-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FhZaf2KY3SqNmqenBwikjBaPGcEMzz+6GaMq/wQQ41ccm5A2Rr3+yYnh39Mv8hM/ ELf9+UOKeFg58x27HvWGWw== 0000910117-00-000046.txt : 20000331 0000910117-00-000046.hdr.sgml : 20000331 ACCESSION NUMBER: 0000910117-00-000046 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL BANCORP CENTRAL INDEX KEY: 0000702430 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 930792841 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10489 FILM NUMBER: 584471 BUSINESS ADDRESS: STREET 1: BENJAMIN FRANKLIN PLZ STREET 2: ONE SW COLUMBIA ST SUITE 900 CITY: PORTLAND STATE: OR ZIP: 97258 BUSINESS PHONE: 5039735556 MAIL ADDRESS: STREET 1: BENJAMIN FRANKLIN PLZ STREET 2: ONE SW COLUMBIA ST SUITE 900 CITY: PORTLAND STATE: OR ZIP: 97258 FORMER COMPANY: FORMER CONFORMED NAME: VALLEY WEST BANCORP DATE OF NAME CHANGE: 19900812 10-K 1 FORM 10K FOR PERIOD ENDED 12/31/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1999 ----------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- ------- Commission file Number: 0-10489 ------- CENTENNIAL BANCORP (Name of registrant as specified in its charter) 93-0792841 Oregon (I.R.S. Employer (State of incorporation) Identification No.) One S. W. Columbia St. Portland, Oregon 97258 (Address of principal executive offices) Registrant's telephone number: (503) 973-5556 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, without par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $160,763,112 aggregate market value as of March 15, 2000, based on the price at which the stock was sold. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 19,684,373 shares of Common Stock on March 15, 2000. DOCUMENTS INCORPORATED BY REFERENCE Part II incorporates information by reference from the issuer's Annual Report to Shareholders for the fiscal year ended December 31, 1999. Part III is incorporated by reference from the issuer's definitive proxy statement for the annual meeting of shareholders to be held on April 26, 2000.
CENTENNIAL BANCORP FORM 10-K ANNUAL REPORT TABLE OF CONTENTS ----------------- PART I PAGE - ------ ---- Item 1. DESCRIPTION OF BUSINESS 4 ----------------------- Item 2. DESCRIPTION OF PROPERTIES 37 ------------------------- Item 3. LEGAL PROCEEDINGS 38 ----------------- Item 4. SUBMISSION OF MATTERS TO A VOTE OF ---------------------------------- SECURITY HOLDERS 38 ---------------- PART II (Items 5 through 9 are incorporated by reference from Centennial Bancorp's Annual Report to Shareholders) Item 5. MARKET FOR BANCORP'S COMMON STOCK --------------------------------- AND RELATED SHAREHOLDER MATTERS 39 ------------------------------- Item 6. SELECTED FINANCIAL DATA 39 ----------------------- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39 --------------------------------------------- Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39 ----------------------------- Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39 ------------------------------------------- Item 9. CHANGES IN AND DISAGREEMENTS WITH --------------------------------- ACCOUNTANTS ON ACCOUNTING AND ----------------------------- FINANCIAL DISCLOSURE 39 -------------------- PART III (Items 10 through 13 are incorporated by reference from Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on April 26, 2000) Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF BANCORP 40 ------------------------------------------- Item 11. EXECUTIVE COMPENSATION 40 ---------------------- Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL ---------------------------------------- OWNERS AND MANAGEMENT 40 --------------------- Item 13. CERTAIN RELATIONSHIPS AND RELATED --------------------------------- TRANSACTIONS 40 ------------ 2 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ---------------------------------------- AND REPORTS ON FORM 8-K 41 ----------------------- SIGNATURES 45 - ----------
3 PART I THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, WHICH ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. STATEMENTS THAT EXPRESSLY OR IMPLICITLY PREDICT FUTURE RESULTS, PERFORMANCE OR EVENTS ARE FORWARD-LOOKING. IN ADDITION, THE WORDS "ANTICIPATE," "BELIEVE," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: (1) POTENTIAL DELAYS OR OTHER PROBLEMS IN IMPLEMENTING BANCORP'S GROWTH AND EXPANSION STRATEGY; (2) THE ABILITY TO ATTRACT NEW DEPOSITS AND LOANS; (3) INTEREST RATE FLUCTUATIONS; (4) COMPETITIVE FACTORS AND PRICING PRESSURES; (5) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, THAT COULD RESULT IN INCREASED LOAN LOSSES; (6) CHANGES IN LEGAL AND REGULATORY REQUIREMENTS; AND (7) CHANGES IN TECHNOLOGY, AS WELL AS OTHER FACTORS DESCRIBED IN THIS AND OTHER BANCORP REPORTS AND STATEMENTS, INCLUDING, BUT NOT LIMITED TO, EXHIBIT 99.1, FILED AS PART OF THIS ANNUAL REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. BANCORP DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS. ITEM 1. DESCRIPTION OF BUSINESS ----------------------- GENERAL Centennial Bancorp, an Oregon corporation, was organized under the name Valley West Bancorp in 1981 to become a bank holding company. In 1982, Centennial Bank and Valley State Bank, both Oregon state-chartered banks, merged and continued business as Centennial Bank. Immediately following the merger, Valley West Bancorp acquired all the common stock of Centennial Bank. In May 1990, Valley West Bancorp changed its name to Centennial Bancorp. Centennial Bancorp has two wholly owned subsidiaries: Centennial Bank and Centennial Mortgage Co. ("Centennial Mortgage"). Unless the context clearly suggests otherwise, references in this Annual Report on Form 10-K to "Bancorp" include Centennial Bancorp and its subsidiaries. 4 All share and per-share information has been restated to give retroactive effect to a 10% common stock split declared in January 1999, a 5% common stock split declared in July 1999, a 10% common stock split declared in January 2000, and for various stock splits and stock dividends declared in prior years. CENTENNIAL BANK Centennial Bank is a full-service commercial bank organized under the Oregon Bank Act. Centennial Bank provides a broad range of depository and lending services to commercial, industrial, and agricultural enterprises, financial institutions, governmental entities and individuals. Deposit-taking and lending activities are primarily directed to the communities in which offices are located. Centennial Bank's primary marketing focus is on small- to medium-sized businesses and on professionals in those communities. Centennial Bank does not provide trust services. At December 31, 1999, based on total assets, Centennial Bank was the 11th largest of the commercial banks maintaining offices in Oregon. At that date, Centennial Bank had 19 branches: four full-service branches in Eugene; one full-service branch in adjacent Springfield; one full-service branch in Cottage Grove, Oregon; three full-service and five limited-service branches in Portland, Oregon; one full-service branch each in Beaverton, Clackamas and Tigard, suburbs of Portland; one full-service branch in Salem, Oregon; and one full-service branch in Vancouver, Washington. Five of the fourteen full-service branches were opened during 1999. The Oakway Center office opened in January 1999 as the fourth branch in the Eugene area. The Hazel Dell office in Vancouver, acquired from Northwest National Bank in April 1999, opened in May as Centennial Bank's first branch in Washington state. The downtown Portland and downtown Salem branches opened during July, and the Clackamas branch opened in November. A second Vancouver branch, the Mill Plain office, opened in February 2000. During the first quarter of 1999, Centennial Bank completed a major reorganization along functional, rather than the previous geographical, lines. The change was made to facilitate continued growth and expansion. As a result of the reorganization, in January 1999 two commercial banking centers were formed, one in downtown Eugene and the other in southwest Portland. A third commercial banking center opened during July in downtown Portland. Centennial Bank provides personalized, quality financial services to its customers and believes this dedication to service has enabled it to maintain a stable and relatively low-cost retail deposit base, while generating a substantial volume of 5 loans. Total deposits increased from $484 million at December 31, 1998 to $573 million at December 31, 1999. Net loans and loans held for sale increased from $428 million at December 31, 1998 to $594 million at December 31, 1999. Deposit accounts at Centennial Bank are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is not a member of the Federal Reserve System. CENTENNIAL MORTGAGE Centennial Mortgage began operations in 1987, originating conventional and federally insured residential mortgage loans for sale in the secondary market. Centennial Mortgage originated $152.5 million, $213.9 million and $111.6 million of mortgages in 1999, 1998 and 1997, respectively. Mortgage loans generally are sold without recourse or retention of servicing rights but may be subject to repurchase under certain circumstances. Centennial Mortgage also originates and administers loans for the acquisition, development and construction of commercial and residential real estate. Loan originated by Centennial Mortgage are generally funded by and booked as assets of Centennial Bank. Centennial Mortgage has two offices in Eugene and three offices in the Portland area. The second Eugene office opened in January 1999 and shares leased space with the Oakway Center branch of Centennial Bank. A trend of rising interest rates which started in 1999 has continued into the Year 2000. Increases in interest rates can adversely affect demand for real estate acquisition, development and construction loans as well as the repayment of those loans from the sale of completed properties. Rising interest rates can also have a significant negative effect on residential mortgage lending activity. NET INTEREST INCOME For most financial institutions, including Bancorp, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in "volume," "spread" and "margin." Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. During 1999, 1998 and 1997, Bancorp's average 6 interest-earning assets were $578 million, $483 million and $399 million, respectively. During these same years, Bancorp's net interest margin on a tax-equivalent basis was 7.15%, 7.22% and 6.92%, respectively. AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID The following table sets forth for 1999, 1998 and 1997 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for Bancorp. 7
Year ended December 31, 1999 1998 1997 --------------------------------- ------------------------------- ----------------------------- Interest Average Interest Average Interest Average Average income or yield or Average income or yield or Average income or yield or balance(1) expense rates balance(1) expense rates balance(1) expense rates ---------- --------- ------- ---------- ---------- -------- ---------- ---------- -------- (Dollars in thousands) ASSETS: Interest-bearing deposits with banks $ 104 $ 8 7.69% $ 264 $ 14 5.30% $ 6,924 $ 376 5.43% Investment securities - taxable 41,954 2,612 6.23 48,554 3,096 6.38 41,933 2,791 6.66 Investment securities - non-taxable (2) 28,155 2,172 7.71 33,508 2,574 7.68 39,097 3,083 7.89 Federal funds sold 5,937 280 4.72 13,253 691 5.21 10,925 573 5.24 Loans and loans held for sale (3) 502,272 54,134 10.78 387,914 44,348 11.43 299,976 34,329 11.44 ------- ------- --------- ------- -------- ------- Total interest-earning assets/interest income (2) 578,422 59,206 10.24 483,493 50,723 10.49 398,855 41,152 10.32 Allowance for loan losses (5,399) (3,882) (3,123) Cash and due from banks 31,440 28,351 27,552 Premises and equipment, net 13,993 11,407 9,790 Other assets 16,547 5,848 6,112 -------- -------- -------- Total assets $635,003 $525,217 $439,186 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Savings and interest-bearing demand 260,240 7,865 3.02 $211,896 6,889 3.25 $166,800 5,156 3.09 Time deposits 167,702 8,597 5.13 145,387 8,185 5.63 129,756 7,299 5.63 Short-term borrowings 26,356 1,405 5.33 10,016 489 4.88 9,688 539 5.56 Long-term debt 5,945 273 4.59 10,000 572 5.72 -------- ------- -------- ------- -------- ------ Total interest-bearing liabilities/interest expense 454,298 17,867 3.93 373,244 15,836 4.24 316,244 13,566 4.29 Demand deposits 106,317 90,166 75,005 Other liabilities 4,948 5,095 2,001 -------- -------- -------- Total liabilities 565,563 468,505 393,250 Shareholders' equity 69,440 56,712 45,936 --------- -------- -------- --------- -------- Total liabilities and shareholders' equity $635,003 $525,217 $439,186 ======== ======== ======== Net interest income (2) $41,339 $34,887 $27,586 ======= ======= ======= Net interest spread (2) 6.31% 6.25% 6.03% ===== ===== ===== Net interest margin (2) 7.15% 7.22% 6.92% Net interest income to average shareholders' equity (2) 59.53% 61.52% 60.05% Average interest-earning assets to average interest-bearing liabilities 127% 130% 126% - -------------------------- (1)Average balances are based on daily averages. (2)Average yield on non-taxable securities, interest income, net interest income, net interest spread, net interest margin and net interest income to average shareholders' equity have been computed on a 34% tax-equivalent basis. (3)Nonaccrual loans have been included in the computation of average loans and loans held for sale. Loan fees recognized and included in interest income totaled $7,282,948, $6,855,866 and $4,769,700 in 1999, 1998 and 1997, respectively.
8
ANALYSIS OF CHANGES IN INTEREST RATE DIFFERENTIAL The following table shows the dollar amount of the increase (decrease) in Bancorp's interest income and interest expense for the years indicated, on a tax-equivalent basis, and attributes such dollar amounts to changes in volume and changes in interest rates. Changes attributable to the combined effect of volume and interest rate changes, which were immaterial, have been allocated equally between interest rate and volume. 1999 vs. 1998 1998 vs. 1997 Change in Change in net interest income due to net interest income due to --------------------------------- -------------------------------- Volume Rate Total Volume Rate Total -------- ------ ------- -------- ------ ------ (In thousands) Interest income: Balances due from banks $ (10) $ 4 $ (6) $ (357) $ (5) $ (362) Investment securities -- taxable (416) (68) (484) 431 (126) 305 Investment securities -- non-taxable (412) 10 (402) (435) (74) (509) Federal funds sold (363) (48) (411) 122 (4) 118 Loans 12,700 (2,914) 9,786 10,059 (40) 10,019 ------ ------ ------ ------ ------ ------ Total interest income 11,499 (3,016) 8,483 9,820 (249) 9,571 Interest expense: Deposits: Savings and interest-bearing demand 1,516 (540) 976 1,430 303 1,733 Time 1,200 (788) 412 880 5 885 Short-term borrowings 834 82 916 17 (67) (50) Long-term debt (273) (273) (209) (90) (299) ------- ------ ------ ------ ------ ------ Total interest expense 3,277 (1,246) 2,031 2,118 151 2,269 ------ ------- ------ ------ ------ ------ Net interest income $8,222 $(1,770) $6,452 $7,702 $ (400) $7,302 ====== ======= ====== ====== ====== ======
9 MARKET AREAS The greater Portland area, where Centennial Bank has eight full-service and five limited-service branches and two commercial banking centers and where Centennial Mortgage has three offices, has become Bancorp's primary market. The metropolitan area, including Vancouver, Washington, has an increasingly diversified, growing economy and a population of approximately 1.8 million. The Portland area continues to provide excellent growth opportunity and also allows dilution of loan portfolio risk due to the area's economic diversity. Bancorp's other major market area, with five full-service bank branches, a commercial banking center and two mortgage lending offices, is the Eugene/Springfield area at the southern end of Oregon's Willamette Valley. The populations of Eugene and Springfield combined total approximately 189,000. The area's economy depends primarily upon U. S., state and local governments, educational institutions, forest products, general manufacturing (especially small manufacturing and high-technology industries) and health care. With the opening of a full-service bank branch in mid-1999, Bancorp entered the Salem, Oregon market. Salem is the state capitol and is located in the Willamette Valley about midway between Portland and Eugene. The Salem area population is approximately 124,000. The area economy is highly dependent on the state government although educational institutions, the U. S. and local governments, healthcare and food processing are also very significant. Centennial Bank has a branch office in Cottage Grove, Oregon, located approximately 20 miles south of Eugene and Springfield. The population of Cottage Grove totals approximately 8,000. Its economy depends primarily upon forest products, general manufacturing and agriculture. LENDING ACTIVITIES GENERAL Bancorp provides a broad range of commercial and real estate lending services. The primary focus of Bancorp's lending activities is to provide commercial loans to small- to medium-sized businesses with annual revenues up to $50 million, and to professionals. Commercial and residential real estate construction lending, as well as residential mortgage loan origination and sales, are also important aspects of Bancorp's lending activities. Bancorp makes consumer loans, primarily to accommodate existing customers, but does not actively pursue such business. Most of Bancorp's loans are made to customers in branch office trade areas. 10 Bancorp strives to maintain sound loan underwriting standards with written loan policies, conservative individual limits and, depending on the size of the credit request, reviews by Centennial Bank's Senior Loan Committee and the Asset/Liability Committee of the Board of Directors. Underwriting standards are designed to achieve a high-quality loan portfolio, compliance with lending regulations and the desired mix of loan maturities and industry concentrations. Management further seeks to minimize credit losses by closely monitoring the financial condition of its borrowers and the value of collateral. In-house legal counsel assists in loan documentation and collections. LOAN PORTFOLIO COMPOSITION The following table sets forth information with respect to the composition of Bancorp's loan portfolio (loans and loans held for sale) by type of loan at December 31 for each of the last five years:
December 31, -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- --------- ---------- ------- (In thousands) Commercial $219,588 $163,577 $146,594 $116,656 $ 77,983 Real estate - construction 227,388 150,816 88,842 66,001 43,851 Real estate - mortgage 129,221 94,475 87,357 79,870 54,442 Installment 8,409 7,073 6,603 6,425 5,929 Loans held for sale 6,155 11,039 5,585 3,538 4,573 Lease financing 4,868 1,897 3,649 3,775 4,001 Other 4,199 3,137 1,995 2,365 311 --------- --------- -------- -------- --------- Total loans and loans held for sale 599,828 432,014 340,625 278,630 191,090 Less allowance for loan losses (6,165) (4,451) (3,349) (2,600) (1,928) --------- -------- -------- --------- --------- Loans receivable, net $593,663 $427,563 $337,276 $266,030 $189,162 ========= ======== ======== ========= =========
The following table presents the aggregate maturities of loans in each major category of Bancorp's loan portfolio at December 31, 1999. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments. Total Due within Due after one but Due after loans by Loan category one year within five years five years category ------------- -------- ----------------- ---------- --------- (In thousands) Commercial $133,703 $58,849 $27,036 $219,588 Real estate - construction 162,244 59,503 5,641 227,388 Real estate - mortgage 26,983 42,504 59,734 129,221 Installment 3,709 4,412 288 8,409 Loans held for sale -- -- 6,155 6,155 Lease financing 174 4,694 -- 4,868 Other 830 3,059 310 4,199 -------- -------- ------- -------- Total loans by maturity $327,643 $173,021 $99,164 $599,828 ======== ======== ======= ========
11 Of Bancorp's $272 million of loans that mature after one year, a total of $157 million (approximately 58%) are fixed-rate loans, and a total of $115 million (approximately 42%) are variable-rate loans. At December 31, 1999, $181 million of Bancorp's loans (approximately 30%) had fixed interest rates, and $419 million (approximately 70% of its loan portfolio) had variable interest rates. REAL ESTATE CONSTRUCTION LOANS Real estate construction loans are Bancorp's largest category of loans. This category includes loans which finance land acquisition, residential lot development, construction of single-family and multi-family residential properties, and the development and construction of a wide range of commercial real estate projects. Land acquisition and lot development loans generally have maturities of 12 to 18 months while residential construction loans generally have maturities of 12 months. Commercial construction loans normally have 12 to 18 month maturities with extension options when justified. At December 31, 1999, 90% of the outstanding loans in this category had variable interest rates with the remaining 10% having fixed rates. Construction financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. The risk of loss on construction loans depends largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, Bancorp might have to advance funds beyond the amount originally committed to permit completion of the project and to protect its security position. Bancorp might also be confronted, at or prior to maturity of the loan, with a project of insufficient value to ensure full repayment. Bancorp's underwriting, monitoring and disbursement practices with respect to construction financing are intended to ensure that sufficient funds are available to complete construction projects. Bancorp endeavors to limit its risk through its underwriting procedures by using only approved, qualified appraisers, by dealing only with qualified builders/borrowers, and by closely monitoring the construction projects through the process of completion and sale. At December 31, 1999, real estate construction loans had increased to $227.4 million from $150.8 million at December 31, 1998 and $88.8 million at December 31, 1997. The increases were primarily attributable to strong growth in commercial real estate construction lending resulting from an expansion of Centennial Mortgage's business strategy. No loans in this category were non-accruing at December 31, 1999. The December 31, 1998 non- 12 accrual total was $2.3 million and was concentrated in loans to one borrower. The borrower filed bankruptcy, and Centennial Bank subsequently foreclosed and acquired the underlying real estate collateral which has been substantially liquidated. Management believes the value of the remaining property is sufficient to preclude loss when sold. At December 31, 1999 and 1998, there were no restructured loans in this category. COMMERCIAL LOANS Commercial loans that are not secured by real estate represent the second largest category of Bancorp's loans. Bancorp's areas of emphasis include, but are not limited to, loans to small- to medium-sized businesses and to professionals. Bancorp provides a wide range of commercial business loans, including lines of credit for working capital and term loans for the acquisition of equipment and other purposes. Collateral generally includes equipment, accounts receivable and inventory. Where warranted by the overall financial condition of the borrower, loans may be made on an unsecured basis. At December 31, 1999, approximately 74% of Bancorp's commercial loans had floating or adjustable interest rates; the remaining 26% had fixed interest rates. Operating lines of credit are payable on demand and subject to annual renewal. Term loan maturities generally range from one to five years. Commercial loans outstanding at December 31, 1999 were $219.6 million, compared to $163.6 million at December 31, 1998 and $146.6 million at December 31, 1997. Loan growth in 1999 and 1998 was primarily the result of Centennial Bank's business development program, expansion through new commercial banking centers and branch offices, and the continuing favorable Oregon economy. Non-accrual loans in this category totaled $579,00 at December 31, 1999 ($776,000 at December 31, 1998); there were no restructured loans at December 31, 1999 or 1998. REAL ESTATE MORTGAGE LOANS Real estate mortgage loans represent Bancorp's third largest category of loans. Of the $135.4 million of real estate mortgage loans outstanding at December 31, 1999, $109.7 million consisted of income property and commercial loans secured by real estate. Income property loans and commercial loans secured by real estate typically involve large balances to single borrowers or groups of related borrowers. These borrowers may be more sensitive to changes in economic conditions than residential mortgage loan customers. At December 31, 1999, approximately 66% of Bancorp's real estate mortgage loans had fixed interest rates; the other 34% had floating or adjustable interest rates. Maturities of the real estate mortgage loans retained by Bancorp usually range from one to ten years. Real estate mortgage loans outstanding increased 13 to $135.4 million at December 31, 1999 from $105.5 million at December 31, 1998 and $92.9 million at December 31, 1997. The strong 1999 growth was primarily due to strategic emphasis on developing the income property and commercial real estate portion of the portfolio. At December 31, 1999, there were no non-accrual loans in this category ($726,000 at December 31, 1998). At December 31, 1999 and 1998, there were no restructured loans in this category. Bancorp's underwriting standards specify the following maximum loan-to-value ratios for real estate loans: 85% for loans secured by owner-occupied residences, 80% for other residential loans and for construction loans, and 80% for commercial real estate loans. Bancorp originates SBA real estate loans on owner-occupied properties where the maturities may be up to 20 years, and the loan-to-value ratio may reach 90% of appraised value or cost, whichever is lower. Up to 75% of the amount of these loans is guaranteed or insured by an agency of the U.S. Government. The guaranteed portion of these loans is typically sold to secondary-market investors. At December 31, 1999, the amount of the non-guaranteed portion of these loans retained by Bancorp was not material. INSTALLMENT LOANS Bancorp does not actively solicit consumer loans, but makes such loans primarily as a convenience to existing customers. Bancorp includes in its installment loan category personal lines of credit, as well as consumer installment loans (such as for automobile purchases). Consumer loans may be secured or unsecured. Collections depend principally on the borrower's financial condition or cash flow. Installment loans were $8.4 million at December 31, 1999 compared to $7.1 million at December 31, 1998 and $6.6 million at December 31, 1997. These modest levels of installment loans to individuals were primarily due to Bancorp's focus on lending to businesses and professionals and significant competition for consumer loans from the many credit unions, banks and finance companies in the market areas served by Bancorp. At December 31, 1999 and 1998, there were no non-accrual or restructured loans in this category. COMMITMENTS AND CONTINGENT LIABILITIES In the ordinary course of business, Bancorp enters into various types of transactions that include commitments to extend credit and standby letters of credit as described in Note 7 to Bancorp's Consolidated Financial Statements, which are incorporated by reference from Bancorp's 1999 Annual Report to Shareholders. Bancorp applies the same credit standards to these 14 commitments as it uses in all its lending processes and includes these commitments in its lending risk evaluations. Collateral for these commitments may include cash, accounts receivable, inventory, equipment, securities and/or real estate. CREDIT AUTHORITY AND LOAN LIMITS All Bancorp loans and other credit facilities are subject to credit and collateral approval procedures and loan amount limitations. Loan officers and lending unit managers have individual authority to approve loans in amounts up to established limits, ranging from $25,000 to $750,000. Credit requests in excess of those limits, or not in conformance with lending policies, are reviewed by successive levels of approval authority according to the total amounts involved. These authority levels include, by ascending approval limits, Credit Administration officers, the Senior Loan Committee and the Asset/Liability Committee of the Board of Directors. The Senior Loan Committee consists entirely of Bancorp senior management. The Asset/Liability Committee has seven members including five non-employee directors, Bancorp's President and CEO, and Centennial Bank's President and CEO. All loans in excess of $25,000 to executive officers and directors of Bancorp or any of its subsidiaries must be approved by the Asset/Liability Committee and ratified by Centennial Bank's Board of Directors. Under Oregon law, permissible loans from a financial institution to one borrower are generally limited to 15% of the institution's Tier 1 and Tier 2 capital, as defined by regulation. However, loans and other obligations up to an additional 10% of the institution's capital may be made to the borrower if the obligations are secured by a first lien on real estate, and the obligation does not exceed 80% of the fair market value of the real estate as determined by an independent appraisal. At December 31, 1999, Centennial Bank's legal lending limit was $9.9 million (or $16.5 million if secured by a first lien on real estate). However, for internal policy purposes, Centennial Bank's legal lending limit is set at $9.25 million (or $15.5 million if secured by a first lien on real estate). Loan pricing decisions are based on an evaluation of credit risk, cost of funds, operating and administrative costs, an allowance for loan losses, desired profit margin and other factors. Bancorp uses a computer based pricing model that analyzes a borrower's contribution to net earnings and return on assets. Centennial Bank sells loan participations to accommodate borrowers whose financing needs exceed Centennial Bank's lending limits, to diversify risk and manage liquidity. Centennial Bank occasionally purchases participations in loans from correspondent banks. Centennial Bank's policies prohibit aggregate purchased 15 participations in excess of 10% of Centennial Bank's loan portfolio. NON-PERFORMING ASSETS Non-performing assets consist of loans past due 90 days or more, non-accrual loans, troubled debt restructurings ("restructured loans") and other real estate owned ("OREO"). The following table sets forth information concerning Bancorp's non-performing assets at the end of each of the last five years:
