-----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, Co7TPJH45Pk7BLdsZVMA8eGdSKi6ly374kgKFTEQS/DhwmJbw/q9nYEZTNAIEoCr 7iREyfSX8EKyybzsoj7ccg== 0000910117-96-000031.txt : 19960329 0000910117-96-000031.hdr.sgml : 19960329 ACCESSION NUMBER: 0000910117-96-000031 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NASD 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10489 FILM NUMBER: 96540237 BUSINESS ADDRESS: STREET 1: 675 OAK ST CITY: EUGENE STATE: OR ZIP: 97401 BUSINESS PHONE: 5033423970 MAIL ADDRESS: STREET 1: 675 OAK STREET CITY: EUGENE STATE: OR ZIP: 97401 FORMER COMPANY: FORMER CONFORMED NAME: VALLEY WEST BANCORP DATE OF NAME CHANGE: 19900812 10-K405 1 12/31/95 FORM 10-K 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, 1995 ---------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- ------- Commission file Number: 0-10489 ------------ CENTENNIAL BANCORP (Name of registrant as specified in its charter) Oregon 93-0792841 (State of incorporation) (I.R.S. Employer Identification No.) 675 Oak Street Eugene, Oregon 97401 (Address of principal executive offices) Registrant's telephone number: (541) 342-3970 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $2.00 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ 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. $47,550,000 aggregate market value as of February 29, 1996, 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: 4,700,847 shares of $2.00 par value Common Stock on March 15, 1996. DOCUMENTS INCORPORATED BY REFERENCE Part I and Part II incorporate information by reference from the issuer's Annual Report to Shareholders for the fiscal year ended December 31, 1995. Part III is incorporated by reference from the issuer's definitive proxy statement for the annual meeting of shareholders to be held on May 15, 1996. CENTENNIAL BANCORP FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Page - ------- ---- (Portions of Item 1 are incorporated by reference from Centennial Bancorp's Annual Report to Shareholders) Item 1. DESCRIPTION OF BUSINESS 3 Item 2. DESCRIPTION OF PROPERTY 35 Item 3. LEGAL PROCEEDINGS 35 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36 PART II (Items 5, 6, 7 and 8 are incorporated by reference from Centennial Bancorp's Annual Report to Shareholders) Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 37 Item 6. SELECTED FINANCIAL DATA 37 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS 37 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 37 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 37 PART III (Items 10 through 13 and portions of Item 14 are incorporated by reference from Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on May 15, 1996) Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 38 Item 11. EXECUTIVE COMPENSATION 38 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 38 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 38 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 38 SIGNATURES 42 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Centennial Bancorp, an Oregon corporation, is successor to Valley West Bancorp which was organized in 1981 to become a bank holding company. In 1982, Centennial Bank and Valley State Bank, both Oregon state-chartered banks, were 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. On December 2, 1994, CG Bancorp, an Oregon corporation, was merged with and into Centennial Bancorp in a stock transaction accounted for as a pooling of interests. CG Bancorp was the parent corporation of Western Oregon Community Bank, which operated a branch office in Creswell, Oregon in addition to its head office in Cottage Grove, Oregon. Both branches of Western Oregon Community Bank became branches of Centennial Bank. Centennial Bank has decided to close its Creswell office. At December 31, 1995, Centennial Bancorp ("Bancorp") has two wholly owned subsidiaries: Centennial Bank and Centennial Mortgage Co. ("Centennial Mortgage"). From July 1993 until its sale in August 1995, Bancorp also owned Harding Fletcher Co. ("Harding Fletcher"), a mortgage banking subsidiary. Unless the context clearly suggests otherwise, references in this Annual Report on Form 10-K to "Bancorp" include Centennial Bancorp and its subsidiaries. All data in this Annual Report on Form 10-K has been restated to give retroactive effect to the merger with CG Bancorp. In addition, all share and per share information has been restated to give retroactive effect to a stock split declared in January 1996, and for various stock splits and stock dividends declared in years prior to 1996. CENTENNIAL BANK Centennial Bank is a full-service commercial bank organized in 1977 under the Oregon Bank Act. Centennial Bank provides a broad range of depository and lending services to commercial, industrial, and agricultural enterprises, financial institutions, and governmental entities and individuals. Centennial Bank directs its deposit-taking and lending activities primarily to the communities in which its branches are located. Its primary marketing focus is on small- to medium-sized businesses and on professionals in those communities. Centennial Bank does not provide trust services. At December 31, 1995, based on total assets, Centennial Bank was the 12th largest bank of the 50 commercial banks maintaining offices in Oregon. Centennial Bank has seven branches; three in Eugene; one in adjacent Springfield; one in Tigard, a suburb of Portland, Oregon; and the former Western Oregon Community Bank offices in Cottage Grove and Creswell, Oregon. Eugene and Springfield are at the southern end of the Willamette Valley on Interstate 5, with Creswell and Cottage Grove located approximately 12 and 20 miles further south, respectively. Centennial Bank opened the Tigard office in August 1994 and acquired the Western Oregon Community Bank offices in December 1994. Centennial Bank provides personalized, quality financial services to its customers and believes this dedication to service has enabled it to maintain a stable and relatively low-cost retail deposit base, while generating a substantial volume of loans. Total deposits increased from $216 million at December 31, 1994 to $268 million at December 31, 1995. Net loans and loans held for sale increased from $160 million at December 31, 1994 to $189 million at December 31, 1995. Deposit accounts at Centennial Bank are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"). Centennial Bank is not a member of the Federal Reserve System. It is a merchant depository for MasterCard and VISA. Centennial Bank also offers tax-deferred annuities and mutual funds through a contract arrangement with Financial Marketing Group, Inc. of Portland, Oregon. Its revenues from this activity are not significant. CENTENNIAL MORTGAGE Centennial Mortgage began operations in 1987, originating conventional and federally insured residential mortgage loans for sale in the secondary market. Centennial Bank regularly provides interim financing, generally for 30 to 60 days, for loans originated by Centennial Mortgage. Centennial Mortgage originated $30.0 million, $20.7 million and $44.5 million of mortgages in 1995, 1994 and 1993, respectively. Mortgage loans generally are sold without recourse and with no servicing rights retained. Under certain circumstances, Centennial Mortgage may be obligated to repurchase loans sold in the secondary market. Centennial Mortgage has one office in Eugene, Oregon, and opened an office in Lake Oswego, Oregon, a Portland suburb, in 1993. That office relocated to the Centennial Bank building in Tigard, Oregon in 1995. Centennial Mortgage established a residential mortgage construction lending department during 1994 to establish relationships with home builders in the Eugene/Springfield and Portland-area markets and to attempt to generate additional permanent loan activity as the houses-under-construction are sold. Increases in interest rates could adversely affect demand for construction lending, as well as the ability of borrowers to sell the houses when completed, and also could impact Centennial Mortgage's permanent mortgage lending activity. HARDING FLETCHER In July 1993, Bancorp formed a subsidiary to acquire certain assets of Harding Fletcher, a commercial mortgage banker with offices in Oregon (Lake Oswego), Washington (Tacoma) and California (Sacramento and Fresno). Bancorp paid $320,000 for the Harding Fletcher assets and an additional $80,000 in consideration for a noncompetition agreement with Wallace E. Harding, the President and Chief Executive Officer of Harding Fletcher. In August 1995, Bancorp sold substantially all of the assets of Harding Fletcher for $741,000. Under the terms of the asset sale agreement, Bancorp received $155,131 cash for the mortgage servicing rights and certain furniture and equipment. The balance of the purchase price is to be paid over four years from the transaction closing date from a percentage of loan servicing income the buyer receives from the assets sold and from a percentage of loan origination fees for certain identified transactions. Harding Fletcher arranged commercial real estate loans, which were funded by insurance companies and other institutional investors. The loans arranged were generally between $500,000 and $35 million in size. Harding Fletcher was not a party to the loans, but was typically retained to service the loans. BANCORP CONSOLIDATED STATISTICAL INFORMATION Bancorp incorporates by reference the following financial and statistical information from its Annual Report to Shareholders for the year ended December 31, 1995: Centennial Bancorp Annual Report to Shareholders Page No. -------------------- Investment securities 15 Loans and reserve for loan losses 16 Deposits 7 NET INTEREST INCOME For most financial institutions, including Bancorp, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in "volume," "spread" and "margin." Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. During 1995, 1994 and 1993, Bancorp's average interest-earning assets were $252 million, $205 million and $169 million, respectively. During these same years, Bancorp's net interest margin was 6.66%, 7.24% and 6.69%, respectively. AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID The following table sets forth for 1995, 1994 and 1993 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for Bancorp.
Year ended December 31, 1995 1994 1993 ------------------------------ ------------------------------ ----------------------------- 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 ---------- --------- --------- ---------- --------- -------- ---------- --------- -------- ASSETS: (Dollars in thousands) Interest-earning due from banks $ 5,971 $ 352 5.90% $ 2,498 $ 110 4.40% $ 4,012 $ 118 2.94 Securities - taxable 40,116 2,403 5.99 36,632 1,927 5.26 25,561 1,264 4.95 Securities - tax-exempt(2) 24,159 1,827 7.56 23,040 1,866 8.10 20,844 1,816 8.71 Federal funds sold 5,618 317 5.64 3,349 131 3.91 3,964 112 2.83 Loans and loans held for sale (3) 176,384 20,909 11.85 139,672 16,003 11.46 114,414 12,092 10.57 Total interest-earning assets/ interest income 252,248 25,808 10.23 205,191 20,037 9.77 168,795 15,402 9.12 Reserve for loan losses (1,824) (1,652) (1,280) Cash and due from banks 16,975 14,562 12,323 Premises and equipment, net 8,477 5,981 5,815 Other real estate owned 22 957 532 Other assets 5,854 4,236 4,059 Total assets $281,752 $229,275 $190,244 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Savings and interest-bearing demand $107,983 3,352 3.10 $101,256 2,333 2.30 $ 86,593 2,178 2.52 Time deposits 71,912 4,146 5.77 47,258 2,106 4.46 40,335 1,611 3.99 Short-term borrowings 13,823 861 6.23 4,259 174 4.09 1,002 38 3.79 Long-term debt 9,200 645 7.01 7,410 559 7.54 6,434 275 4.27 Total interest-bearing liabilities /interest expense 202,918 9,004 4.44 160,183 5,172 3.23 134,364 4,102 3.05 Demand deposits 53,399 47,406 36,931 Other liabilities 2,133 2,984 3,048 Total liabilities 258,450 210,573 174,343 Shareholders' equity 23,302 18,702 15,901 -------- ------- -------- ------- -------- ------- Total liabilities and shareholders' equity $281,752 $229,275 $190,244 ======== ======== ======== Net interest income $16,804 $14,865 $11,300 ======= ======= ======= Net interest spread (2) 5.79% 6.54% 6.07% ===== ====== ===== Net interest margin (2) 6.66% 7.24% 6.69%
- ----------------------------------------- (1) Average balances are based on daily averages and include nonaccrual loans. (2) Average yield on nontaxable securities, net interest spread and net interest margin have been computed on a 34% tax-equivalent basis. (3) Nonaccrual loans ($631,100, $783,200 and $311,500 in 1995, 1994 and 1993, respectively) have been included in the computation of average loans and loans held for sale. Loan fees recognized, included in interest income, totalled $2,541,800, $2,958,600 and $1,626,000 in 1995, 1994 and 1993, respectively. 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.
1995 vs. 1994 1994 vs. 1993 Change in Change in net interest income net interest income due to due to ---------------------------- ------------------------------ Volume Rate Total Volume Rate Total ------ ------ ------ ------ ------ ------- (In thousands) Interest income: Balances due from banks $ 179 $ 63 $ 242 $ (56) $ 48 $ (8) Securities - taxable 196 280 476 565 98 663 Securities - tax-exempt 88 (127) (39) 185 (135) 50 Federal funds sold 108 78 186 (21) 40 19 Loans 4,279 627 4,906 2,782 1,129 3,911 ------ ------ ------ ------ ------ ------ Total interest income 4,850 921 5,771 3,455 1,180 4,635 ------ ------ ------ ------ ------ ------ Interest expense: Deposits: Savings and interest- bearing-demand 182 837 1,019 353 (198) 155 Time 1,260 780 2,040 293 202 495 Short-term borrowings 493 194 687 128 8 136 Long-term debt 130 (44) 86 58 226 284 ------ ------- ------ ------ ------ ------ Total interest expense 2,065 1,767 3,832 832 238 1,070 ------ ------ ------ ------ ------ ------ Net interest income $2,785 $ (846) $1,939 $2,623 $ 942 $3,565 ====== ====== ====== ====== ====== ======
MARKET AREAS Centennial Bank's primary market area is the Eugene/ Springfield area at the southern end of Oregon's Willamette Valley. The populations of Eugene and Springfield total approximately 170,000. The area's economy depends primarily upon educational institutions, U.S. and local government, forest products, general manufacturing (especially small manufacturing and high-technology industries), health care and tourism. The University of Oregon, located in Eugene, is the area's largest employer. Centennial Bank also has branch offices in Cottage Grove and Creswell, Oregon, located approximately 20 and 12 miles south, respectively, of Eugene and Springfield. The populations of Cottage Grove and Creswell total approximately 10,000. Their economies similarly depend primarily upon forest products, general manufacturing, agriculture and tourism. In August 1994, Centennial Bank opened a branch office in Tigard, a suburb of Portland, Oregon. The Portland metropolitan area has a diverse economy and a population of approximately 1.3 million. Management believes the Portland metropolitan area offers an opportunity to increase Bancorp's asset size and business operations, and to provide diversification of risk in its loan portfolio through the diversity of the economic market in the metropolitan area. LENDING ACTIVITIES GENERAL Bancorp provides a broad range of commercial and real estate lending services. Currently, the primary focus of Bancorp's lending activities is to provide commercial loans to small- to medium-sized businesses with annual revenues typically up to $20 million, and to professionals. Most of Bancorp's loans are made to customers in the trade areas served by branch offices. Bancorp also makes construction loans and makes secured real estate loans, most of which are sold in the secondary markets. Bancorp makes consumer loans, primarily to accommodate existing customers, but does not actively pursue such lending. Bancorp strives to maintain sound loan underwriting standards with written loan policies, conservative individual and branch limits and, depending on the size of the commitment, reviews by Centennial Bank's Administrative Loan and Asset/Liability committees. Underwriting standards are designed to achieve a high-quality loan portfolio, compliance with lending regulations and the desired mix of loan maturities and industry concentrations. Management further seeks to minimize credit losses by closely monitoring the financial condition of its borrowers and the value of collateral. In-house legal counsel assists in loan documentation and collections. 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, ---------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- --------- -------- -------- (Dollars in thousands) Commercial and other $ 78,564 $ 66,845 $ 61,640 $48,496 $50,833 Real estate - mortgage 59,204 56,792 44,253 34,774 32,913 Real estate - construction 44,003 29,337 11,626 5,214 1,572 Installment 5,929 6,951 10,653 9,179 8,722 Lease financing 4,001 2,686 138 -- -- -------- --------- --------- ------- -------- Total loans and loans held for sale 191,701 162,611 128,310 97,663 94,040 Less deferred loan fees (611) (600) (394) (155) (52) Less reserve for loan losses (1,928) (1,700) (1,514) (1,078) (1,116) --------- --------- -------- -------- ------- Loans receivable, net $189,162 $160,311 $126,402 $96,430 $92,872 ======== ======== ======== ======= =======
The following table presents the aggregate maturities of loans in each major category of Bancorp's loan portfolio at December 31, 1995. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments. The following table presents the aggregate maturities of loans in each major category of Bancorp's loan portfolio at December 31, 1995. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments.
Due after Total Due within one but within Due after loans by Loan category one year five years five years category ------------- ----------- --------------- ---------- --------- (Dollars in thousands) Commercial $ 58,803 $14,993 $ 4,457 $ 78,253 Real estate - mortgage 19,493 22,053 13,085 Real estate - construction 39,972 4,031 -- 54,631 Installment 3,572 2,274 83 44,003 Loans held for sale -- -- 4,573 5,929 Lease financing 124 2,444 118 4,573 Other -- 311 -- 4,001 Less deferred loans fees (234) (277) (100) 311 (611) --------- -------- -------- --------- Total loans by maturity $121,607 $47,386 $22,097 $191,090 ======== ======= ======= ========
Of Bancorp's $69.5 million of loans that mature after one year, a total of $55.4 million (79.7%) are fixed-rate loans, and a total of $14.1 million (20.3%) are variable-rate loans. At December 31, 1995, $79.6 million (approximately 41.7% of Bancorp's loan portfolio) had fixed interest rates and $111.5 million (approximately 58.3%) had variable interest rates. COMMERCIAL LOANS Commercial loans that are not collateralized by real estate represent the largest category of Bancorp's loans. Bancorp's areas of emphasis include, but are not limited to, loans to small- to medium-sized businesses and to professionals. Bancorp provides a wide range of commercial business loans, including lines of credit for working capital and term loans for the acquisition of equipment and other purposes. Collateral generally includes equipment, accounts receivable and inventory. Where warranted by the overall financial condition of the borrower, loans may be made on an unsecured basis. At December 31, 1995, approximately 62% of Bancorp's commercial loans had floating or adjustable interest rates; the remaining 38% 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, 1995 were $78.3 million, compared to $66.5 million at December 31, 1994 and $60.0 million at December 31, 1993. Management believes the increases in 1995 and 1994 were primarily a result of Centennial Bank's business development program and the opening of the branch office in Tigard, Oregon in August 1994. Nonaccrual loans in this category totalled $478,000 at December 31, 1995 ($693,000 at December 31, 1994); there were no restructured loans at December 31, 1995 or 1994. REAL ESTATE MORTGAGE LOANS Real estate mortgage loans represent Bancorp's second largest category of loans. Of the $54.6 million of real estate mortgage loans outstanding at December 31, 1995, $36.7 million were made to commercial customers where the collateral for the loans included the real estate occupied by the customers' businesses. Therefore, many loans characterized as real estate mortgage loans could be characterized as commercial loans that are collateralized by real estate. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. These borrowers may be more sensitive to changes in economic conditions than are residential loan customers. Real estate mortgage loans outstanding decreased to $54.6 million at December 31, 1995 from $56.8 million at December 31, 1994. The decrease was primarily a result of customers refinancing or otherwise paying off older mortgage loans with higher interest rates. Real estate mortgage loans increased to $56.8 million at December 31, 1994 from $47.5 million at December 31, 1993. The increase was primarily a result of new customers, and a change in Bancorp's reporting category of home equity loans from installment to real estate to conform with federal regulatory reporting requirements. At December 31, 1995 and 1994, there were no nonaccrual loans or restructured loans in this category. At December 31, 1995, $31.6 million (or approximately 58%) of Bancorp's real estate mortgage loans had fixed interest rates and $23.0 million (or approximately 42%) had floating or adjustable interest rates. Maturities of real estate mortgage loans usually range from one to ten years. Bancorp's underwriting standards specify the following maximum loan-to-value ratios for real estate loans: 90% for loans collateralized by owner-occupied residences, 80% for other residential loans and for construction loans, and 70% for commercial real estate loans. Management believes that Bancorp's current real estate mortgage portfolio does not present a material risk of loan losses. Bancorp originates SBA real estate loans on owner-occupied properties where the maturities may be up to 20 years, and the loan-to-value ratio may reach 75% of appraised value or cost, whichever is lower. Up to 90% of the amount of these loans is guaranteed or insured by an agency of the U.S. Government. The guaranteed portion of these loans is typically sold to secondary-market investors. REAL ESTATE CONSTRUCTION LOANS Bancorp makes construction loans to individuals and contractors to construct single-family primary residences or second homes and, to a much lesser extent, small multi-family residential projects. The construction loans represent custom homes, pre-sold homes and homes that are not pre-sold. These loans generally have maturities of six to nine months. Interest rates are typically adjustable, although fixed-rate loans are also made under appropriate conditions. Centennial Bank provides funding for all the construction loans originated by Centennial Mortgage, and Centennial Mortgage provides monitoring and reporting services on all construction loans made by Centennial Bank. Construction financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. The risk of loss on construction loans depends largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, Bancorp might have to advance funds beyond the amount originally committed to permit completion of the development and to protect its security position. Bancorp might also be confronted, at or prior to maturity of the loan, with a project with insufficient value to ensure full repayment. Bancorp's underwriting, monitoring and disbursement practices with respect to construction financing are intended to ensure that sufficient funds are available to complete construction projects. Bancorp endeavors to limit its risk through its underwriting procedures by using only approved, qualified appraisers, by dealing only with qualified builders/borrowers, and by closely monitoring the construction projects through the process of completion and sale. At December 31, 1995 and 1994, there were no nonaccrual loans or restructured loans in this category. INSTALLMENT LOANS Bancorp does not actively solicit consumer loans, but makes such loans primarily as a convenience to existing customers. Bancorp includes in its installment loan category personal lines of credit, as well as consumer installment loans (such as for automobile purchases). Consumer loans may be collateralized or unsecured. Collections depend principally on the borrower's financial condition or cash flow. Installment loans were $5.9 million at December 31, 1995 compared to $7.0 million at December 31, 1994 and $9.1 million at December 31, 1993. These decreases 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. The $2.1 million decrease at December 31, 1994 as compared to December 31, 1993 also reflects the reclassification of home equity loans from installment to real estate to conform with federal regulatory reporting requirements. At December 31, 1995 and 1994, there were no nonaccrual loans 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 10 of Notes to Consolidated Financial Statements of Bancorp, which are incorporated by reference from Bancorp's 1995 Annual Report to Shareholders. Bancorp applies the same credit standards to these commitments as it uses in all its lending processes and has included these commitments in its lending risk evaluations. Collateral for these commitments may include cash, securities and/or real estate. CREDIT AUTHORITY AND LOAN LIMITS All Bancorp loans and other credit facilities are subject to credit and collateral approval procedures and loan amount limitations. Individual loan officers and branch managers have authority to approve loans in amounts up to established limits, generally ranging from $25,000 to $50,000. Loans in excess of branch limits, or not in conformance with credit or collateral criteria, are reviewed by Centennial Bank's Administrative Loan Committee. The Asset/Liability Committee, a majority of whom are nonofficer members of Centennial Bank's Board of Directors, reviews loan applications over established Administrative Loan Committee limits. All loans in excess of $25,000 to executive officers and directors of Bancorp or any of its subsidiaries must be approved by the Asset/Liability Committee and ratified by Centennial Bank's Board of Directors. Under Oregon law, permissible loans from a financial institution to one borrower are generally limited to 15% of the institution's aggregate paid-up and unimpaired capital and surplus (which includes capital debentures with a maturity date of more than five years). At December 31, 1995, Centennial Bank's permissible loan limit was $2.5 million (or $4.2 million if the loan is collateralized by real estate). Loan pricing decisions are based on an evaluation of risk, cost of funds, operating and administrative costs, a reserve for loan losses, desired profit margin and other factors. Loan risk is based in part on a risk rating assigned to each loan. Bancorp uses a computerized pricing system that analyzes a borrower's total contribution to net interest income. Centennial Bank sells loan participations to accommodate borrowers whose financing needs exceed Centennial Bank's lending limits, and to diversify risk. Centennial Bank occasionally purchases participations in loans from correspondent banks. Centennial Bank's policies prohibit aggregate purchased participations in excess of 10% of Centennial Bank's loan portfolio. NONPERFORMING ASSETS Nonperforming assets consist of loans past due 90 days or more, nonaccrual loans, restructured loans and other real estate owned ("OREO"). The following table sets forth information concerning Bancorp's nonperforming assets at the end of each of the last five years:
DECEMBER 31, ------------------------------------------------------ 1995 1994 1993 1992 1991 ------ ------ ------ ------ ----- (Dollars in thousands) Nonperforming loans: Loans past due 90 days or more $ 645 $ 190 $ 186 $ 203 $ 104 Nonaccrual loans 478 693 881 -- 119 Restructured loans -- -- -- -- -- ------- ------- ------- ------- ------- Total nonperforming loans 1,123 883 1,067 203 223 Other real estate owned (1) -- 392 221 549 169 ------ ------ ------ ------ ------ Total nonperforming assets $1,123 $1,275 $1,288 $ 752 $ 392 ====== ====== ====== ====== ====== Reserve for loans losses $1,928 $1,700 $1,514 $1,078 $1,116 Ratio of total nonperforming assets to total assets .35% .49% .58% .41% .24% Ratio of total nonperforming loans to total loans .59 .54 .83 .21 .23 Ratio of reserve for loan losses to total nonperforming loans 172 193 142 531 500
- ---------- (1) OREO consists of real estate acquired through foreclosure or by a deed in lieu of foreclosure. The OREO specified above does not include Bancorp's former head office facility, which was reclassified as OREO in 1993 and sold in 1994. Bancorp's total nonperforming assets decreased by $152,000 during 1995 and decreased by $13,000 during 1994. Total nonperforming assets, as a percentage of total assets, decreased to .35% at December 31, 1995 from .49% at December 31, 1994 and .58% at December 31, 1993. Nonperforming loans, comprised of loans past due 90 days or more, nonaccrual loans and restructured loans, increased by $240,000 during 1995 and increased by $56,000 during 1994. Nonperforming loans, as a percentage of total loans, increased to .59% at December 31, 1995 from .54% at December 31, 1994, but decreased from .83% at December 31, 1993. The accrual of interest on a loan is discontinued when, in management's judgment, the future collectibility of principal or interest is in doubt. Loans placed on nonaccrual status may or may not be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on nonaccrual status, Bancorp's policy is to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such loans is credited to loan principal if, in the opinion of management, full collectibility of principal is doubtful. If interest on nonaccrual loans had been accrued, such income would have been $74,000 in 1995, $77,000 in 1994 and $46,000 in 1993. The amount recognized as interest income on these loans was none in 1995 and 1994 and $41,000 in 1993. Restructured loans are those for which concessions have been granted due to the borrower's weakened financial condition or other factors. Such concessions may include reduction of interest rates below rates otherwise available to that borrower or deferral of interest or principal. Interest on restructured loans is accrued at the restructured rate when it is anticipated that no loss of original principal will occur. Bancorp had no restructured loans at December 31, 1995 or 1994. OREO consists of real estate acquired by Bancorp through foreclosure or by a deed in lieu of foreclosure. Properties in OREO are carried at the lower of fair market value (less anticipated selling costs) or the principal balance of the related loan. Any excess of the loan balance over fair value of the property is charged to the reserve for loan losses. At December 31, 1995, Bancorp held no OREO. At December 31, 1994, Bancorp's OREO consisted of one single-family dwelling with acreage in Springfield, Oregon. At that date, the book value of the property was $392,000, which was sold during 1995 for a loss of $25,000. At December 31, 1993, Bancorp's OREO consisted of one single-family dwelling and one commercial building, with an aggregate book value of $221,000, which was sold for a loss of $28,000. ANALYSIS OF THE RESERVE FOR LOAN LOSSES The reserve for loan losses represents management's estimate of the losses inherent in the loan portfolio. The reserve is based primarily on management's evaluation of the overall quality and risk characteristics of Bancorp's loan portfolio, which is dependent upon numerous interrelated factors including present nonperforming and delinquent loans, borrowers' perceived abilities to repay, value of collateral, general and local economic conditions and historical loan loss experience. Centennial Bank's Asset/Liability Committee reviews the adequacy of the reserve for loan losses quarterly. Although determination of the adequacy of the reserve involves substantial subjective judgment based on the Committee's analysis of the risk characteristics of the entire loan portfolio, the Committee also uses three quantitative methods to analyze the adequacy of the reserve. Under the first method, management assigns a specific percentage to each nonperforming, substandard or doubtful loan in Bancorp's loan portfolio to calculate a total amount of average anticipated loan losses. The second method uses the risk-weighted ratings (from one through five) developed by the FDIC, with management assigning a percentage to the loans in the various risk categories (using .0025% for loans in the lowest risk category up to 25% for loans in the highest risk category) to calculate an alternative amount of possible losses. The third method is in accordance with the requirements of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), which Bancorp adopted on January 1, 1995. Under SFAS 114, a loan is considered impaired based on current information and events if it is probable that Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. This policy is generally consistent with Bancorp's nonaccrual policy. Bancorp also specifically examines all loans greater than $100,000 that are identified on an internal watch list. Loans which are over 90 days contractually delinquent and loans which have developed inherent problems prior to being 90 days delinquent may be considered impaired. An insignificant delay or shortfall in the amount of payments is not an event that, when considered in isolation, would automatically cause a loan to be considered impaired for purposes of SFAS 114. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. The amounts calculated by the quantitative methods are then compared by the Committee to the reserve for loan losses in evaluating the adequacy of the reserve. As a result of the decline in real estate market values in many parts of the United States and the significant losses experienced by many financial institutions, regulators have increasingly scrutinized loan portfolios and loss reserves, particularly with respect to commercial and multi-family residential real estate loans. Management believes that Bancorp's reserve for loan losses is adequate to cover anticipated losses and is in accordance with generally accepted accounting principles. There can be no assurance, however, that management will not decide to increase the reserve for loan losses or that regulators will not require Bancorp to increase the reserve, either of which events could adversely affect Bancorp's results of operations. Further, there can be no assurance that Bancorp's actual loan losses will not exceed its reserve. The following table sets forth information regarding changes in Bancorp's reserve for loan losses for each of the last five years:
At or for the year ended December 31, ------------------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- ------ (Dollars in thousands) Loans and loans held for sale at year-end $191,090 $162,011 $127,916 $97,508 $93,988 ======== ======== ======== ======= ======= Average loans and loans held for sale $176,384 $139,672 $114,414 $98,476 $88,385 ======== ======== ======== ======= ======= Reserve for loan losses, beginning of year $ 1,700 $ 1,514 $ 1,078 $ 1,116 $ 961 Charge-offs: Commercial and other (128) (108) (18) (112) (54) Real estate - construction -- -- -- -- -- Real estate - mortgage -- (17) -- (160) (63) Installment (34) (22) (17) (32) (9) -------- -------- ------- ------- ------- Total charge-offs (162) (147) (35) (304) (126) -------- -------- ------- ------- ------- Recoveries: Commercial and other 10 8 7 5 30 Real estate - construction 3 -- 149 -- -- Real estate - mortgage 7 -- -- -- 14 Installment 20 10 5 5 2 -------- -------- ------- ------- ------- Total recoveries 40 18 161 10 46 -------- -------- ------- ------- ------- Net loans (charged off) recovered (122) (129) 126 (294) (80) Provision for loan losses 350 315 310 256 235 -------- -------- ------- ------- ------- Reserve for loan losses at year-end $ 1,928 $ 1,700 $ 1,514 $ 1,078 $ 1,116 ======== ======== ======= ======= ======= Ratio of net loans (charged off) recovered to average loans outstanding (.07)% (.09)% .11% (.30)% (.09)% Ratio of reserve for loan losses to loans at year-end 1.01 1.05 1.18 1.11 1.19
Anticipated loan losses are charged against the reserve for loan losses when, in management's opinion, ultimate recovery is unlikely or when bank examiners require a charge-off. As the actual amount of loss with respect to specific loans is often dependent upon future events (including liquidation of collateral), Bancorp cannot accurately predict precisely what losses, if any, will be sustained with respect to specific loans. Historical experience has also shown that, at any particular time, loan losses may exist in a loan portfolio that have not yet been identified. For these reasons, although management analyzes specific loans in determining the adequacy of its reserve for loan losses, it does not normally allocate the reserve to specific groups or categories of loans. Management estimates, however, that the allocation of the reserve for loan losses by loan category at the end of each of the last five years was as set forth below:
Amount of Loans in reserve category as a for percentage of loan total gross losses loans --------- ------------- (Dollars in thousands) December 31, 1995 - ---------------------------- Commercial and other $1,200 44.1% Real estate - mortgage 125 29.2 Real estate - construction 520 23.5 Installment 35 3.2 Unallocated 48 -- ------ ----- Total $1,928 100.0% ====== ===== December 31, 1994 - ---------------------------- Commercial and other $1,000 42.8% Real estate - mortgage 125 34.9 Real estate - construction 500 18.0 Installment 35 4.3 Unallocated 40 -- ------ ----- Total $1,700 100.0% ====== ===== December 31, 1993 - ---------------------------- Commercial and other $ 550 46.8% Real estate - mortgage 120 37.0 Real estate - construction 115 9.1 Installment 35 7.1 Unallocated 696 -- ------ ----- Total $1,516 100.0% ====== ===== December 31, 1992 - ---------------------------- Commercial and other $ 550 49.7% Real estate - mortgage 120 35.6 Real estate - construction 100 5.3 Installment 30 9.4 Unallocated 278 -- ------ ----- Total $1,078 100.0% ====== ===== December 31, 1991 - ---------------------------- Commercial and other $ 552 54.1% Real estate - mortgage 120 35.0 Real estate - construction 100 1.7 Installment 30 9.2 Unallocated 314 -- ------ ----- Total $1,116 100.0% ====== =====
The following table details the carrying value of Bancorp's impaired loan, in accordance with SFAS 114, by type of loan as of December 31, 1995:
Net Recorded Valuation Carrying Amount Allowance Value --------- --------- --------- Commercial $424,000 $100,000 $324,000 ======== ======== ========
The above impaired loan was measured based on the fair value of the loan's collateral. The allowance for loan losses for all other loans is determined based on the methodology discussed above. INVESTMENT ACTIVITIES Bancorp's investment portfolio is comprised of U.S. government securities, municipal securities, mortgage-backed securities, corporate bonds and equity securities. Bancorp's primary investment objectives are to maintain liquidity and to generate after-tax profits consistent with the risk guidelines established by the Board of Directors. At December 31, 1995 and 1994, Blount Investment Group, of Eugene, Oregon, advised Bancorp with respect to the investment portfolio. Centennial Bank has extended loans to Blount Investment Group and its affiliates. Such loans are made on terms, including interest rates and collectibility, no more favorable to the borrowers than loans to other borrowers. All of the securities held in the investment portfolio were classified as available-for-sale at December 31, 1995 and 1994. Those securities will be sold as necessary to provide liquidity and to respond to interest rate changes. Because these securities are carried at their market value, fluctuations in interest rates could affect the carrying value of these securities and, therefore, the reported shareholders' equity of Bancorp. The following table provides the carrying values of Bancorp's investment portfolio at the end of each of the last three years. See Note 2 of Notes to Consolidated Financial Statements for more information about investment securities held at December 31, 1995 and 1994.
December 31, ------------------------------------------- 1995 1994 1993 ------- ------- ------ (In thousands) U.S. Treasuries $ 8,428 $15,162 $13,394 U.S. Government agencies 29,422 8,457 2,460 States and political subdivisions 23,845 17,088 21,159 Bankers' acceptances -- -- 3,941 Corporate bonds 2,300 5,118 5,037 Mortgage-backed securities 8,929 8,727 9,496 ------- ------- ------- Total debt securities 72,924 54,552 55,487 Equity securities 4,040 4,243 2,615 ------- ------- ------- Total investment securities $76,964 $58,795 $58,102 ======= ======= =======
The following table provides the carrying values, principal amounts, maturities and weighted average yields of Bancorp's investment securities at December 31, 1995, all of which are classified as available-for-sale:
Carrying value Weighted (fair market Principal average Type and maturity value) amount yield(1) ----------------- ----------- --------- -------- (Dollars in thousands) U.S. Treasuries Due within 1 year $ 4,003 $ 4,000 4.61% Due after 1 but within 5 years 4,164 4,150 5.29 Due after 5 but within 10 years 261 250 5.83 ------- ------- Total U.S. Treasuries 8,428 8,400 4.98 U.S. Government Agencies Due after 1 but within 5 years 1,206 1,200 6.37 Due after 5 but within 10 years 27,564 27,200 7.01 Due after 10 years 652 650 7.15 ------- ------- Total U.S. Government Agencies 29,422 29,050 6.99 States and political political Due within 1 year 388 385 6.89 Due after 1 but within 5 years 305 300 7.27 Due after 5 but within 10 years 14,543 14,240 7.90 Due after 10 years 8,609 8,595 8.20 ------- ------- Total states and political subdivisions 23,845 23,520 7.98 Corporate bonds Due after 1 but within 5 years 200 200 6.30 Due after 5 but within 10 years 2,100 2,010 6.12 ------- ------- Total corporate bonds 2,300 2,210 6.14 Mortgage-backed securities (U.S. Government agencies) 8,929 8,935 5.45 ------- ------- Total debt securities 72,924 72,115 6.86 Equity securities 4,040 4,040 ------- ------- Total securities $76,964 $76,155 ======= =======
- ------------ (1) Weighted average yield on state and political subdivisions has been computed on a 34% tax-equivalent basis. DEPOSITS Centennial Bank offers a variety of accounts for depositors designed to attract short-term and long-term deposits. These accounts include certificates of deposit ("CDs"), savings accounts, money market accounts, checking and negotiable order of withdrawal ("NOW") accounts and individual retirement accounts. These accounts generally earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Centennial Bank does not pay brokerage commissions to attract deposits. Centennial Bank has developed a special account for customers age 50 or older (called the "50+ Account"). The 50+ Account is designed to attract customers in this age group, who generally have higher than average deposits and favorable ability to repay borrowings. Centennial Bank also markets to small- to medium-sized businesses and to professionals in its commercial lending program. These types of customers also create substantial deposits, resulting in low-cost funds being available for Centennial Bank's lending activities. Management believes that Centennial Bank's percentage of demand deposits (relative to total deposits) is among the highest in Oregon. The following table presents the average balances for each major category of deposits and the weighted average interest rates paid for interest-bearing deposits for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993 ----------------- ----------------- --------------- Average Average Average ----------------- ----------------- ---------------- Balance Rate Balance Rate Balance Rate ------- ----- -------- ------ ------- ----- (Dollars in thousands) Noninterest-bearing demand $ 53,399 N/A $ 47,406 N/A $ 36,931 N/A Interest-bearing demand 92,937 3.23% 82,916 2.45% 70,966 2.48% Savings 15,046 2.34 18,340 2.48 15,627 2.77 CDs 71,912 5.77 47,258 4.24 40,335 3.99 -------- -------- -------- Total $233,294 4.17 $195,920 2.31 $163,859 2.32 ======== ======== ========
The following table shows the dollar amount of CDs that had balances of $100,000 or more at December 31, 1995 and 1994: December 31 ------------------------------ 1995 1994 ------ ------- (In thousands) CDs $100,000 or over with remaining maturity: Three months or less $ 9,788 $ 6,692 Over three months through six months 19,449 6,499 Over six months through twelve months 1,472 3,349 Over twelve months 105 101 ------- ------- Total $30,814 $16,641 ======= ======= SHORT-TERM BORROWINGS At December 31, 1995, Bancorp's short-term borrowings consisted of securities sold under agreements to repurchase totalling $3.4 million and advances from the Federal Home Loan Bank of Seattle totalling $8.0 million. Securities sold under agreements to repurchase generally range in duration from one to eighty-nine days. The advances from the Federal Home Loan Bank of Seattle are due May 1996 and bear interest of 5.87%. The following table sets forth certain information with respect to short-term borrowings at December 31 and during each of 1995, 1994 and 1993:
December 31, ---------------------------------------- 1995 1994 1993 -------- -------- ------ (Dollars in thousands) Amount outstanding at year-end $11,419 $11,840 $ 300 Weighted average interest rate at year-end 5.59% 6.23% 3.00% Maximum amount outstanding at any month-end during the year $16,458 $16,541 $4,580 Daily average amount outstanding during the year $13,823 $4,259 $1,002 Average weighted interest rate during the year 6.23% 4.09% 3.79%
LONG-TERM DEBT At December 31, 1995, Bancorp's long-term debt consisted of $9.2 million of Convertible Exchangeable Redeemable Subordinated Debentures (the "Convertible Debentures"). Interest on the Convertible Debentures is payable semiannually at the rate of 7% per year. The Convertible Debentures mature on May 1, 2004, subject to prior conversion, redemption or exchange. Holders of Convertible Debentures may convert the principal amount of the Convertible Debentures into shares of Bancorp Common Stock at a price of $10.307 per share. Subsequent to December 31, 1995 (through March 15, 1996), holders converted $240,000 of the Convertible Debentures into 23,279 shares of Bancorp's Common Stock. Bancorp has the right to require that the Convertible Debentures be exchanged for Series A Preferred Stock if the Board of Directors of Bancorp deems it necessary to meet regulatory capital guidelines. Any such exchange would occur at the rate of one share of Series A Preferred Stock for each $25 in principal amount of Convertible Debentures. Any such exchange would apply to all outstanding Convertible Debentures. The Convertible Debentures may be redeemed at the option of Bancorp. Any redemption occurring prior to May 1, 1998 would involve a redemption premium. The Convertible Debentures may not be redeemed prior to May 1, 1997, unless the closing sale price of the Bancorp Common Stock has been at least $14.43 for at least 20 trading days within a 30-day period prior to the date of the redemption notice. Bancorp may redeem fewer than all the Convertible Debentures. The Convertible Debentures are governed by an Indenture Agreement. The Indenture Agreement restricts the ability of Bancorp to incur certain indebtedness and limits cash dividends and other capital distributions by Bancorp. RETURN ON EQUITY AND ASSETS The following table sets forth Bancorp's return on daily average assets and equity for 1995, 1994 and 1993:
1995 1994 1993 ------- -------- ------ (Dollars in thousands) Net income $ 4,551 $ 3,502 $ 2,763 Average total assets 281,752 229,275 190,244 Return on average assets 1.62% 1.53% 1.45% Net income $ 4,551 $ 3,502 $ 2,763 Average equity 23,302 18,702 15,901 Return on average equity 19.53% 18.72% 17.38% Average total equity $ 23,302 $ 18,702 $ 15,901 Average total assets 281,752 229,275 190,244 Average total equity to assets ratio 8.27% 8.16% 8.36%
COMPETITION Commercial banking in Oregon is highly competitive with respect to both loans and deposits. Centennial Bank competes principally with other commercial banks, savings and loan associations, credit unions, mortgage companies, and other financial institutions with respect to the scope and type of services offered, interest rates paid on deposits and pricing of loans, among other factors. Many of these competitors have substantially greater resources than Centennial Bank and have branches in more locations. Certain of these competitors have larger lending capabilities due to their greater size, and provide other services that Centennial Bank does not offer. Centennial Bank competes for loans principally through the range and quality of the services it provides. Centennial Bank believes its personal service philosophy and its focus on small- to medium-sized businesses and on professionals enables it to compete effectively with other financial institutions for the loans and deposits it seeks. To serve customers whose borrowing requirements exceed its lending limits, Centennial Bank arranges participations with other lenders. During the past several years, many financial institutions in Oregon have merged or consolidated. Management believes that, in many cases, the acquiring institutions have shifted the focus of the acquired banks away from the small- to medium-sized businesses that are at the core of Bancorp's marketing efforts. Bancorp intends to capitalize on this banking environment. EMPLOYEES Centennial Bancorp has no employees other than its executive officers, who are also employees of Centennial Bank. At December 31, 1995, Centennial Bank and Centennial Mortgage had 146 and 24 full-time equivalent employees, respectively. Bancorp places a high priority on selective hiring and development of staff. Staff development involves training in customer service, marketing and regulatory compliance. Bancorp has adopted extensive incentive programs for employees that focus and are dependent on the achievement of certain of Bancorp's financial, service and marketing goals. None of Bancorp's employees is covered by collective bargaining agreements, and management believes that Bancorp's relationship with its employees is good. SUPERVISION AND REGULATION Bancorp and Centennial Bank are extensively regulated under federal and Oregon law. These laws and regulations are primarily intended to protect depositors and the deposit insurance fund, not shareholders of Bancorp. The following information is qualified in its entirety by reference to applicable statutory and regulatory provisions. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of Bancorp and its subsidiaries. CENTENNIAL BANCORP GENERAL Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "FRB"). Bancorp is required to file an annual report and such other reports as the FRB may require. ACQUISITIONS As a bank holding company, Bancorp is required to obtain the prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or bank holding company. The FRB may not approve any acquisition, merger or consolidation that would have a substantial anti-competitive result, unless the anti- competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. The FRB also considers managerial, capital and other financial factors in acting on acquisition or merger applications. Bancorp also is required to obtain the prior approval of the Director of the Oregon Department of Consumer and Business Services (the "Oregon Director") before acquiring direct or indirect ownership or control of 25% or more of the voting shares of an Oregon state-chartered bank or bank holding company. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") allows adequately capitalized and managed bank holding companies to acquire banks in any state. Such acquisitions must comply with any applicable state law requiring a bank to be in existence for a minimum period of time before the acquisition. Oregon law allows such acquisitions with respect to banks that have been providing banking services for at least three years. Therefore, Bancorp and Centennial Bank could be acquired by a bank holding company located outside Oregon following receipt of necessary regulatory approvals. Under the Interstate Banking Act, Bancorp could acquire banks or bank holding companies in other states. PERMISSIBLE ACTIVITIES A bank holding company may not engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, a nonbanking activity, unless the activity has been determined by the FRB to be closely related to banking or managing banks. The FRB has identified certain nonbanking activities in which a bank holding company may engage with notice to, or prior approval by, the FRB. Management believes that all activities conducted by Centennial Mortgage are permitted nonbanking activities. CAPITAL ADEQUACY The federal bank regulatory agencies monitor the capital adequacy of bank holding companies and have adopted risk-based capital adequacy guidelines to evaluate bank holding companies and banks. If an institution's capital falls below the minimum levels established by these guidelines, the bank holding company may be denied approval to acquire or establish additional banks or nonbank businesses. The guidelines require a minimum ratio of total capital to risk-weighted assets of 8%. At December 31, 1995, Bancorp's ratio of total capital to risk-weighted assets was 11.22%. The FRB also uses a leverage ratio to evaluate the capital adequacy of bank holding companies. The leverage ratio applicable to Bancorp requires a ratio of "Tier 1" capital (generally, tangible common stockholders' equity, perpetual preferred stock and minority interests in consolidated subsidiaries) to adjusted average total assets of not less than 3% and up to 5% or higher depending on Bancorp's general capital condition. Bancorp's leverage ratio at December 31, 1995 was 8.27%. If Bancorp fails to meet capital guidelines, the FRB may institute appropriate supervisory or enforcement actions. As discussed below, Centennial Bank is also subject to capital adequacy requirements. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), Bancorp could be required to guarantee the capital restoration plan of Centennial Bank, should Centennial Bank become undercapitalized. In addition, the Oregon Director has the authority to require Bancorp to contribute additional capital to Centennial Bank if its capital becomes impaired. CENTENNIAL BANK GENERAL Centennial Bank is an Oregon state-chartered bank, the deposits of which are insured by the FDIC. Accordingly, Centennial Bank files financial and other reports periodically with, and is regularly examined by, both the Oregon Director and the FDIC. Centennial Bank is not a member of the Federal Reserve System. PERMISSIBLE ACTIVITIES Under FDICIA, no state bank may engage in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the insurance fund. This limitation should not affect Centennial Bank, since management believes that Centennial Bank is not presently involved in any such activities. BRANCHING AND ACQUISITIONS Banks are permitted to conduct business through branches after application to and approval of the FDIC and the Oregon Director, if they make certain findings regarding the financial history and condition of the bank and the appropriateness of the branch in the community to be served. Centennial Bank currently has seven branches. 