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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File No. 0-16356
/ / 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 1-10321
CENTRAL BANCORPORATION
(name of small business issuer in its charter)
WASHINGTON 91-1203145
State of Incorporation I.R.S. Employer Identification No.
301 NORTH CHELAN
WENATCHEE, WASHINGTON 98801
(Address of principal executive offices)
(509) 663-0733
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
$1.67 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
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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
--- ---
Revenue for most recent year: $17,884,000
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Aggregate market value of voting Common Stock(1) held by nonaffiliates of
Registrant as of January 10, 1996: $18,258,780.
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Number of shares of common stock, $1.67 par value, outstanding as of January 10,
1996: 1,014,565 Common Stock.
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Documents incorporated by reference and parts of Form 10-KSB into which
incorporated: None.
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(1) Based on most recent trade known to the company in a limited trading market;
does not necessarily reflect recently announced pending merger into InterWest
Bancorp.
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TABLE OF CONTENTS
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ITEM 1........................................................................... 1
DESCRIPTION OF BUSINESS .......................................... 1
Subsidiary Banks ................................................. 1
Non-Banking Activities ........................................... 2
Competition ...................................................... 2
Employees ........................................................ 2
SUPERVISION AND REGULATION ................................................ 2
Bancorp .......................................................... 2
Holding Company Structure ........................................ 2
Control Transactions ............................................. 3
The Banks ........................................................ 4
Regulation of State Banks ........................................ 4
Regulation of Management ......................................... 4
Control of Financial Institutions ................................ 4
Recent Federal Legislation ....................................... 5
Capital Adequacy Requirements .................................... 6
FDIC Insurance ................................................... 6
EFFECTS OF GOVERNMENTAL MONETARY POLICIES ................................. 7
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES .......................... 8
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential ......................... 8
Securities Portfolio ............................................. 10
Loan Portfolio ................................................... 11
Summary of Loan Loss Experience .................................. 13
Deposits ......................................................... 14
Significant Financial Ratios ..................................... 15
Short-Term Borrowings ............................................ 15
ITEM 2........................................................................... 16
DESCRIPTION OF PROPERTY ................................................... 16
ITEM 3........................................................................... 16
LEGAL PROCEEDINGS ......................................................... 16
ITEM 4........................................................................... 16
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....................... 16
ITEM 5........................................................................... 17
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .................. 17
ITEM 6........................................................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION ..................................................... 17
Selected Financial Data .......................................... 18
Results of Operations ............................................ 18
Net Interest Income .............................................. 18
Provision and Allowance for Loan Losses .......................... 20
Other Income ..................................................... 20
Other Expenses ................................................... 21
Financial Condition .............................................. 21
Non-accrual, Past Due and Restructured Loans ..................... 22
Liquidity and Interest Rate Sensitivity Management ............... 23
Capital Resources ................................................ 25
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<TABLE>
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ITEM 7 .................................................................... 26
FINANCIAL STATEMENTS ................................................ 26
ITEM 8 .................................................................... 26
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ................................................ 26
ITEM 9 .................................................................... 47
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSON; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ........... 47
ITEM 10 ................................................................... 47
EXECUTIVE COMPENSATION .............................................. 47
ITEM 11 ................................................................... 47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ...... 47
ITEM 12 ................................................................... 47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................... 47
ITEM 13 ................................................................... 48
EXHIBITS, LISTS AND REPORTS ON FORM 8-K ............................. 48
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
Central Bancorporation ("Bancorp") is a bank holding company incorporated under
the laws of the State of Washington with its principal office at 301 North
Chelan in Wenatchee, Washington. Bancorp became the parent holding company on
July 1, 1983, of Central Washington Bank ("Central"), a banking corporation
organized under the laws of the State of Washington through a holding company
reorganization.
On April 30, 1994, Bancorp acquired First Bank Washington, Omak, Washington, as
a wholly owned subsidiary of Bancorp which operates under the name North Central
Washington Bank ("North Central"). The acquisition was accomplished pursuant to
a stock purchase agreement dated January 7, 1994, entered into by Bancorp, First
Bank System, Inc. and FBS Washington Bancorporation, a wholly owned subsidiary
of FBS. Bancorp used the purchase method of accounting in recording the
acquisition.
The principal role of Bancorp is to supervise and coordinate the activities of
Central and North Central (collectively, the "Subsidiary Banks") and to provide
them with capital and services of various kinds. Bancorp derives substantially
all of its income from its subsidiaries as dividends. Dividends paid by Bancorp
are determined on an individual basis, generally in relation to each Subsidiary
Bank's earnings, capital position, and future prospects.
On January 10, 1996, Bancorp and its subsidiary banks entered into an agreement
and plan of mergers with InterWest Bancorp, Inc., Oak Harbor, Washington and
InterWest's subsidiary, InterWest Savings Bank, pursuant to which Bancorp will
be merged into InterWest. The merger agreement provides that Bancorp's common
stock will be exchanged for shares of InterWest common stock pursuant to a
specified exchange ratio. Consummation of the acquisition is subject to several
conditions, including receipt of applicable regulatory approval and approval by
Bancorp and InterWest shareholders.
SUBSIDIARY BANKS
Central conducts a general commercial banking business at six locations,
principally throughout Chelan and, to a lesser degree, Douglas, Grant and
Okanogan Counties which, geographically, are considered to be included in
Central's market area. North Central conducts a general commercial banking
business at four locations principally throughout Okanogan County.
The Subsidiary Banks perform banking services for their customers which are
customary for banks of similar size and character. Such services include retail
banking services to individuals and small and medium size businesses, as well as
savings accounts, regular and special checking accounts, money market deposit
accounts, certificates of deposit, individual retirement accounts, safe deposit
and other consumer and business related services.
The Subsidiary Banks are also active in the consumer and commercial banking
business, and provide individuals and businesses a variety of loan programs
including real estate, commercial and agricultural loans.
Central maintains offices in Cashmere, Chelan, East Wenatchee, Leavenworth and
Manson as well as in Wenatchee. Central has been located in the City of
Wenatchee since it opened for business on January 26, 1965. Central's main
office is located at 301 North Chelan.
North Central maintains offices in Brewster, Omak, Oroville and Tonasket, with
its main office located at 21 West First in Omak, Washington.
As state banks, the Subsidiary Banks' ability to extend its existing branch
banking system is subject to approval by the Director of Financial Institutions
of the State of Washington ("Director"), and by the Federal Deposit Insurance
Corporation ("FDIC"). The branching laws of the State of Washington allow banks
to branch anywhere in the State.
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NON-BANKING ACTIVITIES
Central engages in providing its customers insurance and investment related
products such as annuities and mutual funds through its wholly owned subsidiary,
Central Financial Services, Inc. Revenues do not presently constitute a
significant portion of Bancorp's total operating revenues.
COMPETITION
The financial services industry is facing increasingly intense competition
fostered in part by continuing government deregulation efforts. Such
deregulation has narrowed the differences between banks and other financial
institutions and has, therefore, increased the competition among them.
The Subsidiary Banks actively compete with other financial institutions in their
primary market area. Competition for making real estate, commercial and
installment loans, and in attracting savings deposits comes primarily from the
branches of three large regional banks, three community banks and from a number
of other financial institutions, including mutual savings banks, savings and
loan associations, finance companies and credit unions. Additional competition
in attracting savings deposits comes from non-bank institutions providing
financial services such as money market mutual funds, diversified retail
companies, and obligations offered by corporations, governments and government
agencies.
EMPLOYEES
Bancorp and the Subsidiary Banks had 114 full- and 34 part-time employees as of
December 31, 1995. Such employees are not represented by a union or any other
collective bargaining group, and management considers employee relations good.
Employees are provided benefits such as paid vacations and medical, vision,
dental and life insurance, and a savings and profit sharing plan.
SUPERVISION AND REGULATION
BANCORP
GENERAL
As a bank holding company, Bancorp is subject to the Bank Holding Company Act of
1956 ("BHCA"), as amended, which places Bancorp under the supervision of the
Board of Governors of the Federal Reserve System ("FRB"). In general, the BHCA
limits the business of bank holding companies to owning or controlling banks and
engaging in other activities related to banking. Certain recent legislation
designed to expand interstate branching and relax federal restrictions on
interstate banking will continue to be phased in over the next two years and may
expand opportunities for bank holding companies (for additional information see
below under the heading "The Bank - Recent Federal Legislation - Interstate
Banking and Branching"). However, the impact of this legislation on Bancorp is
unclear at this time.
HOLDING COMPANY STRUCTURE
FRB Regulation. Bancorp must obtain the approval of the FRB: (1) prior to
acquiring direct or indirect ownership or control of any voting shares of any
bank if, after such acquisition, it would own or control, directly or
indirectly, more than 5 percent of the voting shares of such bank; (2) before
merging or consolidating with another bank holding company; and (3) before
acquiring substantially all of the assets of any additional banks. Until
September, 1995, the BHCA also prohibited the acquisition by Bancorp of any such
interest in any bank or bank holding company located in a state other than
Washington unless the laws of the state in which such bank was located expressly
authorized such acquisition. Now, subject to certain state laws, such as age and
contingency laws, a bank holding company that is adequately capitalized and
adequately managed may acquire the assets of an out-of-state bank without regard
to whether such transaction is prohibited by the laws of any state.
Bancorp is required by the BHCA to file annual and quarterly reports and such
other reports as may be required from
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time to time by the FRB. In addition, the FRB performs periodic examinations of
Bancorp and its subsidiary Banks.
Holding Company Control of Nonbanks. With certain exceptions, the BHCA prohibits
bank holding companies from acquiring direct or indirect ownership or control of
voting shares in any company which is not a bank or a bank holding company
unless the FRB determines that the activities of such company are so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making such determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer advantages
to the public that would outweigh possible adverse effects. For example, the FRB
has by regulation determined activities such as, among others, operating an
industrial loan company, industrial bank, savings association, mortgage company,
finance company, trust company, credit card company or factoring company;
performing certain data processing operations; and providing investment and
financial advice, are so closely related to banking as to be a proper incident
thereto within the meaning of the BHCA. On the other hand, activities such as,
among others, real estate brokerage and syndication; land development; property
management; underwriting of life insurance not related to credit transactions;
and, with certain exceptions, securities underwriting and equity funding, are
not so closely related to banking as to be a proper incident thereto within the
meaning of the BHCA. In the future, the FRB may from time to time add to or
delete from the list of activities permissible for bank holding companies.
Transactions With Affiliates. Bancorp and its subsidiary Banks will be deemed
affiliates within the meaning of the Federal Reserve Act and transactions
between affiliates are subject to certain restrictions. Covered transactions
include, subject to specific exceptions, loans by bank subsidiaries to
affiliates, investments by bank subsidiaries in securities issued by an
affiliate, the taking of such securities as collateral, and the purchase of
assets by a bank subsidiary from an affiliate. Bancorp and its subsidiary Banks
are also subject to certain restrictions with respect to engaging in the
underwriting, public sale and distribution of securities.
Tie-In Arrangements. Bancorp and its subsidiary Banks are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example, with
certain exceptions, Bancorp or its subsidiary Banks may not condition an
extension of credit on a customer's obtaining services provided by it or on a
promise from its customer not to obtain other services from a competitor.
State Law Restrictions. As a corporation chartered under the laws of the State
of Washington, Bancorp is also be subject to certain limitations and
restrictions as provided under applicable Washington corporate law.
Securities Registration and Reporting. The common stock of Bancorp is registered
as a class with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 and thus is subject to the periodic reporting
and proxy solicitation requirements and the insider-trading restrictions of that
Act. The periodic reports, proxy statements, and other information filed by
Bancorp under that Act can be inspected and copied at or obtained from the
Washington, D.C., office of the SEC. In addition, the securities issued by
Bancorp are subject to the registration requirements of the Securities Act of
1933 and applicable state securities laws unless exemptions are available.
CONTROL TRANSACTIONS
The Change in Bank Control Act of 1978, as amended, prohibits a person or group
of persons from acquiring "control" of a bank holding company unless the FRB has
been given 60 days' prior written notice of the proposed acquisition, and within
that time period, the FRB has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to the expiration
of the disapproval period if the FRB issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the FRB,
the acquisition of 10 percent or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the FRB
under the BHCA before acquiring 25 percent (5 percent if the company is a bank
holding company) or more of the outstanding shares of Bancorp, or otherwise
obtain control over Bancorp.
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THE BANKS
GENERAL
Despite some recent legislative initiatives to reduce regulatory burdens,
banking remains a highly regulated industry. Legislation enacted from time to
time may increase the cost of doing business, limit or expand permissible
activities, or affect the competitive balance between banks and other financial
and nonfinancial institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks and other financial institutions
are frequently made in Congress, in the Washington State Legislature, and before
various bank regulatory agencies. In addition, there continue to be proposals in
Congress to restructure the banking system.
Some of the significant areas of bank regulation, including significant federal
legislation affecting state-chartered banks, are generally discussed below.
REGULATION OF STATE BANKS
Washington State banks such as the Banks are subject to primary regulation and
examination by the Director and by the FDIC. Applicable federal and state
statutes and regulations governing a bank's operations relate, among other
matters, to capital requirements, required reserves against deposits,
investments, loans, legal lending limits (see below), certain interest rates
payable, mergers and consolidations, borrowings, issuance of securities, payment
of dividends, establishment of branches, and dealings with affiliated persons.
The FDIC also has authority to prohibit banks under their supervision from
engaging in what they consider to be an unsafe and unsound practice in
conducting their business. State banks are permitted by state law to invest, up
to a specified amount of assets or net worth (as defined), in the equity
securities of any business entity except an insurance or travel agency. This and
certain other powers of state banks have been limited by federal legislation
(for additional information see below, "Recent Federal Legislation - Interstate
Banking and Branching").
State banking law provides that the amount of funds which a bank may lend to a
single borrower is generally limited to 20 percent of capital and surplus. For
this purpose, capital includes (i) the amount of common stock outstanding and
unimpaired, (ii) the amount of preferred stock outstanding and unimpaired, and
(iii) capital notes or debentures issued pursuant to RCW 30.36. Surplus includes
capital surplus, reflecting the amounts paid in excess of the par or stated
value of capital stock, or amounts contributed to the bank other than for
capital stock, and undivided profits. As of December 31, 1995, CWB's lending
limit was approximately $1,095,000 and NCWB's lending limit was approximately
$823,000.
REGULATION OF MANAGEMENT
Federal law provides for the circumstances under which officers or directors of
a bank may be removed by the institution's federal supervisory agency, places
restraints on lending by a bank to its executive officers, directors, or
principal shareholders, and prohibits management personnel of a bank from
serving as a director or in other management positions of another financial
institution whose assets exceed a specified amount or which has an office within
a specified geographic area.
CONTROL OF FINANCIAL INSTITUTIONS
No person may acquire "control" of a bank unless the appropriate federal agency
has been given 60 days prior written notice and within that time the agency has
not disapproved the acquisition. Substantial monetary penalties may be imposed
for violation of the change in control or other provisions of banking laws.
State banking laws further require that 30 days prior to the acquisition of
control, defined as direct or indirect ownership, control or power to vote 25
percent or more of the outstanding stock of a bank, the acquiring party must
file with the Director an application containing certain specified information.
Acquisitions of control in violation of the statute are deemed void.
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RECENT FEDERAL LEGISLATION
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") will, over the next two
years, permit nationwide interstate banking and branching. This legislation
generally authorizes interstate branching and relaxes federal law restrictions
on interstate banking. Individual states have authority to "opt out" of certain
of these provisions. The Interstate Act currently allows states to enact
"opting-in" legislation that (i) permits interstate mergers within their own
borders before June 1, 1997, and (ii) permits out-of-state banks to establish de
novo branches within the state. After September 29, 1995, bank holding companies
may purchase banks in any state, and states may not prohibit such purchases.
Additionally, beginning June 1, 1997, banks will be permitted to merge with
banks in other states as long as the home state of neither merging bank has
"opted out." The Interstate Act requires regulators to consult with community
organizations before permitting an interstate institution to close a branch in a
low-income area.
Given that Washington State has permitted interstate banking for a number of
years, this legislation is not expected to have a profound impact on banking in
Washington or on the Banks' operations in particular. Nevertheless, the impact
that the Interstate Act might have on the Banks is impossible to predict.
Since July of 1987, the State of Washington has generally permitted out-of-state
bank holding companies to purchase more than 5 percent of the voting shares of a
Washington-based bank, provided (1) such bank has been doing business for at
least three years prior to the acquisition by the out-of-state bank holding
company of such voting shares, and (2) the state in which the out-of-state bank
holding company is based has reciprocal laws (i.e. permits Washington bank
holding companies to purchase more than 5 percent of the voting shares of banks
chartered under that state's laws).
The Interstate Act broadens interstate banking authority by eliminating the
reciprocity requirement for adequately capitalized bank holding companies.
Washington may enact "opting in" legislation authorizing interstate mergers. In
any event, unless Washington enacts "opting out" legislation, interstate bank
holding companies may, after June 1, 1997, consolidate their banking
subsidiaries into a single interstate institution.
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA").
FDICIA was enacted into law in late 1991. As required by FDICIA, numerous
regulations have been adopted by federal bank regulatory agencies, including the
following: (1) federal bank regulatory authorities have established five
different capital levels for banks and, as a general matter, enable banks with
higher capital levels to engage in a broader range of activities; (2) the FRB
has issued regulations requiring standardized disclosures with respect to
interest paid on deposits; (3) the FDIC has imposed restrictions on the
acceptance of brokered deposits by weaker banks; (4) the FDIC has implemented
risk-based deposit insurance premiums; and (5) the FDIC has issued regulations
requiring state chartered banks to comply with certain restrictions with respect
to equity investments and activities in which the banks act as a principal.