December 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 ----- ------ ------ ------ ------ (Dollars in thousands) Non-performing loans: Loans past due 90 days or more $2,163 $1,043 $ 402 $ 420 $ 645 Non-accrual loans 579 3,841 873 1,480 478 Restructured loans -- -- -- -- -- ------ ------ ------ ------ ------ Total non-performing loans 2,742 4,884 1,275 1,900 1,123 Other real estate owned 413 105 -- -- -- ------ ------ ------ ------ ------ Total non-performing assets $3,155 $4,989 $1,275 $1,900 $1,123 ====== ====== ====== ====== ====== Allowance for loans losses $6,165 $4,451 $3,349 $2,600 $1,928 Ratio of total non-performing assets to total assets .43% .87% .26% .47% .35% Ratio of total non-performing loans to total loans .46% 1.13% .38% .71% .59% Ratio of allowance for loan losses to total non-performing loans 225% 91% 263% 137% 172%
The accrual of interest on a loan is discontinued when, in management's judgment, the future collection of principal or interest is in doubt. Loans placed on non-accrual status may or may not be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on non-accrual status, Bancorp's policy is to reverse, and charge against current income, interest previously accrued but uncollected. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. If interest on non-accrual loans had been accrued, such income would have been approximately $97,000 in 1999, $273,000 in 1998 and $103,000 in 1997. Total interest income of $27,500 and $141,600 was recognized on non-accrual loans during 1999 and 1998 respectively; no such income was recognized in 1997. Restructured loans occur when Bancorp, for economic or legal reasons related to a borrower's financial difficulties, grants a concession that would not otherwise be considered. Such concessions include reduction of the interest rate for the remainder of the contract term, extension of the maturity date at 16 an interest rate less than the market rate for new debt of similar risk, and forgiveness of accrued interest and/or principal. Bancorp had no restructured loans at December 31, 1999, 1998 or 1997. OREO consists of real estate acquired by Bancorp through foreclosure or by a deed in lieu of foreclosure. Properties in OREO are carried at the lower of net realizable value or the principal balance of the related loan. Any excess of the loan balance over fair value of the property is charged to the allowance for loan losses. At December 31, 1999 and 1998, OREO totaled $413,100 and $105,400, respectively, and consisted of one property at each date. At December 31, 1997, Bancorp held no OREO. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's estimate of the losses inherent in the loan portfolio. The allowance is based primarily on management's evaluation of the overall quality and risk characteristics of Bancorp's loan portfolio, which is dependent upon numerous interrelated factors including present non-performing and delinquent loans, borrowers' perceived abilities to repay, value of collateral, general and local economic conditions and historical loan loss experience. Centennial Bank's Asset/Liability Committee reviews the adequacy of the allowance for loan losses quarterly. Although determination of the adequacy of the allowance involves substantial subjective judgment based on the Committee's analysis of the risk characteristics of the entire loan portfolio, the Committee also uses three quantitative methods to analyze the adequacy of the allowance. Under the first method, management assigns a specific percentage, based on historic loss factors, to each non-accrual, substandard or doubtful loan in Bancorp's loan portfolio to calculate a total amount of average anticipated loan losses. The second method uses credit risk ratings (from one through eight) and related loss factor multipliers (from .10% for loans in the lowest risk category up to 100% for loans in the highest risk category) to calculate an alternative amount of possible losses. The third method is in accordance with the requirements of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114, a loan is considered impaired, based on current information and events, if it is probable that Bancorp will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Bancorp specifically examines all loans greater than $100,000 that are identified on an internal watch list. Loans which are 17 over 90 days contractually delinquent and loans which have developed inherent problems prior to being 90 days delinquent may be considered impaired. An insignificant delay or shortfall in the amount of payments is not an event that, when considered in isolation, would automatically cause a loan to be considered impaired for purposes of SFAS 114. All collateral-dependent loans are measured for impairment based on the fair value of the collateral. The measurement of other impaired loans is based on the present value of expected future cash flows discounted at the historical effective interest rate The amounts calculated by the quantitative methods are then compared by the Committee to the allowance for loan losses in evaluating the adequacy of the allowance. Management believes that Bancorp's allowance for loan losses is adequate to cover anticipated losses and is in accordance with generally accepted accounting principles. There can be no assurance, however, that management will not decide to increase the allowance for loan losses or that regulators will not require Bancorp to increase the allowance, either of which events could adversely affect Bancorp's results of operations. Further, there can be no assurance that Bancorp's actual loan losses will not exceed its allowance. The following table sets forth information regarding changes in Bancorp's allowance for loan losses for each of the last five years:
At or for the year ended December 31, --------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in thousands) Loans and loans held for sale at year-end $599,828 $432,014 $340,625 $268,630 $191,090 ======== ======== ======== ======== ======== Average loans and loans held for sale $502,272 $387,914 $299,976 $226,965 $176,384 ======== ======== ======== ======== ======== Allowance for loan losses, beginning of year $ 4,451 $ 3,349 $ 2,600 $ 1,928 $ 1,700 Charge-offs: Commercial and other (559) (370) (556) (89) (128) Real estate -- construction -- -- -- -- -- Real estate -- mortgage (110) -- -- -- -- Installment (3) (82) (2) (20) (34) -------- -------- ------- ------- ------ Total charge-offs (672) (452) (558) (109) (162) -------- -------- ------- ------- ------ Recoveries: Commercial and other 43 43 55 24 10 Real estate -- construction -- -- -- -- 3 Real estate -- mortgage -- -- -- 20 7 Installment 43 11 2 2 20 --------- -------- -------- -------- ------ Total recoveries 86 54 57 46 40 --------- -------- -------- -------- ------ Net loans charged off (586) (398) (501) (63) (122) Loan loss provision 2,300 1,500 1,250 735 350 --------- -------- -------- -------- ------ Allowance for loan losses at year-end $ 6,165 $ 4,451 $ 3,349 $ 2,600 $ 1,928 ======== ======== ======== ======= ====== 18 Ratio of net loans charged off to average loans outstanding (.12)% (.10)% (.17)% (.03)% (.07)% Ratio of allowance for loan losses to loans at year-end 1.03% 1.04% .98% .97% 1.01%
Anticipated loan losses are charged against the allowance for loan losses when, in management's opinion, ultimate recovery is unlikely or when bank examiners require a charge-off. As the actual amount of loss with respect to specific loans is often dependent upon future events (including liquidation of collateral), Bancorp cannot accurately predict precisely what losses, if any, will be sustained with respect to specific loans. Historical experience has also shown that, at any particular time, loan losses may exist in a loan portfolio that have not yet been identified. For these reasons, although management analyzes specific loans in determining the adequacy of its allowance for loan losses, it does not normally allocate the allowance to specific groups or categories of loans. Management estimates, however, that the allocation of the allowance for loan losses by loan category at the end of each of the last five years was as set forth in the following tables: Amount of Loans in allowance category as a for percentage of loan total gross losses loans ------------ -------------- (Dollars in thousands) December 31, 1999 - ----------------- Commercial and other $3,700 38.1% Real estate - construction 1,850 37.9 Real estate - mortgage 450 22.6 Installment 100 1.4 Unallocated 65 -- ------ ----- Total $6,165 100.0% ====== ===== December 31, 1998 - ----------------- Commercial and other $2,701 39.1% Real estate - construction 1,350 34.9 Real estate - mortgage 275 24.4 Installment 75 1.6 Unallocated 50 -- ------ ----- Total $4,451 100.0% ====== ===== December 31, 1997 - ----------------- Commercial and other $1,999 45.2% Real estate - construction 1,000 26.6 Real estate - mortgage 250 26.2 Installment 50 2.0 Unallocated 50 -- ------ ------ Total $3,349 100.0% ====== ===== 19 December 31, 1996 - ----------------- Commercial and other $1,500 46.5% Real estate - construction 750 25.0 Real estate - mortgage 250 26.5 Installment 50 2.0 Unallocated 50 -- ------ ----- Total $2,600 100.0% ====== ===== December 31, 1995 - ----------------- Commercial and other $1,200 44.1% Real estate - construction 520 23.5 Real estate - mortgage 125 29.2 Installment 35 3.2 Unallocated 48 -- ------ ----- Total $1,928 100.0% ====== ===== The following table details the carrying value of Bancorp's impaired loans, in accordance with SFAS 114, by type of loan at December 31, 1999 and 1998: Net Recorded Valuation Carrying Amount Allowance Value -------- --------- ----- December 31, 1999 - ---------------------- Commercial $5,170,200 $389,100 $4,781,100 Real Estate - construction 662,700 75,500 587,200 ---------- -------- ---------- Total $5,832,900 $464,600 $5,368,300 ========== ======== ========== December 31, 1998 - ---------------------- Commercial $1,576,700 $160,600 $1,416,100 Real Estate - construction 2,791,000 289,900 2,501,100 Real Estate - mortgage 850,700 112,600 738,100 ---------- -------- ---------- Total $5,218,400 $563,100 $4,655,300 ========== ======== ========== The above impaired loans were measured based on the fair value of the loan's collateral. The allowance for loan losses for all other loans is determined based on the methodology discussed above. 20 INVESTMENT ACTIVITIES Bancorp's investment portfolio consists of U.S. government securities, municipal securities, mortgage-backed securities, corporate bonds and equity securities. Bancorp's primary investment objectives are to maintain liquidity and to generate after-tax profits consistent with the risk guidelines established by the Board of Directors. At December 31, 1999 and 1998, Blount Investment Group of Eugene, Oregon, advised Bancorp with respect to the investment portfolio. Centennial Bank has extended loans to Blount Investment Group and its affiliates. Such loans are made on terms no more favorable than the terms on similar loans to other borrowers. All of the securities held in the investment portfolio were classified as available-for-sale at December 31, 1999 and 1998. Those securities will be sold as necessary to provide liquidity and to respond to interest rate changes. Because these securities are carried at their market value, fluctuations in interest rates could affect the carrying value of these securities and, therefore, the reported shareholders' equity of Bancorp. The following table provides the carrying values of Bancorp's investment portfolio at the end of each of the last three years. See Note 2 to Bancorp's Consolidated Financial Statements for more information about investment securities held at December 31, 1999, 1998 and 1997. December 31, - ------------ 1999 1998 1997 ------- ------- ------- (In thousands) U.S. Treasury securities $ 1,399 $ 1,435 $ 1,417 U.S. Government agencies 26,534 39,263 34,415 States and political subdivisions 27,316 29,578 39,434 Corporate bonds 2,205 2,311 2,301 Mortgage-backed securities 1,905 4,206 6,337 ------- ------- ------- Total investment securities $59,359 $76,793 $83,904 ======= ======= ======= 21 The following table provides the carrying values, principal amounts, maturities and weighted average yields of Bancorp's investment securities at December 31, 1999, all of which are classified as available-for-sale:
Weighted Carrying value Principal average Type and maturity (fair market value) amount yield(1) ----------------- ------------------- ----------- -------- (Dollars in thousands) U.S. Treasuries Due within 1 year $ 654 $ 649 6.72% Due after 1 but within 5 years 745 751 5.70 Due after 5 but within 10 years -- -- ------ ------ Total U.S. Treasuries 1,399 1,401 6.17 U.S. Government agencies Due after 1 but within 5 years 12,545 13,000 5.69 Due after 5 but within 10 years 13,989 14,989 6.11 ------ ------ Total U.S. Government agencies 26,534 27,989 5.92 States and political subdivisions Due after 1 but within 5 years 7,396 7,346 7.71 Due after 5 but within 10 years 3,044 3,045 7.75 Due after 10 years 16,876 18,078 7.75 ------ ------ Total states and political subdivisions 27,316 28,469 7.74 Corporate bonds Due within 1 year 200 200 6.26 Due after 1 but within 5 years 1,762 1,826 6.19 Due after 5 but within 10 years 243 258 6.08 ------- ------ Total corporate bonds 2,205 2,284 6.18 Mortgage-backed securities Due within 1 year 451 469 4.76 Due after 5 but within 10 years 1,131 1,136 4.96 Due after 10 years 323 330 5.94 ------- ------ Total mortgage-backed securities 1,905 1,935 5.08 Total investment securities $59,359 $62,078 6.75 ======= ======= - ------------ (1) Weighted average yield on state and political subdivisions has been computed on a 34% tax-equivalent basis.
22 DEPOSITS Centennial Bank offers a variety of accounts for depositors designed to attract short-term and long-term deposits. These accounts include certificates of deposit ("CDs"), savings accounts, money market accounts, checking and interest checking accounts and individual retirement accounts. These accounts generally earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Centennial Bank does not pay brokerage commissions to attract deposits. Centennial Bank has developed a special account for customers age 50 or older called the "50+ Account." The 50+ Account is designed to attract customers in this age group who generally have higher than average deposits and favorable ability to repay borrowings. Centennial Bank also markets to small- to medium-sized businesses and to professionals in its commercial lending program. These types of customers also create substantial deposits, resulting in low-cost funds being available for Centennial Bank's lending activities. The following table presents the average balances for each major category of deposits and the weighted average interest rates paid for interest-bearing deposits for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---------------- ---------------- --------------- Average Average Average ---------------- ---------------- --------------- Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- (Dollars in thousands) Noninterest-bearing demand $ 106,317 N/A $ 90,166 N/A $ 75,005 N/A Interest-bearing demand 231,861 2.99 192,356 3.30 152,453 3.16 Savings 28,379 3.26 19,540 2.79 14,347 2.36 CDs 167,702 5.12 145,387 5.63 129,756 5.63 ------- ------- -------- Total $534,259 3.08 $447,449 3.37 $371,561 3.35 ======== ======== ========
The following table shows the dollar amount of CDs that had balances of $100,000 or more at December 31, 1999 and 1998:
December 31, ----------------------------- 1999 1998 ----------- ---------- (In thousands) CDs $100,000 or over with remaining maturity: Three months or less $20,043 $15,985 Over three months through twelve months 44,043 39,437 Over one year through three years 15,100 5,161 Over three years 239 125 -------- ------- Total $79,425 $60,708 ======= =======
23 SHORT-TERM BORROWINGS At December 31, 1999, Bancorp's short-term borrowings consisted of securities sold under agreements to repurchase totaling $8.2 million, federal funds purchased totaling $19.6 million and Federal Home Loan Bank of Seattle advances totaling $46.7 million. Securities sold under agreement to repurchase are due on demand, but generally range in duration from one to eighty-nine days. At December 31, 1998, Bancorp's short-term borrowings consisted of securities sold under agreements to repurchase totaling $16.1 million, federal funds purchased totaling $1.0 million and Federal Home Loan Bank of Seattle advances totaling $3.5 million. At December 31, 1997, Bancorp's short-term borrowings consisted of securities sold under agreements to repurchase totaling $7.7 million. The following table sets forth certain information with respect to Bancorp's short-term borrowings at December 31 and during each of 1999, 1998 and 1997:
December 31, ------------------------------------------ 1999 1998 1997 ------- -------- -------- (Dollars in thousands) Amount outstanding at year-end $74,554 $20,600 $ 7,716 Weighted average interest rate at year-end 5.45% 4.55% 5.03% Maximum amount outstanding at any month-end during the year 74,554 $20,500 $18,321 Daily average amount outstanding during the year 26,356 $10,016 $ 9,688 Average weighted interest rate during the year 5.33% 4.88% 5.56%
LONG-TERM DEBT At December 31, 1999 and 1998, Bancorp had no long-term debt. At December 31, 1997, Bancorp's long-term debt consisted of $10.0 million of funds advanced from the Federal Home Loan Bank of Seattle to Centennial Bank. Interest on the debt was payable monthly at the rate of 6.14%. The debt matured and was paid August 6, 1998. The loan was secured by Federal Home Loan Bank of Seattle stock, funds on deposit with the Federal Home Loan Bank of Seattle, investments and loans. 24 RETURN ON EQUITY AND ASSETS
The following table sets forth Bancorp's return on daily average assets and equity for 1999, 1998 and 1997: 1999 1998 1997 -------- -------- ------- (Dollars in thousands) Net income $ 12,106 $ 11,435 $ 9,303 Average total assets 635,003 525,217 439,186 Return on average assets 1.91% 2.18% 2.12% Net income $ 12,106 $ 11,435 $ 9,303 Average equity 69,440 56,712 45,936 Return on average equity 17.43% 20.16% 20.25% Average total equity $ 69,440 $ 56,712 $ 45,936 Average total assets 635,003 525,217 439,186 Average total equity to assets ratio 10.94% 10.80% 10.46%
CHANGES IN ACCOUNTING PRINCIPLES The Financial Accounting Standards Board ("FASB") has issued the following accounting pronouncements which Bancorp has adopted in 1999 or will be required to adopt in future fiscal reporting periods. SFAS NO. 133, 137 In June 1999, FASB issued Statement of Financial Accounting Standards 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement 133" (SFAS 137), an amendment of SFAS 133, which establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS 133, as amended by SFAS 137, is effective for all quarterly and annual financial statements of fiscal years beginning after June 15, 2000. Bancorp had no significant derivatives as of December 31, 1999, nor does Bancorp engage in any hedging activities. Accordingly, Bancorp does not anticipate that the adoption of SFAS 133, as amended by SFAS 137, will have a material effect on its consolidated financial position or results of operations. SFAS NO. 134 In October 1998, SFAS 134, "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" 25 (SFAS 134), was issued. SFAS 134 was effective in 1999 and had no effect on Bancorp's consolidated financial position or results of operation. COMPETITION Commercial banking in Oregon is highly competitive with respect to both loans and deposits. Centennial Bank competes principally with other commercial banks, savings and loan associations, credit unions, mortgage companies, and other financial institutions with respect to the scope and type of services offered, interest rates paid on deposits and pricing of loans, among other factors. Many of these competitors have substantially greater resources than Centennial Bank and have branches in more locations. Certain of these competitors have larger lending capabilities due to their greater size and provide other services that Centennial Bank does not offer. During the past several years, Bancorp capitalized on the marketing opportunities created by the consolidation of the banking industry as the larger institutions were perceived to de-emphasize the small- to medium-size business and professional market, which is Bancorp's primary focus. Several banks, which focus on the same types of customers, have been formed in Bancorp's market areas during the last few years. This growing number of community banks and a new emphasis by larger institutions on this market segment has intensified competition. In addition, the Gramm-Leach-Bliley Act, enacted on November 12, 1999 (the "GLB Act"), eliminates several barriers to affiliation among providers of financial services and may affect the competitive environment in which Bancorp operates in substantial and unpredictable ways. Effective March 11, 2000, the GLB Act permits certain business combinations between banks, insurance companies, securities firms, and other financial service providers that were not permitted previously. Using the Financial Holding Company structure created by the GLB Act, insurance companies and securities firms may now compete more directly with banks and bank holding companies, and attempt to acquire existing financial institutions. Bancorp cannot predict the changes in the competitive environment or the financial condition of Bancorp that may occur as a direct or indirect result of the GLB Act and the increased competition it may create. Bancorp will continue to compete for loans and deposits principally through the range and quality of the services it provides. Management believes Bancorp's emphasis on high-quality, personal attention to customers and on providing services specific to the needs of its customers enables it to compete effectively with other financial institutions. To serve customers whose borrowing requirements exceed its 26 lending limits, Centennial Bank arranges participations with other lenders. EMPLOYEES Centennial Bancorp has no employees other than its executive officers, who are also employees of Centennial Bank. At December 31, 1999, Centennial Bank and Centennial Mortgage had 234 and 62 full-time equivalent employees, respectively. Bancorp places a high priority on selective hiring and development of staff. Staff development involves training in customer service, marketing and regulatory compliance. Bancorp has adopted extensive incentive programs for employees that focus and are dependent on the achievement of certain of Bancorp's financial, service and marketing goals. None of Bancorp's employees is covered by collective bargaining agreements, and management believes that Bancorp's relationship with its employees is good. SUPERVISION AND REGULATION Bancorp and Centennial Bank are extensively regulated under federal and Oregon law. These laws and regulations are primarily intended to protect depositors and the deposit insurance fund, not shareholders of Bancorp. The following information is qualified in its entirety by reference to applicable statutory and regulatory provisions. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of Bancorp and its subsidiaries. Various laws and regulations are enacted from time to time at the state or federal level, which may change the operating environment of Bancorp in substantial and unpredictable ways. The GLB Act recently enacted by Congress is expected to have a significant impact on the banking industry. (See "Recent Legislation - the Gramm-Leach-Bliley Act" below.) Several regulatory agencies and state legislatures are in the process of responding to changes required or suggested by the GLB Act. Bancorp cannot determine the ultimate effect that the GLB Act, or the regulations implemented and legislation enacted as a result of that act, will have on the operating structure, financial condition or results of operations of Bancorp. RECENT LEGISLATION - THE GRAMM-LEACH-BLILEY ACT On November 12, 1999, Congress enacted the GLB Act, also known as the Financial Services Modernization Act. The GLB Act provides substantial changes that directly affect the banking industry. The GLB Act removes several state and federal barriers to affiliation among banks, insurance companies, securities firms, and other financial services providers, and creates a new 27 entity known as a "financial holding company" ("FHC"). Effective March 11, 2000, a bank holding company may elect to become an FHC and, as an FHC, engage in a broader range of financial and other activities than is permissible for the traditional bank holding companies. In order to qualify as an FHC, each depository institution subsidiary of the bank holding company must be rated as "well capitalized" and "well managed." Also, in order to commence any of the newly authorized activities or acquire control of a company engaged in the newly authorized activities, the holding company must qualify as an FHC and each depository institution subsidiary of the FHC or its affiliates must have received at least a "satisfactory" rating in its most recent examination under the Community Reinvestment Act of 1977 (the "CRA"). FHCs will be permitted to engage in activities defined by the GLB Act as "financial in nature" including, among others, insurance underwriting and agency activities, investment advisory services, merchant banking, investment banking and underwriting activities, and dealing or making a market in securities. Bank holding companies that do not qualify for, or have not elected, FHC status are limited to those non-banking activities determined by the Board of Governors of the Federal Reserve System (the "FRB") to be "so closely related to banking as to be a proper incident thereto" prior to adoption of the GLB Act. FHCs that do not continue to meet all of the requirements for FHC status may not be able to undertake new activities or acquisitions that are "financial in nature," or could lose their ability to continue activities that are not generally permissible for bank holding companies. In addition, the GLB Act provides for expanded activities for "financial subsidiaries" of national banks. Financial subsidiaries may engage in financial activities except for insurance underwriting, real estate development or investment, and merchant banking, all of which may only be engaged in by a subsidiary of an FHC. In order to have a financial subsidiary, the national bank and each of its depository institution affiliates must be well capitalized and well managed, and the total assets of all financial subsidiaries may not exceed the lesser of 45% of the consolidated total assets of the parent bank or $50 billion. In addition, the national bank must meet certain rating requirements if it is one of the 100 largest insured banks and engages in financial activities as a principal. Insured state banks may control or hold an interest in a subsidiary that engages in activities as a principal that would only be permissible for a national bank to conduct through a financial subsidiary, so long as the bank and all insured depository affiliates are well capitalized after meeting certain capital deduction and financial statement disclosure requirements. In addition, an insured state bank may retain its interests in subsidiaries controlled or acquired before the 28 enactment of the GLB Act. Oregon law permits commercial banks chartered by the state to engage in any activity permissible for national banks, so Centennial Bank may form subsidiaries to engage in financial activities to the same extent as a national bank. At this time, Centennial Bank is "adequately capitalized," and not "well capitalized." Therefore, Bancorp would not qualify to become an FHC, and Centennial Bank would not qualify to control or hold an interest in a new financial subsidiary. Bancorp's management is examining its business plan and operating policies to determine whether Bancorp would desire to utilize any of the expanded powers provided to an FHC or a financial subsidiary by the GLB Act. PRIVACY PROVISIONS The GLB Act also includes extensive consumer privacy provisions. These provisions mandate full disclosure by all financial institutions to consumers of the institution's policies and practices regarding the sharing of non-public information with both affiliates and other third parties. Consumers must receive notice of and an opportunity to "opt out" of disclosure of non-public personal information to non-affiliated third parties. Disclosures of an institution's privacy policy is required at the time a customer relationship is established, and at least annually for so long as the relationship continues. Each federal banking agency, the National Credit Union Administration, the Secretary of the Treasury, the Securities and Exchange Commission, the Federal Trade Commission, and state insurance regulators are all expected to design and enforce their own privacy policies, and are in the process of drafting their privacy policies at this time. Privacy legislation or regulation, including possible conflicts in privacy policies when an institution is regulated by more than one entity, could place additional limitations on Bancorp's operations or significantly affect earnings. CENTENNIAL BANCORP GENERAL Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is subject to regulation, supervision and examination by the FRB. Bancorp is required to file an annual report and such other reports as the FRB may require. ACQUISITIONS As a bank holding company, Bancorp is required to obtain the prior approval of the FRB before: (1) acquiring direct or indirect ownership or control of any voting shares of any bank 29 or bank holding company, if after such acquisition, Bancorp would own or control, directly or indirectly, more than 5% of the voting shares of the bank or bank holding company; (2) merging or consolidating with another bank holding company; or (3) acquiring substantially all of the assets of any other bank. The FRB may not approve any acquisition, merger or consolidation that would have a substantial anti-competitive result, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. The FRB also considers managerial, capital and other financial factors in acting on acquisition or merger applications. Bancorp also is required to obtain the prior approval of the Director of the Oregon Department of Consumer and Business Services (the "Oregon Director") before acquiring direct or indirect ownership or control of 25% or more of the voting shares of an Oregon state-chartered bank or bank holding company. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") allows adequately capitalized and managed bank holding companies to acquire banks in any state. Such acquisitions must comply with any applicable state law requiring a bank to be in existence for a minimum period of time before the acquisition. Oregon law allows such acquisitions with respect to banks that have been providing banking services for at least three years. Therefore, Bancorp and Centennial Bank could be acquired by a bank holding company or an FHC located outside Oregon following receipt of necessary regulatory approvals. Under the Interstate Banking Act, Bancorp could acquire banks or bank holding companies in other states. PERMISSIBLE ACTIVITIES A bank holding company may not engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, a non-banking activity, unless the activity was determined by the FRB to be closely related to banking or managing banks prior to the enactment of the GLB Act. The FRB has identified certain non-banking activities in which a bank holding company may engage with notice to, or prior approval by, the FRB. Management believes that all activities conducted by Centennial Mortgage are non-banking activities approved by the FRB prior to the enactment of the GLB Act. CAPITAL ADEQUACY The federal bank regulatory agencies monitor the capital adequacy of bank holding companies and have adopted risk-based capital adequacy guidelines to evaluate bank holding companies and banks. If an institution's capital falls below the minimum levels established by these guidelines, the bank 30 holding company may be denied approval to acquire or establish additional banks or non-bank businesses. The guidelines require a minimum ratio of total capital to risk-weighted assets of 8%. At December 31, 1999, Bancorp's ratio of total capital to risk-weighted assets was 9.88%. The FRB also uses a leverage ratio to evaluate the capital adequacy of bank holding companies. The leverage ratio applicable to Bancorp requires the ratio of "Tier 1" capital (generally, tangible common stockholders' equity, perpetual preferred stock and minority interests in consolidated subsidiaries) to adjusted average total assets to be not less than 3% and up to 5% or higher depending on Bancorp's general capital condition. Bancorp's leverage ratio at December 31, 1999 was 9.65%. If Bancorp fails to meet capital guidelines, the FRB may institute appropriate supervisory or enforcement actions. As discussed below, Centennial Bank is also subject to capital adequacy requirements. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), Bancorp could be required to guarantee the capital restoration plan of Centennial Bank, should Centennial Bank become undercapitalized. CENTENNIAL BANK GENERAL Centennial Bank is an Oregon state-chartered bank, the deposits of which are insured by the FDIC. Accordingly, Centennial Bank files financial and other reports periodically with, and is regularly examined by, both the Oregon Director and the FDIC. Centennial Bank is not a member of the Federal Reserve System. PERMISSIBLE ACTIVITIES Under FDICIA, no state bank may engage in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the insurance fund. This limitation should not affect Centennial Bank, since management believes that Centennial Bank is not presently involved in any such activities. BRANCHING AND ACQUISITIONS Banks are permitted to conduct business through branches after application to and approval of the FDIC and the Oregon Director, if they make certain findings regarding the financial history and condition of the bank and the appropriateness of the branch in the community to be served. 31 Prior to opening a new branch in Washington, Centennial Bank must receive approval from the FDIC, the Oregon Director and the Director of the Department of Financial Institutions in the state of Washington (the "Washington Director"). Centennial Bank currently has 20 branches, the most recent of which opened in February 2000. Acquisitions of Oregon banks and bank holding companies by out-of-state banks, holding companies and other financial institutions are permitted if the bank being acquired has been providing banking services for a period of at least three years prior to the effective date of the acquisition and upon receipt of the approval of the Oregon Director. Other conditions set forth in Oregon law also must be satisfied. Approval of the FRB and/or the FDIC is also required. The Interstate Banking Act permits banks to merge with banks across state lines, thereby creating out-of-state branches, without regard to whether such transactions are prohibited under the law of any state. Oregon permits interstate bank mergers. Banks are able to establish branches in other states only through interstate mergers, as described above, unless the state where the branch is proposed to be opened has opted in to DE NOVO interstate branching. Neither Oregon nor Washington has opted in to DE NOVO branching. COMMUNITY REINVESTMENT ACT Enacted in 1977, the federal Community Reinvestment Act (the "CRA") has become increasingly important to financial institutions, including their holding companies. Under the GLB Act, a satisfactory CRA rating for each depository institution is required before a bank holding company may elect to be one of the newly created FHCs. The CRA allows regulators to reject an application to make an acquisition or establish a branch unless the applicant has performed satisfactorily under the CRA. Citizens and interest groups have standing before the FRB to assert noncompliance with the CRA. Satisfactory performance means adequately meeting the credit needs of the communities the applicant serves, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. The applicable federal regulators now regularly conduct CRA examinations to assess the performance of financial institutions. Centennial Bank has received satisfactory ratings in its most recent CRA examinations. TRANSACTIONS WITH AFFILIATES Centennial Bank is subject to certain FRB restrictions on transactions among related parties. The Federal Reserve Act limits the amount of certain transactions, including loans to and investments in affiliates of Centennial Bank, requires 32 certain levels of collateral for such loans, and limits the amount of advances to third parties that may be collateralized by the securities of Bancorp or its subsidiaries. The Federal Reserve Act also requires that certain transactions between Centennial Bank and its affiliates to be on terms substantially the same, or at least as favorable to Centennial Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. In addition, the Federal Reserve Act requires that the aggregate amount of an institution's loans to officers, directors and principal shareholders (and their affiliates) is limited to the amount of its unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate. A violation of any of the foregoing restrictions may result in the assessment of civil fines on a bank or a person participating in the conduct of the affairs of such bank or the imposition of a cease and desist order. DIVIDEND RESTRICTIONS Dividends paid by Centennial Bank provide substantially all Bancorp's cash flow. Under federal law, prior to the declaration of any dividend by Centennial Bank, the approval of the principal regulator is required if the total of all dividends declared in any calendar year exceeds the total of Centennial Bank's net profits for that year combined with its retained net profits for the preceding two years. In addition, FDICIA provides that a bank cannot pay a dividend if it will reduce the bank's capital ratios below the regulatory minimums required to be considered adequately capitalized. Under Oregon law, Centennial Bank is subject to restrictions on the payment of cash dividends to its shareholders (i.e., to Bancorp). An Oregon state-chartered bank may not pay a cash dividend in an amount greater than the bank's unreserved retained earnings, after first deducting to the extent not already charged against earnings or reflected in a reserve, (1) all bad debts, which are debts on which interest is unpaid and past due at least six months, unless the debt is fully secured and in the process of collection; (2) all other assets charged off as required by the Oregon Director or a state or federal examiner; and (3) all accrued expenses, interest and taxes of the bank. At December 31, 1999, $11.8 million was available for declaration of dividends by Centennial Bank to Bancorp without prior regulatory approval. 33 EXAMINATIONS The FDIC, the Oregon Director and the Washington Director periodically examine and evaluate Centennial Bank. Based upon such evaluations, the examining regulator may revalue the assets of an insured institution and require that it charge off or reduce the carrying value of specific assets or establish a specific allowance to compensate for the difference between the value determined by the regulator and the book value of such assets. CAPITAL ADEQUACY Federal regulations establish minimum requirements for the capital adequacy of depository institutions. The regulators may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. Banks with capital ratios below the required minimums are subject to certain administrative actions, including prompt corrective action, the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing. The federal risk-based capital guidelines for banks require a ratio of Tier 1 or core capital to total risk-weighted assets of 4% and a ratio of total capital to total risk-weighted assets of 8%. The leverage capital guidelines require that banks maintain Tier 1 capital of no less than 4% of total adjusted assets, except in the case of certain highly rated banks for which the minimum requirement is 3% of total adjusted assets. At December 31, 1999, Centennial Bank's leverage ratio, Tier 1 capital to risk-weighted assets ratio and total risk-based capital to risk-weighted assets ratio were 8.7%, 8.1% and 9.0%, respectively. FDICIA requires federal banking regulators to take "prompt corrective action" with respect to a capital-deficient institution, including requiring a capital restoration plan and restricting certain growth activities of the institution. Bancorp could be required to guarantee any such capital restoration plan required of Centennial Bank. Bancorp's maximum liability under such guarantee would be the lesser of 5% of Centennial Bank's total assets at the time it became undercapitalized or the amount necessary to bring Centennial Bank into compliance with the capital plan. As an institution's capital decreases, the powers of the federal regulators increase, which can include mandated capital-raising activities, restrictions on interest rates paid, restrictions on transactions with affiliates, and removal of management. In addition, an institution generally is prohibited from paying dividends or management fees to 34 control persons if the institution would be undercapitalized after any such payment. Pursuant to FDICIA, regulations were adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized, severely undercapitalized and critically undercapitalized. Under the regulations, Centennial Bank is considered "adequately capitalized." INTERNAL OPERATING REQUIREMENTS In 1993, federal regulators adopted regulations addressing, among other things: (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) ratio of classified assets to capital; (7) minimum earnings; and (8) compensation and benefit standards for management officials. These regulations add further to the cost of compliance and impose record-keeping requirements on Centennial Bank and Bancorp. The consumer lending activities of Centennial Bank are also regulated by numerous laws and regulations which impose race, sex, age, marital status and other specified classifications and impose other restrictions on credit and collection practices. REAL ESTATE LENDING EVALUATIONS Federal regulators have adopted uniform standards for evaluating loans secured by real estate or made to finance improvements to real estate. Banks are required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. The regulations establish loan-to-value ratio limitations on real estate loans, which are equal to or higher than the loan-to-value limitations established by Centennial Bank and Centennial Mortgage. DEPOSIT INSURANCE PREMIUMS As an FDIC-insured institution and member of the Bank Insurance Fund ("BIF"), Centennial Bank is subject to quarterly deposit insurance premium assessments. The FDIC uses a risk-related premium system that applies premium rates according to an institution's risk category. Capital ratios and examination ratings are the primary determinants of risk category assignments. The FDIC sets rate schedules semi-annually based on an analysis of several factors including probable fund losses, operating needs and the impact of assessments on BIF members. At December 31, 1999, Centennial 35 Bank's BIF annualized assessment rate was three basis points of assessable deposits. In addition to the BIF assessment, Centennial Bank is also subject to an additional assessment which helps support the FSLIC Resolution Fund ("FRF"). The FRF was established in 1989 to liquidate the remaining Federal Savings & Loan Insurance Corporation ("FSLIC") assets and liabilities resulting from thrift failures prior to that date. The assessment is one-fifth of the assessment rate imposed on Savings Association Insurance Fund members for the same purpose. At December 31, 1999, the annualized assessment rate was 2.12 basis points of assessable deposits. Bancorp's FDIC insurance assessment expenses totaled $60,000 in 1999 and $50,000 in 1998. Based on deposit levels and assessment rates as of December 31, 1999, Centennial Bank's FDIC assessment expenses for 2000 would be approximately $290,000. The significant increase in 2000 is expected primarily because Centennial Bank's capital level changed from "well capitalized" to "adequately capitalized" as a result of the goodwill associated with the acquisition of the Hazel Dell branch. When "well capitalized," Centennial Bank was not subject to a BIF assessment but, as "adequately capitalized," recently became subject to the BIF assessment rate discussed above. CENTENNIAL MORTGAGE Centennial Mortgage is, by definition of the Department of Housing and Urban Development, a non-supervised lender. Because Centennial Mortgage is a member of Bancorp's consolidated group, its accounts and activities are reviewed by the FRB in conjunction with its periodic examinations of Bancorp. Centennial Mortgage, like Centennial Bank, is indirectly affected by the monetary policies of the FRB, which may have a material adverse effect on its business and earnings. Oregon law requires the licensing of certain persons engaged in mortgage brokering transactions. Centennial Mortgage is exempt from these requirements as a wholly owned subsidiary of a regulated bank holding company. CHANGING REGULATORY STRUCTURE The laws and regulations affecting banks and bank holding companies are evolving. (See "Recent Legislation - the Gramm-Leach-Bliley Act" above.) The rules and the regulatory agencies in the banking area have changed significantly over recent years, and there is reason to expect that similar changes will occur in the future. It is difficult to predict the outcome of these changes. 36 One of the major additional burdens imposed on the banking industry by FDICIA is the increased authority of federal agencies to regulate the activities of federal and state banks and their holding companies. The FRB, the FDIC, the Oregon Director and the Washington Director have extensive enforcement authority to police unsafe or unsound practices by depository institutions and their holding companies and to penalize them for violating applicable laws and regulations. FDICIA and other laws have expanded the agencies' authority in recent years, and the agencies have not yet fully tested the limits of their powers. EFFECT OF ECONOMIC ENVIRONMENT The policies of regulatory authorities, including the monetary policies of the FRB, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open-market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. FRB monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of Bancorp and its subsidiaries cannot be predicted. ITEM 2. DESCRIPTION OF PROPERTIES ------------------------- The primary properties owned by Bancorp include a four-story, 36,000 square foot office building in Eugene, Oregon and a three-story, 21,000 square foot office building in Tigard, Oregon. Each building houses one bank branch and one commercial banking center as well as various administrative and operational support functions. The Tigard building is subject to a 50-year ground lease which is renewable for two additional 10-year periods. Bancorp also owns six other properties which house bank branches. One property, the Springfield Office, is also subject to a ground lease. All other Bancorp facilities occupy leased space. See Note 9 to Bancorp's Consolidated Financial Statements for summary information concerning payments and future obligations under non-cancelable operating leases. Management considers all Bancorp facilities adequate for current and anticipated future use. 37 ITEM 3. LEGAL PROCEEDINGS ----------------- Periodically, and in the ordinary course of business, various claims and lawsuits are brought by and against Bancorp, such as claims to enforce liens, condemnation proceedings on properties in which Bancorp holds security interests, claims involving the making and servicing of real property loans, and other issues incident to Bancorp's business. As of the date of this Annual Report, Bancorp was not a party to any legal proceedings management believes are material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. 38 PART II ------- The information called for by Items 5, 6, 7, 7A, 8 and 9 of Part II is included in Centennial Bancorp's Annual Report to Shareholders for the year ended December 31, 1999, and is incorporated herein by reference as follows: Centennial Bancorp Annual Report to Shareholders Page No. --------------- ITEM 5. MARKET FOR BANCORP'S COMMON STOCK --------------------------------- AND RELATED SHAREHOLDER MATTERS 33 ------------------------------ ITEM 6. SELECTED FINANCIAL DATA 34 ----------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND --------------------------- ANALYSIS OF FINANCIAL CONDITION ------------------------------- AND RESULTS OF OPERATIONS 26 - 33 ------------------------- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 30 - 31 ----------------------------- ITEM 8. FINANCIAL STATEMENTS AND ------------------------- SUPPLEMENTARY DATA 9 - 25 ------------------ ITEM 9. CHANGES IN AND DISAGREEMENTS ---------------------------- WITH ACCOUNTANTS ON ACCOUNTING ------------------------------ AND FINANCIAL DISCLOSURE 32 ------------------------ 39 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF BANCORP ------------------------------------------- The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on April 26,2000, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on April 26, 2000, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on April 26, 2000, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on April 26, 2000, and is incorporated herein by reference. 40 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON ------------------------------------------------------- FORM 8-K -------- (a) The following documents are filed as part of this Annual Report on Form 10-K. (1) Financial Statements. The financial statements required in this Annual Report are listed below and are included in Centennial Bancorp's Annual Report to Shareholders for the year ended December 31, 1999, and are incorporated herein by reference: Annual Report to Shareholders Page Number ----------- Report of Independent Auditors 8 Consolidated balance sheets at December 31, 1999 and 1998 9 For the three years ended December 31, 1999 Consolidated statements of income 10 Consolidated statements of shareholders' equity 11 Consolidated statements of cash flows 12 Notes to consolidated financial statements 13 - 25 (2) Financial Statement Schedules. All financial statement schedules are omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or notes thereto. (3) Exhibits. 