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, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file Number: 0-10489
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CENTENNIAL BANCORP
(Name of registrant as specified in its charter)
93-0792841
Oregon (I.R.S. Employer
(State of incorporation) Identification No.)
One S. W. Columbia St.
Portland, Oregon 97258
(Address of principal executive offices)
Registrant's telephone number: (503) 973-5556
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(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
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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. [ X ]
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.
$160,763,112 aggregate market value as of March 15, 2000, 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: 19,684,373 shares of Common
Stock on March 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part II incorporates information by reference from the issuer's Annual
Report to Shareholders for the fiscal year ended December 31, 1999. Part III is
incorporated by reference from the issuer's definitive proxy statement for the
annual meeting of shareholders to be held on April 26, 2000.
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CENTENNIAL BANCORP
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
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PART I PAGE
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Item 1. DESCRIPTION OF BUSINESS 4
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Item 2. DESCRIPTION OF PROPERTIES 37
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Item 3. LEGAL PROCEEDINGS 38
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF
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SECURITY HOLDERS 38
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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 BANCORP'S COMMON STOCK
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AND RELATED SHAREHOLDER MATTERS 39
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Item 6. SELECTED FINANCIAL DATA 39
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39
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Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 39
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39
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Item 9. CHANGES IN AND DISAGREEMENTS WITH
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ACCOUNTANTS ON ACCOUNTING AND
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FINANCIAL DISCLOSURE 39
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PART III
(Items 10 through 13 are incorporated by reference from
Centennial Bancorp's definitive proxy statement for the annual
meeting of shareholders to be held on April 26, 2000)
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF BANCORP 40
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Item 11. EXECUTIVE COMPENSATION 40
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
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OWNERS AND MANAGEMENT 40
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Item 13. CERTAIN RELATIONSHIPS AND RELATED
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TRANSACTIONS 40
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
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AND REPORTS ON FORM 8-K 41
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SIGNATURES 45
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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. STATEMENTS THAT EXPRESSLY OR
IMPLICITLY PREDICT FUTURE RESULTS, PERFORMANCE OR EVENTS ARE FORWARD-LOOKING. IN
ADDITION, THE WORDS "ANTICIPATE," "BELIEVE," "INTEND," "EXPECT" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: (1) POTENTIAL
DELAYS OR OTHER PROBLEMS IN IMPLEMENTING BANCORP'S GROWTH AND EXPANSION
STRATEGY; (2) THE ABILITY TO ATTRACT NEW DEPOSITS AND LOANS; (3) INTEREST RATE
FLUCTUATIONS; (4) COMPETITIVE FACTORS AND PRICING PRESSURES; (5) GENERAL
ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, THAT COULD RESULT IN
INCREASED LOAN LOSSES; (6) CHANGES IN LEGAL AND REGULATORY REQUIREMENTS; AND
(7) CHANGES IN TECHNOLOGY, AS WELL AS OTHER FACTORS DESCRIBED IN THIS AND OTHER
BANCORP REPORTS AND STATEMENTS, INCLUDING, BUT NOT LIMITED TO, EXHIBIT 99.1,
FILED AS PART OF THIS ANNUAL REPORT. 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
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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 has two wholly owned subsidiaries: Centennial Bank
and Centennial Mortgage Co. ("Centennial Mortgage"). Unless the context clearly
suggests otherwise, references in this Annual Report on Form 10-K to "Bancorp"
include Centennial Bancorp and its subsidiaries.
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All share and per-share information has been restated to give
retroactive effect to a 10% common stock split declared in January 1999, a 5%
common stock split declared in July 1999, a 10% common stock split declared in
January 2000, 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. Deposit-taking
and lending activities are primarily directed to the communities in which
offices are located. Centennial Bank's 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, 1999, based on total assets, Centennial Bank was the
11th largest of the commercial banks maintaining offices in Oregon. At that
date, Centennial Bank had 19 branches: four full-service branches in Eugene; one
full-service branch in adjacent Springfield; one full-service branch in Cottage
Grove, Oregon; three full-service and five limited-service branches in Portland,
Oregon; one full-service branch each in Beaverton, Clackamas and Tigard, suburbs
of Portland; one full-service branch in Salem, Oregon; and one full-service
branch in Vancouver, Washington.
Five of the fourteen full-service branches were opened during 1999. The
Oakway Center office opened in January 1999 as the fourth branch in the Eugene
area. The Hazel Dell office in Vancouver, acquired from Northwest National Bank
in April 1999, opened in May as Centennial Bank's first branch in Washington
state. The downtown Portland and downtown Salem branches opened during July, and
the Clackamas branch opened in November. A second Vancouver branch, the Mill
Plain office, opened in February 2000.
During the first quarter of 1999, Centennial Bank completed a major
reorganization along functional, rather than the previous geographical, lines.
The change was made to facilitate continued growth and expansion. As a result of
the reorganization, in January 1999 two commercial banking centers were formed,
one in downtown Eugene and the other in southwest Portland. A third commercial
banking center opened during July in downtown Portland.
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
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loans. Total deposits increased from $484 million at December 31, 1998 to $573
million at December 31, 1999. Net loans and loans held for sale increased from
$428 million at December 31, 1998 to $594 million at December 31, 1999.
Deposit accounts at Centennial Bank are insured up to applicable limits
by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is not a
member of the Federal Reserve System.
CENTENNIAL MORTGAGE
Centennial Mortgage began operations in 1987, originating conventional
and federally insured residential mortgage loans for sale in the secondary
market. Centennial Mortgage originated $152.5 million, $213.9 million and $111.6
million of mortgages in 1999, 1998 and 1997, respectively. Mortgage loans
generally are sold without recourse or retention of servicing rights but may be
subject to repurchase under certain circumstances. Centennial Mortgage also
originates and administers loans for the acquisition, development and
construction of commercial and residential real estate. Loan originated by
Centennial Mortgage are generally funded by and booked as assets of Centennial
Bank.
Centennial Mortgage has two offices in Eugene and three offices in the
Portland area. The second Eugene office opened in January 1999 and shares leased
space with the Oakway Center branch of Centennial Bank.
A trend of rising interest rates which started in 1999 has continued
into the Year 2000. Increases in interest rates can adversely affect demand for
real estate acquisition, development and construction loans as well as the
repayment of those loans from the sale of completed properties. Rising interest
rates can also have a significant negative effect on residential mortgage
lending activity.
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 average
interest-earning assets and is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities. During 1999, 1998 and
1997, Bancorp's average
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interest-earning assets were $578 million, $483 million and $399 million,
respectively. During these same years, Bancorp's net interest margin on a
tax-equivalent basis was 7.15%, 7.22% and 6.92%, respectively.
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table sets forth for 1999, 1998 and 1997 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, 1999 1998 1997
--------------------------------- ------------------------------- -----------------------------
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
---------- --------- ------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits
with banks $ 104 $ 8 7.69% $ 264 $ 14 5.30% $ 6,924 $ 376 5.43%
Investment securities -
taxable 41,954 2,612 6.23 48,554 3,096 6.38 41,933 2,791 6.66
Investment securities -
non-taxable (2) 28,155 2,172 7.71 33,508 2,574 7.68 39,097 3,083 7.89
Federal funds sold 5,937 280 4.72 13,253 691 5.21 10,925 573 5.24
Loans and loans held for
sale (3) 502,272 54,134 10.78 387,914 44,348 11.43 299,976 34,329 11.44
------- ------- --------- ------- -------- -------
Total interest-earning
assets/interest income (2) 578,422 59,206 10.24 483,493 50,723 10.49 398,855 41,152 10.32
Allowance for loan losses (5,399) (3,882) (3,123)
Cash and due from banks 31,440 28,351 27,552
Premises and equipment, net 13,993 11,407 9,790
Other assets 16,547 5,848 6,112
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Total assets $635,003 $525,217 $439,186
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LIABILITIES AND SHAREHOLDERS'
EQUITY:
Savings and interest-bearing
demand 260,240 7,865 3.02 $211,896 6,889 3.25 $166,800 5,156 3.09
Time deposits 167,702 8,597 5.13 145,387 8,185 5.63 129,756 7,299 5.63
Short-term borrowings 26,356 1,405 5.33 10,016 489 4.88 9,688 539 5.56
Long-term debt 5,945 273 4.59 10,000 572 5.72
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Total interest-bearing
liabilities/interest
expense 454,298 17,867 3.93 373,244 15,836 4.24 316,244 13,566 4.29
Demand deposits 106,317 90,166 75,005
Other liabilities 4,948 5,095 2,001
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Total liabilities 565,563 468,505 393,250
Shareholders' equity 69,440 56,712 45,936
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Total liabilities and
shareholders' equity $635,003 $525,217 $439,186
======== ======== ========
Net interest income (2) $41,339 $34,887 $27,586
======= ======= =======
Net interest spread (2) 6.31% 6.25% 6.03%
===== ===== =====
Net interest margin (2) 7.15% 7.22% 6.92%
Net interest income to
average shareholders'
equity (2) 59.53% 61.52% 60.05%
Average interest-earning
assets to average
interest-bearing
liabilities 127% 130% 126%
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(1)Average balances are based on daily averages.
(2)Average yield on non-taxable securities, interest income, net interest income, net interest spread, net interest margin and net
interest income to average shareholders' equity have been computed on a 34% tax-equivalent basis.
(3)Nonaccrual loans have been included in the computation of average loans and loans held for sale. Loan fees recognized and
included in interest income totaled $7,282,948, $6,855,866 and $4,769,700 in 1999, 1998 and 1997, 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.
1999 vs. 1998 1998 vs. 1997
Change in Change in
net interest income due to net interest income due to
--------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
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(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Balances due from banks $ (10) $ 4 $ (6) $ (357) $ (5) $ (362)
Investment securities -- taxable (416) (68) (484) 431 (126) 305
Investment securities -- non-taxable (412) 10 (402) (435) (74) (509)
Federal funds sold (363) (48) (411) 122 (4) 118
Loans 12,700 (2,914) 9,786 10,059 (40) 10,019
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Total interest income 11,499 (3,016) 8,483 9,820 (249) 9,571
Interest expense:
Deposits:
Savings and interest-bearing
demand 1,516 (540) 976 1,430 303 1,733
Time 1,200 (788) 412 880 5 885
Short-term borrowings 834 82 916 17 (67) (50)
Long-term debt (273) (273) (209) (90) (299)
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Total interest expense 3,277 (1,246) 2,031 2,118 151 2,269
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Net interest income $8,222 $(1,770) $6,452 $7,702 $ (400) $7,302
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MARKET AREAS
The greater Portland area, where Centennial Bank has eight full-service
and five limited-service branches and two commercial banking centers and where
Centennial Mortgage has three offices, has become Bancorp's primary market. The
metropolitan area, including Vancouver, Washington, has an increasingly
diversified, growing economy and a population of approximately 1.8 million. The
Portland area continues to provide excellent growth opportunity and also allows
dilution of loan portfolio risk due to the area's economic diversity.
Bancorp's other major market area, with five full-service bank
branches, a commercial banking center and two mortgage lending offices, is the
Eugene/Springfield area at the southern end of Oregon's Willamette Valley. The
populations of Eugene and Springfield combined total approximately 189,000. 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) and health care.
With the opening of a full-service bank branch in mid-1999, Bancorp
entered the Salem, Oregon market. Salem is the state capitol and is located in
the Willamette Valley about midway between Portland and Eugene. The Salem area
population is approximately 124,000. The area economy is highly dependent on the
state government although educational institutions, the U. S. and local
governments, healthcare and food processing are also very significant.
Centennial Bank 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 and agriculture.
LENDING ACTIVITIES
GENERAL
Bancorp provides a broad range of commercial and real estate lending
services. 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. Commercial and residential real estate
construction lending, as well as residential mortgage loan origination and
sales, are also important aspects of Bancorp's lending activities. Bancorp makes
consumer loans, primarily to accommodate existing customers, but does not
actively pursue such business. Most of Bancorp's loans are made to customers in
branch office trade areas.
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Bancorp strives to maintain sound loan underwriting standards with
written loan policies, conservative individual limits and, depending on the size
of the credit request, reviews by Centennial Bank's Senior Loan Committee and
the Asset/Liability Committee of the Board of Directors. Underwriting standards
are designed to achieve a high-quality loan portfolio, compliance with lending
regulations and the desired mix of loan maturities and industry concentrations.
Management further seeks to minimize credit losses by closely monitoring the
financial condition of its borrowers and the value of collateral. In-house legal
counsel assists in loan documentation and collections.
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,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
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(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial $219,588 $163,577 $146,594 $116,656 $ 77,983
Real estate - construction 227,388 150,816 88,842 66,001 43,851
Real estate - mortgage 129,221 94,475 87,357 79,870 54,442
Installment 8,409 7,073 6,603 6,425 5,929
Loans held for sale 6,155 11,039 5,585 3,538 4,573
Lease financing 4,868 1,897 3,649 3,775 4,001
Other 4,199 3,137 1,995 2,365 311
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Total loans and
loans held for sale 599,828 432,014 340,625 278,630 191,090
Less allowance for loan
losses (6,165) (4,451) (3,349) (2,600) (1,928)
--------- -------- -------- --------- ---------
Loans receivable, net $593,663 $427,563 $337,276 $266,030 $189,162
========= ======== ======== ========= =========
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The following table presents the aggregate maturities of loans in each major category of Bancorp's loan portfolio
at December 31, 1999. 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
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(In thousands)
<S> <C> <C> <C> <C>
Commercial $133,703 $58,849 $27,036 $219,588
Real estate - construction 162,244 59,503 5,641 227,388
Real estate - mortgage 26,983 42,504 59,734 129,221
Installment 3,709 4,412 288 8,409
Loans held for sale -- -- 6,155 6,155
Lease financing 174 4,694 -- 4,868
Other 830 3,059 310 4,199
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Total loans by maturity $327,643 $173,021 $99,164 $599,828
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Of Bancorp's $272 million of loans that mature after one year, a total
of $157 million (approximately 58%) are fixed-rate loans, and a total of $115
million (approximately 42%) are variable-rate loans.
At December 31, 1999, $181 million of Bancorp's loans (approximately
30%) had fixed interest rates, and $419 million (approximately 70% of its loan
portfolio) had variable interest rates.
REAL ESTATE CONSTRUCTION LOANS
Real estate construction loans are Bancorp's largest category of loans.
This category includes loans which finance land acquisition, residential lot
development, construction of single-family and multi-family residential
properties, and the development and construction of a wide range of commercial
real estate projects. Land acquisition and lot development loans generally have
maturities of 12 to 18 months while residential construction loans generally
have maturities of 12 months. Commercial construction loans normally have 12 to
18 month maturities with extension options when justified. At December 31, 1999,
90% of the outstanding loans in this category had variable interest rates with
the remaining 10% having fixed rates.
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 of 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, 1999, real estate construction loans had increased to
$227.4 million from $150.8 million at December 31, 1998 and $88.8 million at
December 31, 1997. The increases were primarily attributable to strong growth in
commercial real estate construction lending resulting from an expansion of
Centennial Mortgage's business strategy. No loans in this category were
non-accruing at December 31, 1999. The December 31, 1998 non-
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accrual total was $2.3 million and was concentrated in loans to one borrower.
The borrower filed bankruptcy, and Centennial Bank subsequently foreclosed and
acquired the underlying real estate collateral which has been substantially
liquidated. Management believes the value of the remaining property is
sufficient to preclude loss when sold. At December 31, 1999 and 1998, there were
no restructured loans in this category.
COMMERCIAL LOANS
Commercial loans that are not secured by real estate represent the
second 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, 1999, approximately 74% of Bancorp's commercial loans
had floating or adjustable interest rates; the remaining 26% 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, 1999 were $219.6 million, compared to $163.6
million at December 31, 1998 and $146.6 million at December 31, 1997. Loan
growth in 1999 and 1998 was primarily the result of Centennial Bank's business
development program, expansion through new commercial banking centers and branch
offices, and the continuing favorable Oregon economy. Non-accrual loans in this
category totaled $579,00 at December 31, 1999 ($776,000 at December 31, 1998);
there were no restructured loans at December 31, 1999 or 1998.
REAL ESTATE MORTGAGE LOANS
Real estate mortgage loans represent Bancorp's third largest category
of loans. Of the $135.4 million of real estate mortgage loans outstanding at
December 31, 1999, $109.7 million consisted of income property and commercial
loans secured by real estate. 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.
At December 31, 1999, approximately 66% of Bancorp's real estate
mortgage loans had fixed interest rates; the other 34% had floating or
adjustable interest rates. Maturities of the real estate mortgage loans retained
by Bancorp usually range from one to ten years. Real estate mortgage loans
outstanding increased
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to $135.4 million at December 31, 1999 from $105.5 million at December 31, 1998
and $92.9 million at December 31, 1997. The strong 1999 growth was primarily due
to strategic emphasis on developing the income property and commercial real
estate portion of the portfolio. At December 31, 1999, there were no non-accrual
loans in this category ($726,000 at December 31, 1998). At December 31, 1999 and
1998, there were no restructured loans in this category.
Bancorp's underwriting standards specify the following maximum
loan-to-value ratios for real estate loans: 85% for loans secured by
owner-occupied residences, 80% for other residential loans and for construction
loans, and 80% for commercial real estate loans.
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, 1999, 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 $8.4 million at December 31, 1999 compared to
$7.1 million at December 31, 1998 and $6.6 million at December 31, 1997. These
modest levels of installment loans to individuals were primarily due to
Bancorp's focus on lending to businesses and professionals and significant
competition for consumer loans from the many credit unions, banks and finance
companies in the market areas served by Bancorp. At December 31, 1999 and 1998,
there were no non-accrual or 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 7 to Bancorp's Consolidated Financial Statements,
which are incorporated by reference from Bancorp's 1999 Annual Report to
Shareholders. Bancorp applies the same credit standards to these
14
<PAGE>
commitments as it uses in all its lending processes and includes 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. Loan officers and
lending unit managers have individual authority to approve loans in amounts up
to established limits, ranging from $25,000 to $750,000. Credit requests in
excess of those limits, or not in conformance with lending policies, are
reviewed by successive levels of approval authority according to the total
amounts involved. These authority levels include, by ascending approval limits,
Credit Administration officers, the Senior Loan Committee and the
Asset/Liability Committee of the Board of Directors. The Senior Loan Committee
consists entirely of Bancorp senior management. The Asset/Liability Committee
has seven members including five non-employee directors, Bancorp's President and
CEO, and Centennial Bank's President and CEO. 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 Tier 1 and Tier 2
capital, as defined by regulation. However, loans and other obligations up to an
additional 10% of the institution's capital may be made to the borrower if the
obligations are secured by a first lien on real estate, and the obligation does
not exceed 80% of the fair market value of the real estate as determined by an
independent appraisal. At December 31, 1999, Centennial Bank's legal lending
limit was $9.9 million (or $16.5 million if secured by a first lien on real
estate). However, for internal policy purposes, Centennial Bank's legal lending
limit is set at $9.25 million (or $15.5 million if secured by a first lien on
real estate).