FDICIA recapitalized the Bank Insurance Fund ("BIF") and required the FDIC to
maintain the BIF and Savings Association Insurance Fund ("SAIF") at 1.25 percent
of insured deposits by increasing deposit insurance premiums as necessary to
maintain such ratio. FDICIA also required federal bank regulatory authorities to
prescribe, by December 1, 1993, (1) non-capital standards of safety and
soundness; (2) operational and managerial standards for banks; (3) asset and
earnings standards for banks and bank holding companies addressing such areas as
classified assets, capital, and stock price; and (4) standards for compensation
of executive officers and directors of banks. However, this provision was
modified by recent legislation to allow federal regulatory agencies to implement
these standards through either guidelines or regulations.
The full effect FDICIA will have on financial institutions is not known at this
time and cannot be predicted with certainty. However, FDICIA and similar
legislation and regulatory requirements have historically increased the cost of
doing business, and it is clear that this legislation places a premium on the
maintenance of a strong capital position.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). FIRREA became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in FDIC insurance
premiums paid by commercial banks; (2) created two deposit insurance pools
within the FDIC, one to insure commercial bank and savings bank deposits and the
other to insure savings association deposits; (3) for the first time, permitted
bank
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holding companies to acquire healthy savings associations; (4) permitted
commercial banks that meet certain housing-related asset requirements to secure
advances and other federal services from their local Federal Home Loan Banks;
and (5) greatly enhanced the regulators' enforcement powers by removing
procedural barriers and sharply increasing the civil and criminal penalties for
violating statutes and regulations.
CAPITAL ADEQUACY REQUIREMENTS
The FRB, the FDIC, and the OCC (collectively, the "Federal Banking Agencies")
have established uniform capital requirements for all commercial banks. A bank
that does not achieve and maintain adequate capital levels may be subject to
supervisory action through the issuance of a capital directive to ensure the
maintenance of required capital levels. In addition, banks are required to meet
certain guidelines concerning the maintenance of an adequate allowance for loan
and lease losses.
The Federal Banking Agencies' "risk-based" capital guidelines establish a
systematic, analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations, takes
off-balance sheet exposures into explicit account in assessing capital
adequacy, and minimizes disincentives to holding liquid, low-risk assets. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into several categories, with high levels of capital being
required for the categories perceived as representing greater risk. The risk
weights assigned to assets and credit equivalent amounts of off-balance sheet
items are based primarily on credit risk. Other types of exposure, such as
interest rate, liquidity and funding risks, as well as asset quality problems,
are not factored into the risk-based ratio. Such risks, however, will be taken
into account in determining a final assessment of an organization's capital
adequacy. Under these new regulations, banks are required to achieve a minimum
total risk-based capital ratio of 8 percent.
The Federal Banking Agencies also have adopted leverage ratio standards that
require commercial banks to maintain a minimum ratio of core capital to total
assets (the "Leverage Ratio") of 3 percent. Any institution operating at or near
this level is expected to have well-diversified risk, including no undue
interest rate risk exposure, excellent asset quality, high liquidity and good
earnings, and in general, to be a strong banking organization without any
supervisory, financial or operational weaknesses or deficiencies. Any
institutions experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions, well above the
minimum levels (e.g., an additional cushion of at least 100 to 200 basis points,
depending upon the particular circumstances and risk profile).
Regulations adopted by the Federal Banking Agencies as required by FDICIA impose
even more stringent capital requirements. The regulators require the OCC and
other Federal Banking Agencies to take certain "prompt corrective action" when a
bank fails to meet certain capital requirements. The regulations establish and
define five capital levels at which an institution is deemed to be
"well-capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In order to be
"well-capitalized," an institution must maintain, among other things, at least
10 percent total risk-based capital and a 5 percent Leverage Ratio. Increasingly
severe restrictions are imposed on the payment of dividends and mortgage fees,
asset growth and other aspects of the operations of institutions that fall below
the category of "adequately capitalized" (which requires at least 8 percent
risk-based capital and a 4 percent Leverage Ratio). Undercapitalized
institutions are required to develop and implement capital plans acceptable to
the appropriate federal regulatory agency. Such plans must require that any
company that controls the undercapitalized institution must provide certain
guarantees that the institution will comply with the plan until it is adequately
capitalized. The Banks would qualify as well-capitalized as of December 31,
1995. Also, as of December 31, 1995, the Banks were not subject to any
regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.
FDIC INSURANCE
Generally, customer deposit accounts in banks are insured by the FDIC for up to
a maximum amount of $100,000. The FDIC has adopted a risk-related insurance
assessment system. The risk classification is based on an assignment of the
institution by the FDIC to one of three capital groups and to one of three
supervisory subgroups. The capital groups are "well capitalized," "adequately
capitalized," and "undercapitalized." The three supervisory subgroups are Group
"A" (for financially sound institutions with only a few minor weaknesses), Group
"B" (for those institutions with weaknesses
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which, if uncorrected, could cause substantial deterioration of the institution
and increase risk to the deposit insurance fund), and Group "C' (for those
institutions with a substantial probability of loss to the fund absent effective
corrective action). Recent FDIC proposed rules would reduce the amount of the
assessment that banks or savings associations are required to pay.
In August, 1995, the FDIC published a rule that revised the then current range
to a new range of $.04 to $.31, thereby reducing premiums that some banks would
pay for deposit insurance. The actual rate paid by each bank continued to depend
on how much risk that bank posed to the Bank Insurance Fund ("BIF"). The new
range did not apply to savings associations whose deposits are insured by the
Savings Association Insurance Fund ("SAIF"). Although this rule was effective on
September 15, 1995, the new rates took effect retroactive to June 1, 1995, the
first day of the month following the month in which BIF's mandated reserve ratio
of 1.25 percent was reached. The rule included a mechanism for refunding to
banks any excess premiums that were paid after May 31, 1995.
On November 14, 1995, the FDIC voted to reduce the assessment range even further
to $.00 to $.27 for the semiannual assessment period that began January 1, 1996.
The reduction represents a downward adjustment of 4 basis points from the BIF
assessment rate promulgated in August of 1995. One implication of the zero
marginal assessment is that the largest institutions in the best capital group
will pay the same dollar amount for deposit insurance as the smallest
institutions. Another implication is that the best-rated new institutions will
receive insurance protection essentially premium-free. The FDIC is analyzing
this issue to determine whether new institutions should receive special
assessment treatment for a period of time after they initially become insured.
EFFECTS OF GOVERNMENTAL MONETARY POLICIES
Banking is a business which depends on interest rate differentials. In general,
the difference between the interest rates paid on a bank's deposits and other
interest bearing liabilities and the interest rates earned on a bank's loans,
securities and other interest earning assets is the major source of a bank's
earnings. Thus, the earnings and growth of Bancorp are affected not only by
general economic conditions, but also by the monetary and fiscal policies of the
United States and its agencies, particularly the Federal Reserve. The Federal
Reserve can and does implement national monetary policy for such purposes and
curbing inflation and combating recession, but its open market operations in
United States government securities, control of the discount rate applicable to
the borrowings from the Federal Reserve, and the establishment of reserve
requirements against certain deposits influence growth of bank loans,
investments and deposits and also affect interest rates charged on loans or paid
on deposits. The nature and impact of future changes in monetary policies and
their impact on Bancorp are not predictable.
7
<PAGE> 11
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth the average consolidated balance sheets of
Bancorp for the past three years along with an analysis of net interest earnings
for each major category of interest earning assets and interest bearing
liabilities, the average yield or rate paid on each category, and net yield on
interest earning assets:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------ ------------------------------ ------------------------------
Average Average Average Average Average Average
Balance (1) Interest Rate Balance (1) Interest Rate Balance (1) Interest Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Loans (2)
Commercial and agricultural $ 65,485 $ 6,745 10.30% $ 52,338 $ 5,061 9.67% $ 38,927 $ 3,742 9.61%
Real estate 38,494 3,494 9.08% 30,352 2,681 8.83% 21,633 2,132 9,86%
Consumer and other 24,902 2,450 9.84% 20,617 2,089 10.13% 15,856 1,655 10.44%
-------- ------- ------ -------- ------- ------ -------- ------- ------
128,881 12,689 9.85% 103,307 9,831 9.52% 76,416 7,529 9.85%
Securities
Taxable 39,097 2,120 5.42% 38,828 1,941 5.00% 32,484 1,692 5.21%
Nontaxable (3) 4,637 332 7.16% 5,551 373 6.72% 5,790 435 7.51%
Federal funds sold and other
interest earning assets 9,682 561 5.79% 9,915 431 4.35% 7,955 245 3.08%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest earning
assets 182,297 15,702 8.61% 157,601 12,576 7.98% 122,645 9,901 8.07%
NON-INTEREST EARNING ASSETS
Cash and due from banks 9,774 8,436 6,667
Other assets 8,658 8,095 6,355
Less: allowance for loan loss (1,740) (1,464) (1,120)
-------- -------- --------
Total $198,989 $172,668 $134,547
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Interest bearing demand $ 38,900 $ 804 2.07% $ 36,832 $ 764 2.07% $ 29,086 $ 750 2.58%
Savings deposits 47,789 1,511 3.16% 46,092 1,327 2.88% 34,175 1,067 3.12%
Time deposits 64,150 3,484 5.43% 46,610 1,989 4.27% 34,780 1,575 4.53%
-------- ------- ------ -------- ------- ------ -------- ------- ------
150,839 5,799 3.84% 129,534 4,080 3.15% 98,041 3,392 3.46%
Short-term borrowings 2,670 145 5.43% 1,962 102 5.20% 2,897 70 2.42%
Notes payable 2,906 236 8.12% 2,636 152 5.77% 1,534 66 4.30%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest bearing
liabilities 156,415 6,180 3.95% 134,132 4,334 3.23% 102,472 3,528 3.44%
NON-INTEREST BEARING LIABILITIES
AND STOCKHOLDERS' EQUITY
Demand deposits 25,576 23,934 18,873
Other 2,364 1,647 1,461
Stockholders' equity 14,634 12,955 11,741
-------- -------- --------
Total $198,989 $172,668 $134,547
======== ======== ========
Net interest income $ 9,522 $ 8,242 $ 6,373
======= ======= =======
Net yield on earning assets 5.22% 5.23% 5.20%
====== ====== ======
Tax equivalent adjustment (3) $ 113 $ 127 $ 148
</TABLE>
(1) For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2) Included in interest on loans are amortized loan fees which totalled
$345,000, $378,000, and $307,000 during 1995, 1994, and 1993, respectively.
(3) Taxable equivalent adjustment is computed using a 34% tax rate.
8
<PAGE> 12
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
--------------------- ---------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans:
Commercial $ 1,337 $ 347 $ 1,684 $ 1,297 $ 22 $ 1,319
Real estate 737 76 813 788 (239) 549
Consumer and other 423 (61) 362 484 (50) 434
------- ----- ------- ------- ----- -------
Total 2,497 362 2,859 2,569 (267) 2,302
Securities:
Taxable 14 167 181 319 (70) 249
Non-taxable (64) 20 (44) (17) (45) (62)
Other interest earning assets (10) 139 129 70 116 186
------- ----- ------- ------- ----- -------
Total interest
earning assets 2,437 688 3,125 2,941 (266) 2,675
INTEREST PAID ON:
Deposits:
Interest bearing demand 43 (4) 39 178 (164) 14
Savings deposits 50 134 184 348 (88) 260
Time deposits 867 628 1,495 510 (96) 414
------- ----- ------- ------- ----- -------
Total 960 758 1,718 1,036 (348) 688
Short-term borrowing (1) 35 (2) 33 (29) 61 32
Note payable 17 78 95 58 28 86
------- ----- ------- ------- ----- -------
Total interest bearing
liabilities 1,012 834 1,846 1,065 (259) 806
------- ----- ------- ------- ----- -------
Net interest income $ 1,425 $(146) $ 1,279 $ 1,876 $ (7) $ 1,869
======= ===== ======= ======= ===== =======
</TABLE>
The change in interest due to volume and rate has been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts of
the change in each.
(1) Short-term borrowing includes federal funds purchased, securities sold under
agreements to repurchase, and the Treasury Tax and Loan account.
9
<PAGE> 13
SECURITIES PORTFOLIO
Securities
The carrying values of the major classifications of securities were as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U. S. Treasury and other
U. S. Government agencies
and corporations $25,738 $25,635 $33,573 $11,962 $15,788 --
States and political
subdivisions 102 81 -- 4,720 4,384 6,178
Other securities 496 573 1,671 37 44 --
------- ------- ------- ------- ------- ------
Total $26,336 $26,289 $35,244 $16,719 $20,216 $6,178
</TABLE>
Analysis of Securities Portfolio
The following table (dollars in thousands) sets forth the stated maturities of
securities at December 31, 1995, and the weighted average yields of such
securities (calculated on the basis of the cost and effective yield weighted for
the scheduled maturity of each security). Mortgage backed securities are
reported at their estimated average life. Yields on tax exempt obligations have
been computed on a tax equivalent basis using a 34% tax rate.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------
After One After Five
But Within But Within
Within One Yr. Five Yrs. Ten Years After Ten Years
-------------- ---------- ---------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
- ------------------
U.S. Treasury & other
U.S. Gov't agencies
and corporations $19,184 5.27% $6,554 5.81% $ -- --% $ -- --%
States and political
subdivisions -- -- -- -- -- -- 102 8.13
Other securities 496 4.97 -- -- -- -- -- --
------- ---- ------ ---- ------ ---- ---- ----
Total $19,680 5.27% $6,554 5.81% $ -- --% $102 8.13%
Held to Maturity
- ----------------
U.S. Treasury & other
U.S. Gov't agencies
and corporations $ 9,477 5.50% $1,666 5.72% $ 809 6.32% $ 10 9.36%
States and political
subdivisions 1,584 4.96 2,343 6.15 793 6.89 -- --
Other securities -- -- 37 6.37 -- -- -- --
------- ---- ------ ---- ------ ---- ---- ----
Total $11,061 5.42% $4,046 5.95% $1,602 6.60% $ 10 9.36%
</TABLE>
States and political subdivisions at December 31, 1995, included $4,732,000 of
debt securities issued by the State of Washington and its political
subdivisions. The market value of these securities totalled $4,759,000. These
tax exempt securities were purchased to reduce Bancorp's effective marginal tax
rate.
For additional information concerning securities, see Notes 1 and 3 of "Notes to
Consolidated Financial Statements".
10
<PAGE> 14
LOAN PORTFOLIO
The amount of loans outstanding at the indicated dates are shown in the
following table according to type of loans.
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 20,426 15.37% $ 18,255 14.94% $11,073 14.28% $11,194 15.00% $12,463 17.64%
Real Estate
Construction 8,018 6.03% 5,649 4.62% 1,573 2.03% 4,929 6.60% 3,845 5.44
Commercial 27,306 20.55% 25,736 21.07% 20,135 25.97% 16,938 22.69% 15,679 22.19
1-4 single family 39,640 29.83% 38,801 31.77% 22,860 29.49% 23,186 31.06% 19,237 27.22
Installment 19,891 14.97% 18,727 15.33% 12,868 16.60% 12,001 16.08% 12,497 17.69
Agricultural 13,594 10.23% 12,750 10.44% 6,839 8.82% 4,683 6.27% 5,466 7.74
All other 4,019 3.02% 2,232 1.83% 2,182 2.81% 1,715 2.30% 1,473 2.08
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total $132,894 100.00% $122,150 100.00% $77,530 100.00% $74,646 100.00% $70,660 100.00%
======== ====== ======== ====== ======= ====== ======= ====== ======= ======
</TABLE>
The following table shows the maturity analysis of loans outstanding (excluding
real estate mortgage, installment, and other loans) as of December 31, 1995.
Also provided are the amounts due after one year classified according to the
sensitivity to changes in interest rates:
<TABLE>
<CAPTION>
Maturing
--------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $12,631 $ 6,125 $ 1,670 $20,426
Real Estate
Construction 6,869 1,076 73 8,018
Agricultural 9,237 3,340 1,017 13,594
------- ------- ------- -------
$28,737 $10,541 $ 2,760 $42,038
======= ======= ======= =======
Loans maturing after one year with:
Predetermined
interest rates $ 4,592 $ 2,760
Floating or
adjustable
interest rates 5,949 --
------- -------
Total $10,541 $ 2,760
======= =======
</TABLE>
Risk Elements
Risk elements include accruing loans past due ninety days or more, non-accrual
loans, and loans which have been restructured to provide a reduction or deferral
of interest or principal for reasons related to the debtors financial
difficulties, potential problem loans, and loan concentrations.
The Bank's policy for placing loans on non-accrual status is based upon
management's evaluation of collectibility of both principal and interest.
Generally, loans with interest or principal payments which are ninety days or
more past due are placed on non-accrual, and the interest accrued is reversed
against income.