3.1 Restated Articles of Incorporation (filed as Exhibit 3.1 to registrant's Form 10-K Report for the year ended December 31, 1998, and incorporated herein by reference) 3.2 Bylaws, as restated (filed as Exhibit 3.2 to registrant's Form 10-K Report for the 41 year ended December 31, 1992, and incorporated herein by reference) 10.1* Registrant's 1993 Incentive Stock Option Plan, restated as of April 13, 1994 (filed as Exhibit B to registrant's Proxy Statement for the 1994 annual shareholder meeting, filed April 29, 1994, and incorporated herein by reference) 10.2* Registrant's Nonemployee Director's Stock Option Plan (filed as Exhibit 10.2 to registrant's Form 10-K Report for the year ended December 31, 1991, and incorporated herein by reference) 10.3* Registrant's 1993 Stock Option Plan for Nonemployee Directors, restated as of April 13, 1994 (filed as Exhibit A to registrant's Proxy Statement for the 1994 annual shareholder meeting, filed April 29, 1994, and incorporated herein by reference) 10.4* Restated 1995 Stock Incentive Plan (filed as Exhibit A to registrant's Proxy Statement for the 1998 annual shareholder meeting, filed April 13, 1998, and incorporated herein by reference) 10.5* Nonstatutory (Nonqualified) Stock Option Agreement dated November 22, 1995, between registrant and Richard C. Williams (filed as Exhibit 10.10 to registrant's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference) 10.6 Ground Lease, dated as of February 10, 1994, between registrant and Pacific Realty Associates, L.P. (filed as Exhibit 10.10 to registrant's Registration Statement on SB-2, filed March 28, 1994, and incorporated herein by reference) 10.7 Advances, Security and Deposit Agreement, dated February 5, 1999, between Centennial Bank and the Federal Home Loan Bank of Seattle 10.8* Centennial Bank Deferred Compensation Plan, dated effective January 1, 1996 (filed as Exhibit 10.13 to registrant's Form 10-K for the year ended December 31, 42 1996, and incorporated herein by reference) 10.9* Participation Agreement for use with Centennial Bank Deferred Compensation Plan (filed as Exhibit 10.14 to registrant's Form 10-K for the year ended December 31, 1996, and incorporated herein by reference) 10.10* Employment Agreement dated July 29, 1997 between Thaddeus (Ted) Winnowski and Centennial Bank (filed as Exhibit 10.17 to registrant's Form 10-Q Report for the quarter ended September 30, 1997, and incorporated herein by reference) 10.11* Employment Agreement dated October 1, 1995, between Richard C. Williams and registrant (filed as Exhibit 10.3 to registrant's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference) 10.12* First Amendment to Employment Agreement dated December 1, 1997, between Richard C. Williams and registrant (filed as Exhibit 10.18 to registrant's Form 10-K for the year ended December 31, 1997, and incorporated herein by reference) 10.13 Pledge, Security and Safekeeping Agreement dated September 30, 1997, between Centennial Bank and the Federal Home Loan Bank of Seattle 11.1 Earnings per Share Computation 13.1 Portions of 1999 Annual Report to Shareholders (which are incorporated by reference in this Form 10-K Annual Report) 16.1 Letter dated November 5, 1998 from PricewaterhouseCoopers LLP to the Securities and Exchange Commission (filed as Exhibit 16 to registrant's Form 8-K Report filed November 5, 1998 and incorporated herein by reference) 20.1 Portions of definitive proxy statement for 2000 annual shareholder meeting (to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report) 43 21.1 Subsidiaries of registrant (filed as Exhibit 21.1 to registrant's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference) 23.1 Consent of Symonds, Evans & Larson, P.C., Independent Accountants 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.3 Report of PricewaterhouseCoopers LLP, Independent Accountants 27.1 Financial Data Schedule as of December 31, 1999 99.1 Certain Factors to Consider in Connection with Forward-Looking Statements - --------------- * Management contract or compensatory plan or arrangement. Upon written request to Michael J. Nysingh, Chief Financial Officer, Centennial Bancorp, Post Office Box 1560, Eugene, Oregon, 97440, shareholders will be furnished a copy of any exhibit, upon payment of $.25 per page, which represents Centennial Bancorp's reasonable expenses in furnishing the exhibit requested. (b) Bancorp did not file any Forms 8-K during the quarter ended December 31, 1999. 44 SIGNATURES ---------- Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTENNIAL BANCORP DATED: March 20, 2000 By /s/ Richard C. Williams -- ------------------------ Richard C. Williams, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR DATED: March 20, 2000 By /s/ Richard C. Williams -- ------------------------ Richard C. Williams, President, Chief Executive Officer and Director CHIEF FINANCIAL OFFICER DATED: March 20, 2000 By /s/ Michael J. Nysingh -- ------------------------ Michael J. Nysingh Chief Financial Officer DIRECTORS: DATED: March 21, 2000 By /s/ Dan Giustina -- ------------------------ Dan Giustina, Director DATED: March 22, 2000 By /s/ Cordy H. Jensen -- ---------------------- Cordy H. Jensen, Director DATED: March 22, 2000 By /s/ Robert L. Newburn -- ------------------------ Robert L. Newburn, Director DATED: March 23, 2000 By /s/ Brian B. Obie -- ------------------------ Brian B. Obie, Director DATED: March 22, 2000 By /s/ Ted Winnowski -- ------------------------ Ted Winnowski, Director 45 EXHIBIT INDEX Exhibit* - -------- 10.7 Advances, Security and Deposit Agreement, dated February 5, 1999, between Centennial Bank and the Federal Home Loan Bank of Seattle 10.13 Pledge, Security and Safekeeping Agreement dated September 30, 1997, between Centennial Bank and the Federal Home Loan Bank of Seattle 11.1 Earnings per Share Computation 13.1 Portions of 1999 Annual Report to Shareholders (which are incorporated by reference into this Form 10-K Annual Report) 23.1 Consent of Symonds, Evans & Larson, P.C., Independent Accountants 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.3 Report of PricewaterhouseCoopers LLP, Independent Accountants 27.1 Financial Data Schedule as of December 31, 1999 99.1 Certain Factors to Consider in Connection with Forward-Looking Statements - --------------- * See Item 14(a)(3) of this Annual Report for a list of all exhibits, including those incorporated by reference. EX-10.7 2 ADVANCES, SECURITY AND DEPOSIT AGREEMENT ADVANCES, SECURITY AND DEPOSIT AGREEMENT FEBRUARY 5, 1999 ---------------- This Advances, Security and Deposit Agreement ("Agreement") is made as of the above date and is between the Federal Home Loan Bank of Seattle, including its successors ("Seattle Bank"), and CENTENNIAL BANK, EUGENE, OREGON, including its successors ("Customer"). Except as to Customers which have not signed prior Agreements, it renews, amends and restates prior contracts between the parties or their predecessors entitled "Advances Agreement, Pledge Agreement and Security Agreement" and "Deposit Account Resolution." RECITALS -------- A. The Seattle Bank is authorized by the Federal home Loan Bank Act, as amended, and related regulations and directives ("Act"), and by the Seattle Bank's own policies, to make loans to the Customer ("Advances"). The Seattle Bank is also authorized to provide demand and time deposit accounts to the Customer ("Accounts") and to perform additional services, all of which may create obligations from the Customer to the Seattle Bank ("Other Obligations"). Other Obligations may include, without limitation, debts by reason of interest rate swap agreements, letters of credit, overdrafts, settlements, and wire transfers. B. This Agreement, and related policies which are, from time to time, sent by the Seattle Bank to its customers, specifies the terms and conditions under which the Seattle Bank may make Advances available to the Customer; open and use Accounts; and collateralize such Advances and Other Obligations. AGREEMENTS ---------- 1. Prior to or at the time of the execution and delivery of this Agreement, the Customer has provided the Seattle Bank with a certified copy of a resolution adopted by the Customer's Board of Directors or other governing body ("Resolution") approving this Agreement and authorizing designated officers or employees of the Customer to obtain Advances, open and use Accounts, and incur Other Obligations. The Seattle Bank may rely upon, and the Customer is estopped from denying, the authority of the persons designated in the Resolution. 2. The Customer may request advances from the Seattle Bank by applying to the Seattle Bank in such form as it shall require. 3. Each Advance shall be evidenced by a promissory note ("Note") or by another confirming document as required by the Seattle Bank. The applicable terms and conditions of this Agreement are incorporated therein as well as in other agreements, if any, that relate to Other Obligations. 4. On the first day of each month or at such other times that payments of principal and/or interest are due, the Customer agrees to pay, or to authorize a charge to the Customer's Account for the principal and/or interest that is due on each outstanding Advance, Note or Other Obligation. Interest shall be charged at the rate set forth in the Note or other instrument evidencing the Indebtedness. Delinquent principal and/or interest may bear interest, at the option of the Seattle Bank, equal to the Seattle Bank's then-current Flexible Balance advance rate. 5. As collateral ("Security") for the payment of all Advances, Notes or Other Obligations (collectively, "Indebtedness") of the Customer to the Seattle Bank, the Customer hereby assigns, pledges and grants security interests to the Seattle Bank ("Security Interest") in the following: (a) its stock in the Seattle Bank (which cannot be pledged to another entity); (b) its funds on deposit with the Seattle Bank; (c) its notes or other instruments representing obligations of third parties, including the proceeds thereof, and any related mortgages or deeds of trust ("Mortgages") securing any of them and/or any securities representing an interest in such Mortgages; (d) securities issued, insured or guaranteed by the United States government or by any agency thereof; (e) other real estate-related collateral; and (f) its instruments, accounts, general intangibles, inventory, equipment and other property in which a security interest can be granted by the Customer to the Seattle Bank. Upon the withdrawal from membership in the Seattle Bank, and as the final part of the plan of liquidation of the Customer's Indebtedness to the Seattle Bank, the stock of such Customer may be redeemed and credited upon the Indebtedness of the Customer, in whole or in part, for an amount equal to the par value of the stock which would otherwise be paid to the Customer by the Seattle Bank. 6. The Customer agrees that it holds the Security for the benefit of, and subject to the direction and control of, the Seattle Bank; including, without limitation, the following: (a) Security and Security Interests shall include and extend to after-acquired Security; (b) the Customer may use, commingle or dispose of all or part of the Security or proceeds thereof if, at all times, it owns and maintains Security of the types and kinds specified by the Act and as required to meet the requirements thereof, free and clear of pledges, liens or other encumbrances of third parties, in such amount of the outstanding Indebtedness as may be specified by the Seattle Bank from time to time; (c) at its expense and as soon as possible upon demand by the Seattle Bank, the Customer will assemble, segregate and/or deliver such portions of the Security as are directed by the Seattle Bank at or to a location designated by it; will allow the Seattle Bank to participate in such assembly, segregation or delivery and to verify or audit such Security, including, without limitation, access to the Customer's premises and records for such purposes; and will protect and promptly disclose to the Seattle Bank any material change in value of the Security so assembled, segregated or delivered; (d) the Customer promptly will make, execute and deliver to the Seattle Bank such assignments, listings, powers or other documents as the Seattle Bank may reasonably request concerning the Security; (e) at its expense, the Customer promptly will provide to the Seattle Bank such reports, audits and confirmations regarding the Security as the Seattle Bank may reasonably request; and (f) the Customer shall pay to the Seattle Bank any reasonable fees associated with the processing, control, and maintenance of such Security. 7. Upon the occurrence of any one or more of the following events ("Default"), the Seattle Bank may, without notice, declare and thereby cause all Indebtedness of the Customer to be due and payable immediately: (a) failure of the Customer to make any payment due on any Indebtedness, or breach of or failure to perform any other duty as provided herein or in any other agreement to which the Customer and the Seattle Bank are parties; (b) any taking over of the customer or any of its assets by a supervising agency, or an application for or the appointment of a conservator, receiver, trustee or liquidator for it or any of its assets; (c) an adjudication of the Customer's bankruptcy or insolvency; (d) an assignment by the Customer for the benefit of creditors, a general transfer of its assets for any purpose or any other form of liquidation, merger, sale of assets or dissolution of or by the Customer; (e) existence of facts indicating a representation, statement or warranty made or furnished to the Seattle Bank by or on behalf of the Customer in connection with all or part of any Indebtedness or other transaction was or is false in any material respect; (f) damage, loss, sale or encumbrance of any of the Security except as permitted by this Agreement; (g) any levy, seizure, garnishment (as the debtor), execution, attachment or other process issued against the Customer; (h) any event which results in acceleration of the maturity of any debt of the Customer to others; (i) good faith determination by the Seattle Bank that the Customer's ability to repay any Indebtedness has become impaired or that a material adverse change has occurred in the financial condition of the Customer from that disclosed to the Seattle Bank at the time of creation of any Indebtedness or subsequently; (j) termination of the Customer's membership in the Seattle Bank; or (k) good faith determination by the Seattle Bank that there is a reasonable possibility that the Indebtedness would not be paid in full from the proceeds of a liquidation of the Security if the Seattle Bank did not declare a Default. 8. At any time after Default, the Customer may not substitute Security without permission of the Seattle Bank, and the Seattle Bank shall have all of the rights and remedies of a secured party under the Act, the Uniform Commercial Code of the State of Washington and/or as otherwise provided by law, by this Agreement or by any other agreement between the parties ("Default Rights") including, without limitation, the Seattle Bank's 2 right to take immediate possession of any or all Security wherever located and to dispose of the Security in accordance with applicable law. If any notice of disposition of Security is required by law, such notification shall be deemed reasonable and properly given if mailed, postage prepaid, at least five calendar days before such disposition to the last address of the Customer then appearing on the records of the Seattle Bank. The proceeds of any disposition of Security shall be applied in the following order to payment of: (a) all reasonable expenses incurred by or on behalf of the Seattle Bank for the collection, care, safekeeping, sale, foreclosure, delivery or other disposition of Security including, without limitation, insurance, commissions, guarantees, security valuation fees, expenses, costs and reasonable attorneys' fees incurred in connection therewith; (b) interest on all Indebtedness, whether due or accrued; (c) the principal amount of all Indebtedness; (d) any secondarily secured debt of the Customer to any third party who proves its subordinate security interest in the Security to the reasonable satisfaction of the Seattle Bank; and (e) any remainder to the Customer. If there is a deficiency, the Customer shall be liable to the Seattle Bank therefor. No delay by the Seattle Bank in the exercise of its Default Rights shall operate as a waiver, and a waiver of any specific Default Right shall not constitute a waiver of any other Default Right not specifically waived. The Customer hereby irrevocably appoints the Seattle Bank and/or its designee as its true and lawful attorney in fact to deal in any manner with the Security in the event of a Default. 9. The Customer may open Accounts with the Seattle Bank subject to the Regulations of the Seattle Bank. Any Customer's funds deposited in Accounts shall be subject to withdrawal or charge at any time and from time to time upon wire transfers or any other orders for the payment of money when made and drawn on behalf of the customer by a person or persons authorized by the Customer. The Seattle Bank is authorized to pay any such wire transfers or other orders, provided they are in the form prescribed by it, and to charge the Customer's Accounts therefor, without inquiry as to the circumstances of issue or the disposition of the proceeds, even if drawn to the individual order of any authorized person or payable to others for his account. 10. The Seattle Bank, if it acts in good faith and with ordinary care (and without liability if it does so act), can charge the Accounts with orders received by the Seattle Bank from any person acting for or purporting to act for the Customer by telephone, or otherwise orally, for the transfer of funds to others, including the person giving such instructions or payable to others for his account, or between Accounts of the Customer. All authorized Seattle Bank charges and fees will be charged monthly to such Accounts. 11. The Customer shall maintain a net positive collected balance in all of its Accounts. The Seattle Bank shall have the option of closing or restricting the use of Accounts in which positive balances are not maintained. For each day the aggregate collected balance of an Account is negative, the Customer shall pay such charges as are consistent with the Seattle Bank's published schedules. 12. The Customer agrees to provide to the Seattle Bank, within five days after a request, its business plans and other financial data. In connection with, and as an extension of, any other informational rights of the Seattle Bank relating to examination of the Customer by a supervising agency and reports relating thereto, the Customer agrees that all Security shall always be subject to audit and verification, at the Customer's expense, by or on behalf of the Seattle Bank and that the Seattle Bank shall have access to the Customer's premises and records for that purpose. 13. If the services of an attorney, either with or without suit, are engaged by the Seattle Bank in connection with any Default or any dispute relating to this Agreement, the Customer agrees to pay the Seattle Bank's reasonable attorneys' fees, expenses and costs incurred in connection therewith. 14. This Agreement shall be construed and enforced according to the laws of the State of Washington and the Act. If any provision hereof is inconsistent with the Act, this Agreement shall be deemed amended to the end that such provision is not in conflict with the Act. In the event any such provision cannot be so amended and is found to be contrary to law, the balance of this Agreement shall remain in full force and effect if so elected by the Seattle Bank. 3 15. This Agreement shall continue until terminated by written notice from one party to the other; provided that this Agreement shall remain applicable to all then outstanding Indebtedness and duties of the Customer and to the documents relating thereto. Centennial Bank, Eugene, Oregon - ------------------------------------------------- (Name of Customer) By Ted Winnowski President/CEO ----------------------------------------------- (Name) (Title) /s/ Ted Winnowski ----------------------------------------------- (Signature) Its President/CEO Date: February 01, 1999 --------------------------------- --------------------------- (Title) and By Michael Nysingh Sr. V. P./Cashier --------------------------------------------------- (Name) (Title) /s/ Michael Nysingh --------------------------------------------------- (Signature) Its SVP/Cashier Date: February 01, 1999 --------------------------------- --------------------------- (Title) FEDERAL HOME LOAN BANK OF SEATTLE By Kelli L. Bono Senior Vice President ---------------------------------------------------------------- (Name) (Title) /s/ Kelli L. Bono ---------------------------------------------------------------- (Signature) Its Chief Financial Officer Date: June 14, 1999 --------------------------------- ----------------------- (Title) Form 1991-3 (Rev. 10/98) 4 EX-10.13 3 PLEDGE, SECURITY AND SAFEKEEPING AGREEMENT FEDERAL HOME LOAN BANK OF SEATTLE Seattle, Washington PLEDGE, SECURITY AND SAFEKEEPING AGREEMENT September 30, 1997 ------------------ This Agreement is made as of the above date between CENTENNIAL BANK OF EUGENE, OREGON ("Institution") and the FEDERAL HOME LOAN BANK OF SEATTLE ("Bank"). Recitals -------- A. The Institution has received funds under Repurchase Agreements from designated customers ("Depositors"). B. The Institution has agreed with the Depositors to collateralize those funds by creating a security interest in the collateral ("Collateral") pledged by the Institution to the Depositors for that purpose. C. The Bank is willing to safekeep such collateral as the security agent ("Custodian") for the Depositors on the terms and conditions set forth herein. Agreements ---------- 1. The Collateral used for the purposes of this Agreement hereby is pledged by the Institution to the Depositors to secure funds deposited by the Depositors with the Institution. The Depositors are granted a primary security interest therein and they are third party beneficiaries of this Agreement. 2. The Collateral secures the performance by the Institution of the Repurchase Agreements as the interests of the Depositors from time to time may appear. Acknowledgement of such interest can be obtained from the Bank upon request by a Depositor. 3. The Institution shall furnish information at least once a month to the Bank, or more often if requested, as to the interest in the Collateral securing each designated Depositor, which information shall include the repurchase price and the securities pledged hereunder. The percentage security interest of each Depositor shall be the total repurchase price of that Depositor's Repurchase Agreement(s) divided by the purchase price paid by the Institution for the Collateral. 4. Unless and until a Claim (as subsequently defined) is made by one or more Depositors, all interest, principal, dividends and/or other payments relating to the Collateral shall be for the account of the Institution, it being understood that principal or similar distributions will be replaced by other Collateral of equal or greater par or face value if needed. 5. In the event the Institution so requests, the Bank shall release to the Institution any of the Collateral upon receipt in substitution of other Collateral of which the par or face value is at least equal to the par or face value of the Collateral released. The Institution hereby warrants to the Bank and to the Depositors that all Collateral, initially or in substitution, will be eligible as to type, quality and sufficiency, and will comply in all respects with applicable law and the terms of this Agreement. The Bank shall have no responsibility for determining such eligibility or adequacy. It expressly is understood that no Collateral will be released by the Bank to the Institution except (i) on written authorization received from all the Depositors, or (ii) on receipt in substitution of other Collateral at least equal in par or face value, or (iii) for the purpose of reducing excess Collateral (or all of it if there are no outstanding Repurchase Agreements) upon written request by the Institution (the Bank can rely upon such a written request without reservation). 6. All charges for the handling and safekeeping of Collateral shall be paid by the Institution. 7. As between the Institution and the Bank, the safekeeping of the Collateral is subject to the terms and conditions of the Bank's "Securities Services Agreement" (Form 8A [Rev. Nov. 1996]), including (but not by way of limitation) Section 7.6 thereof which provides as follows: "Under the provisions of various documents now or hereafter in force between Bank and Institution, the collateral that may be pledged to a third party . . . will have been assigned previously by Institution to Bank as security for any and all of Institution's obligations to Bank. It expressly is understood that Bank's security interest in such collateral will continue despite the creation of a primary security interest therein in favor of such third party, but the Bank's security interest will be subordinate to that of such third party. Under those circumstances, the Bank will hold such collateral both (i) on behalf of the third party as the primarily secured party under all the terms, conditions and provisions of the Tri-Party Agreement, and (ii) also on its own behalf as the secondarily secured party." 8. In the event the Institution defaults on its obligations to one or more Depositors under one or more Repurchase Agreements secured by the Collateral, such Depositor(s) can give written notice to the Bank and the Institution of the dollar amount claimed ("Claim"). If within 15 days after such notice (i) the Institution does not cure the default(s) or (ii) the Institution delivers to the Bank a sworn affidavit disputing the Claim, the Bank shall bring an interpleader action joining such Depositor(s) and the Institution and thereby interplead an amount of Collateral having a market value equal to the Claim. The disposition or other use of that part of the Collateral shall be determined by the Court as provided by law. 9. Bank is authorized and directed to accept and to rely upon the information to be provided by Institution pursuant to this Agreement. The Institution warrants that all such information will be accurate and complete. 10. Unless terminated, this Agreement shall continue to be effective whenever Collateral is in safekeeping with the Bank. The Institution or the Bank, upon not less than 15 days prior notice to the other, may elect to terminate the Bank's duties hereunder. The Institution agrees, by such 15th day, to find a successor to replace the Bank. Upon appointment by the Institution of a successor, the Bank, without any recourse against it, shall transfer to such successor all Collateral. If no successor is designated within the 15 days, the Bank may appoint the successor. Upon transfer by the Bank of the Collateral, it shall be relieved and released of all duties and liability hereunder. 11. The Bank makes no representations or warranties of any kind with respect to the safekeeping to be provided hereunder, except as specifically set forth herein. The Bank shall not be liable for any loss or damage resulting from any action or inaction by it under this Agreement in the absence of a showing of gross negligence or willful misconduct. The Institution shall defend, indemnify and hold harmless the Bank, and its directors, officers, employees, agents and subagents, from and against any and all claims, losses, liabilities, obligations, damages, costs and/or expenses (including, without limitation, attorney fees both in connection with this indemnification and in the enforcement thereof) that the Bank or such other parties may at any time sustain or incur in connection with or arising out of this Agreement and the 2 safekeeping provided hereunder, except upon a showing of gross negligence or willful misconduct. In no event shall the Bank be liable to the Institution or to the Depositors for any special, consequential, incidental or punitive damages. Executed as of the date first appearing above. FEDERAL HOME LOAN BANK OF SEATTLE By /s/ Rebecca Paul --------------------------- (Authorized Officer) Its AVP Manager -------------------------- (Title) Centennial Bank ----------------------------------- (Institution) By /s/ Eric Hardin --------------------------------- (Authorized Officer) Its Executive Vice President -------------------------------- (Title) By /s/ Michael Nysingh --------------------------------- (Authorized Officer) Its Sr. Vice President & Cashier -------------------------------- (Title) Form 11 (Rev. April 1990) 3 EX-11.1 4 EARNINGS PER SHARE COMPUTATION