Loan pricing decisions are based on an evaluation of credit risk, cost
of funds, operating and administrative costs, an allowance for loan losses,
desired profit margin and other factors. Bancorp uses a computer based pricing
model that analyzes a borrower's contribution to net earnings and return on
assets.
Centennial Bank sells loan participations to accommodate borrowers
whose financing needs exceed Centennial Bank's lending limits, to diversify risk
and manage liquidity. Centennial Bank occasionally purchases participations in
loans from correspondent banks. Centennial Bank's policies prohibit aggregate
purchased
15
<PAGE>
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, troubled debt restructurings ("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,
-------------------------------------------------------
1999 1998 1997 1996 1995
----- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Loans past due 90 days or more $2,163 $1,043 $ 402 $ 420 $ 645
Non-accrual loans 579 3,841 873 1,480 478
Restructured loans -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans 2,742 4,884 1,275 1,900 1,123
Other real estate owned 413 105 -- -- --
------ ------ ------ ------ ------
Total non-performing assets $3,155 $4,989 $1,275 $1,900 $1,123
====== ====== ====== ====== ======
Allowance for loans losses $6,165 $4,451 $3,349 $2,600 $1,928
Ratio of total non-performing assets
to total assets .43% .87% .26% .47% .35%
Ratio of total non-performing loans
to total loans .46% 1.13% .38% .71% .59%
Ratio of allowance for loan losses
to total non-performing loans 225% 91% 263% 137% 172%
</TABLE>
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
on non-accrual status, Bancorp's policy is to reverse, and charge against
current income, interest previously accrued but uncollected. The interest on
these loans is accounted for on the cash-basis or cost-recovery method until
qualifying for return to accrual status. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured. If interest on non-accrual
loans had been accrued, such income would have been approximately $97,000 in
1999, $273,000 in 1998 and $103,000 in 1997. Total interest income of $27,500
and $141,600 was recognized on non-accrual loans during 1999 and 1998
respectively; no such income was recognized in 1997.
Restructured loans occur when Bancorp, for economic or legal reasons
related to a borrower's financial difficulties, grants a concession that would
not otherwise be considered. Such concessions include reduction of the interest
rate for the remainder of the contract term, extension of the maturity date at
16
<PAGE>
an interest rate less than the market rate for new debt of similar risk, and
forgiveness of accrued interest and/or principal. Bancorp had no restructured
loans at December 31, 1999, 1998 or 1997.
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, 1999 and 1998, OREO totaled $413,100 and $105,400,
respectively, and consisted of one property at each date. At December 31, 1997,
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, based on
historic loss factors, to each non-accrual, substandard or doubtful loan in
Bancorp's loan portfolio to calculate a total amount of average anticipated loan
losses.
The second method uses credit risk ratings (from one through eight) and
related loss factor multipliers (from .10% for loans in the lowest risk category
up to 100% 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"). 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 and interest when due according to
the contractual terms of the loan agreement. Bancorp specifically examines all
loans greater than $100,000 that are identified on an internal watch list. Loans
which are
17
<PAGE>
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. All collateral-dependent loans are measured
for impairment based on the fair value of the collateral. The measurement of
other impaired loans is based on the present value of expected future cash flows
discounted at the historical effective interest rate
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.
The following table sets forth information regarding changes in
Bancorp's allowance for loan losses for each of the last five years:
<TABLE>
<CAPTION>
At or for the year ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans and loans held for sale
at year-end $599,828 $432,014 $340,625 $268,630 $191,090
======== ======== ======== ======== ========
Average loans and
loans held for sale $502,272 $387,914 $299,976 $226,965 $176,384
======== ======== ======== ======== ========
Allowance for loan losses,
beginning of year $ 4,451 $ 3,349 $ 2,600 $ 1,928 $ 1,700
Charge-offs:
Commercial and other (559) (370) (556) (89) (128)
Real estate -- construction -- -- -- -- --
Real estate -- mortgage (110) -- -- -- --
Installment (3) (82) (2) (20) (34)
-------- -------- ------- ------- ------
Total charge-offs (672) (452) (558) (109) (162)
-------- -------- ------- ------- ------
Recoveries:
Commercial and other 43 43 55 24 10
Real estate -- construction -- -- -- -- 3
Real estate -- mortgage -- -- -- 20 7
Installment 43 11 2 2 20
--------- -------- -------- -------- ------
Total recoveries 86 54 57 46 40
--------- -------- -------- -------- ------
Net loans charged off (586) (398) (501) (63) (122)
Loan loss provision 2,300 1,500 1,250 735 350
--------- -------- -------- -------- ------
Allowance for loan losses
at year-end $ 6,165 $ 4,451 $ 3,349 $ 2,600 $ 1,928
======== ======== ======== ======= ======
18
<PAGE>
Ratio of net loans charged off to average
loans outstanding (.12)% (.10)% (.17)% (.03)% (.07)%
Ratio of allowance for loan losses
to loans at year-end 1.03% 1.04% .98% .97% 1.01%
</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
allowance for loan losses by loan category at the end of each of the last five
years was as set forth in the following tables:
Amount of Loans in
allowance category as a
for percentage of
loan total gross
losses loans
------------ --------------
(Dollars in thousands)
December 31, 1999
- -----------------
Commercial and other $3,700 38.1%
Real estate - construction 1,850 37.9
Real estate - mortgage 450 22.6
Installment 100 1.4
Unallocated 65 --
------ -----
Total $6,165 100.0%
====== =====
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%
====== =====
19
<PAGE>
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%
====== =====
The following table details the carrying value of Bancorp's impaired loans,
in accordance with SFAS 114, by type of loan at December 31, 1999 and 1998:
Net
Recorded Valuation Carrying
Amount Allowance Value
-------- --------- -----
December 31, 1999
- ----------------------
Commercial $5,170,200 $389,100 $4,781,100
Real Estate - construction 662,700 75,500 587,200
---------- -------- ----------
Total $5,832,900 $464,600 $5,368,300
========== ======== ==========
December 31, 1998
- ----------------------
Commercial $1,576,700 $160,600 $1,416,100
Real Estate - construction 2,791,000 289,900 2,501,100
Real Estate - mortgage 850,700 112,600 738,100
---------- -------- ----------
Total $5,218,400 $563,100 $4,655,300
========== ======== ==========
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.
20
<PAGE>
INVESTMENT ACTIVITIES
Bancorp's investment portfolio consists 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, 1999 and 1998, 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 no more favorable than the terms on
similar loans to other borrowers.
All of the securities held in the investment portfolio were classified
as available-for-sale at December 31, 1999 and 1998. 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, 1999, 1998 and 1997.
December 31,
- ------------
1999 1998 1997
------- ------- -------
(In thousands)
U.S. Treasury securities $ 1,399 $ 1,435 $ 1,417
U.S. Government agencies 26,534 39,263 34,415
States and political subdivisions 27,316 29,578 39,434
Corporate bonds 2,205 2,311 2,301
Mortgage-backed securities 1,905 4,206 6,337
------- ------- -------
Total investment securities $59,359 $76,793 $83,904
======= ======= =======
21
<PAGE>
The following table provides the carrying values, principal amounts,
maturities and weighted average yields of Bancorp's investment securities at
December 31, 1999, 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)
----------------- ------------------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasuries
Due within 1 year $ 654 $ 649 6.72%
Due after 1 but within 5 years 745 751 5.70
Due after 5 but within 10 years -- --
------ ------
Total U.S. Treasuries 1,399 1,401 6.17
U.S. Government agencies
Due after 1 but within 5 years 12,545 13,000 5.69
Due after 5 but within 10 years 13,989 14,989 6.11
------ ------
Total U.S. Government agencies 26,534 27,989 5.92
States and political subdivisions
Due after 1 but within 5 years 7,396 7,346 7.71
Due after 5 but within 10 years 3,044 3,045 7.75
Due after 10 years 16,876 18,078 7.75
------ ------
Total states and political subdivisions 27,316 28,469 7.74
Corporate bonds
Due within 1 year 200 200 6.26
Due after 1 but within 5 years 1,762 1,826 6.19
Due after 5 but within 10 years 243 258 6.08
------- ------
Total corporate bonds 2,205 2,284 6.18
Mortgage-backed securities
Due within 1 year 451 469 4.76
Due after 5 but within 10 years 1,131 1,136 4.96
Due after 10 years 323 330 5.94
------- ------
Total mortgage-backed securities 1,905 1,935 5.08
Total investment securities $59,359 $62,078 6.75
======= =======
- ------------
(1) Weighted average yield on state and political subdivisions has been computed on a 34% tax-equivalent basis.
</TABLE>
22
<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.
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ---------------
Average Average Average
---------------- ---------------- ---------------
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C>
Noninterest-bearing demand $ 106,317 N/A $ 90,166 N/A $ 75,005 N/A
Interest-bearing demand 231,861 2.99 192,356 3.30 152,453 3.16
Savings 28,379 3.26 19,540 2.79 14,347 2.36
CDs 167,702 5.12 145,387 5.63 129,756 5.63
------- ------- --------
Total $534,259 3.08 $447,449 3.37 $371,561 3.35
======== ======== ========
</TABLE>
The following table shows the dollar amount of CDs that had balances of
$100,000 or more at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
----------- ----------
(In thousands)
<S> <C> <C>
CDs $100,000 or over with remaining maturity:
Three months or less $20,043 $15,985
Over three months through twelve months 44,043 39,437
Over one year through three years 15,100 5,161
Over three years 239 125
-------- -------
Total $79,425 $60,708
======= =======
</TABLE>
23
<PAGE>
SHORT-TERM BORROWINGS
At December 31, 1999, Bancorp's short-term borrowings consisted of
securities sold under agreements to repurchase totaling $8.2 million, federal
funds purchased totaling $19.6 million and Federal Home Loan Bank of Seattle
advances totaling $46.7 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, 1998, Bancorp's short-term borrowings consisted of
securities sold under agreements to repurchase totaling $16.1 million, federal
funds purchased totaling $1.0 million and Federal Home Loan Bank of Seattle
advances totaling $3.5 million.
At December 31, 1997, Bancorp's short-term borrowings consisted of
securities sold under agreements to repurchase totaling $7.7 million.
The following table sets forth certain information with respect to
Bancorp's short-term borrowings at December 31 and during each of 1999, 1998 and
1997:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1999 1998 1997
------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Amount outstanding at year-end $74,554 $20,600 $ 7,716
Weighted average interest rate at year-end 5.45% 4.55% 5.03%
Maximum amount outstanding at any month-end during the year 74,554 $20,500 $18,321
Daily average amount outstanding during the year 26,356 $10,016 $ 9,688
Average weighted interest rate during the year 5.33% 4.88% 5.56%
</TABLE>
LONG-TERM DEBT
At December 31, 1999 and 1998, Bancorp had no long-term debt.
At December 31, 1997, 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.
24
<PAGE>
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
The following table sets forth Bancorp's return on daily average assets and equity for 1999, 1998 and 1997:
1999 1998 1997
-------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Net income $ 12,106 $ 11,435 $ 9,303
Average total assets 635,003 525,217 439,186
Return on average assets 1.91% 2.18% 2.12%
Net income $ 12,106 $ 11,435 $ 9,303
Average equity 69,440 56,712 45,936
Return on average equity 17.43% 20.16% 20.25%
Average total equity $ 69,440 $ 56,712 $ 45,936
Average total assets 635,003 525,217 439,186
Average total equity to assets ratio 10.94% 10.80% 10.46%
</TABLE>
CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board ("FASB") has issued the
following accounting pronouncements which Bancorp has adopted in 1999 or will be
required to adopt in future fiscal reporting periods.
SFAS NO. 133, 137
In June 1999, FASB issued Statement of Financial Accounting Standards
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement 133" (SFAS 137), an amendment of SFAS 133,
which establishes accounting and reporting standards for derivative instruments
and hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. SFAS 133, as amended by SFAS 137, is effective for all quarterly
and annual financial statements of fiscal years beginning after June 15, 2000.
Bancorp had no significant derivatives as of December 31, 1999, nor does Bancorp
engage in any hedging activities. Accordingly, Bancorp does not anticipate that
the adoption of SFAS 133, as amended by SFAS 137, will have a material effect on
its consolidated financial position or results of operations.
SFAS NO. 134
In October 1998, SFAS 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise"
25
<PAGE>
(SFAS 134), was issued. SFAS 134 was effective in 1999 and had no effect on
Bancorp's consolidated financial position or results of operation.
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.
During the past several years, Bancorp capitalized on the marketing
opportunities created by the consolidation of the banking industry as the larger
institutions were perceived to de-emphasize the small- to medium-size business
and professional market, which is Bancorp's primary focus. Several banks, which
focus on the same types of customers, have been formed in Bancorp's market areas
during the last few years. This growing number of community banks and a new
emphasis by larger institutions on this market segment has intensified
competition.
In addition, the Gramm-Leach-Bliley Act, enacted on November 12, 1999
(the "GLB Act"), eliminates several barriers to affiliation among providers of
financial services and may affect the competitive environment in which Bancorp
operates in substantial and unpredictable ways. Effective March 11, 2000, the
GLB Act permits certain business combinations between banks, insurance
companies, securities firms, and other financial service providers that were not
permitted previously. Using the Financial Holding Company structure created by
the GLB Act, insurance companies and securities firms may now compete more
directly with banks and bank holding companies, and attempt to acquire existing
financial institutions. Bancorp cannot predict the changes in the competitive
environment or the financial condition of Bancorp that may occur as a direct or
indirect result of the GLB Act and the increased competition it may create.
Bancorp will continue to compete for loans and deposits principally
through the range and quality of the services it provides. Management believes
Bancorp's emphasis on high-quality, personal attention to customers and on
providing services specific to the needs of its customers enables it to compete
effectively with other financial institutions. To serve customers whose
borrowing requirements exceed its
26
<PAGE>
lending limits, Centennial Bank arranges participations with other lenders.
EMPLOYEES
Centennial Bancorp has no employees other than its executive officers,
who are also employees of Centennial Bank. At December 31, 1999, Centennial Bank
and Centennial Mortgage had 234 and 62 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.
Various laws and regulations are enacted from time to time at the state
or federal level, which may change the operating environment of Bancorp in
substantial and unpredictable ways. The GLB Act recently enacted by Congress is
expected to have a significant impact on the banking industry. (See "Recent
Legislation - the Gramm-Leach-Bliley Act" below.) Several regulatory agencies
and state legislatures are in the process of responding to changes required or
suggested by the GLB Act. Bancorp cannot determine the ultimate effect that the
GLB Act, or the regulations implemented and legislation enacted as a result of
that act, will have on the operating structure, financial condition or results
of operations of Bancorp.
RECENT LEGISLATION - THE GRAMM-LEACH-BLILEY ACT
On November 12, 1999, Congress enacted the GLB Act, also known as the
Financial Services Modernization Act. The GLB Act provides substantial changes
that directly affect the banking industry. The GLB Act removes several state and
federal barriers to affiliation among banks, insurance companies, securities
firms, and other financial services providers, and creates a new
27
<PAGE>
entity known as a "financial holding company" ("FHC"). Effective March 11, 2000,
a bank holding company may elect to become an FHC and, as an FHC, engage in a
broader range of financial and other activities than is permissible for the
traditional bank holding companies.
In order to qualify as an FHC, each depository institution subsidiary
of the bank holding company must be rated as "well capitalized" and "well
managed." Also, in order to commence any of the newly authorized activities or
acquire control of a company engaged in the newly authorized activities, the
holding company must qualify as an FHC and each depository institution
subsidiary of the FHC or its affiliates must have received at least a
"satisfactory" rating in its most recent examination under the Community
Reinvestment Act of 1977 (the "CRA").
FHCs will be permitted to engage in activities defined by the GLB Act
as "financial in nature" including, among others, insurance underwriting and
agency activities, investment advisory services, merchant banking, investment
banking and underwriting activities, and dealing or making a market in
securities. Bank holding companies that do not qualify for, or have not elected,
FHC status are limited to those non-banking activities determined by the Board
of Governors of the Federal Reserve System (the "FRB") to be "so closely related
to banking as to be a proper incident thereto" prior to adoption of the GLB Act.
FHCs that do not continue to meet all of the requirements for FHC status may not
be able to undertake new activities or acquisitions that are "financial in
nature," or could lose their ability to continue activities that are not
generally permissible for bank holding companies.
In addition, the GLB Act provides for expanded activities for
"financial subsidiaries" of national banks. Financial subsidiaries may engage in
financial activities except for insurance underwriting, real estate development
or investment, and merchant banking, all of which may only be engaged in by a
subsidiary of an FHC. In order to have a financial subsidiary, the national bank
and each of its depository institution affiliates must be well capitalized and
well managed, and the total assets of all financial subsidiaries may not exceed
the lesser of 45% of the consolidated total assets of the parent bank or $50
billion. In addition, the national bank must meet certain rating requirements if
it is one of the 100 largest insured banks and engages in financial activities
as a principal.
Insured state banks may control or hold an interest in a subsidiary
that engages in activities as a principal that would only be permissible for a
national bank to conduct through a financial subsidiary, so long as the bank and
all insured depository affiliates are well capitalized after meeting certain
capital deduction and financial statement disclosure requirements. In addition,
an insured state bank may retain its interests in subsidiaries controlled or
acquired before the
28
<PAGE>
enactment of the GLB Act. Oregon law permits commercial banks chartered by the
state to engage in any activity permissible for national banks, so Centennial
Bank may form subsidiaries to engage in financial activities to the same extent
as a national bank.
At this time, Centennial Bank is "adequately capitalized," and not
"well capitalized." Therefore, Bancorp would not qualify to become an FHC, and
Centennial Bank would not qualify to control or hold an interest in a new
financial subsidiary. Bancorp's management is examining its business plan and
operating policies to determine whether Bancorp would desire to utilize any of
the expanded powers provided to an FHC or a financial subsidiary by the GLB Act.
