh
---- ------------------------------------
Michael J. Nysingh
Chief Financial Officer
DIRECTORS:
DATED: March 26 , 1999 By /s/ Dan Giustina
---- ------------------------------------
Dan Giustina, Director
DATED: March 19 , 1999 By /s/ Cordy H. Jensen
---- ------------------------------------
Cordy H. Jensen, Director
DATED: March 24 , 1999 By /s/ Robert L. Newburn
----- ------------------------------------
Robert L. Newburn, Director
DATED: March 30 , 1999 By /s/ Brian B. Obie
---- ------------------------------------
Brian B. Obie, Director
DATED: March 25, 1999 By /s/ Ted Winnowski
---- ------------------------------------
Ted Winnowski, Director
47
<PAGE>
EXHIBIT INDEX
-------------
Exhibit*
- - --------
3.1 Restated Articles of Incorporation
11.1 Earnings per Share Computation
13.1 Portions of 1998 Annual Report to Shareholders
(which are incorporated by reference into this Form
10-K Annual Report)
23.1 Consent of Symonds, Evans & Larson, P.C., Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
27.1 Financial Data Schedule as of December 31, 1998
99.1 Safe Harbor for Forward-Looking Statements under Private
Securities Litigation Reform Act of 1995:Certain Cautionary
Statements
- - ---------------
* See Item 14(a)(3) of this Annual Report for a list of all exhibits,
including those incorporated by reference.
48
Submit the original CORPORATION DIVISION - BUSINESS REGISTRY
and one true copy 255 Capitol Street NE, Suite 151 THIS SPACE
$10.00 Salem, OR 97310-1327 FOR OFFICE
(503) 986-2200 Facsimile (503) 378-4381 USE ONLY
REGISTRY NUMBER: FILED
MARCH 05 1999
150901-11 Oregon
- - --------- Secretary of State
RESTATED ARTICLES OF INCORPORATION
BUSINESS CORPORATION
PLEASE TYPE OR PRINT LEGIBLY IN BLACK INK
1. Name of the corporation prior to amendment: Centennial Bancorp
----------------------------
2. New name of the corporation (if changed):
------------------------------------
3. A copy of the restated articles is attached.
4. The date of adoption of the restated articles was February 17, 1999, which
is the date of adoption of amendments included in the restated articles.
5. Check the appropriate statement(s):
/x/ The restated articles contain amendments which do not require
shareholder approval. These amendments were duly adopted by
the board of directors.
/_/ The restated articles contain amendments which require
shareholder approval. The vote of shareholders was as
follows:
- - ------------ -------------- ---------------- --------------- ---- ----------
Class or Number of Number of Number of Number of
series of shares votes entitled votes votes
shares outstanding to be cast cast for cast against
- - ------------ -------------- ---------------- --------------- ---------------
- - ------------ -------------- ---------------- --------------- ---------------
/_/ The corporation has not issued any shares of stock.
Shareholder action was not required to adopt the restated
articles. The restated articles were adopted by the
incorporators or by the board of directors.
6. Other provisions, if applicable:
Execution: /s/ Michael J. Nysingh Michael J. Nysingh Chief Financial Officer
----------------------------------------------------------------------
Signature Printed Name Title
Person to contact about this filing: Carol Dey Hibbs (503) 802-2016
------------------------------------------
Name Daytime phone number
MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION OR INCLUDE YOUR VISA OR
MASTERCARD NUMBER AND EXPIRATION DATE - - - / . SUBMIT THE COMPLETED
FORM AND FEE TO THE ABOVE ADDRESS OR FAX TO (503) 378-4381
113 (6/94)
<PAGE>
RESTATED ARTICLES OF INCORPORATION
CENTENNIAL BANCORP
ARTICLE I.
The name of the Corporation is Centennial Bancorp and its duration
shall be perpetual.
ARTICLE II.
The purposes for which the Corporation is organized are:
(1) To own and hold the capital stocks of state or
federally-chartered banks.
(2) To engage in any lawful activity for which a corporation may
be organized under ORS Chapter 60.
(3) To invest and reinvest all or part of its assets, to the
extent permitted by applicable law, now or hereafter existing,
in any and all: obligations, loans, notes, bonds, debentures,
warrants, certificates or other evidences of indebtedness of
any person, firm, partnership, association, corporation,
cooperative, trust, business or investment trust, the United
States, any foreign country, or of any other state, territory,
governmental district agency or municipality thereof; real
property, improved or unimproved, of every kind and
description and all interests and estates therein of
whatsoever nature; personal property, or any interest therein,
including but not limited to, contracts, choses in action,
rights and powers, all of which may be either negotiable or
non-negotiable; securities, common or preferred stocks or
certificates (participating, voting or non-voting), of
corporations, cooperatives, trusts or business or investment
trusts; oil and mineral rights, leases and interests of every
kind and description; and every other matter or thing, real,
personal or mixed, tangible or intangible, of every kind and
description, without limitation except as may be imposed by
applicable laws.
(4) To manage, sell, convey, transfer, lease, mortgage, divide or
subdivide, exchange or otherwise dispose of or deal with, or
to improve any and all of its investments and other real and
personal property, or any interest therein, and to exercise
all rights, privileges and powers with respect to all of such
investment, real and personal property, including, but not
limited to, voting shares, securities, stocks and certificates
and entering into pooling and trust agreements with respect
thereto.
(5) To purchase, take, receive, lease or otherwise acquire, own,
hold, improve, use and deal with personal property, or any
interest therein, Which it deems necessary or convenient to
operate its business, including, but not limited to,
RESTATED ARTICLES OF INCORPORATION - Page 1
<PAGE>
mechanical, electrical and electronic computers and equipment,
and data processing and accounting systems, and to mortgage,
pledge, sell, convey or otherwise transfer or dispose of such
personal property or any interest therein.
(6) To acquire by purchase, occupation, lease, gift, exchange, or
otherwise, and to hold, occupy, improve, develop, subdivide or
partition, lay out, plat, dedicate to public use, use and
enjoy, rent, lease, convey, contract to sell, or otherwise
dispose of and deal in real property, improved or unimproved,
of every kind and description and all interests and estates
therein of whatsoever kind or nature, and to erect, occupy,
alter, manage, maintain or tear down buildings and structures
of every kind and description.
(7) To carry on all or any of its operations and business and to
exercise all or any of its powers in any of the states,
districts, territories or possessions of the United States and
in any and all foreign countries, subject to the laws of such
states, districts, territories, possessions or countries, and
to have one or more offices therein.
(8) To make contracts with individuals, partnerships,
associations, corporations, other business or commercial
entities, governments and governmental agencies, incur
liabilities and obligations, borrow or raise moneys at such
rates of interest as it may determine, and to draw, discount,
make, accept, endorse, execute, issue, transfer and deliver
promissory notes, drafts, bills of exchange, warrants, bonds,
debentures and other negotiable or non-negotiable instruments
and evidences of indebtedness for any of the objects or
purposes of the Corporation from time to time, without
limitation as to amount, and to secure the payment or
performance thereof and of the interest thereon by mortgage
upon or pledge, conveyance or assignment in trust of the whole
or any part of the property or income of this Corporation and
to sell, pledge or otherwise dispose of such bonds or other
obligations of this Corporation for its corporate purposes,
and to make gifts of its property and assets for educational,
scientific, charitable, religious, civic and public welfare
purposes.
(9) To lend money, assets or credit for its corporate purposes
and, at its option, to take and hold real and personal
property, tangible or intangible, and choses in action, as
security for the payment of assets and credit so loaned.
(10) To assume, give assurances, and guarantee the obligations and
liabilities, contractual or otherwise, of other persons, for
its corporate purposes.
(11) To acquire and pay for in cash, shares or other securities, or
property of this Corporation or otherwise, the good will,
rights, assets, and property, and to undertake or assume the
whole or any part of the obligations or liabilities of any
person, firm, trust, association or corporation.
RESTATED ARTICLES OF INCORPORATION - Page 2
<PAGE>
(12) To take, receive or acquire by way of purchase, gift,
compromise or discharge of claims or indebtedness or
otherwise, hold, own, pledge, transfer or otherwise dispose of
its own shares and its other securities as long as it shall
not purchase, either directly or indirectly, its own shares in
violation of the laws of the State of Oregon.
(13) To enter joint enterprises and to become a member of any
lawful associations or organizations for the conduct,
proposition and pursuit of any of the purposes herein
enumerated and to promote corporations and other organizations
to be organized for any legal purpose.
(14) In addition to the business, objects and purposes herein set
forth, to do anything necessary, suitable, useful, expedient
or convenient for the carrying on of any said businesses, or
purposes, or for the exercise of any power, herein set forth,
or which at any time shall appear to be beneficial to this
corporation in connection therewith, or for the performance of
any or all acts expressly or impliedly authorized or required
under applicable laws; and to do any and all of the things
herein set forth either alone or jointly with others, and
either as principal for its own account, or as agent, trustee,
contractor, broker, factor or otherwise, and to the same
extent as fully as a natural person might or could do in the
State of Oregon, or elsewhere.
The several clauses contained in the statement of purposes shall be
construed both as purposes and powers, and the statements contained in each
clause, except where otherwise expressed, shall in no way be limited or
restricted by reference to, or inference from, the terms of any other clauses,
but shall be regarded as independent purposes and powers. This Corporation shall
have all the powers now or hereafter conferred by the laws of the State of
Oregon and of any other state or country in which it may be operating, whether
or not such powers be enumerated in these Articles of Incorporation. The
business or purpose of this Corporation is from time to time to do any one or
more of the acts and things herein set forth. The enumeration of specific powers
and purposes shall not be held to limit or restrict in any manner any powers or
purposes of this Corporation. In the event that a court of competent
jurisdiction should determine that any portion of any Article or part thereof is
unlawful or unenforceable, such portion shall be deemed severable from the
remainder of such Article or part thereof, and the remainder shall remain in
full force and effect.
ARTICLE III.
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is sixty million shares divided into
three classes, as follows:
Five million shares of voting preferred stock, without par value
(hereinafter sometimes referred to as "Voting Preferred Stock");
RESTATED ARTICLES OF INCORPORATION - Page 3
<PAGE>
Five million shares of preferred stock, without par value, without
voting rights, except with respect to voting rights in the event of a default in
the payment of any dividend or with respect to any provisions granting the right
to consent to the issuance of a different series of Preferred Stock which would
materially or adversely affect the rights, preferences or powers of such
issuance (hereinafter sometimes referred to as "Non-voting Preferred Stock");
and
Fifty million shares of common stock, without par value (hereinafter
sometimes referred to as "Common Stock").
ARTICLE IV.
The Board of Directors is expressly authorized to adopt, from time to
time by resolution, the designation of one or more series of Voting Preferred
Stock, or one or more series of Non-voting Preferred Stock, fixing and
determining the relative rights and preferences thereof. The authority of the
Board of Directors to designate the relative rights and preferences between
series of Voting or Non-voting Preferred Stock shall include the following:
(1) The rate of dividend.
(2) Whether the shares can be redeemed and, if so, the redemption
price and the terms and conditions of redemption.
(3) The amount payable upon the shares in the event of voluntary
or involuntary liquidation.
(4) Sinking fund provisions, if any, for the redemption or
purchase of the shares.
(5) The terms and conditions, if any, on which the shares may be
converted.
ARTICLE V.
Subject to any rights to receive dividends to which the holders of the
shares of Voting or Non-voting Preferred Stock may be entitled, the holders of
shares of Common Stock shall be entitled to receive dividends, if and when
declared, payable from time to time by the Board of Directors, from any funds
legally available therefor.
Except as provided by law or these Articles of Incorporation with
respect to voting by class, each outstanding share of Common Stock and each
outstanding share of Voting Preferred Stock of the Corporation shall entitle the
holder thereof to one vote on each matter submitted to a vote at a meeting of
the shareholders.
RESTATED ARTICLES OF INCORPORATION - Page 4
<PAGE>
ARTICLE VI.
The shareholders of the Corporation shall have no preemptive right to
acquire shares of the Corporation which would otherwise be available to the
shareholders pursuant to ORS 60.
ARTICLE VII.
In furtherance and addition to, and not in limitation of the powers
conferred on directors by law, the Board of Directors is expressly authorized:
(1) To manage the business and affairs of this Corporation and to
appoint and remove all officers, agents, fiduciaries,
employees, contractors, counsel, auditors and others and to
fix their compensation.
(2) To exercise all powers conferred on this Corporation and all
powers necessary or proper to carry out the purposes of this
Corporation which are not expressly reserved to shareholders
by statute or these Articles of Incorporation and Amendments
thereto.
(3) To adopt, alter, amend or repeal the By-Laws of this
Corporation except as the By-Laws may otherwise provide.
(4) To fix the compensation of Directors.
(5) To authorize or cause to be executed mortgages, liens and
encumbrances upon the real and personal property of this
Corporation.
(6) To set apart out of any of the net profits arising from the
business of this Corporation a reserve or reserves for any
proper purpose or to abolish any such reserve in the manner in
which it was created.
(7) To fill any vacancy on the Board of Directors occurring by
reason of death, removal, inability to serve or resignation of
a Director, or by reason of an increase in the number of
Directors, by the affirmative vote of a majority of the
remaining Directors.
(8) To provide generally or specifically for the designation of
two or more Directors to constitute an Executive Committee,
which committee may have and may exercise all the authority of
the Board of Directors in the management of this Corporation,
excepting only the authority to amend the Articles of
Incorporation, adopt a plan of merger or consolidation;
recommend to the shareholders the sale, lease, exchange,
mortgage, pledge or other disposition of all or substantially
all the property and assets of this Corporation other than in
the usual course of business; recommend to the shareholders a
RESTATED ARTICLES OF INCORPORATION - Page 5
<PAGE>
voluntary dissolution of the Corporation or a revocation
thereof; or amending the By-Laws of this Corporation.