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. Beginning June 1, 1997, the Interstate Banking Act will permit 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. States can opt-in to interstate branching earlier, or opt-out before January 1, 1997. In 1995, Oregon opted-in to permit interstate bank mergers. Banks are able to establish branches in other states only through interstate mergers, as described above, unless the state where the branch is proposed to be opened has opted-in to DE NOVO interstate branching. Oregon has not opted-in to DE NOVO branching. COMMUNITY REINVESTMENT ACT Enacted in 1977, the federal Community Reinvestment Act (the "CRA") has become increasingly important to financial institutions, including their holding companies. The CRA allows regulators to reject an application to make an acquisition or establish a branch unless the applicant has performed satisfactorily under the CRA. Citizens and interest groups have standing before the FRB to assert noncompliance with the CRA. Satisfactory performance means adequately meeting the credit needs of the communities the applicant serves, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. The applicable federal regulators now regularly conduct CRA examinations to assess the performance of financial institutions. Centennial Bank has received satisfactory ratings in its most recent CRA examinations. TRANSACTIONS WITH AFFILIATES Centennial Bank is subject to certain FRB restrictions on transactions among related parties. Section 23A of the Federal Reserve Act limits the amount of certain transactions, including loans to and investments in affiliates of Centennial Bank, requires certain levels of collateral for such loans, and limits the amount of advances to third parties that may be collateralized by the securities of Bancorp or its subsidiaries. Section 23B of the Federal Reserve Act requires that certain transactions between Centennial Bank and its affiliates must be on terms substantially the same, or at least as favorable to Centennial Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. In addition, Section 22(h) of the Federal Reserve Act requires that the aggregate amount of an institution's loans to officers, directors and principal shareholders (and their affiliates) is limited to the amount of its unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate. A violation of any of the foregoing restrictions may result in the assessment of civil fines on a bank or a person participating in the conduct of the affairs of such bank or the imposition of a cease and desist order. DIVIDEND RESTRICTIONS Dividends paid by Centennial Bank provide substantially all Bancorp's cash flow. Under federal law, prior to the declaration of any dividend by Centennial Bank, the approval of the principal regulator is required if the total of all dividends declared in any calendar year exceeds the total of Centennial Bank's net profits for that year combined with its retained net profits for the preceding two years. In addition, FDICIA provides that a bank cannot pay a dividend if it will cause the bank to be "undercapitalized." Oregon law imposes the following limitations on the payment of dividends by Oregon state-chartered banks: (i) no dividends may be paid that would impair capital; (ii) until the surplus fund of a bank is equal to 50% of its paid-in capital, no dividends may be declared unless there has been carried to the surplus account at least 20% of the bank's net profits for the dividend period; (iii) dividends cannot be greater than net undivided profits minus losses, certain bad debts, certain charged-off assets or depreciation and accrued expenses, interest and taxes; and (iv) if the surplus fund does not exceed 50% of paid-up capital and a further reduction in the surplus occurs due to losses, dividends cannot be declared or paid in excess of 50% of net earnings until the surplus fund is restored to at least the amount from which the surplus was originally reduced. At December 31, 1995, $11.2 million was available for declaration of dividends by Centennial Bank to Bancorp without prior regulatory approval. EXAMINATIONS The FDIC periodically examines and evaluates state-chartered banks. Based upon such an evaluation, the examining regulator may revalue the assets of an insured institution and require that it charge off or reduce the carrying value of specific assets or establish specific reserves to compensate for the difference between the value determined by the regulator and the book value of such assets. The Oregon Director also conducts examinations of Centennial Bank. CAPITAL ADEQUACY Federal regulations establish minimum requirements for the capital adequacy of depository institutions. The regulators may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. Banks with capital ratios below the required minimums are subject to certain administrative actions, including prompt corrective action, the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing. The federal risk-based capital guidelines for banks require a ratio of Tier 1 or core capital to total risk-weighted assets of 4% and a ratio of total capital to total risk-weighted assets of 8%. The leverage capital guidelines require that banks maintain Tier 1 capital of no less than 5% of total adjusted assets, except in the case of certain highly rated banks for which the minimum requirement is 3% of total adjusted assets. At December 31, 1995, Centennial Bank's leverage ratio, Tier 1 capital to risk-weighted assets ratio and total risk-based capital to risk- weighted assets ratio were 9.37, 11.99% and 12.80%, respectively. FDICIA requires federal banking regulators to take "prompt corrective action" with respect to a capital-deficient institution, including requiring a capital restoration plan and restricting certain growth activities of the institution. Bancorp could be required to guarantee any such capital restoration plan required of Centennial Bank. Bancorp's maximum liability under such guarantee would be the lesser of 5% of Centennial Bank's total assets at the time it became undercapitalized or the amount necessary to bring Centennial Bank into compliance with the capital plan. Under Oregon law, the Oregon Director has the authority to require the shareholders of an Oregon state-chartered bank (Bancorp, in the case of Centennial Bank) to contribute additional capital to the bank if its capital becomes impaired. The capital of a bank is impaired under Oregon law when the value of the bank's assets is insufficient to pay its liabilities (excluding any liability on outstanding capital debentures) plus the amount of its paid-up capital stock. As an institution's capital decreases, the powers of the federal regulators increase, which can include mandated capital-raising activities, restrictions on interest rates paid, restrictions on transactions with affiliates, and removal of management. In addition, an institution generally is prohibited from paying dividends or management fees to control persons if the institution would be undercapitalized after any such payment. Pursuant to FDICIA, regulations were adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized, severely undercapitalized and critically undercapitalized. Under the regulations, Centennial Bank is considered "well capitalized." INTERNAL OPERATING REQUIREMENTS In 1993, federal regulators adopted regulations addressing, among other things: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth; (vi) ratio of classified assets to capital; (vii) minimum earnings; and (viii) compensation and benefit standards for management officials. These regulations add further to the cost of compliance and impose record-keeping requirements on Centennial Bank and Bancorp. The consumer lending activities of Centennial Bank are also regulated by numerous laws and regulations which impose disclosure requirements, prohibit discrimination based on race, sex, age, marital status and other specified classifications and impose other restrictions on credit and collection practices. REAL ESTATE LENDING EVALUATIONS Federal regulators have adopted uniform standards for evaluating loans secured by real estate or made to finance improvements to real estate. Banks are required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. The regulations establish loan-to-value ratio limitations on real estate loans, which are equal to or higher than the loan-to-value limitations established by Centennial Bank and Centennial Mortgage. DEPOSIT INSURANCE PREMIUMS The FDIC has adopted regulations establishing a risk-based deposit insurance premium schedule. In July 1995, Centennial Bank's assigned risk assessment classification was reduced from $.23 to $.04 per $100 of insured deposits. Effective January 1, 1996, Centennial Bank's risk assessment classification was further reduced to $.00, so Centennial Bank now pays only a minimum annual payment of $2,000. Each of these risk assessment classifications was the lowest possible classification at the time. Classifications are reviewed semiannually. In addition, the FDIC has the power to impose special assessments to cover the cost of borrowings from the U.S. Treasury, the Federal Financing Bank, and Bank Insurance Fund member banks. CENTENNIAL MORTGAGE Centennial Mortgage is, by definition of the Department of Housing and Urban Development, a nonsupervised lender. Because Centennial Mortgage is a member of Bancorp's consolidated group, its accounts and activities are reviewed by the FRB in conjunction with its periodic examinations of Bancorp. Centennial Mortgage, like Centennial Bank, is indirectly affected by the monetary policies of the FRB, which may have a material adverse effect on its business and earnings. Oregon law requires the licensing of certain persons engaging in mortgage brokering transactions. Centennial Mortgage is exempt from these requirements as a wholly owned subsidiary of a regulated bank holding company. CHANGING REGULATORY STRUCTURE The laws and regulations affecting banks and bank holding companies are in a state of flux. The rules and the regulatory agencies in this area have changed significantly over recent years, and there is reason to expect that similar changes will occur in the future. It is difficult to predict the outcome of these changes. The Clinton Administration has announced a program to reduce the regulatory burden on banks and to streamline and consolidate regulatory oversight. However, the scope and effect of this program are not yet known. One of the major additional burdens imposed on the banking industry by FDICIA is the increased authority of federal agencies to regulate the activities of federal and state banks and their holding companies. The FRB, the FDIC and the Oregon Director have extensive enforcement authority to police unsafe or unsound practices by depository institutions and their holding companies and to penalize them for violating applicable laws and regulations. FDICIA and other laws have expanded the agencies' authority in recent years, and the agencies have not yet fully tested the limits of their powers. EFFECT OF ECONOMIC ENVIRONMENT The policies of regulatory authorities, including the monetary policies of the FRB, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open-market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. FRB monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of Bancorp and its subsidiaries cannot be predicted. ITEM 2. DESCRIPTION OF PROPERTY Bancorp's main offices are located at 675 Oak Street, Eugene, Oregon, in a four-floor facility (approximately 35,000 square feet), owned by Centennial Bank. Construction of the office building was completed in June 1993. Bancorp and Centennial Bank occupy the lower two floors and the fourth floor of the building. Centennial Bank has entered into five-year leases with two tenants for a total of approximately 6,250 square feet of the building's third floor. Centennial Bank is seeking a tenant for the remaining approximate 2,500 square feet of available space on the third floor. In February 1994, Bancorp entered into a long-term ground lease in Tigard, Oregon, a suburb of Portland, where Centennial Bank located a new branch. The ground lease has an initial term of 50 years and is renewable for two additional 10-year periods. Lease payments of $5,834 per month began in November 1994, with increases thereafter scheduled in accordance with the lease agreement. Construction of a three-story office building was completed in June 1995 at a cost of $2.9 million. Centennial Bank occupies the first and part of the second floors, while Centennial Mortgage occupies the remainder of the second floor. The third floor of the building was leased to another company effective January 1996. Centennial Bank owns three other branch facilities and leases two branch facilities with annual lease payments of $101,700 in 1995. Centennial Bank also leases certain storage facilities with annual lease payments of $18,000 in 1995. Centennial Bank also maintains a lease for a former branch site at an annual rental of $13,200 in 1995. The lease expires in May 1997. Centennial Bank has sublet the property through April 1997 for an annual rental of $16,600. Centennial Mortgage's offices are located in leased facilities. Centennial Mortgage's Eugene office is located in a building formerly owned by Centennial Bank which was sold to a third party in August 1994. Centennial Mortgage paid lease payments of $71,200 to the new building owner in 1995. Centennial Mortgage leases office space for its Portland- area office from Centennial Bank. 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. In management's opinion, the ultimate liability, if any, resulting from the routine claims and lawsuits that currently exist will not have a material adverse effect on the financial position or results of operations of Bancorp. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II The information called for by Items 5, 6, 7 and 8 of Part II is included in Centennial Bancorp's Annual Report to Shareholders for the year ended December 31, 1995, and is incorporated herein by reference as follows: Centennial Bancorp Annual Report to Shareholders Page No. ---------------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 37 ITEM 6. SELECTED FINANCIAL DATA 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28 - 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 7 - 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on May 15, 1996, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on May 15, 1996, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on May 15, 1996, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on May 15, 1996, and is incorporated herein by reference. 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, 1995, and are incorporated herein by reference: Annual Report to Shareholders Page Number ------------ Report of Independent Accountants 6 Consolidated balance sheets at December 31, 1995 and 1994 7 For the three years ended December 31, 1995 Consolidated statements of income 8 Consolidated statements of shareholders' equity 9 Consolidated statements of cash flows 10-11 Notes to consolidated financial statements 12-27 (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) Exhibits. 3.1 Articles of Incorporation, as restated and amended (filed as Exhibit 3.1 to registrant's Form 10-Q Report for the quarter ended June 30, 1990, and incorporated herein by reference) 3.1(a) Proposed Articles of Amendment (included as part of Exhibit 4.1 to registrant's Registration Statement on Form SB-2, filed March 28, 1994, and incorporated herein by reference) 3.2 Bylaws, as restated (filed as Exhibit 3.2 to registrant's Form 10-K Report for the year ended December 31, 1992, and incorporated herein by reference) 4.1 Indenture dated April 27, 1994 governing registrant's 7% Convertible Exchangeable Redeemable Subordinated Debentures due May 1, 2004 (filed as Exhibit 4 to registrant's Registration Statement on Form S-4, filed August 26, 1994, 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* Form of Stock Option Agreement entered into between registrant and certain employees pursuant to registrant's 1993 Incentive Stock Option Plan (filed as Exhibit 10.2 to registrant's Registration Statement on SB-2, filed March 28, 1994, and incorporated herein by reference) 10.3* Employment Agreement dated October 1, 1995, between Richard C. Williams and registrant 10.4* Registrant's Nonemployee Director's Stock Option Plan (filed as Exhibit 10.2 to registrant's Form 10-K Report for the year ended December 31, 1991, and incorporated herein by reference) 10.5* Form of Stock Option Agreement entered into between registrant and certain nonemployee directors pursuant to registrant's Nonemployee Director's Stock Option Plan (filed as Exhibit 10.5 to registrant's Registration Statement on SB-2, filed March 28, 1994, and incorporated herein by reference) 10.6* Registrant's 1993 Stock Option Plan for Nonemployee Directors, restated as of April 13, 1994 (filed as Exhibit A to registrant's Proxy Statement for the 1994 annual shareholder meeting, filed April 29, 1994, and incorporated herein by reference) 10.7* Form of Stock Option Agreement entered into between registrant and certain nonemployee directors pursuant to registrant's 1993 Stock Option Plan for Nonemployee Directors (filed as Exhibit 10.7 to registrant's Registration Statement on SB-2, filed March 28, 1994, and incorporated herein by reference) 10.8* Deferred Compensation Agreement between Centennial Bank and Ron R. Peery (filed as Exhibit 10.3 to registrant's Form 10-Q Report for the quarter ended June 30, 1989, and incorporated herein by reference) 10.9* 1995 Stock Incentive Plan 10.10* Nonstatutory (Nonqualified) Stock Option Agreement dated November 22, 1995, between registrant and Richard C. Williams 10.11 Ground Lease, dated as of February 10, 1994, between registrant and Pacific Realty Associates, L.P. (filed as Exhibit 10.10 to registrant's Registration Statement on SB-2, filed March 28, 1994, and incorporated herein by reference) 10.12 Advances, Security and Deposit Agreement, dated May 28, 1991, between Centennial Bank and the Federal Home Loan Bank of Seattle (filed as Exhibit 10.11 to registrant's Registration Statement on SB-2, filed March 28, 1994, and incorporated herein by reference) 11.1 Earnings per Share Computation 13.1 Portions of 1995 Annual Report to Shareholders (which are incorporated by reference in this Form 10-K Annual Report) 21.1 Subsidiaries of registrant 23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants 27.1 Financial Data Schedule - --------------- * Management contract or compensation plan or arrangement. Upon written request to Michael J. Nysingh, Chief Financial Officer, Centennial Bancorp, Post Office Box 1560, Eugene, Oregon, 97440, shareholders will be furnished a copy of any exhibit, upon payment of $.25 per page, which represents Centennial Bancorp's reasonable expenses in furnishing the exhibit requested. (b) Reports on Form 8-K. Centennial Bancorp did not file any reports on Form 8-K during the last quarter of the fiscal year ended December 31, 1995. 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 19 , 1996 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 19 , 1996 By /s/Richard C. Williams --- ------------------------------- Richard C. Williams, President, Chief Executive Officer and Director CHIEF FINANCIAL OFFICER DATED: March 19 , 1996 By /s/Michael J. Nysingh --- ------------------------------- Michael J. Nysingh Chief Financial Officer DIRECTORS: DATED: March 19 , 1996 By /s/Dan Giustina --- ------------------------------- Dan Giustina, Director DATED: March 19 , 1996 By /s/Cordy H. Jensen --- ------------------------------- Cordy H. Jensen, Director DATED: March 19 , 1996 By /s/Robert L. Newburn --- ------------------------------- Robert L. Newburn, Director DATED: March 19 , 1996 By /s/Brian B. Obie --- ------------------------------- Brian B. Obie, Director EXHIBIT INDEX EXHIBIT 10.3 Employment Agreement dated October 1, 1995, between Richard C. Williams and registrant 10.9 1995 Stock Incentive Plan 10.10 Nonstatutory (Nonqualified) Stock Option Agreement dated November 22, 1995, between registrant and Richard C. Williams 11.1 Earnings per Share Computation 13.1 Portions of 1995 Annual Report to Shareholders, which are incorporated by reference in this Form 10-K 21.1 Subsidiaries of registrant 23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants 27.1 Financial Data Schedule EX-10 2 EMPLOYMENT AGREEMENT - ----------------------------------------------------------------- EMPLOYMENT AGREEMENT - ----------------------------------------------------------------- PARTIES: CENTENNIAL BANCORP ("Company") RICHARD C. WILLIAMS ("Executive") EFFECTIVE DATE: OCTOBER 1, 1995 - ----------------------------------------------------------------- RECITALS: A. Company is an Oregon corporation. B. Executive is an executive officer of Company and has contributed substantially to the successful development and expansion of the business of Company. C. Company desires to assure the continued employment of Executive and to assist him in providing for his financial security. D. The parties entered into an Employment Agreement dated October 1, 1991 respecting Executive's employment by Company for a term ending September 30, 1996, and have agreed to extend the term of such employment to end on December 31, 2001 as provided in and subject to the conditions stated in this Agreement. AGREEMENT: 1. POSITIONS, DUTIES AND TERM 1.1 Company shall employ Executive as President and Chief Executive Officer of Company, and Executive shall serve Company in such capacity, during the Employment Period. 1.2 The Employment Period under this Agreement shall commence effective at October 1, 1995, and shall end on December 31, 2001, unless it is earlier terminated in accordance with other provisions of this Agreement. 1.3 Executive shall perform such duties as may be assigned to him from time to time by the board of directors of Company. Such assignments shall not unduly diminish the relative importance and responsibility of Executive's position, and the title of his position shall not be changed without his consent, except pursuant to this Agreement. 1.4 Without limiting the generality of the other provisions of this Section, Executive shall: 1.4.1 Be responsible to Company's board of directors for the operation of Company and its subsidiaries (currently Centennial Bank and Centennial Mortgage Co.); 1.4.2 Serve as the vice chairman and chief executive officer of Centennial Bank (the "Bank") until a new chief executive officer of the Bank is employed by the Bank; 1.4.3 Identify and select for approval by the board of directors of the Bank a new chief executive officer for the Bank no later than December 31, 1997; 1.4.4 Implement a new regional organizational structure for the Bank prior to the hiring of the new chief executive officer of the Bank; 1.4.5 Serve, if requested by Company's board of directors, as chairman of the Bank's board of directors after the new chief executive officer of the Bank has been hired; and 1.4.6 Serve as a member of Company's board of directors, and, if requested by Company's board of directors, also serve on the Bank's board of directors, Centennial Mortgage Co.'s board of directors, the Bank's asset/liability committee, and on the board of directors of any significant subsidiary Company may form or acquire during the Employment Period. 2. EXTENT OF SERVICES 2.1 Except as permitted by Section or 2.4 or as approved by Company's board of directors, which approval it may withhold in its reasonable discretion, Executive shall devote his full time and attention exclusively to the performance of the work and duties assigned to him for and on behalf of Company and shall not, during the Employment Period, either directly or indirectly, engage in, or enter into any business or perform any services for any other person, firm, association, or corporation. 2.2 Executive shall perform his duties with fidelity and to the best of his ability during the Employment Period, and shall at all times during the Employment Period and thereafter respect the confidential nature of the information received by him in the course of performing his duties. 2.3 Nothing contained in this Section shall prohibit Executive from serving on the board of directors of any other corporation that does not compete with Company or any of its subsidiaries (subject to the approval of Company's board of directors, which will not be unreasonably withheld), or from owning or controlling stock or other equity securities of any other company, whether or not the securities are publicly traded (including a company that operates a business that is competitive with Company or its subsidiaries, if such securities are publicly traded and Executive does not beneficially own more than 5% of the outstanding securities); provided, however, that Executive shall not own or control more than 25% of the stock or other equity securities of any company without first obtaining the approval of Company's board of directors, which will not be unreasonably withheld. 2.4 For periods after September 30, 1997 or the date on which a new chief executive officer of the Bank is hired, whichever occurs later, Executive shall be deemed to have fulfilled his obligation to render full time service to Company if he devotes time to Company and its subsidiaries in the performance of his duties under this Agreement that is equivalent to three-fourths of a full-time work schedule. The reduced work schedule shall be applied both on an annual basis and, subject to vacations and other permitted leaves taken by Executive, on a monthly basis. During any period of reduced work schedule under this section, Executive may take sick leave, vacations and other permitted leaves of absence in accordance with Company's policies applicable to other executive officers. 2.5 In addition to all other permitted leaves of absence under the employee benefit plans and policies of Company, Executive shall have the elective right to take a single leave of absence for a period not exceeding 180 days, during which time Executive shall not be required to perform any services for Company. During this leave of absence, which shall not commence until after the new chief executive officer of the Bank is hired, Executive shall be entitled to receive all compensation and benefits provided in other sections of this Agreement. It is contemplated that this leave of absence shall be completed by December 31, 1998. However, the timing of this leave shall be subject to the approval of Company's board of directors. 3. COMPENSATION AND BENEFIT PLANS During the Employment Period, the Executive shall be compensated as follows: 3.1 BASE SALARY. Executive shall receive an annual salary ("Base Salary"), payable in semimonthly installments on the first and 15th days of each month. The Base Salary shall be: 3.1.1 $225,000 for the year beginning October 1, 1995 and ending September 30, 1996. 3.1.2 $250,000 for the year beginning October 1, 1996 and ending September 30, 1997. 3.1.3 Amounts approved by Company's board of directors for periods after September 30, 1997, but not less than $250,000 for each 12-month period. 3.2 CASH BONUS. In addition to the Base Salary specified above, if Company and/or Executive reach the objectives for each calendar year that are determined by Company's board of directors prior to the beginning of such year, Executive shall be paid an annual cash bonus for that year (the "Cash Bonus"). Any Cash Bonus earned shall be paid on the following schedule: 20% on the fifteenth day of each April, July, and October and 40% on the fifteenth day of January, with the first payment being due on April 15, 1996. The Cash Bonus payable hereunder shall be: 3.2.1 $100,000 for the year beginning January 1, 1996 and ending December 31, 1996. 3.2.2 $100,000 for the year beginning January 1, 1997 and ending December 31, 1997. 3.2.3 Amounts approved by Company's board of directors for periods after December 31, 1997, but not less than $25,000 per calendar quarter. 3.3 STOCK OPTIONS AND INCENTIVE COMPENSATION 3.3.1 On November 22, 1995, Company granted to Executive an option (the "Stock Option") to purchase 60,000 shares of Company's common stock under the 1995 Stock Incentive Plan, which was approved by Company's board of directors on November 22, 1995. The grant of the Stock Option was conditioned upon the approval of the 1995 Stock Incentive Plan by Company's shareholders and to the execution of this Agreement. The Stock Option is governed by a separate stock option agreement. 