PRIVACY PROVISIONS
The GLB Act also includes extensive consumer privacy provisions. These
provisions mandate full disclosure by all financial institutions to consumers of
the institution's policies and practices regarding the sharing of non-public
information with both affiliates and other third parties. Consumers must receive
notice of and an opportunity to "opt out" of disclosure of non-public personal
information to non-affiliated third parties. Disclosures of an institution's
privacy policy is required at the time a customer relationship is established,
and at least annually for so long as the relationship continues. Each federal
banking agency, the National Credit Union Administration, the Secretary of the
Treasury, the Securities and Exchange Commission, the Federal Trade Commission,
and state insurance regulators are all expected to design and enforce their own
privacy policies, and are in the process of drafting their privacy policies at
this time. Privacy legislation or regulation, including possible conflicts in
privacy policies when an institution is regulated by more than one entity, could
place additional limitations on Bancorp's operations or significantly affect
earnings.
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 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
29
<PAGE>
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 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 or an FHC 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 was determined by the FRB to be
closely related to banking or managing banks prior to the enactment of the GLB
Act. 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
non-banking activities approved by the FRB prior to the enactment of the GLB
Act.
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
30
<PAGE>
holding 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, 1999, Bancorp's ratio of total
capital to risk-weighted assets was 9.88%.
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, 1999 was 9.65%.
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.
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.
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.
31
<PAGE>
Prior to opening a new branch in Washington, Centennial Bank must receive
approval from the FDIC, the Oregon Director and the Director of the Department
of Financial Institutions in the state of Washington (the "Washington
Director"). Centennial Bank currently has 20 branches, the most recent of which
opened in February 2000.
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.
Neither Oregon nor Washington has 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. Under the GLB Act, a satisfactory CRA rating for each depository
institution is required before a bank holding company may elect to be one of the
newly created FHCs. The CRA allows regulators to reject an application to make
an acquisition or establish a branch unless the applicant has performed
satisfactorily under the CRA. Citizens and interest groups have standing before
the FRB to assert noncompliance with the CRA. Satisfactory performance means
adequately meeting the credit needs of the communities the applicant serves,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution. The applicable federal regulators now
regularly conduct CRA examinations to assess the performance of financial
institutions. Centennial Bank has received satisfactory ratings in its most
recent CRA examinations.
TRANSACTIONS WITH AFFILIATES
Centennial Bank is subject to certain FRB restrictions on transactions
among related parties. The Federal Reserve Act limits the amount of certain
transactions, including loans to and investments in affiliates of Centennial
Bank, requires
32
<PAGE>
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 reduce the bank's capital ratios below the
regulatory minimums required to be considered adequately capitalized. 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 unreserved
retained earnings, after first deducting to the extent not already charged
against earnings or reflected in a reserve, (1) all bad debts, which are debts
on which interest is unpaid and past due at least six months, unless the debt is
fully secured and in the process of collection; (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, 1999, $11.8
million was available for declaration of dividends by Centennial Bank to Bancorp
without prior regulatory approval.
33
<PAGE>
EXAMINATIONS
The FDIC, the Oregon Director and the Washington Director periodically
examine and evaluate Centennial Bank. 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 4% 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, 1999, Centennial
Bank's leverage ratio, Tier 1 capital to risk-weighted assets ratio and total
risk-based capital to risk-weighted assets ratio were 8.7%, 8.1% and 9.0%,
respectively.
FDICIA requires federal banking regulators to take "prompt corrective
action" with respect to a capital-deficient institution, including requiring a
capital restoration plan and restricting certain growth activities of the
institution. Bancorp could be required to guarantee any such capital restoration
plan required of Centennial Bank. Bancorp's maximum liability under such
guarantee would be the lesser of 5% of Centennial Bank's total assets at the
time it became undercapitalized or the amount necessary to bring Centennial Bank
into compliance with the capital plan.
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
34
<PAGE>
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 "adequately 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.
DEPOSIT INSURANCE PREMIUMS
As an FDIC-insured institution and member of the Bank Insurance Fund
("BIF"), Centennial Bank is subject to quarterly deposit insurance premium
assessments. The FDIC uses a risk-related premium system that applies premium
rates according to an institution's risk category. Capital ratios and
examination ratings are the primary determinants of risk category assignments.
The FDIC sets rate schedules semi-annually based on an analysis of several
factors including probable fund losses, operating needs and the impact of
assessments on BIF members. At December 31, 1999, Centennial
35
<PAGE>
Bank's BIF annualized assessment rate was three basis points of assessable
deposits.
In addition to the BIF assessment, Centennial Bank is also subject to
an additional assessment which helps support the FSLIC Resolution Fund ("FRF").
The FRF was established in 1989 to liquidate the remaining Federal Savings &
Loan Insurance Corporation ("FSLIC") assets and liabilities resulting from
thrift failures prior to that date. The assessment is one-fifth of the
assessment rate imposed on Savings Association Insurance Fund members for the
same purpose. At December 31, 1999, the annualized assessment rate was 2.12
basis points of assessable deposits.
Bancorp's FDIC insurance assessment expenses totaled $60,000 in 1999
and $50,000 in 1998. Based on deposit levels and assessment rates as of December
31, 1999, Centennial Bank's FDIC assessment expenses for 2000 would be
approximately $290,000. The significant increase in 2000 is expected primarily
because Centennial Bank's capital level changed from "well capitalized" to
"adequately capitalized" as a result of the goodwill associated with the
acquisition of the Hazel Dell branch. When "well capitalized," Centennial Bank
was not subject to a BIF assessment but, as "adequately capitalized," recently
became subject to the BIF assessment rate discussed above.
CENTENNIAL MORTGAGE
Centennial Mortgage is, by definition of the Department of 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 engaged 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
evolving. (See "Recent Legislation - the Gramm-Leach-Bliley Act" above.) The
rules and the regulatory agencies in the banking area have changed significantly
over recent years, and there is reason to expect that similar changes will occur
in the future. It is difficult to predict the outcome of these changes.
36
<PAGE>
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, the
Oregon Director and the Washington 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
-------------------------
The primary properties owned by Bancorp include a four-story, 36,000
square foot office building in Eugene, Oregon and a three-story, 21,000 square
foot office building in Tigard, Oregon. Each building houses one bank branch and
one commercial banking center as well as various administrative and operational
support functions. The Tigard building is subject to a 50-year ground lease
which is renewable for two additional 10-year periods. Bancorp also owns six
other properties which house bank branches. One property, the Springfield
Office, is also subject to a ground lease.
All other Bancorp facilities occupy leased space. See Note 9 to
Bancorp's Consolidated Financial Statements for summary information concerning
payments and future obligations under non-cancelable operating leases.
Management considers all Bancorp facilities adequate for current and
anticipated future use.
37
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
Periodically, and in the ordinary course of business, various claims
and lawsuits are brought by and against Bancorp, such as claims to enforce
liens, condemnation proceedings on properties in which Bancorp holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to Bancorp's business.
As of the date of this 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.
38
<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, 1999, and is incorporated herein by reference as follows:
Centennial Bancorp
Annual Report
to Shareholders
Page No.
---------------
ITEM 5. MARKET FOR BANCORP'S COMMON STOCK
---------------------------------
AND RELATED SHAREHOLDER MATTERS 33
------------------------------
ITEM 6. SELECTED FINANCIAL DATA 34
-----------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND
---------------------------
ANALYSIS OF FINANCIAL CONDITION
-------------------------------
AND RESULTS OF OPERATIONS 26 - 33
-------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 30 - 31
-----------------------------
ITEM 8. FINANCIAL STATEMENTS AND
-------------------------
SUPPLEMENTARY DATA 9 - 25
------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS
----------------------------
WITH ACCOUNTANTS ON ACCOUNTING
------------------------------
AND FINANCIAL DISCLOSURE 32
------------------------
39
<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 April 26,2000, 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 April 26, 2000, 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 April 26, 2000, 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 April 26, 2000, and is
incorporated herein by reference.
40
<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, 1999,
and are incorporated herein by reference:
Annual
Report to
Shareholders
Page Number
-----------
Report of Independent Auditors 8
Consolidated balance sheets at
December 31, 1999 and 1998 9
For the three years ended December 31, 1999
Consolidated statements of income 10
Consolidated statements of
shareholders' equity 11
Consolidated statements of cash flows 12
Notes to consolidated financial statements 13 - 25
(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 (filed as
Exhibit 3.1 to registrant's Form 10-K Report
for the year ended December 31, 1998, and
incorporated herein by reference)
3.2 Bylaws, as restated (filed as Exhibit 3.2 to
registrant's Form 10-K Report for the
41
<PAGE>
year ended December 31, 1992, and
incorporated herein by reference)
10.1* Registrant's 1993 Incentive Stock Option
Plan, restated as of April 13, 1994 (filed
as Exhibit B to registrant's Proxy Statement
for the 1994 annual shareholder meeting,
filed April 29, 1994, and incorporated
herein by reference)
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* Restated 1995 Stock Incentive Plan (filed as
Exhibit A to registrant's Proxy Statement
for the 1998 annual shareholder meeting,
filed April 13, 1998, and incorporated
herein by reference)
10.5* 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)
10.6 Ground Lease, dated as of February 10, 1994,
between registrant and Pacific Realty
Associates, L.P. (filed as Exhibit 10.10 to
registrant's Registration Statement on SB-2,
filed March 28, 1994, and incorporated
herein by reference)
10.7 Advances, Security and Deposit Agreement,
dated February 5, 1999, between Centennial
Bank and the Federal Home Loan Bank of
Seattle
10.8* 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,
42
<PAGE>
1996, and incorporated herein by reference)
10.9* 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)
10.10* 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)
10.11* 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)
10.12* 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)
10.13 Pledge, Security and Safekeeping Agreement
dated September 30, 1997, between Centennial
Bank and the Federal Home Loan Bank of
Seattle
11.1 Earnings per Share Computation
13.1 Portions of 1999 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)
20.1 Portions of definitive proxy statement for
2000 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)
43
<PAGE>
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
23.3 Report of PricewaterhouseCoopers LLP,
Independent Accountants
27.1 Financial Data Schedule as of
December 31, 1999
99.1 Certain Factors to Consider in Connection
with Forward-Looking 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) Bancorp did not file any Forms 8-K during the quarter ended
December 31, 1999.
44
<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 20, 2000 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 20, 2000 By /s/ Richard C. Williams
-- ------------------------
Richard C. Williams, President,
Chief Executive Officer and
Director
CHIEF FINANCIAL OFFICER
DATED: March 20, 2000 By /s/ Michael J. Nysingh
-- ------------------------
Michael J. Nysingh
Chief Financial Officer
DIRECTORS:
DATED: March 21, 2000 By /s/ Dan Giustina
-- ------------------------
Dan Giustina, Director
DATED: March 22, 2000 By /s/ Cordy H. Jensen
-- ----------------------
Cordy H. Jensen, Director
DATED: March 22, 2000 By /s/ Robert L. Newburn
-- ------------------------
Robert L. Newburn, Director
DATED: March 23, 2000 By /s/ Brian B. Obie
-- ------------------------
Brian B. Obie, Director
DATED: March 22, 2000 By /s/ Ted Winnowski
-- ------------------------
Ted Winnowski, Director
45
<PAGE>
EXHIBIT INDEX
Exhibit*
- --------
10.7 Advances, Security and Deposit Agreement, dated February 5, 1999,
between Centennial Bank and the Federal Home Loan Bank of Seattle
10.13 Pledge, Security and Safekeeping Agreement dated September 30,
1997, between Centennial Bank and the Federal Home Loan Bank of
Seattle
11.1 Earnings per Share Computation
13.1 Portions of 1999 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
23.3 Report of PricewaterhouseCoopers LLP, Independent Accountants
27.1 Financial Data Schedule as of December 31, 1999
99.1 Certain Factors to Consider in Connection with Forward-Looking
Statements
- ---------------
* See Item 14(a)(3) of this Annual Report for a list of all exhibits, including
those incorporated by reference.
ADVANCES, SECURITY AND DEPOSIT AGREEMENT
FEBRUARY 5, 1999
----------------
This Advances, Security and Deposit Agreement ("Agreement") is made as
of the above date and is between the Federal Home Loan Bank of Seattle,
including its successors ("Seattle Bank"), and CENTENNIAL BANK, EUGENE, OREGON,
including its successors ("Customer"). Except as to Customers which have not
signed prior Agreements, it renews, amends and restates prior contracts between
the parties or their predecessors entitled "Advances Agreement, Pledge Agreement
and Security Agreement" and "Deposit Account Resolution."
RECITALS
--------
A. The Seattle Bank is authorized by the Federal home Loan Bank Act, as
amended, and related regulations and directives ("Act"), and by the
Seattle Bank's own policies, to make loans to the Customer
("Advances"). The Seattle Bank is also authorized to provide demand and
time deposit accounts to the Customer ("Accounts") and to perform
additional services, all of which may create obligations from the
Customer to the Seattle Bank ("Other Obligations"). Other Obligations
may include, without limitation, debts by reason of interest rate swap
agreements, letters of credit, overdrafts, settlements, and wire
transfers.
B. This Agreement, and related policies which are, from time to time, sent
by the Seattle Bank to its customers, specifies the terms and
conditions under which the Seattle Bank may make Advances available to
the Customer; open and use Accounts; and collateralize such Advances
and Other Obligations.
AGREEMENTS
----------
1. Prior to or at the time of the execution and delivery of this
Agreement, the Customer has provided the Seattle Bank with a certified
copy of a resolution adopted by the Customer's Board of Directors or
other governing body ("Resolution") approving this Agreement and
authorizing designated officers or employees of the Customer to obtain
Advances, open and use Accounts, and incur Other Obligations. The
Seattle Bank may rely upon, and the Customer is estopped from denying,
the authority of the persons designated in the Resolution.
2. The Customer may request advances from the Seattle Bank by applying to
the Seattle Bank in such form as it shall require.
3. Each Advance shall be evidenced by a promissory note ("Note") or by
another confirming document as required by the Seattle Bank. The
applicable terms and conditions of this Agreement are incorporated
therein as well as in other agreements, if any, that relate to Other
Obligations.
4. On the first day of each month or at such other times that payments of
principal and/or interest are due, the Customer agrees to pay, or to
authorize a charge to the Customer's Account for the principal and/or
interest that is due on each outstanding Advance, Note or Other
Obligation. Interest shall be charged at the rate set forth in the Note
or other instrument evidencing the Indebtedness. Delinquent principal
and/or interest may bear interest, at the option of the Seattle Bank,
equal to the Seattle Bank's then-current Flexible Balance advance rate.
5. As collateral ("Security") for the payment of all Advances, Notes or
Other Obligations (collectively, "Indebtedness") of the Customer to the
Seattle Bank, the Customer hereby assigns, pledges and grants security
interests to the Seattle Bank ("Security Interest") in the following:
(a) its stock in the Seattle Bank (which
<PAGE>
cannot be pledged to another entity); (b) its funds on deposit with the
Seattle Bank; (c) its notes or other instruments representing
obligations of third parties, including the proceeds thereof, and any
related mortgages or deeds of trust ("Mortgages") securing any of them
and/or any securities representing an interest in such Mortgages; (d)
securities issued, insured or guaranteed by the United States
government or by any agency thereof; (e) other real estate-related
collateral; and (f) its instruments, accounts, general intangibles,
inventory, equipment and other property in which a security interest
can be granted by the Customer to the Seattle Bank. Upon the withdrawal
from membership in the Seattle Bank, and as the final part of the plan
of liquidation of the Customer's Indebtedness to the Seattle Bank, the
stock of such Customer may be redeemed and credited upon the
Indebtedness of the Customer, in whole or in part, for an amount equal
to the par value of the stock which would otherwise be paid to the
Customer by the Seattle Bank.
6. The Customer agrees that it holds the Security for the benefit of,
and subject to the direction and control of, the Seattle Bank;
including, without limitation, the following: (a) Security and Security
Interests shall include and extend to after-acquired Security; (b) the
Customer may use, commingle or dispose of all or part of the Security
or proceeds thereof if, at all times, it owns and maintains Security of
the types and kinds specified by the Act and as required to meet the
requirements thereof, free and clear of pledges, liens or other
encumbrances of third parties, in such amount of the outstanding
Indebtedness as may be specified by the Seattle Bank from time to time;
(c) at its expense and as soon as possible upon demand by the Seattle
Bank, the Customer will assemble, segregate and/or deliver such
portions of the Security as are directed by the Seattle Bank at or to a
location designated by it; will allow the Seattle Bank to participate
in such assembly, segregation or delivery and to verify or audit such
Security, including, without limitation, access to the Customer's
premises and records for such purposes; and will protect and promptly
disclose to the Seattle Bank any material change in value of the
Security so assembled, segregated or delivered; (d) the Customer
promptly will make, execute and deliver to the Seattle Bank such
assignments, listings, powers or other documents as the Seattle Bank
may reasonably request concerning the Security; (e) at its expense, the
Customer promptly will provide to the Seattle Bank such reports, audits
and confirmations regarding the Security as the Seattle Bank may
reasonably request; and (f) the Customer shall pay to the Seattle Bank
any reasonable fees associated with the processing, control, and
maintenance of such Security.
7. Upon the occurrence of any one or more of the following events
("Default"), the Seattle Bank may, without notice, declare and thereby
cause all Indebtedness of the Customer to be due and payable
immediately: (a) failure of the Customer to make any payment due on any
Indebtedness, or breach of or failure to perform any other duty as
provided herein or in any other agreement to which the Customer and the
Seattle Bank are parties; (b) any taking over of the customer or any of
its assets by a supervising agency, or an application for or the
appointment of a conservator, receiver, trustee or liquidator for it or
any of its assets; (c) an adjudication of the Customer's bankruptcy or
insolvency; (d) an assignment by the Customer for the benefit of
creditors, a general transfer of its assets for any purpose or any
other form of liquidation, merger, sale of assets or dissolution of or
by the Customer; (e) existence of facts indicating a representation,
statement or warranty made or furnished to the Seattle Bank by or on
behalf of the Customer in connection with all or part of any
Indebtedness or other transaction was or is false in any material
respect; (f) damage, loss, sale or encumbrance of any of the Security
except as permitted by this Agreement; (g) any levy, seizure,
garnishment (as the debtor), execution, attachment or other process
issued against the Customer; (h) any event which results in
acceleration of the maturity of any debt of the Customer to others; (i)
good faith determination by the Seattle Bank that the Customer's
ability to repay any Indebtedness has become impaired or that a
material adverse change has occurred in the financial condition of the
Customer from that disclosed to the Seattle Bank at the time of
creation of any Indebtedness or subsequently; (j) termination of the
Customer's membership in the Seattle Bank; or (k) good faith
determination by the Seattle Bank that there is a reasonable
possibility that the Indebtedness would not be paid in full from the
proceeds of a liquidation of the Security if the Seattle Bank did not
declare a Default.