CENTENNIAL BANCORP COMPUTATION OF EARNINGS PER SHARE Year Ended December 31, ---------------------------------------------- 1999 1998 1997 ---------- --------- ---------- Income available to common shareholders $12,106,435 $11,434,546 $9,303,363 =========== =========== ========== Reconciliation of Basic and Diluted Shares - ------------------------------------------ Weighted average shares outstanding 19,603,896 19,431,440 19,255,191 Incremental shares from stock options issued 631,625 890,420 863,546 ---------- ---------- ---------- Weighted average shares outstanding - diluted 20,235,521 20,321,860 20,118,737 ========== ========== ==========
EX-13.1 5 PORTIONS OF 1999 ANNUAL REPORT REPORT OF SYMONDS, EVANS & LARSON, P.C., INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Centennial Bancorp We have audited the accompanying consolidated balance sheets of Centennial Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Centennial Bancorp and subsidiaries for the year ended December 31, 1997, were audited by other auditors whose report dated January 22, 1998, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1999 and 1998 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centennial Bancorp and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Portland, Oregon January 21, 2000
CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 ASSETS 1999 1998 ------ ------------------ ------------------ Cash and cash equivalents: Cash and due from banks $ 29,934,856 $ 40,838,367 Federal funds sold - 1,003,000 ------------------ ------------------ Total cash and cash equivalents 29,934,856 41,841,367 Investment securities available-for-sale 59,358,757 76,793,378 Loans, net 587,507,784 416,524,430 Mortgage loans held for sale 6,155,343 11,039,045 Federal Home Loan Bank stock 5,468,800 5,083,700 Premises and equipment, net 15,911,497 12,613,321 Accrued interest and other assets 22,400,675 8,154,849 ------------------ ------------------ Total assets $ 726,737,712 $ 572,050,090 ================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Deposits: Demand $ 106,113,028 $ 102,714,344 Interest-bearing demand 246,690,606 204,032,594 Savings 33,320,788 18,483,765 Time 186,917,061 158,635,593 ------------------ ------------------ Total deposits 573,041,483 483,866,296 Short-term borrowings 74,553,967 20,600,071 Accrued interest and other liabilities 4,813,501 3,866,582 ------------------ ------------------ Total liabilities 652,408,951 508,332,949 Commitments and contingencies (Note 9) Shareholders' equity: Preferred stock - - Common stock, 19,645,891 and 16,869,363 shares issued and outstanding in 1999 and 1998, respectively 30,390,824 29,690,949 Retained earnings 45,624,007 33,517,242 Accumulated other comprehensive income (loss) (1,686,070) 508,950 ------------------ ------------------ Total shareholders' equity 74,328,761 63,717,141 ------------------ ------------------ Total liabilities and shareholders' equity $ 726,737,712 $ 572,050,090 ================== ==================
2
CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 --------------- --------------- ---------------- Interest and dividend income: Interest and fees on loans $ 54,133,662 $ 44,348,206 $ 34,329,126 Taxable interest on investment securities 2,227,213 2,723,091 2,445,547 Nontaxable interest on investment securities 1,433,205 1,699,128 2,034,551 Dividends on Federal Home Loan Bank stock 385,100 372,600 345,300 Interest on federal funds sold 280,334 691,063 573,027 Deposits with banks 8,303 14,401 376,499 --------------- --------------- ---------------- Total interest and dividend income 58,467,817 49,848,489 40,104,050 Interest expense: Deposits: Interest bearing demand and savings 7,865,362 6,889,086 5,155,632 Time 8,596,805 8,184,923 7,298,741 Short-term borrowings 1,405,250 489,595 538,947 Long-term debt - 272,897 572,673 --------------- --------------- ---------------- Total interest expense 17,867,417 15,836,501 13,565,993 --------------- ---------------- ---------------- Net interest income 40,600,400 34,011,988 26,538,057 Loan loss provision 2,300,000 1,500,000 1,250,000 --------------- ------------- ---------------- Net interest income after loan loss provision 38,300,400 32,511,988 25,288,057 Noninterest income: Service charges on deposit accounts 1,459,402 1,207,782 1,065,267 Gains on sales of mortgage loans, net 995,823 1,752,506 908,068 Gains on sales of investment securities, net 298,625 599,885 168,716 Other 773,432 623,343 1,053,083 --------------- --------------- ---------------- Total noninterest income 3,527,282 4,183,516 3,195,134 Noninterest expense 22,801,627 19,348,558 14,851,028 --------------- --------------- ---------------- Income before income taxes 19,026,055 17,346,946 13,632,163 Provision for income taxes 6,919,290 5,912,400 4,328,800 --------------- --------------- ---------------- Net income $ 12,106,765 $ 11,434,546 $ 9,303,363 =============== =============== ================ Basic earnings per common share $ .62 $ .59 $ .48 =============== =============== ================ Diluted earnings per common share $ .60 $ .56 $ .46 =============== =============== ================ Weighted average common shares outstanding: Basic 19,603,896 19,431,440 19,255,191 Diluted 20,235,521 20,321,860 20,118,737
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1999, 1998 and 1997 Accumulated Number other Additional Total of Common Retained comprehensive Comprehensive paid-in shareholders' shares stock earnings income (loss) income (loss) capital equity ---------- ----------- ------------ ------------- ------------- ------------ ---------- Balance at December 31, 1996 6,535,447 $13,070,894 $17,171,984 $ (34,190) $11,137,171 $41,345,859 Comprehensive income: Net income - - 9,303,363 - $ 9,303,363 - 9,303,363 Other comprehensive income - change in unrealized gains on investment securities of $845,364 (net of income taxes of approximately $448,000) net of reclassification adjustment for gains included in net income of $115,064 (net of income taxes of approximately $54,000) - - - 730,300 730,300 - 730,300 ----------- Comprehensive income - - - - $ 10,033,663 - - ============ Stock split (10%) 655,664 1,311,328 - - (1,311,328) - Stock options exercised 66,727 133,454 - - 267,490 400,944 Tax benefit of stock options exercised - - - - 29,692 29,692 Stock split (100%) 7,257,838 14,515,676 (4,392,651) - (10,123,025) - ----------- ------------ ----------- ------------ ------------ ---------- Balance at December 31, 1997 14,515,676 $29,031,352 $22,082,696 $696,110 $ - $51,810,158
See accompanying notes. 4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued) Years ended December 31, 1999, 1998 and 1997 Accumulated Number other Additional Total of Common Retained comprehensive Comprehensive paid-in shareholders' shares stock earnings income (loss) income (loss) capital equity ---------- ----------- ------------ ------------- ------------- ------------ ---------- Comprehensive income: Net income - $ - $11,434,546 $ - $11,434,546 $ - $ 11,434,546 Other comprehensive income - change in unrealized gains on investment securities of $208,764 (net of income taxes of approximately $115,000) net of reclassification adjustment for gains included in net income of $395,924 (net of income taxes of approximately $204,000)- - - (187,160) (187,160) - (187,160) ------------- Comprehensive income - - - $11,247,386 - - ============= Stock split (5%) 727,386 - - - - - Stock options exercised 92,723 267,381 - - - 267,381 Tax benefit of stock options exercised - 392,216 - - - 392,216 Stock split (10%) 1,533,578 - - - - - ---------- ----------- -------------- ----------- ------------ ----------- Balance at December 31, 1998 16,869,363 $29,690,949 $ 33,517,242 $ 508,950 $ - $ 63,717,141
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued) Years ended December 31, 1999, 1998 and 1997 Number other Additional Total of Common Retained comprehensive Comprehensive paid-in shareholders' shares stock earnings income (loss) income (loss) capital equity ---------- ----------- ------------ ------------- ------------- ------------ ---------- Net income - $ - $12,106,765 $ - $ 12,106,765 $ - $ 12,106,765 Other comprehensive income - change in unrealized losses on investment securities of $2,005,005 (net of income taxes of approximately $1,345,000) net of reclassification adjustment for gains included in net income of $190,015 (net of income taxes of approximately $109,000) - - - (2,195,020) (2,195,020) - 2,195,020) Comprehensive income - - - - $ 9,911,745 - - ============= Stock split (5%) 828,761 - - - - - Stock options exercised 161,774 383,619 - - - 383,619 Tax benefit of stock options exercised - 316,256 - - - 316,256 Stock split (10%) 1,785,993 - - - - - ----------- ----------- -------------- ----------- ---------- ------------ Balance at December 31, 1999 19,645,891 $30,390,824 $ 45,624,007 $(1,686,070) $ - $74,328,761 =========== =========== ============== ============ ========== ============
6
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 --------------- --------------- ---------------- Cash flows from operating activities: Net income $ 12,106,765 $ 11,434,546 $ 9,303,363 Adjustments to reconcile net income to net cash provided by operating activities: Net gains on sales of investment securities and mortgage loans (1,294,448) (2,352,391) (1,076,784) Dividends on Federal Home Loan Bank stock (385,100) (372,600) (345,300) Loan loss provision 2,300,000 1,500,000 1,250,000 Deferred income taxes (935,809) (437,882) (113,702) Depreciation and amortization 2,356,296 1,697,578 1,329,421 Originations of mortgage loans held for sale (152,458,419) (213,853,812) (111,645,075) Proceeds from sales of mortgage loans held for sale 158,337,944 210,152,220 110,506,192 Changes in assets and liabilities: Accrued interest and other assets (12,391,249) (1,335,735) 302,160 Accrued interest and other liabilities 946,919 101,196 (230,165) --------------- --------------- ---------------- Net cash provided by operating activities 8,582,899 6,533,120 9,280,110 Cash flows from investing activities: Investment securities available-for-sale: Purchases (11,202,082) (31,984,219) (28,385,904) Maturities 2,312,850 27,624,797 8,009,362 Proceeds from sales 23,071,850 11,754,232 20,463,409 Loan originations, net (173,283,354) (86,333,031) (70,449,408) Purchases of premises and equipment, net (4,901,376) (3,558,652) (2,373,818) --------------- --------------- ---------------- Net cash used in investing activities (164,002,112) (82,496,873) (72,736,359) Cash flows from financing activities: Net increase in deposits 89,175,187 64,584,212 79,326,839 Increase (decrease) in short-term borrowings, net 53,953,896 12,884,288 (4,599,800) Payments on long-term debt - (10,000,000) - Proceeds from exercise of stock options 383,619 267,381 400,944 --------------- --------------- ---------------- Net cash provided by financing activities 143,512,702 67,735,881 75,127,983 --------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents (11,906,511) (8,227,872) 11,671,734 Cash and cash equivalents at beginning of year 41,841,367 50,069,239 38,397,505 --------------- --------------- ---------------- Cash and cash equivalents at end of year $ 29,934,856 $ 41,841,367 $ 50,069,239 =============== =============== ================
See accompanying notes. 7 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. Description of business and summary of significant accounting policies ---------------------------------------------------------------------- Principles of consolidation --------------------------- The accompanying consolidated financial statements include the accounts of Centennial Bancorp, a bank holding company, and its wholly-owned subsidiaries, Centennial Bank (the Bank) and Centennial Mortgage Co. (Centennial Mortgage). Unless the context clearly suggests otherwise, references in this annual report to "Bancorp" include Centennial Bancorp and its subsidiaries. The Bank provides commercial financing, banking and other services, and Centennial Mortgage provides a variety of residential and commercial real estate financing services. All significant intercompany accounts and transactions have been eliminated in consolidation. Method of accounting -------------------- Bancorp prepares its consolidated financial statements in conformity with generally accepted accounting principles and prevailing practices within the banking industry. Bancorp utilizes the accrual method of accounting that recognizes income when earned and expenses when incurred. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. Cash and cash equivalents ------------------------- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from or deposited with banks, interest-bearing balances due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. Supplemental disclosures of cash flow information ------------------------------------------------- During 1999, 1998 and 1997, noncash transactions resulted from unrealized gains (losses) on investment securities available-for-sale, net of income taxes, and the income tax benefit of stock options exercised, as disclosed in the accompanying consolidated statements of changes in shareholders' equity. During 1999, 1998 and 1997, Bancorp paid approximately $17,647,000, $15,754,000 and $13,423,000, respectively, in interest expense. 8 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. Description of business and summary of significant accounting policies (continued) ------------------------------------------------------------------------- Investment securities available-for-sale ---------------------------------------- Investment securities available-for-sale are reported at fair value with unrealized gains and losses excluded from earnings and reported as other comprehensive income or loss, net of income taxes. Gains and losses on sales of investment securities are recognized on a specific identification basis. Premiums and discounts on investment securities are recognized in interest income using the interest method over the period to maturity. Declines (unless they are considered temporary) in the fair value of investment securities available-for-sale below cost would result in write-downs of the individual securities to their fair value. Loans ----- Loans are reported at their outstanding principal balance less the allowance for loan losses and deferred loan fees. The allowance for loan losses represents management's recognition of the assumed risks of extending credit and the quality of the existing loan portfolio. The allowance is maintained at a level considered adequate to provide for potential loan losses based on management's assessment of various factors affecting the portfolio. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. The allowance is based on estimates and ultimate losses may vary from the current estimates. These estimates are reviewed periodically, and as adjustments become necessary, they are reported in earnings in the periods in which they become known. The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. Bancorp's credit policies require an evaluation of each borrower's creditworthiness prior to extending credit. In the course of evaluating the creditworthiness, management determines a requisite amount of collateral support. The type of collateral held varies, but may include real estate, equipment, accounts receivable and inventories. At the discretion of management, personal guarantees of the borrower may also be obtained in addition to the 9 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. Description of business and summary of significant accounting policies (continued) ------------------------------------------------------------------------- collateral. Management believes that Bancorp's loan portfolio is diversified among industry groups and does not contain a direct concentration of loans in a single industry (other than the construction industry) which exceeds 10% of the portfolio. It is management's opinion that the allowance for loan losses is adequate to absorb known and inherent risks in the loan portfolio. However, actual results may differ from estimates. Bancorp considers loans to be impaired when management believes that it is probable that all amounts due will not be collected according to the contractual terms. An impaired loan must be valued using the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the estimated fair value of the loan's underlying collateral or related guaranty. Bancorp primarily measures impairment on all large-balance nonaccrual loans (typically commercial and commercial real estate loans) based on the estimated fair value of the underlying collateral or related guaranty. In certain other cases, impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Amounts deemed impaired are either specifically allocated for in the allowance for loan losses or reflected as a partial charge-off of the loan balance. Smaller-balance homogeneous loans (typically installment loans) are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual installment loans for impairment disclosures. The accrual of interest on impaired loans is discontinued when repayment of principal and interest is doubtful. When interest accrual is discontinued, all unpaid accrued interest is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loan origination fees, net of origination costs, are deferred and recognized as an adjustment of the yield of the related loan. Interest income on all loans is accrued as earned on the simple interest method. Various regulatory agencies, as an integral part of their examination process, periodically review the Bancorp's allowance for loan losses. Such agencies may require the Bancorp to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. 10 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. Description of business and summary of significant accounting policies (continued) ---------------------------------------------------------------------------- Mortgage loans -------------- Centennial Mortgage's activities include origination of conventional and federally insured residential mortgage loans for resale in the secondary market. Mortgage loans are sold without recourse; however, the sales of these mortgage loans are subject to technical underwriting exceptions and related repurchase risks. Such risks are considered in the determination of the allowance for loan losses. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value. Market value is determined on an aggregate loan basis. At December 31, 1999, 1998 and 1997, Bancorp held servicing rights to approximately $36,842,000, $38,611,000 and $32,274,000, respectively, of mortgage loans that had been sold into the secondary market. Such mortgage loans are not included in the accompanying consolidated balance sheets. Beginning in July 1998, Bancorp began using another financial institution to service these mortgage loans. Previously, Bancorp serviced these mortgage loans in-house. The net amount of capitalized mortgage servicing rights (approximately $366,000 and $392,000 at December 31, 1999 and 1998, respectively) is included in other assets in the accompanying consolidated balance sheets. Federal Home Loan Bank stock ---------------------------- Bancorp's investment in Federal Home Loan Bank (FHLB) stock is carried at par value, which approximates fair value. As a member of the FHLB system, Bancorp must maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets or FHLB advances. At December 31, 1999, Bancorp's minimum required investment was approximately $2,337,000. Bancorp may request redemption at par value of any FHLB stock in excess of the minimum required investment. Stock redemptions are at the discretion of FHLB. 11 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. Description of business and summary of significant accounting policies (continued) ------------------------------------------------------------------------- Premises and equipment ---------------------- Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed principally using the straight-line method over the shorter of the estimated useful lives of the assets or terms of the leases. Amortization of leasehold improvements is included in depreciation and amortization expense in the accompanying consolidated financial statements. Goodwill -------- Goodwill is the excess of the cost over fair value of net assets acquired in business combinations. It is amortized on the straight-line method over periods ranging from 15 to 20 years. It is Bancorp's policy to review goodwill for impairment whenever events or changes in circumstances indicate that its investment in the underlying businesses that gave rise to such goodwill may not be recoverable. Should such an evaluation of impairment become necessary, Bancorp will evaluate the performance of such acquired businesses on an undiscounted basis. At December 31, 1999 and 1998, accrued interest and other assets include goodwill of approximately $8,834,000 and $283,000, respectively, net of accumulated amortization. Additional goodwill was recorded in April 1999 when Bancorp acquired a branch located in the Hazel Dell area of Vancouver, Washington from another financial institution. Goodwill amortization for 1999 was approximately $487,000. Goodwill amortization for 1998 and 1997 was insignificant. Advertising ----------- Advertising costs are generally charged to expense during the year in which they are incurred. Income taxes ------------ Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. 12 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. Description of business and summary of significant accounting policies (continued) ------------------------------------------------------------------------- Stock splits ------------ During the years ended December 31, 1999, 1998 and 1997, Bancorp had various stock splits as reflected in the accompanying consolidated statements of changes in shareholders' equity. In addition, on January 19, 2000, Bancorp's Board of Directors declared a 10% stock split -- payable March 3, 2000 -- for Bancorp shareholders of record at the close of business on February 11, 2000. This stock split will result in the issuance of 1,785,993 additional shares of common stock. All issued and outstanding, weighted average number of common shares outstanding, per-share data and stock option plan information in the accompanying consolidated financial statements and footnotes has been adjusted to give retroactive effect to all stock splits. Recently issued accounting standards ------------------------------------ In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement 133" (SFAS 137), an amendment of SFAS 133, which establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS 133, as amended by SFAS 137, is effective for all quarterly and annual financial statements of fiscal years beginning after June 15, 2000. Bancorp had no significant derivatives as of December 31, 1999, nor does Bancorp engage in any hedging activities. Accordingly, Bancorp does not anticipate that the adoption of SFAS 133, as amended by SFAS 137, will have a material effect on its consolidated financial position or results of operations. In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS 134), was issued. SFAS 134 was effective in 1999 and had no effect on the accompanying consolidated financial statements. Reclassifications ----------------- Certain amounts in 1998 and 1997 have been reclassified to conform with the 1999 presentation. Net income was not affected by these reclassifications. 13
CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 2. Investment securities available-for-sale ---------------------------------------- Investment securities available-for-sale consisted of the following at December 31, 1999 and 1998: Gross Gross Estimated Amortized unrealized unrealized fair 1999 cost gains losses value ---- ----------------- ---------------- ---------------- ------------------ U.S. Treasury securities $ 1,400,808 $ 4,759 $ 6,325 $ 1,399,242 U.S. Government and agency securities 27,988,761 - 1,454,349 26,534,412 Obligations of state and political subdivisions 28,468,534 79,235 1,232,228 27,315,541 Corporate bonds 2,284,118 120 79,123 2,205,115 Mortgage-backed securities 1,936,017 - 31,570 1,904,447 ----------------- ---------------- ---------------- ----------------- Total $ 62,078,238 $ 84,114 $ 2,803,595 $ 59,358,757 ================= ================ ================ ================= 1998 ---- U.S. Treasury securities $ 1,398,726 $ 36,190 $ - $ 1,434,916 U.S. Government and agency securities 39,479,940 116,050 333,250 39,262,740 Obligations of state and political subdivisions 28,571,672 1,006,580 - 29,578,252 Corporate bonds 2,304,968 13,059 6,749 2,311,278 Mortgage-backed securities 4,217,462 1,330 12,600 4,206,192 ----------------- ---------------- ---------------- ----------------- Total $ 75,972,768 $ 1,173,209 $ 352,599 $ 76,793,378 ================= ================ ================ =================
14 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 2. Investment securities available-for-sale (continued) ---------------------------------------------------- The amortized cost and estimated fair value of investment securities available-for-sale at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. In addition, the contractual maturities for mortgage-backed securities were allocated assuming no prepayments. Amortized Estimated cost fair value ---------------- ----------------- Due in 1 year or less $ 1,318,710 $ 1,305,105 Due after 1 through 5 years 22,923,785 22,447,699 Due after 5 through 10 years 19,427,389 18,407,642 Due after 10 years 18,408,354 17,198,311 ---------------- ----------------- Total $ 62,078,238 $ 59,358,757 ================ ================= At December 31, 1999, investment securities available-for-sale with an estimated fair value of approximately $12,329,000 (approximately $12,266,000 at December 31, 1998) were pledged to collateralize public deposits, and investment securities available-for-sale with an estimated fair value of approximately $10,061,000 (approximately $10,562,000 at December 31, 1998) were pledged to collateralize short-term borrowings (see Note 6). Proceeds from sales of investment securities available-for-sale and gross realized gains and losses on those sales were as follows: Gross Gross realized realized Net gains Proceeds gains losses on sales -------------- ------------ ---------- ------------ 1999 $ 23,071,850 $ 298,025 $ - $ 298,025 1998 11,754,232 599,885 - 599,885 1997 20,463,409 191,291 22,575 168,716 15 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 3. Loans - -------- Loans consisted of the following at December 31, 1999 and 1998: 1999 1998 ---------------- ------------------ Real estate - mortgage $ 129,220,429 $ 94,474,773 Real estate - construction 227,387,353 150,815,834 Commercial 219,588,355 163,577,415 Installment 8,409,380 7,073,011 Lease financing 4,867,834 1,896,609 Other 4,198,940 3,137,402 ---------------- ----------------- 593,672,291 420,975,044 Less allowance for loan losses (6,164,507) (4,450,614) ---------------- ----------------- Loans, net $ 587,507,784 $ 416,524,430 ================ ================= Bancorp is located and conducts its business primarily within Lane County, Oregon, the greater Portland metropolitan area, and Clark County, Washington. These geographic areas have experienced growth which has resulted in increasing loan demand. A substantial portion of Bancorp's loans are collateralized by real estate in these geographic areas and, accordingly, the ultimate collectability of a substantial portion of Bancorp's loan portfolio is susceptible to changes in local market conditions. Transactions in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997 ---------------- ---------------- ----------------- Balance at beginning of year $ 4,450,614 $ 3,348,914 $ 2,599,653 Loan loss provision 2,300,000 1,500,000 1,250,000 Loans charged-off (671,827) (452,100) (557,949) Recoveries of loans previously charged-off 85,720 53,800 57,210 ---------------- ---------------- ----------------- Balance at end of year $ 6,164,507 $ 4,450,614 $ 3,348,914 ================ ================ =================