(9) To distribute assets of this Corporation to the shareholders
in partial liquidation out of stated capital or capital
surplus, in cash or property, in its discretion, if such
distribution is otherwise consistent with laws of the State of
Oregon.
(10) To create and issue (whether or not in connection with the
issuance and sale of any of this Corporation's shares or other
securities or obligations) warrants, rights, options or other
obligations convertible into, exchangeable for or entitling
the holder thereof to purchase from this Corporation, shares
of any class or classes of stock. Such warrants, rights,
options or other obligations shall be evidenced in such manner
as the Board of Directors shall approve and shall set forth
the terms on which, the time or times within which, and the
price or prices at which such shares may be purchased from the
Corporation upon the exercise of any such warrants, rights,
options or other obligations. The price or prices to be
received for any shares, to be issued upon the exercise of
such warrants, rights, options or other obligations shall not
be less than the par value thereof. In the absence of fraud in
the transaction, the judgment of the Board of Directors as to
the value of the consideration received for such warrants,
rights, options or other obligations or the shares underlying
them shall be conclusive.
(11) To issue authorized, but unissued, shares of this Corporation
at such times, on such terms and for such type and amount of
consideration, not less than the par value thereof if such
shares have a par value, as the Board of Directors may
determine, and the judgment of the Board of Directors as to
the judgment of the consideration received shall be conclusive
in the absence of fraud in the transaction.
(12) To purchase, take, receive or otherwise acquire, hold, own,
pledge, sell, transfer or otherwise assign shares, securities
or other obligations of this Corporation (whether issued,
unissued, or treasury shares or securities, and whether in
connection with the issuance and sale of any stock,
obligations or other securities of this Corporation or
otherwise) at such times, on such terms, and for such
consideration, whether less than the par value thereof or not,
as the Board of Directors shall deem adequate.
(13) To purchase shares or other securities of this Corporation
without limitation for the purpose of eliminating fractional
shares, collecting or compromising indebtedness of this
Corporation, paying dissenting shareholders entitled to
payment for their shares under the laws of the State of
Oregon, or for effecting, subject to the laws of the State of
Oregon, the retirement of redeemable shares of this
Corporation by redemption or by purchase.
RESTATED ARTICLES OF INCORPORATION - Page 6
<PAGE>
ARTICLE VIII.
(1) Non-Derivative Actions.
Subject to the provisions of Sections (3) and (6) below, the
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative,
(including all appeals) (other than an action by or in the right of the
corporation) by reason of or arising from the fact that the person is or was a
director or officer of the corporation or one of its subsidiaries, or is or was
serving at the request of the corporation as a director, officer, partner, or
trustee of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against reasonable expenses
(including attorney's fees), judgments, fines, penalties, excise taxes assessed
with respect to any employee benefit plan and amounts paid in settlement
actually and reasonably incurred by the person to be indemnified in connection
with such action, suit or proceeding if the person acted in good faith, did not
engage in intentional misconduct, and, with respect to any criminal action or
proceeding, did not know the conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith or, with respect to any
criminal action or proceeding, that the person knew that the conduct was
unlawful.
(2) Derivative Actions.
Subject to the provisions of Sections (3) and (6) below, the
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit
(including all appeals) by or in the right of the corporation to procure a
judgment in its favor by reason of or arising from the fact that the person is
or was a director or officer of the corporation or one of its subsidiaries, or
is or was serving at the request of the corporation as a director, officer,
partner, or trustee of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
reasonable expenses (including attorneys' fees) actually incurred by the person
to be indemnified in connection with the defense or settlement of such action or
suit if the person acted in good faith; provided, however, that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for deliberate
misconduct in the performance of that person's duty to the corporation, for any
transaction in which the person received an improper personal benefit, for any
breach of the duty of loyalty to the Corporation, or for any distribution to
shareholders which is unlawful under applicable Oregon law, unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
RESTATED ARTICLES OF INCORPORATION - Page 7
<PAGE>
(3) Determination of Right To Indemnification in Certain Cases.
Subject to the provisions of Section (5) and (6) below, indemnification
under Sections (1) and (2) of this Article shall not be made by the corporation
unless it is expressly determined that indemnification of the person who is or
was an officer or director, or is or was serving at the request of the
corporation as a director, officer, partner, or trustee of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, is proper in the circumstances because the person has met
the applicable standard of conduct set forth in Sections (1) or (2) That
determination may be made by any of the following:
(a) By the Board of Directors by majority vote of a quorum
consisting of directors who are not or were not parties to the action,
suit or proceeding;
(b) If a quorum cannot be obtained under paragraph (a) of this
subsection, by majority vote of a committee duly designated by the
Board of Directors consisting solely of two or more directors not at
the time parties to the proceeding (directors who are parties to the
proceeding may participate in designation of the committee);
(c) By special legal counsel selected by the Board of
Directors or its committee in the manner prescribed in (a) or (b) or,
if a quorum of the Board of Directors cannot be obtained under (a) and
a committee cannot be designated under (b) the special legal counsel
shall be selected by majority vote of the full Board of Directors,
including directors who are parties to the proceeding;
(d) By the shareholders; or
(e) By a court of competent jurisdiction.
(4) Indemnification of Persons other than Officers or Directors.
Subject to the provisions of Section (6), in the event any person not
included with the group of persons referred to or in Sections (1) and (2) of
this Article was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding of a type referred
to in Sections (1) or (2) of this Article by reason of or arising from the fact
that such person is or was an employee or agent (including an attorney) of the
corporation or one of its subsidiaries, or is or was serving at the request of
the corporation as an employee or agent (including an attorney) of another
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, the Board of Directors of the corporation by a
majority vote of a quorum (whether or not such quorum consists in whole or in
part of directors who were parties to such action, suit or proceeding) or the
stockholders of the corporation by a majority vote of the outstanding shares,
may, but shall not be required to, grant to such person a right of
indemnification to the extent described in Sections (1) or (2) of this Article
as if the person were an officer or director referred to therein, provided that
such person meets the applicable standard of conduct set forth in such Sections.
RESTATED ARTICLES OF INCORPORATION - Page 8
<PAGE>
Furthermore, the Board of Directors may designate by resolution in advance of
any action, suit or proceeding, those employees or agents (including attorneys)
who shall have all rights of indemnification granted to officers and directors
under this Article.
(5) Successful Defense.
Notwithstanding any other provision of Sections (1), (2), (3) or (4) of
this Article, but subject to the provisions of Section (6), to the extent a
director, officer, employee or agent (including an attorney) is successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in Sections (1), (2) or (4) of this Article, or in defense of any claim, issue
or matter therein, that person shall be indemnified against expenses (including
attorneys fees) actually and reasonably incurred by him in connection therewith.
(6) Condition Precedent to Indemnification Under Sections (1), (2)
or (4).
Any person who desires to receive the benefits otherwise conferred by
Sections (1), (2) or (4) of this Article shall promptly notify the corporation
that the person has been named a defendant to an action, suit or proceeding of a
type referred to in Sections (1), (2) or (4) and intends to rely upon the right
of indemnification described in Sections (1), (2) or (4) of this Article. The
notice shall be in writing and mailed, via registered or certified mail, return
receipt requested, to the President of the corporation at the executive offices
of the corporation or, in the event the notice is from the President, to the
registered agent of the corporation. Failure to give the notice required hereby
shall entitle the Board of Directors of the corporation by a majority vote of a
quorum (consisting of directors who, insofar as indemnity of officers or
directors is concerned, were not parties to such action, suit or proceeding, but
who, insofar as indemnity of employees or agents is concerned, may or may not
have been parties) or the stockholders of the corporation by a majority of the
votes entitled to be cast by holders of shares of the corporation's stock which
have unlimited voting rights of the corporation to make a determination that
such a failure was prejudicial to the corporation in the circumstances and that,
therefore, the right to indemnification referred to in Sections (1), (2) or (4)
of this Article shall be denied in its entirety or reduced in amount.
(7) Advances for Expenses.
Expenses incurred by a person indemnified hereunder in defending a
civil, criminal, administrative or investigative action, suit or proceeding
(including all appeals) or threat thereof, may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such person to repay such expenses if it
shall ultimately be determined that the person is not entitled to be indemnified
by the corporation and a written affirmation of the person's good faith belief
that he or she has met the applicable standard of conduct. The undertaking must
be a general personal obligation of the party receiving the advances but need
not be secured and may be accepted without reference to financial ability to
make repayment.
RESTATED ARTICLES OF INCORPORATION - Page 9
<PAGE>
(8) Insurance.
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation
or one of its subsidiaries or is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against any liability asserted against
and incurred by that person in any such capacity, or arising out of his status
as such, whether or not the corporation would have the power to indemnify that
person against such liability under the provisions of this Article or under
applicable Oregon law.
(9) Purpose and Exclusivity.
The indemnification referred to in the various Sections of this Article
shall be deemed to be in addition to and not in lieu of any other rights to
which those indemnified may be entitled under any statute, rule of law or
equity, agreement, vote of the stockholders or Board of Directors or otherwise.
The corporation is authorized to enter into agreements of indemnification. The
purpose of this Article is to augment the provisions of applicable Oregon law
dealing with indemnification.
(10) Severability.
If any of the provisions of this Article are found, in any action, suit
or proceeding, to be invalid or ineffective, the validity and the effect of the
remaining provisions shall not be affected.
ARTICLE IX.
In construing these Articles, it is understood that if the context so
requires, the masculine pronoun shall be taken to mean and include the feminine.
ARTICLE X.
No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for conduct as a director,
except that this provision shall not eliminate or limit the liability of a
director for any act or omission occurring prior to the date of adoption of this
Article and that this provision shall not eliminate or limit the liability of a
director for (a) any breach of the director's duty of loyalty to the corporation
or its stockholders; (b) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (c) any distribution to
shareholders which is unlawful under Oregon law; or (d) any transaction from
which the director derived an improper personal benefit. No amendment to or
repeal of this Article shall apply to or have any effect on the liability or
alleged liability of any director of the corporation for or with respect to any
acts or omissions prior to such amendment or repeal.
RESTATED ARTICLES OF INCORPORATION - Page 10
<PAGE>
If Oregon law is amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the corporation shall be eliminated or limited to the fullest extent permitted
by Oregon law, as so amended.
RESTATED ARTICLES OF INCORPORATION - Page 11
<TABLE>
<CAPTION>
EXHIBIT 11.1
CENTENNIAL BANCORP
COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31,
----------------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Reconciliation of Income
Net income - basic $11,434,546 $9,303,363 $6,514,288
Income impact of assumed conversion of
Convertible Debentures, net of taxes -- -- 363,358
---------- ---------- ----------
Income available to common
shareholders - diluted $11,434,546 $9,303,363 $6,877,646
=========== ========== ==========
Reconciliation of Basic and Diluted Shares
Weighted average shares outstanding 16,823,758 16,671,161 14,349,085
Incremental shares from stock options
issued 770,926 747,659 565,873
Incremental shares from assumed
conversion of Convertible Debentures -- -- 2,114,838
---------- --------- ---------
Weighted average shares outstanding -
diluted 17,594,684 17,418,820 17,029,796
========== ========== ==========
</TABLE>
CENTENNIAL BANCORP
ANNUAL REPORT
1998
<PAGE>
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
1999, and for various stock splits and stock dividends declared in prior years.
Bancorp has never declared or paid cash dividends to shareholders.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 49,849 $ 40,104 $ 32,058 $ 25,274 $ 19,474
Interest expense 15,837 13,566 11,368 9,004 5,172
-------- -------- -------- -------- --------
Net interest income 34,012 26,538 20,690 16,270 14,302
Loan loss provision 1,500 1,250 735 350 316
Net income 11,435 9,303 6,514 4,551 3,502
Total assets 572,050 492,573 407,186 317,464 257,326
Total deposits 483,866 419,282 339,955 267,880 216,320
Short-term borrowings 20,600 7,716 12,316 11,419 11,840
Long-term debt -- 10,000 10,000 9,200 9,200
Shareholders' equity 63,717 51,810 41,346 26,390 19,205
Earnings per common share:
Basic $ .68 $ .56 $ .45 $ .34 $ .27
Diluted .65 .53 .40 .27 .24
</TABLE>
2
<PAGE>
REPORT OF SYMONDS, EVANS & LARSON, P.C., INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Centennial Bancorp
We have audited the accompanying consolidated balance sheet of Centennial
Bancorp and subsidiaries as of December 31, 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated financial
statements of Centennial Bancorp and subsidiaries as of December 31, 1997, and
for each of the years in the two year period then ended, were audited by other
auditors whose report dated January 22, 1998, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centennial
Bancorp and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
SYMONDS, EVANS & LARSON, P.C.