8. At any time after Default, the Customer may not substitute Security
without permission of the Seattle Bank, and the Seattle Bank shall have
all of the rights and remedies of a secured party under the Act, the
Uniform Commercial Code of the State of Washington and/or as otherwise
provided by law, by this Agreement or by any other agreement between
the parties ("Default Rights") including, without limitation, the
Seattle Bank's
2
<PAGE>
right to take immediate possession of any or all Security wherever
located and to dispose of the Security in accordance with applicable
law. If any notice of disposition of Security is required by law, such
notification shall be deemed reasonable and properly given if mailed,
postage prepaid, at least five calendar days before such disposition to
the last address of the Customer then appearing on the records of the
Seattle Bank. The proceeds of any disposition of Security shall be
applied in the following order to payment of: (a) all reasonable
expenses incurred by or on behalf of the Seattle Bank for the
collection, care, safekeeping, sale, foreclosure, delivery or other
disposition of Security including, without limitation, insurance,
commissions, guarantees, security valuation fees, expenses, costs and
reasonable attorneys' fees incurred in connection therewith; (b)
interest on all Indebtedness, whether due or accrued; (c) the principal
amount of all Indebtedness; (d) any secondarily secured debt of the
Customer to any third party who proves its subordinate security
interest in the Security to the reasonable satisfaction of the Seattle
Bank; and (e) any remainder to the Customer. If there is a deficiency,
the Customer shall be liable to the Seattle Bank therefor. No delay by
the Seattle Bank in the exercise of its Default Rights shall operate as
a waiver, and a waiver of any specific Default Right shall not
constitute a waiver of any other Default Right not specifically waived.
The Customer hereby irrevocably appoints the Seattle Bank and/or its
designee as its true and lawful attorney in fact to deal in any manner
with the Security in the event of a Default.
9. The Customer may open Accounts with the Seattle Bank subject to the
Regulations of the Seattle Bank. Any Customer's funds deposited in
Accounts shall be subject to withdrawal or charge at any time and from
time to time upon wire transfers or any other orders for the payment of
money when made and drawn on behalf of the customer by a person or
persons authorized by the Customer. The Seattle Bank is authorized to
pay any such wire transfers or other orders, provided they are in the
form prescribed by it, and to charge the Customer's Accounts therefor,
without inquiry as to the circumstances of issue or the disposition of
the proceeds, even if drawn to the individual order of any authorized
person or payable to others for his account.
10. The Seattle Bank, if it acts in good faith and with ordinary care (and
without liability if it does so act), can charge the Accounts with
orders received by the Seattle Bank from any person acting for or
purporting to act for the Customer by telephone, or otherwise orally,
for the transfer of funds to others, including the person giving such
instructions or payable to others for his account, or between Accounts
of the Customer. All authorized Seattle Bank charges and fees will be
charged monthly to such Accounts.
11. The Customer shall maintain a net positive collected balance in all of
its Accounts. The Seattle Bank shall have the option of closing or
restricting the use of Accounts in which positive balances are not
maintained. For each day the aggregate collected balance of an Account
is negative, the Customer shall pay such charges as are consistent with
the Seattle Bank's published schedules.
12. The Customer agrees to provide to the Seattle Bank, within five days
after a request, its business plans and other financial data. In
connection with, and as an extension of, any other informational rights
of the Seattle Bank relating to examination of the Customer by a
supervising agency and reports relating thereto, the Customer agrees
that all Security shall always be subject to audit and verification, at
the Customer's expense, by or on behalf of the Seattle Bank and that
the Seattle Bank shall have access to the Customer's premises and
records for that purpose.
13. If the services of an attorney, either with or without suit, are
engaged by the Seattle Bank in connection with any Default or any
dispute relating to this Agreement, the Customer agrees to pay the
Seattle Bank's reasonable attorneys' fees, expenses and costs incurred
in connection therewith.
14. This Agreement shall be construed and enforced according to the laws of
the State of Washington and the Act. If any provision hereof is
inconsistent with the Act, this Agreement shall be deemed amended to
the end that such provision is not in conflict with the Act. In the
event any such provision cannot be so amended and is found to be
contrary to law, the balance of this Agreement shall remain in full
force and effect if so elected by the Seattle Bank.
3
<PAGE>
15. This Agreement shall continue until terminated by written notice from
one party to the other; provided that this Agreement shall remain
applicable to all then outstanding Indebtedness and duties of the
Customer and to the documents relating thereto.
Centennial Bank, Eugene, Oregon
- -------------------------------------------------
(Name of Customer)
By Ted Winnowski President/CEO
-----------------------------------------------
(Name) (Title)
/s/ Ted Winnowski
-----------------------------------------------
(Signature)
Its President/CEO Date: February 01, 1999
--------------------------------- ---------------------------
(Title)
and
By Michael Nysingh Sr. V. P./Cashier
---------------------------------------------------
(Name) (Title)
/s/ Michael Nysingh
---------------------------------------------------
(Signature)
Its SVP/Cashier Date: February 01, 1999
--------------------------------- ---------------------------
(Title)
FEDERAL HOME LOAN BANK OF SEATTLE
By Kelli L. Bono Senior Vice President
----------------------------------------------------------------
(Name) (Title)
/s/ Kelli L. Bono
----------------------------------------------------------------
(Signature)
Its Chief Financial Officer Date: June 14, 1999
--------------------------------- -----------------------
(Title)
Form 1991-3
(Rev. 10/98)
4
FEDERAL HOME LOAN BANK OF SEATTLE
Seattle, Washington
PLEDGE, SECURITY AND SAFEKEEPING AGREEMENT
September 30, 1997
------------------
This Agreement is made as of the above date between CENTENNIAL BANK OF
EUGENE, OREGON ("Institution") and the FEDERAL HOME LOAN BANK OF SEATTLE
("Bank").
Recitals
--------
A. The Institution has received funds under Repurchase Agreements from
designated customers ("Depositors").
B. The Institution has agreed with the Depositors to collateralize those
funds by creating a security interest in the collateral ("Collateral") pledged
by the Institution to the Depositors for that purpose.
C. The Bank is willing to safekeep such collateral as the security agent
("Custodian") for the Depositors on the terms and conditions set forth herein.
Agreements
----------
1. The Collateral used for the purposes of this Agreement hereby is pledged
by the Institution to the Depositors to secure funds deposited by the Depositors
with the Institution. The Depositors are granted a primary security interest
therein and they are third party beneficiaries of this Agreement.
2. The Collateral secures the performance by the Institution of the
Repurchase Agreements as the interests of the Depositors from time to time may
appear. Acknowledgement of such interest can be obtained from the Bank upon
request by a Depositor.
3. The Institution shall furnish information at least once a month to the
Bank, or more often if requested, as to the interest in the Collateral securing
each designated Depositor, which information shall include the repurchase price
and the securities pledged hereunder. The percentage security interest of each
Depositor shall be the total repurchase price of that Depositor's Repurchase
Agreement(s) divided by the purchase price paid by the Institution for the
Collateral.
4. Unless and until a Claim (as subsequently defined) is made by one or
more Depositors, all interest, principal, dividends and/or other payments
relating to the Collateral shall be for the account of the Institution, it being
understood that principal or similar distributions will be replaced by other
Collateral of equal or greater par or face value if needed.
5. In the event the Institution so requests, the Bank shall release to the
Institution any of the Collateral upon receipt in substitution of other
Collateral of which the par or face value is at least equal to the par or face
value of the Collateral released. The Institution hereby warrants to the Bank
and to the Depositors that all Collateral, initially or in substitution, will be
eligible as to type, quality and sufficiency,
<PAGE>
and will comply in all respects with applicable law and the terms of this
Agreement. The Bank shall have no responsibility for determining such
eligibility or adequacy. It expressly is understood that no Collateral will be
released by the Bank to the Institution except (i) on written authorization
received from all the Depositors, or (ii) on receipt in substitution of other
Collateral at least equal in par or face value, or (iii) for the purpose of
reducing excess Collateral (or all of it if there are no outstanding Repurchase
Agreements) upon written request by the Institution (the Bank can rely upon such
a written request without reservation).
6. All charges for the handling and safekeeping of Collateral shall be paid
by the Institution.
7. As between the Institution and the Bank, the safekeeping of the
Collateral is subject to the terms and conditions of the Bank's "Securities
Services Agreement" (Form 8A [Rev. Nov. 1996]), including (but not by way of
limitation) Section 7.6 thereof which provides as follows: "Under the provisions
of various documents now or hereafter in force between Bank and Institution, the
collateral that may be pledged to a third party . . . will have been assigned
previously by Institution to Bank as security for any and all of Institution's
obligations to Bank. It expressly is understood that Bank's security interest in
such collateral will continue despite the creation of a primary security
interest therein in favor of such third party, but the Bank's security interest
will be subordinate to that of such third party. Under those circumstances, the
Bank will hold such collateral both (i) on behalf of the third party as the
primarily secured party under all the terms, conditions and provisions of the
Tri-Party Agreement, and (ii) also on its own behalf as the secondarily secured
party."
8. In the event the Institution defaults on its obligations to one or more
Depositors under one or more Repurchase Agreements secured by the Collateral,
such Depositor(s) can give written notice to the Bank and the Institution of the
dollar amount claimed ("Claim"). If within 15 days after such notice (i) the
Institution does not cure the default(s) or (ii) the Institution delivers to the
Bank a sworn affidavit disputing the Claim, the Bank shall bring an interpleader
action joining such Depositor(s) and the Institution and thereby interplead an
amount of Collateral having a market value equal to the Claim. The disposition
or other use of that part of the Collateral shall be determined by the Court as
provided by law.
9. Bank is authorized and directed to accept and to rely upon the
information to be provided by Institution pursuant to this Agreement. The
Institution warrants that all such information will be accurate and complete.
10. Unless terminated, this Agreement shall continue to be effective
whenever Collateral is in safekeeping with the Bank. The Institution or the
Bank, upon not less than 15 days prior notice to the other, may elect to
terminate the Bank's duties hereunder. The Institution agrees, by such 15th day,
to find a successor to replace the Bank. Upon appointment by the Institution of
a successor, the Bank, without any recourse against it, shall transfer to such
successor all Collateral. If no successor is designated within the 15 days, the
Bank may appoint the successor. Upon transfer by the Bank of the Collateral, it
shall be relieved and released of all duties and liability hereunder.
11. The Bank makes no representations or warranties of any kind with respect to
the safekeeping to be provided hereunder, except as specifically set forth
herein. The Bank shall not be liable for any loss or damage resulting from any
action or inaction by it under this Agreement in the absence of a showing of
gross negligence or willful misconduct. The Institution shall defend, indemnify
and hold harmless the Bank, and its directors, officers, employees, agents and
subagents, from and against any and all claims, losses, liabilities,
obligations, damages, costs and/or expenses (including, without limitation,
attorney fees both in connection with this indemnification and in the
enforcement thereof) that the Bank or such other parties may at any time sustain
or incur in connection with or arising out of this Agreement and the
2
<PAGE>
safekeeping provided hereunder, except upon a showing of gross negligence or
willful misconduct. In no event shall the Bank be liable to the Institution or
to the Depositors for any special, consequential, incidental or punitive
damages.
Executed as of the date first appearing above.
FEDERAL HOME LOAN BANK OF SEATTLE
By /s/ Rebecca Paul
---------------------------
(Authorized Officer)
Its AVP Manager
--------------------------
(Title)
Centennial Bank
-----------------------------------
(Institution)
By /s/ Eric Hardin
---------------------------------
(Authorized Officer)
Its Executive Vice President
--------------------------------
(Title)
By /s/ Michael Nysingh
---------------------------------
(Authorized Officer)
Its Sr. Vice President & Cashier
--------------------------------
(Title)
Form 11 (Rev. April 1990)
3
<TABLE>
<CAPTION>
CENTENNIAL BANCORP
COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31,
----------------------------------------------
1999 1998 1997
---------- --------- ----------
<S> <C> <C> <C>
Income available to common
shareholders $12,106,435 $11,434,546 $9,303,363
=========== =========== ==========
Reconciliation of Basic and Diluted Shares
- ------------------------------------------
Weighted average shares outstanding 19,603,896 19,431,440 19,255,191
Incremental shares from stock options
issued 631,625 890,420 863,546
---------- ---------- ----------
Weighted average shares outstanding -
diluted 20,235,521 20,321,860 20,118,737
========== ========== ==========
</TABLE>
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 sheets of Centennial
Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years 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 audits. The
consolidated financial statements of Centennial Bancorp and subsidiaries for the
year ended December 31, 1997, were audited by other auditors whose report dated
January 22, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a
reasonable basis for our opinion.
In our opinion, the 1999 and 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, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Portland, Oregon
January 21, 2000
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
------ ------------------ ------------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 29,934,856 $ 40,838,367
Federal funds sold - 1,003,000
------------------ ------------------
Total cash and cash equivalents 29,934,856 41,841,367
Investment securities available-for-sale 59,358,757 76,793,378
Loans, net 587,507,784 416,524,430
Mortgage loans held for sale 6,155,343 11,039,045
Federal Home Loan Bank stock 5,468,800 5,083,700
Premises and equipment, net 15,911,497 12,613,321
Accrued interest and other assets 22,400,675 8,154,849
------------------ ------------------
Total assets $ 726,737,712 $ 572,050,090
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Demand $ 106,113,028 $ 102,714,344
Interest-bearing demand 246,690,606 204,032,594
Savings 33,320,788 18,483,765
Time 186,917,061 158,635,593
------------------ ------------------
Total deposits 573,041,483 483,866,296
Short-term borrowings 74,553,967 20,600,071
Accrued interest and other liabilities 4,813,501 3,866,582
------------------ ------------------
Total liabilities 652,408,951 508,332,949
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock - -
Common stock, 19,645,891 and 16,869,363 shares
issued and outstanding in 1999 and 1998, respectively 30,390,824 29,690,949
Retained earnings 45,624,007 33,517,242
Accumulated other comprehensive income (loss) (1,686,070) 508,950
------------------ ------------------
Total shareholders' equity 74,328,761 63,717,141
------------------ ------------------
Total liabilities and shareholders' equity $ 726,737,712 $ 572,050,090
================== ==================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 54,133,662 $ 44,348,206 $ 34,329,126
Taxable interest on investment securities 2,227,213 2,723,091 2,445,547
Nontaxable interest on investment securities 1,433,205 1,699,128 2,034,551
Dividends on Federal Home Loan Bank stock 385,100 372,600 345,300
Interest on federal funds sold 280,334 691,063 573,027
Deposits with banks 8,303 14,401 376,499
--------------- --------------- ----------------
Total interest and dividend income 58,467,817 49,848,489 40,104,050
Interest expense:
Deposits:
Interest bearing demand and savings 7,865,362 6,889,086 5,155,632
Time 8,596,805 8,184,923 7,298,741
Short-term borrowings 1,405,250 489,595 538,947
Long-term debt - 272,897 572,673
--------------- --------------- ----------------
Total interest expense 17,867,417 15,836,501 13,565,993
--------------- ---------------- ----------------
Net interest income 40,600,400 34,011,988 26,538,057
Loan loss provision 2,300,000 1,500,000 1,250,000
--------------- ------------- ----------------
Net interest income after loan loss provision 38,300,400 32,511,988 25,288,057
Noninterest income:
Service charges on deposit accounts 1,459,402 1,207,782 1,065,267
Gains on sales of mortgage loans, net 995,823 1,752,506 908,068
Gains on sales of investment securities, net 298,625 599,885 168,716
Other 773,432 623,343 1,053,083
--------------- --------------- ----------------
Total noninterest income 3,527,282 4,183,516 3,195,134
Noninterest expense 22,801,627 19,348,558 14,851,028
--------------- --------------- ----------------
Income before income taxes 19,026,055 17,346,946 13,632,163
Provision for income taxes 6,919,290 5,912,400 4,328,800
--------------- --------------- ----------------
Net income $ 12,106,765 $ 11,434,546 $ 9,303,363
=============== =============== ================
Basic earnings per common share $ .62 $ .59 $ .48
=============== =============== ================
Diluted earnings per common share $ .60 $ .56 $ .46
=============== =============== ================
Weighted average common shares outstanding:
Basic 19,603,896 19,431,440 19,255,191
Diluted 20,235,521 20,321,860 20,118,737
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
Accumulated
Number other Additional Total
of Common Retained comprehensive Comprehensive paid-in shareholders'
shares stock earnings income (loss) income (loss) capital equity
---------- ----------- ------------ ------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at 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 -
change in unrealized gains on
investment securities of
$845,364 (net of income taxes
of approximately $448,000)
net of reclassification
adjustment for gains included in
net income of $115,064 (net of
income taxes of approximately $54,000) - - - 730,300 730,300 - 730,300
-----------
Comprehensive income - - - - $ 10,033,663 - -
============
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) -
----------- ------------ ----------- ------------ ------------ ----------
Balance at December 31, 1997 14,515,676 $29,031,352 $22,082,696 $696,110 $ - $51,810,158
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)
Years ended December 31, 1999, 1998 and 1997
Accumulated
Number other Additional Total
of Common Retained comprehensive Comprehensive paid-in shareholders'
shares stock earnings income (loss) income (loss) capital equity
---------- ----------- ------------ ------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income:
Net income - $ - $11,434,546 $ - $11,434,546 $ - $ 11,434,546
Other comprehensive income -
change in unrealized gains on
investment securities of
$208,764 (net of income taxes
of approximately $115,000) net
of reclassification adjustment
for gains included in net income
of $395,924 (net of income
taxes of approximately $204,000)- - - (187,160) (187,160) - (187,160)
-------------
Comprehensive income - - - $11,247,386 - -
=============
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 - - - - -
---------- ----------- -------------- ----------- ------------ -----------
Balance at December 31, 1998 16,869,363 $29,690,949 $ 33,517,242 $ 508,950 $ - $ 63,717,141
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)
Years ended December 31, 1999, 1998 and 1997
Number other Additional Total
of Common Retained comprehensive Comprehensive paid-in shareholders'
shares stock earnings income (loss) income (loss) capital equity
---------- ----------- ------------ ------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income - $ - $12,106,765 $ - $ 12,106,765 $ - $ 12,106,765
Other comprehensive income -
change in unrealized losses on
investment securities of
$2,005,005 (net of income taxes
of approximately $1,345,000)
net of reclassification adjustment
for gains included in net income
of $190,015 (net of income taxes
of approximately $109,000) - - - (2,195,020) (2,195,020) - 2,195,020)
Comprehensive income - - - - $ 9,911,745 - -
=============
Stock split (5%) 828,761 - - - - -
Stock options exercised 161,774 383,619 - - - 383,619
Tax benefit of stock options
exercised - 316,256 - - - 316,256
Stock split (10%) 1,785,993 - - - - -
----------- ----------- -------------- ----------- ---------- ------------
Balance at December 31, 1999 19,645,891 $30,390,824 $ 45,624,007 $(1,686,070) $ - $74,328,761
=========== =========== ============== ============ ========== ============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,106,765 $ 11,434,546 $ 9,303,363
Adjustments to reconcile net income to net cash
provided by operating activities:
Net gains on sales of investment securities and
mortgage loans (1,294,448) (2,352,391) (1,076,784)
Dividends on Federal Home Loan Bank stock (385,100) (372,600) (345,300)
Loan loss provision 2,300,000 1,500,000 1,250,000
Deferred income taxes (935,809) (437,882) (113,702)
Depreciation and amortization 2,356,296 1,697,578 1,329,421
Originations of mortgage loans held for sale (152,458,419) (213,853,812) (111,645,075)
Proceeds from sales of mortgage loans held for sale 158,337,944 210,152,220 110,506,192
Changes in assets and liabilities:
Accrued interest and other assets (12,391,249) (1,335,735) 302,160
Accrued interest and other liabilities 946,919 101,196 (230,165)
--------------- --------------- ----------------
Net cash provided by operating activities 8,582,899 6,533,120 9,280,110
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases (11,202,082) (31,984,219) (28,385,904)
Maturities 2,312,850 27,624,797 8,009,362
Proceeds from sales 23,071,850 11,754,232 20,463,409
Loan originations, net (173,283,354) (86,333,031) (70,449,408)
Purchases of premises and equipment, net (4,901,376) (3,558,652) (2,373,818)
--------------- --------------- ----------------
Net cash used in investing activities (164,002,112) (82,496,873) (72,736,359)
Cash flows from financing activities:
Net increase in deposits 89,175,187 64,584,212 79,326,839
Increase (decrease) in short-term borrowings, net 53,953,896 12,884,288 (4,599,800)
Payments on long-term debt - (10,000,000) -
Proceeds from exercise of stock options 383,619 267,381 400,944
--------------- --------------- ----------------
Net cash provided by financing activities 143,512,702 67,735,881 75,127,983
--------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (11,906,511) (8,227,872) 11,671,734
Cash and cash equivalents at beginning of year 41,841,367 50,069,239 38,397,505
--------------- --------------- ----------------
Cash and cash equivalents at end of year $ 29,934,856 $ 41,841,367 $ 50,069,239
=============== =============== ================
</TABLE>
See accompanying notes.