4. TERMINATION FOR DISABILITY 4.1 For purposes of this Agreement, the term "disability" shall mean Executive's inability because of sickness or injury to perform the material duties of his occupation, as determined by a physician acceptable to Company. 4.2 If, during the Employment Period, because of disability Executive becomes unable to perform his duties for six months in the aggregate in any 12-month period, or for any consecutive three months in circumstances where Executive's medical prognosis is that he will be unable to resume performance of his duties within an additional three months, then Company may thereafter terminate the Employment Period upon 30 days' written notice to Executive. At Company's request and expense, Executive shall submit to annual physical examinations by a physician mutually approved by Company and Executive, and Executive will execute such written consents for release of information as will permit the physician's report on each examination to be delivered to Company's board of directors. 4.3 Beginning with the date of any termination of the Employment Period because of Executive's disability, Company shall provide: 4.3.1 Disability income benefits comparable to the benefits payable under the insurance policies currently held by Company, issued by Standard Insurance Company. Company shall at its expense continue to maintain in effect those policies or a substantially comparable policy or policies throughout the Employment Period. 4.3.2 Employee Group Benefits (as defined in Section 6.1) to Executive for so long as Executive meets the eligibility requirements for participation in the insurance, plans and programs maintained or provided by Company for its employees or executive officers generally. Company shall be obligated to use its best efforts to maintain Employee's eligibility to participate in such insurance, plans and programs. 4.3.3 Post-Retirement Medical Coverage to Executive as provided in Section . 4.4 Upon any termination of the Employment Period because of Executive's disability, Company's only other obligations to Executive shall be the payment of: (a) Base Salary, Cash Bonus, and benefits accrued to the date of termination; and (b) Deferred Compensation (as defined in Section 9). 5. DEATH OF EXECUTIVE In the event of Executive's death before any other termination of the Employment Period, the Employment Period shall terminate effective at the date of his death. Upon termination of the Employment Period because of Executive's death, Company's only obligations to Executive shall be the payment of: (a) Base Salary, Cash Bonus, and benefits accrued to the date of termination; and (b) Deferred Compensation. 6. EMPLOYEE GROUP BENEFITS 6.1 This Agreement shall not operate to reduce or otherwise adversely affect Executive's continuing or future participation in, or his vested rights or accrued benefits under any plan, program or policy of Company or any of its subsidiaries providing Employee Group benefits. The term "Employee Group Benefits" shall mean medical, dental, vision, group life, accidental death, and similar insurance, plans and programs maintained or provided by Company for its employees or executive officers generally, but shall not include any group disability insurance plans or programs so long as Company provides disability coverage for Executive in accordance with Section 4.3.1. 6.2 Following termination of the Employment Period (other than any termination by Company for cause or any termination by Executive without good reason), Company shall at its expense provide Executive with coverage ("Post-Retirement Medical Coverage") for payment or reimbursement of medical expenses incurred by him, on the following terms and conditions: 6.2.1 The Post-Retirement Medical Coverage shall be provided by Company either pursuant to an indemnity or capitation contract with a medical insurance company or health maintenance organization, or by self- insurance and direct reimbursement by Company from its general funds. 6.2.2 The Post-Retirement Medical Coverage shall include such coverages, deductibles, and co-payment benefits and obligations as are then being provided by Company for its executive employees generally, but shall not require Executive to pay insurance premiums. 6.2.3 The Post-Retirement Medical Coverage shall terminate as to Executive at the end of the month following the earliest of the following dates: (a) the date Executive becomes eligible for Medicare; or (b) the date at which Executive attains age 65. 6.3 This Agreement shall not operate or reduce or otherwise adversely affect Executive's continuing or future participation in, or his vested rights or accrued benefits under, the Bank's Employee Savings and Profit Sharing Plan or any similar successor plan. 7. TERMINATION OTHER THAN UPON DEATH OR DISABILITY 7.1 BY COMPANY. Company may relieve Executive of his duties and terminate the Employment Period at any time in its sole discretion upon written notice to Executive, in which event Executive shall have no further authority to act on behalf of Company or any of its affiliates. 7.1.1 TERMINATION FOR CAUSE. If Company terminates the Employment Period for "cause" (as defined in Section 7.1.3), Company's only obligations to Executive shall be the payment of: (a) Base Salary, Cash Bonus, and benefits accrued to the date of termination; and (b) Deferred Compensation. 7.1.2 TERMINATION WITHOUT CAUSE. If Company terminates the Employment Period without cause, Company's only obligations to Executive shall be the payment of: (a) Base Salary, Cash Bonus, and benefits accrued to the date of termination; (b) Deferred Compensation; (c) Post-Retirement Medical Coverage as provided in Section 6.2; and (d) Base Salary, Cash Bonus, and Employee Group benefits until December 31, 2001; provided, however, Company's obligation to provide Employee Group Benefits to Executive shall exist only so long as Executive meets the eligibility requirements for participation in the insurance, plans and programs maintained or provided by Company for its employees or executive officers generally. Company shall be obligated to use its best efforts to maintain Executive's eligibility to participate in such insurance, plans and programs. 7.1.3 DEFINITION OF CAUSE. As used in this Agreement, "cause" shall mean any one of the following: 7.1.3.1 Dishonesty, gross negligence, or deliberate misconduct by Executive in performance of his duties to Company or its subsidiaries or Executive's conviction of or entry of a plea of guilty or nolo contendere to a felony or other crime that has or may have a material adverse effect on Executive's ability to carry out his duties under this Agreement or upon the reputation of Company or its subsidiaries. 7.1.3.2 Willful and material breach of this Agreement by Executive (other than acts covered by Section 7.1.3.1), which breach continues uncorrected for 30 days following written notice thereof by Company to Executive. 7.1.3.3 Executive's removal from office because of the requirement or recommendation of a regulatory agency having jurisdiction over Company or its subsidiary. 7.1.3.4 Uncorrected failure of Executive to perform his duties in a manner consistent with past performance or consistent with standards respecting either Company's or Executive's performance established by Company's board of directors in discussion with Executive during the course of regular review of Executive's performance. Any such failure of performance shall be deemed uncorrected if it continues substantially unrectified for a period of 90 days or more. 7.2 BY EXECUTIVE. Executive may terminate the Employment Period at any time in his sole discretion upon written notice to Company. 7.2.1 TERMINATION FOR GOOD REASON. If Executive terminates the Employment Period for "good reason" (as defined in Section 7.2.3), Company's only obligations to Executive shall be the payment of: (a) Base Salary, Cash Bonus, and benefits accrued to the date of termination; (b) Deferred Compensation; (c) Post-Retirement Medical Coverage as provided in Section 6.2; and (d) Base Salary, Cash Bonus, and Employment Group Benefits until December 31, 2001; provided, however, Company's obligation to provide Employee Group Benefits to Executive shall exist only so long as Executive meets the eligibility requirements for participation in the insurance, plans and programs maintained or provided by Company for its employees or executive officers generally. Company shall be obligated to use its best efforts to maintain Executive's eligibility to participate in such insurance, plans and programs. 7.2.2 TERMINATION WITHOUT GOOD REASON. If Executive terminates the Employment Period without good reason, Company's only obligations to Executive shall be the payment of: (a) Base Salary, Cash Bonus, and benefits accrued to the date of termination; and (b) Deferred Compensation. 7.2.3 DEFINITION OF GOOD REASON. As used in this Agreement, "good reason" shall mean (a) the assignment to Executive of any significant duties inconsistent with his status as the Chief Executive Officer of Company or any material and adverse change in his responsibilities or authority hereunder; (b) the relocation of the Executive without his consent to any place other than Eugene, Oregon or, on a temporary basis comparable to the arrangement currently in existence, to Portland, Oregon; or (c) any other willful and material breach of this Agreement by Company which continues uncorrected for 30 days following written notice thereof by Executive to Company. 8. OTHER EMPLOYMENT AFTER TERMINATION Without the consent of Company's board of directors, which it may withhold in its reasonable discretion, during the three-year period following termination of the Employment Period, Executive shall not, either directly or indirectly, engage in, or enter into any business or perform any services for any other person, firm, association or corporation that is engaged in any direct, substantial competition with Company or any of its subsidiaries; provided, however, that this restriction shall not apply following any termination by Company without cause, any termination by Executive with good reason, or any termination by Executive following the acquisition by any person (including any corporation, partnership, joint venture, trust, association, or individual) of more than 50% of Company's then outstanding stock (whether by exchange of stock or securities, purchase, redemption or any combination thereof) or the acquisition by any person of all or substantially all of Company's operating assets. Except as limited by the foregoing sentence, Executive's becoming self-employed or accepting other employment following termination of the Employment Period shall not operate to reduce or impair any amount payable, any benefit, any service credit for benefits, or any other right, privilege or interest of Executive under this Agreement. 9. DEFERRED COMPENSATION In addition to all other payments to be made in accordance with this Agreement, Company shall pay to Executive, or to Executive's personal representative in the event of Executive's death prior to satisfaction of Company's obligations hereunder, the deferred compensation specified in this Section 9 ("Deferred Compensation"). 9.1 AMOUNT OF DEFERRED COMPENSATION. The total amount of Deferred Compensation shall be equal to eight and four tenths (8.4) times Executive's Base Salary as specified in Section 3.1.2. 9.2 VESTED PERCENTAGE. The Deferred Compensation shall be 100% vested upon execution of this Agreement, unless the Employment Period is terminated by Company for cause or is terminated by Executive without good reason, in either of which cases the Deferred Compensation shall be vested 95% until October 1, 1996, on which date the Deferred Compensation shall become 100% vested. Except for this vesting schedule, the Deferred Compensation shall not be subject to reduction for any reason (including but not limited to early termination of the Employment Period). 9.3 INSTALLMENT PAYMENTS. The Deferred Compensation shall be payable by Company in 288 equal semimonthly payments, without interest, payable on the fifteenth day and the last day of each calendar month after commencement of payments. 9.4 COMMENCEMENT OF PAYMENTS. The first semimonthly payment of Deferred Compensation shall be paid on the fifteenth day of the month next following the month in which occurs the earliest of the following dates: 9.4.1 December 31, 2001. 9.4.2 The date of Executive's death. 9.4.3 The date of termination of the Employment Period, unless Executive's employment shall have terminated by reason of his disability. 9.4.4 The date of the last payment to be made under the disability income insurance policy referenced in Section 4.3.1, if Executive's employment shall have terminated by reason of his disability. 9.5 NO PREPAYMENT. Deferred Compensation shall not be prepaid or accelerated by Company without the written approval of Executive or his personal representative. 10. AUTOMOBILE Company agrees to provide for Executive's use an automobile during the Employment Period on terms substantially comparable to Company's current arrangements with Executive. 11. PAYROLL WITHHOLDINGS All payments of Base Salary, Cash Bonus, Deferred Compensation, and other compensation payable by Company pursuant to this Agreement shall be subject to the customary withholding of income taxes and shall be subject to other withholdings required with respect to compensation paid by a corporation to an employee. 12. EXECUTIVE'S COVENANT AND INDEMNITY Executive covenants and agrees that all information supplied by him incident to Company's or his application for any life, disability income or other insurance to fund (directly or indirectly) Company's obligations hereunder will be true, accurate and complete. Executive agrees to indemnify and hold Company harmless from any loss or reduction of life, disability income or other insurance benefits or proceeds resulting from breach of this covenant. Company shall have the right to set off any such loss or reduction in insurance benefits or proceeds against amounts Company would otherwise be obligated to pay to Executive in accordance with this Agreement. 13. ARBITRATION Any controversy, claim, dispute or difference arising out of the interpretation, construction or performance of this Agreement shall be settled by arbitration in the state of Oregon under the rules and auspices of the American Arbitration Association, and judgment upon the award entered in such arbitration may be entered in any court having jurisdiction thereof. 14. JURISDICTION This Agreement has been made in and shall be governed by the laws of the state of Oregon. 15. SUCCESSORS AND ASSIGNS All rights and duties of Company under this Agreement shall be binding on and inure to the benefit of its successors, assigns or any company which purchases or otherwise acquires all or substantially all of its operating assets or outstanding shares by any method. This Agreement shall not be assignable by Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's estate or personal representative. References in this Agreement to Executive's personal representative or estate shall also mean and include Executive's heirs and devisees. 16. LEGAL COUNSEL AND EXPENSES The parties acknowledge and agree that: (a) the law firm of Gleaves Swearingen Larsen Potter Scott & Smith ("GSLPSS") has acted as legal counsel to Company, Bank, and Executive, respectively, on various matters in the past; (b) that GSLPSS represents Executive only, and not Company or Bank, in connection with this Agreement; (c) neither Company nor Bank has sought or relied on any advice from GSLPSS in connection with this Agreement; (d) prior to executing this Agreement, Company and Bank have obtained and relied upon review by, and advice from their general legal counsel, Tonkon, Torp, Galen, Marmaduke & Booth, concerning Company's and Bank's rights and obligations under this Agreement. Company shall reimburse Executive the amount of legal fees incurred by Executive in having this Agreement prepared by GSLPSS. 17. ATTORNEY FEES If any action, suit or arbitration is instituted to enforce or interpret this Agreement, the prevailing party shall be entitled to recover from the other party, in addition to all other rights and remedies, the prevailing party's reasonable attorney fees in the arbitration or at trial and on appeal. 18. INTEGRATION Effective at October 1, 1995, this Agreement entirely superseded the Employment Agreement dated October 1, 1991, and the 1991 Employment Agreement shall be deemed terminated, and no further payments shall be made under that Agreement, except for the January 15, 1996 payment with respect to Executive's cash bonus for 1995. This Agreement contains the entire agreement of the parties relating to the subject matter hereof, and may not be amended except by an instrument in writing signed by the parties. 19. NOTICES All notices required or permitted under this Agreement shall be in writing and may be personally served or mailed by registered or certified U.S. mail, postage prepaid and addressed as follows, or sent to such other address as a party shall specify by notice to the other party: If to Company: Centennial Bancorp 675 Oak Street Eugene, Oregon 97401 Attention: Secretary If to Executive: Richard C. Williams 2060 Graham Drive Eugene, Oregon 97405 20. SEVERABILITY If any provision of this Agreement shall be found, in any action, suit, arbitration or other proceeding, to be invalid or ineffective, the validity and effect of the remaining provisions shall not be affected. 21. PERFORMANCE BY COMPANY OR BANK All compensation and benefits to be provided to Executive pursuant to this Agreement shall be provided either by Company or by Bank, or partly by each. 22. EXECUTION The parties have executed this Agreement on the dates specified below, with this Agreement to be effective at the date appearing in the caption of this Agreement. COMPANY: EXECUTIVE: CENTENNIAL BANCORP By /s/Cordy H. Jensen /s/Richard C. Williams ----------------------- -------------------------- Cordy H. Jensen Richard C. Williams Director and Secretary Date: November 22, 1995 Date: November 22, 1995 ---- ---- EX-10 3 STOCK INCENTIVE PLAN CENTENNIAL BANCORP 1995 STOCK INCENTIVE PLAN Adopted by the Board of Directors on November 22, 1995 I. PURPOSE The purpose of the Plan is to provide a means by which selected Employees, Directors and Consultants may be given an opportunity to acquire stock of the Company. The Company, by means of the Plan, seeks to retain the services of persons who are currently Employees, Directors or Consultants, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company. Accordingly, the Plan provides for granting Incentive Stock Options, Nonstatutory Stock Options and Restricted Stock Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular person as provided herein. II. DEFINITIONS The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph: a. "1934 ACT" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. b. "AWARD" means, individually or collectively, any Option or Restricted Stock Award. c. "BOARD" means the Board of Directors of Centennial Bancorp. d. "CODE" means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to any such section. e. "COMMITTEE" means not less than two members of the Board who are selected by the Board as provided in Paragraph A of Article IV. f. "COMMON STOCK" means the shares of Common Stock of the Company, with par value of $2.00 per share. g. "COMPANY" means Centennial Bancorp and any Parent and Subsidiary of Centennial Bancorp. h. "CONSULTANT" means any person, including an adviser, engaged by the Company to render services and who does not render such services as an Employee or Director. i. "DIRECTOR" means an individual elected to the Board by the shareholders of the Company or by the Board under applicable corporate law who is serving on the Board on the date the Plan is adopted by the Board or is elected to the Board after such date. j. "DISABILITY" means the condition of being permanently "disabled" within the meaning of Section 22(e)(3) of the Code, namely being unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. k. "EMPLOYEE" means any person (including a Director) in an employment relationship with the Company. l. "FAIR MARKET VALUE" means, as of any specified date: (i) If the Common Stock is listed on any established stock exchange, its fair market value shall be the closing sale price of the Common Stock (or the average of the closing bid and asked prices, if no sales were reported), as quoted on such exchange (or the exchange with the greatest volume of trading in Common Stock) on the business day preceding the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or (ii) If the Common Stock is quoted on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation (Nasdaq) System, its fair market value shall be the average of the closing bid and asked prices for the Common Stock on the business day preceding the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or (iii) In the absence of an established market for the Common Stock, the fair market value thereof shall be determined in good faith by the Committee. m. "HOLDER" means an Employee, Consultant or a Director who has been granted an Award, and any assignee or transferee of such person as permitted under the Plan. n. "INCENTIVE STOCK OPTION" means an incentive stock option within the meaning of Section 422 of the Code. o. "NONSTATUTORY STOCK OPTION" means a stock option other than an Incentive Stock Option. p. "OPTION" means an Award described in Article VII of the Plan. q. "OPTION AGREEMENT" means a written agreement between the Company and a Holder with respect to an Option. r. "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. s. "PLAN" means the 1995 Stock Incentive Plan of Centennial Bancorp, as set forth herein and as may be hereafter amended from time to time. t. "RESTRICTED STOCK AGREEMENT" means a written agreement between the Company and a Holder with respect to a Restricted Stock Award. u. "RESTRICTED STOCK AWARD" means an Award described in Article VIII of the Plan. v. "RULE 16B-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the 1934 Act, as such may be amended from time to time, and any successor rule, regulation or statute fulfilling the same or similar function. w. "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code; namely, any corporation in which the Company directly or indirectly controls 50 percent or more of the total combined voting power of all classes of stock having voting power. III. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall be effective as of November 22, 1995, the date of its adoption by the Board, subject to its ratification and approval by the shareholders of Centennial Bancorp on or before November 21, 1996. Until the Plan has been approved by shareholders, any Awards made under the Plan shall be conditioned upon such approval. No Awards may be granted under the Plan after November 21, 2005. The Plan shall remain in effect until all Awards granted under the Plan have been satisfied or expired. IV. ADMINISTRATION A. COMPOSITION OF COMMITTEE. The Plan shall be administered by a committee which shall be (i) appointed by the Board and (ii) constituted so as to permit the Plan to comply with Rule 16b-3. Except as may be permitted without causing the Plan to lose its qualification under Rule 16b-3, no member of the Committee shall be eligible to receive an Award under the Plan and no person who has received an Award in the preceding year shall be eligible to serve on the Committee. B. AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have sole authority, in its discretion, to determine: (i) which Employees, Directors and Consultants shall receive Awards; (ii) the time or times when Awards shall be granted; (iii) the type or types of Awards to be granted; and (iv) the number of shares of Common Stock which may be issued under each Award. In making such determinations, the Committee may take into account the nature of the services rendered by the respective individuals, their present and potential contribution to the success of the Company, and such other factors as the Committee in its discretion shall deem relevant. The Committee shall also have such additional powers as are delegated to it by the Plan. Subject to the express provisions of the Plan, the Committee is authorized to construe the Plan and the respective agreements executed hereunder, to prescribe such rules and regulations relating to the Plan as it may deem advisable to carry out the Plan, and to determine the terms, restrictions and provisions of each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in any agreement relating to an Award in the manner and to the extent it shall deem expedient to carry the Award into effect. The determinations of the Committee on the matters referred to in this Article IV shall be conclusive. C. LIABILITY OF COMMITTEE MEMBERS. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award. D. COSTS OF PLAN. The costs and expenses of administering the Plan shall be borne by the Company. V. ELIGIBILITY Employees, Directors and Consultants are eligible to receive Options and Restricted Stock Awards; provided, however, only Employees are eligible to receive Incentive Stock Options. Members of the Committee shall be eligible to receive Awards only to the extent provided in Paragraph A of Article IV. Any Award may be granted on more than one occasion to the same person, and may include an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, or any combination thereof. VI. SHARES SUBJECT TO THE PLAN A. AGGREGATE NUMBER OF SHARES. Subject to Article IX, the aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 200,000 shares. Shares shall be deemed to have been issued under the Plan only (i) to the extent actually issued and delivered pursuant to an Award, or (ii) to the extent an Award is settled in cash. To the extent that an Award lapses or the rights of its Holder terminate, any shares of Common Stock subject to such Award shall again be available for the grant of an Award under the Plan. B. STOCK OFFERED. The stock to be offered pursuant to the grant of any Award may be authorized but unissued Common Stock or Common Stock previously issued and outstanding and reacquired by the Company. VII. OPTIONS A. OPTION PERIOD. The term of each Option shall be as specified by the Committee at the date of grant, except that no Incentive Stock Option shall be exercisable after the expiration of ten years from the date of grant of such Incentive Stock Option. B. LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee. C. SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options granted are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company exceeds $100,000, such Incentive Stock Options shall be treated as options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of a Holder's Options will not constitute Incentive Stock Options because of such limitation and shall notify the Holder of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, unless (i) at the time such Option is granted the exercise price is at least 110 percent of the Fair Market Value of the Common Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. D. SEPARATE STOCK CERTIFICATES. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of a Nonstatutory Stock Option. E. OPTION AGREEMENT. Each Option shall be evidenced by an Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an Incentive Stock Option under Section 422 of the Code. An Option Agreement may provide for the payment of the exercise price, in whole or in part, by the delivery of a number of shares of Common Stock (plus cash if necessary) having a Fair Market Value (as of the exercise date of the Option) equal to such exercise price. Moreover, an Option Agreement may provide for a "cashless exercise" of the Option by establishing procedures whereby the Holder, by a properly executed written notice, directs: (i) an immediate market sale or margin loan respecting all or a part of the shares of Common Stock to which the Holder is entitled upon exercise of the Option; (ii) the delivery of the shares of Common Stock from the Company directly to a brokerage firm; and (iii) the delivery of the exercise price from sale or margin loan proceeds from the brokerage firm directly to the Company. Such Option Agreement may also include, without limitation, provisions relating to: (a) vesting of Options; (b) tax matters (including provisions covering any applicable employee wage withholding requirements); and (c) any other matters not inconsistent with the terms and provisions of this Plan that the Committee shall in its sole discretion determine. The terms and conditions of the respective Option Agreements need not be identical. F. EXERCISE PRICE AND PAYMENT. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee, but such exercise price (i) shall not be less than the Fair Market Value of a share of Common Stock on the date such Option is granted if the Option is an Incentive Stock Option and (ii) shall be subject to adjustment as provided in Article IX. An Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company. The exercise price of an Option or portion thereof shall be paid in full in the manner prescribed by the Committee. G. TERMINATION OF EMPLOYMENT OR SERVICE. 1. In the event the employment or service of a Holder of an Option by the Company terminates for any reason other than because of Disability or death, such Option may be exercised at any time prior to the expiration date of the Option or the expiration of three months after the date of such termination, whichever is the shorter period, but only if and to the extent the Holder was entitled to exercise the Option at the date of such termination. 2. In the event the employment or service of a Holder of an Option by the Company terminates because of Disability, such Option may be exercised at any time prior to the expiration date of the Option or the expiration of one year after the date of such termination, whichever is the shorter period, but only if and to the extent the Holder was entitled to exercise the Option at the date of such termination. 3. In the event of the death of a Holder of an Option while employed by or providing service to the Company, such Option may be exercised at any time prior to the expiration date of the Option or the expiration of one year after the date of such death, whichever is the shorter period, but only if and to the extent the Holder was entitled to exercise the Option on the date of death. An Incentive Stock Option may be exercised only by the person or persons to whom such Holder's rights under the Option shall pass by the Holder's will or by the laws of descent and distribution of the state or country of domicile at the time of death. 4. The Committee, at the time of grant or at any time thereafter, may extend the three-month and one-year post-termination exercise periods any length of time not later than the original expiration date of the Option, and may increase the portion of the Option that is exercisable, subject to such terms and conditions as the Committee may determine. 5. To the extent that the Option of any deceased Holder or of any Holder whose employment or service terminates is not exercised within the applicable period, all further rights to purchase Common Stock pursuant to such Option shall cease and terminate. H. RIGHTS AS A SHAREHOLDER. The Holder of an Option under the Plan shall have no rights as a shareholder with respect to the Common Stock subject to such Option until the date of issue to the Holder of a stock certificate for such shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued. I. OPTIONS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS. Options may be granted under the Plan from time to time in substitution for stock options held by individuals employed by corporations who become Employees as a result of a merger or consolidation of the employing corporation with the Company, or the acquisition by the Company of the assets of the employing corporation, or the acquisition by the Company of stock of the employing corporation with the result that such employing corporation becomes a Subsidiary. J. RESTRICTION ON SALE. Unless otherwise permitted by the Committee, if an officer subject to Section 16 of the 1934 Act or a Director exercises an Option within six months of the grant of the Option to such person, the shares acquired upon exercise of the Option may not be sold until six months after the date of grant of the Option; provided, however, that, with respect to Options granted subject to shareholder approval of the Plan, the six-month period shall commence upon such shareholder approval. VIII. RESTRICTED STOCK AWARDS A. RESTRICTION PERIOD. At the time a Restricted Stock Award is granted, the Committee shall establish a period of time (the "Restriction Period") applicable to such Award. Each Restricted Stock Award may have a different Restriction Period, in the discretion of the Committee. The Restriction Period applicable to a particular Restricted Stock Award shall not be changed except as permitted by Paragraph B of this Article VIII or by Article IX. B. OTHER TERMS AND CONDITIONS. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends during the Restriction Period, to vote Common Stock subject thereto and to enjoy all other shareholder rights, except that: (i) the Holder shall not be entitled to delivery of the stock certificate until the Restriction Period shall have expired; (ii) the Company shall retain custody of the stock certificate during the Restriction Period; (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock during the Restriction Period; and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Agreement shall cause a forfeiture of the Restricted Stock Award. Stock dividends issued with respect to Common Stock awarded pursuant to a Restricted Stock Award shall be treated as additional Common Stock covered by the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of employment or service (by retirement, Disability, death or otherwise) of a Holder prior to expiration of the Restriction Period. Such additional terms, conditions or restrictions shall be set forth in a Restricted Stock Agreement entered into in conjunction with the Award. Such Restricted Stock Agreement may also include, without limitation, provisions relating to: (i) vesting of Awards; (ii) tax matters (including provisions (x) covering any applicable employee wage withholding requirements and (y) prohibiting an election by the Holder under Section 83(b) of the Code); and (iii) any other matters not inconsistent with the terms and provisions of this Plan that the Committee shall in its sole discretion determine. Unless otherwise permitted by the Committee, if an officer subject to Section 16 of the 1934 Act or a Director receives a Restricted Stock Award, shares issued pursuant to such Award may not be sold until six months after the date of the Award. C. PURCHASE PRICE AND PAYMENT. The Committee shall determine the amount and form of any payment for Common Stock received pursuant to a Restricted Stock Award, provided that, in the absence of such a determination, a Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law. D. RESTRICTED STOCK AGREEMENT. At the time any Award is granted under this Article VIII, the Company and the Holder shall enter into a Restricted Stock Agreement setting forth each of the matters contemplated hereby and such other matters as the Committee may determine to be appropriate. The terms and provisions of the respective Restricted Stock Agreements need not be identical. IX. CHANGES IN CAPITAL STRUCTURE A. If the outstanding Common Stock is hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split-up, combination of shares or dividend payable in shares, appropriate adjustment shall be made by the Committee in the number and kind of shares available for Awards. In addition, the Committee shall make appropriate adjustment in the number and kind of shares as to which outstanding Options, or portions thereof then unexercised, shall be exercisable, so that the Holder's proportionate interest before and after the occurrence of the event is maintained. Notwithstanding the foregoing, the Committee shall have no obligation to effect any adjustment that would or might result in the issuance of fractional shares, and any fractional shares resulting from any adjustment may be disregarded or provided for in any manner determined by the Committee. Any such adjustments made by the Committee shall be conclusive. Any adjustment provided for in this Paragraph A of Article IX shall be subject to any required shareholder action. In the event of dissolution of the Company or a merger, consolidation, plan of exchange or similar transaction affecting the Company, in lieu of providing for Options as provided above in this Paragraph A of Article IX or in lieu of having the Options continue unchanged, the Committee may, in its sole discretion, provide a 30-day period prior to such event during which Holders shall have the right to exercise Options in whole or in part without any limitation on exercisability and upon the expiration of such 30-day period all unexercised Options shall immediately terminate. Notwithstanding the foregoing, if the Holder of an Option is subject to Section 16(b) of the 1934 Act and if such event occurs less than six months after the date the Option is granted, the exercise of the Option shall not be accelerated, unless such acceleration is approved by both the Committee and the Holder, if such acceleration would cause the grant or the exercise of the Option to be deemed a purchase subject to Section 16(b) of the 1934 Act and the regulations promulgated thereunder. B. The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities senior to or affecting Common Stock or the rights thereof, the dissolution or liquidation of the Company, or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. C. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to Awards previously granted or the exercise price per share, if applicable. X. AMENDMENT AND TERMINATION OF THE PLAN The Board in its discretion may terminate the Plan at any time with respect to any shares for which Awards have not previously been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that no change in any Award previously granted may be made which would impair the rights of the Holder without the consent of the Holder; provided further, that the Board may not, without approval of the shareholders, amend the Plan: (a) to increase the maximum number of shares which may be issued on grant or exercise of an Award, except as provided in Article IX; (b) to change the price at which an Award may be granted or exercised; (c) to change the class of individuals eligible to receive Awards; (d) to extend the maximum period during which Awards may be granted under the Plan; or (e) to decrease any authority granted to the Committee hereunder if such change would cause the Plan to lose its qualification under Rule 16b-3. XI. MISCELLANEOUS A. NO RIGHT TO AN AWARD. Neither the adoption of the Plan by the Company nor any action of the Board or the Committee shall be deemed to give an Employee, a Consultant or a Director any right to be granted an Award or any of the rights hereunder except as may be evidenced by an Award or by an Option Agreement or Restricted Stock Agreement duly executed on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. B. NO EMPLOYMENT RIGHTS CONFERRED. Nothing in the Plan shall (i) confer upon any Employee any right with respect to continuation of employment with the Company or (ii) interfere in any way with the right of the Company to terminate the Employee's employment (or service as a Director, in accordance with applicable corporate law, or service as a Consultant) at any time for any reason, with or without cause. C. OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue any Common Stock pursuant to any Award granted under the Plan at any time when the shares covered by such Award have not been registered under the Securities Act of 1933, as amended, and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. D. NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan shall be construed to prevent the Company from taking any corporate action which is deemed by the Company to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award granted under the Plan. No Employee, Consultant, Director, beneficiary or other person shall have any claim against the Company as a result of any such action. E. RESTRICTIONS ON TRANSFER. An Award shall not be transferable otherwise than by will or the laws of descent and distribution; provided, however, that, with the consent of the Committee, Nonstatutory Stock Options may be assigned or transferred, if such assignment or transfer does not cause the Plan to lose its qualification under Rule 16b-3. (At the date the Plan was approved by the Board, the following additional transfers of Nonstatutory Stock Options could be made without causing the Plan to lose its qualification under Rule 16b-3: (i) transfers pursuant to qualified domestic relations orders; (ii) transfers to members of the Optionee's immediate family (i.e., children, grandchildren and spouses); (iii) transfers to trusts for the benefit of such family members; and (iv) transfers to partnerships whose only partners are such family members.) No consideration may be paid for the transfer of any Nonstatutory Stock Option, and, after any permitted transfer, the Nonstatutory Stock Option shall continue to be subject to the same terms and conditions as were applicable to it immediately prior to its transfer. Before permitting any transfer, the Committee may require the transferee to agree in writing to be so bound. Unless otherwise permitted by the Committee, an officer subject to Section 16 of the 1934 Act or a Director may not transfer a Nonstatutory Stock Option within six months of the date of grant; provided, however, that, with respect to Nonstatutory Stock Options made subject to shareholder approval of the Plan, the six-month period shall commence upon such shareholder approval. Incentive Stock Options may be exercisable during the lifetime of the optionee only by the optionee, or by the optionee's guardian or legal representative. F. RULE 16B-3. It is intended that the Plan and, except as otherwise determined by the Committee, any grant of an Award made to a person subject to Section 16 of the 1934 Act meet all of the requirements of Rule 16b-3, as modified or amended from time to time. If any provision of the Plan or any such Award would disqualify the Plan or such Award under, or would otherwise not comply with, Rule 16b-3, such provision or Award shall be construed or deemed amended to conform to Rule 16b-3, except as the Committee shall otherwise determine with respect to any particular Award. G. GOVERNING LAW. To the extent that federal laws (such as the Code and the federal securities laws) do not otherwise control, the Plan shall be construed in accordance with the laws of the state of Oregon. H. HEADINGS. Headings contained in the Plan are for reference purposes and shall not affect the meaning or interpretation of the Plan. /s/Cordy H. Jensen --------------------------------- Cordy H. Jensen, Secretary EX-10 4 STOCK OPTION AGREEMENT CENTENNIAL BANCORP NONSTATUTORY (NONQUALIFIED) STOCK OPTION AGREEMENT EFFECTIVE DATE: November 22, 1995 BETWEEN: Centennial Bancorp, an Oregon corporation (the "Company") AND: Richard C. Williams (the "Optionee") Pursuant to the Company's 1995 Stock Incentive Plan (the "Plan"), the Compensation Committee of the Board of Directors (the "Committee") has granted to the Optionee an option to purchase shares of the Company's Common Stock, $2 par value (the "Stock"), in the amount indicated below. NOW, THEREFORE, the parties agree as follows: 1. GRANT; TERMS OF OPTION. Subject to the terms and conditions of this Agreement and the Plan, the Company grants to the Optionee the right and option (the "Option") to purchase any part of an aggregate of 60,000 shares of the Company's authorized but unissued Stock at a purchase price of $11.625 per share, this price being the fair market value of the shares as determined pursuant to the Plan on the date of the grant of the Option. It is the intent of the Committee that the Option be a nonstatutory (nonqualified) stock option and, therefore, not qualify as an "incentive stock option" under the tax laws. The Option is granted upon the following terms and conditions: (a) TERM OF OPTION. Subject to reductions in the Option term provided in subparagraphs (c) and (g) below, the Option shall continue in effect through November 21, 2015. (b) TIMING OF RIGHT TO EXERCISE. Except as provided in subparagraph (c) hereof, the Option may be exercised from time to time over the term of the Option by the purchase of shares in the following amounts: Prior to September 30, 1996: None On September 30, 1996: 20,000 shares On September 30, 1997: An additional 20,000 shares On September 30, 1998: The remaining 20,000 shares subject to the Option If the Optionee does not purchase in any one year the full number of shares that he is then entitled to purchase, the Optionee's rights shall be cumulative, and, subject to the other provisions of this Agreement, the Optionee may purchase those shares thereafter during the term of the Option. (c) TERMINATION OF EMPLOYMENT. Except as provided in this subparagraph (c), the Option shall not be exercised unless at the time of such exercise the Optionee is in the employ of the Company or a parent or subsidiary corporation of the Company and shall have so served continuously since the effective date of this Agreement. Vesting of the Option shall continue during approved absences or leaves (including an extended illness). If the employment of the Optionee with the Company or a parent or subsidiary corporation of the Company terminates by reason of the Optionee's death or disability, or is terminated by the Company without "cause" (as defined in the Employment Agreement between the Optionee and the Company, dated effective October 1, 1996 (the "Employment Agreement")), or is terminated by the Optionee with "good reason" (as defined in the Employment Agreement), or terminates at the end of the "Employment Period" (as defined in the Employment Agreement), the Option shall become fully exercisable as of the date of such termination, and the Option shall continue to be exercisable during the remainder of its term (subject to subparagraph (g) below). If the employment of the Optionee by the Company or a parent or subsidiary corporation of the Company terminates for any other reason, the Option may be exercised by the Optionee at any time prior to the expiration date of the Option or the expiration of three months after the date of such termination, whichever is the shorter period, but only if and to the extent the Optionee was entitled to exercise the Option at the date of such termination. In such event, to the extent that the Option is not exercised within the three-month period, all further rights to purchase shares pursuant to the Option shall cease and terminate at the expiration of such period. (d) CERTAIN TRANSFERS PERMITTED. The Option shall not be assignable or transferable by the Optionee, either voluntarily or by operation of law, except as follows: (i) by will or by the laws of descent and distribution of the state or country of the Optionee's domicile at the time of death; (ii) pursuant to a qualified domestic relations order; (iii) to members of the Optionee's immediate family (i.e., children, grandchildren and spouse); (iv) to trusts for the benefit of such family members; and (v) to partnerships whose only partners are such family members. The Optionee understands and agrees that: (i) no consideration may be paid for the transfer of the Option; and (ii) the Option, after any permitted transfer, shall continue to be subject to the same terms and conditions as were applicable to the Option immediately prior to its transfer and, upon the request of the Committee, the Optionee will obtain from the transferee the transferee's agreement in writing to be so bound. Once such conditions are satisfied, the Optionee may, at any time, effect a permitted transfer. After any permitted transfer, whenever the word "Optionee" is used in this Agreement under circumstances where the provision should logically be construed to apply to the transferee, the word "Optionee" shall be deemed to include such transferee. (e) MANNER OF EXERCISE. Shares may be purchased pursuant to the Option only upon receipt by the Company of written notice from the Optionee of the Optionee's desire to purchase, specifying the number of shares the Optionee desires to purchase and the date on which the Optionee desires to complete the purchase. The Option may not be exercised for a fraction of a share. If required to comply with any applicable federal or state securities laws, the notice also shall contain a representation that it is the Optionee's intention to acquire the shares for investment and not for resale. On the date specified for completion of the purchase of the shares, the Optionee shall pay the Company the full purchase price of the shares in cash or by such other method of payment as shall be approved by the Committee. No shares shall be issued until full payment has been made, and the Optionee shall have none of the rights of a shareholder until shares are issued. (f) WITHHOLDING OBLIGATIONS. The Optionee shall, upon notification of the amount due and prior to or concurrently with delivery of the certificate representing the shares, pay to the Company any amounts necessary to satisfy applicable federal, state and local tax withholding requirements. If additional withholding is or becomes required beyond any amount deposited before delivery of the certificates, the Optionee shall pay such amount to the Company on demand. (g) CHANGES IN CAPITAL STRUCTURE. Except as provided in the final sentence of this subparagraph (g), if the outstanding shares of Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split-up, combination of shares or dividend payable in shares, the Committee shall make appropriate adjustment in the number and kind of shares as to which the Option, or portion thereof then unexercised, shall be exercisable, in order that the Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in the Option shall be made without change in the total price applicable to the unexercised portion of the Option and with a corresponding adjustment in the option price per share. Any such adjustment made by the Committee shall be conclusive. In the event of the dissolution of the Company or a merger, consolidation, plan of exchange or similar transaction affecting the Company, in lieu of adjusting the Option as described above, the Committee may, in its sole discretion, provide a 30-day period immediately prior to such event during which the Optionee shall have the right to exercise the Option in whole or in part without any limitation on exercisability. 2. CONDITIONS. The obligations of the Company under this Agreement shall be subject to: (i) the approval of such state or federal authorities or agencies as may have jurisdiction in the matter; and (ii) the approval of the Plan by the Company's shareholders. The Company shall use its best efforts to take such steps as may be required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission, any quotation system on which the Stock may then be traded and any stock exchange on which the Stock may then be listed, in connection with the issuance or sale of any shares acquired pursuant to this Agreement or the trading or listing of such shares on any such system or exchange. The Company shall not be obligated to issue or deliver shares under this Agreement if, upon advice of its legal counsel, such issuance or delivery would violate state or federal securities laws. The Option shall not be exercisable until the Plan has been approved by the Company's shareholders; and, if the Plan terminates as a result of failure to receive shareholder approval, the Option shall be null and void. 3. LEGENDS. Certificates representing the shares subject to this Agreement shall bear such legends as the Company shall deem appropriate to reflect any restrictions on transfer imposed by federal or applicable state securities laws. 4. CONTINUING RELATIONSHIP. Nothing in the Plan or in this Agreement shall confer upon the Optionee any right to continue as an employee of the Company or any parent or subsidiary corporation of the Company or interfere in any way with the right of the Company or parent or subsidiary to terminate the Optionee's employment at any time for any reason. 5. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of any successor of the Company, but except as provided above, the Option shall not be assigned or otherwise disposed of by the Optionee. 6. THE PLAN. The Option is subject to the terms and conditions of the Plan. In the event of a conflict between the Plan and this Agreement, the terms of the Plan shall control. The Optionee agrees to be bound by the rules and regulations for the administration of the Plan, as presently prescribed or hereafter amended, and by any amendment, construction or interpretation of the Plan properly adopted by the Company's Board of Directors or by the Committee. 7. NOTICES. Parties to this Agreement shall give all notices to the other parties concerning this Agreement by personal delivery, by telecopier or by registered or certified mail, return receipt requested, addressed as follows: If to the Company: Centennial Bancorp 675 Oak Street Eugene, Oregon 97440 Attention: Chairman If to Optionee: Richard C. Williams 2060 Graham Drive Eugene, Oregon 97405 Any party may, by written notice to the other parties, designate a new address to which notices shall thereafter be delivered. Notice hereunder shall be deemed effective upon the earlier of actual receipt or three days after being sent by registered or certified mail. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date stated above. CENTENNIAL BANCORP By /s/Cordy H. Jensen --------------------------------- Cordy H. Jensen Director and Secretary /s/Richard C. Williams --------------------------------- Richard C. Williams Address: 2060 Graham Drive Eugene, Oregon 97405 EX-11 5 EARNINGS PER SHARE Exhibit 11.1 Centennial Bancorp Computation of Earnings Per Share Year Ended December 31, 1995 1994 1993 ---------- ----------- ----------- INCOME: Net income (primary) $4,551,318 $3,501,579 $2,763,039 Add Convertible Debenture interest expense, net of tax (1) 430,603 310,830 -- ---------- ---------- --------- Net income (fully diluted) $4,981,921 $3,812,409 $2,763,039 ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING: Weighted average shares outstanding (primary) 4,796,285 4,751,256 4,710,545 Weighted average shares issuable upon conversion of all debentures (1) 892,598 606,478 -- --------- --------- --------- Weighted average shares outstanding (fully diluted) 5,688,883 5,357,734 4,710,545 ========= ========= ========= NET INCOME PER SHARE: Primary $ .95 $ .74 $ .59 Fully diluted $ .88 $ .71 $ .59 (1) The Convertible Debentures were issued April 27, 1994. EX-13 6 PORTION OF ANNUAL REPORT Centennial Bancorp is a bank holding company, which provides commercial and consumer banking services through its subsidiary Centennial Bank, and residential mortgage brokering services through its subsidiary Centennial Mortgage Co. SELECTED FINANCIAL DATA The following table sets forth selected financial data of Centennial Bancorp for the years indicated (in thousands of dollars, except per share amounts). All data in this Annual Report to Shareholders has been restated to give retroactive effect to the 1994 merger with CG Bancorp. In addition, all share and per share information has been restated to give retroactive effect to a stock split declared in January 1996, and for various stock splits and stock dividends declared in years prior to 1996.