Portland, Oregon
January 27, 1999
3
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31, 1998 1997
------------- -------------
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and due from banks $ 40,838,367 $ 26,269,239
Federal funds sold 1,003,000 23,800,000
------------ ------------
Total cash and cash equivalents 41,841,367 50,069,239
Securities available-for-sale 76,793,378 83,904,253
Mortgage loans held for sale 11,039,045 5,584,947
Loans, net 416,524,430 331,691,399
Federal Home Loan Bank stock 5,083,700 4,711,100
Premises and equipment, net 12,613,321 10,486,892
Accrued interest and other assets 8,154,849 6,125,581
------------ ------------
Total assets $572,050,090 $492,573,411
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $102,714,344 $ 97,262,856
Interest-bearing demand 204,032,594 173,583,239
Savings 18,483,765 13,751,676
Time 158,635,593 134,684,313
------------ ------------
Total deposits 483,866,296 419,282,084
Short-term borrowings 20,600,071 7,715,783
Accrued interest and other liabilities 3,866,582 3,765,386
Long-term debt -- 10,000,000
------------ ------------
Total liabilities 508,332,949 440,763,253
Commitments and contingencies (Note 10)
Shareholders' Equity:
Preferred stock -- --
Common stock, 16,869,363 and 14,515,676 shares
issued and outstanding in 1998 and 1997,
respectively 29,690,949 29,031,352
Retained earnings 33,517,242 22,082,696
Accumulated other comprehensive income 508,950 696,110
------------ ------------
Total shareholders' equity 63,717,141 51,810,158
------------ ------------
Total liabilities and shareholders' equity $572,050,090 $492,573,411
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans, including fees $44,348,206 $34,329,126 $26,298,655
Securities:
Taxable 2,723,091 2,445,547 2,894,436
Exempt from Federal income taxes 1,699,128 2,034,551 1,838,858
Dividends on Federal Home Loan
Bank stock 372,600 345,300 325,400
Deposits with banks 14,401 376,499 578,948
Federal funds sold 691,063 573,027 121,997
----------- ----------- -----------
Total interest income 49,848,489 40,104,050 32,058,294
Interest expense:
Deposits:
Interest-bearing demand and savings 6,889,086 5,155,632 4,440,175
Time 8,184,923 7,298,741 5,207,755
Short-term borrowings 489,595 538,947 887,641
Long-term debt 272,897 572,673 832,666
----------- ----------- -----------
Total interest expense 15,836,501 13,565,993 11,368,237
Net interest income 34,011,988 26,538,057 20,690,057
Loan loss provision 1,500,000 1,250,000 735,000
----------- ----------- -----------
Net interest income after loan
loss provision 32,511,988 25,288,057 19,955,057
Noninterest income:
Service charges on deposit accounts 1,207,782 1,065,267 959,333
Net gains on sales of mortgage loans 1,752,506 908,068 623,240
Net gains on sales of securities 599,885 168,716 6,595
Other 623,343 1,053,083 507,122
----------- ----------- -----------
Total noninterest income 4,183,516 3,195,134 2,096,290
Noninterest expense 19,348,558 14,851,028 12,400,159
----------- ----------- -----------
Income before income taxes 17,346,946 13,632,163 9,651,188
Provision for income taxes 5,912,400 4,328,800 3,136,900
----------- ----------- -----------
Net income $11,434,546 $ 9,303,363 $ 6,514,288
=========== =========== ===========
Earnings per common share:
Basic $ .68 $ .56 $ .45
=========== =========== ===========
Diluted $ .65 $ .53 $ .40
=========== =========== ===========
Weighted average common shares outstanding:
Basic 16,823,758 16,671,161 14,349,085
Diluted 17,594,684 17,418,820 17,029,796
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Additional Total
Number of Common Retained Comprehensive Comprehensive Paid-in Shareholders'
Shares Stock Earnings Income Income Capital Equity
---------- ---------- -------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 4,651,130 $ 9,302,260 $10,657,696 $600,700 $5,829,404 $26,390,060
Comprehensive income:
Net income 6,514,288 $ 6,514,288 6,514,288
Other comprehensive income-
unrealized losses on
securities available-for-
sale, net of income taxes
of approximately $389,000 (634,890) (634,890) (634,890)
Reclassification adjustment for net
gains on sales of securities
included in net income, net
of income taxes of
approximately $2,000 (4,452)
----------
Comprehensive income $ 5,874,946
===========
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) --
---------- --------- ----------- -------- ---------- -----------
Balances, December 31, 1996 6,535,447 13,070,894 17,171,984 (34,190) 11,137,171 41,345,859
Comprehensive income:
Net income 9,303,363 $ 9,303,363 9,303,363
Other comprehensive income-
unrealized gains on
securities available-for-
sale, net of income taxes
of approximately $448,000 730,300 730,300 730,300
6
<PAGE>
Reclassification adjustment for
net gains on sales of
securities included in net
income, net of income taxes
of approximately $54,000 (115,064)
-----------
Comprehensive income $ 9,918,599
===========
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 (4,392,651) (10,123,025) --
---------- ----------- ----------- ------ ----------- -----------
Balances, December 31, 1997 14,515,676 29,031,352 22,082,696 696,110 -- 51,810,158
Comprehensive income:
Net income 11,434,546 $11,434,546 11,434,546
Other comprehensive income-
unrealized losses on
securities available-for-
sale, net of income taxes
of approximately $115,000 (187,160) (187,160) (187,160)
Reclassification adjustment for
net gains on sales of
securities included in net
income, net of income taxes
of approximately $204,000 (395,924)
----------
Comprehensive income $10,851,462
===========
Stock split (5%) 727,386 --
Stock options exercised 92,723 267,381 267,381
Tax benefit of stock options
exercised 392,216 392,216
Stock split (10%) 1,533,578 --
---------- ----------- ----------- ---------- ---------- -----------
Balances, December 31, 1998 16,869,363 $29,690,949 $33,517,242 $508,950 -- $63,717,141
========== =========== =========== ======== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,434,546 $ 9,303,363 $ 6,514,288
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net gains on sales of securities
and mortgage loans (2,352,391) (1,076,784) (629,835)
Stock dividends on Federal Home
Loan Bank stock (372,600) (345,300) (325,400)
Loan loss provision 1,500,000 1,250,000 735,000
Deferred income taxes (437,882) (113,702) (310,024)
Depreciation and amortization 1,697,578 1,329,421 1,167,936
Originations of mortgage loans
held for sale (213,853,812) (111,645,075) (67,258,899)
Proceeds from sales of mortgage loans 209,152,220 110,506,192 68,853,519
Changes in assets and liabilities:
Accrued interest and
other assets (1,335,735) 302,160 (1,329,999)
Accrued interest and
other liabilities 101,196 (230,165) 1,454,091
----------- -------------------- -----------
Net cash provided by
operating activities 6,533,120 9,280,110 8,870,677
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases (31,984,219) (28,385,904) (22,037,443)
Maturities 27,624,797 8,009,362 4,968,520
Proceeds from sales 11,754,232 20,463,409 6,302,328
Loan originations, net (86,333,031) (70,449,408) (78,574,452)
Purchases of premises and equipment, net (3,558,652) (2,373,818) (1,134,394)
---------- ---------- ----------
Net cash used in
investing activities (82,496,873) (72,736,359) (90,475,441)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 64,584,212 79,326,839 72,074,953
Increase (decrease) in
short-term borrowings, net 12,884,288 (4,599,800) 896,460
Proceeds from issuance of long-term debt -- -- 10,000,000
Payments on long-term debt (10,000,000) -- (37,000)
Proceeds from exercise of stock options 267,381 400,944 346,397
----------- ----------- -----------
Net cash provided by financing
activities 67,735,881 75,127,983 83,280,810
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (8,227,872) 11,671,734 1,676,046
Cash and cash equivalents at
beginning of year 50,069,239 38,397,505 36,721,459
----------- ----------- -----------
Cash and cash equivalents at end of year $41,841,367 $50,069,239 $38,397,505
=========== =========== ===========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Supplemental Disclosures of Cash Flow Information:
Years ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Noncash 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)
Tax benefit of stock options exercised 392,216 29,692 229,743
Change in net unrealized gains (losses)
on securities available-for-sale,
net of income taxes (187,160) 730,300 (634,890)
Cash paid during the year for:
Interest on deposits and
other borrowings $15,754,000 $13,423,000 $11,316,000
Income taxes 6,056,000 4,414,000 3,413,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- - -- ------------------------------------------
Principles of 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. Bancorp utilizes the accrual method of accounting which
recognizes income when earned and expenses when incurred. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the balance
sheet, and the reported amount of income and expenses during the reporting
periods. 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.
At December 31, 1997, Bancorp was 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 cash and maintaining an
average reserve balance with the Federal Reserve Bank. Bancorp was not required
to maintain a reserve balance at December 31, 1998.
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 the Bank's 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 other comprehensive income, net of income taxes.
Gains and losses on sales of securities are recognized on a specific
identification basis. Premiums and discounts on securities are recognized in
interest income using the interest method over the period to maturity.
10
<PAGE>
Declines in the fair value of securities available-for-sale below their cost
that are other than temporary would result in write-downs of the individual
securities to their fair value.
Mortgage Loans
- - --------------
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; however, the sales of these mortgage
loans are subject to technical underwriting exceptions and related repurchase
risks. Such risks are considered in the determination of the allowance for loan
losses.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value. Market value is
determined on an aggregate loan basis.
At December 31, 1998, 1997 and 1996, the Bank held servicing rights to
approximately $50,436,000, $32,274,000 and $6,583,000, respectively, in mortgage
loans which had been sold into the secondary market. Such mortgage loans are not
included in the accompanying consolidated balance sheets. Beginning in July
1998, the Bank began using another financial institution to sub-service these
mortgage loans. Previously, the Bank serviced these mortgage loans in-house. At
December 31, 1998 and 1997, the net amount of capitalized mortgage servicing
rights (approximately $392,000 and $340,000, respectively) is included in other
assets in the accompanying consolidated balance sheets.
Loans
- - -----
Loans are reported at their outstanding principal balance less the allowance for
loan losses and deferred loan fees.
Loan origination fees, net of origination costs, are deferred and recognized as
an adjustment of the yield of the related loan.
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 a
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions. The allowance is based on estimates and
ultimate losses may vary from the current estimates. These estimates are
reviewed periodically, and as adjustments become necessary, they are reported in
earnings in the periods in which they become known. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their judgment
of information available to them at the time of their examination.
11
<PAGE>
Federal Home Loan Bank Stock
- - ----------------------------
The Bank's investment in Federal Home Loan Bank ("FHLB") stock is carried at par
value, which 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, 1998, Bancorp's minimum required investment was $1,471,700. 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 and
amortization. Depreciation and amortization are computed principally using the
straight-line method over the shorter of the estimated useful lives of the
assets or terms of the leases. Estimated useful lives are 30 to 40 years for
buildings, and 3 to 10 years for furniture and equipment. Amortization of
leasehold improvements is included in depreciation and amortization expense in
the accompanying consolidated financial statements.
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 periods
ranging from 15 - 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.
Advertising
- - -----------
Advertising costs are generally charged to expense during the year in which they
are incurred.
Income Taxes
- - ------------
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Earnings per Common Share
- - -------------------------
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding for the period plus dilutive common
shares related to stock options and convertible debentures (see Note 16).
The weighted average number of common shares outstanding and the stock option
plan information (see Note 14) have been adjusted to give retroactive effect to
stock splits and stock dividends.
12
<PAGE>
Recently Issued Accounting Standards
- - ------------------------------------
In 1998, Bancorp retroactively adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 established standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Accordingly, any unrealized gains or
losses on securities available-for-sale are recognized as a component of
comprehensive income.
In 1998, Bancorp also retroactively adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131, in
general, requires that public business enterprises report financial and
descriptive information about its material reportable operating segments and
also establishes standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by key management personnel in deciding how to allocate
resources and in assessing performance. Management believes that, based on the
materiality standards of SFAS 131, Bancorp primarily operates in one business
segment. In addition, the related disclosures of SFAS 131 are included in the
accompanying consolidated financial statements and notes as applicable.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), was issued. SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. At December 31,
1998, Bancorp had no derivative instruments or hedging activities.
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" (SFAS 134), was issued. SFAS 134 is effective for the first
fiscal quarter beginning after December 15, 1998. At December 31, 1998, Bancorp
had not entered into any transaction for which SFAS 134 would apply.
There were no other accounting standards recently issued that had a significant
effect on Bancorp's consolidated financial statements.
Reclassifications
- - -----------------
Certain amounts in 1997 and 1996 have been reclassified to conform with the 1998
presentation in the consolidated financial statements. Net income was not
affected by these reclassifications.
13
<PAGE>
2. Securities Available-for-Sale
- - -- -----------------------------
<TABLE>
<CAPTION>
Securities available-for-sale consisted of the following at December 31, 1998 and 1997:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury securities $ 1,398,726 $ 36,190 $ -- $ 1,434,916
U.S. Government agencies 39,479,940 116,050 333,250 39,262,740
Obligations of states and
political subdivisions 28,571,672 1,006,580 -- 29,578,252
Corporate bonds 2,304,968 13,059 6,749 2,311,278
Mortgage-backed securities 4,217,462 1,330 12,600 4,206,192
----------- ---------- ---------- -----------
Total $75,972,768 $1,173,209 $ 352,599 $76,793,378
=========== ========== ========== ===========
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
Obligations of states and
political 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 93 49,179 6,337,407
----------- ---------- ---------- -----------
Total $82,781,508 $1,249,087 $ 126,342 $83,904,253
=========== ========== ========== ===========
Amortized Estimated
Contractual maturities at December 31, 1998: Cost Fair Value
-------- ----------
Due after 1 through 5 years $32,472,378 $32,754,918
Due after 5 through 10 years 28,024,523 28,083,343
Due after 10 years 15,475,867 15,955,117
----------- -----------
Total $75,972,768 $76,793,378
=========== ===========
</TABLE>
The contractual maturities for mortgage-backed securities were allocated
assuming no prepayments. 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, 1998, securities with an estimated fair value of approximately
$12,266,000 were pledged to collateralize public deposits, and securities with
an estimated fair value of approximately $10,562,000 were pledged to
collateralize short-term borrowings ($13,538,000 and $5,586,000 at December 31,
1997, respectively).