7
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Description of business and summary of significant accounting policies
----------------------------------------------------------------------
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of Centennial Bancorp, a bank holding company, and its wholly-owned
subsidiaries, Centennial Bank (the Bank) and Centennial Mortgage Co.
(Centennial Mortgage). Unless the context clearly suggests otherwise,
references in this annual report to "Bancorp" include Centennial Bancorp
and its subsidiaries. The Bank provides commercial financing, banking and
other services, and Centennial Mortgage provides a variety of residential
and commercial real estate financing services. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Method of accounting
--------------------
Bancorp prepares its consolidated financial statements in conformity with
generally accepted accounting principles and prevailing practices within
the banking industry. Bancorp utilizes the accrual method of accounting
that recognizes income when earned and expenses when incurred. The
preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts
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.
Supplemental disclosures of cash flow information
-------------------------------------------------
During 1999, 1998 and 1997, noncash transactions resulted from unrealized
gains (losses) on investment securities available-for-sale, net of income
taxes, and the income tax benefit of stock options exercised, as
disclosed in the accompanying consolidated statements of changes in
shareholders' equity.
During 1999, 1998 and 1997, Bancorp paid approximately $17,647,000,
$15,754,000 and $13,423,000, respectively, in interest expense.
8
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Description of business and summary of significant accounting policies
(continued)
-------------------------------------------------------------------------
Investment securities available-for-sale
----------------------------------------
Investment securities available-for-sale are reported at fair value with
unrealized gains and losses excluded from earnings and reported as other
comprehensive income or loss, net of income taxes.
Gains and losses on sales of investment securities are recognized on a
specific identification basis. Premiums and discounts on investment
securities are recognized in interest income using the interest method
over the period to maturity.
Declines (unless they are considered temporary) in the fair value of
investment securities available-for-sale below cost would result in
write-downs of the individual securities to their fair value.
Loans
-----
Loans are reported at their outstanding principal balance less the
allowance for loan losses and deferred loan fees.
The allowance for loan losses represents management's recognition of the
assumed risks of extending credit and the quality of the existing loan
portfolio. The allowance is maintained at a level considered adequate to
provide for potential loan losses based on management's assessment of
various factors affecting the portfolio. 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. The allowance for loan losses is
increased by charges to income and decreased by charge-offs, net of
recoveries.
Bancorp's credit policies require an evaluation of each borrower's
creditworthiness prior to extending credit. 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
9
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Description of business and summary of significant accounting policies
(continued)
-------------------------------------------------------------------------
collateral. Management believes that Bancorp's 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.
Bancorp considers loans to be impaired when management believes that it
is probable that all amounts due will not be collected according to the
contractual terms. An impaired loan must be valued using the present
value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the estimated fair
value of the loan's underlying collateral or related guaranty. Bancorp
primarily measures impairment on all large-balance nonaccrual loans
(typically commercial and commercial real estate loans) based on the
estimated fair value of the underlying collateral or related guaranty. In
certain other cases, impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate. Amounts deemed impaired are either specifically allocated for in
the allowance for loan losses or reflected as a partial charge-off of the
loan balance. Smaller-balance homogeneous loans (typically installment
loans) are collectively evaluated for impairment. Accordingly, the Bank
does not separately identify individual installment loans for impairment
disclosures.
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 charged against
current income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future
payments are reasonably assured.
Loan origination fees, net of origination costs, are deferred and
recognized as an adjustment of the yield of the related loan.
Interest income on all loans is accrued as earned on the simple interest
method.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Bancorp's allowance for loan losses.
Such agencies may require the Bancorp to recognize additions to the
allowance based on their judgment of information available to them at the
time of their examination.
10
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Description of business and summary of significant accounting policies
(continued)
----------------------------------------------------------------------------
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, 1999, 1998 and 1997, Bancorp held servicing rights to
approximately $36,842,000, $38,611,000 and $32,274,000, respectively, of
mortgage loans that had been sold into the secondary market. Such
mortgage loans are not included in the accompanying consolidated balance
sheets. Beginning in July 1998, Bancorp began using another financial
institution to service these mortgage loans. Previously, Bancorp serviced
these mortgage loans in-house. The net amount of capitalized mortgage
servicing rights (approximately $366,000 and $392,000 at December 31,
1999 and 1998, respectively) is included in other assets in the
accompanying consolidated balance sheets.
Federal Home Loan Bank stock
----------------------------
Bancorp'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 must maintain a minimum level of investment in FHLB stock based
on specific percentages of its outstanding mortgages, total assets or
FHLB advances. At December 31, 1999, Bancorp's minimum required
investment was approximately $2,337,000. Bancorp may request redemption
at par value of any FHLB stock in excess of the minimum required
investment. Stock redemptions are at the discretion of FHLB.
11
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Description of business and summary of significant accounting policies
(continued)
-------------------------------------------------------------------------
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. 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 to 20 years. It is Bancorp's policy to
review goodwill for impairment whenever events or changes in
circumstances indicate that its investment in the underlying businesses
that gave rise to such goodwill may not be recoverable. Should such an
evaluation of impairment become necessary, Bancorp will evaluate the
performance of such acquired businesses on an undiscounted basis. At
December 31, 1999 and 1998, accrued interest and other assets include
goodwill of approximately $8,834,000 and $283,000, respectively, net of
accumulated amortization. Additional goodwill was recorded in April 1999
when Bancorp acquired a branch located in the Hazel Dell area of
Vancouver, Washington from another financial institution. Goodwill
amortization for 1999 was approximately $487,000. Goodwill amortization
for 1998 and 1997 was insignificant.
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.
12
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Description of business and summary of significant accounting policies
(continued)
-------------------------------------------------------------------------
Stock splits
------------
During the years ended December 31, 1999, 1998 and 1997, Bancorp had
various stock splits as reflected in the accompanying consolidated
statements of changes in shareholders' equity. In addition, on January
19, 2000, Bancorp's Board of Directors declared a 10% stock split --
payable March 3, 2000 -- for Bancorp shareholders of record at the close
of business on February 11, 2000. This stock split will result in the
issuance of 1,785,993 additional shares of common stock. All issued and
outstanding, weighted average number of common shares outstanding,
per-share data and stock option plan information in the accompanying
consolidated financial statements and footnotes has been adjusted to give
retroactive effect to all stock splits.
Recently issued accounting standards
------------------------------------
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement 133" (SFAS 137), an amendment of SFAS 133, which
establishes accounting and reporting standards for derivative instruments
and hedging activities and requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS 133, as amended by SFAS
137, is effective for all quarterly and annual financial statements of
fiscal years beginning after June 15, 2000. Bancorp had no significant
derivatives as of December 31, 1999, nor does Bancorp engage in any
hedging activities. Accordingly, Bancorp does not anticipate that the
adoption of SFAS 133, as amended by SFAS 137, will have a material effect
on its consolidated financial position or results of operations.
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 was
effective in 1999 and had no effect on the accompanying consolidated
financial statements.
Reclassifications
-----------------
Certain amounts in 1998 and 1997 have been reclassified to conform with
the 1999 presentation. Net income was not affected by these
reclassifications.
13
<PAGE>
<TABLE>
<CAPTION>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
2. Investment securities available-for-sale
----------------------------------------
Investment securities available-for-sale consisted of the following at
December 31, 1999 and 1998:
Gross Gross Estimated
Amortized unrealized unrealized fair
1999 cost gains losses value
---- ----------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,400,808 $ 4,759 $ 6,325 $ 1,399,242
U.S. Government and
agency securities 27,988,761 - 1,454,349 26,534,412
Obligations of state and
political subdivisions 28,468,534 79,235 1,232,228 27,315,541
Corporate bonds 2,284,118 120 79,123 2,205,115
Mortgage-backed securities 1,936,017 - 31,570 1,904,447
----------------- ---------------- ---------------- -----------------
Total $ 62,078,238 $ 84,114 $ 2,803,595 $ 59,358,757
================= ================ ================ =================
1998
----
U.S. Treasury securities $ 1,398,726 $ 36,190 $ - $ 1,434,916
U.S. Government and
agency securities 39,479,940 116,050 333,250 39,262,740
Obligations of state 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
================= ================ ================ =================
</TABLE>
14
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
2. Investment securities available-for-sale (continued)
----------------------------------------------------
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1999, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties. In addition, the contractual
maturities for mortgage-backed securities were allocated assuming no
prepayments.
Amortized Estimated
cost fair value
---------------- -----------------
Due in 1 year or less $ 1,318,710 $ 1,305,105
Due after 1 through 5 years 22,923,785 22,447,699
Due after 5 through 10 years 19,427,389 18,407,642
Due after 10 years 18,408,354 17,198,311
---------------- -----------------
Total $ 62,078,238 $ 59,358,757
================ =================
At December 31, 1999, investment securities available-for-sale with an
estimated fair value of approximately $12,329,000 (approximately
$12,266,000 at December 31, 1998) were pledged to collateralize public
deposits, and investment securities available-for-sale with an estimated
fair value of approximately $10,061,000 (approximately $10,562,000 at
December 31, 1998) were pledged to collateralize short-term borrowings
(see Note 6).
Proceeds from sales of investment securities available-for-sale and gross
realized gains and losses on those sales were as follows:
Gross Gross
realized realized Net gains
Proceeds gains losses on sales
-------------- ------------ ---------- ------------
1999 $ 23,071,850 $ 298,025 $ - $ 298,025
1998 11,754,232 599,885 - 599,885
1997 20,463,409 191,291 22,575 168,716
15
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
3. Loans
- --------
Loans consisted of the following at December 31, 1999 and 1998:
1999 1998
---------------- ------------------
Real estate - mortgage $ 129,220,429 $ 94,474,773
Real estate - construction 227,387,353 150,815,834
Commercial 219,588,355 163,577,415
Installment 8,409,380 7,073,011
Lease financing 4,867,834 1,896,609
Other 4,198,940 3,137,402
---------------- -----------------
593,672,291 420,975,044
Less allowance for loan losses (6,164,507) (4,450,614)
---------------- -----------------
Loans, net $ 587,507,784 $ 416,524,430
================ =================
Bancorp is located and conducts its business primarily within Lane
County, Oregon, the greater Portland metropolitan area, and Clark County,
Washington. These geographic areas have experienced growth which has
resulted in increasing loan demand. A substantial portion of Bancorp's
loans are collateralized by real estate in these geographic areas and,
accordingly, the ultimate collectability of a substantial portion of
Bancorp's loan portfolio is susceptible to changes in local market
conditions.
Transactions in the allowance for loan losses for the years ended
December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Balance at beginning of year $ 4,450,614 $ 3,348,914 $ 2,599,653
Loan loss provision 2,300,000 1,500,000 1,250,000
Loans charged-off (671,827) (452,100) (557,949)
Recoveries of loans previously charged-off 85,720 53,800 57,210
---------------- ---------------- -----------------
Balance at end of year $ 6,164,507 $ 4,450,614 $ 3,348,914
================ ================ =================
</TABLE>
At December 31, 1999 and 1998, Bancorp had approximately $5,833,000 and
$5,218,000, respectively, in impaired loans. The specific valuation
allowance related to these impaired loans totaled approximately $465,000
and $563,000 at December 31, 1999 and 1998, respectively. The average
recorded investment in impaired loans for 1999, 1998 and 1997 was
approximately $5,525,000, $2,968,000 and $909,000, respectively. Interest
income
16
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
3. Loans (continued)
-----------------
recognized on impaired loans in 1999 was approximately $417,000. Interest
income recognized on impaired loans in 1998 and 1997 was insignificant.
Loans on nonaccrual status at December 31, 1999 were approximately
$579,000 ($3,841,000 at December 31, 1998). Interest income which would
have been realized on such nonaccrual loans outstanding at year-end, if
they had remained current, was approximately $97,000, $273,000 and
$103,000 during 1999, 1998 and 1997, respectively. Loans contractually
past due 90 days or more on which Bancorp continued to accrue interest at
December 31, 1999 were approximately $2,163,000 ($1,043,000 at December
31, 1998).
4. Premises and equipment
----------------------
Premises and equipment consisted of the following at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------- -------------
<S> <C> <C>
Land $ 2,375,046 $ 1,769,388
Buildings and leasehold improvements 13,278,013 10,728,522
Furniture and equipment 9,185,477 7,288,122
---------------- -------------
24,838,536 19,786,032
Less accumulated depreciation and amortization (8,927,039) (7,172,711)
---------------- -------------
Premises and equipment, net $ 15,911,497 $ 12,613,321
================ =============
</TABLE>
5. Time certificates of deposit
----------------------------
Time certificates of deposits in excess of $100,000 aggregated
approximately $79,425,000 and $60,708,000 at December 31, 1999 and 1998,
respectively. At December 31, 1999, the scheduled annual maturities of
all time certificates of deposit were approximately as follows:
2000 $ 150,615,000
2001 34,141,000
2002 926,000
2003 896,000
2004 104,000
Thereafter 235,000
---------------
Total $186,917,000
===============
17
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
6. Short-term borrowings
---------------------
Short-term borrowings consisted of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Securities sold under agreement to repurchase $ 8,213,967 $ 16,100,071
Federal funds purchased 19,600,000 1,000,000
FHLB cash management advance program 25,740,000 3,500,000
FHLB borrowings under promissory note agreements 21,000,000 -
------------ -------------
$ 74,553,967 $ 20,600,071
============ =============
</TABLE>
Securities sold under agreement to repurchase are due on demand. The
weighted average interest rate on such borrowings was 5.42% and 4.42% at
December 31, 1999 and 1998, respectively.
Federal funds purchased are due on demand. The weighted average interest
rate on such borrowings was 4.65% and 5.00% at December 31, 1999 and
1998, respectively.
Amounts owed under the FHLB cash management advance program are due
within one year and bear interest at 5.70% and 5.15% at December 31, 1999
and 1998, respectively.
FHLB borrowings under promissory note agreements are due in January 2000
and bear interest at 5.90% at December 31, 1999.
As of December 31, 1999, Bancorp has remaining available borrowings from
the FHLB of approximately $4,960,000. In addition, Bancorp maintains
federal funds lines with correspondent banks as a backup source of
liquidity. At December 31, 1999, Bancorp had approximately $10,400,000
(approximately $32,000,000 at December 31, 1998) of federal funds lines
available to draw against on an uncollateralized basis.
7. 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. At December 31, 1999 and
1998, Bancorp had no commitments to extend credit at below-market
interest rates and held no derivative financial instruments.
18
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
7. Off-balance-sheet financial instruments (continued)
---------------------------------------------------
Bancorp's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit, is represented by the contractual amount
of those instruments. Bancorp uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Bancorp's off-balance-sheet financial instruments at December 31, 1999
and 1998 were as follows:
1999 1998
----------- -------------
Commitments to extend credit $ 276,852,000 $ 198,583,000
Standby and commercial letters of credit 11,108,000 6,982,000
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed
expiration dates but may be terminated by Bancorp if certain conditions
of the contract are violated. Although subject to drawdown, many of these
commitments are expected to expire or terminate without funding.