At December 31, 1999 and 1998, Bancorp had approximately $5,833,000 and $5,218,000, respectively, in impaired loans. The specific valuation allowance related to these impaired loans totaled approximately $465,000 and $563,000 at December 31, 1999 and 1998, respectively. The average recorded investment in impaired loans for 1999, 1998 and 1997 was approximately $5,525,000, $2,968,000 and $909,000, respectively. Interest income 16 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 3. Loans (continued) ----------------- recognized on impaired loans in 1999 was approximately $417,000. Interest income recognized on impaired loans in 1998 and 1997 was insignificant. Loans on nonaccrual status at December 31, 1999 were approximately $579,000 ($3,841,000 at December 31, 1998). Interest income which would have been realized on such nonaccrual loans outstanding at year-end, if they had remained current, was approximately $97,000, $273,000 and $103,000 during 1999, 1998 and 1997, respectively. Loans contractually past due 90 days or more on which Bancorp continued to accrue interest at December 31, 1999 were approximately $2,163,000 ($1,043,000 at December 31, 1998). 4. Premises and equipment ---------------------- Premises and equipment consisted of the following at December 31, 1999 and 1998:
1999 1998 ---------------- ------------- Land $ 2,375,046 $ 1,769,388 Buildings and leasehold improvements 13,278,013 10,728,522 Furniture and equipment 9,185,477 7,288,122 ---------------- ------------- 24,838,536 19,786,032 Less accumulated depreciation and amortization (8,927,039) (7,172,711) ---------------- ------------- Premises and equipment, net $ 15,911,497 $ 12,613,321 ================ =============
5. Time certificates of deposit ---------------------------- Time certificates of deposits in excess of $100,000 aggregated approximately $79,425,000 and $60,708,000 at December 31, 1999 and 1998, respectively. At December 31, 1999, the scheduled annual maturities of all time certificates of deposit were approximately as follows: 2000 $ 150,615,000 2001 34,141,000 2002 926,000 2003 896,000 2004 104,000 Thereafter 235,000 --------------- Total $186,917,000 =============== 17 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 6. Short-term borrowings --------------------- Short-term borrowings consisted of the following at December 31, 1999 and 1998:
1999 1998 ------------ ------------ Securities sold under agreement to repurchase $ 8,213,967 $ 16,100,071 Federal funds purchased 19,600,000 1,000,000 FHLB cash management advance program 25,740,000 3,500,000 FHLB borrowings under promissory note agreements 21,000,000 - ------------ ------------- $ 74,553,967 $ 20,600,071 ============ =============
Securities sold under agreement to repurchase are due on demand. The weighted average interest rate on such borrowings was 5.42% and 4.42% at December 31, 1999 and 1998, respectively. Federal funds purchased are due on demand. The weighted average interest rate on such borrowings was 4.65% and 5.00% at December 31, 1999 and 1998, respectively. Amounts owed under the FHLB cash management advance program are due within one year and bear interest at 5.70% and 5.15% at December 31, 1999 and 1998, respectively. FHLB borrowings under promissory note agreements are due in January 2000 and bear interest at 5.90% at December 31, 1999. As of December 31, 1999, Bancorp has remaining available borrowings from the FHLB of approximately $4,960,000. In addition, Bancorp maintains federal funds lines with correspondent banks as a backup source of liquidity. At December 31, 1999, Bancorp had approximately $10,400,000 (approximately $32,000,000 at December 31, 1998) of federal funds lines available to draw against on an uncollateralized basis. 7. Off-balance-sheet financial instruments --------------------------------------- In the ordinary course of business, Bancorp enters into various transactions which include commitments to extend credit and standby letters of credit that are not included in the accompanying consolidated balance sheets. Bancorp applies the same credit standards to these commitments as it uses in all of its lending processes and includes these commitments in its lending risk evaluations. At December 31, 1999 and 1998, Bancorp had no commitments to extend credit at below-market interest rates and held no derivative financial instruments. 18 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 7. Off-balance-sheet financial instruments (continued) --------------------------------------------------- Bancorp's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Bancorp's off-balance-sheet financial instruments at December 31, 1999 and 1998 were as follows: 1999 1998 ----------- ------------- Commitments to extend credit $ 276,852,000 $ 198,583,000 Standby and commercial letters of credit 11,108,000 6,982,000 Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by Bancorp if certain conditions of the contract are violated. Although subject to drawdown, many of these commitments are expected to expire or terminate without funding. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Collateral relating to these commitments varies, but may include cash, accounts receivable, inventories, equipment, securities and real estate. Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay Bancorp upon default of performance. Collateral for standby letters of credit is based on an individual evaluation of each customer's creditworthiness, but may include cash, accounts receivable, inventories, equipment, securities and real estate. 8. Estimated fair value of financial instruments --------------------------------------------- Bancorp primarily uses quoted market prices or present value techniques to estimate the fair values of its fixed-rate financial instruments. The carrying amounts of variable- and adjustable-rate financial instruments are considered reasonable estimates of fair value. Valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current market exchange. 19 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 8. Estimated fair value of financial instruments (continued) --------------------------------------------------------- In addition, as Bancorp normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments but which have significant value. These include such off-balance-sheet items as core deposit intangibles. Bancorp does not believe that it would be practicable to estimate a representational fair value for these types of items at December 31, 1999 and 1998. Because the estimated fair value disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of Bancorp. Bancorp used the following methods and assumptions to estimate the fair value of its financial instruments: Cash and cash equivalents: The carrying amount approximates the -------------------------- estimated fair value. Investment Securities available-for-sale: The estimated fair value is ---------------------------------------- based on quoted market prices or the market values for comparable securities. Loans: The estimated fair value of fixed-rate loans is estimated by ----- discounting the contractual cash flows of the loans using December 31, 1999 and 1998 origination rates. The resulting amounts are adjusted to estimate the effects of changes in credit quality of borrowers since the loans were originated. Mortgage loans held for sale: The estimated fair value represents the ---------------------------- anticipated proceeds from sale of the loans. FHLB stock: The carrying amount approximates the estimated fair ---------- value. 20 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 8. Estimated fair value of financial instruments (continued) --------------------------------------------------------- Deposits: The estimated fair value of demand deposits, consisting of -------- checking, savings and certain interest-bearing demand deposit accounts, is represented by the amounts payable on demand. The estimated fair value of time deposits is calculated by discounting the scheduled cash flows using the December 31, 1999 and 1998 rates offered on these instruments. Short-term borrowings: The carrying amount approximates the estimated --------------------- fair value. Off-balance-sheet financial instruments: The estimated fair value of --------------------------------------- off-balance-sheet financial instruments (primarily commitments to extend credit and standby letters of credit) is determined based on fees currently charged for similar commitments. Management estimates that these fees approximate $1,440,000 and $1,028,000 at December 31, 1999 and 1998, respectively. The estimated fair value of Bancorp's significant on-balance-sheet financial instruments at December 31, 1999 and 1998 were as follows:
1999 1998 ----------------------------------- ----------------------------------- Estimated Estimated Carrying fair Carrying fair value value value value ----------------- ---------------- ---------------- ----------------- Financial assets: Cash and cash equivalents $ 29,935,000 $ 29,935,000 $ 41,841,000 $ 41,841,000 Investment securities available-for-sale 59,359,000 59,359,000 76,793,000 76,793,000 Loans and mortgage loans held for sale 593,663,000 589,213,000 427,564,000 421,343,000 FHLB stock 5,469,000 5,469,000 5,084,000 5,084,000 Financial liabilities: Deposits $ 573,041,000 $ 572,746,000 $ 483,866,000 $ 485,283,000 Short-term borrowings 74,554,000 74,554,000 20,600,000 20,600,000
21 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 9. Commitments and contingencies ----------------------------- Bancorp leases certain land and facilities under noncancelable operating leases, generally for terms of 5 to 50 years, some of which include renewal options and escalation clauses. At December 31, 1999, the aggregate minimum rental commitments under operating leases that have initial or remaining noncancelable lease terms in excess of one year were approximately as follows: 2000 $ 1,170,000 2001 1,140,000 2002 1,035,000 2003 827,000 2004 774,000 Later years 9,889,000 ---------------- Total minimum lease payments $ 14,835,000 ================ Total rent expense was approximately $1,213,000, $750,000 and $343,000 in 1999, 1998 and 1997, respectively. In the ordinary course of business, litigation arises from normal banking activities. In the opinion of management, the ultimate outcome of these matters will not have a material adverse effect on Bancorp's consolidated financial position, results of operations or cash flows. 10. Noninterest expense - --- ------------------- Noninterest expense consisted of the following for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ------------- ------------- ------------ Salaries and employee benefits $ 14,293,013 $ 12,834,456 $ 9,552,513 Premises and equipment 3,315,826 2,644,173 2,049,771 Advertising 830,097 801,135 489,315 Data processing 665,704 252,570 251,077 Legal and professional 657,816 843,890 742,165 Other 3,039,171 1,972,334 1,766,187 ------------- ------------- ------------ Total noninterest expense $ 22,801,627 $ 19,348,558 $ 14,851,028 ============= ============= ============
22 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 11. Income taxes ------------ The provision (credit) for income taxes consisted of the following for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---------------- ------------- ------------- Current: Federal $ 6,482,551 $ 5,098,082 $ 3,903,417 State 1,372,548 1,252,200 539,085 Deferred (935,809) (437,882) (113,702) ---------------- ------------- ------------- Provision for income taxes $ 6,919,290 $ 5,912,400 $ 4,328,800 ================ ============= =============
The provision (credit) for income taxes results in effective tax rates that are different than the federal income tax statutory rate. The nature of the differences for the years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997 ---------------- ---------------- -------------- Expected federal income tax provision at 34% $ 6,659,004 $ 6,041,839 $ 4,634,935 State income tax, net of federal effect 843,341 763,479 342,880 Tax-exempt interest income (478,504) (577,312) (679,305) Other, net (104,551) (315,606) 30,290 ---------------- ---------------- -------------- Provision for income taxes $ 6,919,290 $ 5,912,400 $ 4,328,800 ================ ================ ==============
The components of the net deferred tax assets and liabilities at December 31, 1999 and 1998 were as follows:
1999 1998 ---------------- ------------- Deferred tax assets: Nonqualified benefit plans $ 745,362 $ 661,632 Allowance for loan losses 2,001,389 1,342,735 Net unrealized losses on investment securities 1,033,402 - Other, net 659,516 208,679 ---------------- ------------- Total deferred tax assets 4,439,669 2,213,046
23 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 11. Income taxes (continued) ------------------------
1999 1998 ---------------- ----------------- Deferred tax liabilities: Mortgage servicing rights 140,392 150,559 FHLB stock dividends 843,966 695,734 Net unrealized gains on investment securities - 311,832 Other, net 347,546 228,199 ---------------- ----------------- Total deferred tax liabilities 1,331,904 1,386,324 ---------------- ----------------- Net deferred tax assets $ 3,107,765 $ 826,722 ================ =================
Management believes, based upon Bancorp's historical performance, that the net deferred tax assets will be recognized in the normal course of operations and, accordingly, management has not reduced net deferred tax assets by a valuation allowance. The exercise of nonstatutory stock options which have been granted under Bancorp's stock option plans give rise to compensation which is included in the taxable income of the applicable directors or employees and is deductible by Bancorp for federal and state income tax purposes. Such compensation results from increases in the fair market value of Bancorp's common stock subsequent to the date of grant of the applicable stock options. In accordance with generally accepted accounting principles, such compensation is not recognized as an expense for financial accounting purposes and the related tax benefits are recorded as an increase to common stock. Bancorp's provision for income taxes for 1999, 1998 and 1997 included approximately $109,000, $204,000 and $57,000, respectively, related to gains on sales of investment securities. During 1999, 1998 and 1997, Bancorp paid approximately $8,443,000, $6,056,000 and $4,414,000, respectively, in income taxes. 24 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 12. Transactions with related parties --------------------------------- Activity with respect to loans to directors and their affiliates and executive officers of Bancorp and subsidiaries for the year ended December 31, 1999 was as follows: Balance at January 1, 1999 $ 7,298,571 Additions or renewals 6,794,122 Amounts collected or renewed (6,470,302) ------------ Balance at December 31, 1999 $ 7,622,391 ============ In addition, included in commitments in Note 9 are approximately $1,887,000 of commitments to extend credit to directors and their affiliates and executive officers at December 31, 1999 ($2,399,000 at December 31, 1998). 13. Stock options ------------- Bancorp has two Non-employee Director Stock Option Plans (Director Plans) - 1988 and 1993, two Incentive Stock Option Plans (Incentive Plans) - 1983 and 1993, and a 1995 Stock Incentive Plan (Option Plan). Director Plans -------------- Under the Director Plans, shares of common stock are reserved for issuance at their fair market value at the date of grant to non-employee directors of Bancorp and its subsidiaries. Generally, options become exercisable over a period of three years of subsequent service. The options expire in a maximum of ten years from the date of grant. At December 31, 1999, 201,401 of the 211,647 options outstanding were exercisable, with 127,540 shares reserved for future grant. Incentive Plans --------------- Under the Incentive Plans, officers of Bancorp and its subsidiaries may be granted options to purchase shares of common stock. The option price is the fair market value at the date of grant. Generally, options become exercisable over a period of five years of subsequent service. The options expire in a maximum of ten years from the date of grant. At December 31, 1999, 324,839 of the 348,212 options outstanding were exercisable, and 988 shares were reserved for future grant. 25 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 13. Stock options (continued) ------------------------ Option Plan ----------- Under the Option Plan, Bancorp employees, directors and consultants may be granted nonstatutory stock options or restricted stock awards, and Bancorp employees may be granted incentive stock options. The exercise prices of nonstatutory stock options and the price to be paid for restricted stock is established by a committee of the Board of Directors. The exercise price of incentive stock options must be no less than the fair market value of the underlying shares on the date of grant. Options granted under the Option Plan expire on such date as established by a committee of the Board of Directors. However, incentive stock options expire in a maximum of ten years from the date of grant. During the year ended December 31, 1998, the shareholders of Bancorp approved an amendment to the Option Plan, which resulted in Bancorp reserving 721,681 additional shares for future grant. At December 31, 1999, 861,286 options were outstanding under the Option Plan, consisting of 528,052 incentive stock options and 333,234 nonstatutory stock options. At December 31, 1999, a total of 412,296 of the options outstanding were exercisable, and 594,727 shares were reserved for future grant. Bancorp has not granted any restricted stock awards under the Option Plan. Transactions involving option activity for the years ended December 31, 1999, 1998 and 1997 are summarized as follows:
1999 1998 1997 ------------------------ ------------------------ ------------------------- Weighted- Weighted- Weighted- average average average Options exercise Options exercise Options exercise outstanding price outstanding price outstanding price ----------- ----------- ------------ ----------- ------------ ----------- Balance at beginning of year 1,377,176 $ 4.64 1,238,999 $ 2.84 1,385,386 $ 2.59 Granted 212,176 11.66 290,531 11.61 58,402 5.15 Forfeited (6,433) 13.96 (32,520) 7.36 (21,109) 3.16 Exercised (161,774) 2.37 (119,834) 2.24 (183,680) 2.18 ---------- ---------- ---------- Balance at end of year 1,421,145 $ 5.90 1,377,176 $ 4.64 1,238,999 $ 2.84 ========= ======= ========= ======= ========= =======
26 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 13. Stock options (continued) ------------------------ Information regarding the number, weighted-average exercise price and weighted-average remaining contractual life of options by range of exercise price at December 31, 1999 is as follows:
Options outstanding Options exercisable ------------------------------------- --------------------------- Weighted- average Weighted- Weighted- Range of remaining average average exercise Number life exercise Number exercise price of options (years) price of options price --------------- ---------- ----------- ----------- ----------- --------- Under $5.00 909,286 7.4 $ 2.79 850,273 $ 2.71 $5.01-$10.00 121,253 9.4 9.22 30,120 9.16 $10.01-$15.00 390,606 11.7 12.11 58,143 11.48 ---------- ------- 1,421,145 8.8 $ 5.90 938,536 $ 5.24 ========== === ======= ======= =======
Exercisable options as of December 31, 1998 and 1997 totaled 950,981 and 874,184, respectively. No compensation cost has been recognized for the options issued under the stock option plans as Bancorp adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Had compensation cost been determined based on the fair value of the options at the date of grant consistent with the provisions of SFAS No. 123, Bancorp's pro forma net income and pro forma earnings per common share would have been as follows for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---------------- ---------------- ---------------- Net income - as reported $ 12,106,765 $ 11,434,546 $ 9,303,363 - pro forma 11,753,038 11,360,952 9,205,469 Basic earnings per common share: - as reported $ .62 $ .59 $ .48 - pro forma .60 .59 .47 Diluted earnings per common share: - as reported $ .60 $ .56 $ .46 - pro forma .58 .56 .46
27 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 13. Stock options (continued) ------------------------ The pro forma effect on net income for 1999, 1998 and 1997 is not representative of the pro forma effect in future years because compensation expense related to grants made prior to December 31, 1994 -- and which vest in subsequent years -- is not considered. For purposes of the above pro forma information, the fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1999 1998 1997 ----------- ----------- ---------- Risk-free interest rate 6.3% 5.6% 6.3% Expected life (in years) 7.3 7.3 7.3 Expected volatility 32.6% 31.0% 29.4% Expected dividend yield 0% 0% 0% The effect of applying the fair-value-based method to stock options granted in the years ended December 31, 1999, 1998 and 1997 resulted in a weighted-average grant date fair value of $5.83, $5.31 and $4.42, respectively. 14. Shareholders' equity -------------------- At December 31, 1999 and 1998, Bancorp had 10,000,000 shares of authorized but unissued preferred stock, which consists of 5,000,000 shares each of voting and nonvoting stock. In May 1998, shareholders of Bancorp authorized an amendment to the Articles of Incorporation to change the preferred stock from $5 par value to no par value. At December 31, 1999 and 1998, Bancorp had 50,000,000 shares of authorized common stock. In May 1998, shareholders of Bancorp authorized an amendment to the Articles of Incorporation to change the common stock from $2 par value to no par value. Dividends paid by the Bank to Bancorp provide substantially all of Bancorp's cash flow. Those dividends are subject to prior regulatory approval if in excess of certain regulatory limits. At December 31, 1999, approximately $11.8 million was available from the Bank for the payment of dividends to Bancorp without prior regulatory approval. In January 2000, Bancorp authorized the repurchase of up to an aggregate of 5% of its currently outstanding common stock over a two-year period. 28 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 15. Basic and diluted earnings per common share ------------------------------------------- Bancorp's basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Bancorp's diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding plus dilutive common shares related to stock options. The numerators and denominators used in computing basic and diluted earnings per common share for the years ended December 31, 1999, 1998 and 1997 can be reconciled as follows:
Net income Shares Per-share (numerator) (denominator) amount -------------- ------------- -------------- 1999 ---- Basic earnings per common share - Income available to common shareholders $ 12,106,765 19,603,896 $ .62 ===== Effect of assumed exercise of stock options - 631,625 -------------- ------------ Diluted earnings per common share $ 12,106,765 20,235,521 $ .60 ============== ========== ===== 1998 ---- Basic earnings per common share - Income available to common shareholders $ 11,434,546 19,431,440 $ .59 ===== Effect of assumed exercise of stock options - 890,420 -------------- ------------ Diluted earnings per common share $ 11,434,546 20,321,860 $ .56 ============== ========== ===== 1997 ---- Basic earnings per common share - Income available to common shareholders $ 9,303,363 19,255,191 $ .48 ===== Effect of assumed exercise of stock options - 863,546 -------------- ------------ Diluted earnings per common share $ 9,303,363 20,118,737 $ .46 ============== ========== =====
29 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 16. Employee benefit plan --------------------- Bancorp has an employee savings plan and profit sharing plan (the Plan) which covers all full-time employees over age 21 with one year of service. The Plan allows employees to contribute between 2% to 15% of their salary on a tax-deferred basis. Bancorp's matching contributions are determined annually by the Board of Directors, up to 6% of individual employee salaries. In addition to the matching contributions, Bancorp may also make discretionary contributions to the Plan. Bancorp's contributions charged to operations related to the Plan totaled approximately $400,000 for 1999 ($400,000 for 1998 and $350,000 for 1997). 17. Regulatory matters ------------------ Bancorp and the Bank are subject to the regulations of certain federal and state agencies, and receive periodic examinations by those regulatory authorities. In addition, Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on Bancorp's or the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Bancorp's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Bancorp and the Bank to maintain minimum amounts and ratios (set forth in the tables below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (all as defined in the regulation). Management believes, as of December 31, 1999, that Bancorp and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, Bancorp and the Bank were adequately capitalized under the regulatory framework. To be categorized as adequately capitalized, Bancorp and the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events that management believes would change Bancorp's or the Bank's regulatory capital categorization. 30 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 17. Regulatory matters (continued) ----------------------------- Bancorp's actual and required capital amounts and ratios are presented in the table below:
Regulatory minimum to be Regulatory minimum to be Actual "adequately capitalized" "well capitalized" ------------------------ ------------------------ ----------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----------- ----------- ----------- ----------- ---------- December 31, 1999: Total capital (to risk-weighted assets) $73,308,000 9.9% $59,239,000 8.0% $74,048,000 10.0% Tier 1 capital (to risk-weighted assets) 67,143,000 9.0 29,619,000 4.0 44,429,000 6.0 Tier 1 capital (to average assets) 67,143,000 9.7 27,688,000 4.0 34,610,000 5.0 December 31, 1998: Total capital (to risk-weighted assets) 66,127,000 12.0 44,085,000 8.0 55,106,000 10.0 Tier 1 capital (to risk-weighted assets) 61,676,000 11.2 22,042,000 4.0 33,064,000 6.0 Tier 1 capital (to average assets) 61,676,000 10.9 22,633,000 4.0 28,292,000 5.0