1995 1994 1993 1992 1991 -------- -------- -------- -------- ------ Interest income $ 25,274 $ 19,474 $ 14,849 $ 13,319 $ 13,124 Interest expense 9,004 5,172 4,102 4,658 5,645 -------- -------- -------- -------- -------- Net interest income 16,270 14,302 10,747 8,661 7,479 Loan loss provision 350 316 310 256 235 Net income 4,551 3,502 2,763 2,005 1,811 Total assets 317,464 257,326 220,760 181,617 161,155 Total deposits 267,880 216,320 192,112 156,119 144,823 Short-term borrowings 11,419 11,840 300 1,700 2,300 Long-term debt 9,200 9,200 6,989 6,354 500 Shareholders' equity 26,390 19,205 17,420 14,517 12,521 Earnings per share: Primary $ .95 $ .74 $ .59 $ .43 $ .39 Fully diluted .88 .71 .59 .43 .39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Shareholders of Centennial Bancorp: We have audited the accompanying consolidated balance sheets of Centennial Bancorp and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Centennial Bancorp and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Eugene, Oregon February 1, 1996
CONSOLIDATED BALANCE SHEETS December 31, 1995 1994 ------------- ------------ Assets Cash and cash equivalents: Cash and due from banks $ 21,991,459 $ 19,783,038 Interest-bearing deposits with banks 6,000,000 5,575,000 Federal funds sold 8,730,000 -- ------------ ------------ Total cash and cash equivalents 36,721,459 25,358,038 Available-for-sale securities 76,964,342 58,794,836 Loans 186,517,192 160,136,068 Reserve for loan losses (1,928,372) (1,700,130) ------------ ------------ Loans, net 184,588,820 158,435,938 Loans held for sale 4,573,095 1,874,728 Premises and equipment, net 9,214,564 6,763,983 Other asset 5,401,435 6,098,831 ------------ ------------ Total assets $317,463,715 $257,326,354 ============ ============ Liabilities and Shareholders' Equity Liabilities: Deposits: Demand $ 70,578,820 $ 63,699,442 Interest-bearing demand 98,600,873 79,942,836 Savings 13,743,140 15,888,076 Time 84,957,459 56,789,446 ------------ ------------ Total deposits 267,880,292 216,319,800 Short-term borrowings: Securities sold under agreement to repurchase 3,419,123 2,839,608 Advances from Federal Home Loan Bank ("FHLB") 8,000,000 9,000,000 ------------ ------------ Total short-term borrowings 11,419,123 11,839,608 Accrued interest and other liabilities 2,574,240 761,615 Long-term debt 9,200,000 9,200,000 ------------ ------------ Total liabilities 291,073,655 238,121,023 Commitments and contingencies (Notes 10 and 11) Shareholders' Equity: Preferred stock -- -- Common stock, $2.00 par value; 10,000,000 shares authorized, 4,651,130 issued (3,974,225 at December 31, 1994) 9,302,260 7,948,450 Additional paid-in capital 5,829,404 7,067,963 Retained earnings 10,657,696 6,106,378 Unrealized gains (losses) on securities available- for-sale, net of deferred income taxes 600,700 (1,917,460) ------------ ------------ Total shareholders' equity 26,390,060 19,205,331 ------------ ------------ Total liabilities and shareholders' equity $317,463,715 $257,326,354 ============ ============
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1995 1994 1993 ----------- ----------- -------- Interest income: Loans $20,908,425 $16,003,263 $12,091,667 Securities: Taxable 2,403,376 1,926,971 1,263,886 Exempt from Federal income taxes 1,037,272 1,092,525 1,080,958 Dividends on FHLB stock 255,704 210,771 181,445 Deposits with banks 352,229 109,755 117,857 Federal funds sold 317,162 130,772 112,712 ----------- ----------- ----------- Total interest income 25,274,168 19,474,057 14,848,525 Interest expense: Deposits: Savings and interest- bearing demand 3,352,248 2,333,354 2,177,423 Time 4,145,754 2,106,197 1,610,780 Long-term debt 644,970 558,738 275,118 Short-term borrowings 861,484 174,131 38,358 ----------- ----------- ----------- Total interest expense 9,004,456 5,172,420 4,101,679 ----------- ----------- ----------- Net interest income 16,269,712 14,301,637 10,746,846 Loan loss provision 350,000 315,500 310,000 ----------- ----------- ----------- Net interest income after loan loss provision 15,919,712 13,986,137 10,436,846 Noninterest income: Service charges 904,813 848,860 792,219 Loan servicing fees 329,712 520,633 241,426 Other 572,929 814,751 415,032 Gains on sales of loans 404,027 575,266 659,270 Gains on sales of securities 65,895 103,167 414,846 ----------- ----------- ----------- Total noninterest income 2,277,376 2,862,677 2,522,793 Noninterest expense 11,503,970 11,809,835 8,983,912 ----------- ----------- ----------- Income before income taxes 6,693,118 5,038,979 3,975,727 Provision for income taxes 2,141,800 1,537,400 1,212,688 ----------- ----------- ----------- Net income $ 4,551,318 $ 3,501,579 $ 2,763,039 =========== =========== =========== Earnings per share: Primary $ .95 $ .74 $ .59 =========== =========== =========== Fully diluted $ .88 $ .71 $ .59 =========== =========== =========== Weighted average shares outstanding: Primary 4,796,285 4,751,256 4,710,545 Fully diluted 5,688,883 5,357,734 4,710,545
The accompanying notes are an integral part of these financial statement.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Net Common Stock Unrealized ----------------------- Additional Gains Total Number Paid in Retained (Losses)on Shareholders' of Shares Amount Capital Earnings Securities Equity --------- --------- ----------- ----------- ---------- -------------- Balances, January 1, 1993 2,872,435 $5,744,870 $7,521,152 $1,251,308 $14,517,330 5% stock dividend 135,264 270,528 1,099,020 (1,369,548) -- Stock options exercised 127,576 255,152 (109,402) -- 145,750 Effect of stock split (10%) 288,205 576,410 (576,410) -- -- Net unrealized gain, net of deferred income taxes -- -- -- -- $ 33,775 33,775 Cash dividend -- -- -- (40,000) -- (40,000) Net income -- -- -- 2,763,039 -- 2,763,039 --------- ---------- ---------- ---------- ----------- ----------- Balances, December 31, 1993 3,423,480 6,846,960 7,934,360 2,604,799 33,775 17,419,894 Effect of stock split (5%) 159,486 318,972 (318,972) -- -- -- Stock options exercised 29,966 59,932 (28,579) -- -- 31,353 Tax benefit of stock options exercised -- -- 203,740 -- -- 203,740 Effect of stock split (10%) 361,293 722,586 (722,586) -- -- -- Net unrealized loss, net of deferred income taxes -- -- -- -- (1,951,235) (1,951,235) Net income -- -- -- 3,501,579 -- 3,501,579 --------- ---------- ---------- ---------- --------- ----------- Balances, December 31, 1994 3,974,225 7,948,450 7,067,963 6,106,378 (1,917,460) 19,205,331 Effect of stock split (5%) 200,950 401,900 (401,900) -- -- -- Stock options exercised 53,125 106,250 (19,333) -- -- 86,917 Tax benefit of stock options exercised -- -- 28,334 -- -- 28,334 Effect of stock split (10%) 422,830 845,660 (845,660) -- -- -- Net unrealized gain, net of deferred income taxes -- -- -- -- 2,518,160 2,518,160 Net income -- -- -- 4,551,318 -- 4,551,318 --------- ---------- ---------- ---------- ---------- ----------- Balances, December 31, 1995 4,651,130 $9,302,260 $5,829,404 $10,657,696 $ 600,700 $26,390,060 ========= ========== ========== =========== ========== ===========
CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents Years ended December 31, 1995 1994 1993 ----------- ----------- -------- Cash flows from operating activities: Net income $ 4,551,318 $ 3,501,579 $ 2,763,039 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gains on sales of securities, loans and other real estate owned (469,922) (771,673) (1,074,116) Stock dividends on FHLB stock (255,704) (210,771) (181,445) Loan loss provision 350,000 315,500 310,000 Deferred income taxes (41,473) 881,509 (584,504) Depreciation and amortization 978,755 1,000,682 603,805 Originations of loans for sale (30,039,215) (20,664,772) (44,477,872) Proceeds from sale of loans 27,744,875 23,116,819 44,208,056 Changes in assets and liabilities: Accrued interest receivable (709,087) (590,223) (90,366) Other assets (220,380) 79,700 147,213 Other liabilities 1,771,352 (2,866,470) 1,021,802 ----------- ----------- ----------- Net cash provided by operating activities 3,660,519 3,791,880 2,645,612 ----------- ----------- ----------- Cash flows from investing activities: Available-for-sale securities: Maturities 10,405,612 7,268,938 -- Purchases (30,410,092) (13,032,648) -- Proceeds from sales 6,165,340 6,782,417 -- Held-to-maturity securities: Maturities -- 1,849,622 -- Purchases -- (6,542,956) -- Investment securities: Purchases -- -- (43,799,912) Maturities -- -- 5,975,663 Proceeds from sales -- -- 25,596,114 Net increase in loans (26,502,882) (36,100,972) (29,353,425) Purchases of premises and equipment (3,387,116) (1,486,405) (2,038,998) Sales of premises and equipment 49,985 18,600 -- Purchase of Harding Fletcher Co. -- -- (400,000) Sale of Harding Fletcher Co. 155,131 -- -- ----------- ----------- ----------- Net cash used in investing activities (43,524,022) (41,243,404) (44,020,558) ----------- ----------- ----------- Cash flows from financing activities: Net increase in deposits 51,560,492 24,207,857 35,993,688 Cash dividend payments -- -- (40,000) Net increase in short-term borrowings 579,515 2,539,608 -- Notes payable and advances, FHLB: Proceeds 8,000,000 9,000,000 -- Payments (9,000,000) -- (1,400,000) Proceeds from long-term debt -- 9,200,000 800,000 Payments on long-term debt -- (6,989,261) (164,793) Proceeds from exercise of stock options 86,917 31,353 145,750 ----------- ----------- ----------- Net cash provided by financing activities 51,226,924 37,989,557 35,334,645 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 11,363,421 538,033 (6,040,301) Cash and cash equivalents at beginning of year 25,358,038 24,820,005 30,860,306 ----------- ----------- ----------- Cash and cash equivalents at end of year $36,721,459 $25,358,038 $24,820,005 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Purchase of Harding Fletcher Co.: Furniture and equipment $ -- $ -- $ 40,000 Loan servicing rights -- -- 270,000 Excess of cost over fair value of assets acquired -- -- 90,000 ----------- ----------- ---------- $ -- $ -- $ 400,000 =========== =========== ========== Sale of Harding Fletcher Co.: Cash received at closing $ 150,000 $ -- $ -- Proration of expenses 5,131 -- -- ----------- ----------- ---------- $ 155,131 $ -- $ -- =========== =========== ========== Noncash investing and financing activities: Change in net unrealized gains (losses) on securities available-for-sale, net of deferred income tax liability (benefit) $ 2,518,160 $(1,951,235) $ 33,775 Transfer of held-to-maturity securities to available-for sale securities -- 40,681,546 -- Transfer of premises to other assets-held for sale -- -- 1,235,097 Cash paid during the year for: Interest on deposits and other borrowings 8,708,000 4,975,000 4,076,000 Income taxes 1,565,000 2,412,000 1,375,000
The accompanying notes are an integral part of these financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Centennial Bancorp ("Bancorp"), a bank holding company, and its wholly-owned subsidiaries, Centennial Bank (the "Bank"), Centennial Mortgage Co. ("Centennial Mortgage"), and Harding Fletcher Co. ("Harding Fletcher"). The Bank provides commercial financing, banking and other services. Centennial Mortgage provides residential mortgage brokering services. All significant intercompany balances and transactions have been eliminated in consolidation. Results of operations of entities acquired in purchase transactions are included in the consolidated financial statements from the date of acquisition. DIVESTITURE In August 1995, Bancorp sold substantially all the assets of its Harding Fletcher subsidiary for $746,000 in cash and assets, recognizing a pretax gain of approximately $64,000. Harding Fletcher provided commercial mortgage banking services and loan servicing. Exclusive of the gain recognized, this transaction did not have a significant impact on Bancorp's operating results. BASIS OF PRESENTATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and prevailing practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from or deposited with banks, interest bearing balances due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. Bancorp is required to maintain an average reserve balance with the Federal Reserve Bank, or maintain such reserve balance in the form of cash. The amount of this reserve balance required at December 31, 1995 was approximately $5,282,000, which was met by holding approximately $2,133,000 in the form of cash and by depositing approximately $3,149,000 with the Federal Reserve Bank. SECURITIES In 1993, Bancorp adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This Statement requires that investments in securities be classified by management as held-to-maturity, available-for-sale, or trading securities. Management determines the appropriate classification of securities at the time of purchase. Investments in debt securities classified as held-to-maturity are acquired with the intent and ability to hold to maturity, are stated at cost, and are adjusted for amortization of discounts and accretion of premiums. As a result of a sale during 1994 of $4,889,700 of securities classified as held-to-maturity for reasons other than those permitted by SFAS 115, Bancorp has classified all securities as available-for-sale. Securities classified as available-for-sale are to be held for indefinite periods of time and may be sold in response to movements in market interest rates, changes in the maturity mix of bank assets and liabilities or demand on liquidity. At December 31, 1995 and 1994, securities classified as available-for-sale are carried at fair value. Unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of shareholders' equity. Securities classified as trading are to be carried at fair value, with the unrealized gains and losses included in earnings. During 1995 and 1994, Bancorp had no securities classified as trading securities. Interest income on debt securities is included in income using the level yield method. Gains and losses on sales of securities are recognized on a specific identification basis. LOANS AND LOANS HELD FOR SALE Loans held for investment are stated at the amount of unpaid principal adjusted for any deferred loan origination fees and costs. Bancorp has both the ability and intent to hold such loans for the foreseeable future or until maturity. Certain loans are held for sale and are carried at the lower of cost or market. Market value for loans held for sale is separately determined using the aggregate loan basis for both residential and commercial loans. Interest income is accrued daily on the outstanding loan balances using the simple interest method. The accrual of interest on loans is discontinued when, in management's judgment, the future collectibility of interest or principal is in doubt. Loan origination and commitment fees, net of certain loan origination costs, are generally recognized over the life of the related loan as an adjustment of yield. RESERVE FOR LOAN LOSSES Bancorp adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," on January 1, 1995. Under the new Standard, a loan is considered impaired based on current information and events if it is probable that Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral- dependent loans are measured for impairment based on the fair value of the collateral. The adequacy of the reserve for loan losses is periodically evaluated by Bancorp in order to maintain the reserve at a level that is sufficient to absorb probable credit losses. Management's evaluation of the adequacy of the reserve is based on a review of Bancorp's historical loss experience, known and inherent risks in the loan portfolio, including adverse circumstances that may affect the ability of the borrower to repay interest or principal, the estimated value of collateral, and an analysis of the levels and trends of delinquencies and charge-offs, and the risk ratings of the various loan categories. Such factors as the level and trend of interest rates and the condition of the national and local economies are also considered. The reserve for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the reserve due to changes in the measurement of impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the reserve and subsequent recoveries, if any, are credited to the reserve. INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well- collateralized and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is classified as nonaccrual. Loans that are on a current payment status or past due less that 90 days may also be classified as nonaccrual if full repayment of principal or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonable assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of interest and principal. While a loan is classified as nonaccrual, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the reserve for loan losses until prior charge-offs have been fully recovered. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Capital leases are included in premises and equipment at the capitalized amount less accumulated amortization. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 30 to 40 years for buildings, 3 to 10 years for furniture and equipment, and up to the lease term for leasehold improvements. OTHER REAL ESTATE OWNED Other real estate owned, acquired through foreclosure or deed in lieu of foreclosure, is carried at the lower of cost or fair market value at the time of foreclosure. When the property is acquired, any excess of the loan balance over fair value of the property is charged to the reserve for loan losses. Subsequently, the property is valued at the lower of its carrying amount or net realizable value. Write-downs to net realizable value, if any, rental income, and disposition gains and losses are included in noninterest expense. Other real estate owned at December 31, 1994 has been included in other assets in the consolidated balance sheets. Bancorp did not hold any other real estate owned at December 31, 1995. DEBT ISSUANCE COSTS Costs associated with the issuance of Convertible Debentures are deferred and amortized using the effective interest method. Debt issuance costs are included in other assets. INTANGIBLE ASSETS During 1982, Bancorp acquired Centennial Bank in a transaction accounted for as a purchase. The resulting excess ($1,715,751) of purchase cost over the estimated fair value of net assets acquired is being amortized on the straight-line method over 20 years. Accumulated amortization at December 31, 1995 and 1994 was $1,176,133 and $1,090,345, respectively. When factors indicate goodwill should be evaluated for possible impairment, Bancorp uses an estimate of the related business undiscounted net income over the remaining life of the goodwill in measuring whether the goodwill is recoverable. At December 31, 1995 and 1994, management estimates that all goodwill is recoverable. INCOME TAXES Bancorp files consolidated federal and State of Oregon income tax returns. Subsidiaries of Bancorp are allocated a share of the consolidated income tax provision by use of the separate return method. Bancorp uses an asset and liability approach for financial accounting and reporting for income taxes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. EARNINGS PER COMMON SHARE Primary earnings per common share is calculated by dividing net income by the weighted average shares outstanding. Weighted average shares outstanding consist of common shares outstanding and common stock equivalents attributable to outstanding stock options. Fully diluted earnings per share is calculated by dividing net income plus after-tax interest incurred on the 7% Convertible Debentures by common shares outstanding, common stock equivalents attributable to outstanding stock options, and shares assumed to be issued on conversion of the Convertible Debentures. The Convertible Debentures were issued in 1994. The weighted average number of shares and common share equivalents have been adjusted to give retroactive effect to a stock split declared January 16, 1996, and various stock splits and stock dividends declared prior to December 31, 1995. MORTGAGE BANKING ACTIVITIES 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 and with no servicing rights retained. Mortgage loans held for sale are carried at the lower of cost or market. Gains on the sale of loans are recognized at the time funds are received in closing from the third-party secondary market investor. Harding Fletcher originated and serviced commercial real estate mortgage loans as agent for third party investors. Fee income was recognized when the loans closed. Mortgage servicing income was recognized as serviced loan payments were received. FINANCIAL ACCOUNTING STANDARDS BOARD Effective October 1995, the Financial Accounting Standards Board ("FASB") adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for fiscal years beginning after December 15, 1995, although early implementation is acceptable. The Standard requires either adopting a fair market based method of accounting for compensation costs related to stock options in the income statement, or continuing to use the accounting treatment prescribed by Accounting Principles Board Opinion No. 25. However, if SFAS No. 123 is not adopted, proforma disclosures will need to be reported in the footnotes of the annual report to shareholders. Bancorp will not adopt the fair value method of accounting provisions of SFAS No. 123 but will include appropriate proforma disclosures in its 1996 annual report to shareholders. RECLASSIFICATIONS Certain amounts for 1994 and 1993 in the consolidated financial statements have been reclassified to conform with the 1995 presentation. Net income was not affected by these reclassifications. 2. SECURITIES The amortized cost and estimated fair values of securities are as follows at December 31:
Gross Gross Amortized Unrealized Unrealized Fair Available-for-Sale Cost Gains Losses Value ------------ ---------- ---------- ---------- 1995: U.S. Treasury securities $ 8,400,771 $ 44,978 $ 17,983 $ 8,427,766 U.S. Government agencies 28,832,546 589,753 467 29,421,832 States and political subdivisions 23,350,735 583,554 89,614 23,844,675 Corporate bonds 2,360,454 100 60,528 2,300,026 Mortgage-backed securities 9,010,556 2,947 83,860 8,929,643 FHLB stock 4,040,400 -- -- 4,040,400 ----------- ---------- ---------- ----------- Total $75,995,462 $1,221,332 $ 252,452 $76,964,342 =========== ========== ========== =========== 1994: U.S. Treasury securities $15,688,037 $ 8,406 $ 534,197 $15,162,246 U.S. Government agencies 8,729,462 1,463 274,356 8,456,569 States and political subdivisions 18,106,445 61,738 1,079,671 17,088,512 Corporate bonds 5,593,934 170 476,032 5,118,072 Mortgage-backed securities 9,530,662 -- 804,000 8,726,662 FHLB stock and other 4,239,005 3,770 -- 4,242,775 ----------- ---------- ---------- ----------- Total $61,887,545 $ 75,547 $3,168,256 $58,794,836 =========== ========== ========== ===========
The amortized cost and fair value of investments in debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Approximate Cost Fair Value ----------- ----------- Due in 1 year or less $ 5,396,667 $ 5,386,148 Due after 1 through 5 years 13,836,545 13,809,031 Due after 5 through 10 years 43,612,865 44,467,400 Due after 10 years 9,108,985 9,261,363 ----------- ----------- Total $71,955,062 $72,923,942 =========== =========== At December 31, 1995, securities with a market value of approximately $3,425,000 were pledged to collateralize public deposits as required or permitted by law. In addition, at December 31, 1995, securities with a fair value of approximately $4,000,000 were pledged to collateralize short-term borrowings. Proceeds from sales of investment securities and gross realized gains and losses on those sales were as follows:
Proceeds Gross Gross Net Gains from Sales of Realized Realized on Sales of Securities Gains Losses Securities ------------- -------- ---------- ----------- 1995 $6,165,340 $ 78,348 $(12,453) $ 65,895 1994 6,782,417 153,786 (50,619) 103,167 1993 25,596,114 439,050 (24,204) 414,846
3. LOANS AND RESERVE FOR LOAN LOSSES Loans consist of the following at December 31: 1995 1994 ------------ ------------ Real estate - mortgage $ 54,631,309 $ 54,916,880 Real estate - construction 44,002,950 29,337,387 Commercial 78,252,968 66,514,955 Installment loans to individuals 5,929,351 6,950,813 Lease financing 4,001,250 2,686,227 Other 310,737 329,899 ------------ ------------ 187,128,565 160,736,161 Less deferred loan fees (611,373) (600,093) ------------ ------------ $186,517,192 $160,136,068 ============ ============ Transactions in the reserve for loan losses were as follows:
1995 1994 1993 ---------- ---------- ----------- Balance at beginning of year $1,700,130 $1,514,314 $1,077,813 Provision charged to operations 350,000 315,500 310,000 Recoveries 40,133 17,635 160,982 Loans charged off (161,891) (147,319) (34,481) ---------- ---------- ---------- Balance at end of year $1,928,372 $1,700,130 $1,514,314 ========== ========== ==========
At December 31, 1995, Bancorp had only one loan requiring a specific valuation allowance in accordance with SFAS No. 114. It was the only loan classified as impaired under the guidelines of SFAS No. 114 during 1995. The specific valuation allowance is $100,000 on a loan with remaining principal outstanding of $424,000 at December 31, 1995. Loans on nonaccrual status at December 31, 1995 were approximately $478,000 ($693,000 at December 31, 1994). Interest income which would have been realized on nonaccrual loans if they had remained current was approximately $74,000, $77,000 and $46,000 during 1995, 1994 and 1993, respectively. Loans contractually past due 90 days or more on which Bancorp continued to accrue interest at December 31, 1995 were approximately $645,000 ($190,000 at December 31, 1994). Bancorp is located and conducts substantially all of its business within Lane County, Oregon, and the greater Portland metropolitan area. Bancorp's credit policies require an evaluation of each borrower's creditworthiness on a case-by-case basis. Collateral consists of real and personal property. At the discretion of management, personal guarantees of the borrower may be obtained in addition to the collateral. The ultimate collectibility of a substantial portion of Bancorp's loan portfolio is susceptible to adverse changes in local market conditions. The loan portfolio is diversified among industry groups and does not contain a direct concentration of loans to a single industry which exceeds 10% of the portfolio. It is management's opinion that the reserve for loan losses is adequate to absorb known and inherent risks in the loan portfolio. 4. MORTGAGE BANKING ACTIVITIES: The following table summarizes Bancorp's financial data with respect to its mortgage banking activities for the years ended December 31:
1995 1994 1993 ---------- ---------- ------- Revenues $2,080,243 $2,970,783 $1,973,165 Expenses 2,077,086 3,034,518 1,559,211 ---------- ---------- ---------- Income (loss) before income taxes $ 3,157 $ (63,735) $ 413,954 ========== ========== ========== Total assets $1,022,537 $1,530,985 $1,517,077 ========== ========== ==========
Commercial real estate loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of serviced loans at December 31, 1995 and 1994 were none and $353,740,000, respectively. Custodial balances maintained in connection with loan servicing were none and $780,100 at December 31, 1995 and 1994, respectively, and are included in demand deposits. 5. PREMISES AND EQUIPMENT The composition of premises and equipment at December 31 was as follows: 1995 1994 ----------- ----------- Land $ 569,388 $ 569,388 Buildings and improvements 7,876,785 4,888,434 Furniture and equipment 4,328,421 3,439,619 Construction in process -- 755,606 ----------- ----------- 12,774,594 9,653,047 Less accumulated depreciation and amortization (3,560,030) (2,889,064) ----------- ---------- Net premises and equipment $ 9,214,564 $ 6,763,983 =========== =========== Construction in process at December 31, 1994 was for a new branch facility for the Bank in Tigard, Oregon which was completed during the summer of 1995. All monies expended for the construction project were provided by Bancorp's Convertible Debenture offering. Bancorp leases certain facilities under noncancelable lease arrangements. The major facilities leases are for terms of 5 to 50 years and generally provide renewal options. Rent expense under all operating leases was approximately $393,600, $313,400 and $174,600 in 1995, 1994 and 1993, respectively. Future minimum lease payments under these noncancelable operating leases as of December 31, 1995 are as follows: 1996 $ 302,500 1997 301,300 1998 287,000 1999 193,700 2000 166,900 Later years 5,966,400 ---------- Total minimum lease payments $7,217,800 ========== 6. OTHER ASSETS At December 31, other assets consisted of the following: 1995 1994 ---------- ---------- Accrued interest receivable $2,536,493 $1,827,406 Intangible assets, net 539,618 876,655 Deferred tax asset -- 1,410,722 Other 2,325,324 1,984,048 ---------- ---------- $5,401,435 $6,098,831 ========== ========== 7. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE Borrowings related to securities sold under agreement to repurchase were $3,419,123 and $2,839,608 at December 31, 1995 and 1994, respectively. The agreements are due on demand, but generally range in duration from one to eighty-nine days. The interest rate payable on such borrowings was 4.70% and 4.50% at December 31, 1995 and 1994, respectively. 8. ADVANCES FROM FEDERAL HOME LOAN BANK At December 31, advances consisted of the following: 1995 1994 ---------- --------- Advances from FHLB, collateralized by FHLB stock, funds on deposit with the FHLB, investments and loans: Interest at 5.86719%, due May 1996 $8,000,000 $ -- Interest at 6.4958%, due May 1995 -- 4,500,000 Interest at 7.05%, due November 1995 -- 4,500,000 ---------- ---------- $8,000,000 $9,000,000 ========== ========== Bancorp has available a credit facility from the FHLB in the amount of $23,471,500 at December 31, 1995 ($16,606,400 at December 31, 1994) at prevailing market interest rates. 9. LONG-TERM DEBT At December 31, long-term debt consisted of the following: 1995 1994 ---------- ---------- Bancorp 7% Convertible Debentures, semi-annual interest payments, without collateral, maturing May 1, 2004 $9,200,000 $9,200,000 ========== ========== The Debentures are convertible into Bancorp's common stock at the conversion rate of 97 shares of Bancorp common stock for each $1,000 principal amount of the debentures (equivalent to a conversion price of approximately $10.307 per share). Subsequent to December 31, 1995 (through January 31, 1996), holders converted $240,000 of the Convertible Debentures into 23,279 shares of Bancorp's common stock. The amount of debt converted, net of unamortized issue costs, will be credited to common stock and additional paid-in-capital. 10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the ordinary course of business, Bancorp enters into various types of transactions which include commitments to extend credit and standby letters of credit that are not included in the accompanying balance sheets. Bancorp applies the same credit standards to these commitments as it uses in all its lending processes and has included these commitments in its lending risk evaluations. Bancorp has no commitments to extend credit at below-market interest rates. Financial commitments at December 31 were as follows: 1995 1994 ----------- ----------- Commitments to extend credit $57,543,000 $44,805,000 Standby letters of credit 4,016,000 3,705,000 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 currently subject to drawdown, many of these commitments are expected to expire or terminate without funding. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Collateral relating to these commitments varies, but may include cash, securities and real estate. Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay Bancorp upon default of performance. Collateral for standby letters of credit is based on an individual evaluation of each customer's creditworthiness, but may include cash, securities and real estate. 11. CONTINGENCIES In the ordinary course of business, litigation has occurred from normal banking activities, the ultimate outcome of which, in the opinion of management, will not have a material adverse effect on Bancorp's consolidated financial position, results of operations or cash flows. 12. TRANSACTIONS WITH RELATED PARTIES Activity with respect to loans receivable from directors and their affiliates and executive officers of Bancorp and subsidiaries is as follows: 1995 1994 ------------ ------------- Balance at January 1 $ 5,663,376 $ 4,644,528 Additions or renewals 13,364,339 12,180,160 Amounts collected or renewed (14,097,295) (11,161,312) ------------ ------------ Balance at December 31 $ 4,930,420 $ 5,663,376 ============ ============ In addition, approximately $2,722,000 of commitments to extend credit to directors and officers were outstanding at December 31, 1995 ($3,106,000 at December 31, 1994), and are included as part of commitments in Note 10. 13. NONINTEREST EXPENSE Noninterest expense consisted of the following for the years ended December 31:
1995 1994 1993 ----------- ----------- -------- Salaries and employee benefits $ 6,457,661 $ 6,453,635 $4,759,294 Premises and equipment 1,643,309 1,309,452 919,539 Data processing 166,328 212,212 131,686 Legal and professional 550,756 837,757 629,258 Insurance 324,086 519,489 430,761 Communications 295,408 288,070 225,206 Advertising 353,430 352,455 259,774 Printing and stationery 291,111 286,830 205,802 Litigation reserve or settlement -- 342,052 788,427 Write-down of assets to net realizable value 275,000 -- -- Other 1,146,881 1,207,883 634,165 ----------- ----------- ---------- Total noninterest expense $11,503,970 $11,809,835 $8,983,912 =========== =========== ==========
14. INCOME TAXES The provision for income taxes is comprised of the following at December 31:
1995 1994 1993 ---------- ---------- ------- Currently payable: Federal $1,963,173 $ 462,091 $1,443,992 State 220,100 193,800 353,200 Deferred provision (benefit) (41,473) 881,509 (584,504) ---------- ---------- ---------- $2,141,800 $1,537,400 $1,212,688 ========== ========== ==========
The effective tax rate of the provision for income taxes varies from the federal income tax statutory rate for the following reasons:
1995 1994 1993 ---------- ---------- ------- Expected federal income tax provision at 34% $2,275,700 $1,713,300 $1,351,757 State income tax, net of federal income tax effect 291,600 221,000 173,147 Interest income on obligations of states and political subdivisions exempt from federal taxation (343,400) (379,400) (338,015) Other, net (82,100) (17,500) 25,799 ---------- ---------- ---------- $2,141,800 $1,537,400 $1,212,688 ========== ========== ==========
The components of the net deferred tax asset at December 31 are as follows: 1995 1994 ---------- ---------- Assets: Nonqualified benefit plans $ 439,250 $ 337,800 Reserve for loan losses 374,300 284,000 Net unrealized losses on securities available-for-sale -- 1,175,249 Other, net 104,100 2,800 ----------- ---------- Total deferred tax assets 917,650 1,799,849 Liabilities: FHLB stock 294,800 196,900 Excess tax over book depreciation 56,800 33,300 Purchased companies 34,100 37,000 Deferred loan fees 208,200 100,907 Net unrealized gains on securities available-for-sale 368,180 -- Other, net 46,804 21,020 ---------- ---------- Total deferred tax liabilities 1,008,884 389,127 ---------- ---------- Net deferred tax asset (liability) $ (91,234) $1,410,722 ========== ========== Bancorp's provision for income taxes for 1995, 1994 and 1993 includes $21,600, $39,200 and $160,973, respectively, related to gains on sales of investment securities. 15. NONEMPLOYEE DIRECTOR STOCK OPTION PLANS Under the 1988 Nonemployee Director's Stock Option Plan (the "1988 Director's Plan"), for nonemployee directors of Bancorp and its subsidiaries, shares of common stock are reserved for issuance at their fair market value at the date of grant. All options outstanding under the 1988 Director's Plan at December 31, 1995 were exercisable. Options expire ten years after the date of grant and are subject to earlier cancellation in the event an optionee ceases to be a director. At December 31, 1995, options covering 55,497 shares were outstanding under the 1988 Director's Plan. The 1988 Director's Plan was discontinued in June 1994 when the 1993 Stock Option Plan for Nonemployee Directors (the "1993 Director's Plan") was approved by shareholders. Under the 1993 Director's Plan, shares of common stock are reserved for issuance to nonemployee directors of Bancorp and its subsidiaries at their fair market value at the date of grant and become exercisable to the extent of one-third of the optioned shares per year, with credit given for prior service. Options expire ten years after the date of grant and are subject to earlier cancellation in the event an optionee ceases to be a director. At December 31, 1995, 139,383 shares were reserved under the 1993 Director's Plan, including 37,205 shares available for future grant. Options covering 70,461 shares outstanding under the 1993 Director's Plan were exercisable at December 31, 1995.
1988 Director's Plan 1993 Director's Plan -------------------- -------------------- Average Average Price Price Options Per Options Per Outstanding Share Outstanding Share ----------- -------- ----------- ------- Balance at January 1, 1993 97,683 $1.64 Granted -- 66,014 $7.45 Exercised (21,094) $1.32 -- ------- -------- Balance at December 31, 1993 76,589 $1.69 66,014 $7.45 Granted -- 13,339 $8.72 Exercised (10,546) $1.32 -- ------- -------- Balance at December 31, 1994 66,043 $1.74 79,353 $7.66 Granted -- 22,825 $9.12 Exercised (10,546) $1.53 -- ------- ------- Balance at December 31, 1995 55,497 $1.78 102,178 $7.99 ======= =======
16. INCENTIVE STOCK OPTION PLANS Under the 1983 Incentive Stock Option Plan (the "1983 Incentive Plan"), for key management officers, shares of common stock are reserved for issuance at their fair market value at the date of grant. Options expire ten years after the date of grant and are subject to earlier cancellation in the event an optionee ceases to be an employee. At December 31, 1995, options covering 47,512 shares were outstanding under the 1983 Incentive Plan. No shares are available for future grant. All 1983 Incentive Plan options outstanding are exercisable. In June 1994, shareholders approved the 1993 Incentive Stock Option Plan (the "1993 Incentive Plan"). Under the 1993 Incentive Plan, shares of common stock are reserved for issuance at their fair market value at the date of grant. Options vest in accordance with the vesting schedule set at the time the options are granted. Options expire ten years after the date of grant and are subject to earlier cancellation in the event an optionee ceases to be an employee. At December 31, 1995, 214,219 shares were reserved under the 1993 Incentive Plan, including 18,274 shares available for future grant. Options covering 104,778 shares outstanding under the 1993 Incentive Plan were exercisable at December 31, 1995.
1983 Incentive 1993 Incentive Stock Option Plan Stock Option Plan ------------------------- ---------------------------- Average Average Price Price Options Per Options Per Outstanding Share Outstanding Share ----------- ------ ----------- ------- Balance at January 1, 1993 287,093 $ .67 Granted -- 212,748 $7.45 Exercised (166,105) $ .71 -- -------- -------- Balance at December 31, 1993 120,988 $ .60 212,748 $7.45 Granted -- 6,669 $8.20 Exercised (28,759) $ .60 -- -------- -------- Balance at December 31, 1994 92,229 $ .60 219,417 $7.48 Exercised (44,717) $ .60 (5,868) $7.45 Cancelled and returned to Plan -- (17,604) -------- -------- Balance at December 31, 1995 47,512 $ .60 195,945 $7.48 ======== =======
In November 1995, the Board of Directors approved the 1995 Stock Incentive Plan, subject to its adoption by shareholders at the 1996 annual meeting. Under the 1995 Stock Incentive Plan, 220,000 shares are reserved for issuance to employees, directors or consultants as either incentive stock options, nonstatutory stock options or restricted stock awards. The exercise price for incentive stock options must be no less than the fair market value of the underlying shares on the date of grant. The exercise price of nonstatutory stock options and the price to be paid for restricted stock will be established by a committee of the Board of Directors. Incentive stock options may only be granted to employees. The duration of options granted will be established by a committee of the Board of Directors; however, the maximum term of incentive stock options is ten years. At December 31, 1995, options for 66,000 shares had been granted under the 1995 Stock Incentive Plan, subject to shareholder approval of the Plan. 17. SHAREHOLDERS' EQUITY Preferred Stock At December 31, 1995 and 1994, Bancorp had 5,000,000 shares of authorized but unissued $5.00 par value non-voting preferred stock, and 5,000,000 shares of authorized but unissued $5.00 par value voting preferred stock. Stock Splits On January 16, 1996, the Board of Directors declared a 10% stock split, payable February 21, 1996, in the form of a distribution of one additional share of the Bancorp's common stock for each ten shares owned by shareholders of record at the close of business on January 31, 1996. Par value remained at $2 per share. The stock split resulted in the issuance of 422,830 additional shares of common stock from authorized but unissued shares. The issuance of authorized but unissued shares resulted in the transfer of $845,660 from additional paid-in capital to common stock, representing the par value of the shares issued. Additionally, in 1995, 1994 and 1993, Bancorp has distributed various stock splits. Stock Dividends On July 12, 1993, the Board of Directors authorized a 5% stock dividend to shareholders of record on July 26, 1993. Additionally, in 1992 and prior years Bancorp has distributed various stock dividends. 18. EMPLOYEE BENEFIT PLAN The Bank has an employee savings plan (401(k)) and profit sharing plan which covers all full-time employees over age 21 with one year of service. The employee savings plan allows employees to contribute between 2% to 15% of their salary on a tax deferred basis. For 1995, 1994 and 1993, the Bank matched 75% of employee contributions up to 6% of their salary. The Bank matching contributions are determined annually by the Board of Directors. In addition to the matching contributions, the Bank also makes discretionary contributions to the profit sharing plan. The Bank's policy is to fund contributions as accrued. The Bank's contributions to the employee savings plan was $200,000 in 1995 ($150,000 for 1994 and $125,000 for 1993). 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by management to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. The resulting estimates of fair value require subjective judgments and are approximate. Changes in the following methodologies and assumptions could significantly affect the estimates: CASH AND CASH EQUIVALENTS. For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. AVAILABLE-FOR-SALE SECURITIES. For securities, the fair value is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS HELD FOR SALE. For loans held for sale, the fair value represents the anticipated proceeds from sale of the loans. LOANS. The fair value of fixed-rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Variable rate loans with quarterly rate adjustments have carrying amounts which are a reasonable estimate of fair value. DEPOSITS. The fair value of demand, interest-bearing demand and savings deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the interest rates currently offered for the deposits of similar remaining maturities. SHORT-TERM BORROWINGS. The carrying amount of short-term borrowings is a reasonable estimate of fair value. LONG-TERM DEBT. The fair value of long-term debt at December 31, 1995 and 1994 is based on quoted market prices for the Convertible Debentures. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. Commitments to extend credit and letters of credit represent the principal categories of off-balance- sheet financial instruments. The fair value of these commitments, based on fees currently charged for similar commitments is not material. The estimated fair values of Bancorp's financial instruments are as follows at December 31:
1995 1994 ----------------------------------- --------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------- ------------- ------------ ------------- Financial assets: Cash and cash equivalents $ 36,721,459 $ 36,721,500 $ 25,358,038 $ 25,358,000 Available-for-sale securities 76,964,342 76,964,300 58,794,836 58,795,000 Loans held for sale 4,573,095 4,573,100 1,874,728 1,874,700 Loans 186,517,192 186,372,000 160,136,068 159,066,200 Financial liabilities: Deposits $267,880,292 $269,156,000 $216,319,800 $216,175,000 Short-term borrowings 11,419,123 11,419,100 11,839,608 11,840,000 Long-term debt 9,200,000 10,079,500 9,200,000 9,108,000
20. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Centennial Bancorp (Parent Company only) is presented below:
Condensed Balance Sheets (Unconsolidated) December 31, 1995 1994 ----------- ----------- Assets - ------ Cash, deposited with the Bank $ 4,220,201 $ 3,941,217 Available-for-sale securities -- 457,875 Due from the Bank -- 629,900 Due from Harding Fletcher -- 240,000 Equipment, net 75,231 15,595 Deferred tax asset 274,292 222,656 Other assets 1,552,902 1,258,853 Investment in subsidiaries at cost plus equity in earnings of subsidiaries 30,831,700 22,591,236 ----------- ----------- Total assets $36,954,326 $29,357,332 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accrued interest and other liabilities $ 1,364,266 $ 952,001 Long-term debt 9,200,000 9,200,000 ----------- ----------- Total liabilities 10,564,266 10,152,001 Shareholders' equity 26,390,060 19,205,331 ----------- ----------- Total liabilities and shareholders' equity $36,954,326 $29,357,332
Condensed Statements of Income (Unconsolidated) Years ended December 31, 1995 1994 1993 ---------- ---------- ------- Income: Cash dividends from the Bank $ -- $ 120,000 $ 665,000 Other income 385,809 14,286 600 Gain on sale of investments 44,272 38,665 -- Other interest income from the subsidiaries 543,259 181,736 78,136 ---------- ---------- ---------- 973,340 354,687 743,736 ---------- ---------- ---------- Expense: Salaries and employee benefits 1,078,378 502,108 324,445 Interest expense 694,643 520,660 28,550 Other 631,105 345,269 ---------- ---------- 134,681 2,404,126 1,368,037 487,676 ---------- ---------- ---------- Income (loss) before income taxes and equity in undistributed earnings of subsidiaries (1,430,786) (1,013,350) 256,060 Income tax benefit 542,605 267,224 150,210 ---------- ---------- ---------- Income (loss) before equity in undistributed earnings of subsidiaries (888,181) (746,126) 406,270 Equity in undistributed earnings of subsidiaries 5,439,499 4,247,705 2,356,769 ---------- ---------- ---------- Net income $4,551,318 $3,501,579 $2,763,039 ========== ========== ==========
Condensed Statements of Cash Flows (Unconsolidated) Increase (Decrease) in Cash Years ended December 31, 1995 1994 1993 ----------- ----------- -------- Cash flows from operating activities: Net income $ 4,551,318 $ 3,501,579 $ 2,763,039 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on sale of securities (44,272) (38,665) -- Depreciation of equipment 5,760 6,238 6,281 Undistributed earnings of subsidiaries (5,439,499) (4,247,705) (2,356,769) Deferred tax benefit (51,636) (78,956) (67,412) Changes in assets and liabilities: Increase in other assets (294,049) (1,025,352) (89,920) Increase (decrease) in accrued interest and other liabilities 412,261 (52,655) 434,647 ----------- ----------- ----------- Net cash provided by (used in) operating activities (860,117) (1,935,516) 689,866 ----------- ----------- ----------- Cash flows from investing activities: Purchase of securities -- -- (840,600) Proceeds from sale of securities 498,377 425,160 -- Purchase of Harding Fletcher stock -- -- (500,000) Proceeds from sale of Harding Fletcher 155,131 -- -- Payments made to (from) subsidiaries, net 398,676 (2,991,358) (111,355) ----------- ----------- ----------- Net cash used in operating activities 1,052,184 (2,566,198) (1,451,955) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from long-term debt -- 9,200,000 800,000 Payments on long-term debt -- (959,375) (117,043) Proceeds from issuance of common stock 86,917 31,353 145,750 Cash dividends -- -- (40,000) ----------- ----------- ----------- Net cash provided by financing activities 86,917 8,271,978 788,707 ----------- ----------- ----------- Net increase in cash 278,984 3,770,264 26,618 Cash at beginning of year 3,941,217 170,953 144,335 ----------- ----------- ----------- Cash at end of year $ 4,220,201 $ 3,941,217 $ 170,953 =========== =========== =========== Noncash investing activity: Change in net unrealized holding gain (loss) on securities available-for-sale: Bancorp $ 3,770 $ 2,340 $ (57,576) The Bank 2,514,390 (1,953,575) 91,351
For purposes of reporting cash flows, cash represents amounts due from banks. Bancorp paid approximately $652,900, $358,200 and $28,500 in interest on borrowings in 1995, 1994 and 1993, respectively. The Bank, as a state-chartered bank, is prohibited from declaring or paying any dividend in an amount greater than undivided profits. At December 31, 1995, $11,201,200 was available from the Bank for the payment of dividends to Bancorp without prior regulatory approval. Bancorp and the Bank are subject to the regulations of certain federal and state agencies, and receive periodic examinations by those regulatory authorities. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HIGHLIGHTS Centennial Bancorp reported net income of $4.6 million, or $.95 per share, in the year ended December 31, 1995. This represented a 30.0% increase in net income, as compared to $3.5 million, or $.74 per share, in 1994. Net income in 1994 represented a 26.7% increase from 1993's net income of $2.8 million, or $.59 per share. The return on average assets was 1.62% in 1995 compared to 1.53% in 1994 and 1.45% in 1993. The increased earnings for 1995 and 1994 primarily reflected increased net interest income due to the expansion of Bancorp's interest-earning assets each year. In late April 1994, Bancorp completed a $9.2 million Convertible Debenture offering, which provided net proceeds of $8.4 million after payment of underwriting discounts, commissions and expenses. Bancorp used a portion of the net proceeds to repay $2.9 million of then existing debt. The remaining $5.5 million of net proceeds was invested in the Bank to fund its liquidity and to construct a new branch office in Tigard, a suburb of Portland, Oregon. Centennial Bank opened a branch office in Tigard, a suburb of Portland, Oregon, in August 1994 and began construction of a permanent facility which was completed and occupied in June 1995. Customer response to the services offered was greater than expected and by year-end 1994 total loans at the office were $27.7 million, making the five-month old branch the second largest lending facility of the Bank's branch system at that time. In December 1994, Bancorp completed the merger of CG Bancorp with Bancorp through a stock transaction which was accounted for as a pooling of interests. Accordingly, the financial condition and results of operations discussed herein include the combined results of Bancorp and CG Bancorp for all periods discussed. Subsequent to December 31, 1995, the Bank announced the decision to close the Creswell Office, which was one of the offices acquired through the merger of CG Bancorp. Regulatory approvals for the closure have been received, and the office is scheduled to be closed in May 1996. Customer accounts of the Creswell Office will be relocated to other offices of the Bank. NET INTEREST INCOME For most financial institutions, including Bancorp, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in "volume," "spread" and "margin." Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. During 1995, 1994 and 1993, Bancorp's average interest-earning assets were $252 million, $205 million and $169 million, respectively. During these same years, Bancorp's net interest margin was 6.66%, 7.24% and 6.69%, respectively. AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID The following table sets forth for 1995 and 1994 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for Bancorp.