Therefore, the total commitment amounts do not necessarily represent
future cash requirements. Collateral relating to these commitments
varies, but may include cash, 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.
8. Estimated fair value of financial instruments
---------------------------------------------
Bancorp primarily uses quoted market prices or present value techniques
to estimate the fair values of its fixed-rate financial instruments. The
carrying amounts of variable- and adjustable-rate financial instruments
are considered reasonable estimates of fair value. 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.
19
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
8. Estimated fair value of financial instruments (continued)
---------------------------------------------------------
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 that 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, 1999 and 1998.
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 approximates the
--------------------------
estimated fair value.
Investment Securities available-for-sale: The estimated fair value is
----------------------------------------
based on quoted market prices or the market values for comparable
securities.
Loans: The estimated fair value of fixed-rate loans is estimated by
-----
discounting the contractual cash flows of the loans using December
31, 1999 and 1998 origination rates. The resulting amounts are
adjusted to estimate the effects of changes in credit quality of
borrowers since the loans were originated.
Mortgage loans held for sale: The estimated fair value represents the
----------------------------
anticipated proceeds from sale of the loans.
FHLB stock: The carrying amount approximates the estimated fair
----------
value.
20
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
8. Estimated fair value of financial instruments (continued)
---------------------------------------------------------
Deposits: The estimated fair value of demand deposits, consisting of
--------
checking, savings and certain interest-bearing demand deposit
accounts, is represented by the amounts payable on demand. The
estimated fair value of time deposits is calculated by discounting
the scheduled cash flows using the December 31, 1999 and 1998 rates
offered on these instruments.
Short-term borrowings: The carrying amount approximates the estimated
---------------------
fair value.
Off-balance-sheet financial instruments: The estimated fair value of
---------------------------------------
off-balance-sheet financial instruments (primarily commitments to
extend credit and standby letters of credit) is determined based on
fees currently charged for similar commitments. Management estimates
that these fees approximate $1,440,000 and $1,028,000 at December 31,
1999 and 1998, respectively.
The estimated fair value of Bancorp's significant on-balance-sheet
financial instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------- -----------------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 29,935,000 $ 29,935,000 $ 41,841,000 $ 41,841,000
Investment securities
available-for-sale 59,359,000 59,359,000 76,793,000 76,793,000
Loans and mortgage loans
held for sale 593,663,000 589,213,000 427,564,000 421,343,000
FHLB stock 5,469,000 5,469,000 5,084,000 5,084,000
Financial liabilities:
Deposits $ 573,041,000 $ 572,746,000 $ 483,866,000 $ 485,283,000
Short-term borrowings 74,554,000 74,554,000 20,600,000 20,600,000
</TABLE>
21
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
9. Commitments and contingencies
-----------------------------
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. At December 31, 1999, the
aggregate minimum rental commitments under operating leases that have
initial or remaining noncancelable lease terms in excess of one year were
approximately as follows:
2000 $ 1,170,000
2001 1,140,000
2002 1,035,000
2003 827,000
2004 774,000
Later years 9,889,000
----------------
Total minimum lease payments $ 14,835,000
================
Total rent expense was approximately $1,213,000, $750,000 and $343,000 in
1999, 1998 and 1997, respectively.
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.
10. Noninterest expense
- --- -------------------
Noninterest expense consisted of the following for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Salaries and employee benefits $ 14,293,013 $ 12,834,456 $ 9,552,513
Premises and equipment 3,315,826 2,644,173 2,049,771
Advertising 830,097 801,135 489,315
Data processing 665,704 252,570 251,077
Legal and professional 657,816 843,890 742,165
Other 3,039,171 1,972,334 1,766,187
------------- ------------- ------------
Total noninterest expense $ 22,801,627 $ 19,348,558 $ 14,851,028
============= ============= ============
</TABLE>
22
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
11. Income taxes
------------
The provision (credit) for income taxes consisted of the following for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ 6,482,551 $ 5,098,082 $ 3,903,417
State 1,372,548 1,252,200 539,085
Deferred (935,809) (437,882) (113,702)
---------------- ------------- -------------
Provision for income taxes $ 6,919,290 $ 5,912,400 $ 4,328,800
================ ============= =============
</TABLE>
The provision (credit) for income taxes results in effective tax rates
that are different than the federal income tax statutory rate. The nature
of the differences for the years ended December 31, 1999, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- --------------
<S> <C> <C> <C>
Expected federal income tax provision
at 34% $ 6,659,004 $ 6,041,839 $ 4,634,935
State income tax, net of federal effect 843,341 763,479 342,880
Tax-exempt interest income (478,504) (577,312) (679,305)
Other, net (104,551) (315,606) 30,290
---------------- ---------------- --------------
Provision for income taxes $ 6,919,290 $ 5,912,400 $ 4,328,800
================ ================ ==============
</TABLE>
The components of the net deferred tax assets and liabilities at December
31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- -------------
<S> <C> <C>
Deferred tax assets:
Nonqualified benefit plans $ 745,362 $ 661,632
Allowance for loan losses 2,001,389 1,342,735
Net unrealized losses on investment securities 1,033,402 -
Other, net 659,516 208,679
---------------- -------------
Total deferred tax assets 4,439,669 2,213,046
</TABLE>
23
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
11. Income taxes (continued)
------------------------
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
<S> <C> <C>
Deferred tax liabilities:
Mortgage servicing rights 140,392 150,559
FHLB stock dividends 843,966 695,734
Net unrealized gains on investment securities - 311,832
Other, net 347,546 228,199
---------------- -----------------
Total deferred tax liabilities 1,331,904 1,386,324
---------------- -----------------
Net deferred tax assets $ 3,107,765 $ 826,722
================ =================
</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 generally accepted accounting principles,
such compensation is not recognized as an expense for financial
accounting purposes and the related tax benefits are recorded as an
increase to common stock.
Bancorp's provision for income taxes for 1999, 1998 and 1997 included
approximately $109,000, $204,000 and $57,000, respectively, related to
gains on sales of investment securities.
During 1999, 1998 and 1997, Bancorp paid approximately $8,443,000,
$6,056,000 and $4,414,000, respectively, in income taxes.
24
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
12. 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, 1999 was as follows:
Balance at January 1, 1999 $ 7,298,571
Additions or renewals 6,794,122
Amounts collected or renewed (6,470,302)
------------
Balance at December 31, 1999 $ 7,622,391
============
In addition, included in commitments in Note 9 are approximately
$1,887,000 of commitments to extend credit to directors and their
affiliates and executive officers at December 31, 1999 ($2,399,000 at
December 31, 1998).
13. Stock options
-------------
Bancorp has two Non-employee 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 non-employee
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, 1999, 201,401 of the 211,647 options outstanding were
exercisable, with 127,540 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, 1999, 324,839 of the 348,212 options outstanding were
exercisable, and 988 shares were reserved for future grant.
25
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
13. Stock options (continued)
------------------------
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 721,681
additional shares for future grant. At December 31, 1999, 861,286 options
were outstanding under the Option Plan, consisting of 528,052 incentive
stock options and 333,234 nonstatutory stock options. At December 31,
1999, a total of 412,296 of the options outstanding were exercisable, and
594,727 shares were reserved for future grant. Bancorp has not granted
any restricted stock awards under the Option Plan.
Transactions involving option activity for the years ended December 31,
1999, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Weighted- Weighted- Weighted-
average average average
Options exercise Options exercise Options exercise
outstanding price outstanding price outstanding price
----------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 1,377,176 $ 4.64 1,238,999 $ 2.84 1,385,386 $ 2.59
Granted 212,176 11.66 290,531 11.61 58,402 5.15
Forfeited (6,433) 13.96 (32,520) 7.36 (21,109) 3.16
Exercised (161,774) 2.37 (119,834) 2.24 (183,680) 2.18
---------- ---------- ----------
Balance at end of year 1,421,145 $ 5.90 1,377,176 $ 4.64 1,238,999 $ 2.84
========= ======= ========= ======= ========= =======
</TABLE>
26
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
13. Stock options (continued)
------------------------
Information regarding the number, weighted-average exercise price and
weighted-average remaining contractual life of options by range of
exercise price at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------- ---------------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number life exercise Number exercise
price of options (years) price of options price
--------------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Under $5.00 909,286 7.4 $ 2.79 850,273 $ 2.71
$5.01-$10.00 121,253 9.4 9.22 30,120 9.16
$10.01-$15.00 390,606 11.7 12.11 58,143 11.48
---------- -------
1,421,145 8.8 $ 5.90 938,536 $ 5.24
========== === ======= ======= =======
</TABLE>
Exercisable options as of December 31, 1998 and 1997 totaled 950,981 and
874,184, respectively.
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 "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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income - as reported $ 12,106,765 $ 11,434,546 $ 9,303,363
- pro forma 11,753,038 11,360,952 9,205,469
Basic earnings per common share:
- as reported $ .62 $ .59 $ .48
- pro forma .60 .59 .47
Diluted earnings per common share:
- as reported $ .60 $ .56 $ .46
- pro forma .58 .56 .46
</TABLE>
27
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
13. Stock options (continued)
------------------------
The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect in future years because
compensation expense related to grants made prior to December 31, 1994 --
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:
1999 1998 1997
----------- ----------- ----------
Risk-free interest rate 6.3% 5.6% 6.3%
Expected life (in years) 7.3 7.3 7.3
Expected volatility 32.6% 31.0% 29.4%
Expected dividend yield 0% 0% 0%
The effect of applying the fair-value-based method to stock options
granted in the years ended December 31, 1999, 1998 and 1997 resulted in a
weighted-average grant date fair value of $5.83, $5.31 and $4.42,
respectively.
14. Shareholders' equity
--------------------
At December 31, 1999 and 1998, Bancorp had 10,000,000 shares of
authorized but unissued preferred stock, which consists 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.
At December 31, 1999 and 1998, 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.
Dividends paid by the Bank to Bancorp provide substantially all of
Bancorp's cash flow. Those dividends are subject to prior regulatory
approval if in excess of certain regulatory limits. At December 31, 1999,
approximately $11.8 million was available from the Bank for the payment
of dividends to Bancorp without prior regulatory approval.
In January 2000, Bancorp authorized the repurchase of up to an aggregate
of 5% of its currently outstanding common stock over a two-year period.
28
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
15. Basic and diluted earnings per common share
-------------------------------------------
Bancorp's basic earnings per common share is computed by dividing net
income by the weighted-average number of common shares outstanding during
the period. Bancorp's diluted earnings per common share is computed by
dividing net income by the weighted-average number of common shares
outstanding plus dilutive common shares related to stock options.
The numerators and denominators used in computing basic and diluted
earnings per common share for the years ended December 31, 1999, 1998 and
1997 can be reconciled as follows:
<TABLE>
<CAPTION>
Net
income Shares Per-share
(numerator) (denominator) amount
-------------- ------------- --------------
1999
----
<S> <C> <C> <C>
Basic earnings per common share -
Income available to common shareholders $ 12,106,765 19,603,896 $ .62
=====
Effect of assumed exercise of stock options - 631,625
-------------- ------------
Diluted earnings per common share $ 12,106,765 20,235,521 $ .60
============== ========== =====
1998
----
Basic earnings per common share -
Income available to common shareholders $ 11,434,546 19,431,440 $ .59
=====
Effect of assumed exercise of stock options - 890,420
-------------- ------------
Diluted earnings per common share $ 11,434,546 20,321,860 $ .56
============== ========== =====
1997
----
Basic earnings per common share -
Income available to common shareholders $ 9,303,363 19,255,191 $ .48
=====
Effect of assumed exercise of stock options - 863,546
-------------- ------------
Diluted earnings per common share $ 9,303,363 20,118,737 $ .46
============== ========== =====
</TABLE>
29
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
16. Employee benefit plan
---------------------
Bancorp has an employee savings plan and profit sharing plan (the Plan)
which covers all full-time employees over age 21 with one year of
service. The Plan allows employees to contribute between 2% to 15% of
their salary on a tax-deferred basis. Bancorp's matching contributions
are determined annually by the Board of Directors, up to 6% of individual
employee salaries. In addition to the matching contributions, Bancorp may
also make discretionary contributions to the Plan. Bancorp's
contributions charged to operations related to the Plan totaled
approximately $400,000 for 1999 ($400,000 for 1998 and $350,000 for
1997).
17. Regulatory matters
------------------
Bancorp and the Bank are subject to the regulations of certain federal
and state agencies, and receive periodic examinations by those regulatory
authorities. In addition, 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, 1999,
that Bancorp and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 1999, Bancorp and the Bank were adequately capitalized
under the regulatory framework. To be categorized as adequately
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 that management
believes would change Bancorp's or the Bank's regulatory capital
categorization.
30
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
17. Regulatory matters (continued)
-----------------------------
Bancorp's actual and required capital amounts and ratios are presented in
the table below:
<TABLE>
<CAPTION>
Regulatory minimum to be Regulatory minimum to be
Actual "adequately capitalized" "well capitalized"
------------------------ ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- ----------
December 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $73,308,000 9.9% $59,239,000 8.0% $74,048,000 10.0%
Tier 1 capital
(to risk-weighted assets) 67,143,000 9.0 29,619,000 4.0 44,429,000 6.0
Tier 1 capital
(to average assets) 67,143,000 9.7 27,688,000 4.0 34,610,000 5.0
December 31, 1998:
Total capital
(to risk-weighted assets) 66,127,000 12.0 44,085,000 8.0 55,106,000 10.0
Tier 1 capital
(to risk-weighted assets) 61,676,000 11.2 22,042,000 4.0 33,064,000 6.0
Tier 1 capital
(to average assets) 61,676,000 10.9 22,633,000 4.0 28,292,000 5.0
</TABLE>
The Bank's actual and required capital amounts and ratios are presented
in the table below:
<TABLE>
<CAPTION>
Regulatory minimum to be Regulatory minimum to be
Actual "adequately capitalized" "well capitalized"
------------------------ ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
December 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $65,969,000 9.0% $58,969,000 8.0% $73,712,000 10.0%
Tier 1 capital
(to risk-weighted assets) 59,804,000 8.1 29,485,000 4.0 44,227,000 6.0
Tier 1 capital
(to average assets) 59,804,000 8.7 27,613,000 4.0 34,516,000 5.0
December 31, 1998:
Total capital
(to risk-weighted assets) 59,658,000 10.9 43,843,000 8.0 54,804,000 10.0
Tier 1 capital
(to risk-weighted assets) 55,207,000 10.1 21,922,000 4.0 32,882,000 6.0
Tier 1 capital
(to average assets) 55,207,000 9.8 22,524,000 4.0 28,155,000 5.0
</TABLE>
31
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
18. Parent company financial information
------------------------------------
Condensed financial information for Centennial Bancorp (Parent Company
only) is presented as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS (Unconsolidated)
December 31,
1999 1998
------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents, deposited with the Bank $ 1,972,516 $ 3,264,923
Equipment, net 69,209 84,911
Deferred tax asset 1,357,495 484,246
Investment in subsidiaries at cost plus equity in earnings 69,883,713 59,394,795
Other assets 2,411,998 1,798,918
------------- --------------
Total assets $ 75,694,931 $ 65,027,793
============= ==============
Liabilities and shareholders' equity:
Accrued liabilities $ 1,366,170 $ 1,310,652
Shareholders' equity 74,328,761 63,717,141
------------- --------------
Total liabilities and shareholders' equity $ 75,694,931 $ 65,027,793
============= ==============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME (Unconsolidated)
Years ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Income:
Interest income from subsidiaries $ 103,815 $ 135,862 $ 149,995
Other income - 24,725 8,007
-------------- ------------- --------------
Total income 103,815 160,587 158,002
Expense:
Salaries and employee benefits 702,931 704,256 567,313
Other 343,936 317,866 366,259
-------------- ------------- --------------
Total expenses 1,046,867 1,022,122 933,572
Loss before income tax benefit and equity in
undistributed earnings of subsidiaries (943,052) (861,535) (775,570)
Income tax benefit 366,030 237,601 157,399
-------------- ------------- --------------
Loss before equity in undistributed earnings
of subsidiaries (577,022) (623,934) (618,171)
Equity in undistributed net earnings of subsidiaries 12,683,787 12,058,480 9,921,534
-------------- ------------- --------------
Net income $ 12,106,765 $ 11,434,546 $ 9,303,363
============== ============= ==============
</TABLE>
32
<PAGE>
CENTENNIAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
18. Parent company financial information
------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS (Unconsolidated)
Years ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,106,765 $ 11,434,546 $ 9,303,363
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 101,490 100,238 98,570
Undistributed earnings of subsidiaries (12,683,787) (12,058,480) (9,921,534)
Deferred tax benefit (873,249) (43,442) (18,623)
Changes in assets and liabilities:
Other assets (382,763) (831,450) 710,290
Accrued liabilities 55,518 315,389 (261,295)
-------------- ------------- --------------
Net cash used by operating activities (1,676,026) (1,083,199) (89,229)
Cash flows used by investing activities -
purchases of equipment - (18,789) (7,999)
Cash flows from financing activities -
proceeds from exercise of stock options 383,619 267,381 400,944
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents (1,292,407) (834,607) 303,716
Cash and cash equivalents at beginning of year 3,264,923 4,099,530 3,795,814
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 1,972,516 $ 3,264,923 $ 4,099,530
============== ============= ==============
</TABLE>
33
<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 RELATED NOTES AT DECEMBER 31, 1999
AND FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 WHICH ARE INCLUDED
ELSEWHERE IN THIS ANNUAL REPORT.
THIS DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, WHICH ARE MADE
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. STATEMENTS THAT EXPRESSLY OR IMPLICITLY PREDICT FUTURE
RESULTS, PERFORMANCE OR EVENTS ARE FORWARD-LOOKING. IN ADDITION, THE WORDS
"ANTICIPATE," "BELIEVE," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
ANTICIPATED. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THE FOLLOWING: (1) POTENTIAL DELAYS OR OTHER PROBLEMS IN
IMPLEMENTING BANCORP'S GROWTH AND EXPANSION STRATEGY; (2) THE ABILITY TO ATTRACT
NEW DEPOSITS AND LOANS; (3) INTEREST RATE FLUCTUATIONS; (4) COMPETITIVE FACTORS
AND PRICING PRESSURES; (5) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR
REGIONALLY THAT COULD RESULT IN INCREASED LOAN LOSSES; (6) CHANGES IN LEGAL AND
REGULATORY REQUIREMENTS; AND (7) CHANGES IN TECHNOLOGY, AS WELL AS OTHER FACTORS
DESCRIBED IN THIS AND OTHER BANCORP REPORTS AND STATEMENTS. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON BANCORP'S FORWARD-LOOKING STATEMENTS,
WHICH SPEAK ONLY AS OF THE DATE HEREOF. BANCORP DOES NOT INTEND TO UPDATE ITS
FORWARD-LOOKING STATEMENTS.