11
<PAGE> 15
The following table summarizes the Bank's non-accrual, past due and restructured
loans for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
LOANS ACCOUNTED FOR
ON A NONACCRUAL BASIS:
Commercial $ 71 $ 84 $ 79 $ 67 $21
Real estate
Construction -- 3 -- -- --
Mortgage 127 131 4 71 5
Installment 30 47 65 22 17
Agricultural -- 123 123 -- --
---- ---- ---- ---- ---
Total $228 $388 $271 $160 $43
==== ==== ==== ==== ===
ACCRUING LOANS WHICH ARE
PAST DUE 90 DAYS OR MORE:
Installment -- -- -- 3 --
Agricultural -- 129 -- -- --
---- ---- ---- ---- ---
Total $ -- $129 $ -- $ 3 $--
==== ==== ==== ==== ===
RESTRUCTURED LOANS -- -- -- -- --
</TABLE>
The gross interest income on non-accrual loans that would have been recorded
during 1995, if the loans had been current in accordance with their original
terms and had been outstanding throughout the year or since origination if held
for part of the year, amounts to $73,000. Interest in the amount of $42,000 was
included in income during 1995 on non-accrual loans; the difference between the
gross income and the amount included in income, or $31,000, represents the
amount of interest lost during the year on those loans classified as non-accrual
at December 31, 1995.
There are approximately $1,827,000 of loans classified current (and which are
performing) on which there are doubts as to the ability of the borrower to
comply with the loan repayment terms in the future. Of this amount, management
believes that approximately $1,682,000 of such loans have sufficient collateral
to cover the debt in the event of liquidation. These loans have been considered
by Bancorp in establishing the allowance for loan losses.
At December 31, 1995, the Bank had no foreign loans outstanding and no loan
concentrations, except for those indicated in the first table under "Loan
Portfolio", exceeding 10 percent of total loans.
Management believes all material restructured loans have been identified based
upon the Bank's loan data system and management's awareness of the loan files
and customer contact.
12
<PAGE> 16
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Bank's loan loss experience for each of the
last five years ended December 31:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1995 1994 1993 1992 1991
------ ------- ------- ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance for loans losses
at the beginning of years $1,667 $1,156 $ 978 $ 955 $1,090
Charge-offs:
Commercial 61 15 76 52 111
Real Estate Construction - - - - -
Real Estate Mortgage 67 - - - -
Installment 64 30 13 45 46
Agricultural - 5 13 - 162
All Other 36 14 17 12 2
------ ------ ------ ------ ------
Total Loan Charge-offs $ 228 $ 64 $ 119 $ 109 $ 321
Recoveries:
Commercial $ 194 $ 127 $ 116 $ 45 $ 103
Real Estate Construction - - - - -
Real Estate Mortgage 9 27 - - -
Installment 24 21 5 75 41
Agricultural 4 5 174 11 42
All Other 5 2 2 1 -
------ ------ ------ ------ ------
Total Loan Recoveries $ 236 $ 182 $ 297 $ 132 $ 186
Net Recoveries (charge-offs) $ 8 $ 118 $ 178 $ 23 $ (135)
Changes Incident to Acquisitions - 393 - - -
Additions Charged to Operations 120 - - - -
------ ------ ------ ------ ------
Balance at end of years $1,795 $1,667 $1,156 $ 978 $ 955
====== ====== ====== ====== ======
</TABLE>
The amount charged to operations and the related balance in the allowance for
loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, classification of loans, and management's estimation of future
potential losses.
The 1995 increase in total loan charge-offs reflects a significant increase
over 1994 and 1993 due to several factors. They include a weaker economic
market and trend and because of the acquisition of North Central which added
additional charge-offs in 1995 as compared to 1994. In many instances,
charge-offs were taken due to the length of delinquency even though the bank
holds a strong collateral position. Many of the 1995 charge-offs are expected
to result in recoveries as collateral positions are liquidated.
The allowance for loan losses should not be interpreted as an indication that
charge-offs will occur in these amounts or proportions, or that the allocation
indicates future charge-off trends. Furthermore, the portion allocated to each
category is not the total amount available for future losses that might occur
within such categories.
13
<PAGE> 17
<TABLE>
<CAPTION>
Allowance for Loan Losses at December 31
----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
Amount % Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 308 17% $ 233 14% $ 398 34% $ 207 21% $ 238 25%
Real Estate
Construction 80 4 46 3 41 4 49 5 52 5
Real Estate
Mortgage 726 41 576 35 323 28 386 39 354 37
Installment 254 14 192 12 172 15 222 23 209 22
Agricultural 205 11 158 9 113 10 97 10 80 8
All Other 82 5 17 1 14 1 17 2 22 3
Unallocated 140 8 445 26 95 8 - - - -
------ --- ------ --- ------ --- ----- --- ----- ---
Total $1,795 100% $1,667 100% $1,156 100% $ 978 100% $ 955 100%
====== === ====== === ====== === ===== === ===== ===
</TABLE>
The following table sets forth by major category the ratio of net loans charged
off (recovered) to total average loans outstanding:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Commercial (.10)% (.15)% (.05)% .01% .01%
Real Estate Construction - - - - -
Real Estate Mortgage .04 (.04) - - -
Installment .03 .02 - (.04) .01
Agricultural - - (.21) (.02) .18
All Other .02 .02 .03 .02 -
---- ---- ---- ---- ---
Total (.01)% (.15)% (.23)% (.03)% .20%
===== ==== ==== ==== ===
</TABLE>
For additional information, see "Management's Discussion and Analysis or plan
of Operations - Provision for Loan Losses".
DEPOSITS
The average daily amount of deposits and rates paid on savings deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ----- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Non-interest bearing demand $ 25,576 - % $ 23,934 - % $ 18,873 - %
Interest bearing demand 38,900 2.06 36,832 2.07 29,086 2.58
Savings deposits 47,789 3.16 46,092 2.88 34,175 3.12
Time deposits 64,150 5.43 46,610 4.27 34,780 4.53
-------- -------- --------
$176,415 $153,468 $116,914
</TABLE>
14
<PAGE> 18
Maturities of time certificates of deposits of $100,000 or more outstanding as
of December 31, 1995, are summarized as follows:
(dollars in thousands)
<TABLE>
<S> <C>
3 months or less $ 6,939
Over 3 months through 6 months 2,714
Over 6 months through 12 months 2,136
Over 12 months 1,670
-------
$13,459
=======
</TABLE>
Deposits by foreign depositors at December 31, 1995, 1994, and 1993 were
insignificant. For additional information, see Note 7 of "Notes to
Consolidated Financial Statements".
SIGNIFICANT FINANCIAL RATIOS
The following table sets forth consolidated operating and capital ratios for
the last three years:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Return on average assets 1.28% 1.02% 1.35%
Return on average equity 17.5% 13.6% 15.5%
Average equity to average asset ratio 7.4% 7.5% 8.7%
Dividend payout ratio to net income 23.6% 33.7% 29.6%
</TABLE>
SHORT-TERM BORROWINGS
For the years ended December 31, 1995, 1994, and 1993 short-term borrowings
consisted primarily of federal funds purchased, treasury tax and loan, and
securities sold under agreements to repurchase. The following is a summary of
consolidated short-term debt for the years indicated:
<TABLE>
<CAPTION>
Securities Sold Treasury
Under Repurchase Federal Funds Tax and Loan
---------------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C>
Year ended December 31,
1995 $ 734 $ 1,505 $ 656
1994 412 866 922
1993 601 776 588
Weighted average interest
rate at year end:
1995 5.53% 5.53% 5.15%
1994 6.06 6.06 5.52
1993 2.63 2.63 2.76
Maximum amount outstanding
during the year:
1995 $ 1,090 $ 2,408 $ 1,345
1994 600 2,215 1,178
1993 830 3,493 1,368
Average amount outstanding
during the year:
1995 $ 598 $ 1,460 $ 599
1994 427 966 568
1993 617 1,639 641
Weighted average interest
rate during the year:
1995 5.62% 5.74% 2.76%
1994 3.86 3.83 2.38
1993 2.61 2.67 1.69
</TABLE>
15
<PAGE> 19
The average amounts outstanding are principally daily averages, and the average
interest rates for the year are computed by dividing the respective interest
expense by the average balance.
For additional information, see Note 8 of "Notes to Consolidated Financial
Statements".
ITEM 2 DESCRIPTION OF PROPERTY
Bancorp maintains its office at 301 North Chelan, Wenatchee, Washington, which
is the same location as Central's main office. The building has, with
additions, approximately 27,000 square feet of office space, three drive-up
lanes, one walk-up window, 105 parking spaces, and one drive-up ATM. The
building was built in 1938, and was extensively remodeled in 1983.
Bancorp, through its subsidiaries, owns the following buildings and property:
East Wenatchee (4,176 square feet; purchased in 1984), Chelan (6,997 square
feet; built in 1969), Leavenworth (3,608 square feet; built in 1992), Manson
(1,756 square feet; built in 1982), Omak (7,658 square feet; built in 1970),
Brewster (5,862 square feet; built in 1979), Tonasket (6,226 square feet; built
in 1975), and Oroville (5,754 square feet; built in 1978).
Bancorp leases 3,760 square feet of office space in Cashmere, Washington, which
was built in 1993.
Other information regarding premises and equipment can be located in Notes 1
and 6 to "Notes to the Consolidated Financial Statements".
ITEM 3 LEGAL PROCEEDINGS
Bancorp and the Subsidiary Banks are party to legal actions from time to time
as part of their normal course of business. Management, after consulting with
counsel in these matters, believes that the outcome of these cases will not
have a materially adverse effect upon Bancorp's or the Subsidiary Banks'
financial position or results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995, no matters were submitted to a vote of
Bancorp's security holders.
16
<PAGE> 20
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bancorp's common stock is currently traded over the counter by a local
brokerage firm. Trading in Bancorp's common stock has not been extensive, and
such trades cannot be characterized as amounting to an active trading market.
Prices for 1995 and 1994 are estimates of Bancorp based on transactions known
to Bancorp. Prices do not include any retail markups, markdowns, or
commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C> <C>
1995
First Quarter $21.88 $20.00
Second Quarter 22.00 20.00
Third Quarter 22.00 21.00
Fourth Quarter 23.00 21.50
For the Year 23.00 20.00
1994
- ----
First Quarter $20.00 $20.00
Second Quarter 20.00 20.00
Third Quarter 20.00 20.00
Fourth Quarter 21.88 20.00
For the Year 21.88 20.00
</TABLE>
As of January 10, 1996, the number of holders of record of Bancorp's common
stock as reflected on Bancorp's stock ledger was 334.
For information concerning Bancorp's common stock and related security holder
matters, see Note 11 "Stockholders' Equity" of the Notes to Consolidated
Financial Statements.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion is provided for the consolidated operations of Bancorp
which includes Central Bancorporation and its wholly owned subsidiaries,
Central Washington Bank (Central) and North Central Washington Bank (North
Central).
The purpose of this discussion is to focus on significant factors affecting
Bancorp's financial condition and results of operations. This discussion
should be read along with the Consolidated Financial Statements (including the
notes thereto) and the Statistical Disclosure by Bank Holding Companies
presented in Item 1 of this report for an understanding of the following
discussion and analysis. In this discussion, net interest income and net
interest margin are presented on a fully taxable equivalent basis. All per
share data is adjusted to reflect all stock dividends and stock splits.
As discussed in Note 18 to the Consolidated Financial Statements, on April 30,
1994, Bancorp completed the cash purchase of 100 percent of the stock of First
Bank Washington, the wholly owned subsidiary of FBS Washington Bancorporation
and First Bank System, Inc. As of May 1, 1994, First Bank Washington's name
was changed to North Central Washington Bank.
Because of the acquisition, the financial statements presented in this report
are not comparable. For a proforma presentation of the financial statements,
please refer to Note 18 to "Notes to the Consolidated Financial Statements".
The proforma statement assumes the acquisition occurred on January 1, 1994, for
the Statement of Operation. It should be noted that the proforma statements
may not be indicative of the results that would have occurred if the
acquisition had been effective on the dates indicated or of the results that may
be obtained in the future.
17
<PAGE> 21
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1995 1994
-------- --------
(amounts in thousands, except per share and ratio data)
<S> <C> <C>
Net interest income $ 9,409 $ 8,115
Net income 2,555 1,765
Per share data: (1)
Net income 2.46 1.70
Cash dividends .60 .60
Book value (equity) per share 15.63 13.41
Notes payable (average) 2,906 2,636
Total average equity 14,634 12,955
Total average assets 198,989 172,668
Ratios:
Net income to average equity 17.5% 13.6%
Net income to average assets 1.28% 1.02%
Net interest income to average
Earning assets 5.2% 5.2%
Average equity to avg. assets 7.4% 7.5%
Average loans to avg. deposits 73.1% 67.3%
Average Number of Shares
Outstanding (1) 1,038 1,035
</TABLE>
(1) After retroactive adjustment for all stock splits and dividends and
including shares issuable under stock option plans, when dilutive.
RESULTS OF OPERATIONS
Net income for 1995 was $2,555,000, representing a 45 percent increase over
1994 net income of $1,765,000. Net income per share was $2.46 in 1995 compared
to $1.70 per share in 1994. For 1995 and 1994, the return on average assets
was 1.28 percent and 1.02 percent, respectively. Return on average equity was
17.5 percent in 1995 compared to 13.6 percent in 1994.
In 1995 results of operations compared to 1994 included the following
contributing factors which are addressed more fully in other sections of this
discussion.
/ / Net interest income increased $1,294,000 or 16 percent in 1995,
primarily as a result of an increase in average earning assets associated
with the North Central acquisition and because of an increase in Bancorp's
average loan portfolio which represents 73.1 percent of average deposits
in 1995 as compared to 67.3 percent in 1994.
/ / A significant increase in gains on Bancorp's sale of loans and a
decrease in the loss on available-for-sale securities. The gains and
losses recorded during 1994 resulted from significant increases in both
short- and long-term interest rates. Interest rates were relatively
stable during 1995.
/ / Other expenses increased $826,000 or 12 percent in 1995, attributable
primarily to a $611,000 increase in salaries and employee benefits
($224,000 from North Central and $268,000 related to Bancorp incentive
plans) and $246,000 in other expenses primarily related to the North
Central acquisition offset by a reduction in deposit insurance
assessments. Bancorp's efficiency ratio, however, improved to 67 percent
in 1995 as compared to 73 percent last year.
NET INTEREST INCOME
Net interest income, Bancorp's primary source of revenue, is the difference
between the amount of interest and fees
18
<PAGE> 22
generated by earning assets, primarily loans and securities, that exceeds the
interest cost of deposits and purchased funds. Net interest income on a tax
equivalent basis adjusts tax exempt income to an amount which would have been
earned had the income been fully subject to income tax. This discussion is
based upon tax equivalency.
The following table (in thousands) summarizes the adjustments made to interest
income as reported in the Consolidated Statements of Operations to arrive at
net interest income. All rates used in the analysis following this table are on
a tax-equivalent basis using 34%.
<TABLE>
<CAPTION>
1995 vs
1995 1994 1994
------- ------- -------
<S> <C> <C> <C>
Total interest income $15,589 $3,140 $12,449
Plus tax-equivalent adjustment 113 (15) 127
------- ------ -------
Interest income(tax-equivalent) 15,702 3,126 12,576
Less interest expense 6,180 1,846 4,334
------- ------ -------
Net interest income,
(tax-equivalent basis) $ 9,522 $1,280 $ 8,242
======= ====== =======
Yield on earning assets 8.61% 7.98%
Cost of funds 3.95% 3.23%
Net interest margin 5.22% 5.23%
</TABLE>
The following discussion regarding net interest income should be read in
conjunction with Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential presented in Item I of this report.
Net interest income during 1995 totaled $9,522,000, a $1,280,000 (15.5 percent)
increase over 1994. The increase resulted from an increase in average earning
assets, while net interest margin remained relatively unchanged. The
acquisition of North Central contributed $885,000 to net interest income during
1995.
Net interest income is influenced by changes in both interest rate(s) and
changes in interest-bearing assets and liabilities (volume).
Bancorp's average earning assets in 1995 increased $24,696,000 ($16,304,000
from North Central) over 1994 while Bancorp's average interest-bearing
liabilities increased $22,283,000 ($13,823,000 from North Central). Excluding
the volume from the North Central acquisition, Bancorp's average earning assets
increased $8,392,000 while Bancorp's interest bearing liabilities increased
$8,460,000. The difference between the interest earned and the interest paid
on this increased volume, including North Central, resulted in approximately
$1,424,000 in additional net interest income during 1995.
The yield on earning assets increased 63 basis points during 1995 to 8.61
percent as compared to 7.98 percent last year. An increase in yield was
experienced in both loans as securities and reflects the repricing of lower
rate maturing loans and securities to higher rates. Bancorp's cost of funds
also increased 72 basis points during 1995 to 3.95 percent as compared to 3.23
percent last year. The decrease also reflects the repricing of lower rate
deposits to higher rates. Because the increase in the cost of funds was
slightly higher than the increase in the yield on earning assets, Bancorp's net
interest margin decreased from 5.23 percent to 5.22 percent during 1994 and
1995, respectively.
Interest rates increased significantly during 1994, leveled off during the
first half of 1995, and decreased slightly during the second half of 1995. The
changes in interest rates have not impacted Bancorp's net interest margin
significantly. However, because Bancorp is liability-sensitive to interest
rates, a change in the direction of rates may have an impact on Bancorp's net
interest margins. Generally when interest rates increase, Bancorp's net
interest margin may decrease and if interest rates decrease, Bancorp's net
interest margin may increase. The impact on Bancorp's net interest margin is
also dependent on the magnitude and direction of future interest rates, deposit
customer alternatives, and Bancorp's need for liquidity.