Year ended December 31, 1995 1994 ---------------------------------- ------------------------------------ Interest Average Interest Average Average income or yield or Average income or yield or Balance(1) Expense Rates Balance(1) Expense Rates ---------- -------- -------- ---------- -------- -------- ASSETS: (Dollars in thousands) Interest-earning due from banks $ 5,971 $ 352 5.90% $ 2,498 $ 110 4.40% Investment securities - taxable 40,116 2,403 5.99 36,632 1,927 5.26 Investment securities - tax-exempt(2) 24,159 1,827 7.56 23,040 1,866 8.10 Federal funds sold 5,618 317 5.64 3,349 131 3.91 Loans and loans held for sale(3) 176,384 20,909 11.85 139,672 16,003 11.46 -------- ------- --------- ------- Total interest-earning assets/interest income 252,248 25,808 10.23 205,191 20,037 9.77 Reserve for loan losses (1,824) (1,652) Cash and due from banks 16,975 14,562 Premises and equipment, net 8,477 5,981 Other real estate owned 22 957 Other assets 5,854 4,236 -------- -------- Total assets $281,752 $229,275 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Savings and interest-bearing demand deposits $107,983 3,352 3.10 $101,256 2,333 2.30 Time deposits 71,912 4,146 5.77 47,258 2,106 4.46 Short-term borrowings 13,823 861 6.23 4,259 174 4.09 Long-term debt 9,200 645 7.01 7,410 559 7.54 -------- ------- -------- ------ Total interest-bearing liabilities/interest expense 202,918 9,004 4.44 160,183 5,172 3.23 Demand deposits 53,399 47,406 Other liabilities 2,133 2,984 -------- -------- Total liabilities 258,450 210,573 Shareholders' equity 23,302 18,702 -------- -------- Total liabilities and shareholders' equity $281,752 $229,275 ======== ======== Net interest income(2) $16,804 $14,865 ======= ======= Net interest spread(2) 5.79% 6.54% ===== ===== Net interest margin(2) 6.66% 7.24% Average interest-earning assets to average interest-bearing liabilities 124% 128%
(1) Average balances are based on daily averages and include nonaccrual loans. (2) Average yield on nontaxable securities, net interest spread and net interest margin have been computed on a 34% tax-equivalent basis. (3) Nonaccrual loans ($631,100 in 1995 and $783,200 in 1994) 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 totalled $2,541,800 in 1995 and $2,958,600 in 1994. ANALYSIS OF CHANGES IN INTEREST RATE DIFFERENTIAL The following table shows the dollar amount, on a tax-equivalent basis, of the increase (decrease) in the Company's interest income and interest expense for the years ended December 31, and attributes such dollar amounts to changes in volume and changes in interest rates. Changes attributable to the combined effect of volume and interest rate changes, which were immaterial, have been allocated equally between interest rate and volume.
1995 vs. 1994 1994 vs. 1993 Change in Change in net interest income net interest income due to due to ----------------------------- ----------------------------- Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- (In thousands) Interest income: Balances due from banks $ 179 $ 63 $ 242 $ (56) $ 48 $ (8) Investment securities - taxable 196 280 476 565 98 663 Investment securities - tax-exempt 88 (127) (39) 185 (135) 50 Federal funds sold 108 78 186 (21) 40 19 Loans 4,279 627 4,906 2,782 1,129 3,911 ------ ------ ------ ------ ------ ------ Total interest income 4,850 921 5,771 3,455 1,180 4,635 ------ ------ ------ ------ ------ ------ Interest expense: Deposits: Savings and interest-bearing demand 182 837 1,019 353 (198) 155 Time 1,260 780 2,040 293 202 495 Short-term borrowings 493 194 687 128 8 136 Long-term debt 130 (44) 86 58 226 284 ------ ------ ------ ------ ------ ------ Total interest expense 2,065 1,767 3,832 832 238 1,070 ------ ------ ------ ------ ------ ------ Net interest income $2,785 $ (846) $1,939 $2,623 $ 942 $3,565 ====== ====== ====== ====== ====== ======
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 NET INTEREST INCOME Bancorp's net interest income increased to $16.8 million, on a tax-equivalent basis, in 1995 as compared to $14.9 million in 1994 and $11.3 million in 1993. During 1995, average interest-earning assets increased to $252 million as compared to average interest-earning assets of $205 million in 1994 and $169 million in 1993. At the same time, average interest-bearing liabilities increased to $203 million in 1995 from $160 million in 1994 and $134 million in 1993. Because the increases in average interest-earning assets were greater than the increases in average interest-bearing liabilities in 1995 and 1994, Bancorp recognized an increase in net interest income. The average yield earned on interest-earning assets increased by .46% (46 basis points) in 1995, while the average rate paid on interest-bearing liabilities increased by 1.21% (121 basis points). Because the increase in the average rate paid on interest-bearing liabilities was greater than the increase in average yield earned on interest-earning assets, Bancorp experienced a decrease in net interest margin in 1995 as compared to 1994. The decrease in net interest margin in 1995 served to limit Bancorp's increase in net interest income. During 1995, Bancorp increased its interest-bearing deposits in anticipation of strong loan demand expected in Bancorp's markets. The increase in interest-bearing deposits was brought about by offering more competitive rates for those deposits. The average yield earned on interest-earning assets increased by 65 basis points in 1994 over the average yield earned in 1993, while the average rate paid on interest-bearing liabilities increased by only 18 basis points. This increase in the average yield earned over the average rate paid in 1994 contributed to the increase in net interest income in 1994 as compared to 1993. During 1995, Bancorp experienced a declining interest rate environment, caused primarily by the Federal Reserve Bank's decreases in its discount rate and the market reactions thereto. A significant portion of Bancorp's loans are immediately repricable upon a change in interest rates (58% and 52% of outstanding loans at December 31, 1995 and 1994, respectively), which provides a benefit to Bancorp in a rising interest rate market, but is a detriment to earnings in a falling interest rate market until the market stabilizes. An increase in the volume of loans can mitigate the negative effects of a falling interest rate market. During 1994, Bancorp experienced a rising interest rate environment, and recognized the favorable impact on its net interest income and net interest margin. Centennial Mortgage established a residential mortgage construction lending department during 1994 to establish relationships with home builders in the Eugene/Springfield and Portland-area markets and to attempt to generate additional permanent loan activity as the houses-under-construction are sold. Management recognizes the lending risks associated with construction lending and has established a detailed approval process for builder lines of credit and has implemented a continuing review of construction in progress to monitor construction loan activity. Increases in interest rates could adversely affect demand for construction lending, as well as the ability of borrowers to sell the houses when completed, and also could impact Centennial Mortgage's permanent mortgage lending activity. PROVISION FOR LOAN LOSSES Management's policy is to maintain an adequate reserve for loan losses. In 1995, Bancorp charged a $350,000 loan loss provision to income, as compared to $315,500 in 1994 and $310,000 in 1993. In 1995, loan charge-offs, net of recoveries were $121,800, as compared to loan charge-offs, net of recoveries of $129,700 in 1994 and loan recoveries, net of loans charged off of $126,500 in 1993. Bancorp's reserve for loan losses was $1.9 million at December 31, 1995, as compared to $1.7 million at December 31, 1994 and $1.5 million at December 31, 1993. The ratio of the reserve for loan losses to total nonperforming loans was 172%, 192% and 142% at December 31, 1995, 1994 and 1993, respectively. Management attributes the relatively low levels of loans charged off, net of recoveries, during 1995, 1994 and 1993 to the loan approval processes and monitoring systems implemented in prior years. Management continues its efforts to collect amounts previously charged off and to originate new loans of high quality. NONINTEREST INCOME Noninterest income decreased $585,300 in 1995 as compared to 1994, but increased $340,000 in 1994 as compared to 1993. The decrease in 1995 was primarily attributable to a decrease in activities of and eventual sale of Harding Fletcher, but was also attributable to a decrease in gains recognized on sales of residential mortgage loans originated by Centennial Mortgage. The increase in 1994 was primarily attributable to an increase in loan servicing fees and to a gain recognized on the sale of other real estate owned. The increase in 1994 was offset in part by decreases in gains recognized on sales of loans and sales of securities. Bancorp experienced a decrease of $190,900 in loan servicing fees in 1995 as compared to 1994. Loan servicing fees were collected by Bancorp primarily through Harding Fletcher, which was sold in August 1995. Loan servicing fees in 1994 increased $279,200 as compared to 1993. 1994 represented the only full year of Bancorp's ownership of Harding Fletcher. Bancorp experienced decreases of $171,200 in gains on sales of loans in 1995 as compared to 1994 and $84,000 in 1994 as compared to 1993. These decreases were primarily due to decreases in residential mortgage refinance lending activity through Centennial Mortgage, and competitive factors which increasingly limited the gain Bancorp was able to recognize on the sale of loans to third-party investors. Bancorp experienced a decrease of $241,800 in other noninterest income in 1995 as compared to 1994. This decrease was attributable in part to a reduction in lease income received (approximately $110,000 was collected for the nine months ended September 30, 1994) from the former Bancorp and Bank head office facility which was reclassified as an other asset in 1994, after Bancorp and the Bank vacated the building to occupy a new head office facility. This building was sold in September 1994 for a gain of $93,200. Other noninterest income also decreased in 1995 due to a decrease in insurance sales commissions received. Bancorp experienced a decrease of $311,700 in gains on sales of securities in 1994 as compared to 1993. This decrease was primarily due to Bancorp's ability to satisfy liquidity needs during the year from borrowings and retention of deposits rather than from liquidation of investment securities. This decrease was also due to the rising interest rate market experienced during 1994 which reduced Bancorp's ability to profitably realign the securities portfolio to improve its interest rate risk exposure. NONINTEREST EXPENSE Noninterest expense decreased $305,900 to $11.5 million in 1995 from $11.8 million in 1994. This decrease was primarily due to the decreases in legal and professional expenses, insurance expenses and other noninterest expense, and was due in part to the sale of Harding Fletcher in August 1995. This decrease was offset in part by an increase in premises and equipment expense and a write-down of an asset to its net realizable value. Noninterest expense increased $2.8 million in 1994 as compared to 1993. This increase was primarily due to the full year of operations of Harding Fletcher, which was acquired in July 1993, and to the opening of the Tigard branch of the Bank in August 1994. Salaries and employee benefits remained constant in 1995 as compared to 1994, but increased $1.7 million to $6.5 million during 1994 as compared to $4.8 million in 1993. The increase in 1994 was primarily due to the Harding Fletcher acquisition and the Tigard branch opening, but was also impacted by a deferred compensation agreement for the former President of CG Bancorp. Premises and equipment expense increased to $1.7 million in 1995 as compared to $1.3 million in 1994 and $920,000 in 1993. The increase in 1995 was primarily due to the additional expenses incurred in the Bank's occupancy of the Pacific Corporate Center Office permanent facility in Tigard, Oregon. The increase in 1994 was also due to the full year occupancy of Bancorp's and Centennial Bank's head office facility which opened in June 1993, and to a full year of owning Harding Fletcher. Data processing expense was $166,300 in 1995, $212,200 in 1994, and $132,000 in 1993. The increase in 1994 was primarily due to data processing equipment and software upgrade expenses incurred to accommodate the additional Tigard branch location of Centennial Bank and the two branches acquired through the merger of CG Bancorp into Bancorp. In addition, CG Bancorp incurred contract data processing expenses in 1994 prior to the merger. The decrease in 1995 resulted from efficiencies of operations after the merger as compared to operating the banks separately. Legal and professional fees decreased by $287,000 in 1995 as compared to 1994, due to the resolution of litigation outstanding against the Bank during the latter part of 1994. This decrease was offset in part by legal fees incurred in 1995 due to the sale of Harding Fletcher. Legal and professional fees increased $209,000 in 1994 as compared to 1993, due in part to the Bank's expenses associated with its appeal of certain litigation and resolution of other litigation, and in part to legal and professional fees associated with the merger of CG Bancorp. Insurance expenses decreased $195,400 to $324,100 in 1995 as compared to $519,500 in 1994. This decrease was due to an assessment rate reduction on Federal Deposit Insurance coverage. Deposit growth and assessment rate increases through 1994 contributed to an $89,000 increase in insurance expenses in 1994 as compared to 1993. Communications, advertising and printing and stationery expenses remained constant in 1995 as compared to 1994, but each of these expenses increased in 1994 as compared to 1993 ($63,000, $93,000 and $81,000, respectively), primarily due to Bancorp's increased business activities. Other noninterest expense remained constant in 1995 as compared to 1994, but increased $574,000 to $1.2 million as compared to $634,000 in 1993. The increase was primarily due to Bancorp's increased business activities and included approximately $80,000 of expenses associated with the merger with CG Bancorp. ASSET/LIABILITY MANAGEMENT Bancorp's results of operations depend substantially on its net interest income. Interest income and interest expense are affected by general economic conditions and by competition in the marketplace. The purpose of Bancorp's asset/liability management program is to provide stable net interest income growth by protecting Bancorp's earnings from undue interest rate risk. Exposure to interest rate risk arises from volatile interest rates, changes in the mix of assets (principally loans and investment portfolio securities) and liabilities (principally deposits) and maturities and repricing schedules of assets and liabilities. Assets and liabilities are described as rate sensitive when they can be repriced (i.e., changed in rate) within a given time period. The difference between the amount of interest-rate-sensitive assets and interest-rate-sensitive liabilities is referred to as the interest- rate-sensitive "GAP" for any given period of time. If an equal amount of assets and liabilities can be repriced during a specific period of time, the financial institution is said to be in a balanced rate-sensitivity position. A balanced position generally may be expected to result in less volatile swings in net interest income. Rising and falling interest rate environments can have various effects on a lender's net interest income, depending on the interest rate GAP, the relative changes in interest rates that occur when assets and liabilities are repriced, unscheduled repayments of loans, early withdrawals of deposits and other factors. As a general rule, in periods of falling interest rates, lenders with positive interest rate GAPs (i.e., those having more interest-rate-sensitive assets than liabilities) are more susceptible to a decline in net interest income. In periods of rising interest rates, lenders with negative interest rate GAPs (i.e., those having more interest-rate-sensitive liabilities than assets) are more likely to experience declines in net interest income. Management's objectives are to control interest rate risk and to achieve predictable and consistent growth in net interest income. Management meets regularly to monitor the composition of the balance sheet, to assess current and projected interest rate trends and to formulate strategies consistent with established objectives. Management attempts to limit exposure to interest rate risk by maintaining a balance sheet posture such that annual net interest income is not significantly affected by market fluctuations in interest rates. Bancorp uses simulation modeling to measure the effects of varying interest rate scenarios and balance sheet strategies on net interest income. The following table sets forth the dollar amount of maturing interest-earning assets and interest-bearing liabilities at December 31, 1995, and the difference between them for the maturing or repricing periods indicated. The amounts in the table are derived from Bancorp's internal data and, although the information may be useful as a general measure of interest rate risk, the data could be significantly affected by external factors such as prepayments of loans or early withdrawals of deposits. Each of these may greatly influence the timing and extent of actual repricing of interest-earning assets and interest-bearing liabilities. Management does not consider savings and negotiable order of withdrawal ("NOW") accounts to be interest-rate-sensitive. Excluding those accounts, Bancorp's variable-rate assets exceed variable-rate liabilities, and its fixed-rate assets exceed fixed-rate liabilities.
December 31, 1995 Amount maturing or repricing within: ---------------------------------------------------------- Three Less than months to three less than One to Over five months one year five years years Total --------- --------- ---------- --------- -------- (Dollars in thousands) Interest-earning assets: Fixed-rate loans $ 7,875 $ 16,311 $38,620 $16,756 $ 79,562 Variable-rate loans 99,846 1,725 8,766 1,191 111,528 Investment securities 5,386 13,809 44,468 9,261 72,924 Other interest-earning assets 14,730 -- -- -- 14,730 -------- -------- ------- ------- -------- Total interest-earning assets 127,837 31,845 91,854 27,208 278,744 Cash and due from banks 21,991 Other noninterest-earning assets 16,729 Total assets $317,464 Interest-bearing liabilities: Savings and interest-bearing demand deposits 112,344 -- -- -- $112,344 Certificates of deposit of $100,000 or more 6,253 19,449 1,472 -- 27,174 Other time accounts 13,792 36,235 7,736 21 57,784 Short-term borrowings 3,419 8,000 -- -- 11,419 Long-term debt -- -- -- 9,200 9,200 -------- -------- ------- ------- -------- Total interest-bearing liabilities 135,808 63,684 9,208 9,221 217,921 Other noninterest-bearing liabilities 73,153 Shareholders' equity 26,390 Total liabilities and shareholders' equity $317,464 ======== Interest rate GAP $ (7,971) $(31,839) $82,646 $17,987 ========= ========= ======= ======= Cumulative interest rate GAP $ (7,971) $(39,810) $42,836 $60,823 ========= ======== ======= ======= GAP ratio (GAP/total assets) (2.51)% (10.03)% 26.03% 5.67% Cumulative GAP ratio (2.51)% (12.54)% 13.49% 19.16%
The following table presents the aggregate maturities of loans in each major category of Bancorp's loan portfolio at December 31, 1995. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments.
Due ---------------------------------------- After one Total Within but within After loans by Loan category one year five years five years category - ------------- --------- ---------- ---------- -------- (Dollars in thousands) Commercial $ 58,803 $14,993 $ 4,457 $ 78,253 Real estate - mortgage 19,493 22,053 13,085 54,631 Real estate - construction 39,972 4,031 -- 44,003 Installment 3,572 2,274 83 5,929 Loans held for sale -- -- 4,573 4,573 Lease financing 124 2,444 118 4,001 Other -- 311 -- 311 Less deferred loan fees (234) (277) (100) (611) ------- ------- ------- -------- Total loans by maturity $121,607 $47,386 $22,097 $191,090 ======== ======= ======= ========
Of Bancorp's $69.5 million of loans that mature after one year, a total of $55.4 million (79.7%) are fixed-rate loans, and a total of $14.1 million (20.3%) are variable-rate loans. At December 31, 1995, $79.6 million (approximately 41.7% of Bancorp's loan portfolio) had fixed interest rates and $111.5 million (approximately 58.3%) had variable interest rates. PROVISION FOR INCOME TAXES Bancorp's provision for income taxes was $2.1 million in 1995, $1.5 million in 1994 and $1.2 million in 1993. Bancorp's effective tax rates for financial reporting were 32.0% in 1995, and 30.5% in 1994 and 1993. The effective tax rate varies from the federal statutory rate of 34% primarily because of nontaxable interest income and state income taxes. See Note 14 of Notes to Consolidated Financial Statements. LIQUIDITY AND SOURCES OF FUNDS Bancorp's primary sources of funds are customer deposits, sales and maturities of investment securities, loan sales, loan repayments, net income and the use of federal funds markets. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments, which are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions and other factors, are not. The Bank's deposits increased to $268 million at December 31, 1995 from $216 million at December 31, 1994 and $192 million at December 31, 1993, primarily because of an ongoing business development program, and expansion of the Bank's presence in the Portland-area through operation of the Pacific Corporate Center Office in Tigard. Net loans and loans held for sale increased to $189 million at December 31, 1995 from $160 million at December 31, 1994 and $126 million at December 31, 1993. These increases were primarily due to the Bank's business development activities and the real estate construction program initiated by Centennial Mortgage in 1994. The Bank maintains federal funds lines with correspondent banks as a backup source of temporary liquidity. At December 31, 1995, the Bank had $16 million of federal funds lines available to draw against on an uncollateralized basis. No borrowings were outstanding under the federal funds lines at that date. During 1994, the Bank obtained a cash management credit facility from the FHLB in the amount of $9.8 million. The credit facility increased and, at December 31, 1995, the Bank had $23.5 million of credit available from the FHLB. The credit facility is limited to 10% of the Bank's assets, measured on a quarterly basis, and is collateralized by the FHLB stock owned by the Bank and by all its other assets. Management anticipates that Bancorp will continue to rely on customer deposits, sales and maturities of investment securities, loan sales, loan repayments, retained earnings and federal funds markets to provide liquidity. Although deposit balances have shown historical growth, such balances may be influenced by changes in the banking industry, interest rates available on other investments, general economic conditions, competition and other factors. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets. The sources of such funds would be federal funds purchased and borrowings from the FHLB, as discussed above. CAPITAL RESOURCES Total shareholders' equity increased to $26.4 million at December 31, 1995 from $19.2 million at December 31, 1994 and $17.4 million at December 31, 1993. Average shareholders' equity was 8.27% of average assets in 1995 as compared to 8.16% in 1994 and 8.36% in 1993. 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 impact 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. FORM 10-K Copies of Bancorp's annual report on Form 10-K required to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 are available to shareholders at no charge upon written request to: Michael J. Nysingh, Chief Financial Officer, Centennial Bancorp, P.O. Box 1560, Eugene, Oregon 97440. MARKET FOR COMMON STOCK Bancorp's Common Stock has been quoted on the Nasdaq National Market since 1989. From 1986 to 1989, Bancorp's Common Stock was traded through the over-the-counter Nasdaq market. 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, 1995: First quarter $ 9.74 $7.28 Second quarter 8.87 8.23 Third quarter 9.77 8.23 Fourth quarter 12.73 8.86 Year ended December 31, 1994: First quarter $ 9.00 $7.15 Second quarter 9.37 7.87 Third quarter 9.05 8.07 Fourth quarter 8.46 7.28 At February 28, 1995, Bancorp had 4,684,742 shares of Common Stock outstanding held by 1,300 shareholders of record. QUARTERLY FINANCIAL DATA (In thousands, except per share amounts)
First Second Third Fourth 1995 Quarter Quarter Quarter Quarter Total - --------------- ------- ------- ------- ------- ------ Interest income $5,621 $6,225 $6,468 $6,960 $25,274 Interest expense 1,900 2,181 2,389 2,534 9,004 ------ ------ ------ ------ ------- Net interest income 3,721 4,044 4,079 4,426 16,270 Loan loss provision 75 75 125 75 350 Income before income taxes 1,381 1,532 1,803 1,977 6,693 Net income 939 1,037 1,236 1,339 4,551 Earnings per share: Primary $ .20 $ .22 $ .26 $ .27 $ .95 Fully diluted $ .19 $ .20 $ .24 $ .25 $ .88 1994 Interest income $3,967 $4,801 $5,044 $5,662 $19,474 Interest expense 1,042 1,217 1,354 1,559 5,172 ------ ------ ------ ------ ------- Net interest income 2,925 3,584 3,690 4,103 14,302 Loan loss provision 83 87 79 67 316 Income before income taxes 1,039 1,195 1,475 1,330 5,039 Net income 708 812 993 989 3,502 Earnings per share: Primary $ .15 $ .17 $ .21 $ .21 $ .74 Fully diluted (1) $ .15 $ .16 $ .19 $ .17 $ .71
(1) Convertible Debentures were issued in the first quarter of 1994. EX-21 7 LIST OF SUBSIDIARIES Exhibit 21.1 Centennial Bancorp List of Subsidiaries Names Under State of Which Name Incorporation Does Business --------- ------------- -------------- Centennial Bank Oregon N/A Centennial Mortgage Co. Oregon N/A EX-23 8 AUDITOR'S CONSENT Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in each of the Registration Statements of Centennial Bancorp's Incentive Stock Option Plan on Form S-8 and Centennial Bancorp's Nonemployee Directors Stock Option Plan on Form S-8 of our report dated February 1, 1996, on our audits of the consolidated financial statements of Centennial Bancorp and subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which report is incorporated by reference in this Annual Report on Form 10-K. Coopers & Lybrand, L.L.P. Eugene, Oregon March 27, 1996 EX-27 9 FDS
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, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 YEAR DEC-31-1995 DEC-31-1995 21,991,459 6,000,000 8,730,000 0 76,964,342 0 0 186,517,192 (1,928,372) 317,463,715 267,880,292 11,419,123 2,574,240 9,200,000 9,302,260 0 0 17,087,800 317,463,715 20,908,425 3,440,648 925,095 25,274,168 7,498,002 9,004,456 16,269,712 350,000 65,895 11,503,970 6,693,118 4,551,318 0 0 4,551,318 .95 .88 0 478,000 645,000 0 0 1,700,130 161,891 40,133 1,928,372 1,928,372 0 0
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