HIGHLIGHTS
Centennial Bancorp reported net income of $12.1 million, or $.62 per share,
for the year ended December 31, 1999. This represented a 5.9% increase in net
income, as compared to $11.4 million, or $.59 per share, in 1998. Net income in
1998 represented a 22.9% increase from 1997 net income of $9.3 million, or $.48
per share. The return on average assets was 1.91% in 1999 compared to 2.18% in
1998 and 2.12% in 1997. The increased earnings for 1999 and 1998 primarily
reflect increased net interest income due to the expansion of Bancorp's
interest-earning assets each year.
At December 31, 1999, total assets increased $154.7 million to $726.7
million. This increase represented a 27.0% increase over total assets at
December 31, 1998. Earning assets at December 31, 1999 represented 90.6% of
total assets, which was an increase from December 31, 1998 when earning assets
were 90.0% of total assets.
1999 was a year of significant change and continued growth for Bancorp. A
new corporate headquarters office was established in downtown Portland to
provide a more central location and better support for Bancorp's growth and
expansion northward along the I-5 corridor. During the first quarter, Centennial
Bank (the "Bank") completed a major reorganization along functional (rather than
geographical) lines, also to facilitate continuing growth and expansion. During
the year, the Bank added five new full-service branches. In January 1999, the
Oakway Center office opened as the Bank's fourth full-service branch in the
Eugene area. The Hazel Dell office in Vancouver, Washington, acquired from
Northwest National Bank, opened on May 3, 1999 as the Bank's first branch in the
State of Washington. The new downtown Portland and
34
<PAGE>
downtown Salem offices opened in July with the Salem office operating out of a
temporary facility while a new building is being constructed. Finally, the
Clackamas office opened in November to serve the southeast Portland area.
Another full-service branch in Vancouver, the Mill Plain office, opened in
February 2000.
As part of the Bank's reorganization, during January 1999, the Bank created
two commercial banking centers, one in downtown Eugene and the other in
southwest Portland. A third center in downtown Portland opened during July.
Bancorp has also announced plans to open commercial banking centers in Clackamas
and Vancouver.
In January 1999, Centennial Mortgage Co. ("Mortgage Co.") opened a second
Eugene office in the Oakway Center next to the new Bank branch and in November
moved its Sunnyside office to the new Bank branch location in Clackamas. Bancorp
has also announced plans to open a Mortgage Co. office in downtown Salem to be
located in the new Bank branch building upon its completion, currently
anticipated early in the second quarter of 2000.
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, and
interest expense, principally on 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 amount and relative mix of interest-earning assets and
interest-bearing liabilities. During 1999, 1998 and 1997, Bancorp's average
interest-earning assets were $578 million, $483 million and $399 million,
respectively. During these same years, Bancorp's net interest margin was 7.15%,
7.22% and 6.92%, respectively.
35
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table sets forth for 1999, 1998 and 1997 information with regard to average balances of assets and liabilities,
as well a 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, 1999 1998 1997
------------------------------ ------------------------------ ----------------------------
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
---------- --------- -------- ---------- --------- -------- ---------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits with banks $ 104 $ 8 7.69% $ 264 $ 14 5.30% $ 6,924 $ 376 5.43%
Investment securities - taxable 41,954 2,612 6.23 48,554 3,096 6.38 41,933 2,791 6.66
Investment securities - non-taxable(2) 28,155 2,172 7.71 33,508 2,574 7.68 39,097 3,083 7.89
Federal funds sold 5,937 280 4.72 13,253 691 5.21 10,925 573 5.24
Loans and loans held for sale(3) 502,272 54,134 10.78 387,914 44,348 11.43 299,976 34,329 11.44
-------- ------- --------- ------- ------- ------
Total interest-earning
assets/interest income (2) 578,422 59,206 10.24 483,493 50,723 10.49 398,855 41,152 10.32
Allowance for loan losses (5,399) (3,882) (3,123)
Cash and due from banks 31,440 28,351 27,552
Premises and equipment, net 13,993 11,407 9,790
Other assets 16,547 5,848 6,112
-------- -------- --------
Total assets $635,003 $525,217 $439,186
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and interest-bearing demand
deposits $260,240 7,865 3.02 $211,896 6,889 3.25 $166,800 5,156 3.09
Time deposits 167,702 8,597 5.13 145,387 8,185 5.63 129,756 7,299 5.63
Short-term borrowings 26,356 1,405 5.33 10,016 489 4.88 9,688 539 5.56
Long-term debt 5,945 273 4.59 10,000 572 5.72
-------- ------- ---------- ------ -------- -------
Total interest-bearing
liabilities/interest expense 454,298 17,867 3.93 373,244 15,836 4.24 316,244 13,566 4.29
Demand deposits 106,317 90,166 75,005
Other liabilities 4,948 5,095 2,001
-------- -------- --------
Total liabilities 565,563 468,505 393,250
Shareholders' equity 69,440 56,712 45,936
-------- -------- --------
Total liabilities and
shareholders' equity $635,003 $525,217 $439,186
======== ======== ========
Net interest income(2) $41,339 $34,887 $27,586
======= ======= =======
Net interest spread(2) 6.31% 6.25% 6.03%
===== ===== =====
Net interest margin(2) 7.15% 7.22% 6.92%
Net interest income to average
shareholders' equity (2) 59.53% 61.52% 60.05%
Average interest-earning assets to
average interest-bearing
liabilities 127% 130% 126%
- ------------------------------
(1) Average balances are based on daily averages.
(2) Average yield on non-taxable securities, interest income, net interest income, net interest spread, net interest margin and
net interest income to average shareholders' equity have been computed on a 34% tax-equivalent basis.
(3) Nonaccrual loans 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 $7,282,948 in 1999, $6,855,866 in 1998 and $4,769,700 in 1997.
</TABLE>
36
<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 have been allocated equally
between interest rate and volume.
1999 vs. 1998 1998 vs. 1997
Change in Change in
net interest income due to net interest income due to
-------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
-------- ------- ------- -------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Balances due from banks $ (10) $ 4 $ (6) $ (357) $ (5) $ (362)
Investment securities - taxable (416) (68) (484) 431 (126) 305
Investment securities - non-taxable (412) 10 (402) (435) (74) (509)
Federal funds sold (363) (48) (411) 122 (4) 118
Loans and loans held for sale 12,700 (2,914) 9,786 10,059 (40) 10,019
------ ------ ----- ------- ------ -------
Total interest income 11,499 (3,016) 8,483 9,820 (249) 9,571
Interest expense:
Deposits:
Savings and interest-bearing demand 1,516 (540) 976 1,430 303 1,733
Time 1,200 (788) 412 880 5 885
Short-term borrowings 834 82 916 17 (67) (50)
Long-term debt (273) (273) (209) (90) (299)
------ ------ ----- ----- ------ ------
Total interest expense 3,277 (1,246) 2,031 2,118 151 2,269
------ ------ ----- ----- ------ ------
Net interest income $8,222 $(1,770) $6,452 $7,702 $ (400) $7,302
====== ======= ====== ====== ======= ======
</TABLE>
37
<PAGE>
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NET INTEREST INCOME
As a result of volume increases and improved interest spread, Bancorp's net
interest income increased to $41.5 million, on a tax-equivalent basis, in 1999
as compared to $34.9 million in 1998 and $27.6 million in 1997. During 1999,
average interest-earning assets increased to $578 million as compared to average
interest-earning assets of $483 million in 1998 and $399 million in 1997. At the
same time, average interest-bearing liabilities increased to $454 million in
1999 from $373 million in 1998 and $316 million in 1997.
The average yield earned on interest-earning assets decreased by .25% (25
basis points) in 1999 and increased by .17% in 1998, while the average rate paid
on interest-bearing liabilities decreased by .31% in 1999 and .05% in 1998.
Although net interest spread for 1999 increased to 6.31% from 6.25% in 1998,
lower loan yields caused a modest decrease in 1999 net interest margin to 7.15%
from 7.22% in 1998. Primarily due to higher loan volumes, net interest spread
for 1998 increased to 6.25% from 6.03% in 1997, and net interest margin for 1998
increased to 7.22% from 6.92% in 1997.
During 1999 and 1998, Bancorp primarily supported its strong loan growth
with increased deposits, which mainly resulted from continuing business
expansion. Borrowing was also a major source of funding during 1999. Decreased
cash balances, partial investment portfolio liquidation, and operating cash flow
were substantial funding sources both years. Purchases of premises and equipment
required a significant use of cash in both 1999 and 1998.
Bancorp experienced rising interest rates during 1999 as compared to
declining rates in 1998 and relative rate stability in 1997. Bancorp's current
rate-sensitive asset and liability portfolio mix has an interest-rate profile
that should enhance earnings in a rising rate environment but would be a
detriment to earnings if interest rates fall. See "Quantitative and Qualitative
Disclosures about Market Risk" below.
The Mortgage Co. has a residential mortgage construction lending
department, which develops relationships with home builders in the
Eugene/Springfield and Portland-area markets and produces 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.
Interest rate increases could adversely affect the demand for construction loans
and the repayment of those loans from the sale of completed properties. Rate
increases could also adversely impact the Mortgage Co.'s permanent mortgage
lending activity.
PROVISION FOR LOAN LOSSES
Management's policy is to maintain an adequate allowance for loan losses.
In 1999, Bancorp charged a $2,300,000 loan loss provision to income, as compared
to $1,500,000 in 1998 and $1,250,000 in 1997. The larger loan loss provisions in
1999 and 1998 primarily reflect the larger amounts of loans outstanding each
year. In
38
<PAGE>
1999, loan charge-offs, net of recoveries, were $586,000, as compared to loan
charge-offs, net of recoveries, of $398,000 in 1998 and $501,000 in 1997.
Bancorp's allowance for loan losses was $6.2 million at December 31, 1999,
as compared to $4.5 million and $3.3 million at December 31, 1998 and December
31, 1997, respectively. The ratio of the allowance for loan losses to total
nonperforming loans was 195%, 89% and 263% at December 31, 1999, 1998 and 1997,
respectively. The significant decrease in the allowance ratio at December 31,
1998 was primarily due to one borrower whose loans were substantially liquidated
during 1999.
Management attributes the relatively low levels of loans charged off, net
of recoveries, during 1999, 1998 and 1997 to favorable economic conditions and
effective credit risk management policies, procedures and practices. Management
continues its efforts to collect amounts previously charged off.
NONINTEREST INCOME
Noninterest income decreased $657,000 to $3.5 million in 1999 as compared
to 1998, and increased $1.0 million to $4.2 million in 1998 as compared to 1997.
The decrease in 1999 was due to lower gains recognized on sales of loans and
securities. The 1998 increase was primarily attributable to increased gains on
loan and securities sales, which were partially offset by the decrease in other
noninterest income that returned to more normal levels after spiking in 1997 due
to the receipt of a $650,000 litigation settlement.
Gains on sales of loans decreased $757,000 in 1999 as compared to 1998, and
increased $844,000 in 1998 as compared to 1997. The 1999 decrease was due to a
decrease in the volume of residential mortgage loans originated through the
Mortgage Co. that are subsequently sold to third-party investors without
retention of servicing rights. The decrease in the volume of loans was primarily
the result of increasing interest rates in 1999. Gains on loan sales increased
during 1998 due to increasing mortgage loan volumes in a favorable interest-rate
environment. The fee income and sale gains from the origination and refinance of
mortgage loans sold to third-party investors is interest-rate sensitive and can
vary significantly. Therefore, there can be no assurance that such income will
contribute to Bancorp's future earnings.
Bancorp recognized decreased gains on sales of securities of $301,000
during 1999 as compared to 1998 and increased gains on sales of $432,000 during
1998 as compared to 1997. Although the volume of securities sold in 1999 was
substantially higher than in 1998, 1999 gains on sales were limited by
unfavorable interest rate trends. Decreasing market rates during 1998 resulted
in increased gains from sales of securities that year.
NONINTEREST EXPENSE
Noninterest expense increased $3.5 million to $22.8 million in 1999 as
compared to 1998, and increased $4.5 million to $19.3 million in 1998 as
compared to 1997. The increases both years were primarily attributable to
increased staffing and facilities expenses. Increased spending on advertising
was also a significant factor in 1998.
39
<PAGE>
Salaries and employee benefits expenses increased $1.5 million to $14.3
million in 1999 as compared to 1998, and increased $3.2 million to $12.8 million
in 1998 as compared to 1997. These increases were primarily the result of staff
additions to accommodate Bancorp's expanding operations.
Premises and equipment expense increased $672,000 to $3.3 million in 1999
as compared to 1998, and increased $594,000 to $2.6 million in 1998 as compared
to 1997. The increases in 1999 and 1998 were primarily due to the increasing
number of Bank and Mortgage Co. offices each year.
Advertising expenses increased $29,000 to $830,000 in 1999 as compared to
1998 and $312,000 to $801,000 in 1998 as compared to 1997. During 1999, Bancorp
maintained 1998 spending levels, which had increased substantially from 1997
levels as Bancorp adopted a more formal advertising strategy with emphasis on
developing name recognition in the markets served.
Although data processing expenses increased $413,000 to $665,000 in 1999 as
compared to 1998, the majority of the increase resulted from the costs of
outsourcing the Bank's item processing. These costs were more than offset by
internal staffing and equipment expense savings.
Other noninterest expense increases in 1999 and 1998 were primarily the
result of business expansion.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings ("earnings") and
current shareholders' equity ("equity"), which may result from changes in market
prices and rates. Bancorp's primary market risk exposure is the interest rate
risk associated with its investing, lending, deposit and borrowing activities.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not materially affect or are not part of Bancorp's
normal business activities. Interest rate risk is the risk that changes in
interest rates will adversely affect earnings and equity. The risk of loss to
earnings in a given period develops when the degree and timing of rate changes
varies among rate-sensitive assets and liabilities. The risk of loss to equity
develops when rate changes affect the current fair value of rate-sensitive
assets and liabilities by differing amounts.
Management actively monitors and manages Bancorp's interest rate risk with
the overall objective of achieving satisfactory and consistent profitability
while maintaining interest rate sensitivity within formal policy guidelines
established by the Board of Directors. The Asset and Liability Committee of the
Board of Directors reviews interest-sensitivity reports and related matters
quarterly or more often if needed. All significant interest rate risk issues
including policy exceptions are presented to the Board of Directors for review.
Bancorp's interest rate risk is currently measured using a computer-based
system developed and implemented during 1999. Bancorp uses an income simulation
model to measure earnings sensitivity by applying +/-1% and +/-2% rate changes
(annualized) to six-month earnings projections. Like all income simulation
models, Bancorp's model is very assumption dependent. The earnings projections
involve numerous assumptions
40
<PAGE>
including, but not limited to, those concerning future portfolio growth and mix,
interest rates, market and economic trends, and customer behavior. The
application of rate changes also involves many assumptions about the basic
components of interest rate risk. Fair value sensitivity is measured using the
computer model in conjunction with investment portfolio reports which include
the relevant information about investment security fair values and interest rate
sensitivity. The computer model determines the fair value of selected loans and
deposits by calculating the present value of future cash flows using discount
rates that are reflective of current market rates. +/-1% and +/-2% instantaneous
interest rate "shocks" are then applied to determine sensitivity. The fair
valuation process is also very dependent on numerous assumptions. Although
Management believes all assumptions and estimates used are reasonable, actual
results may vary substantially.
The following table summarizes Bancorp's six-month earnings sensitivity as
of December 31, 1999:
INTEREST RATE CHANGE CHANGE IN NET INCOME
-2% $-513,000
-1% -261,000
+1% +194,000
+2% +390,000
Comparable information for 1998 was not available since Bancorp was not
using the current measurement system at that time. Bancorp's annual earnings
sensitivity as of December 31, 1998 using different methodology was as follows:
INTEREST RATE CHANGE CHANGE IN NET INCOME
-1% $-179,000
-2% -659,000
Bancorp's fair value sensitivity as of December 31, 1999 was as follows:
INTEREST RATE CHANGE CHANGE IN FAIR VALUES
-2% $+15,305,000
-1% +7,341,000
+1% -7,603,000
+2% -14,486,000
Because of uncertainties about customer behavior, refinance activity,
absolute and relative loan and deposit pricing levels, competitor pricing and
market behavior, product volumes and mix, and other unexpected changes in
economic events affecting movements and volatility in market rates, there can be
no assurance that simulation and fair valuation results are reliable indicators
of interest rate risk under such conditions.
PROVISION FOR INCOME TAXES
Bancorp's provision for income taxes was $6.9 million in 1999, $5.9
million in 1998 and $4.3 million in 1997. Bancorp's effective tax rates for
financial reporting were 36.4% in 1999, 34.1% in 1998 and 31.8% in 1997. The
effective tax rate varies
41
<PAGE>
from federal statutory rates primarily because of nontaxable interest income and
state income taxes. See Note 11 to the Consolidated Financial Statements.
LIQUIDITY AND SOURCES OF FUNDS
Bancorp's primary sources of funds are customer deposits, short-term
borrowings, loan repayments, net income and sales of loans. Although sales of
investment securities were a significant funding source in 1999 and 1998, the
investment portfolio is currently a less effective source of immediate liquidity
due to unrealized losses resulting from recent increases in interest rates.
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 $573 million at December 31, 1999 from $484 million at December 31,
1998 and $419 million at December 31, 1997, primarily because of ongoing
business expansion and development programs.
Net loans and loans held for sale increased to $594 million at December
31, 1999 from $428 million at December 31, 1998 and $337 million at December 31,
1997. These increases were primarily due to the Bank's expansion and business
development activities, and the Mortgage Co.'s real estate construction lending
activities.
The Bank maintains, on an unsecured basis, federal funds lines with
correspondent banks as a backup source of temporary liquidity. At December 31,
1999, the Bank had federal funds lines totaling $30 million ($33 million at
December 31, 1998) with $19.6 million outstanding ($1 million outstanding at
December 31, 1998).
