10-K405

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, 2001
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 No. 0-10489

CENTENNIAL BANCORP

(Name of registrant as specified in its charter)

Oregon
(State of Incorporation) 93-0792841
(IRS Employer Identification No.)

One S.W. Columbia Street
Portland, Oregon 97258
(Address of principal executive offices)

Registrant’s telephone number: (503) 973-5556

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, without par value
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $189,523,038 aggregate market value as of February 22, 2002, 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: 24,898,734 shares of Common Stock on February 22, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the issuer’s definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2002.

TABLE OF CONTENTS

PART I
	Item 1. DESCRIPTION OF BUSINESS
	Item 2. DESCRIPTION OF PROPERTIES
	Item 3. LEGAL PROCEEDINGS
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
	Item 5. MARKET FOR BANCORP’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
	Item 6. SELECTED FINANCIAL DATA
	Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
	Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF BANCORP
	Item 11. EXECUTIVE COMPENSATION
	Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
	Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
INCENTIVE STOCK OPTION AGREEMENT
INCENTIVE STOCK OPTION AGREEMENT
SUBSIDIARIES OF REGISTRANT
CONSENT OF SYMONDS, EVANS & COMPANY, P.C.
CERTAIN FACTORS TO CONSIDER

Centennial Bancorp
Form 10-K
Annual Report

TABLE OF CONTENTS

		Page
PART I
Item 1.	DESCRIPTION OF BUSINESS	3
Item 2.	DESCRIPTION OF PROPERTIES	21
Item 3.	LEGAL PROCEEDINGS	21
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS	21
PART II
Item 5.	MARKET FOR BANCORP’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS	21
Item 6.	SELECTED FINANCIAL DATA	22
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	27
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	49
PART III
	(Items 10 through 13 are incorporated by reference from Centennial Bancorp’s definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2002)
Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF BANCORP	49
Item 11.	EXECUTIVE COMPENSATION	49
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	49
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	49
PART IV
Item 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K	49
SIGNATURES		50

2

PART I

This Annual Report contains certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that expressly or implicitly predict future results, performance or events are forward-looking. In addition, the words “anticipate,” “believe,” “intend,” “expect” and similar expressions identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause or contribute to such differences include, but are not limited to, the following: general economic conditions, either nationally or regionally, that could result in increased loan losses; the ability to attract new deposits and loans; interest rate fluctuations; competitive factors and pricing pressures; potential delays or other problems in implementing Bancorp’s growth and expansion strategy; changes in legal and regulatory requirements; changes in technology; and other factors described in this and other Bancorp reports and statements, including, but not limited to, Exhibit 99.1 to this Form 10-K, which is incorporated herein by reference.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Bancorp does not intend to update these forward-looking statements.

Item 1. DESCRIPTION OF BUSINESS

General

Centennial Bancorp (“Bancorp”), an Oregon corporation, was organized as a bank holding company in 1981.

Bancorp has one wholly owned subsidiary, Centennial Bank (“Centennial”). Effective May 31, 2001, Centennial Mortgage Co., a wholly owned subsidiary of Bancorp at that date, was merged into Centennial. Unless the context clearly suggests otherwise, references in this Annual Report on Form 10-K to “Bancorp” include Centennial Bancorp and its subsidiary.

All share and per-share information has been restated to give retroactive effect to the 5% common stock splits declared in January 2002 and July 2001, the 10% common stock split declared in January 2001, and for various stock splits and stock dividends declared in prior years.

Centennial

Centennial is a full-service commercial bank organized under the Oregon Bank Act. Centennial provides a broad range of depository and lending services to commercial, industrial and agricultural enterprises, financial institutions, governmental entities and individuals. Deposit-taking and lending activities are primarily directed to the communities in which offices are located. Centennial’s primary marketing focus is on small- to medium-sized businesses and on professionals in those communities.

At December 31, 2001, based on total assets, Centennial was the third largest commercial bank headquartered in Oregon. Centennial operates 22 branches: three full-service and seven limited-service branches in Portland, Oregon, including the Mary’s Woods retirement center branch opened in February 2001 and the Cherry Wood Village retirement center branch opened in August 2001; one full-service branch each in the Beaverton, Clackamas and Tigard suburbs of Portland; two full-service branches in Vancouver, Washington; one full-service branch in Salem, Oregon; four full-service branches in Eugene, Oregon; one full-service branch in adjacent Springfield, Oregon; and one full-service branch in Cottage Grove, Oregon. During February 2002, Centennial opened a full-service branch in Gresham, Oregon, also a suburb of Portland.

At December 31, 2001, Centennial also operated six commercial banking centers, with one each in Portland, Eugene, Tigard, Clackamas, Vancouver, and the Beaverton center which opened in February 2001.