Bancorp has approximately $95.2 million in earning assets repricing or maturing
within the next year. As a repricing offset, Bancorp has approximately $52.3
million in certificates of deposit maturing in one year and $86.0 million in
savings and checking accounts whose interest rates may increase or decrease
along with other market rates. Historically, the interest rates paid on
savings and checking accounts lag and do not increase as far as the rates
earned on loans and investments. During 1995, strong loan demand has resulted
in competitive pressures among banks to keep deposit rates relatively high and
these high rates may have a negative impact on Bancorp's net interest margin.
19
<PAGE> 23
In order to help protect Bancorp against significant rising interest rates,
Bancorp has a high proportion of its securities classified as
available-for-sale. These securities have maturities within one to three years
and may be sold prior to maturity. If they are sold prior to maturity, Bancorp
may experience losses which may be offset by high interest income when
reinvested at higher yields.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Bancorp provided approximately $120,000 for loan losses during 1995 compared to
no provisions during 1994. Bancorp had net loan recoveries of $8,000 in 1995
and $118,000 during 1994. The 1995 provision resulted from the slowdown in net
recoveries and because of an increase in Bancorp's loans outstanding. The
provision should be characterized as a general provision not related to any
specific or impaired loans.
The allowance for loan losses totalled $1,795,000 (1.35 percent of loans) at
December 31, 1995, compared to $1,667,000 (1.36 percent of loans) at December
31, 1994. Based upon management's continuing evaluation of inherent risks in
the current loan portfolio, current levels of classified assets, and economic
factors, management believes the allowance to be adequate to absorb potential
losses in the current portfolio.
OTHER INCOME
The following table summarizes the changes in the components of other income
(in thousands):
<TABLE>
<CAPTION>
1995 vs
1995 1994 1994
------ ------- ------
<S> <C> <C> <C>
Mortgage loan servicing fees $ 213 $ 13 $ 200
Service charges on
deposit accounts 1,019 164 855
Gain on sale of loans, net 478 435 43
Loss on sale of
securities, net - 244 (244)
Credit card fees 62 17 45
Contract collection fees 17 - 17
Insurance commissions 59 (33) 92
Data processing fees 137 5 132
Other 310 (7) 317
------ ----- ------
Total other income $2,295 $ 838 $1,457
====== ===== ======
</TABLE>
Other income, excluding security losses, increased $594,000 (35 percent) during
1995 compared to 1994. An increase in service charges on deposits ($99,000
from North Central) and gain on sale of loans net was primarily responsible for
the increase.
Losses realized on securities during 1994 were the result of the sale of
Bancorp's longer-term available for sale debt securities. Consistent with
Bancorp's internal policies, these assets were sold because of the increase in
interest rates and the resulting negative impact on capital which occurs as the
result of the accounting provisions of SFAS No. 115 as well as the adverse
impact on net interest margin.
Bancorp is active in mortgage banking, i.e., the origination and sale of real
estate loans. Fees received for originating these loans are deferred and later
recognized as income at the time of sale. These fees are included in the gain
on sale of loans.
Real estate loan volume and related fees are generally dependent on the
direction of interest rates. As rates decrease, loan origination volume and
fees usually increase, and as rates increase, loan origination volume and fees
normally decrease. During 1995, Bancorp originated approximately $28.7 million
real estate loans compared to $22.1 million in 1994.
Gain on sale of loans, which includes the origination fees when loans are sold,
is also dependent on the direction of rates and the volume of loans sold.
Bancorp sells loans to investors in the secondary market at yields different
than the originated yield, which result in gains and losses. As interest rates
increase, the opportunity for gains decrease and as interest rates
20
<PAGE> 24
decrease, the opportunity for gains increase. The volume of real estate loans
sold during 1995 was $19.2 million compared to $13.9 million in 1994.
In addition to the 1995 sales of real estate loans, Bancorp sold approximately
$3.4 million of commercial loans guaranteed by the Small Business
Administration (SBA). These sales were also to secondary market investors and
resulted in approximately $54,000 in gains.
OTHER EXPENSES
The following table summarizes the changes in the components of other expenses
and the increase related to the North Central acquisition (in thousands):
<TABLE>
<CAPTION>
1995 vs 1995 vs 1994
1995 1994 1994 North Central
------ ------- ------- -------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $4,208 $ 611 $3,597 $ 273
Occupancy expense of premises 518 41 477 23
Printing, stationery and
supplies 361 96 265 27
Equipment and data processing 711 1 710 -
Legal and professional 172 60 112 21
Business and occupation taxes 212 50 162 18
Audits and examinations 135 32 103 2
Marketing 76 (62) 138 7
Insurance 84 19 65 (6)
FDIC assessments 201 (135) 336 (15)
Postage 154 38 116 27
Telephone & telegraph 119 19 100 11
Other 818 56 762 8
------ ------ ------ ------
Subtotal $7,769 $ 826 $6,943 $ 396
====== ====== ====== ======
</TABLE>
Other expenses increased $826,000 or 12 percent during 1995 compared to 1994.
Excluding the North Central impact of $396,000, expenses increased $430,000 or
6 percent. Most of the increase occurred in salaries and employee benefits
($244,000 was from North Central and $268,000 was related to Bancorp's profit
based incentive plans) offset by a decrease in deposit insurance assessment.
During the third quarter of 1995, the Federal Deposit Insurance Corporation
(FDIC) adopted a rule which reduced the assessment banks pay for deposit
insurance from $.23 to $.31 per $100 of insured deposits to a new range of $.00
to $.31. The actual rate paid by each bank will continue to depend on how much
risk it poses to the Bank Insurance Fund (BIF). Assuming the bank remains in
the same risk category, the annual pre-tax savings to Bancorp would be
approximately $396,000 based on a deposit assessment base of $174,000,000.
Other expenses as a percent of average assets was 3.9 percent in 1995 compared
to 4.0 percent in 1994. Bancorp's efficiency ratio (operating expenses as a
percent of operating income) improved to 67 percent in 1995 compared to 73
percent last year. Bancorp anticipates these ratios to improve as its
Leavenworth and Cashmere facilities, which were started de novo during the past
five years, gain profitability as loan and deposit volumes increase and as
efficiencies associated with the acquisition of North Central continue to be
realized.
FINANCIAL CONDITION
Bancorp functions as a financial intermediary, and as such its financial
condition should be examined in terms of trends in sources and uses of funds.
21
<PAGE> 25
CENTRAL BANCORPORATION
<TABLE>
<CAPTION>
SOURCES AND USES OF FUNDS TRENDS 1994-1995
Increase (Decrease)
1995 1994
Average Average
Balance Amount % Balance
------- ------- ----- -------
<S> <C> <C> <C> <C>
FUNDING USES
Earning Assets
Loans $128,881 $25,574 24.8% $103,307
Taxable investment securities 39,097 269 .7% 38,828
Non-taxable investment securities 4,637 (914) (16.5%) 5,551
other interest earning assets 9,682 (233) (2.3%) 9,915
-------- ------- ----- --------
Total earning assets 182,297 24,696 15.7% 157,601
cash and due from banks 9,774 1,338 15.9% 8,436
other funding uses 6,918 287 4.3% 6,631
-------- ------- ----- --------
Total funding uses 198,989 26,321 15.2% 172,668
FUNDING SOURCES
Interest bearing liabilities
Interest bearing deposits 150,839 21,305 16.4% 129,534
Short-term borrowings 2,670 708 36.1% 1,962
Note payable 2,906 270 10.2% 2,636
-------- ------- ----- --------
Total interest bearing liabilities 156,415 22,283 16.6% 134,132
Non-interest demand deposits 25,576 1,642 6.9% 23,934
Stockholders' equity 14,634 1,679 13.0% 12,955
Other sources 2,364 717 43.5% 1,647
-------- ------- ----- --------
Total funding uses $198,989 $26,321 15.2% $172,668
</TABLE>
Total average earning assets increased $24.7 million or 15.7 percent and total
average interest bearing liabilities increased $22.3 million or 16.6 percent,
in 1995. The acquisition of North Central was responsible for approximately
$16.9 million of the increase in earning assets and approximately $20 million
of the increase in interest bearing liabilities. Excluding North Central,
average earning assets and interest bearing liabilities increased $7.8 million
and $2.3 million, respectively.
Average loans, the largest use of funds, increased $25.6 million ($12.8 million
from North Central) or 24.8 percent. The $12.8 million increase (excluding
North Central) was primarily in commercial, agricultural, and real estate
loans. The loan increase was funded with a reduction in investment securities,
as Bancorp increased its loan-to-deposit ratio from 67 percent in 1994 to 73
percent in 1995, and from an increase in deposits.
Total average deposits increased $22.9 million ($15.8 million from North
Central). Excluding North Central, the $7.1 million increase was primarily in
time certificates of deposit offset by a decrease in savings and demand
deposits. Depositors increased their investment in time certificate of
deposits as the interest rate differential between savings and demand deposit
alternatives increased.
Total stockholders' equity increased $1.7 million or 13.0 percent in 1995 as a
result of the retention of 1995 earnings and stock options exercised, partially
offset by the payment of cash dividends.
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
Certain information concerning non-accruals, past due and restructured loans as
set forth in the following tables and in Item 1 under Risk Elements of this
report.
22
<PAGE> 26
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
(dollars in thousands)
<S> <C> <C>
Non-accrual loans $228 $388
Accruing loans past due
90 days or more - 129
Restructured loans - -
Interest foregone on
non-accrual loans 31 14
Past due and non-accrual
loans as percentage of
loans .17% .42%
</TABLE>
The total of accruing loans past due 90 days or more and non-accrual loans
decreased $289,000 to $228,000 at December 31, 1995 compared to $517,000 at
December 31, 1994. The decrease in non-accrual loans was in agricultural
loans. The decrease in accruing loans past due 90 days or more was related to
one loan in 1994 which was subsequently paid current in 1995.
Bancorp does not presently anticipate any significant losses with respect to
these loans or any other assets not reported above.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest earning
assets and interest bearing liabilities. Liquidity represents the ability of
Bancorp to meet maturing obligations and existing commitments, to provide funds
necessary to respond to fluctuations in deposit levels, to fund operations, and
to provide for customers' credit needs.
Liquidity can be provided from both the asset and liability sides of the
balance sheet. On the asset side, liquidity arises primarily through
maturities of investments, daily receipt of principal and interest payments on
loans, and the sale of loans and investments to investors in the secondary
market. Liquidity on the liability side involves the ability of Bancorp to
attract and retain deposits and other funds at a reasonable cost. The Bank has
not actively sought deposits from outside of its service area or from
large-denomination time certificates of deposits which are available to the
highest bidder. Other sources of liquidity include the purchase of Federal
funds, repurchase of U.S. government securities, and sale of long-term debt and
common stock. Additional liquidity is also available through the discounting
facilities of the Federal Reserve Bank, and the borrowings from the Federal
Home Loan Bank.
Bancorp's liquidity position decreased during 1995 as a result of increased
loan demand. However, Bancorp believes its liquidity to be strong and more
than adequate to meet future funding needs. Indicators of liquidity include:
loan-to-deposit ratio (loans as a percent of deposits less time deposits
$100,000 or more) 80 percent at December 31, 1995, compared to 75 percent at
December 31, 1994; securities maturing in one year $30,741,000 compared to
$16,459,000 at December 31, 1995 and 1994, respectively; and interest-bearing
deposits in other banks of $9,387,000 at December 31, 1995, compared to
$5,070,000 at December 31, 1994.
Interest rate sensitivity is a function of the repricing characteristics of
Bancorp's assets and liabilities -- the time at which, either at replacement at
maturity or during the life of the instrument, interest bearing assets and
liabilities are subject to changes in interest rates. Examples of interest
sensitive assets include loans with floating rates and assets that will mature
within a designated time period. Interest sensitive liabilities include
short-term certificates of deposits and money market accounts. The difference
between the amount of rate sensitive assets and rate sensitive liabilities, on
which interest rates may change with market fluctuations within a given period
of time, is referred to as a rate sensitive gap. In theory, any gap can have a
potential impact on a bank's net interest income. For example, if
interest-sensitive liabilities exceed interest-sensitive assets, an increase in
general interest rates might have an adverse effect on earnings which might
have been realized in the absence of such an interest rate change. Conversely,
a decrease in general interest rates might improve earnings.
23
<PAGE> 27
The objective of the interest rate sensitivity process is to maintain an
appropriate balance between Bancorp's interest earning assets and interest
bearing liabilities over a specified time frame. The interest rate sensitivity
analysis, presented below (in thousands), represents the relationship at the
end of 1995 and 1994 between assets and liabilities that are interest-rate
adjustable within given time periods.
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
1 to 90 91 to 365 1 to 5 Over Five
Total Total Days Years Years *
-------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Assets
Loans $132,894 $ 41,686 $14,689 $54,359 $22,160
Securities 43,965 12,266 17,125 10,053 4,521
Other earning assets 9,387 9,387 - - -
Other assets 17,166 - - - 17,166
-------- -------- ------- ------- -------
Total $203,412 $ 63,339 $31,814 $64,412 $43,847
Liabilities and Equity
Deposits $179,913 $104,815 $33,222 $14,513 $27,363
Short-term borrowing 2,895 2,895 - - -
Notes payable 2,295 1,795 - 500 -
Other liabilities 2,456 - - - 2,456
Stockholders' equity 15,853 - - - 15,853
-------- -------- ------- ------- -------
Total $203,412 $109,505 $33,222 $15,013 $45,672
Net assets (liabilities) $(46,166) $(1,408) $49,399 $(1,825)
======== ======= ======= =======
Cumulative net assets (liabilities)
as a percent of Assets (22.7%) (23.4%) 0.9%
DECEMBER 31, 1994
Assets
Loans $122,150 $ 31,320 $ 10,944 $ 55,221 $ 24,665
Securities 47,358 1,820 15,770 25,557 4,211
Other earning assets 5,070 5,070 - - -
Other assets 21,082 - - - 21,082
-------- -------- -------- -------- --------
Total $195,660 $ 38,210 $ 26,714 $ 80,778 $ 49,958
Liabilities and Equity
Deposits $175,190 $106,602 $ 31,704 $ 9,639 $ 27,245
Short-term borrowing 2,200 2,200 - - -
Notes payable 3,194 2,694 - 500 -
Other liabilities 1,678 - - - 1,678
Stockholders' equity 13,398 - - - 13,398
-------- -------- -------- -------- --------
Total $195,660 $111,496 $ 31,704 $ 10,139 $ 42,321
Net assets (liabilities) $(73,286) $( 4,990) $ 70,639 $ 7,637
======== ======== ======== ========
Cumulative net assets (liabilities)
as a percent of Assets (37.5%) (40.0%) (3.9%)
</TABLE>
* Over 5 years includes non-interest bearing assets and liabilities and
stockholders' equity. Interest bearing demand and savings accounts are
included in less than 3 months.
The above chart reflects the contractual maturity and repricing characteristic
of Bancorp's assets and liabilities, and suggests a liability sensitive
structure. Although Bancorp appears somewhat liability sensitive to interest
rates, history has shown that certain interest rates paid on deposit products
lag and do not increase as far as the rates earned on loans and investments.
Therefore, Bancorp's net interest margin depends not only on the direction and
magnitude of future rates, but also customer alternatives, and need for
liquidity. Bancorp's internal interest rate sensitivity model currently
suggests that Bancorp is slightly asset sensitive. Therefore, in the event of
lower interest rates, Bancorp's net interest margin may decrease.
Bancorp's one year cumulative interest rate sensitive GAP decreased from 40.0
percent to 23.4 percent at December 31, 1994 and 1995, respectively. The
decrease resulted from the origination of more interest rate sensitive loans, a
shorter- term security portfolio, and depositors purchasing longer-term
certificates of deposits during 1995.
24
<PAGE> 28
CAPITAL RESOURCES
Bancorp believes a strong capital base is important to the continued
profitability and success of Bancorp, because it promotes depositor and
investor confidence. In addition, it provides a solid foundation for future
growth. Bancorp frequently evaluates the overall adequacy of its capital
position. Bancorp considers among other things, the present and anticipated
needs of the company, current market conditions, and other relevant factors.
Earnings retention continues to be Bancorp's primary source of increasing
capital. However, to remain flexible, Bancorp has additional authorized but
unissued shares of its capital stock. This allows the Board an opportunity to
raise additional capital when necessary and prudent to do so.
Bancorp's stockholders' equity at December 31, 1995, was $15,853,000 compared
to $13,398,000 at December 31, 1994. On a per share basis, stockholders'
equity totaled $15.63 compared to $13.41 on the same dates, respectively.
Bancorp's annualized return on average equity during 1995 totaled 17.5 percent
compared to 13.6 percent during 1994. The increase in stockholders' equity was
the result of the retention on earning after payment of $602,000 in cash
dividends and by recording a $415,000 unrealized gain on securities available
for sale mandated by SFAS No. 115. During 1995, Bancorp issued 15,322 shares
of common stock through the exercise of stock options.
Current regulatory capital adequacy guidelines require bank holding companies
and banks to maintain a minimum "leverage" ratio of core capital (which
excludes unrealized gain and losses on securities available for sale) to total
assets of at least 4 percent.
In addition to the leverage ratio requirements, Bancorp is subject to
risked-based capital guidelines, under which risk percentages are assigned to
various categories of assets and off balance sheet items to calculate a
risk-adjusted capital ratio. They require, Tier I capital of 4 percent and
total capital of 8 percent.