Proceeds from sales of investment securities and gross realized gains and losses
on those sales were as follows:
14
<PAGE>
<TABLE>
<CAPTION>
Proceeds
from Gross Gross Net Gains
Sales of Realized Realized on Sales of
Securities Gains Losses Securities
---------- ----- ------ ----------
<S> <C> <C> <C> <C>
1998 $11,754,232 $599,885 $ -- $599,885
1997 20,463,409 191,291 (22,575) 168,716
1996 6,302,328 23,100 (16,505) 6,595
</TABLE>
3. Loans
- - -- -----
Loans consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Real estate--mortgage $ 94,692,594 $ 87,631,611
Real estate--construction 151,163,783 89,119,688
Commercial 163,954,595 147,052,433
Installment loans to individuals 7,073,011 6,602,690
Lease financing 1,896,609 3,648,728
Other 3,137,402 1,994,689
------------ ------------
421,917,994 336,049,839
Allowance for loan losses (4,450,614) (3,348,914)
Deferred loan fees (942,950) (1,009,526)
------------ -------------
Loans, net $416,524,430 $331,691,399
============ ============
</TABLE>
<TABLE>
<CAPTION>
Changes in the allowance for loan losses were as follows:
1998 1997 1996
---------- ---------- ----------
<S> <C> <C>
Balance at beginning of year $3,348,914 $2,599,653 $1,928,372
Loan loss provision 1,500,000 1,250,000 735,000
Recoveries 53,800 57,210 46,060
Loans charged-off (452,100) (557,949) (109,779)
---------- ---------- ----------
Balance at end of year $4,450,614 $3,348,914 $2,599,653
========== ========== ==========
</TABLE>
At December 31, 1998, eleven loans (two loans at December 31, 1997) required a
specific valuation allowance in accordance with SFAS No. 114, as amended by SFAS
No. 118. The specific valuation allowance totaled $563,000 on loans with
remaining principal balances outstanding of $5,218,000 at December 31, 1998
($150,000 and $718,000, respectively, at December 31, 1997). Each loan with a
current principal balance outstanding of less than $100,000 is grouped into one
homogenous pool when considering the valuation allowance. At December 31, 1998
and 1997, the specific valuation allowance for those loans was insignificant.
Loans on nonaccrual status at December 31, 1998 were approximately $3,841,000
($873,000 at December 31, 1997). Interest income which would have been realized
on nonaccrual loans if they had remained current was approximately $272,600,
$102,600 and $117,500 during 1998, 1997 and 1996, respectively. Loans
contractually past due 90 days or more on which Bancorp continued to accrue
15
<PAGE>
interest at December 31, 1998 were approximately $1,043,000 ($402,000 at
December 31, 1997).
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. In the course of evaluating the creditworthiness, management
determines a requisite amount of collateral support. The type of collateral held
varies, but may include real estate, equipment, accounts receivable and
inventories. At the discretion of management, personal guarantees of the
borrower may also be obtained in addition to the collateral. A substantial
portion of Bancorp's loan portfolio is collateralized by real estate and is,
therefore, susceptible to adverse changes in local market conditions. Management
believes that the loan portfolio is diversified among industry groups and does
not contain a direct concentration of loans in a single industry (other than the
construction 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.
4. Premises and Equipment
- - -- ----------------------
Premises and equipment consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Land $ 1,769,388 $ 1,769,388
Buildings and leasehold improvements 10,728,522 8,588,219
Furniture and equipment 7,288,122 5,869,773
----------- -----------
19,786,032 16,227,380
Less accumulated depreciation and amortization (7,172,711) (5,740,488)
----------- -----------
Premises and equipment, net $12,613,321 $10,486,892
=========== ===========
</TABLE>
5. Time Deposits
- - -- -------------
At December 31, 1998, Bancorp's time deposits totaled $158,635,593. Time
deposits of $141,103,510 mature in 1999.
At December 31, 1998 and 1997, the amount of time deposits with a minimum
denomination of $100,000 were $60,708,411 and $53,886,057, respectively.
At December 31, 1998, the scheduled maturities of time deposits with a minimum
denomination of $100,000 were as follows:
Less than 3 months $15,985,248
Over 3 months but less than 1 year 39,437,302
Over 1 year but less than 3 years 5,160,843
More than 3 years 125,018
-----------
$60,708,411
16
<PAGE>
6. Short-term Borrowings
- - -- ---------------------
Short-term borrowings consisted of the following at December 31, 1998 and 1997:
1998 1997
---------- ----------
Securities sold under agreement to repurchase $16,100,071 $7,715,783
Federal funds purchased 4,500,000 --
----------- ----------
$20,600,071 $7,715,783
=========== ==========
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 4.42% and 5.03% at December 31, 1998 and 1997, respectively.
Federal funds purchased are due on demand. The interest payable on federal funds
purchased was 5.00% at December 31, 1998.
Bancorp had $22,582,000 in available credit from the FHLB at December 31, 1998
($21,443,250 at December 31, 1997) at prevailing market interest rates. In
addition, Bancorp maintains federal funds lines with correspondent banks as a
backup source of liquidity. At December 31, 1998, Bancorp had $32,000,000
($24,000,000 at December 31, 1997) of federal funds lines available to draw
against on an uncollateralized basis.
7. Long-term Debt
- - -- --------------
At December 31, 1997, Bancorp's long-term debt consisted of a $10,000,000
advance to the Bank from FHLB, with monthly interest payments at an annual rate
of 6.14%, collateralized by FHLB stock, funds on deposit with the FHLB,
investments and loans. This advance matured on August 6, 1998 and was repaid.
8. Off-Balance Sheet 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 consolidated balance sheets. Bancorp
applies the same credit standards to these commitments as it uses in all of its
lending processes and includes these commitments in its lending risk
evaluations. Bancorp has no commitments to extend credit at below-market
interest rates and, at December 31, 1998 and 1997, Bancorp held no derivative
financial instruments.
Bancorp's off-balance sheet financial instruments at December 31, 1998 and 1997
were as follows:
1998 1997
------------ -----------
Commitments to extend credit $198,583,000 $151,591,000
Standby letters of credit 6,982,000 4,048,000
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
17
<PAGE>
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, accounts receivable,
inventories, equipment, 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, accounts receivable, inventories, equipment, securities and real
estate.
9. Estimated Fair Value of Financial Instruments
- - -- ---------------------------------------------
Bancorp primarily uses quoted market prices or present value techniques to
estimate the fair values of its financial instruments. Valuation methods require
considerable judgment, and the resulting estimates of fair value can be
significantly affected by the assumptions made and methods used. Accordingly,
the estimates provided herein do not necessarily indicate amounts which could be
realized in a current market exchange.
In addition, as Bancorp normally intends to hold the majority of its financial
instruments until maturity, it does not expect to realize many of the estimated
amounts disclosed. The disclosures also do not include estimated fair value
amounts for items which are not defined as financial instruments but which have
significant value. These include such off-balance sheet items as core deposit
intangibles. Bancorp does not believe that it would be practicable to estimate a
representational fair value for these types of items at December 31, 1998 and
1997.
Because the estimated fair value disclosures exclude certain financial
instruments and all nonfinancial instruments, any aggregation of the fair value
amounts presented would not represent the underlying value of Bancorp.
Bancorp used the following methods and assumptions to estimate the fair value of
its financial instruments:
CASH AND CASH EQUIVALENTS. The carrying amount is a reasonable estimate of fair
value.
SECURITIES AVAILABLE-FOR-SALE. The estimated fair value is based on quoted
market prices.
LOANS. 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.
MORTGAGE LOANS HELD FOR SALE. The estimated fair value represents the
anticipated proceeds from sale of the loans.
18
<PAGE>
FEDERAL HOME LOAN BANK STOCK. The estimated fair value approximates cost due to
the limited market for the asset and because the stock is redeemable by the FHLB
at its carrying value.
DEPOSITS. The estimated fair value of time deposits is estimated using the
interest rates currently offered for similar deposits. The estimated fair value
of other deposits is the carrying amount which is payable on demand.
SHORT-TERM BORROWINGS. The carrying amount approximates the estimated fair
value.
LONG-TERM DEBT. Estimated 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 Bancorp's principal off-balance sheet financial
instruments. The estimated fair value of these commitments, based on fees
currently charged for similar commitments, is not material.
The estimated fair value of financial instruments at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 41,841,000 $ 41,841,000 $ 50,069,000 $ 50,069,000
Securities available-
for-sale 76,793,000 76,793,000 83,904,000 83,904,000
Loans and mortgage loans
held for sale 432,957,000 426,736,000 341,635,000 356,811,000
FHLB stock 5,084,000 5,084,000 4,711,000 4,711,000
Financial liabilities:
Deposits $483,866,000 $485,283,000 $419,282,000 $419,365,000
Short-term borrowings 20,600,000 20,600,000 7,716,000 7,716,000
Long-term debt -- -- 10,000,000 10,000,000
</TABLE>
10. Commitments and Contingencies
- - --- -----------------------------
Leases:
Bancorp leases certain land and facilities under noncancelable operating leases,
generally for terms of 5 to 50 years, some of which include renewal options and
escalation clauses. Future minimum lease payments under these noncancelable
operating leases at December 31, 1998 were approximately as follows:
19
<PAGE>
1999 $ 708,000
2000 629,000
2001 623,000
2002 586,000
2003 503,000
Later years 6,615,000
----------
Total minimum lease payments $9,664,000
==========
Total rent expense was approximately $750,000, $343,000 and $293,000 in 1998,
1997 and 1996, respectively.
Legal Matters:
In the ordinary course of business, litigation arises from normal banking
activities. In the opinion of management, the ultimate outcome of these matters
will not have a material adverse effect on Bancorp's consolidated financial
position, results of operations or cash flows.
11. Noninterest Expense
- - --- -------------------
Noninterest expense was comprised of the following for the years ended December
31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Salaries and employee benefits $12,834,456 $ 9,552,513 $ 7,688,182
Premises and equipment 2,644,173 2,049,771 1,825,632
Legal and professional 843,890 742,165 571,907
Advertising 801,135 489,315 486,313
Other 2,224,904 2,017,264 1,828,125
----------- ----------- ----------
Total noninterest expense $19,348,558 $14,851,028 $12,400,159
=========== =========== ===========
12. Income Taxes
- - --- ------------
The provision for income taxes was comprised of the following for the years
ended December 31, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Current:
Federal $5,098,082 $3,903,417 $2,756,513
State 1,252,200 539,085 690,411
Deferred (437,882) (113,702) (310,024)
----------- ---------- -----------
Provision for income taxes $5,912,400 $4,328,800 $3,136,900
========== ========== ==========
</TABLE>
The provision for income taxes results in effective tax rates which are
different than the federal income tax statutory rate. The nature of the
differences for the years ended December 31, 1998, 1997 and 1996 was as follows:
20
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected federal income tax provision
at 34% $5,897,962 $4,634,935 $3,281,407
State income tax, net of federal
income tax effect 763,479 342,880 420,406
Tax exempt interest income (577,312) (679,305) (609,604)
Other, net (171,729) 30,290 44,691
----------- ---------- ----------
Provision for income taxes $5,912,400 $4,328,800 $3,136,900
========== ========== ==========
The components of the net deferred tax assets and liabilities at December 31,
1998 and 1997 were as follows:
1998 1997
---------- ----------
Deferred tax assets:
Nonqualified benefit plans $ 661,632 $ 528,434
Allowance for loan losses 1,342,735 919,243
Leases 104,051 86,132
Other, net 104,628 37,338
----------- ----------
Total deferred tax assets 2,213,046 1,571,147
Deferred tax liabilities:
Loan servicing rights 150,559 119,692
FHLB stock dividends 695,734 552,307
Net unrealized gains on securities 311,832 426,634
Other, net 228,199 198,476
----------- ----------
Total deferred tax liabilities 1,386,324 1,297,109
----------- ----------
Net deferred tax assets $ 826,722 $ 274,038
============ ==========
</TABLE>
Management believes, based upon Bancorp's historical performance, that the net
deferred tax assets will be recognized in the normal course of operations and,
accordingly, management has not reduced net deferred tax assets by a valuation
allowance.
The exercise of nonstatutory stock options which have been granted under
Bancorp's stock option plans give rise to compensation which is included in the
taxable income of the applicable directors or employees and is deductible by
Bancorp for federal and state income tax purposes. Such compensation results
from increases in the fair market value of Bancorp's common stock subsequent to
the date of grant of the applicable stock options. In accordance with Accounting
Principles Board Opinion No. 25, such compensation is not recognized as an
expense for financial accounting purposes and the related tax benefits are added
directly to common stock.
Bancorp's provision for income taxes for 1998, 1997 and 1996 included
approximately $204,000, $57,000 and $2,000, respectively, related to gains on
sales of securities.
13. Transactions with Related Parties
- - --- ---------------------------------
Activity with respect to loans to directors and their affiliates and executive
officers of Bancorp and subsidiaries for the year ended December 31, 1998 was as
follows:
21
<PAGE>
Balance at January 1, 1998 $10,360,709
Additions or renewals 7,530,984
Amounts collected or renewed (10,593,122)
-----------
Balance at December 31, 1998 $ 7,298,571
===========
In addition, approximately $2,399,000 of commitments to extend credit to
directors and executive officers were outstanding at December 31, 1998
($3,922,000 at December 31, 1997), and are included as part of commitments in
Note 8.
14. Stock Options
- - --- -------------
Bancorp has two Nonemployee Director Stock Option Plans ("Director Plans") -
1988 and 1993, 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. Generally, options become exercisable over a period of
three years of subsequent service. The options expire in a maximum of ten years
from the date of grant. At December 31, 1998, 214,858 of the 220,633 options
outstanding were exercisable, with 115,424 shares reserved for future grant.
Incentive Plans
- - ---------------
Under the Incentive Plans, officers of Bancorp and its subsidiaries may be
granted options to purchase shares of common stock. The option price is the fair
market value at the date of grant. Generally, options become exercisable over a
period of five years of subsequent service. The options expire in a maximum of
ten years from the date of grant. At December 31, 1998, 349,767 of the 393,091
options outstanding were exercisable, with 856 shares reserved for future grant.