Centennial 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 historically generating a substantial volume of loans. Average deposits increased from $649.0 million in 2000 to $716.3 million in 2001. Average net loans and loans held for sale increased from $664.2 million in 2000 to $670.3 million in 2001.

Deposit accounts at Centennial are insured up to applicable limits by the Federal Deposit Insurance Corporation (the “FDIC”). Centennial is not a member of the Federal Reserve System.

3

Centennial Mortgage

Effective May 31, 2001, Centennial Mortgage Co., a wholly owned subsidiary of Bancorp at that date, was merged into Centennial. Now operating through the real estate division of Centennial, and doing business as Centennial Mortgage, it began operations in 1987, originating conventional and federally insured residential mortgage loans for sale in the secondary market. Centennial Mortgage originated $225.3 million, $142.0 million and $152.5 million of mortgages in 2001, 2000 and 1999, respectively. Mortgage loans generally are sold without recourse or retention of servicing rights but may be subject to repurchase under certain circumstances. Centennial Mortgage also originates and administers loans for the acquisition, development and construction of commercial and residential real estate.

At December 31, 2001, the real estate division operated four Centennial Mortgage offices, including two in Portland and two in Eugene.

A trend of rising interest rates, which started in 1999 and continued into 2000, reversed in 2001. Changes in interest rates can affect demand for real estate acquisition, development and construction loans, as well as the repayment of those loans from the sale of completed properties. Changing interest rates can also have a significant effect on residential mortgage lending activity.

Net Interest Income

For most financial institutions, including Bancorp, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income relate to changes in “volume,” “spread” and “margin.” Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. During 2001, 2000 and 1999, Bancorp’s average interest-earning assets were $771.6 million, $737.2 million and $578.4 million, respectively. During these same years, Bancorp’s net interest margin on a tax-equivalent basis was 6.37%, 6.84% and 7.15%, respectively.

4

Average Balances and Average Rates Earned and Paid

The following table sets forth for 2001, 2000 and 1999 information with regard to average daily 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,
		2001								2000
					Interest		Average						Interest		Average
		Average			income or		yield or			Average			income or		yield or
(Dollars in thousands)		balance			expense		rates			balance			expense		rates
Assets
Interest-bearing deposits with banks		$	530		$	14		2.70	%	$	106		$	8		7.55	%
Investment securities taxable			54,293			3,373		6.21			36,699			2,268		6.18
Investment securities — non-taxable(1)			18,307			1,296		7.08			27,569			2,197		7.97
Federal funds sold			17,885			629		3.52			971			61		6.28
Loans and loans held for sale(2)			680,539			67,706		9.95			671,877			74,848		11.14
Total interest-earning assets/interest income(1)			771,554			73,018		9.46			737,222			79,382		10.77
Allowance for loan losses			(10,280	)							(7,657	)
Cash and due from banks			36,306								34,969
Premises and equipment, net			15,609								15,652
Other assets			27,234								20,146
	Total assets	$	840,423							$	800,332
Liabilities and Shareholders’ Equity
Savings and interest-bearing demand deposits		$	331,396			9,278		2.80		$	300,119			11,045		3.68
Time deposits			244,823			13,394		5.47			233,335			13,772		5.90
Borrowings			21,522			1,233		5.73			63,690			4,164		6.54
	Total interest-bearing liabilities/interest expense		597,741			23,905		4.00			597,144			28,981		4.85
Demand deposits			140,098								115,545
Other liabilities			6,089								4,836
	Total liabilities		743,928								717,525
Shareholders’ equity			96,495								82,807
	Total liabilities and shareholders’ equity	$	840,423							$	800,332
Net interest income(1)					$	49,113							$	50,401
Net interest spread(1)								5.46	%							5.92	%
Net interest margin(1)								6.37	%							6.84	%
Average interest-earning assets to average interest-bearing liabilities								129	%							123	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

		Year ended December 31,
		1999
					Interest		Average
		Average			income or		yield or
(Dollars in thousands)		balance			expense		rates
Assets
Interest-bearing deposits with banks		$	104		$	8		7.69	%
Investment securities taxable			41,954			2,612		6.23
Investment securities — non-taxable(1)			28,155			2,172		7.71
Federal funds sold			5,937			280		4.72
Loans and loans held for sale(2)			502,272			54,134		10.78
Total interest-earning assets/interest income(1)			578,422			59,206		10.24
Allowance for loan losses			(5,399	)
Cash and due from banks			31,440
Premises and equipment, net			13,993
Other assets			16,547
	Total assets	$	635,003
Liabilities and Shareholders’ Equity
Savings and interest-bearing demand deposits		$	260,240			7,865		3.02
Time deposits			167,702			8,597		5.13
Borrowings			26,356			1,405		5.33
	Total interest-bearing liabilities/interest expense		454,298			17,867		3.93
Demand deposits			106,317
Other liabilities			4,948
	Total liabilities		565,563
Shareholders’ equity			69,440
	Total liabilities and shareholders’ equity	$	635,003
Net interest income(1)					$	41,339
Net interest spread(1)								6.31	%
Net interest margin(1)								7.15	%
Average interest-earning assets to average interest-bearing liabilities								127	%