Below is a summary of the various capital ratios of Bancorp and subsidiaries at
December 31, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
North
Ratio Bancorp Central Central Minimum
- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Leverage 12-31-95 7.71% 8.43% 8.50% 4.0%
12-31-94 7.03% 8.58% 8.06%
Tier I Capital 12-31-95 11.71% 12.17% 14.92% 4.0%
12-31-94 11.16% 13.02% 14.43%
Total Capital 12-31-95 12.96% 13.42% 16.17% 8.0%
12.31-94 12.41% 14.28% 15.69%
</TABLE>
The above ratios do not include unrealized gains and losses on securities
available for sale which are excluded from the ratios by the federal regulatory
agencies.
25
<PAGE> 29
ITEM 7 FINANCIAL STATEMENTS
The financial statements required by regulation S-B are set forth in the pages
listed below.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 27
Consolidated Balance Sheets as of December 31, 1995 and 1994 28
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 29
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1994 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 31
Notes to Consolidated Financial Statements 33
</TABLE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
26
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
Board of Directors
Central Bancorporation
Wenatchee, Washington
We have audited the accompanying consolidated balance sheet of Central
Bancorporation (Bancorp) and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of Bancorp's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated balance sheet of Bancorp as of December 31, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended were audited by other auditors whose report, dated January
20, 1995, expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Central Bancorporation and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche, LLP
- ---------------------------
January 19, 1996
27
<PAGE> 31
CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1995 1994
- ------ -------- --------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 10,507 $ 14,236
INTEREST-BEARING DEPOSITS IN OTHER BANKS 9,387 5,070
-------- --------
Cash and cash equivalents 19,894 19,306
SECURITIES AVAILABLE FOR SALE, cost of
$26,299 and $26,878 26,336 26,289
SECURITIES HELD TO MATURITY, fair value of
$16,744 and $19,677 16,719 20,216
LOANS 132,894 122,150
Less allowance for loan losses 1,795 1,667
-------- --------
Loans, net 131,099 120,483
ACCRUED INTEREST RECEIVABLE 1,628 1,407
FEDERAL HOME LOAN BANK STOCK 910 853
PREMISES AND EQUIPMENT, net 6,074 6,437
OTHER ASSETS, net 752 669
-------- --------
TOTAL $203,412 $195,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
DEPOSITS:
Interest bearing $152,550 $147,945
Noninterest bearing 27,363 27,245
-------- --------
179,913 175,190
SHORT-TERM BORROWINGS 2,895 2,200
NOTES PAYABLE 2,295 3,194
ACCRUED INTEREST AND OTHER LIABILITIES 2,456 1,678
-------- --------
Total liabilities 187,559 182,262
COMMITMENTS AND CONTINGENCIES (Note 19)
STOCKHOLDERS' EQUITY:
Common stock, $1.67 par value -
Authorized 3,000,000 shares;
issued and outstanding, 1,014,565
shares in 1995 and 999,243 shares in 1994 1,691 1,666
Capital surplus 2,678 2,616
Retained earnings 11,459 9,506
Unrealized gain (loss) on securities available for sale 25 (390)
-------- --------
Total Stockholders' Equity 15,853 13,398
-------- --------
TOTAL $203,412 $195,660
======== ========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 32
CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 12,689 $ 9,831
Interest on securities available for sale 1,273 1,322
Interest and dividends on investment securities:
Taxable 847 619
Exempt from federal income tax 219 246
Interest income on interest-bearing deposits 561 431
-------- --------
Total interest income 15,589 12,449
INTEREST EXPENSE:
Interest on deposits 5,799 4,080
Interest on short-term borrowing 145 87
Interest on note payable 236 167
-------- --------
Total interest expense 6,180 4,334
-------- --------
Net interest income before provision for
loan losses 9,409 8,115
PROVISION FOR LOAN LOSSES 120
-------- --------
Net interest income 9,289 8,115
OTHER INCOME:
Mortgage loan servicing fees 213 200
Service charges on deposit accounts 1,019 855
Gain on sales of loans, net 478 43
Loss on sales of securities, net (244)
Other service charges and fees 585 603
-------- --------
Total other income 2,295 1,457
OTHER EXPENSES:
Salaries and employee benefits 4,208 3,597
Occupancy expense of premises 518 477
Printing, stationery, and supplies 361 265
Equipment and data processing 711 710
Legal and professional 307 215
Business and occupation taxes 212 162
Deposit insurance assessment 201 336
Other 1,251 1,181
-------- --------
Total other expenses 7,769 6,943
-------- --------
INCOME BEFORE INCOME TAX $ 3,815 $ 2,629
INCOME TAX EXPENSE 1,260 864
-------- --------
NET INCOME $ 2,555 $ 1,765
======== ========
NET INCOME PER SHARE $ 2.46 $ 1.70
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 33
CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net unrealized
gain (loss)
on securities
Common Common Capital Retained available
Shares Stock Surplus Earnings for sale Total
--------- ------- ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 987,316 $ 1,646 $ 2,536 $ 8,437 $ - $12,619
Common stock issued for
options exercised, net
of stock redeemed 6,927 12 (12)
Common stock donated 5,000 8 92 (100)
Net income 1,765 1,765
Cash dividends,
$.60 per share (596) (596)
Change in net unrealized
gain (loss) (390) (390)
--------- ------- ------- -------- ------ -------
BALANCE, December 31, 1994 999,243 1,666 2,616 9,506 (390) 13,398
Common stock issued for
options exercised, net
of stock redeemed 15,322 25 62 87
Net income 2,555 2,555
Cash dividends,
$.60 per share (602) (602)
Change in net unrealized
gain (loss) 415 415
--------- -------- ------- ------- ----- -------
BALANCE, December 31, 1995 1,014,565 $ 1,691 $ 2,678 $11,459 $ 25 $15,853
========= ======= ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 34
CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,555 $ 1,765
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 547 578
Provision for loan losses 120
Cash provided (used) by changes in operating
assets and liabilities:
Origination of loans held for sale (13,247) (12,818)
Proceeds from sale of loans 12,000 13,900
Loss on securities available for sale 244
Loan fees deferred, net of amortization 74 164
Dividends on FHLB stock (51) (50)
Deferred compensation expense 92 163
Other (375) 325
-------- --------
Net cash provided by operating activities 1,715 4,271
INVESTING ACTIVITIES:
Proceeds from maturing securities held to maturity 6,842 4,535
Purchases of securities held to maturity (3,377) (11,483)
Proceeds from sales of securities available for sale 7,224
Proceeds from maturing securities available for sale 11,895 15,407
Purchases of securities available for sale (11,162) (10,587)
Cash received in acquisition, net of cash paid 7,281
Loan originations, net of principal repayments (9,563) (17,856)
Acquisition of premises and equipment (191) (277)
-------- --------
Net cash used by investing activities (5,556) (5,756)
FINANCING ACTIVITIES:
Net increase in deposits 4,700 9,699
Net increase in short-term borrowings 1,144 236
Proceeds from borrowings 2,993
Proceeds from stock options 87
Principal payments on note payable (900) (3,299)
Cash dividends (602) (596)
-------- --------
Net cash provided by financing activities 4,429 9,033
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 588 7,548
CASH AND CASH EQUIVALENTS:
Beginning of year 19,306 11,758
-------- --------
End of year $ 19,894 $ 19,306
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 6,359 $ 4,289
Income taxes 1,042 757
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 35
CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
In 1994, Bancorp purchased all the capital stock of First Bank Washington for $4,119. In connection with the acquisition,
liabilities were assumed as follows:
Fair value of assets $52,709
Cash paid for capital stock (4,119)
-------
Liabilities assumed $48,590
=======
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 36
CENTRAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Central Bancorporation (Bancorp), through its wholly owned subsidiaries, Central
Washington Bank and North Central Washington Bank, provides a wide range of
banking products and services principally throughout Chelan and Okanogan
Counties, and to a lesser degree in Douglas and Grant Counties. This North
Central Washington region is predominately agricultural based, and its economic
stability is dependent on the strength of the apple industry. Although the
subsidiaries have a diversified loan portfolio, a substantial portion of their
debtors' ability to pay is dependent on the local economy.
Summarized below are the significant accounting and reporting policies.
CONSOLIDATION: The consolidated financial statements include the accounts
of Bancorp and subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS: For purposes of reporting cash flows, cash equivalents
consist of highly liquid investments with an original maturity of 90 days
or less.
SECURITIES: Securities available for sale are carried at fair value.
Significant unrealized holding gains and losses are excluded from earnings
and reported net, as a separate component of stockholders' equity until
realized. Gains and losses on the sale of investment securities are
computed under the specific identification method.
Securities held to maturity are stated as cost and are adjusted for
amortization of premiums and accretion of discounts using a method that
approximates the interest method. Securities held to maturity are
designated as such at the date of purchase based on management's positive
intent and ability to hold such investments to maturity. Unrealized losses
resulting from market valuation differences deemed other than temporary are
included in earnings. Gains and losses from the sale of investment
securities are computed under the specific identification method.
LOANS: Loans are stated at their principal amount outstanding, net of
unearned income (including deferred loan fees and costs). Mortgage loans
held for sale are valued at the lower of aggregate cost or market.
Interest on loans and amortization of unearned income is credited to income
on a daily basis, based on principal amounts outstanding at applicable
rates. The accrual of interest on impaired loans is discontinued when
management has determined that the borrower may be unable to meet payments
as they become due. Accrual of interest income is generally discontinued
when a loan becomes 90 days past due as to principal or interest. When
interest accruals are discontinued, interest credited to income in the
current year is reversed, and interest accrued in the prior year is charged
to the allowance for loan losses. Interest income is subsequently
recognized only to the extend cash payments are received.
CREDIT RISK AND THE ALLOWANCE FOR LOAN LOSSES: The management of credit
risk is the responsibility of Bancorp's Loan Committee. They have
established maximum credit limits for single borrowers and for loan
classifications generally. The comparison of limits and actual levels of
activity is reviewed by the Board of Directors on a regular basis.
The allowance for loan losses (the allowance) is intended to absorb future
possible losses in the loan portfolio. Provisions for loan losses, which
are charged to operating expenses and added to the allowance, are based
upon several factors including actual loss experience, current and
forecasted economic conditions, a review of the quality of the loan
portfolio, and other pertinent factors. The balance of the allowance is
considered by management adequate to absorb losses which may exist in the
loan portfolio at the balance sheet date. In connection with the
determination
33
<PAGE> 37
of the allowances for loan losses and real estate owned, management obtains
independent appraisals for significant properties.
As of January 1, 1995, Bancorp adopted Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan,
and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures, an amendment of SFAS No. 114. These statements
require that impaired loans that are within their scope be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of collateral if the loan is
collateral dependent. Subsequent changes in the measurement of impaired
loans shall be reported as a provision for loan losses in the same manner
in which impairment initially was recognized or as a reduction in the
provision that would otherwise be reported. The adoption of these
statements had no material impact on Bancorp's financial condition or
results of operations.
LOAN FEE INCOME: Loan origination fees and certain direct loan origination
costs are deferred and the net amount recognized as an adjustment to yield
for the contractual life of the related loans. Fees related to lending
activities other than the origination of loans are recognized as other
income during the period the related services are performed.
PREMISES AND EQUIPMENT: Premises and equipment are recorded at cost and
depreciated over their estimated useful lives. Depreciation expense is
computed using the straight-line method. Gains or losses on disposition are
reflected in operations. Expenditures for improvements are capitalized and
ordinary maintenance and repairs are charged to operations as incurred.
OTHER REAL ESTATE OWNED: Real estate acquired through foreclosures or in
settlement of loans is recorded at the lower of fair market value minus
estimated costs to sell or carrying value of the loan at the acquisition
date.
INCOME TAXES: Bancorp and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes related to the timing differences
of recognizing income and expense for financial statement and income tax
purposes are recorded on the liability method.
MORTGAGE LOAN SERVICING: Mortgage loan servicing fees are based on a
percentage of the outstanding loan principal balances being serviced and
are included in income as related loan payments from mortgages are
collected.
NET INCOME PER SHARE: Net income per share is computed using the weighted
average number of shares of common stock outstanding, including shares
issuable under stock option plans, when dilutive, during the periods
presented, adjusted for stock splits.
The weighted average number of shares outstanding used to compute net
income per share was 1,038,120 in 1995 and 1,035,120 in 1994.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the financial
statements. Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the financial
statements. Bancorp has used significant estimates in determining reported
reserves and allowances for loan losses, tax liabilities, and other
contingencies.
RECLASSIFICATIONS: Certain items in the accompanying 1994 consolidated
financial statements have been reclassified to conform to the 1995
presentation.
34
<PAGE> 38
NOTE 2: RESTRICTIONS ON CASH AND DUE FROM BANKS
The subsidiaries are required to maintain reserve balances with the Federal
Reserve Bank. The average required reserve at December 31, 1995 and 1994, was
approximately $1,468,000 and $1,597,000, respectively. These required reserves
are based on specified percentages of the subsidiaries' total average deposits.
The percentage of deposits required to be maintained is established by the
Federal Reserve Board.
NOTE 3: SECURITIES
The amortized cost and estimated fair values of securities held to maturity and
securities available for sale at December 31, computed on a specific
identification basis, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
1995
Securities available for sale:
U.S. Treasury $ 18,999 $ 67 $ 27 $ 19,039
U.S. Government agencies
and corporations 6,700 1 2 6,699
Corporate securities 500 4 496
Obligations of states and
political subdivisions 100 2 102
-------- ---- ---- --------
$ 26,299 $ 70 $ 33 $ 26,336
======== ==== ==== ========
Securities held to maturity:
U.S. Treasury $ 2,998 $ 7 $ - $ 3,005
U.S. Government agencies
and corporations 4,000 19 4,019
Obligations of states and
political subdivisions 4,720 43 4 4,759
Mortgage-backed securities 5,001 18 58 4,961
-------- ---- ----- --------
$ 16,719 $ 87 $ 62 $ 16,744
======== ==== ===== ========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
1994
Securities available for sale:
U.S. Treasury $ 18,437 $ - $460 $ 17,977
U.S. Government agencies
and corporations 7,761 103 7,658
Corporate securities 600 27 573
Obligations of states and
political subdivisions 80 1 81
-------- ---- ---- --------
$ 26,878 $ 1 $590 $ 26,289
======== ==== ==== ========
Securities held to maturity:
U.S. Treasury $ 6,450 $ - $100 $ 6,350
U.S. Government agencies
and corporations 3,541 56 3,485
Obligations of states and
political subdivisions 4,384 63 4,321
Mortgage-backed securities 5,841 320 5,521
-------- ---- ---- --------
$ 20,216 $ - $539 $ 19,677
======== ==== ==== ========
</TABLE>
The amortized cost and estimated fair value of securities held to maturity and
securities available for sale at December 31, 1995, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturity because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties (in thousands):
35
<PAGE> 39
<TABLE>
<CAPTION>
Securities Held to Securities
Maturity Available for Sale
--------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 8,582 $ 8,610 $ 19,690 $ 19,680
Due after one year through
five years 2,343 2,364 6,509 6,554
Due after five years 793 809 100 102
-------- -------- -------- --------
11,718 11,783 26,299 26,336
Mortgage-backed securities 5,001 4,961
-------- --------
$ 16,719 $ 16,744 $ 26,299 $ 26,336
======== ======== ======== ========
</TABLE>
Proceeds from sales of securities available for sale were $7,224,000 in 1994.
Gross losses of $244,000 were realized on those sales during 1994. There were no
sales of securities in 1995.
Securities carried at $3,987,000 and $3,621,000 at December 31, 1995 and 1994,
respectively, are pledged to secure public and trust deposits, and for other
purposes as required or permitted by law.
NOTE 4: LOANS
Loans by category at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
Real Estate:
1 - 4 single family $ 39,640 $ 38,801
Commercial 27,306 25,736
Construction 8,018 5,649
Installment 19,891 18,727
Commercial 20,426 18,255
Agricultural 13,594 12,750
All other 4,019 2,232
-------- --------
$132,894 $122,150
======== ========
</TABLE>
Nonaccrual loans at December 31, 1995 and 1994, totalled approximately $228,000
and $388,000, respectively. Interest income foregone on such loans was $31,000
and $14,000 during 1995 and 1994, respectively. At December 31, 1995, there were
no loans considered to be impaired in accordance with SFAS No. 114.
Real estate mortgage loans at December 31, 1995 and 1994, include $1,507,000 and
$259,000, respectively, of loans held for sale which are carried at the lower of
cost or market value.
Loans serviced for others totalled $76,123,000 and $64,200,000 at December 31,
1995 and 1994, respectively. Custodial accounts maintained in connection with
this servicing totalled $990,000 and $929,000 at December 31, 1995 and 1994,
respectively.
36
<PAGE> 40
Bancorp originates both adjustable and fixed interest rate loans. At December
31, 1995, the composition of those loans, less undisbursed amounts, are as
follows (in thousands):
<TABLE>
<CAPTION>
1995
----
<S> <C>
Fixed rate (term to maturity):
Three months or less $ 5,260
Three months through one year 4,989
Over one year through five years 25,709
Over five years 21,424
--------
$ 57,382
========
Adjustable rate (term to rate adjustment):
Quarterly or more frequently $ 36,426
Annually or more frequently, but less frequently
than quarterly 9,700
Every five years or more frequently, but less
frequently than annually 28,650
Less frequently than every five years 736
--------
$ 75,512
========
</TABLE>
Substantially all of Bancorp's commercial loans are secured by assignments of
inventory or accounts receivable, buildings and equipment, or savings deposits;
agricultural loans are secured by crops and crop equipment; consumer loans are
generally secured by personal property or savings deposits; and all real estate
loans are secured by land and buildings.