The Bank's actual and required capital amounts and ratios are presented in the table below:
Regulatory minimum to be Regulatory minimum to be Actual "adequately capitalized" "well capitalized" ------------------------ ------------------------ ------------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----------- ----------- ----------- ----------- ----------- December 31, 1999: Total capital (to risk-weighted assets) $65,969,000 9.0% $58,969,000 8.0% $73,712,000 10.0% Tier 1 capital (to risk-weighted assets) 59,804,000 8.1 29,485,000 4.0 44,227,000 6.0 Tier 1 capital (to average assets) 59,804,000 8.7 27,613,000 4.0 34,516,000 5.0 December 31, 1998: Total capital (to risk-weighted assets) 59,658,000 10.9 43,843,000 8.0 54,804,000 10.0 Tier 1 capital (to risk-weighted assets) 55,207,000 10.1 21,922,000 4.0 32,882,000 6.0 Tier 1 capital (to average assets) 55,207,000 9.8 22,524,000 4.0 28,155,000 5.0
31 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 18. Parent company financial information ------------------------------------ Condensed financial information for Centennial Bancorp (Parent Company only) is presented as follows:
CONDENSED BALANCE SHEETS (Unconsolidated) December 31, 1999 1998 ------------- -------------- Assets: Cash and cash equivalents, deposited with the Bank $ 1,972,516 $ 3,264,923 Equipment, net 69,209 84,911 Deferred tax asset 1,357,495 484,246 Investment in subsidiaries at cost plus equity in earnings 69,883,713 59,394,795 Other assets 2,411,998 1,798,918 ------------- -------------- Total assets $ 75,694,931 $ 65,027,793 ============= ============== Liabilities and shareholders' equity: Accrued liabilities $ 1,366,170 $ 1,310,652 Shareholders' equity 74,328,761 63,717,141 ------------- -------------- Total liabilities and shareholders' equity $ 75,694,931 $ 65,027,793 ============= ==============
CONDENSED STATEMENTS OF INCOME (Unconsolidated) Years ended December 31, ------------------------------------------------- 1999 1998 1997 -------------- ------------- -------------- Income: Interest income from subsidiaries $ 103,815 $ 135,862 $ 149,995 Other income - 24,725 8,007 -------------- ------------- -------------- Total income 103,815 160,587 158,002 Expense: Salaries and employee benefits 702,931 704,256 567,313 Other 343,936 317,866 366,259 -------------- ------------- -------------- Total expenses 1,046,867 1,022,122 933,572 Loss before income tax benefit and equity in undistributed earnings of subsidiaries (943,052) (861,535) (775,570) Income tax benefit 366,030 237,601 157,399 -------------- ------------- -------------- Loss before equity in undistributed earnings of subsidiaries (577,022) (623,934) (618,171) Equity in undistributed net earnings of subsidiaries 12,683,787 12,058,480 9,921,534 -------------- ------------- -------------- Net income $ 12,106,765 $ 11,434,546 $ 9,303,363 ============== ============= ==============
32 CENTENNIAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 18. Parent company financial information ------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (Unconsolidated) Years ended December 31, ------------------------------------------------- 1999 1998 1997 -------------- ------------- -------------- Cash flows from operating activities: Net income $ 12,106,765 $ 11,434,546 $ 9,303,363 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 101,490 100,238 98,570 Undistributed earnings of subsidiaries (12,683,787) (12,058,480) (9,921,534) Deferred tax benefit (873,249) (43,442) (18,623) Changes in assets and liabilities: Other assets (382,763) (831,450) 710,290 Accrued liabilities 55,518 315,389 (261,295) -------------- ------------- -------------- Net cash used by operating activities (1,676,026) (1,083,199) (89,229) Cash flows used by investing activities - purchases of equipment - (18,789) (7,999) Cash flows from financing activities - proceeds from exercise of stock options 383,619 267,381 400,944 -------------- ------------- -------------- Net increase (decrease) in cash and cash equivalents (1,292,407) (834,607) 303,716 Cash and cash equivalents at beginning of year 3,264,923 4,099,530 3,795,814 -------------- ------------- -------------- Cash and cash equivalents at end of year $ 1,972,516 $ 3,264,923 $ 4,099,530 ============== ============= ==============
33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH BANCORP'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AT DECEMBER 31, 1999 AND FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 WHICH ARE INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. THIS DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, WHICH ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. STATEMENTS THAT EXPRESSLY OR IMPLICITLY PREDICT FUTURE RESULTS, PERFORMANCE OR EVENTS ARE FORWARD-LOOKING. IN ADDITION, THE WORDS "ANTICIPATE," "BELIEVE," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: (1) POTENTIAL DELAYS OR OTHER PROBLEMS IN IMPLEMENTING BANCORP'S GROWTH AND EXPANSION STRATEGY; (2) THE ABILITY TO ATTRACT NEW DEPOSITS AND LOANS; (3) INTEREST RATE FLUCTUATIONS; (4) COMPETITIVE FACTORS AND PRICING PRESSURES; (5) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY THAT COULD RESULT IN INCREASED LOAN LOSSES; (6) CHANGES IN LEGAL AND REGULATORY REQUIREMENTS; AND (7) CHANGES IN TECHNOLOGY, AS WELL AS OTHER FACTORS DESCRIBED IN THIS AND OTHER BANCORP REPORTS AND STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON BANCORP'S FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. BANCORP DOES NOT INTEND TO UPDATE ITS FORWARD-LOOKING STATEMENTS. HIGHLIGHTS Centennial Bancorp reported net income of $12.1 million, or $.62 per share, for the year ended December 31, 1999. This represented a 5.9% increase in net income, as compared to $11.4 million, or $.59 per share, in 1998. Net income in 1998 represented a 22.9% increase from 1997 net income of $9.3 million, or $.48 per share. The return on average assets was 1.91% in 1999 compared to 2.18% in 1998 and 2.12% in 1997. The increased earnings for 1999 and 1998 primarily reflect increased net interest income due to the expansion of Bancorp's interest-earning assets each year. At December 31, 1999, total assets increased $154.7 million to $726.7 million. This increase represented a 27.0% increase over total assets at December 31, 1998. Earning assets at December 31, 1999 represented 90.6% of total assets, which was an increase from December 31, 1998 when earning assets were 90.0% of total assets. 1999 was a year of significant change and continued growth for Bancorp. A new corporate headquarters office was established in downtown Portland to provide a more central location and better support for Bancorp's growth and expansion northward along the I-5 corridor. During the first quarter, Centennial Bank (the "Bank") completed a major reorganization along functional (rather than geographical) lines, also to facilitate continuing growth and expansion. During the year, the Bank added five new full-service branches. In January 1999, the Oakway Center office opened as the Bank's fourth full-service branch in the Eugene area. The Hazel Dell office in Vancouver, Washington, acquired from Northwest National Bank, opened on May 3, 1999 as the Bank's first branch in the State of Washington. The new downtown Portland and 34 downtown Salem offices opened in July with the Salem office operating out of a temporary facility while a new building is being constructed. Finally, the Clackamas office opened in November to serve the southeast Portland area. Another full-service branch in Vancouver, the Mill Plain office, opened in February 2000. As part of the Bank's reorganization, during January 1999, the Bank created two commercial banking centers, one in downtown Eugene and the other in southwest Portland. A third center in downtown Portland opened during July. Bancorp has also announced plans to open commercial banking centers in Clackamas and Vancouver. In January 1999, Centennial Mortgage Co. ("Mortgage Co.") opened a second Eugene office in the Oakway Center next to the new Bank branch and in November moved its Sunnyside office to the new Bank branch location in Clackamas. Bancorp has also announced plans to open a Mortgage Co. office in downtown Salem to be located in the new Bank branch building upon its completion, currently anticipated early in the second quarter of 2000. NET INTEREST INCOME For most financial institutions, including Bancorp, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on deposits and borrowings. Changes in net interest income result from changes in "volume," "spread" and "margin." Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by interest-earning assets and is influenced by the amount and relative mix of interest-earning assets and interest-bearing liabilities. During 1999, 1998 and 1997, Bancorp's average interest-earning assets were $578 million, $483 million and $399 million, respectively. During these same years, Bancorp's net interest margin was 7.15%, 7.22% and 6.92%, respectively. 35
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID The following table sets forth for 1999, 1998 and 1997 information with regard to average balances of assets and liabilities, as well a total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for Bancorp. Year ended December 31, 1999 1998 1997 ------------------------------ ------------------------------ ---------------------------- Interest Average Interest Average Interest Average Average income or yield or Average income or yield or Average income or yield or balance(1) expense rates balance(1) expense rates balance(1) expense rates ---------- --------- -------- ---------- --------- -------- ---------- --------- ------- (Dollars in thousands) ASSETS: Interest-bearing deposits with banks $ 104 $ 8 7.69% $ 264 $ 14 5.30% $ 6,924 $ 376 5.43% Investment securities - taxable 41,954 2,612 6.23 48,554 3,096 6.38 41,933 2,791 6.66 Investment securities - non-taxable(2) 28,155 2,172 7.71 33,508 2,574 7.68 39,097 3,083 7.89 Federal funds sold 5,937 280 4.72 13,253 691 5.21 10,925 573 5.24 Loans and loans held for sale(3) 502,272 54,134 10.78 387,914 44,348 11.43 299,976 34,329 11.44 -------- ------- --------- ------- ------- ------ Total interest-earning assets/interest income (2) 578,422 59,206 10.24 483,493 50,723 10.49 398,855 41,152 10.32 Allowance for loan losses (5,399) (3,882) (3,123) Cash and due from banks 31,440 28,351 27,552 Premises and equipment, net 13,993 11,407 9,790 Other assets 16,547 5,848 6,112 -------- -------- -------- Total assets $635,003 $525,217 $439,186 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Savings and interest-bearing demand deposits $260,240 7,865 3.02 $211,896 6,889 3.25 $166,800 5,156 3.09 Time deposits 167,702 8,597 5.13 145,387 8,185 5.63 129,756 7,299 5.63 Short-term borrowings 26,356 1,405 5.33 10,016 489 4.88 9,688 539 5.56 Long-term debt 5,945 273 4.59 10,000 572 5.72 -------- ------- ---------- ------ -------- ------- Total interest-bearing liabilities/interest expense 454,298 17,867 3.93 373,244 15,836 4.24 316,244 13,566 4.29 Demand deposits 106,317 90,166 75,005 Other liabilities 4,948 5,095 2,001 -------- -------- -------- Total liabilities 565,563 468,505 393,250 Shareholders' equity 69,440 56,712 45,936 -------- -------- -------- Total liabilities and shareholders' equity $635,003 $525,217 $439,186 ======== ======== ======== Net interest income(2) $41,339 $34,887 $27,586 ======= ======= ======= Net interest spread(2) 6.31% 6.25% 6.03% ===== ===== ===== Net interest margin(2) 7.15% 7.22% 6.92% Net interest income to average shareholders' equity (2) 59.53% 61.52% 60.05% Average interest-earning assets to average interest-bearing liabilities 127% 130% 126% - ------------------------------ (1) Average balances are based on daily averages. (2) Average yield on non-taxable securities, interest income, net interest income, net interest spread, net interest margin and net interest income to average shareholders' equity have been computed on a 34% tax-equivalent basis. (3) Nonaccrual loans have been included in the computation of average loans and loans held for sale. Loan fees recognized during the period and included in the yield calculation totaled $7,282,948 in 1999, $6,855,866 in 1998 and $4,769,700 in 1997.
36
ANALYSIS OF CHANGES IN INTEREST RATE DIFFERENTIAL The following table shows the dollar amount, on a tax-equivalent basis, of the increase (decrease) in the Company's interest income and interest expense for the years ended December 31, and attributes such dollar amounts to changes in volume and changes in interest rates. Changes attributable to the combined effect of volume and interest rate changes have been allocated equally between interest rate and volume. 1999 vs. 1998 1998 vs. 1997 Change in Change in net interest income due to net interest income due to -------------------------------- -------------------------------- Volume Rate Total Volume Rate Total -------- ------- ------- -------- ------ ------- (In thousands) Interest income: Balances due from banks $ (10) $ 4 $ (6) $ (357) $ (5) $ (362) Investment securities - taxable (416) (68) (484) 431 (126) 305 Investment securities - non-taxable (412) 10 (402) (435) (74) (509) Federal funds sold (363) (48) (411) 122 (4) 118 Loans and loans held for sale 12,700 (2,914) 9,786 10,059 (40) 10,019 ------ ------ ----- ------- ------ ------- Total interest income 11,499 (3,016) 8,483 9,820 (249) 9,571 Interest expense: Deposits: Savings and interest-bearing demand 1,516 (540) 976 1,430 303 1,733 Time 1,200 (788) 412 880 5 885 Short-term borrowings 834 82 916 17 (67) (50) Long-term debt (273) (273) (209) (90) (299) ------ ------ ----- ----- ------ ------ Total interest expense 3,277 (1,246) 2,031 2,118 151 2,269 ------ ------ ----- ----- ------ ------ Net interest income $8,222 $(1,770) $6,452 $7,702 $ (400) $7,302 ====== ======= ====== ====== ======= ======
37 RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 NET INTEREST INCOME As a result of volume increases and improved interest spread, Bancorp's net interest income increased to $41.5 million, on a tax-equivalent basis, in 1999 as compared to $34.9 million in 1998 and $27.6 million in 1997. During 1999, average interest-earning assets increased to $578 million as compared to average interest-earning assets of $483 million in 1998 and $399 million in 1997. At the same time, average interest-bearing liabilities increased to $454 million in 1999 from $373 million in 1998 and $316 million in 1997. The average yield earned on interest-earning assets decreased by .25% (25 basis points) in 1999 and increased by .17% in 1998, while the average rate paid on interest-bearing liabilities decreased by .31% in 1999 and .05% in 1998. Although net interest spread for 1999 increased to 6.31% from 6.25% in 1998, lower loan yields caused a modest decrease in 1999 net interest margin to 7.15% from 7.22% in 1998. Primarily due to higher loan volumes, net interest spread for 1998 increased to 6.25% from 6.03% in 1997, and net interest margin for 1998 increased to 7.22% from 6.92% in 1997. During 1999 and 1998, Bancorp primarily supported its strong loan growth with increased deposits, which mainly resulted from continuing business expansion. Borrowing was also a major source of funding during 1999. Decreased cash balances, partial investment portfolio liquidation, and operating cash flow were substantial funding sources both years. Purchases of premises and equipment required a significant use of cash in both 1999 and 1998. Bancorp experienced rising interest rates during 1999 as compared to declining rates in 1998 and relative rate stability in 1997. Bancorp's current rate-sensitive asset and liability portfolio mix has an interest-rate profile that should enhance earnings in a rising rate environment but would be a detriment to earnings if interest rates fall. See "Quantitative and Qualitative Disclosures about Market Risk" below. The Mortgage Co. has a residential mortgage construction lending department, which develops relationships with home builders in the Eugene/Springfield and Portland-area markets and produces additional permanent loan activity as the houses under construction are sold. Recognizing the risks associated with construction lending, management has established a detailed approval process for builder lines of credit and has implemented a continuing review of construction in progress to monitor construction loan activity. Interest rate increases could adversely affect the demand for construction loans and the repayment of those loans from the sale of completed properties. Rate increases could also adversely impact the Mortgage Co.'s permanent mortgage lending activity. PROVISION FOR LOAN LOSSES Management's policy is to maintain an adequate allowance for loan losses. In 1999, Bancorp charged a $2,300,000 loan loss provision to income, as compared to $1,500,000 in 1998 and $1,250,000 in 1997. The larger loan loss provisions in 1999 and 1998 primarily reflect the larger amounts of loans outstanding each year. In 38 1999, loan charge-offs, net of recoveries, were $586,000, as compared to loan charge-offs, net of recoveries, of $398,000 in 1998 and $501,000 in 1997. Bancorp's allowance for loan losses was $6.2 million at December 31, 1999, as compared to $4.5 million and $3.3 million at December 31, 1998 and December 31, 1997, respectively. The ratio of the allowance for loan losses to total nonperforming loans was 195%, 89% and 263% at December 31, 1999, 1998 and 1997, respectively. The significant decrease in the allowance ratio at December 31, 1998 was primarily due to one borrower whose loans were substantially liquidated during 1999. Management attributes the relatively low levels of loans charged off, net of recoveries, during 1999, 1998 and 1997 to favorable economic conditions and effective credit risk management policies, procedures and practices. Management continues its efforts to collect amounts previously charged off. NONINTEREST INCOME Noninterest income decreased $657,000 to $3.5 million in 1999 as compared to 1998, and increased $1.0 million to $4.2 million in 1998 as compared to 1997. The decrease in 1999 was due to lower gains recognized on sales of loans and securities. The 1998 increase was primarily attributable to increased gains on loan and securities sales, which were partially offset by the decrease in other noninterest income that returned to more normal levels after spiking in 1997 due to the receipt of a $650,000 litigation settlement. Gains on sales of loans decreased $757,000 in 1999 as compared to 1998, and increased $844,000 in 1998 as compared to 1997. The 1999 decrease was due to a decrease in the volume of residential mortgage loans originated through the Mortgage Co. that are subsequently sold to third-party investors without retention of servicing rights. The decrease in the volume of loans was primarily the result of increasing interest rates in 1999. Gains on loan sales increased during 1998 due to increasing mortgage loan volumes in a favorable interest-rate environment. The fee income and sale gains from the origination and refinance of mortgage loans sold to third-party investors is interest-rate sensitive and can vary significantly. Therefore, there can be no assurance that such income will contribute to Bancorp's future earnings. Bancorp recognized decreased gains on sales of securities of $301,000 during 1999 as compared to 1998 and increased gains on sales of $432,000 during 1998 as compared to 1997. Although the volume of securities sold in 1999 was substantially higher than in 1998, 1999 gains on sales were limited by unfavorable interest rate trends. Decreasing market rates during 1998 resulted in increased gains from sales of securities that year. NONINTEREST EXPENSE Noninterest expense increased $3.5 million to $22.8 million in 1999 as compared to 1998, and increased $4.5 million to $19.3 million in 1998 as compared to 1997. The increases both years were primarily attributable to increased staffing and facilities expenses. Increased spending on advertising was also a significant factor in 1998. 39 Salaries and employee benefits expenses increased $1.5 million to $14.3 million in 1999 as compared to 1998, and increased $3.2 million to $12.8 million in 1998 as compared to 1997. These increases were primarily the result of staff additions to accommodate Bancorp's expanding operations. Premises and equipment expense increased $672,000 to $3.3 million in 1999 as compared to 1998, and increased $594,000 to $2.6 million in 1998 as compared to 1997. The increases in 1999 and 1998 were primarily due to the increasing number of Bank and Mortgage Co. offices each year. Advertising expenses increased $29,000 to $830,000 in 1999 as compared to 1998 and $312,000 to $801,000 in 1998 as compared to 1997. During 1999, Bancorp maintained 1998 spending levels, which had increased substantially from 1997 levels as Bancorp adopted a more formal advertising strategy with emphasis on developing name recognition in the markets served. Although data processing expenses increased $413,000 to $665,000 in 1999 as compared to 1998, the majority of the increase resulted from the costs of outsourcing the Bank's item processing. These costs were more than offset by internal staffing and equipment expense savings. Other noninterest expense increases in 1999 and 1998 were primarily the result of business expansion. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss to future earnings ("earnings") and current shareholders' equity ("equity"), which may result from changes in market prices and rates. Bancorp's primary market risk exposure is the interest rate risk associated with its investing, lending, deposit and borrowing activities. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not materially affect or are not part of Bancorp's normal business activities. Interest rate risk is the risk that changes in interest rates will adversely affect earnings and equity. The risk of loss to earnings in a given period develops when the degree and timing of rate changes varies among rate-sensitive assets and liabilities. The risk of loss to equity develops when rate changes affect the current fair value of rate-sensitive assets and liabilities by differing amounts. Management actively monitors and manages Bancorp's interest rate risk with the overall objective of achieving satisfactory and consistent profitability while maintaining interest rate sensitivity within formal policy guidelines established by the Board of Directors. The Asset and Liability Committee of the Board of Directors reviews interest-sensitivity reports and related matters quarterly or more often if needed. All significant interest rate risk issues including policy exceptions are presented to the Board of Directors for review. Bancorp's interest rate risk is currently measured using a computer-based system developed and implemented during 1999. Bancorp uses an income simulation model to measure earnings sensitivity by applying +/-1% and +/-2% rate changes (annualized) to six-month earnings projections. Like all income simulation models, Bancorp's model is very assumption dependent. The earnings projections involve numerous assumptions 40 including, but not limited to, those concerning future portfolio growth and mix, interest rates, market and economic trends, and customer behavior. The application of rate changes also involves many assumptions about the basic components of interest rate risk. Fair value sensitivity is measured using the computer model in conjunction with investment portfolio reports which include the relevant information about investment security fair values and interest rate sensitivity. The computer model determines the fair value of selected loans and deposits by calculating the present value of future cash flows using discount rates that are reflective of current market rates. +/-1% and +/-2% instantaneous interest rate "shocks" are then applied to determine sensitivity. The fair valuation process is also very dependent on numerous assumptions. Although Management believes all assumptions and estimates used are reasonable, actual results may vary substantially. The following table summarizes Bancorp's six-month earnings sensitivity as of December 31, 1999: INTEREST RATE CHANGE CHANGE IN NET INCOME -2% $-513,000 -1% -261,000 +1% +194,000 +2% +390,000 Comparable information for 1998 was not available since Bancorp was not using the current measurement system at that time. Bancorp's annual earnings sensitivity as of December 31, 1998 using different methodology was as follows: INTEREST RATE CHANGE CHANGE IN NET INCOME -1% $-179,000 -2% -659,000 Bancorp's fair value sensitivity as of December 31, 1999 was as follows: INTEREST RATE CHANGE CHANGE IN FAIR VALUES -2% $+15,305,000 -1% +7,341,000 +1% -7,603,000 +2% -14,486,000 Because of uncertainties about customer behavior, refinance activity, absolute and relative loan and deposit pricing levels, competitor pricing and market behavior, product volumes and mix, and other unexpected changes in economic events affecting movements and volatility in market rates, there can be no assurance that simulation and fair valuation results are reliable indicators of interest rate risk under such conditions. PROVISION FOR INCOME TAXES Bancorp's provision for income taxes was $6.9 million in 1999, $5.9 million in 1998 and $4.3 million in 1997. Bancorp's effective tax rates for financial reporting were 36.4% in 1999, 34.1% in 1998 and 31.8% in 1997. The effective tax rate varies 41 from federal statutory rates primarily because of nontaxable interest income and state income taxes. See Note 11 to the Consolidated Financial Statements. LIQUIDITY AND SOURCES OF FUNDS Bancorp's primary sources of funds are customer deposits, short-term borrowings, loan repayments, net income and sales of loans. Although sales of investment securities were a significant funding source in 1999 and 1998, the investment portfolio is currently a less effective source of immediate liquidity due to unrealized losses resulting from recent increases in interest rates. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments, which are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions and other factors, are not. The Bank's deposits increased to $573 million at December 31, 1999 from $484 million at December 31, 1998 and $419 million at December 31, 1997, primarily because of ongoing business expansion and development programs. Net loans and loans held for sale increased to $594 million at December 31, 1999 from $428 million at December 31, 1998 and $337 million at December 31, 1997. These increases were primarily due to the Bank's expansion and business development activities, and the Mortgage Co.'s real estate construction lending activities. The Bank maintains, on an unsecured basis, federal funds lines with correspondent banks as a backup source of temporary liquidity. At December 31, 1999, the Bank had federal funds lines totaling $30 million ($33 million at December 31, 1998) with $19.6 million outstanding ($1 million outstanding at December 31, 1998). The Bank also maintains a cash management credit facility with the Federal Home Loan Bank of Seattle ("FHLB"). The credit facility is based on the Bank's holdings of specified housing finance related assets, and is limited to 10% of the Bank's total assets, measured on a quarterly basis. At December 31, 1999, the Bank had a $51.7 million credit facility with the FHLB ($26.1 million at December 31, 1998) with $46.7 million outstanding at December 31, 1999 and $3.5 million outstanding at December 31, 1998. The increase in the Bank's credit facility at December 31, 1999 from the level at December 31, 1998 was due to the Bank's increase in specified housing finance related assets during 1999. The credit facility is secured by the FHLB stock owned by the Bank and by all its other assets. Management anticipates that Bancorp will continue to rely on the primary liquidity sources previously discussed. Although deposit balances have shown historical growth, such balances may be influenced by changes in the banking industry, interest rates available on other investments, general economic conditions, competition and other factors. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets. Federal funds purchased and FHLB advances will probably continue as Bancorp's main sources of borrowed funds, and Bancorp is actively seeking to expand these liquidity sources. Bancorp is also actively seeking to diversify its sources of funding overall. 42 CAPITAL RESOURCES Total shareholders' equity increased to $74.3 million at December 31, 1999 from $63.7 million and $51.8 million at December 31, 1998 and 1997, respectively. Total shareholders' equity was increased during 1999 not only by net income, but also by the effects of stock options exercised ($700,000). Bancorp shareholders' equity (Tier 1 capital) was 9.7% of average assets in 1999 as compared to 10.9% in 1998. The Bank's shareholder equity (Tier 1 capital) was 8.7% of average assets in 1999 as compared to 9.8% in 1998. EFFECTS OF INFLATION AND CHANGING PRICES The primary impact of inflation on Bancorp's operations is increased operating overhead. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution's performance than the effects of general inflation. Interest rates are affected by inflation, but neither the timing nor the magnitude of interest rate fluctuations coincides with changes in an inflation index. For these reasons, management believes that references to other information regarding interest rates earned and paid, interest-earning assets and interest-bearing liabilities will be of greater assistance than inflation-adjusted presentations in understanding Bancorp's ability to react to changing interest rates and inflationary trends. EFFECTS OF YEAR 2000 Some computers and computer software programs are unable to accurately recognize, for years after 1999, dates which are often expressed as a two digit number. This inability to recognize date information accurately could potentially affect computer operations and calculations, or could cause computer systems to not operate at all. Bancorp is heavily reliant on computers for accounting for customer records and transactions, as well as operating performance. Prior to December 31, 1999, Bancorp initiated and completed a comprehensive Year 2000 audit program, primarily directed by a task force organized by management in early 1997. Bancorp also prepared contingency plans to minimize disruptions to its operations due to Year 2000 issues. Among other criteria, Bancorp's Year 2000 programs were designed to comply with guidance provided by federal banking regulators to financial institutions with respect to becoming Year 2000 compliant. To date, Bancorp has not, nor to management's knowledge has any third party vendor or service provider on which Bancorp relies, experienced any material problems related to the Year 2000. However, Bancorp cannot determine if it will be subject to Year 2000 compliance problems in the future, or if Year 2000 problems have arisen that management has failed to detect. Bancorp will continue to monitor its business applications and maintain contact with significant third parties to resolve any Year 2000 problems that may arise in 43 the future. Management believes that its efforts to achieve Year 2000 compliance and the impact of the Year 2000 problem will not have a material effect on Bancorp's operations. FORM 10-K Copies of Bancorp's annual report on Form 10-K required to be filed with the SEC under the Securities Exchange Act of 1934 are available to shareholders at no charge upon written request to: Michael J. Nysingh, Chief Financial Officer, Centennial Bancorp, P.O. Box 1560, Eugene, Oregon 97440. Copies of Bancorp's material filed with the SEC can also be accessed via the Internet at "www.sec.gov." CHANGE OF ACCOUNTANTS Effective October 30, 1998, Bancorp dismissed its prior independent accountant, PricewaterhouseCoopers ("PwC"). The decision to change accountants was approved by Bancorp's Board of Directors. PwC's reports on Bancorp's financial statements for the 1997 and 1996 fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the audits for 1997 and 1996 and through the subsequent interim period to the date of the change of accountants, there were no disagreements between Bancorp and PwC on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports. Bancorp requested that PwC furnish it with a letter addressed to the SEC stating whether or not it agreed with the above statements. A copy of such letter was filed as Exhibit 16 to Form 8-K filed November 5, 1998. Effective October 30, 1998, Bancorp engaged Symonds, Evans & Larson, P.C. as its principal independent accountant. During 1997 and 1996 and the subsequent interim period to the date of the change of accountants, Bancorp did not consult Symonds, Evans & Larson, P.C. regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of the SEC's Regulation S-K. 44 MARKET FOR COMMON STOCK Bancorp's Common Stock is quoted on the Nasdaq National Market under the symbol "CEBC." The following table sets forth the high and low bid prices for the Common Stock on the Nasdaq National Market for the last two years: High Low ---- --- Year ended December 31, 1999: First quarter $15.15 $10.82 Second quarter 12.39 8.87 Third quarter 12.88 9.89 Fourth quarter 10.80 8.86 Year ended December 31, 1998: First quarter $14.38 $10.59 Second quarter 14.52 10.96 Third quarter 13.49 9.65 Fourth quarter 14.95 10.82 At February 29, 2000, Bancorp had 19,649,231 shares of Common Stock outstanding held by 1,246 shareholders of record. Bancorp has never declared or paid cash dividends to shareholders and has no intention to do so in the foreseeable future. 45
QUARTERLY FINANCIAL DATA (In thousands, except per-share amounts) First Second Third Fourth 1999 Quarter Quarter Quarter Quarter Total - --------------- ------- ------- ------- ------- ------ Interest income $12,894 $13,939 $15,274 $16,361 $58,468 Interest expense 3,833 4,237 4,670 5,128 17,868 ------- ------- ------- ------- ------- Net interest income 9,061 9,702 10,604 11,233 40,600 Loan loss provision 500 600 600 600 2,300 Net gains on sales of securities 166 133 - - 299 Income before income taxes 4,595 4,744 4,981 4,706 19,026 Net income 2,960 3,045 3,102 3,000 12,107 Earnings per share: Basic $ .16 $ .15 $ .15 $ .16 $ .62 Diluted $ .15 $ .15 $ .15 $ .15 $ .60 1998 - --------------- Interest income $11,339 $12,232 $13,033 $13,244 $49,848 Interest expense 3,587 3,840 4,258 4,151 15,836 ------- ------- ------- ------- ------- Net interest income 7,752 8,392 8,775 9,093 34,012 Loan loss provision 300 300 600 300 1,500 Net gains on sales of securities 145 262 193 - 600 Income before income taxes 3,780 4,167 4,530 4,870 17,347 Net income 2,551 2,813 3,033 3,038 11,435 Earnings per share: Basic $ .13 $ .14 $ .16 $ .16 $ .59 Diluted $ .12 $ .13 $ .15 $ .16 $ .56
46 SELECTED FINANCIAL DATA The following table sets forth selected financial data of Bancorp (in thousands of dollars, except per-share amounts). All share and per-share information has been restated to give retroactive effect to a stock split declared in January 2000, and for various stock splits and stock dividends declared in prior years. Bancorp has never declared or paid cash dividends to shareholders.
1999 1998 1997 1996 1995 -------- -------- -------- -------- ------- Interest income $ 58,468 $ 49,849 $ 40,104 $ 32,058 $ 25,274 Interest expense 17,867 15,837 13,566 11,368 9,004 -------- -------- -------- -------- -------- Net interest income 40,600 34,012 26,538 20,690 16,270 Loan loss provision 2,300 1,500 1,250 735 350 Net income 12,107 11,435 9,303 6,514 4,551 Total assets 726,738 572,050 492,573 407,186 317,464 Total deposits 573,041 483,866 419,282 339,955 267,880 Short-term borrowings 74,554 20,600 7,716 12,316 11,419 Long-term debt -- -- 10,000 10,000 9,200 Shareholders' equity 74,329 63,717 51,810 41,346 26,390 Earnings per common share: Basic $ .62 $ .59 $ .48 $ .39 $ .29 Diluted .60 .56 .46 .35 .23
47 EX-23.1 6 CONSENT OF ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in each of Centennial Bancorp's Form S-8 Registration Statement Nos. 33-44701, 33-86650 and 333-32081, and in Centennial Bancorp's Annual Report on Form 10-K as of and for the year ended December 31, 1999, of our report dated January 21, 2000, on our audits of the consolidated financial statements of Centennial Bancorp and subsidiaries as of and for the years ended December 31, 1999 and 1998, which are incorporated by reference in this Annual Report on Form 10-K. /S/ SYMONDS, EVANS & LARSON, P.C. Portland, Oregon March 23, 2000 EX-23.2 7 CONSENT OF ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Centennial Bancorp and subsidiaries on Form S-8 (File Nos. 33-44701, 33-86650 and 333-32081) of our report dated January 22, 1998 on our audit of the consolidated statements of income, of changes in shareholders' equity and of cash flows of Centennial Bancorp and subsidiaries for the year ended December 31, 1997, which report is incorporated by reference in this Annual Report on Form 10-K. /S/ PRICEWATERHOUSECOOPERS LLP Portland, Oregon March 28, 2000 EX-23.3 8 REPORT OF INDEPENDENT ACCOUNTANTS REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Centennial Bancorp In our opinion, the consolidated statements of income, of changes in shareholders' equity and of cash flows for the year ended December 31, 1997 (appearing on pages 10 through 12 of Centennial Bancorp and subsidiaries (the Bank) 1999 Annual Report to Shareholders which has been incorporated by reference in this Form 10-K) present fairly, in all material respects, the results of operations and cash flows of the Bank for the year ended December 31, 1997, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Bank's management; our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of the Bank for any period subsequent to December 31, 1997. /S/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Portland, Oregon January 22, 1998 EX-27.1 9 ART. 9 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTENNIAL BANCORP'S CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED INTO ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 29,934,856 0 0 0 59,358,757 0 0 593,672,291 6,164,507 726,737,712 573,041,483 74,553,967 4,813,501 0 0 0 30,390,824 43,937,937 726,737,712 54,133,662 4,045,518 288,637 58,467,817 16,462,167 17,867,417 40,600,400 2,300,000 298,625 22,801,627 19,026,055 12,106,765 0 0 12,106,765 .62 .60 0 579,000 2,163,000 0 0 4,450,614 671,827 85,720 6,164,507 6,164,507 0 0 REFLECTS AN 11-FOR-10 STOCK SPLIT PAID IN FEBRUARY 2000.
EX-99.1 10 FACTORS TO CONSIDER/FORWARD LOOKING STATEMENTS Certain Factors to Consider in Connection with Forward-Looking Statements March 2000 From time to time, Centennial Bancorp ("Bancorp," "we," "us" or "our") and our representatives may make forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995 (the "Act")) regarding, among other things, expected future revenues or earnings, projections, plans, future performance and other estimates relating to us. Forward-looking statements may be included in our reports filed under the Securities Exchange Act of 1934, as amended, in press releases or in oral statements made with the approval of an authorized executive officer or director of Bancorp. We invoke to the fullest extent possible the protection of the Act and the judicially created "bespeaks caution" doctrine with respect to such statements. Accordingly, we are filing this Exhibit 99.1, which lists certain factors that may cause our actual results to differ materially from the results indicated in our forward-looking statements. The following list is not necessarily exhaustive. Bancorp and our subsidiaries, Centennial Bank and Centennial Mortgage Co., operate in a rapidly changing environment, and new risk factors emerge periodically. There can be no assurance that this Exhibit lists all material risks to us at any specific time. Our actual results may differ materially from those described in our forward-looking statements as a result of various factors, including those listed below. Readers are cautioned not to unduly rely on any forward-looking statement, which speaks only as of the date on which it is made. We do not intend to update our forward-looking statements. CHANGES IN INTEREST RATES OR GENERAL ECONOMIC CONDITIONS COULD REDUCE OUR PROFITS Our results of operations and those of our subsidiaries may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate market values, rapid changes in interest rates or changes in the monetary and fiscal policies of the federal government. Our profitability depends on the difference between the amount of interest we earn on investments and loans, and the amount of interest we pay on deposits and other liabilities. This difference is referred to as interest rate spread. Any decline in the economy in our market areas could have an adverse effect on us. Like most financial institutions, our net interest spread and margin will be affected by general economic conditions and other factors that influence interest rates. Our assets and liabilities will be affected differently by a given change in interest rates. For example, an increase or decrease in rates, the terms of our loans, or the mix of adjustable- and fixed-rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. A change in market interest rates can also have a significant impact on our ability to grow. Changes in rates may encourage depositors to withdraw deposit account funds to invest in other alternatives, which may limit the funds available to us for making loans. Additionally, changes in rates could discourage businesses and customers from seeking new loans or could encourage them to pay off existing loans with us through a refinancing with another financial institution. We cannot predict or control changes in interest rates. Negative developments in the economy, or our inability to respond to such changes, could adversely affect Bancorp and our subsidiaries. Most of the loans originated by Centennial Bank are made to borrowers within the Portland and the Eugene/Springfield, Oregon areas. The bank also has branch offices in Vancouver, Washington and Salem, Oregon. Adverse changes in economic conditions in the Portland/Vancouver or Eugene/Springfield areas could impair our ability to collect loans and could otherwise have a negative effect on our financial condition. WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY We intend to continue to pursue an aggressive growth strategy focused primarily upon our ability to develop new account relationships, to establish new Centennial Bank branches in Oregon and Washington, to make acquisitions, and to generate loans and deposits. The success of our growth strategy will depend on our ability to manage credit and liquidity risks, control costs and provide competitive products and services while rapidly expanding our geographic presence by branching or acquiring other banks or branches of banks. There can be no assurance that we will be successful in increasing our volume of loans and deposits at acceptable risk levels and upon acceptable terms, expanding our asset base, managing the costs and implementation risks associated with our growth strategy, integrating any acquired institutions or branches or preventing deposit erosion at acquired institutions or branches. Also, there can be no assurance that our expansion plans, when implemented, will be profitable. Acquisitions and branching by Bancorp will be subject to regulatory approvals, and there can be no assurance that we will succeed in securing such approvals. Our ability to pursue our growth strategy may also be adversely affected by general economic conditions. As part of our overall growth strategy, we from time to time consider acquiring other banks. Any acquisition by Bancorp would create risks and uncertainties, including the possible issuance of additional shares of common stock to pay for such acquisition, which issuance may result in dilution to our current shareholders, the diversion of management's attention to acquisition negotiations and, if an acquisition were consummated, our ability to effectively assimilate the acquired bank and branches. The banking industry generally has seen a trend toward the automation of delivery of banking services, a reduction in the number of full-service branch offices and a de-emphasis on personal service. This trend appears to be the result of efforts by banks to reduce costs and increase efficiency. While we seek to improve our capacity to use technological innovations, our growth strategy is based more on the belief that customer demand for personal contact and strategically placed branch offices will continue for the foreseeable future. Thus, we continue to expand our branch network and the availability to customers of well-trained and highly motivated personnel at a time when many banks are consolidating their branch networks and 2 automating customer responses. There can be no assurance that our strategy will be successful or that technological advances by our competitors will not result in our loss of customer relationships. As a result of our strategy, certain of our costs for providing banking services may be higher than those of many of our competitors for the foreseeable future. Bancorp's growth strategy requires, among other things, expanded operational systems, the implementation of new control procedures, and success in hiring and retaining skilled employees. We believe that our capital, borrowings, and expected earnings will be sufficient to support our operations and anticipated expansion and to meet all regulatory requirements for the foreseeable future. There can be no assurance that we will be successful in implementing, or will have the necessary regulatory capital to implement, our growth strategy. OUR CUSTOMERS MAY NOT REPAY THEIR LOANS The risk of borrowers not paying their loans is inherent in commercial banking. Loan defaults may have a material adverse effect on our earnings and overall financial condition. The risk of loss is affected by general economic conditions, the type of loan, the borrower's overall ability to repay the loan, and the quality of the collateral, if any, provided to us to secure the loan. We offer a full range of loans to our customers. Some types of loans carry a greater risk of default than other loans. Bancorp's loan portfolio consists primarily of commercial loans (not secured by real estate), real estate construction loans and real estate mortgage loans (including commercial loans secured by real estate). Commercial loans that are secured by property other than real estate generally are considered to involve a higher degree of risk than loans secured by real estate, primarily because the non-real-estate collateral may be difficult to repossess and liquidate. We focus on small- to medium-sized businesses. This results in a larger concentration by Bancorp of loans to such businesses. As a result, we may assume greater lending risks than institutions that tend to make loans to larger businesses or institutions that make loans primarily to consumers. Because payment of commercial loans is typically dependent on the success of the borrower's business, commercial loans are affected more by adverse general economic conditions than real estate loans. Construction lending also is subject to substantial risks. It is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. The risk of loss on construction loans depends largely on the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may have to advance funds beyond the amount we originally committed to permit completion of the project and to protect our security position. We may also be confronted, at or prior to maturity of the loan, with a project of insufficient value to ensure full repayment. In addition, if the borrower is unable to obtain permanent financing in a timely manner, the borrower may not be able to repay the construction loan. 3 WE MAY NOT ADEQUATELY ALLOW FOR LOAN LOSSES Our allowance for loan losses is maintained at a level we consider adequate to absorb anticipated losses. The amount of future losses, however, may be affected by changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and future losses may exceed our current estimates. There can be no assurance that our allowance will be adequate to cover our actual losses. WE MAY BE LIABLE IF CENTENNIAL BANK IS UNDERCAPITALIZED Under federal law, a bank holding company may be required to guarantee a capital plan filed by an undercapitalized bank subsidiary with its primary regulator. If the bank defaults under the plan, the holding company may be required to contribute to the capital of the bank an amount equal to the lesser of 5% of the bank's assets at the time it became undercapitalized or the amount necessary to bring the bank into compliance with applicable standards. We are the sole shareholder of Centennial Bank. WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN OUR MARKETS The banking and mortgage lending businesses in Oregon and Washington are highly competitive. We compete for loans and deposits with other commercial banks, savings banks, savings and loan associations, finance companies, money market funds, brokerage firms, credit unions and other nonfinancial institutions. Many of these competitors have substantially greater resources than Bancorp. Many of our competitors have substantially larger lending limits than we do and offer certain services, including trust and international banking services, that we do not provide. The larger institutions in our markets have competitive advantages over us in that they have higher public visibility and are able to maintain advertising and marketing activities on a much larger scale than we can economically sustain. By law, lending limits are dependent upon the capital of the financial institution, giving larger banks an additional competitive advantage with respect to loan applications that are in excess of Centennial Bank's legal lending limits. During the past several years, we capitalized on the marketing opportunities created by the consolidation of the banking industry, as the larger institutions were perceived to de-emphasize the small- to medium-size business and professional market, which is our primary focus. Several banks, which focus on the same types of customers as we do, have been formed in our market areas during the last few years. This growing number of community banks and a new emphasis by larger institutions on this market segment has intensified competition. In addition, out-of-state banks and bank holding companies headquartered anywhere in the United States are permitted to acquire Oregon state-chartered banks that have been operating for three or more years. Statewide branch banking also is permitted in Oregon and Washington. As a result of such interstate banking and branch banking, Centennial Bank and Centennial Mortgage may experience increased competition in their market areas. 4 In addition, the Gramm-Leach-Bliley Act, enacted on November 12, 1999 (the "GLB Act"), eliminates several barriers to affiliation among providers of financial services and may affect the competitive environment in which Bancorp operates in substantial and unpredictable ways. Effective March 11, 2000, the GLB Act permits certain business combinations between banks, insurance companies, securities firms, and other financial service providers that were not permitted previously. Using the Financial Holding Company structure created by the GLB Act, insurance companies and securities firms may now compete more directly with banks and bank holding companies, and attempt to acquire existing financial institutions. Because Centennial Bank is "adequately capitalized," as defined by the regulations, but not "well capitalized," we do not currently qualify to become a "financial holding company" under the GLB Act, which would have permitted us to engage in a broader range of financial activities (e.g., insurance underwriting and agency services, investment advisory services, merchant banking, investment banking and underwriting activities, dealing or making a market in securities, etc.). Bancorp cannot predict the changes in the competitive environment or the financial condition of Bancorp that may occur as a direct or indirect result of the GLB Act and the increased competition it may create. WE MAY NOT BE ABLE TO IMPLEMENT TECHNOLOGICAL IMPROVEMENTS REQUIRED BY OUR CUSTOMERS The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, effective use of technology increases efficiency and enables banks to reduce costs. Our future success will depend in part on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements and highly skilled technical personnel. To be competitive, we may need to spend significant amounts on computer hardware and software, and for technical personnel. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. GOVERNMENT REGULATION MAY LIMIT OUR OPERATIONS AND REDUCE OUR REVENUES OR PROFITS Bancorp and our subsidiaries, particularly Centennial Bank, are subject to extensive federal and state legislation, regulation and supervision. These and other restrictions limit the manner in which Bancorp and Centennial Bank may conduct their businesses and obtain financing. These laws are intended primarily to protect depositors and are not for the benefit of shareholders. In addition, the burdens and restrictions imposed by federal and state banking regulations may place Centennial Bank at a competitive disadvantage compared to competitors who are less regulated. Legislation and regulations have had and will continue to have a significant impact on the banking industry. For example, Congress recently enacted the GLB Act. Several regulatory 5 agencies and state legislatures are in the process of responding to changes required or suggested by the GLB Act. We cannot determine the ultimate effect that the GLB Act, or the regulations implemented and the legislation enacted as a result of that act, will have on our operating structure, financial condition or results of operations. Some legislative and regulatory changes may increase our costs of doing business, assist competitors or otherwise adversely affect our operations. We are unable to predict the nature or extent of the effects on our business and earnings that any fiscal or monetary policies, or new federal or state legislation or regulations, may have in the future. WE ARE REGULARLY INVOLVED IN LEGAL PROCEEDINGS Periodically, and in the ordinary course of business, various claims and lawsuits are brought by and against us and our subsidiaries, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real estate loans and other issues incident to our business. YEAR 2000 DATA PROCESSING PROBLEMS MAY INTERRUPT OUR BUSINESS AND REDUCE OUR PROFITS We are heavily reliant on computers for accounting for customer records and transactions, as well as operating performance. The failure of these systems, or the computer systems of third parties on which we depend, to be Year 2000 compliant could cause substantial disruption of our business and have a material adverse financial impact on us. 6 -----END PRIVACY-ENHANCED MESSAGE-----