(1)	Average yield on non-taxable securities, interest income, net interest income, net interest spread and net interest margin have been computed on a 34% tax-equivalent basis.
(2)	Nonaccrual loans have been included in the computation of average loans and loans held for sale. Loan fees recognized and included in interest income totaled $7.4 million, $7.0 million and $7.3 million in 2001, 2000 and 1999, respectively.

5

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.

		2001 vs. 2000									2000 vs. 1999
		Change in net interest income due to									Change in net interest income due to
(In thousands)		Volume			Rate			Total			Volume			Rate			Total
Interest income:
Balances due from banks		$	21		$	(15	)	$	6		$	—		$	—		$	—
Investment securities — taxable			1,091			14			1,105			(326	)		(18	)		(344	)
Investment securities — non-taxable			(697	)		(204	)		(901	)		(46	)		71			25
Federal funds sold			826			(258	)		568			(273	)		54			(219	)
Loans and loans held for sale			913			(8,055	)		(7,142	)		18,587			2,127			20,714
	Total interest income		2,154			(8,518	)		(6,364	)		17,942			2,234			20,176
Interest expense:
Deposits:
	Savings and interest-bearing demand		1,013			(2,780	)		(1,767	)		1,336			1,844			3,180
	Time		653			(1,031	)		(378	)		3,619			1,556			5,175
Borrowings			(2,586	)		(345	)		(2,931	)		2,216			543			2,759
	Total interest expense		(920	)		(4,156	)		(5,076	)		7,171			3,943			11,114
Net interest income		$	3,074		$	(4,362	)	$	(1,288	)	$	10,771		$	(1,709	)	$	9,062

Market Areas

The greater Portland area, where Centennial has eight full-service branches and seven limited-service branches, five commercial banking centers, and two mortgage banking offices, is one of Bancorp’s two principal market areas. The metropolitan area, including Vancouver, Washington, has a population of approximately 1.9 million, and a diversified economy that allows for dilution of loan portfolio risk. The Portland area, which has historically provided excellent growth opportunity, experienced depressed economic conditions during 2001.

Bancorp’s other principal market area, with five full-service bank branches, one commercial banking center, and two mortgage lending offices, is the Eugene/Springfield area at the southern end of Oregon’s Willamette Valley. The combined population of Eugene and Springfield is approximately 190,000. The area’s economy depends primarily upon federal, state and local governments, educational institutions, forest products, general manufacturing (especially small manufacturing and high-technology industries) and health care.

Bancorp also has a bank branch in downtown Salem, Oregon. Salem is the state capitol with a population of approximately 130,000 and is located in the Willamette Valley about midway between Portland and Eugene. The area economy is highly dependent on the state government although educational institutions, federal and local governments, healthcare and food processing are also very significant.

Centennial also has a branch office in Cottage Grove, Oregon, located approximately 20 miles south of Eugene and Springfield. The population of Cottage Grove is approximately 8,000. Its economy depends primarily upon forest products, general manufacturing and agriculture.

6

Lending Activities

General

Bancorp provides a broad range of commercial and real estate lending services. The primary focus is to provide commercial loans to small- to medium-sized businesses with annual revenues up to $100 million, and to professionals. Commercial and residential real estate construction lending, as well as residential mortgage loan origination and sales, are also important aspects of Bancorp’s lending activities. Bancorp makes consumer loans, primarily to accommodate existing customers, but does not actively pursue such business. Most loans are made to customers in Bancorp’s trade areas.