Option Plan
- - -----------
Under the Option Plan, Bancorp employees, directors and consultants may be
granted nonstatutory stock options or restricted stock awards, and Bancorp
employees may be granted incentive stock options. The exercise prices of
nonstatutory stock options and the price to be paid for restricted stock is
established by a committee of the Board of Directors. The exercise price of
incentive stock options must be no less than the fair market value of the
underlying shares on the date of grant. Options granted under the Option Plan
expire on such date as established by a committee of the Board of Directors.
However, incentive stock options expire in a maximum of ten years from the date
of grant. During the year ended December 31, 1998, the shareholders of Bancorp
approved an amendment to the Option Plan, which resulted in Bancorp reserving
624,832 additional shares for future grant. At December 31, 1998, 578,636
options were outstanding under the Option Plan, consisting of 379,925 incentive
stock options and 198,711 nonstatutory stock options. At December 31, 1998, a
total of 258,735 of the options outstanding were exercisable, with 691,858
22
<PAGE>
shares reserved for future grant. Bancorp has not granted any restricted stock
awards under the Option Plan.
23
<PAGE>
<TABLE>
<CAPTION>
Transactions involving option activity for the years ended December 31, 1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Price of Shares Price of Shares Price
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 1,072,727 $3.28 1,199,469 $2.99 1,357,653 $2.04
Granted 251,542 13.41 50,565 5.95 188,664 6.14
Expired (28,156) 8.50 (18,276) 3.65 -- --
Exercised (103,753) 2.58 (159,031) 2.52 (346,848) 1.00
-------- -------- --------
Outstanding,
December 31 1,192,360 5.36 1,072,727 3.28 1,199,469 2.99
========== ========== ==========
Exercisable at
December 31 823,360 3.00 756,868 2.76 763,634 2.81
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about Bancorp's stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------------- ------------------------------------------------
Weighted
Range of Weighted Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- - --------------- ------------- ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(Years)
Under $5.00 903,667 5.79 $ 3.08 809,561 $ 2.92
$5.01 - $10.00 23,291 8.01 5.77 8,379 5.77
$10.01 - $15.00 225,225 16.70 12.59 5,420 10.31
$15.01 - $20.00 40,177 9.53 15.73 -- --
---------- ------- -------
1,192,360 8.02 $ 5.36 823,360 $ 3.00
========= ====== ======= =======
</TABLE>
No compensation cost has been recognized for the options issued under the stock
option plans as Bancorp adopted the disclosure-only provisions of SFAS No. 123
24
<PAGE>
"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 common share would have been as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Net income - as reported $11,434,546 $9,303,363 $6,514,288
- pro forma 11,360,952 9,205,469 6,457,978
Basic earnings per common share:
- as reported $ .68 $ .56 $ .45
- pro forma .68 .55 .45
Diluted earnings per common share:
- as reported $ .65 $ .53 $ .40
- pro forma .65 .53 .40
</TABLE>
The pro forma effect on net income for 1998, 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:
1998 1997 1996
-------- ------- -------
Risk-free interest rate 5.62% 6.25% 6.65%
Expected life (in years) 7.25 7.25 7.25
Expected volatility 31.00% 29.37% 29.35%
Expected dividend yield 0.00% 0.00% 7.50%
The effect of applying the fair-value-based method to stock options granted in
the years ended December 31, 1998, 1997 and 1996 resulted in a weighted-average
grant date fair value of $6.14, $5.10 and $1.38, respectively.
25
<PAGE>
15. Shareholders' Equity
- - --- --------------------
Preferred Stock:
At December 31, 1998 and 1997, Bancorp had 10,000,000 shares of authorized but
unissued preferred stock, which is comprised of 5,000,000 shares each of voting
and nonvoting stock. In May 1998, shareholders of Bancorp authorized an
amendment to the Articles of Incorporation to change the preferred stock from $5
par value to no par value.
Common Stock:
At December 31, 1998 and 1997, Bancorp had 50,000,000 shares of authorized
common stock. In May 1998, shareholders of Bancorp authorized an amendment to
the Articles of Incorporation to change the common stock from $2 par value to no
par value.
Stock Split Subsequent to Year End:
On January 20, 1999, the Board of Directors declared an 11-for-10 stock split,
payable February 19, 1999, in the form of a distribution of one additional share
of Bancorp's common stock for each ten shares owned by shareholders of record at
the close of business on January 29, 1999. The stock split resulted in the
issuance of 1,533,578 additional shares of common stock from authorized but
unissued shares and such issuance has been retroactively reflected in the 1998
consolidated statement of shareholders' equity. Per share data and the stock
option plan information (see Note 14) in 1998 and prior periods have also been
adjusted to retroactively reflect the effect of this split.
16. Effect of Dilutive Securities on Earnings Per Common Share
- - --- ----------------------------------------------------------
A reconciliation of the basic and diluted earnings per common share computations
for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
Reconciliation of Income 1998 1997 1966
- - ------------------------ -----------------------------------------------------------
<S> <C> <C> <C>
Net income--basic $11,434,546 $9,303,363 $6,514,288
Income impact of assumed conversion of
Convertible Debentures, net of taxes -- -- 363,358
-----------------------------------------------------------
Income available to common
shareholders--diluted $11,434,546 $9,303,363 $6,877,646
=========== ========== ==========
Reconciliation of Basic and Diluted Shares
Weighted average shares outstanding--basic 16,823,758 16,671,161 14,349,085
Incremental shares from stock options
issued 770,926 747,659 565,873
Incremental shares from assumed
conversion of Convertible Debentures -- -- 2,114,838
-----------------------------------------------------------
Weighted average shares
outstanding--diluted 17,594,684 17,418,820 17,029,796
========== ========== ==========
</TABLE>
26
<PAGE>
17. Employee Benefit Plan
- - --- ---------------------
Bancorp 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 1998, Bancorp matched 54% of employee
contributions up to 6% of their salary (60% for 1997 and 1996). Bancorp's
matching contributions are determined annually by the Board of Directors. In
addition to the matching contributions, Bancorp may also make discretionary
contributions to the profit sharing plan. Bancorp's policy is to fund
contributions as accrued. Bancorp's contributions to the employee savings and
profit sharing plan totaled $400,000 for 1998 ($350,000 for 1997 and $300,000
for 1996).
18. Regulatory Matters
- - --- ------------------
Dividends:
The Bank, as a state-chartered bank, is prohibited from declaring or paying any
dividend in an amount greater than net unreserved retained earnings. At December
31, 1998, $21,147,000 was available from the Bank for the payment of dividends
to Bancorp without prior regulatory approval.
Regulatory Examinations:
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:
Bancorp and the Bank are 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 Bancorp's or the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Bancorp and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. Bancorp's and 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 Bancorp and the Bank to maintain minimum amounts and ratios (set forth
in the tables 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, 1998, that Bancorp and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal Reserve
Bank and the Federal Deposit Insurance Corporation categorized Bancorp and the
Bank as well capitalized under the regulatory framework for prompt corrective
27
<PAGE>
action. To be categorized as well capitalized, Bancorp and the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the following tables. There are no conditions or events since
the notifications from the regulators that management believes would change
Bancorp's or the Bank's regulatory capital categorization.
Bancorp'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
------ ----- ----- -----
<S> <C> <C> <C> <C>
At December 31, 1998:
Total Capital
(to Risk-Weighted Assets) $66,127,000 12.0% 8.0% 10.0%
Tier I Capital
(to Risk-Weighted Assets) $61,676,000 11.2% 4.0% 6.0%
Tier I Capital
(to Average Assets) $61,676,000 10.9% 4.0% 5.0%
At December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $53,990,000 12.9% 8.0% 10.0%
Tier I Capital
(to Risk-Weighted Assets) $50,641,000 12.1% 4.0% 6.0%
Tier I Capital
(to Average Assets) $50,641,000 10.6% 4.0% 5.0%
The Bank's capital amounts and ratios are presented in the table below:
To Be Well
Capitalized
For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------------- -------- -----------
Amount Ratio Ratio Ratio
------ ----- ----- -----
At December 31, 1998:
Total Capital
(to Risk-Weighted Assets) $59,658,000 10.9% 8.0% 10.0%
Tier I Capital
(to Risk-Weighted Assets) $55,207,000 10.1% 4.0% 6.0%
Tier I Capital
(to Average Assets) $55,207,000 9.8% 4.0% 5.0%
28
<PAGE>
At December 31, 1997:
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%
</TABLE>
29
<PAGE>
19. Parent Company Financial Information
- - --- ------------------------------------
<TABLE>
<CAPTION>
Condensed financial information for Centennial Bancorp (Parent Company only) is presented below:
Condensed Balance Sheets (Unconsolidated)
December 31, 1998 1997
---------- ----------
<S> <C> <C>
Assets
- - ------
Cash and cash equivalents, deposited with the Bank $ 3,264,923 $ 4,099,530
Equipment, net 84,911 80,572
Deferred tax asset 484,246 440,804
Other assets 1,798,918 660,880
Investment in subsidiaries at cost plus
equity in earnings 59,394,795 47,523,635
----------- -----------
Total assets $65,027,793 $52,805,421
=========== ===========
Liabilities and Shareholders' Equity
- - ------------------------------------
Accrued liabilities $ 1,310,652 $ 995,263
Shareholders' equity 63,717,141 51,810,158
----------- -----------
Total liabilities and shareholders' equity $65,027,793 $52,805,421
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income (Unconsolidated)
Years ended December 31, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Other income $ 24,725 $ 8,007 $ 3,829
Other interest income from subsidiaries 135,862 149,995 232,648
---------- ---------- ----------
160,587 158,002 236,477
Expense:
Salaries and employee benefits 704,256 567,313 459,420
Interest expense -- -- 586,059
Other 317,866 366,259 298,995
---------- ---------- ----------
1,022,122 933,572 1,344,474
Loss before income tax benefit and
equity in undistributed earnings
of subsidiaries (861,535) (775,570) (1,107,997)
Income tax benefit 237,601 157,399 393,954
---------- ---------- ----------
Loss before equity in undistributed
earnings of subsidiaries (623,934) (618,171) (714,043)
Equity in undistributed earnings
of subsidiaries 12,058,480 9,921,534 7,228,331
----------- ---------- ----------
Net income $11,434,546 $9,303,363 $6,514,288
=========== ========== ==========
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows (Unconsolidated)
Years ended December 31, 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,434,546 $ 9,303,363 $ 6,514,288
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 100,238 98,570 99,168
Undistributed earnings
of subsidiaries (12,058,480) (9,921,534) (7,228,331)
Deferred tax benefit (43,442) (18,623) (147,889)
Changes in assets and liabilities:
Other assets (831,450) 710,290 126,869
Accrued liabilities 315,389 (261,295) (107,708)
----------- ----------- ------------
Net cash used in
operating activities (1,083,199) (89,229) (743,603)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (18,789) (7,999) --
Proceeds from sale of equipment -- -- 9,819
----------- ----------- -----------
Net cash provided by (used in)
investing activities (18,789) (7,999) 9,819
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt -- -- (37,000)
Proceeds from exercise of stock options 267,381 400,944 346,397
----------- ----------- -----------
Net cash provided by
financing activities 267,381 400,944 309,397
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (834,607) 303,716 (424,387)
Cash and cash equivalents at
beginning of year 4,099,530 3,795,814 4,220,201
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,264,923 $ 4,099,530 $ 3,795,814
=========== =========== ===========
Supplemental disclosure of noncash 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)
Tax benefit of stock options
exercised 392,216 29,692 229,743
Change in net unrealized gains (losses)
on securities available-for-sale: (187,160) 730,300 (634,890)
For purposes of reporting cash flows, cash and cash equivalents represents amounts deposited with the Bank.
Bancorp paid $641,500 in interest on borrowings in 1996. No interest was paid by Bancorp in 1998 and 1997.
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH BANCORP'S
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO AT DECEMBER 31,
1998 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
INCLUDED ELSEWHERE IN THIS REPORT.
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. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED
TO, THE FOLLOWING: (1) POTENTIAL DELAYS OR OTHER PROBLEMS IN IMPLEMENTING
BANCORP'S GROWTH AND EXPANSION STRATEGY; (2) THE ABILITY TO ATTRACT NEW DEPOSITS
AND LOANS; (3) INTEREST RATE FLUCTUATIONS; (4) COMPETITIVE FACTORS AND PRICING
PROSSURES; (5) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY; (6)
CHANGES IN LEGAL AND REGULATORY REQUIREMENTS; (7) CHANGES IN TECHNOLOGY; AND (8)
YEAR 2000 PROBLEMS, AS WELL AS OTHER FACTORS DESCRIBED IN THIS AND OTHER BANCORP
REPORTS AND STATEMENTS. SHOULD ONE OR MORE OF THE FOREGOING RISKS MATERIALIZE,
OR SHOULD BANCORP'S UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS OR
OUTCOMES MAY VARY MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON BANCORP'S
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. 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 $11.4 million, or $.68 per share,
in the year ended December 31, 1998. This represented a 22.9% increase in net
income, as compared to $9.3 million, or $.56 per share, in 1997. Net income in
1997 represented a 42.8% increase from 1996's net income of $6.5 million, or
$.45 per share. The return on average assets was 2.18% in 1998 compared to 2.12%
in 1997 and 1.82% in 1996. The increased earnings for 1998 and 1997 primarily
reflect increased net interest income due to the expansion of Bancorp's
interest-earning assets each year.
At December 31, 1998, total assets increased $79.5 million to $572.1
million. This increase represented a 16.1% increase over total assets at
December 31, 1997. Earning assets at December 31, 1998 represented 90.0% of
total assets, which was a decrease from December 31, 1997 when earning assets
were 92.0% of total assets.