On May 12, 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing
Rights. SFAS No. 122 eliminates distinctions between servicing rights that were
purchased and those that were retained upon the sale of loans. The statement
requires mortgage servicers to recognize as separate assets rights to service
loans, no matter how the rights were acquired. Institutions who sell loans and
retain the servicing rights will be required to allocate the total cost of the
loans to servicing rights and loans based on their relative fair values if that
value can be estimated. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. Further, SFAS No. 122 requires that all capitalized
mortgage servicing rights be periodically evaluated for impairment based upon
the current fair value of these rights. This statement will be adopted January
1, 1996; however, it is not anticipated to have a material impact on the results
of operations or financial condition of the Bancorp.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the years ended December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Balance, beginning of year $ 1,667 $ 1,156
Provision acquired 393
Provisions 120
-------
1,787 1,549
Loans charged off (228) (64)
Recoveries on loans previously charged off 236 182
------- -------
Net loans recovered 8 118
------- -------
Balance, end of year $ 1,795 $ 1,667
======= =======
</TABLE>
37
<PAGE> 41
NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Land $ 948 $ 948
Buildings and leasehold improvements 5,137 5,137
Equipment and fixtures 3,832 3,680
------- -------
9,917 9,765
Less accumulated depreciation and amortization 3,843 3,328
------- -------
$ 6,074 $ 6,437
======= =======
</TABLE>
NOTE 7: INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Interest-bearing demand (2.0%-2.6%) $ 38,526 $ 39,626
Money market accounts (3.0%-4.0%) 17,851 16,425
Savings accounts (3.0%-4.5%) 29,625 34,523
Time deposits, $100,000 or more (5.0%-7.1%) 13,459 12,155
Other time deposits (4.0%-8.5%) 53,089 45,216
-------- --------
$152,550 $147,945
======== ========
</TABLE>
As of December 31, 1995, scheduled maturities of time deposits are as follows
(in thousands):
<TABLE>
<CAPTION>
Year ending December 31
-----------------------
<S> <C>
1996 $ 52,035
1997 6,356
1998 3,119
1999 2,039
Thereafter 2,999
--------
$ 66,548
========
</TABLE>
Interest expense on time deposits of $100,000 or more totalled $759,000 in 1995
and $306,000 in 1994.
NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Securities sold under repurchase agreements $ 734 $ 412
Federal funds purchased 1,505 866
Treasury tax and loan note 656 922
------- -------
$ 2,895 $ 2,200
======= =======
</TABLE>
Securities sold under repurchase agreements specify the sale and later
repurchase of certain U.S. Government or U.S. Government agency securities at an
agreed-upon interest rate. At December 31, 1995 and 1994, Bancorp sold
securities with par amounts of $740,000 and $430,000, respectively, with an
agreement to repurchase the securities on January 2, 1996 and January 3, 1995,
at an interest rate of 5.53% and 6.06%, respectively.
NOTE 9: NOTES PAYABLE
The subsidiaries have fixed and variable rate advances collateralized under
blanket pledge agreements with the Federal Home Loan Bank totalling $500,000 at
both December 31, 1995 and 1994. Of the amount outstanding at December 31, 1994,
$250,000 matures on September 9, 1997, with interest payable monthly at 5.38%.
The remaining amount outstanding of
38
<PAGE> 42
$250,000 at December 31, 1995, matures on March 3, 1998, with interest payable
monthly at 5.26%.
Bancorp has a note payable of $1,800,000 and $2,700,000 at December 31, 1995 and
1994, respectively, maturing in April 28, 1999. Principal is payable in
semiannual installments of $300,000, and interest is payable quarterly at prime
plus one-half percent. The note is secured by all outstanding stock of Central
Washington Bank.
NOTE 10: INCOME TAXES
The components of income tax expense for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Current $ 1,143 $ 847
Deferred 117 17
------- -------
$ 1,260 $ 864
======= =======
</TABLE>
The reasons for the differences between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------ -------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Expected tax expense $1,297 34% $ 894 34%
Tax-exempt interest (82) (2) (74) (3)
Other 45 1 44 2
------ -- ------ --
$1,260 33% $ 864 33%
====== == ====== ==
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31 are
presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 68 $ 59
Loan loss reserve 312 104
Vacation accruals 9 54
Deferred compensation expense 216 190
Unrealized losses on securities
available for sale 201
Other 18 49
------ ------
Gross deferred tax assets 623 657
Deferred tax liabilities:
FHLB dividends (81) (59)
Depreciation (670) (529)
Unrealized gain on securities
available for sale (13)
Other (147) (26)
------ ------
Gross deferred liabilities (911) (614)
------ ------
$ (288) $ 43
====== ======
</TABLE>
39
<PAGE> 43
NOTE 11: STOCKHOLDERS' EQUITY
CAPITAL REQUIREMENTS: Bancorp and its subsidiaries 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
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Bancorp and its subsidiaries must
each meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Bancorp and its
subsidiaries' capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bancorp and its subsidiaries to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1995, that Bancorp and its subsidiaries meet all capital
adequacy requirements to which they are subject.
The Federal Deposit Insurance Corporation (FDIC) has implemented new
regulations that establish categories of institutions with respect to
capital as required by the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). Depending on Bancorp and its
subsidiaries' FDICIA category classification, the FDIC may restrict certain
of their activities, including acceptance of brokered deposits or offering
interest rates on deposits that are significantly higher than prevailing
interest rates. In order to be categorized as a well-capitalized
institution, the FDIC requires financial institutions it regulates to
maintain a leverage ratio, defined as Tier I capital divided by total
regulatory assets, of at least 5%, total risk-based capital of at least 10%
of risk-weighted assets; and Tier I risk-based capital of at least 6% of
risk-weighted assets.
As of December 31, 1995, the most recent notification from the FDIC
categorized Bancorp as well capitalized under the regulatory framework for
prompt corrective action.
At December 31, 1995, Bancorp had the following regulatory capital and
capital ratios calculated in accordance with FDIC standards (amounts in
thousands):
<TABLE>
<CAPTION>
Minimum Capital
Actual Requirement
------------------ --------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Central Bancorporation:
Total capital (to risk-weighted assets) $17,519 13.0 % $10,816 8.0 %
Tier I capital (to risk-weighted assets) 15,828 11.7 5,408 4.0
Tier I capital (to average assets) 15,828 7.7 8,207 4.0
Central Washington Bank:
Total capital (to risk-weighted assets) $13,763 13.4 % $ 8,204 8.0 %
Tier I capital (to risk-weighted assets) 12,481 12.2 4,102 4.0
Tier I capital (to average assets) 12,481 8.4 5,925 4.0
North Central Washington Bank:
Total capital (to risk-weighted assets) $ 5,238 16.2 % $ 2,592 8.0 %
Tier I capital (to risk-weighted assets) 4,832 14.9 1,296 4.0
Tier I capital (to average assets) 4,832 8.5 2,274 4.0
</TABLE>
DIVIDENDS: Bancorp paid dividends of $.60 per share in 1995 and $.60 per
share in 1994. On January 10, 1996, Bancorp declared a $.40 per share cash
dividend payable by February 9, 1996, to stockholders of record on January
10, 1996.
RESTRICTIONS ON DIVIDENDS: There are limited restrictions on the ability of
Bancorp to pay dividends from its retained earnings; however, under
Washington State banking law, Bancorp's banking subsidiaries may not,
without approval of the Director of the State Department of Financial
Institutions (Director), declare dividends payable to Bancorp in excess of
undivided profits, as defined by statute, less any required transfers to
surplus. This State statute also grants to the
40
<PAGE> 44
Director the discretion to require any bank to suspend the payment of any
and all dividends until any requirements that may have been made by the
Director, or any duly appointed examiner, shall have been complied with. At
December 31, 1995 and 1994, the subsidiaries could have provided funds to
Bancorp of up to approximately $7,715,000 and $6,911,000, respectively,
without further approval of regulatory authorities.
STOCK OPTIONS: In 1986, the stockholders authorized and Bancorp adopted an
Incentive Stock Option Plan (the Plan) for officers and key employees. All
options granted immediately become exercisable. In total, as many as 94,000
shares may be issued under the Plan until the Plan's expiration date in
1996. At December 31, 1995, 34,686 options previously granted under the
1986 Plan remain outstanding.
In 1992, the stockholders approved the Company's 1992 Stock Option Plan,
which reserved an additional 60,000 shares of Bancorp's common stock for
the granting of options to key employees. Options granted under this stock
option plan vest over a period of seven to ten years. At December 31, 1995,
22,150 options had been granted, and no options had been exercised.
In 1994, the stockholders approved the Company's 1994 Director's Stock
Option Plan, which reserved an additional 60,000 shares of Bancorp's common
stock for the granting of options to directors. All options granted
immediately become exercisable. At December 31, 1995, 40,000 options had
been granted, and no options had been exercised.
Information on options is summarized below:
<TABLE>
<CAPTION>
Shares Price
Under Option Per Share
------------ --------------
<S> <C> <C>
December 31, 1993 68,944 $5.08 - $16.00
Granted 52,500 20.00
Exercised 9,286 5.08
-------
December 31, 1994 112,158 5.08 - 20.00
Granted
Exercised 15,322 5.08 - 8.14
-------
December 31, 1995 96,836
=======
</TABLE>
Exercisable shares under option at December 31, 1995, totalled 80,822 at a
price of $5.08 to $20.00 per share. Exercisable shares under option at
December 31, 1994, totalled 91,387 at a price of $5.08 to $20.00 per share.
During 1994, 9,286 shares under option were exercised at a price of $5.08
per share. These shares were issued in an exchange whereby Bancorp redeemed
2,359 shares of its common stock with a market price of $20.00 per share,
in exchange for the shares issued under option.
During 1994, Bancorp issued 5,000 shares of its common stock to the
original investors of Sentinel Bancorporation (Sentinel) at a market price
of $20.00 per share. Sentinel was incorporated with the intention of
purchasing First Bank Washington from First Bank System, Inc. First Bank
Washington was subsequently purchased by Bancorp, and 5,000 shares were
issued to Sentinel's investors for their efforts and resulting benefit to
Bancorp.
NOTE 12: EMPLOYEE BENEFIT PLANS
Bancorp has adopted a 401(k) savings and profit sharing plan (PSP). All
full-time employees who have been continuously employed for one year are
eligible to participate by having a percentage of their pay deferred under the
PSP. Bancorp, at its direction, may contribute a portion of the profits to the
PSP. Participants will receive their share of those profits upon retirement or
termination subject to a vesting schedule. The PSP provides deferred investment
options to participants. Bancorp's contribution to the PSP was $69,000 during
1995 and $46,000 during 1994.
NOTE 13: DEFERRED COMPENSATION PLANS
41
<PAGE> 45
Bancorp adopted deferred compensation plans for the subsidiaries' directors and
for Bancorp's executive officer. The plans allow for the deferral of director
fees and executive compensation until retirement or termination of the plans.
Under the terms of the plans, Bancorp agrees to pay the deferred amount plus
interest at retirement (or sooner based upon the agreements' provisions) over a
ten- to fifteen-year period. Bancorp has purchased insurance policies on the
lives of the plan participants as a vehicle to fund the benefits payable under
the agreements. The amounts charged to operations for these plans were $92,000
in 1995 and $169,000 in 1994.
NOTE 14: INCENTIVE PLANS
The subsidiaries have adopted voluntary incentive compensation plans for
employees, senior officers, and directors. The plans allow for additional
compensation based upon a predetermined level of Bancorp or subsidiary
profitability, as defined. The amounts charged to operations for these plans
were $487,000 in 1995 and $237,000 in 1994.
NOTE 15: RELATIONSHIPS WITH AFFILIATES, DIRECTORS, AND EXECUTIVE OFFICERS
Bancorp and the subsidiaries have had and expect to have transactions in the
ordinary course of business with many of their directors, executive officers,
their associates, and family members.
The table below reflects information concerning loans (in thousands) by the
subsidiaries to the above-mentioned related parties at December 31. In the
opinion of management, these credit transactions did not, at the time they were
entered into, involve more than normal risk of collectibility or present other
unfavorable features.
<TABLE>
<CAPTION>
Amounts
1994 Additions Collected 1995
------ --------- --------- ------
<S> <C> <C> <C> <C>
Loans to directors, executive officers,
and family members $ 514 $ 600 $ 123 $ 991
Loans to companies of which directors
were principal stockholders or
directors 487 326 192 621
------ ----- ----- ------
$1,001 $ 926 $ 315 $1,612
====== ===== ===== ======
Percent of loans outstanding .82% 1.21%
====== ======
</TABLE>
NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by Bancorp using
available market information and appropriate valuation methodologies. However,
considerable judgement is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts Bancorp could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
42
<PAGE> 46
The fair value of financial instruments was as follows at December 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 10,507 $ 10,507
Interest-bearing deposits in other banks 9,387 9,387
Federal Home Loan Bank stock 910 910
Securities available for sale 26,336 26,336
Securities held to maturity 16,719 16,744
Loans, exclusive of allowance for loan losses 132,894 132,832
Financial liabilities:
Noninterest-bearing deposits 27,363 27,363
Interest-bearing deposits:
Demand deposits 86,002 86,002
Time deposits 66,548 66,638
Short-term borrowings 2,895 2,895
Notes payable 2,295 2,295
Off-balance sheet information:
Commitments on line-of-credit arrangements
Undrawn credit card lines
Standby letters of credit
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument as of December 31, 1995:
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS, FEDERAL FUNDS SOLD: The
carrying amount represented fair value.
SECURITIES AVAILABLE FOR SALE: Fair values were based on quoted market
prices or dealer quotes.
LOANS: Loans were priced using the discounted cash flow method. The
discount rate used was the rate currently offered on similar products.
NONINTEREST-BEARING DEPOSITS: The fair value of noninterest-bearing
accounts was the amount payable on demand at the reporting date.
INTEREST-BEARING DEPOSITS, DEMAND DEPOSITS: The fair value of demand
deposit accounts was the amount payable on demand at the reporting date.
INTEREST-BEARING DEPOSITS, TIME DEPOSITS: For time certificates of deposit,
the fair value was determined using the discounted cash flow method. The
discount rate was equal to the rate currently offered on similar products.
SHORT-TERM BORROWINGS: These notes are based on current rates equal to
current market rates.
NOTES PAYABLE: These notes were valued using the discounted cash flow
method. The discount rate was equal to rates currently offered on similar
borrowings.
COMMITMENTS ON LINE-OF-CREDIT AGREEMENTS, UNDRAWN CREDIT CARD LINES, AND
STANDBY LETTERS OF CREDIT: Total outstanding commitments are primarily
credit cards and personal lines of credit totalling $22,925,000 and
$24,221,000 at December 31, 1995 and 1994, respectively. These commitments
are at market interest rates.
43
<PAGE> 47
NOTE 17: CONDENSED FINANCIAL INFORMATION OF CENTRAL BANCORPORATION
Condensed financial information of Central Bancorporation (parent only) for the
years ended December 31, 1995 and 1994, follows (in thousands):
<TABLE>
<CAPTION>
BALANCE SHEETS 1995 1994
-------------- -------- --------
<S> <C> <C>
Assets:
Cash and due from banks $ 440 $ 65
Investment in subsidiaries 17,338 16,120
Other assets, net 325 258
-------- --------
Total $ 18,103 $ 16,443
======== ========
Liabilities:
Notes payable $ 1,795 $ 2,694
Other liabilities 455 351
-------- --------
Total liabilities 2,250 3,045
Stockholders' equity:
Common stock 1,691 1,666
Capital surplus 2,678 2,616
Retained earnings 11,459 9,506
Unrealized gain (loss) on
securities available for sale 25 (390)
-------- --------
Total stockholders' equity 15,853 13,398
-------- --------
Total $ 18,103 $ 16,443
======== ========
STATEMENTS OF OPERATIONS
Equity in net income of subsidiary $ 3,129 $ 2,228
Expenses:
Interest expense 219 152
Operating expenses 746 551
-------- --------
Total expenses 965 703
-------- --------
Net income before federal income taxes 2,164 1,525
Federal income tax benefit 391 240
-------- --------
Net income $ 2,555 $ 1,765
======== ========
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS 1995 1994
------------------------ -------- -------
<S> <C> <C>
Operating activities:
Net income $ 2,555 $ 1,765
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income of subsidiary (3,129) (2,228)
Dividends received from subsidiary 1,860 2,400
Other assets and liabilities 504 116
------- -------
Net cash provided by operating activities 1,790 2,053
Investing activities:
Payments for investment in subsidiary (4,119)
Financing activities:
Proceeds from issuance of note payable 2,993
Proceeds from stock options 87
Principal repayment of note payable (900) (299)
Cash dividends (602) (596)
------- -------
Net cash provided (used) by financing activities (1,415) 2,098
------- -------
Increase in cash due from banks 375 32
Cash and due from banks:
Beginning of year 65 33
------- -------
End of year $ 440 $ 65
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 219 $ 152
Income tax 1,042 757
</TABLE>
NOTE 18: ACQUISITION OF FIRST BANK WASHINGTON
On April 30, 1994, Bancorp completed the cash purchase of 100% of the common
stock of First Bank Washington, a wholly owned subsidiary of FBS Washington
Bancorporation and First Bank System, Inc. The purchase price, including
acquisition cost, of $4,119,000 was financed with a combination of cash and by a
$3,000,000 note payable to an unaffiliated lender. The acquisition was accounted
for as a purchase for financial statement purposes, and operations of the
acquired bank are included in the financial statements from May 1, 1994, onward.