The Bank also maintains a cash management credit facility with the Federal
Home Loan Bank of Seattle ("FHLB"). The credit facility is based on the Bank's
holdings of specified housing finance related assets, and is limited to 10% of
the Bank's total assets, measured on a quarterly basis. At December 31, 1999,
the Bank had a $51.7 million credit facility with the FHLB ($26.1 million at
December 31, 1998) with $46.7 million outstanding at December 31, 1999 and $3.5
million outstanding at December 31, 1998. The increase in the Bank's credit
facility at December 31, 1999 from the level at December 31, 1998 was due to the
Bank's increase in specified housing finance related assets during 1999. The
credit facility is secured by the FHLB stock owned by the Bank and by all its
other assets.
Management anticipates that Bancorp will continue to rely on the primary
liquidity sources previously discussed. 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. Federal
funds purchased and FHLB advances will probably continue as Bancorp's main
sources of borrowed funds, and Bancorp is actively seeking to expand these
liquidity sources. Bancorp is also actively seeking to diversify its sources of
funding overall.
42
<PAGE>
CAPITAL RESOURCES
Total shareholders' equity increased to $74.3 million at December 31, 1999
from $63.7 million and $51.8 million at December 31, 1998 and 1997,
respectively. Total shareholders' equity was increased during 1999 not only by
net income, but also by the effects of stock options exercised ($700,000).
Bancorp shareholders' equity (Tier 1 capital) was 9.7% of average assets in 1999
as compared to 10.9% in 1998. The Bank's shareholder equity (Tier 1 capital) was
8.7% of average assets in 1999 as compared to 9.8% in 1998.
EFFECTS OF INFLATION AND CHANGING PRICES
The primary impact of inflation on Bancorp's operations is increased
operating overhead. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant effect on a financial
institution's performance than the effects of general inflation. Interest rates
are affected by inflation, but neither the timing nor the magnitude of interest
rate fluctuations coincides with changes in an inflation index.
For these reasons, management believes that references to other
information regarding interest rates earned and paid, interest-earning assets
and interest-bearing liabilities will be of greater assistance than
inflation-adjusted presentations in understanding Bancorp's ability to react to
changing interest rates and inflationary trends.
EFFECTS OF YEAR 2000
Some computers and computer software programs are unable to accurately
recognize, for years after 1999, dates which are often expressed as a two digit
number. This inability to recognize date information accurately could
potentially affect computer operations and calculations, or could cause computer
systems to not operate at all.
Bancorp is heavily reliant on computers for accounting for customer
records and transactions, as well as operating performance. Prior to December
31, 1999, Bancorp initiated and completed a comprehensive Year 2000 audit
program, primarily directed by a task force organized by management in early
1997. Bancorp also prepared contingency plans to minimize disruptions to its
operations due to Year 2000 issues. Among other criteria, Bancorp's Year 2000
programs were designed to comply with guidance provided by federal banking
regulators to financial institutions with respect to becoming Year 2000
compliant.
To date, Bancorp has not, nor to management's knowledge has any third
party vendor or service provider on which Bancorp relies, experienced any
material problems related to the Year 2000. However, Bancorp cannot determine if
it will be subject to Year 2000 compliance problems in the future, or if Year
2000 problems have arisen that management has failed to detect.
Bancorp will continue to monitor its business applications and maintain
contact with significant third parties to resolve any Year 2000 problems that
may arise in
43
<PAGE>
the future. 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
Bancorp's operations.
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."
CHANGE OF ACCOUNTANTS
Effective October 30, 1998, Bancorp dismissed its prior independent
accountant, PricewaterhouseCoopers ("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 the change of accountants, 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 the change of accountants, 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.
44
<PAGE>
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, 1999:
First quarter $15.15 $10.82
Second quarter 12.39 8.87
Third quarter 12.88 9.89
Fourth quarter 10.80 8.86
Year ended December 31, 1998:
First quarter $14.38 $10.59
Second quarter 14.52 10.96
Third quarter 13.49 9.65
Fourth quarter 14.95 10.82
At February 29, 2000, Bancorp had 19,649,231 shares of Common Stock
outstanding held by 1,246 shareholders of record.
Bancorp has never declared or paid cash dividends to shareholders and has
no intention to do so in the foreseeable future.
45
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
(In thousands, except per-share amounts)
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Total
- --------------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Interest income $12,894 $13,939 $15,274 $16,361 $58,468
Interest expense 3,833 4,237 4,670 5,128 17,868
------- ------- ------- ------- -------
Net interest income 9,061 9,702 10,604 11,233 40,600
Loan loss provision 500 600 600 600 2,300
Net gains on sales of
securities 166 133 - - 299
Income before income taxes 4,595 4,744 4,981 4,706 19,026
Net income 2,960 3,045 3,102 3,000 12,107
Earnings per share:
Basic $ .16 $ .15 $ .15 $ .16 $ .62
Diluted $ .15 $ .15 $ .15 $ .15 $ .60
1998
- ---------------
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 $ .13 $ .14 $ .16 $ .16 $ .59
Diluted $ .12 $ .13 $ .15 $ .16 $ .56
</TABLE>
46
<PAGE>
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
2000, and for various stock splits and stock dividends declared in prior years.
Bancorp has never declared or paid cash dividends to shareholders.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Interest income $ 58,468 $ 49,849 $ 40,104 $ 32,058 $ 25,274
Interest expense 17,867 15,837 13,566 11,368 9,004
-------- -------- -------- -------- --------
Net interest income 40,600 34,012 26,538 20,690 16,270
Loan loss provision 2,300 1,500 1,250 735 350
Net income 12,107 11,435 9,303 6,514 4,551
Total assets 726,738 572,050 492,573 407,186 317,464
Total deposits 573,041 483,866 419,282 339,955 267,880
Short-term borrowings 74,554 20,600 7,716 12,316 11,419
Long-term debt -- -- 10,000 10,000 9,200
Shareholders' equity 74,329 63,717 51,810 41,346 26,390
Earnings per common share:
Basic $ .62 $ .59 $ .48 $ .39 $ .29
Diluted .60 .56 .46 .35 .23
</TABLE>
47
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, 1999, of our report dated January 21, 2000, on our audits of the
consolidated financial statements of Centennial Bancorp and subsidiaries as of
and for the years ended December 31, 1999 and 1998, which are incorporated by
reference in this Annual Report on Form 10-K.
/S/ SYMONDS, EVANS & LARSON, P.C.
Portland, Oregon
March 23, 2000
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 audit of the
consolidated statements of income, of changes in shareholders' equity and of
cash flows of Centennial Bancorp and subsidiaries for the year ended December
31, 1997, which report is incorporated by reference in this Annual Report on
Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
March 28, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Centennial Bancorp
In our opinion, the consolidated statements of income, of changes in
shareholders' equity and of cash flows for the year ended December 31, 1997
(appearing on pages 10 through 12 of Centennial Bancorp and subsidiaries (the
Bank) 1999 Annual Report to Shareholders which has been incorporated by
reference in this Form 10-K) present fairly, in all material respects, the
results of operations and cash flows of the Bank for the year ended December 31,
1997, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Bank's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of the Bank for any period
subsequent to December 31, 1997.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Portland, Oregon
January 22, 1998
<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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,934,856
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,358,757
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 593,672,291
<ALLOWANCE> 6,164,507
<TOTAL-ASSETS> 726,737,712
<DEPOSITS> 573,041,483
<SHORT-TERM> 74,553,967
<LIABILITIES-OTHER> 4,813,501
<LONG-TERM> 0
0
0
<COMMON> 30,390,824
<OTHER-SE> 43,937,937
<TOTAL-LIABILITIES-AND-EQUITY> 726,737,712
<INTEREST-LOAN> 54,133,662
<INTEREST-INVEST> 4,045,518
<INTEREST-OTHER> 288,637
<INTEREST-TOTAL> 58,467,817
<INTEREST-DEPOSIT> 16,462,167
<INTEREST-EXPENSE> 17,867,417
<INTEREST-INCOME-NET> 40,600,400
<LOAN-LOSSES> 2,300,000
<SECURITIES-GAINS> 298,625
<EXPENSE-OTHER> 22,801,627
<INCOME-PRETAX> 19,026,055
<INCOME-PRE-EXTRAORDINARY> 12,106,765
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,106,765
<EPS-BASIC> .62<F1>
<EPS-DILUTED> .60<F1>
<YIELD-ACTUAL> 0
<LOANS-NON> 579,000
<LOANS-PAST> 2,163,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,450,614
<CHARGE-OFFS> 671,827
<RECOVERIES> 85,720
<ALLOWANCE-CLOSE> 6,164,507
<ALLOWANCE-DOMESTIC> 6,164,507
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> REFLECTS AN 11-FOR-10 STOCK SPLIT PAID IN FEBRUARY 2000.
</FN>
</TABLE>
Certain Factors to Consider in Connection
with Forward-Looking Statements
March 2000
From time to time, Centennial Bancorp ("Bancorp," "we," "us" or "our")
and our representatives may make forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995 (the "Act"))
regarding, among other things, expected future revenues or earnings,
projections, plans, future performance and other estimates relating to us.
Forward-looking statements may be included in our reports filed under the
Securities Exchange Act of 1934, as amended, in press releases or in oral
statements made with the approval of an authorized executive officer or director
of Bancorp.
We invoke to the fullest extent possible the protection of the Act and
the judicially created "bespeaks caution" doctrine with respect to such
statements. Accordingly, we are filing this Exhibit 99.1, which lists certain
factors that may cause our actual results to differ materially from the results
indicated in our forward-looking statements.
The following list is not necessarily exhaustive. Bancorp and our
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 us at any specific time.
Our actual results may differ materially from those described in our
forward-looking statements as a result of various factors, including those
listed below. Readers are cautioned not to unduly rely on any forward-looking
statement, which speaks only as of the date on which it is made. We do not
intend to update our forward-looking statements.
CHANGES IN INTEREST RATES OR GENERAL ECONOMIC CONDITIONS COULD REDUCE OUR
PROFITS
Our results of operations and those of our 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. Our
profitability depends on the difference between the amount of interest we earn
on investments and loans, and the amount of interest we pay on deposits and
other liabilities. This difference is referred to as interest rate spread. Any
decline in the economy in our market areas could have an adverse effect on us.
Like most financial institutions, our net interest spread and margin will be
affected by general economic conditions and other factors that influence
interest rates. Our assets and liabilities will be affected differently by a
given change in interest rates. For example, an increase or decrease in rates,
the terms of our loans, or the mix of adjustable- and fixed-rate loans in our
portfolio could have a positive or negative effect on our net income, capital
and liquidity. A change in market interest rates can also have a significant
impact on our ability to grow. Changes in rates may encourage depositors to
withdraw deposit
<PAGE>
account funds to invest in other alternatives, which may limit the funds
available to us for 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 us through a refinancing with another
financial institution. We cannot predict or control changes in interest rates.
Negative developments in the economy, or our inability to respond to such
changes, could adversely affect Bancorp and our subsidiaries.
Most of the loans originated by Centennial Bank are made to borrowers
within the Portland and the Eugene/Springfield, Oregon areas. The bank also has
branch offices in Vancouver, Washington and Salem, Oregon. Adverse changes in
economic conditions in the Portland/Vancouver or Eugene/Springfield areas could
impair our ability to collect loans and could otherwise have a negative effect
on our financial condition.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY
We intend to continue to pursue an aggressive growth strategy focused
primarily upon our 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 our growth strategy will depend
on our ability to manage credit and liquidity risks, control costs and provide
competitive products and services while rapidly expanding our geographic
presence by branching or acquiring other banks or branches of banks. There can
be no assurance that we will be successful in increasing our volume of loans and
deposits at acceptable risk levels and upon acceptable terms, expanding our
asset base, managing the costs and implementation risks associated with our
growth strategy, integrating any acquired institutions or branches or preventing
deposit erosion at acquired institutions or branches. Also, there can be no
assurance that our 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 we will succeed in securing such approvals.
Our ability to pursue our growth strategy may also be adversely affected by
general economic conditions.
As part of our overall growth strategy, we from time to time consider
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 our
current shareholders, the diversion of management's attention to acquisition
negotiations and, if an acquisition were consummated, our ability to effectively
assimilate the acquired bank and branches.
The banking industry generally has seen a trend toward the 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 we
seek to improve our capacity to use technological innovations, our growth
strategy is based more on the belief that customer demand for personal contact
and strategically placed branch offices will continue for the foreseeable
future. Thus, we continue to expand our 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
2
<PAGE>
automating customer responses. There can be no assurance that our strategy will
be successful or that technological advances by our competitors will not result
in our loss of customer relationships. As a result of our strategy, certain of
our costs for providing banking services may be higher than those of many of our
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. We believe that our capital,
borrowings, and expected earnings will be sufficient to support our operations
and anticipated expansion and to meet all regulatory requirements for the
foreseeable future. There can be no assurance that we will be successful in
implementing, or will have the necessary regulatory capital to implement, our
growth strategy.
OUR CUSTOMERS MAY NOT REPAY THEIR LOANS
The risk of borrowers not paying their loans is inherent in commercial
banking. Loan defaults may have a material adverse effect on our 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 us to secure the loan. We
offer a full range of loans to our customers. Some types of loans carry a
greater risk of default than other loans.
Bancorp's loan portfolio consists primarily of commercial loans (not
secured by real estate), real estate construction loans and real estate mortgage
loans (including commercial loans secured by real estate). Commercial loans that
are secured by property other than real estate generally are considered to
involve a higher degree of risk than loans secured by real estate, primarily
because the non-real-estate collateral may be difficult to repossess and
liquidate. We focus on small- to medium-sized businesses. This results in a
larger concentration by Bancorp of loans to such businesses. As a result, we may
assume greater lending risks than institutions that tend to make loans to larger
businesses or institutions that make loans primarily to consumers. 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. It 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 on 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, we may have to advance funds beyond the amount we originally
committed to permit completion of the project and to protect our security
position. We may also be confronted, at or prior to maturity of the loan, with a
project of insufficient value to ensure full repayment. In addition, if the
borrower is unable to obtain permanent financing in a timely manner, the
borrower may not be able to repay the construction loan.
3
<PAGE>
WE MAY NOT ADEQUATELY ALLOW FOR LOAN LOSSES
Our allowance for loan losses is maintained at a level we consider
adequate 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, which may be beyond our control, and future losses
may exceed our current estimates. There can be no assurance that our allowance
will be adequate to cover our actual losses.
WE MAY BE LIABLE IF CENTENNIAL BANK IS UNDERCAPITALIZED
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. We are
the sole shareholder of Centennial Bank.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN OUR MARKETS
The banking and mortgage lending businesses in Oregon and Washington
are highly competitive. We compete 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 our competitors have substantially larger lending limits
than we do and offer certain services, including trust and international banking
services, that we do not provide. The larger institutions in our markets have
competitive advantages over us in that they have higher public visibility and
are able to maintain advertising and marketing activities on a much larger scale
than we 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 that are in excess of
Centennial Bank's legal lending limits.
During the past several years, we capitalized on the marketing
opportunities created by the consolidation of the banking industry, as the
larger institutions were perceived to de-emphasize the small- to medium-size
business and professional market, which is our primary focus. Several banks,
which focus on the same types of customers as we do, have been formed in our
market areas during the last few years. This growing number of community banks
and a new emphasis by larger institutions on this market segment has intensified
competition.
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 market areas.
4
<PAGE>
In addition, the Gramm-Leach-Bliley Act, enacted on November 12, 1999
(the "GLB Act"), eliminates several barriers to affiliation among providers of
financial services and may affect the competitive environment in which Bancorp
operates in substantial and unpredictable ways. Effective March 11, 2000, the
GLB Act permits certain business combinations between banks, insurance
companies, securities firms, and other financial service providers that were not
permitted previously. Using the Financial Holding Company structure created by
the GLB Act, insurance companies and securities firms may now compete more
directly with banks and bank holding companies, and attempt to acquire existing
financial institutions. Because Centennial Bank is "adequately capitalized," as
defined by the regulations, but not "well capitalized," we do not currently
qualify to become a "financial holding company" under the GLB Act, which would
have permitted us to engage in a broader range of financial activities (e.g.,
insurance underwriting and agency services, investment advisory services,
merchant banking, investment banking and underwriting activities, dealing or
making a market in securities, etc.). Bancorp cannot predict the changes in the
competitive environment or the financial condition of Bancorp that may occur as
a direct or indirect result of the GLB Act and the increased competition it may
create.
WE MAY NOT BE ABLE TO IMPLEMENT TECHNOLOGICAL IMPROVEMENTS REQUIRED BY OUR
CUSTOMERS
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. Our future success will depend in
part on our ability to address the needs of our customers by using technology to
provide products and services that will satisfy customer demands for convenience
as well as create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in technological
improvements and highly skilled technical personnel. To be competitive, we may
need to spend significant amounts on computer hardware and software, and for
technical personnel. There can be no assurance that we will be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers.
GOVERNMENT REGULATION MAY LIMIT OUR OPERATIONS AND REDUCE OUR REVENUES OR
PROFITS
Bancorp and our 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. For example, Congress recently
enacted the GLB Act. Several regulatory
5
<PAGE>
agencies and state legislatures are in the process of responding to changes
required or suggested by the GLB Act. We cannot determine the ultimate effect
that the GLB Act, or the regulations implemented and the legislation enacted as
a result of that act, will have on our operating structure, financial condition
or results of operations.
Some legislative and regulatory changes may increase our costs of doing
business, assist competitors or otherwise adversely affect our operations. We
are unable to predict the nature or extent of the effects on our business and
earnings that any fiscal or monetary policies, or new federal or state
legislation or regulations, may have in the future.
WE ARE REGULARLY INVOLVED IN LEGAL PROCEEDINGS
Periodically, and in the ordinary course of business, various claims
and lawsuits are brought by and against us and our subsidiaries, such as claims
to enforce liens, condemnation proceedings on properties in which we hold
security interests, claims involving the making and servicing of real estate
loans and other issues incident to our business.
YEAR 2000 DATA PROCESSING PROBLEMS MAY INTERRUPT OUR BUSINESS AND REDUCE OUR
PROFITS
We are heavily reliant on computers for accounting for customer records
and transactions, as well as operating performance. The failure of these
systems, or the computer systems of third parties on which we depend, to be Year
2000 compliant could cause substantial disruption of our business and have a
material adverse financial impact on us.
6