During 1998, Centennial Bank (the "Bank") opened one additional
full-service branch and another limited-service retirement center branch in the
Portland metropolitan area. The full-service branch opened in August 1998 on
Airport Road, and the limited-service branch opened in January 1998 in the
Willamette View Manor retirement center. Both branches are in leased facilities.
In September 1998, the Bank completed construction of a permanent facility for
the new (December 1997) branch in the Tanasbourne area of Beaverton and
32
<PAGE>
relocated the office from a temporary facility at the site. In January 1999, the
Bank opened its fourth full-service branch in the Eugene area, the Oakway Center
office.
During 1998, the Bank announced plans to acquire the Hazel Dell Branch of
Northwest National Bank in Vancouver, Washington. The Bank has received
regulatory approval for the acquisition, which is scheduled for completion in
the Spring of 1999. The transaction will represent the Bank's initial entry into
the Washington marketplace. Also in 1998, Centennial Bank announced plans to
open a new full-service branch in Salem, Oregon and has leased a site in the
downtown Salem area.
During the fourth quarter of 1998, Centennial Bank began implementing a
plan to reorganize internal reporting responsibilities along functional lines,
rather than the geographical lines previously used. The implementation of this
restructuring was completed during the first quarter of 1999. Management
believes that this will allow more flexibility and efficiency within functional
lines, especially as the Bank's operations continue to expand. For example,
commercial lending personnel throughout Centennial Bank's system now report to a
common person; all branch personnel now also report to a common, albeit
different, person. In addition, management has restructured its credit
administration division, and has established a small business/SBA lending
department and a cash management department.
In April 1998, Centennial Mortgage Co. moved an office from the Centennial
Bank building in Tigard, Oregon to a leased facility in the Kruse Woods area of
Lake Oswego, Oregon. The move was necessary to accommodate the Bank's space
requirements in the Tigard building. In November 1998, Centennial Mortgage
opened a new office in the Bank's Tanasbourne branch facility. In January 1999,
Centennial Mortgage opened a second Eugene office in Oakway Center next to the
new Bank branch.
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 1998, 1997 and 1996, Bancorp's
average interest-earning assets were $483 million, $399 million and $323
million, respectively. During these same years, Bancorp's net interest margin
was 7.22%, 6.92% and 6.70%, respectively.
33
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table sets forth for 1998, 1997 and 1996 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, 1998 1997 1996
----------------------------- ---------------------------- -------------------------------
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 $ 264 $ 14 5.30% $ 6,924 $ 376 5.43% $ 10,872 $ 579 5.33%
Investment securities -- taxable 48,554 3,096 6.38 41,933 2,791 6.66 48,088 3,220 6.70
Investment securities -- tax-exempt(2) 33,508 2,574 7.68 39,097 3,083 7.89 34,877 2,786 7.99
Federal funds sold 13,253 691 5.21 10,925 573 5.24 2,265 122 5.39
Loans and loans held for sale(3) 387,914 44,348 11.43 299,976 34,329 11.44 226,965 26,299 11.59
-------- ------- --------- ------- -------- -------
Total interest-earning
assets/interest income 483,493 50,723 10.49 398,855 41,152 10.32 323,067 33,006 10.22
Allowance for loan losses (3,882) (3,123) (2,237)
Cash and due from banks 28,351 27,552 20,274
Premises and equipment, net 11,407 9,790 9,339
Other assets 5,848 6,112 7,201
-------- -------- --------
Total assets $525,217 $439,186 $357,644
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and interest-bearing demand
deposits $211,896 6,889 3.25 $166,800 5,156 3.09 $128,611 4,440 3.45
Time deposits 145,387 8,185 5.63 129,756 7,299 5.63 100,549 5,208 5.18
Short-term borrowings 10,016 489 4.88 9,688 539 5.56 11,399 833 7.31
Long-term debt 5,945 273 4.59 10,000 572 5.72 16,443 887 5.39
-------- ------- --------- ------ -------- -------
Total interest-bearing
liabilities/interest expense 373,244 15,836 4.24 316,244 13,566 4.29 257,002 11,368 4.42
Demand deposits 90,166 75,005 66,525
Other liabilities 5,095 2,001 2,617
-------- -------- --------
Total liabilities 468,505 393,250 326,144
Shareholders' equity 56,712 45,936 31,500
-------- -------- -------- -------
Total liabilities and
shareholders' equity $525,217 $439,186 $357,644
======== ======== ========
Net interest income(2) $34,887 $27,586 $21,963
======= ======= =======
Net interest spread(2) 6.25% 6.03% 5.80%
===== ===== =====
Net interest margin(2) 7.22% 6.92% 6.70%
Net interest income to average
shareholders' equity 61.52% 60.05% 68.69%
Average interest-earning assets to
average interest-bearing
liabilities 130% 126% 126%
- - ---------------------------
(1) Average balances are based on daily averages and include nonaccrual loans.
(2) Interest income and average yield on tax-exempt securities, net interest spread and net interest margin have
been computed on a 34% tax-equivalent basis.
(3) Nonaccrual loans ($2,151,200 in 1998, $1,032,600 in 1997 and $994,600 in 1996) have been included in the computation
of average loans and loans held for sale. Loan fees recognized during the period and included in the yield calculation
totaled $6,855,866 in 1998, $4,769,700 in 1997 and $3,745,900 in 1996.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN INTEREST RATE DIFFERENTIAL
The following table shows the dollar amount, on a tax-equivalent basis, of the increase (decrease) in the Company's
interest income and interest expense for the years ended December 31, 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.
1998 vs. 1997 1997 vs. 1996
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 $ (357) $ (5) $ (362) $ (212) $ 9 $ (203)
Investment securities -- taxable 431 (126) 305 (411) (18) (429)
Investment securities -- tax-exempt (435) (74) (509) 335 (38) 297
Federal funds sold 122 (4) 118 460 (9) 451
Loans and loans held for sale 10,059 (40) 10,019 8,408 (378) 8,030
------ ------- ------ ------- ------- -------
Total interest income 9,820 (249) 9,571 8,580 (434) 8,146
Interest expense:
Deposits:
Savings and interest-bearing demand 1,430 303 1,733 1,249 (533) 716
Time 880 5 885 1,578 513 2,091
Short-term borrowings 17 (67) (50) (110) (184) (294)
Long-term debt (209) (90) (299) (358) 43 (315)
------ ------ ------ ------- ------- ------
Total interest expense 2,118 151 2,269 2,359 (161) 2,198
------ ------ ------ ------ ------- ------
Net interest income $7,702 $ (400) $7,302 $6,221 $ (273) $5,948
====== ======== ====== ====== ======= ======
</TABLE>
35
<PAGE>
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NET INTEREST INCOME
Bancorp's net interest income increased to $34.9 million, on a
tax-equivalent basis, in 1998 as compared to $27.6 million in 1997 and $22
million in 1996. During 1998, average interest-earning assets increased to $483
million as compared to average interest-earning assets of $399 million in 1997
and $323 million in 1996. At the same time, average interest-bearing liabilities
increased to $373 million in 1998 from $316 million in 1997 and $257 million in
1996. Because the increases in average interest-earning assets were greater
than the increases in average interest-bearing liabilities in 1998 and 1997,
Bancorp recognized increases in net interest income.
The average yield earned on interest-earning assets increased by .17% (17
basis points) in 1998, while the average rate paid on interest-bearing
liabilities decreased by .05% (5 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 1998 as compared to 1997. The increase in net interest
margin in 1998 also served to increase Bancorp's net interest income.
During 1998 and 1997, Bancorp primarily supported its strong loan growth
with increased interest-bearing deposits which resulted from continuing business
expansion and more competitive pricing of certain time deposit products during
1997. Income from operations was also a substantial source of cash flow in both
years. Other significant sources of cash flow in 1998 included partial
investment portfolio liquidation and short-term borrowings. Repayment of
long-term debt was a substantial cash use in 1998, and purchases of premises and
equipment required a significant use of cash in both 1998 and 1997.
During 1998 and 1997, Bancorp experienced a relatively stable interest rate
environment with rates declining modestly from the rates experienced during
1996. A significant portion of Bancorp's loans are immediately repricable upon a
change in interest rates (68% of outstanding loans at December 31, 1998 and
1997). 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.
36
<PAGE>
PROVISION FOR LOAN LOSSES
Management's policy is to maintain an adequate allowance for loan losses.
In 1998, Bancorp charged a $1,500,000 loan loss provision to income, as compared
to $1,250,000 in 1997 and $735,000 in 1996. The larger loan loss provisions in
1998 and 1997 reflect the larger amounts of loans outstanding each year. In
1998, loan charge-offs, net of recoveries were $398,000, as compared to loan
charge-offs, net of recoveries, of $501,000 in 1997 and $64,000 in 1996.
Bancorp's allowance for loan losses was $4.5 million at December 31, 1998,
as compared to $3.3 million and $2.6 million at December 31, 1997 and December
31, 1996, respectively. The ratio of the allowance for loan losses to total
nonperforming loans was 89%, 263% and 137% at December 31, 1998, 1997 and 1996,
respectively. The significant decrease in the allowance ratio at December 31,
1998 was primarily due to one borrower whose loans are in the process of
liquidation. Management is regularly monitoring the related collateral values
which are currently considered adequate to support outstanding balances.
Management attributes the relatively low levels of loans charged off, net
of recoveries, during 1998, 1997 and 1996 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 $1.0 million to $4.2 million in 1998 as
compared to 1997, and increased $1.1 million to $3.2 million in 1997 as compared
to 1996. The increase in noninterest income in 1998 was primarily attributable
to increased gains recognized on sales of loans and securities. 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 securities.
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 1998 and 1996.
Bancorp increased gains on sales of loans by $844,000 in 1998 as compared
to 1997, and $285,000 in 1997 as compared to 1996. These increases were
primarily due to increases in residential mortgage loans originated through
Centennial Mortgage which are subsequently sold to third-party investors without
retention of servicing rights. The origination and refinance of mortgage loans
and related fee income and gains on sales to third-party investors is dependent
upon the general level and direction of interest rates. Therefore, there can be
no assurance that such income will contribute to Bancorp's future earnings.
Bancorp recognized increased gains on sales of securities of $431,000
during 1998 as compared to 1997 and $162,000 during 1997 as compared to 1996.
The 1998 increase resulted from partial portfolio liquidation to help support
strong loan growth and a continuation of Bancorp's strategy to reduce the
average life of the investment portfolio. The 1997 increase in gains from sales
37
<PAGE>
of securities was due to the sale of approximately $20.5 million of
available-for-sale securities, primarily to repurchase shorter-term securities.
NONINTEREST EXPENSE
Noninterest expense increased $4.5 million to $19.3 million in 1998 as
compared to 1997, and increased $2.5 million to $14.9 million in 1997 as
compared to 1996. The 1998 increase was primarily attributable to increases in
salaries and employee benefits, premises and equipment, and advertising. The
increase in 1997 was primarily attributable to increases in salaries and
employee benefits, and premises and equipment expense.
Salaries and employee benefits increased $3.2 million to $12.8 million in
1998 as compared to 1997, and increased $1.9 million to $9.6 million in 1997 as
compared to 1996. These increases were primarily the result of staff additions
to accommodate Bancorp's increased operations.
Premises and equipment expense increased $594,000 to $2.6 million in 1998
as compared to 1997, and increased $224,000 to $2.0 million in 1997 as compared
to 1996. The increases in 1998 and 1997 were due to the increasing number of
Bank and Centennial Mortgage offices during both years.
Advertising expenses increased $312,000 to $801,000 in 1998 as compared to
1997 and $3,000 to $489,000 in 1997 as compared to 1996. Spending in 1998
increased substantially as Bancorp adopted a more formal advertising strategy
with emphasis on developing name recognition in markets served. Expenditures in
the developing Portland market also increased. Bancorp's 1997 advertising budget
was virtually the same as 1996.
Other components of noninterest expense increased as a result of general
business growth.
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
38
<PAGE>
portfolio securities) and liabilities (principally deposits) and maturities and
repricing schedules of assets and liabilities. Assets and liabilities are
described as rate sensitive when rate adjustments are within Bancorp's
discretion or are automatic based on contractual terms or changes in rate
indexes. 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
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, 1998,
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.
39
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
Amount maturing or repricing within:
---------------------------------------------------------------------
Three
Less than months to
three less than One to Over five
months one year five years years Total
------ -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Fixed-rate loans $ 7,479 $ 19,115 $47,276 $64,514 $138,384
Variable-rate loans 283,832 2,073 7,467 258 293,630
Investment securities -- -- 32,755 44,039 76,794
Federal Home Loan Bank stock 5,084 -- -- -- 5,084
Other interest-earning assets 1,003 -- -- -- 1,003
------- -------- ------- ------- --------
Total interest-earning assets 297,398 21,188 87,498 108,810 514,895
Cash and due from banks 40,838
Other noninterest-earning assets 16,317
Total assets $572,050
Interest-bearing liabilities:
Savings and interest-bearing demand deposits $222,516 -- -- -- $222,516
Certificates of deposit of
$100,000 or more 15,985 39,437 5,286 -- 60,708
Other time accounts 21,078 64,603 12,104 142 97,927
Short-term borrowings 20,600 -- -- -- 20,600
------- ------- ------ --- -------
Total interest-bearing liabilities 280,179 104,040 17,390 142 401,751
Other noninterest-bearing liabilities 106,582
Shareholders' equity 63,717
-------
Total liabilities and shareholders'
equity $572,050
========
Interest rate GAP $ 17,219 $(82,852) $ 70,108 $108,668
======== ========= ======== ========
Cumulative interest rate GAP $ 17,219 $(65,633) $ 4,475 $113,143
======== ========= ======== ========
GAP ratio (GAP/total assets) 3.01% (14.50)% 12.23% 19.00%
Cumulative GAP ratio 3.01% (11.49)% .75% 19.79%
</TABLE>
40
<PAGE>
The estimated fair market value of each class of financial instrument is
presented in Note 9 to the accompanying Consolidated Financial Statements.