Below is a summary of the fair values of First Bank Washington's assets and
liabilities at the date of acquisition (in thousands):
<TABLE>
<S> <C>
Total cash and cash equivalents $ 11,400
Securities 11,202
Net loans 27,499
Other assets 2,608
Deposits (48,428)
Other liabilities (162)
--------
Net assets acquired $ 4,119
========
</TABLE>
As of May 1, 1994, the name First Bank Washington was changed to North Central
Washington Bank.
The income statements presented for December 31, 1995 and 1994, are not
comparable because the December 31, 1994, statements only contain eight months
of activity. To facilitate comparability, below are condensed pro forma
financial statements as though the purchase had occurred on December 31, 1993
(in thousands, except per share amounts):
45
<PAGE> 49
<TABLE>
<CAPTION>
CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
- --------------------------------------------
Twelve Months ended December 31,
--------------------------------
1995 1994
-------- --------
(unaudited)
<S> <C> <C>
Interest income $ 15,589 $ 13,520
Interest expense 6,180 4,788
Provision for loan loss 120
-------- --------
Net interest income 9,289 8,732
Other income 2,295 1,602
Other expense (7,769) (7,595)
Income tax expense (1,260) (902)
-------- --------
Net income $ 2,555 $ 1,837
======== ========
Net income per share $ 2.46 $ 1.77
======== ========
</TABLE>
NOTE 19: COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments outstanding and
contingent liabilities (such as guarantees and commitments to extend credit,
etc.) that are not reflected in the accompanying financial statements.
Commitments to extend credit are agreements to lend to a borrower as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Bancorp evaluates each borrower's
creditworthiness on a case-by-case basis. The amount of the collateral obtained,
if it is deemed necessary by Bancorp upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies but may
include accounts receivable; inventory; property, plant, and equipment; and
deposits.
Standby letters of credit are conditional commitments issued by the subsidiaries
to guarantee the performance of a customer to a third party. Generally, standby
letters of credit are expected to expire without being drawn upon. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to borrowers. The subsidiaries hold real
or personal property as collateral supporting those commitments for which
collateral is necessary.
The amounts committed under these agreements represent the maximum potential
loss of principal, if fully drawn and if the customer defaults. However, the
actual credit risk varies depending on the creditworthiness of the customer and
the value of the collateral held.
Commitments outstanding at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Loan commitments $18,416 $20,477
Undrawn credit card lines 4,419 3,342
Standby letters of credit 90 412
</TABLE>
NOTE 20: PROPOSED MERGER
On January 10, 1996, Bancorp and its subsidiary banks entered into an agreement
and plan of mergers with InterWest Bancorp, Inc., Oak Harbor, Washington and
InterWest's subsidiary, InterWest Savings Bank, pursuant to which Bancorp will
be merged into InterWest. The merger agreement provides that Bancorp's common
stock will be exchanged for shares of InterWest common stock pursuant to a
specified exchange ratio. Consummation of the acquisition is subject to several
conditions, including receipt of applicable regulatory approval and approval by
Bancorp and InterWest shareholders.
46
<PAGE> 50
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
For information concerning directors and certain executive officers of Bancorp,
see "INFORMATION CONCERNING CENTRAL -- Election of Directors" and "Ownership of
Certain Beneficial Owners and Management" in Bancorp's 1996 Annual Meeting Proxy
Statement ("Proxy Statement"), which is incorporated herein by reference.
ITEM 10 EXECUTIVE COMPENSATION
For information concerning executive compensation, see "INFORMATION CONCERNING
CENTRAL -- Executive Compensation" in the Proxy Statement, which is incorporated
herein by reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning the security ownership of certain beneficial owners
and management, see "INFORMATION CONCERNING CENTRAL -- Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement, which is incorporated
herein by reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1995, many directors and executive officers of Bancorp and the Subsidiary
Banks and their associates were also customers of the Subsidiary Banks. It is
anticipated that directors, executive officers, and their associates will
continue to be customers of the Subsidiary Banks in the future. All transactions
between the Subsidiary Banks and directors, executive officers, and their
associates were made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and in the opinion of
management did not involve more than the normal risk of collectibility or
present other unfavorable features.
The law firm of Carlson and Drewelow, Inc. P.C., of which director Larry Carlson
is a partner, serves as counsel to Bancorp and the Subsidiary Banks on various
legal matters.
47
<PAGE> 51
PART IV
ITEM 13 EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Financial Statements:
Index of documents filed as part of this report.
Report of Independent Auditors'.
Consolidated Balance Sheets as of December 31, 1995 and 1994.
Consolidated Statements of Operations for the years ended December 31,
1995 and 1994 . Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995 and 1994. Consolidated Statements of Cash
Flows for the years ended December 31, 1995 and 1994.
Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
(1) No reports of Form 8-K were filed during the last quarter of the period
covered by this report.
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statement on Form S-8 No. 33-26352
(filed December 23, 1988), S-8 No. 33- 50360 (filed August 7, 1992), and S-8 No.
33-82682 (filed August 9, 1994).
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to its articles of incorporation or by-laws or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) Exhibits
Exhibit Number
3.1 Restated Articles of Incorporation, as amended (1)
3.2 Bylaws of Bancorporation, as amended (2)
10.1 Deferred Compensation Agreement for Gary M. Bolyard (3)
10.2 First Amendment to Deferred Compensation Agreement for
Gary M. Bolyard. (4)
10.3 Form of Directors' Deferred Compensation Plan, as amended (5)
10.4 Employee Incentive Stock Option Plan (4)
10.5 Incentive Compensation Plan for Executive Officers (6)
48
<PAGE> 52
10.6 Director Stock Option Plan (7)
10.7 Deferred Compensation Agreement for Joseph E. Riordan
10.8 Executive Severance Agreement for Joseph E. Riordan, and amendments
thereto
10.9 Executive Severance Agreement for Scott W. Southwick
10.10 Executive Severance Agreement for Marla Chase
21 The only subsidiaries of Central Bancorporation are Central
Washington Bank and North Central Washington Bank, each a Washington
banking corporation.
23.1 Consent of KPMG Peat Marwick
23.2 Consent of Deloitte & Touche, LLP
(1) Incorporated by reference to Bancorp's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993.
(2) Incorporated by reference to Bancorp's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1987.
(3) Incorporated by reference to Bancorp's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.
(4) Incorporated by reference to Bancorp's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
(5) Incorporated by reference to Bancorp's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988.
(6) Incorporated by reference to Bancorp's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
(7) Incorporated by reference to Bancorp's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
49
<PAGE> 53
S I G N A T U R E S
Pursuant to the requirements of Section 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, on the 13th day of March,
1996.
CENTRAL BANCORPORATION
(registrant)
By /s/ GARY M. BOLYARD
--------------------------------
Gary M. Bolyard
President/Chief Executive Officer
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 in
the capacities indicated, on the 13th day of March, 1996.
Principal Executive Officer:
By /s/ GARY M. BOLYARD
--------------------------------
Gary M. Bolyard
President and Director
Principal Financial Officer:
By /s/ JOSEPH E. RIORDAN
--------------------------------
Joseph E. Riordan
Treasurer and Assistant Secretary
50
<PAGE> 54
S I G N A T U R E S
A majority of the Board of Directors:
/s/ DON WM. TELFORD
--------------------------------------
Don Wm. Telford, Chairman of the Board
/s/ LARRY CARLSON
--------------------------------------
Larry Carlson, Director
/s/ GERALD CAWDERY
--------------------------------------
Gerald Cawdery, Director
/s/ ALFRED W. CORDELL
--------------------------------------
Alfred W. Cordell, Director
/s/ LONNIE DECAMP
--------------------------------------
Lonnie DeCamp, Director
/s/ L. COURTNEY GUDERIAN
--------------------------------------
L. Courtney Guderian, Director
/s/ WILLIAM LIDDELL
--------------------------------------
William Liddell, Director
51
<PAGE> 1
EXHIBIT 10.7
EXECUTIVE DEFERRED COMPENSATION AGREEMENT
THIS EXECUTIVE DEFERRED COMPENSATION AGREEMENT ("Agreement") is made and entered
into as of June 30, 1995 (the "Effective Date") by and between CENTRAL
BANCORPORATION, a Washington corporation ("Employer"), acting on behalf of
itself and its present and future subsidiaries ("Employer Group"), and JOSEPH E.
RIORDAN ("Executive").
A. Executive is employed by Employer Group in a key managerial
capacity presently holding the positions of Treasurer and Assistant Secretary of
Employer and Vice President, Secretary/Treasurer and Chief Financial Officer of
its subsidiary Central Washington Bank ("Bank"); and
B. Executive has performed Executive's duties in a capable and
efficient manner, resulting in substantial growth and progress to Employer
Group; and
C. Employer Group is willing to provide additional benefits to
Executive, in the nature of deferred compensation, in addition to the
compensation and fringe benefits from time to time have been and will in the
future be made available to Executive; and
D. Employer Group desires, in providing additional benefits to
Executive, to obtain from Executive certain assurances that Executive will not
engage in certain forms of competition with Employer Group; and
E. Executive is willing to continue in the employ of Employer Group
pursuant to the terms and conditions of this Agreement; and
F. Employer Group is in the process of acquiring life insurance policy
(the "Policy"), on the life of Executive.
Now, therefore, for value received, and in consideration of the mutual
covenants herein, the parties covenant and agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "Actual Retirement Date" is the date of termination of
substantially full-time services as an employee of Employer Group.
1.2 "Deferred Compensation Balance" means the death benefit payable
with respect to the Policy, as defined in this Agreement, determined from time
to time.
-1-
<PAGE> 2
1.3 "Disability" and "Disabled" means that because of injury or
sickness, Executive cannot perform each of the material duties of Executive's
regular occupation and is not reasonably expected to be able to perform such
duties in the foreseeable future, resulting in the termination of substantially
full-time services as an employee to Employer Group.
1.4 "Normal Retirement Date" is the date on which Executive reaches age
fifty- five (55).
1.5 "Plan Administrator" shall mean the Board of Directors of Employer
or such Board's designee.
1.6 "Policy" means that certain life insurance policy number SL
54304829 bearing the date of June 28, 1995, in the face amount of $225,000
issued by Safeco Insurance Company on the life of Executive (the "Initial
Policy"), or any policy providing substantially identical benefits acquired by
Employer as a substitute or replacement for such policy. Further, in the event
no such policy is in effect during all or any portion of the term of this
Agreement, the Deferred Compensation Balance shall be determined as if the
Initial Policy had remained in effect throughout the term of this Agreement.
1.7 "Vested Deferred Compensation Balance" means one-fourteenth (1/14)
of the Deferred Compensation Balance, multiplied by Executive's Years of
Service.
1.8 "Years of Service" means the number of partial or complete calendar
years Executive serves as an employee of Employer, commencing with the year in
which this Agreement is entered into and continuing for each subsequent calendar
year, not to exceed fourteen (14) years.
ARTICLE 2
ADDITIONAL COMPENSATION
Agreement for Additional Compensation. Notwithstanding any other
agreements between the parties, Employer agrees to pay Executive the amounts
provided for in this Agreement (payments of which will be deferred as provided
herein) as compensation in addition to any compensation provided for in other
agreements between the parties.
-2-
<PAGE> 3
ARTICLE 3
BENEFITS PAYABLE UPON RETIREMENT
3.1 Payment of Deferred Compensation. Except as otherwise provided in
Article 4, Employer shall commence payment of benefits under this Agreement to
Executive on the first day of the first calendar month beginning after the later
of Executive's (i) Normal Retirement Date or (ii) Actual Retirement Date.
3.2 Amount and Payment Schedule. Employer shall pay Executive the
Benefits under this Agreement in fifteen (15) equal annual installments
consisting of principal and interest, sufficient in amount to pay in full
Executive's Vested Deferred Compensation Balance, with interest calculated on
the unpaid principal amount of such Vested Deferred Compensation Balance at
eight percent (8%) per annum, provided, however, that Employer may deduct from
the principal installment to be paid as might be elected, pursuant to paragraph
3.2 (a) or 3.2 (b), three percent (3%) thereof as an administrative fee.
If Executive dies after receiving a payment under this Article 3, but
prior to receiving all such payments, the remaining payments shall continue to
be paid to Executive's beneficiary as defined in this Agreement.
ARTICLE 4
BENEFITS PAYABLE ON DEATH OR DISABILITY
4.1 Payment of Death or Disability Benefit. If Executive dies or
becomes Disabled prior to the later of Executive's (i) Normal Retirement Date or
(ii) Actual Retirement Date, Employer shall pay Executive (or in the case of
Executive's death, Executive's Beneficiary) the benefits under this Agreement.
Employer shall commence payment of such benefits on the first day of the first
calendar month beginning after such death or disability.
4.2 Amount and Payment Schedule. Employer shall pay Executive the
benefits under this Agreement in fifteen (15) equal annual installments
consisting of principal and interest, sufficient in amount to pay in full
Executive's Deferred Compensation Balance, with interest calculated on the
unpaid principal amount of such Deferred Compensation Balance at eight percent
(8%) per annum, provided, however, that Employer may deduct from the principal
installment to be paid as might be elected, pursuant to paragraph 3.2(a) or
3.2(b), three percent (3%) thereof as an administrative fee.
If Executive dies after receiving a payment under this Article 4,
but prior to receiving all such payments, the remaining payments shall continue
to be paid to Executive's Beneficiary.
-3-
<PAGE> 4
ARTICLE 5
MISCELLANEOUS
5.1 Further Acts. Each party to this Agreement agrees to perform any
and all further acts and to execute and deliver any and all further documents,
and to take all other further actions which may be reasonably necessary or
otherwise required in order to carry out the provisions of this Agreement,
including the acquisition of the Policy.
5.2 Executive's Beneficiary. Executive's "Beneficiary" as used in this
Agreement shall mean any one or more persons or trusts, or combination thereof,
designated by Executive in writing and filed with Employer during Executive's
life upon a Nomination of Beneficiary form provided by Employer. Any such
designation or designations of Beneficiary shall be revocable at any time
without the consent of any beneficiary, whether now living or born hereafter, by
filing another Nomination of Beneficiary form. In the absence or failure of
Executive to designate a Beneficiary, Executive's Beneficiary shall be
Executive's estate.
5.3 Nature of Executive's Rights. All benefits provided for under this
Agreement are unsecured and are payable only out of the general assets of
Employer. Neither Executive nor any other person shall have any interest in any
fund or in any specific asset or assets of Employer by reason of any amounts due
under this Agreement, nor any right to receive any payment under this Agreement,
except as and to the extent expressly provided in this Agreement. Reference to
the Policy is solely to measure the amount of the benefits payable to Executive
under this Agreement, and such reference shall not be construed to require
Employer to obtain or maintain any such policy, or to grant to Executive any
rights in any such Policy obtained.
5.4 Binding Effect; Successors. This Agreement is binding upon and
shall inure to the benefit of the parties and their beneficiaries, heirs,
executors, administrators and successors and assigns except as specifically
provided, and shall not be modified or invalidated by any successor whether
resulting from a merger, consolidation or acquisition with or by any other
corporation, or otherwise.
5.5 No Assignment by Executive. Neither Executive nor Executive's
successors, assigns or beneficiary shall have any right to assign, transfer,
commute, encumber or otherwise dispose of the right to receive payments under
this Agreement, which payments and the right thereto are expressly declared to
be non-assignable and non-transferable, either voluntarily or involuntarily.
Employer shall make payments under the terms of this Agreement only to Executive
if he is living, or to Executive's Beneficiary if not living; and Employer shall
have no obligation with respect to any other party whatsoever and shall make
payments to no other party whatsoever.
-4-
<PAGE> 5
5.6 No Contract of Employment. This Agreement shall not be construed
as a contract of employment and nothing herein shall be construed as conferring
upon Executive the right to continue in the employment of Employer.
5.7 Effect on Qualified Plan. Any amount deferred under this Agreement
shall not be deemed salary or other compensation of Executive for the purpose of
computing benefits to which Executive may be entitled under any pension plan,
profit sharing plan, or other arrangement of Employer for the Benefit of its
employees.
5.8 Entire Agreement; Amendment. This Agreement constitutes the entire
agreement and understanding concerning its subject matter between the parties,
and may be modified, supplemented or amended only by a written instrument
executed by the parties.
5.9 Singular - Plural. Whenever any words are used herein in the
singular form, they shall be construed as though they were also used in the
plural or in all cases where they would so apply.
5.10 Masculine - Feminine. Whenever any words are used herein in the
masculine form they shall be construed as though they were also in the feminine
form in all cases where they would so apply. Whenever any words are used herein
in the feminine form they shall be construed as though they were also used in
the masculine form in all cases where they would apply.
5.11 Governing Law. This Agreement shall be construed in accordance
with and governed by the internal laws, and not the laws of conflicts, of the
State of Washington.
5.12 Arbitration. If any controversy arising out of this Agreement
cannot be settled by the parties hereto, the controversy shall be settled by
arbitration in accordance with the laws of the State of Washington then in
effect, and the judgement on the award may be entered in any court having
jurisdiction. The prevailing party shall be entitled to the costs of
arbitration, including reasonable attorney's fees.
5.13 Notices. To be effective, any notice hereunder shall be in
writing, delivered in person or mailed by certified or registered mail, postage
prepaid.
-5-
<PAGE> 6
IN WITNESS WHEREOF, Employer has caused this Agreement to be executed
on its behalf by its duly authorized officer, and Executive has executed this
Agreement, both effective as of the date first written above.