Bancorp's sensitivity to the potential loss of future annual earnings due
to a hypothetical decrease in interest rates at December 31, is as follows:
Decrease in Decrease in
Interest Rates Net Interest Margin
-------------- -------------------
1998 1997
---- ----
1.0% $179,000 $ 5,000
2.0% 659,000 290,000
Management has provided this quantitative disclosure about market risk in
lieu of other information due to management's belief that the potential loss of
future earnings due to a hypothetical decrease in interest rates provides more
meaningful disclosure to the reader.
The following table presents the aggregate maturities of loans in each
major category of Bancorp's loan portfolio at December 31, 1998. 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
- - ------------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Commercial $122,586 $29,985 $11,384 $163,954
Real estate - construction 142,761 6,047 2,356 151,164
Real estate -- mortgage 41,122 14,496 39,074 94,692
Installment 5,623 1,411 39 7,073
Mortgage loans held for sale -- -- 11,039 11,039
Lease financing 388 1,509 -- 1,897
Other 427 2,710 -- 3,138
Less deferred loan fees (682) (122) (139) (943)
------- ------- ------- ------
Total loans by maturity $312,225 $56,036 $63,753 $432,014
======== ======= ======= ========
</TABLE>
41
<PAGE>
Bancorp has $119.5 million of loans that mature after one year, consisting
of fixed-rate loans aggregating $111.8 million (93.6%) and variable-rate loans
aggregating $7.7 million (6.4%).
At December 31, 1998, $138 million of Bancorp's loans (approximately 32%
of Bancorp's loan portfolio) had fixed interest rates and $294 million
(approximately 68%) had variable interest rates.
PROVISION FOR INCOME TAXES
Bancorp's provision for income taxes was $5.9 million in 1998, $4.3
million in 1997 and $3.1 million in 1996. Bancorp's effective tax rates for
financial reporting were 34.1% in 1998, 31.8% in 1997 and 32.5% in 1996. 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 to the
Consolidated Financial Statements.
LIQUIDITY AND SOURCES OF FUNDS
Bancorp's primary sources of funds are customer deposits, sales and
maturities of investment securities, sales of loans, loan repayments, net income
and the use of short-term borrowings. 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 $484 million at December 31, 1998 from
$419 million at December 31, 1997 and $340 million at December 31, 1996,
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 $428 million at December
31, 1998 from $337 million at December 31, 1997 and $266 million at December 31,
1996. These increases were primarily due to the Bank's business development
activities and Centennial Mortgage's real estate construction activities.
The Bank maintains, on an uncollateralized basis, federal funds lines with
correspondent banks as a backup source of temporary liquidity. At December 31,
1998, the Bank had federal funds lines totaling $33 million ($24 million at
December 31, 1997) with $1 million outstanding. No borrowings were outstanding
under the federal funds lines at December 31, 1997.
The Bank also maintains a cash management credit facility with 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, 1998, the Bank had $26.1 million of credit
available from the FHLB ($21.4 million at December 31, 1997) with $3.5 million
outstanding at December 31, 1998 and none outstanding at December 31, 1997. The
increase in the Bank's credit facility at December 31, 1998 from the level at
December 31, 1997 was due to the Bank's increase in specified housing finance
related assets during 1998. The credit facility is collateralized by the FHLB
stock owned by the Bank and by all its other assets.
42
<PAGE>
Management anticipates that Bancorp will continue to rely on customer
deposits, sales and maturities of investment securities, sales of loans, loan
repayments, retained earnings and short-term borrowings 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.
Bancorp may experience additional liquidity needs in connection with
increased deposit withdrawals due to customer concerns over the Year 2000 issue.
Management has adopted a contingency funding plan to guide management in
handling unusual liquidity needs. In preparing for possible increased Year 2000
liquidity needs, management is planning several actions including: (1)
modification of the pricing and terms of certain time deposit products to
encourage depositors to accept maturities after year-end; (2) developing plans
to place collateral with various sources of secondary liquidity to facilitate
short-term borrowing; and (3) developing plans to have additional cash available
at the branches and ATMs of the Bank during the latter part of the year.
Although management believes these and other actions will prepare Bancorp for
this potential liquidity need, there can be no assurance these steps will be
adequate.
CAPITAL RESOURCES
Total shareholders' equity increased to $63.7 million at December 31, 1998
from $51.8 million and $41.3 million at December 31, 1997 and 1996,
respectively. Total shareholders' equity was increased during 1998 not only by
net income, but also by the effects of stock options exercised ($660,000).
Bancorp shareholders' equity (Tier I capital) was 10.9% of average assets in
1998 as compared to 10.6% in 1997. The Bank's shareholder equity (Tier I
capital) was 9.8% of average assets in 1998 as compared to 9.5% in 1997.
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.
43
<PAGE>
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.
The federal banking regulators have issued several statements providing
guidance to financial institutions on the steps the regulators expect financial
institutions to take to become Year 2000 compliant. Bancorp's Year 2000 programs
are designed to comply with this guidance. Each of the federal banking
regulators is also examining the financial institutions under its jurisdiction
to assess each institution's compliance with the outstanding guidance. If an
institution's progress in addressing the Year 2000 problem is deemed by its
primary federal regulator to be less than satisfactory, the institution will be
required to enter into a memorandum of understanding with the regulator which
will, among other things, require the institution to promptly develop and submit
an acceptable plan for becoming Year 2000 compliant and to provide periodic
reports describing the institution's progress in implementing the plan. Failure
to satisfactorily address the Year 2000 problem may also expose a financial
institution to other forms of enforcement action that its primary federal
regulator deems appropriate to address the deficiencies in the institution's
Year 2000 remediation program.
Bancorp is heavily reliant on computers for accounting for customer
records and transactions, as well as operating performance. Recognizing the
risks of the Year 2000 problem, management organized a task force in early 1997
to identify and address the issues related to the Year 2000. 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 the internal
computer hardware and software utilized by Bancorp, as well as mechanical
systems which may be dependent upon computer components, and contacted vendors
seeking their certification of Year 2000 compliance (Bancorp does not utilize
any proprietary computer hardware or software). The task force has retained
computer consultants to assist with testing of computer hardware and software.
The testing process is on schedule and expected to be completed by June 30,
1999. Results to date indicate systems are compliant. Management anticipates
that testing will be completed according to regulatory guidelines. Additional
testing may continue through year end 1999 to ensure continued systems
compliance to the maximum extent possible.
Management of Bancorp has also required that lending personnel ascertain
loan customer awareness and intent to timely achieve Year 2000 compliance.
Bancorp's credit risk associated with borrowers may increase to the extent
borrowers fail to adequately address their Year 2000 issues. As a result, there
may be increases in problem loans and credit losses in future years. In
addition, because of the possible effects on Bancorp's cash needs and liquidity,
management has interviewed selected significant deposit customers to determine
their Year 2000 compliance efforts and anticipated potential cash requirements
due to the Year 2000 problem.
44
<PAGE>
Bancorp's inquiry of each of its material vendors, borrowers and
depositors has not disclosed that any such person has failed to adequately
address the Year 2000 issue. Notwithstanding Bancorp's efforts, there can be no
assurance that these or other third parties significant to Bancorp's operations
will adequately address such issue.
During 1998, management budgeted $100,000 and expended $74,000 for Year
2000 compliance costs. For 1999, management has established a $300,000 budget
for such costs. Bancorp has recognized no Year 2000 equipment impairment
writedowns to date and does not anticipate that any will be incurred.
Management believes that its efforts to achieve Year 2000 compliance and
the impact of the Year 2000 problem will not have a material effect on
operations. Although Bancorp believes the actions being taken at this time are
suitable and appropriate to address the Year 2000 issue, there can be no
assurance that such measures will be sufficient or that Year 2000 issues will
not have an adverse impact, at least temporarily, on operations. Specific
factors which could affect Bancorp's ability to address Year 2000 issues include
the ability to locate and correct all relevant systems, the ability of
consultants to complete their testing on schedule, the compliance of third-party
vendors and service providers upon whom Bancorp relies, and similar
uncertainties.
Management believes that a reasonably likely worst case scenario as to the
effect on Bancorp of the Year 2000 compliance issue is that one or more
significant third parties fail to become Year 2000 compliant and disrupt the
Company's operations. It is not possible to quantify the potential impact of
such disruption at this time.
Bancorp is preparing contingency plans to minimize disruption to its
operations due to Year 2000 issues. Included are plans to insulate critical
business operations and develop alternatives to mitigate potential effects of
critical third parties whose own failure to properly address Year 2000 issues
may adversely impact Bancorp operations. Alternative strategies and contingency
plans for liquidity and cash are also included as part of such plans. The
contingency plans are expected to be substantially completed for critical
business operations by June 30, 1999. Review and validation of these plans will
continue through the remainder of 1999.
There can be no assurance that any such plans will fully mitigate any failures
or problems.
The forward-looking statements contained herein with regard to the timing
and overall cost estimates of Bancorp's efforts to address the Year 2000 problem
are based upon Bancorp's experience thus far in this effort. Should Bancorp
encounter unforeseen difficulties either in the continuing review of its
computerized systems, their ultimate remediation, or the response of parties
with which it does business or from which it obtains services, the actual
results could vary significantly from the estimates contained in these
forward-looking statements.
The disclosure contained in this Annual Report as well as the information
in reports previously filed by Bancorp with the Securities and Exchange
Commission (the "SEC") regarding Bancorp's Year 2000 readiness are designated as
Year 2000 readiness disclosures under the Year 2000 Information and Readiness
Disclosure Act.
45
<PAGE>
CHANGE OF ACCOUNTANTS
Effective October 30, 1998, Bancorp dismissed its prior independent
accountant, PricewaterhouseCoopers LLP ("PwC"). The decision to change
accountants was approved by Bancorp's Board of Directors.
PwC's reports on Bancorp's financial statements for the 1997 and 1996
fiscal years did not contain an adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles.
During the audits for 1997 and 1996 and through the subsequent interim
period to the date of change, there were no disagreements between Bancorp and
PwC on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of PwC, would have caused it to make a reference to the
subject matter of the disagreements in connection with its reports.
Bancorp requested that PwC furnish it with a letter addressed to the SEC
stating whether or not it agreed with the above statements. A copy of such
letter was filed as Exhibit 16 to Form 8-K filed November 5, 1998.
Effective October 30, 1998, Bancorp engaged Symonds, Evans & Larson, P.C.
as its principal independent accountant. During 1997 and 1996 and the subsequent
interim period to the date of change, Bancorp did not consult Symonds, Evans &
Larson, P.C. regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of the SEC'S Regulation S-K.
46
<PAGE>
FORM 10-K
Copies of Bancorp's annual report on Form 10-K required to be filed with
the SEC 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 SEC 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, 1998:
First quarter $16.61 $12.23
Second quarter 16.77 12.66
Third quarter 15.58 11.14
Fourth quarter 17.27 12.50
Year ended December 31, 1997:
First quarter $ 6.79 $ 5.64
Second quarter 10.73 6.69
Third quarter 13.32 9.84
Fourth quarter 13.13 10.93
At March 9, 1999, Bancorp had 16,937,600 shares of Common Stock
outstanding held by 1,249 shareholders of record.
Bancorp has never declared or paid cash dividends to shareholders and has
no intention to do so in the forseeable future.
47
<PAGE>
QUARTERLY FINANCIAL DATA
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Total
- - --------------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Interest income $11,339 $12,232 $13,033 $13,244 $49,848
Interest expense 3,587 3,840 4,258 4,151 15,836
------- ------- ------- ------- -------
Net interest income 7,752 8,392 8,775 9,093 34,012
Loan loss provision 300 300 600 300 1,500
Net gains on sales of
securities 145 262 193 -- 600
Income before income taxes 3,780 4,167 4,530 4,870 17,347
Net income 2,551 2,813 3,033 3,038 11,435
Earnings per share:
Basic $ .15 $ .16 $ .18 $ .19 $ .68
Diluted $ .14 $ .15 $ .17 $ .19 $ .65
1997
- - ----------------
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
Net gains on sales of
securities 29 -- 5 135 169
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 $ .13 $ .13 $ .15 $ .15 $ .56
Diluted $ .12 $ .12 $ .15 $ .14 $ .53
</TABLE>
48
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in each of Centennial Bancorp's
Form S-8 Registration Statement Nos. 33-44701, 33-86650 and 333-32081, and in
Centennial Bancorp's Annual Report on Form 10-K as of and for the year ended
December 31, 1998, of our report dated January 27, 1999, on our audit of the
consolidated financial statements of Centennial Bancorp and subsidiaries as of
and for the year ended December 31, 1998, which is incorporated by reference in
this Annual Report on Form 10-K.
/s/ SYMONDS, EVANS & LARSON, P.C.
Portland, Oregon
March 26, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Centennial Bancorp and subsidiaries on Form S-8 (File Nos. 33-44701, 33-86650
and 333-32081) of our report dated January 22, 1998 on our audits of the
consolidated balance sheets of Centennial Bancorp and subsidiaries as of
December 31, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1997, which report is incorporated by reference in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Eugene, Oregon
March 30, 1999
<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, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 40,838,367
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,003,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,793,378
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 20,975,044
<ALLOWANCE> 4,450,614
<TOTAL-ASSETS> 572,050,090
<DEPOSITS> 483,866,296
<SHORT-TERM> 20,600,071
<LIABILITIES-OTHER> 3,866,582
<LONG-TERM> 0
0
0
<COMMON> 29,690,949
<OTHER-SE> 34,026,192
<TOTAL-LIABILITIES-AND-EQUITY> 572,050,090
<INTEREST-LOAN> 44,348,206
<INTEREST-INVEST> 4,794,819
<INTEREST-OTHER> 705,464
<INTEREST-TOTAL> 49,848,489
<INTEREST-DEPOSIT> 15,074,009
<INTEREST-EXPENSE> 15,836,501
<INTEREST-INCOME-NET> 34,011,988
<LOAN-LOSSES> 1,500,000
<SECURITIES-GAINS> 599,885
<EXPENSE-OTHER> 19,348,558
<INCOME-PRETAX> 17,346,946
<INCOME-PRE-EXTRAORDINARY> 11,434,546
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,434,546
<EPS-PRIMARY> .68<F1>
<EPS-DILUTED> .65<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 3,841,000
<LOANS-PAST> 757,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,348,914
<CHARGE-OFFS> 452,100
<RECOVERIES> 53,800
<ALLOWANCE-CLOSE> 4,450,614
<ALLOWANCE-DOMESTIC> 4,450,614
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> REFLECTS AN 11-FOR-10 STOCK SPLIT PAID IN FEBRUARY 1999.
</FN>
</TABLE>
EXHIBIT 99.1
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
UNDER PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
Centennial Bancorp ("Bancorp") and its representatives may make
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act) from time-to-time. Bancorp wants to invoke to the fullest
extent possible the protection of the Private Securities Litigation Reform act
and the judicially created "bespeaks caution" doctrine with respect to such
statements. Accordingly, Bancorp is filing this Exhibit 99.1, which lists
certain factors that may cause actual results to differ materially from the
results indicated in such forward-looking statements.
This list is not necessarily exhaustive. Bancorp and its subsidiaries,
Centennial Bank and Centennial Mortgage Co., operate in a rapidly changing
environment, and new risk factors emerge periodically. There can be no assurance
that this Exhibit lists all material risks to Bancorp at any specific point in
time.
Should one or more of the following risks materialize or should
Bancorp's underlying assumptions prove incorrect, Bancorp's actual results or
outcome may vary materially from those described in its forward-looking
statements. Readers are cautioned not to rely on any forward-looking statements
in making investment decisions. Bancorp does not intend to update its
forward-looking statements.
IMPACT OF INTEREST RATES AND ECONOMIC CONDITIONS
The results of operations for financial institutions, including Bancorp
and its subsidiaries, may be materially and adversely affected by changes in
prevailing economic conditions, including declines in real estate market values,
rapid changes in interest rates or changes in the monetary and fiscal policies
of the federal government. Bancorp's profitability depends on the difference
between the amount of interest it earns on investments and loans, and the amount
of interest it pays on deposits and other liabilities. This difference is
referred to as interest rate spread. Any decline in the economy in Bancorp's
market areas could have an adverse effect on Bancorp. Like most financial
institutions, Bancorp's net interest spread and margin will be affected by
general economic conditions and other factors which influence interest rates.
Bancorp's assets and liabilities will be affected differently by a given change
in interest rates. Thus, an increase or decrease in rates, the terms of
Bancorp's loans , or the mix of adjustable and fixed-rate loans in Bancorp's
portfolio could have a positive or negative effect on Bancorp's net income,
capital and liquidity. A change in market interest rates can also have a
significant impact on the Bank's ability to grow. Changes in rates may encourage
depositors to withdraw deposit account funds to invest in other alternatives,
which may result in limited funds for Bancorp to use in making loans.
Additionally, changes in rates could discourage businesses and customers from
seeking new loans or could encourage them to pay off existing loans with Bancorp
through a refinancing with another financial institution. Changes in interest
rates are not predictable or controllable. Negative developments in the economy,
or Bancorp's inability to respond to such changes, could adversely affect
Bancorp and its subsidiaries.
Most of the loans originated by Centennial Bank are made to borrowers
within the Eugene/Springfield and Portland, Oregon areas. Centennial Bank has
<PAGE>
received regulatory approval to acquire from Northwest National Bank its Hazel
Dell branch office, which is located in Vancouver, Washington. The transaction
is expected to close in the Spring of 1999. This will be Centennial Bank's first
branch outside Oregon. Adverse changes in economic conditions in the
Eugene/Springfield or Portland/Vancouver areas could impair Bancorp's ability to
collect loans and could otherwise have a negative effect on Bancorp's financial
condition.
RISKS OF GROWTH STRATEGY
Bancorp intends to continue to pursue an aggressive growth strategy
focused primarily upon its ability to develop new account relationships, to
establish new Centennial Bank branches in Oregon and Washington, to make
acquisitions, and to generate loans and deposits. The success of Bancorp's
growth strategy will depend on its ability to manage credit risks, control costs
and provide competitive products and services while rapidly expanding its
geographic presence by branching or acquiring other banks or branches of banks.
There can be no assurance that Bancorp will be successful in increasing its
volume of loans and deposits at acceptable risk levels and upon acceptable
terms, expanding its asset base, managing the costs and implementation risks
associated with its growth strategy, integrating any acquired institutions or
branches or preventing deposit erosion at acquired institutions or branches.
Also, there can be no assurance that Bancorp's expansion plans when implemented
will be profitable. Acquisitions and branching by Bancorp will be subject to
regulatory approvals, and there can be no assurance that Bancorp will succeed in
securing such approvals. Bancorp's ability to pursue its growth strategy also
may be adversely affected by general economic conditions.
As part of its overall growth strategy, Bancorp from time to time
considers acquiring other banks. Any acquisition by Bancorp would create risks
and uncertainties, including the possible issuance of additional shares of
Common Stock to pay for such acquisition, which issuance may result in dilution
to the current Bancorp shareholders, the diversion of management's attention to
acquisition negotiations and, if an acquisition were consummated, Bancorp's
ability to effectively assimilate the acquired bank and branches.
The banking industry generally has seen a trend toward automation of
delivery of banking services, a reduction in the number of full-service branch
offices and a de-emphasis on personal service. This trend appears to be the
result of efforts by banks to reduce costs and increase efficiency. While
Bancorp seeks to improve its capacity to use technological innovations, its
growth strategy is based on the belief that customer demand for personal contact
and strategically placed branch offices will continue for the foreseeable
future. Thus, Bancorp is continuing to expand its branch network and the
availability to customers of well-trained and highly motivated personnel at a
time when many banks are consolidating their branch networks and automating
customer responses. There can be no assurance that Bancorp's strategy will be
successful or that technological advances by Bancorp's competitors will not
result in the loss of customer relationships. As a result of Bancorp's strategy,
its costs for providing banking services may generally be higher than many of
its competitors for the foreseeable future.
Bancorp's growth strategy requires, among other things, expanded
operational systems, the implementation of new control procedures, and success
in hiring and retaining skilled employees. Bancorp believes that its capital,
borrowings, and expected earnings will be sufficient to support its operations
and anticipated expansion and to meet all regulatory requirements for the
foreseeable future. There can be no assurance that Bancorp will be successful in
implementing, or will have the necessary regulatory capital to implement, its
growth strategy.
2
<PAGE>
CERTAIN LENDING RISKS
The risk of borrowers not paying their loans is inherent in commercial
banking. Loan defaults may have a material adverse effect on Bancorp's earnings
and overall financial condition. The risk of loss is affected by general
economic conditions, the type of loan, the borrower's overall ability to repay
the loan, and the quality of the collateral, if any, provided to Bancorp to
secure the loan. Bancorp offers a full range of loans to its customers. Some
types of loans carry a greater risk of default than other loans.
Bancorp's loan portfolio consists primarily of commercial loans (not
collateralized by real estate), real estate construction loans and real estate
mortgage loans (including commercial loans collateralized by real estate).
Commercial loans that are collateralized by property other than real estate
generally are considered to involve a higher degree of risk than loans
collateralized by real estate, primarily because the non-real-estate collateral
may be difficult to repossess and liquidate. Bancorp focuses on small- to
medium-sized businesses. This results in a larger concentration by Bancorp of
loans to such businesses. As a result, Bancorp may assume greater lending risks
than institutions that tend to make loans to larger businesses. Because payment
of commercial loans is typically dependent on the success of the borrower's
business, commercial loans are affected more by adverse general economic
conditions than real estate loans. Construction lending also is subject to
substantial risks, such as construction delays, cost overruns, insufficient
collateral and an inability to obtain permanent financing in a timely manner.
ALLOWANCE FOR LOAN LOSSES
Bancorp's allowance for loan losses is maintained at a level considered
adequate by management to absorb anticipated losses. The amount of future
losses, however, may be affected by changes in economic, operating and other
conditions, including changes in interest rates, that may be beyond Bancorp's
control, and future losses may exceed current estimates. There can be no
assurance that Bancorp's allowance will be adequate to cover actual losses.
POTENTIAL LIABILITY FOR UNDERCAPITALIZED BANK SUBSIDIARY
Under federal law, a bank holding company may be required to guarantee
a capital plan filed by an undercapitalized bank subsidiary with its primary
regulator. If the bank defaults under the plan, the holding company may be
required to contribute to the capital of the bank an amount equal to the lesser
of 5% of the bank's assets at the time it became undercapitalized or the amount
necessary to bring the bank into compliance with applicable standards. Bancorp
is the sole shareholder of Centennial Bank.
COMPETITIVE BANKING ENVIRONMENT
The banking and mortgage lending businesses in Oregon and Washington
are highly competitive. Bancorp competes for loans and deposits with other
commercial banks, savings banks, savings and loan associations, finance
companies, money market funds, brokerage firms, credit unions and other
nonfinancial institutions. Many of these competitors have substantially greater
resources than Bancorp. Many of Bancorp's competitors have substantially larger
lending limits than Bancorp and offer certain services, including trust and
international banking services, that Bancorp does not provide. The larger
institutions in Bancorp's markets have competitive advantages over Bancorp in
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that they have higher public visibility and are able to maintain advertising and
marketing activities on a much larger scale than Bancorp can economically
sustain. By law, lending limits are dependent upon the capital of the financial
institution, giving larger banks an additional competitive advantage with
respect to loan applications which are in excess of Centennial Bank's legal
lending limits.
Bancorp also competes with other community banks operating in its
market areas. Several banks, which focus on the same types of customers as
Bancorp, have been formed in Bancorp's market areas during the last few years.
In addition, out-of-state banks and bank holding companies headquartered
anywhere in the United States are permitted to acquire Oregon state-chartered
banks that have been operating for three or more years. Statewide branch banking
also is permitted in Oregon and Washington. As a result of such interstate
banking and branch banking, Centennial Bank and Centennial Mortgage may
experience increased competition in their respective market areas.
TECHNOLOGICAL CHANGES
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, effective use of technology increases
efficiency and enables banks to reduce costs. Bancorp's future success will
depend in part on its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to create additional efficiencies in its operations.
Many of Bancorp's competitors have substantially greater resources to invest in
technological improvements and highly skilled technical personnel. To be
competitive, Bancorp may need to spend significant amounts on computer hardware
and software, and for technical personnel. There can be no assurance that
Bancorp will be able to effectively implement new technology-driven products and
services or be successful in marketing these products and services to its
customers.
GOVERNMENT RREULATION
Bancorp and its subsidiaries, particularly Centennial Bank, are subject
to extensive federal and state legislation, regulation and supervision. These
and other restrictions limit the manner in which Bancorp and Centennial Bank may
conduct their businesses and obtain financing. These laws are intended primarily
to protect depositors and are not for the benefit of shareholders. In addition,
the burdens and restrictions imposed by federal and state banking regulations
may place Centennial Bank at a competitive disadvantage compared to competitors
who are less regulated. Legislation and regulations have had and will continue
to have a significant impact on the banking industry. Some legislative and
regulatory changes may increase Bancorp's costs of doing business, assist
competitors or otherwise adversely affect Bancorp's operations. Bancorp is
unable to predict the nature or extent of the effects on its business and
earnings that any fiscal or monetary policies, or new federal or state
legislation or regulations, may have in the future.
LEGAL PROCEEDINGS
Periodically, and in the ordinary course of business, various claims
and lawsuits are brought by and against Bancorp and its subsidiaries, such as
claims to enforce liens, condemnation proceedings on properties in which Bancorp
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holds security interests, claims involving the making and servicing of real
estate loans and other issues incident to Bancorp's business.
RISK OF LOSS AND BUSINESS INTERRUPTION FROM YEAR 2000 DATA PROCESSING PROBLEMS
Bancorp is a user of computers, computer software and equipment using
embedded microprocessors that will be affected by the Year 2000 issue. As the
century date change occurs, date-sensitive systems that use a two-digit date
field to designate a year may recognize the Year 2000 as 1900, or not at all.
This inability to recognize or properly treat the Year 2000 may cause erroneous
results, ranging from system failures to incorrect or incomplete processing.
Because Bancorp is substantially dependent on its computer systems and the
computer systems of third parties, the failure of these systems to be Year 2000
compliant could cause substantial disruption of Bancorp's business and could
have a material adverse financial impact on Bancorp. Failure to resolve Year
2000 issues presents the following risks to Bancorp: (1) Bancorp could lose
customers to other financial institutions, resulting in a loss of revenue, if
Bancorp is unable to properly process customer transactions; (2) governmental
agencies, such as the Federal Home Loan Bank, and correspondent banks could fail
to provide funds to Bancorp, which could materially impair Bancorp's liquidity
and affect Bancorp's ability to fund loans and deposit withdrawals; (3)
Bancorp's customers could be unable to service their loans from Bancorp,
increasing Bancorp's loan default rates; (4) concern on the part of depositors
that Year 2000 issues could impair access to their deposit account balances
could result in Bancorp's experiencing deposit outflows prior to December 31,
1999; and (5) Bancorp could incur increased personnel costs if additional staff
is required to perform functions that inoperative systems would have otherwise
preformed.
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