EXECUTIVE:
________________________________________
JOSEPH E. RIORDAN
1434 Crabapple Lane
Wenatchee, Washington 98801
CENTRAL BANCORPORATION
By:_____________________________________
GARY M. BOLYARD, President and C.E.O.
CENTRAL WASHINGTON BANK
By:_____________________________________
GARY M. BOLYARD, President and C.E.O.
-6-
<PAGE> 1
EXHIBIT 10.8
EXECUTIVE SEVERANCE AGREEMENT
This Agreement is made and entered into by and between CENTRAL
BANCORPORATION, a Washington business corporation (hereinafter called the
"Company"), and its subsidiary CENTRAL WASHINGTON BANK, a Washington banking
corporation (hereinafter called the "Bank"), acting jointly and severally
(hereinafter collectively referred to as the "Employer Group") and JOSEPH E.
RIORDAN (hereinafter called the "Executive").
WHEREAS, the Executive is employed by the Employer Group in a key
managerial capacity, presently holding the position of Vice President and Chief
Financial Officer of the Bank; and
WHEREAS, the Company wishes to ensure that the Executive will be
available to assist the Board of Directors of the Company (the "Board") in
responding to and, if deemed appropriate by the Board, completing any proposed
change in control of the Company; and
NOW, THEREFORE, the Employer Group and the Executive agree to the
following provisions:
1. Change in Control. For purposes of this Agreement, the term "change
in control" shall mean a change "in the ownership or effective control" or "in
the ownership of a substantial portion of the assets" of the Company or the
Bank, with the quoted phrases of this sentence having the same meaning as when
used in Section 280G(b)(2)(A) of the Internal Revenue Code.
2. Commitment of Executive. In the event that any person extends any
proposal or offer which could result in a change in control, the Executive will,
at the Board's request, assist the Board in evaluating such proposal or offer.
Further, the Executive specifically agrees that he will not resign his
position(s) with the Employer Group during any period from the receipt of a
specific change in control proposal up to the closing or termination of the
transaction contemplated by the proposal.
3. Severance Payment Events. In the event of --
(i) the voluntary or involuntary termination (excluding termination due
to death, disability or commission of a crime) of the Executive's
employment with the Employer Group within three (3) years after a
change in control; or
<PAGE> 2
EXECUTIVE SEVERANCE AGREEMENT
PAGE 2
(ii) the involuntary termination (excluding termination due to death,
disability, or commission of a crime) by the Employer Group of the
Executive's employment on or after the date that any party
announces (or should announce) any prospective change in control
transaction, if a change in control does occur within twelve (12)
months of such termination,
then the Employer Group shall pay to Executive a severance payment, in the
amount determined pursuant to the next paragraph, payable on the later of the
date of termination or the date of the change in control.
4. Amount of the Severance Payment. The severance payment shall be an
amount equal to two (2) times the compensation (as reportable on the Executive's
IRS Form W-2) received by the Executive from the Employer Group during the most
recent twelve (12) calendar months ending before, or simultaneously with, the
date on which the change in control occurs; provided, however, that the
severance payment shall not exceed the lesser of (i) $114,000 or (ii) $1.00 less
than the amount which would cause the payment to be a "parachute payment" as
defined in Section 280G(b)(2)(A) of the Internal Revenue Code.
5. Revocability. This Agreement may be terminated unilaterally by the
Employer Group, but (i) only as of a prospective effective date which follows by
at least 12 months the date that written notice is given to Executive that the
Employer Group, by a vote of at least a majority of its directors, has
determined to terminate the Agreement, and (ii) only if no change in control
occurs prior to such effective date; provided, however, that this Agreement
automatically terminates if, at any time prior to the closing of a change in
control transaction, the Executive (a) voluntarily terminates his employment
with the Employer Group, or (b) is terminated by the Employer Group for
reasonable cause (e.g., acts of dishonesty, disloyalty, illegality or moral
turpitude adversely impacting the Employer Group; repeated failure or refusal to
follow reasonable directions from the Board or Chief Executive Officer of the
Company following a written warning). If not earlier terminated, this Agreement
will terminate three (3) years after any change in control occurs.
<PAGE> 3
EXECUTIVE SEVERANCE AGREEMENT
PAGE 3
IN WITNESS WHEREOF, the parties have executed this Agreement this 24th
day of May, 1990.
CENTRAL BANCORPORATION EXECUTIVE
By: ________________________________ ___________________________
Joseph E. Rioirdan
Title _______________________________
CENTRAL WASHINGTON BANK
By:________________________________
Title_______________________________
<PAGE> 4
FIRST AMENDMENT TO
EXECUTIVE SEVERANCE AGREEMENT
This First Amendment to Executive Severance Agreement is made and
entered into as of this 28th day of December, 1990, by and between Central
Bancorporation, a Washington corporation (the "Company") acting on behalf of
itself and its present and future subsidiaries (the "Employer Group") and JOSEPH
E. RIORDAN (the "Executive"). This Agreement amends an Executive Severance
Agreement (the "Severance Agreement") made and entered into by and between the
same parties dated effective as of May 24, 1990.
RECITAL
The parties desire to enter into this Agreement to amend the terms of
the Severance Agreement in order to provide an exception to the term "Change in
Control" as defined in the Severance Agreement, and to otherwise expressly
ratify and confirm the terms of the Severance Agreement.
AGREEMENT
In consideration of the mutual promises, covenants, agreements and
undertakings contained in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereby contract and agree as follows:
SECTION 1
Section 1 of the Severance Agreement, entitled Change in Control, shall
be amended by adding at the end thereof the following:
Notwithstanding the above, a Change in Control shall not be
deemed to have occurred if such Change in Control is effected
by means of any merger or sale of the Corporation, imposed or
encouraged by executive or regulatory agency, or financial
assistance from the Federal Deposit Insurance Corporation (or
its successor).
<PAGE> 5
FIRST AMENDMENT TO
EXECUTIVE SEVERANCE AGREEMENT
Page 2
SECTION 2
Acknowledgement of Severance Agreement. Except as expressly amended or
modified pursuant to this Amendment, all of the remaining terms, provisions and
conditions of the Severance Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement this 9th
day of January, 1991.
CENTRAL BANCORPORATION: EXECUTIVE:
By:________________________ By:______________________
Joseph E. Riordan
Its:________________________
<PAGE> 6
SECOND AMENDMENT TO
EXECUTIVE SEVERANCE AGREEMENT
This Second Amendment to Executive Severance Agreement is made and
entered into as of this 11th day of January, 1995, by and between Central
Bancorporation, a Washington corporation (the "Company") acting on behalf of
itself and its present and future subsidiaries (the "Employer Group"), and
JOSEPH E. RIORDAN (the "Executive"). This Agreement amends an Executive
Severance Agreement (the "Severance Agreement") and the First Amendment to the
Executive Severance Agreement made and entered into by and between the same
parties dated effective May 24, 1990, and January 9, 1991, respectively.
RECITAL
The parties desire to enter into this Agreement to amend the terms of
the Severance Agreement and the First Amendment to the Severance Agreement in
order to provide clarity as to Section 1 of the First Amendment.
AGREEMENT
In consideration of the mutual promises, covenants, agreements and
undertakings contained in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereby contract and agree as follows:
SECTION 1
Section 1 of the Severance Agreement, entitled Change in Control, shall
be amended by adding at the end thereof the following:
Notwithstanding the terms of the First Amendment to the
Severance Agreement, the Executive shall not be deemed to have
encouraged or imposed a change of control when acting at the
direction of the Company.
<PAGE> 7
SECOND AMENDMENT TO
EXECUTIVE SEVERANCE AGREEMENT
Page 2
SECTION 2
Acknowledgement of Severance Agreement. Except as expressly amended or
modified pursuant to this Amendment, all of the remaining terms, provisions and
conditions of the Severance Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement this 18th
day of January, 1995.
CENTRAL BANCORPORATION: EXECUTIVE:
By:________________________ By:_____________________
Joseph E. Riordan
Its:________________________
<PAGE> 1
EXHIBIT 10.9
EXECUTIVE SEVERANCE AGREEMENT
This Agreement is made and entered into by and between CENTRAL
BANCORPORATION, a Washington business corporation (hereinafter called the
"Company"), and its subsidiary CENTRAL WASHINGTON BANK, a Washington banking
corporation (hereinafter called the "Bank"), acting jointly and severally
(hereinafter collectively referred to as the "Employer Group") and SCOTT W.
SOUTHWICK (hereinafter called the "Executive").
WHEREAS, the Executive is employed by the Employer Group in a key
managerial capacity, presently holding the position of Vice President and Chief
Lending Officer of the Bank; and
WHEREAS, the Company wishes to ensure that the Executive will be
available to assist the Board of Directors of the Company (the "Board") in
responding to and, if deemed appropriate by the Board, completing any proposed
change in control of the Company; and
NOW, THEREFORE, the Employer Group and the Executive agree to the
following provisions:
1. Change in Control. For purposes of this Agreement, the term "change
in control" shall mean a change "in the ownership or effective control" or "in
the ownership of a substantial portion of the assets" of the Company or the
Bank, with the quoted phrases of this sentence having the same meaning as when
used in Section 280G(b)(2)(A) of the Internal Revenue Code. Notwithstanding the
above, a change in control shall not be deemed to have occurred if such change
in control is effected by means of any merger or sale of the Company or any of
its present or future subsidiaries which is imposed or encouraged by regulatory
authorities, or by means of any financial assistance from the Federal Deposit
Insurance Corporation (or its successor).
2. Commitment of Executive. In the event that any person extends any
proposal or offer which could result in a change in control, the Executive will,
at the Board's request, assist the Board in evaluating such proposal or offer.
Further, the Executive specifically agrees that he will not resign his
position(s) with the Employer Group during any period from the receipt of a
specific change in control proposal up to the closing or termination of the
transaction contemplated by the proposal.
<PAGE> 2
EXECUTIVE SEVERANCE AGREEMENT
PAGE 2
3. Severance Payment Events. In the event of --
(i) the voluntary or involuntary termination (excluding termination
due to death, disability or commission of a crime) of the
Executive's employment with the Employer Group within three (3)
years after a change in control; or
(ii) the involuntary termination (excluding termination due to death,
disability, or commission of a crime) by the Employer Group of
the Executive's employment on or after the date that any party
announces (or should announce) any prospective change in control
transaction, if a change in control does occur within twelve (12)
months of such termination, then the Employer Group shall pay to
Executive a severance payment, in the amount determined pursuant
to the next paragraph, payable on the later of the date of
termination or the date of the change in control.
4. Amount of the Severance Payment. The severance payment shall be
an amount equal to one year's compensation (as reportable on the Executive's IRS
Form W-2) received by the Executive from the Employer Group during the most
recent twelve (12) calendar months ending before, or simultaneously with, the
date on which the change in control occurs; provided, however, that the
severance payment shall not exceed the lesser of (i) $62,500; or (ii) $1.00 less
than the amount which would cause the payment to be a "parachute payment" as
defined in Section 280G(b)(2)(A) of the Internal Revenue Code.
5. Revocability. This Agreement may be terminated unilaterally by
the Employer Group, but (i) only as of a prospective effective date which
follows by at least 12 months the date that written notice is given to Executive
that the Employer Group, by a vote of at least a majority of its directors, has
determined to terminate the Agreement, and (ii) only if
<PAGE> 3
EXECUTIVE SEVERANCE AGREEMENT
PAGE 3
no change in control occurs prior to such effective date; provided, however,
that this Agreement automatically terminates if, at any time prior to the
closing of a change in control transaction, the Executive (a) voluntarily
terminates his employment with the Employer Group, or (b) is terminated by the
Employer Group for reasonable cause (e.g., acts of dishonesty, disloyalty,
illegality or moral turpitude adversely impacting the Employer Group; repeated
failure or refusal to follow reasonable directions from the Board or Chief
Executive Officer following a written warning). If not earlier terminated, this
Agreement will terminate three (3) years after any change in control occurs.
IN WITNESS WHEREOF, the parties have executed this Agreement this _____
day of ________________, 1993.
CENTRAL BANCORPORATION EXECUTIVE
By: ________________________________ ___________________________
Title _______________________________
CENTRAL WASHINGTON BANK
By:________________________________
Title_______________________________
<PAGE> 1
EXHIBIT 10.10
C E N T R A L W A S H I N G T O N B A N K
EXECUTIVE SEVERANCE AGREEMENT
This Agreement is made and entered into by and between CENTRAL
BANCORPORATION, a Washington business corporation (hereinafter called the
"Company"), and its subsidiary CENTRAL WASHINGTON BANK, a Washington banking
corporation (hereinafter called the "Bank"), acting jointly and severally
(hereinafter collectively referred to as the "Employer Group") and MARLA CHASE
(hereinafter called the "Executive").
WHEREAS, the Executive is employed by the Employer Group in a key
managerial capacity, presently holding the position of Vice President and Chief
Operations Officer of the Bank; and
WHEREAS, the Company wishes to ensure that the Executive will be
available to assist the Board of Directors of the Company (the "Board") in
responding to and, if deemed appropriate by the Board, completing any proposed
change in control of the Company; and
NOW, THEREFORE, the Employer Group and the Executive agree to the
following provisions:
1. Change in Control. For purposes of this Agreement, the term "change
in control" shall mean a change "in the ownership or effective control" or "in
the ownership of a substantial portion of the assets" of the Company or the
Bank, with the quoted phrases of this sentence having the same meaning as when
used in Section 280G(b)(2)(A) of the Internal Revenue Code. Notwithstanding the
above, a change in control shall not be deemed to have occurred if such change
in control is effected by means of any merger or sale of the Company or any of
its present or future subsidiaries which is imposed or encouraged by regulatory
authorities, or by means of any financial assistance from the Federal Deposit
Insurance Corporation (or its successor).
2. Commitment of Executive. In the event that any person extends any
proposal or offer which could result in a change in control, the Executive will,
at the Board's request, assist the Board in evaluating such proposal or offer.
Further, the Executive specifically agrees that he will not resign his
position(s) with the Employer Group during any period from the receipt of a
specific change in control proposal up to the closing or termination of the
transaction contemplated by the proposal.
<PAGE> 2
CENTRAL WASHINGTON BANK
EXECUTIVE SEVERANCE AGREEMENT
PAGE 2
3. Severance Payment Events. In the event of --
(i) the voluntary or involuntary termination (excluding termination
due to death, disability or commission of a crime) of the
Executive's employment with the Employer Group within three (3)
years after a change in control; or
(ii) the involuntary termination (excluding termination due to death,
disability, or commission of a crime) by the Employer Group of
the Executive's employment on or after the date that any party
announces (or should announce) any prospective change in control
transaction, if a change in control does occur within twelve (12)
months of such termination, then the Employer Group shall pay to
Executive a severance payment, in the amount determined pursuant
to the next paragraph, payable on the later of the date of
termination or the date of the change in control.
4. Amount of the Severance Payment. The severance payment shall be
an amount equal to one year's compensation (as reportable on the Executive's IRS
Form W-2) received by the Executive from the Employer Group during the most
recent twelve (12) calendar months ending before, or simultaneously with, the
date on which the change in control occurs; provided, however, that the
severance payment shall not exceed the lesser of (i) $42,500; or (ii) $1.00 less
than the amount which would cause the payment to be a "parachute payment" as
defined in Section 280G(b)(2)(A) of the Internal Revenue Code.
5. Revocability. This Agreement may be terminated unilaterally by
the Employer Group, but (i) only as of a prospective effective date which
follows by at least 12 months the date that written notice is given to Executive
that the Employer Group, by a vote of at least a majority of its directors, has
determined to terminate the Agreement, and (ii) only if
<PAGE> 3
CENTRAL WASHINGTON BANK
EXECUTIVE SEVERANCE AGREEMENT
PAGE 3
no change in control occurs prior to such effective date; provided, however,
that this Agreement automatically terminates if, at any time prior to the
closing of a change in control transaction, the Executive (a) voluntarily
terminates his employment with the Employer Group, or (b) is terminated by the
Employer Group for reasonable cause (e.g., acts of dishonesty, disloyalty,
illegality or moral turpitude adversely impacting the Employer Group; repeated
failure or refusal to follow reasonable directions from the Board or Chief
Executive Officer following a written warning). If not earlier terminated, this
Agreement will terminate three (3) years after any change in control occurs.
IN WITNESS WHEREOF, the parties have executed this Agreement this _____
day of ________________, 1993.
CENTRAL BANCORPORATION EXECUTIVE
By: ________________________________ ___________________________
Title ______________________________
CENTRAL WASHINGTON BANK
By:________________________________
Title______________________________
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Central Bancorporation:
We consent to incorporation by reference in the registration statements (Nos.
33-26352, 33-50360, and 33- 82682) on Form S-8 of Central Bancorporation of our
report dated January 20, 1995, relating to the consolidated balance sheet of
Central Bancorporation and subsidiary as of December 31, 1994 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended, which report appears in the December 31, 1995 annual report
on Form 10-KSB of Central Bancorporation.
Our report refers to a change in the method of accounting for certain
investments in debt and equity securities.
/s/ KPMG Peat Marwick, LLP
- ---------------------------
Seattle, Washington
March 11, 1996
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
Board of Directors
Central Bancorporation
Wenatchee, Washington
We consent to the incorporation by reference in Registration Statement Nos.
33-26352, 33-50360, and 33-82682 of Central Bancorporation on Form S-8 of our
report dated January 19, 1996, appearing in this Annual Report on Form 10-KSB of
Central Bancorporation for the year ended December 31, 1995.
/s/ Deloitte & Touche, LLP
- ---------------------------
March 13, 1996