Bancorp maintains sound loan underwriting standards with written loan policies, conservative individual lending limits and, depending on the size of the credit request, reviews by Centennial’s Senior Loan Committee and the Director Loan Committee of Centennial’s Board of Directors. Underwriting standards are designed to achieve a high-quality loan portfolio, compliance with lending regulations and the desired mix of loan maturities and industry concentrations. Bancorp 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 the loan portfolio (loans and loans held for sale) by type of loan at December 31 for each of the last five years:

	December 31,
(In thousands)	2001			2000			1999			1998			1997
Commercial	$	259,961		$	273,867		$	219,588		$	163,577		$	146,594
Real estate — construction		212,577			261,727			227,388			150,816			88,842
Real estate — mortgage		163,525			147,737			129,221			94,475			87,357
Installment		11,188			9,379			8,409			7,073			6,603
Loans held for sale		12,394			10,890			6,155			11,039			5,585
Lease financing		4,833			4,607			4,868			1,897			3,649
Other		1,743			5,563			4,199			3,137			1,995
Total loans and loans held for sale		666,221			713,770			599,828			432,014			340,625
Less allowance for loan losses		(10,506	)		(9,150	)		(6,165	)		(4,451	)		(3,349	)
Loans receivable, net	$	655,715		$	704,620		$	593,663		$	427,563		$	337,276

The following table presents the aggregate maturities of loans in each major category of the loan portfolio at December 31, 2001. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments.

	Due		Due after				Total
	within		one but within		Due after		loans by
(In thousands)	one year		five years		five years		category
Loan category
Commercial	$	166,653	$	62,619	$	30,689	$	259,961
Real estate — construction		175,858		21,574		15,145		212,577
Real estate — mortgage		22,595		46,645		94,285		163,525
Installment		3,093		7,700		395		11,188
Loans held for sale		—		—		12,394		12,394
Lease financing		380		4,453		—		4,833
Other		1,310		91		342		1,743
Total loans by maturity	$	369,889	$	143,082	$	153,250	$	666,221

7

Of the $296.3 million of loans that mature after one year, a total of $233.0 million (approximately 79%) are fixed-rate loans, and a total of $63.3 million (approximately 21%) are variable-rate loans.

At December 31, 2001, $539.4 million of loans (approximately 81% of the portfolio) had fixed interest rates, and $126.8 million (approximately 19%) had variable interest rates. Loans with an original floating or adjustable rate that reached a ceiling rate or floor rate at December 31, 2001 are considered to be fixed interest rate loans.

Commercial Loans

Commercial loans that are not secured by real estate are the largest category of loans. Areas of emphasis include 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, 2001, approximately 18% of Bancorp’s commercial loans had floating or adjustable interest rates; the remaining 82% 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, 2001 were $260.0 million, compared to $273.9 million at December 31, 2000 and $219.6 million at December 31, 1999. The decline of commercial loans in 2001 was primarily due to a decrease in loan demand, due to the weakening economy in the market areas served. Nonaccrual loans in this category totaled $2.9 million at December 31, 2001 ($1.2 million at December 31, 2000). There were no restructured loans in this category at December 31, 2001 or 2000.

Real Estate Construction Loans

Real estate construction loans are the second largest category of loans. This category includes loans that finance land acquisition, residential lot development, construction of single-family and multi-family residential properties, and the development and construction of a wide range of commercial real estate projects. Land acquisition and lot development loans generally have maturities of 12 to 18 months while residential construction loans generally have maturities of 12 months. Commercial construction loans normally have 12 to 18 month maturities with extension options when justified. At December 31, 2001, 24% of the outstanding loans in this category had variable interest rates with the remaining 76% having fixed rates.

Construction financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. 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, and that the value of the completed project meets or exceeds that of initial estimates. 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, 2001, real estate construction loans were $212.6 million, compared to $261.7 million and $227.4 million at December 31, 2000 and 1999, respectively. The decrease in 2001 was a result of Bancorp’s desire to reduce concentration risks in hotel and motel and assisted living facility projects, and the effect of a weakening regional economy. At December 31, 2001, nonaccrual loans in this category totaled $4.3 million ($5.7 million at December 31, 2000). The nonaccrual total was concentrated in loans to five borrowers, which were in the process of liquidation. The value of the real-estate collateral is believed adequate to support amounts outstanding, and loss potential is considered nominal. At December 31, 2001 and 2000, there were no restructured loans in this category.

Real Estate Mortgage Loans

Real estate mortgage loans represent Bancorp’s third largest category of loans. Of the $163.5 million of real estate mortgage loans outstanding at December 31, 2001, $141.9 million consisted of income property and commercial loans secured by real estate. Income property loans and commercial loans secured by real estate typically involve large balances to single borrowers or groups of related borrowers. These borrowers may be more sensitive to changes in economic conditions than residential mortgage loan customers.

At December 31, 2001, approximately 88% of Bancorp’s real estate mortgage loans had fixed interest rates; the other 12% had floating or adjustable interest rates. Maturities of the real estate mortgage loans usually range from one to ten years. Real estate mortgage loans outstanding increased to $163.5 million at December 31, 2001 from $147.7 million at December 31, 2000 and $129.2 million at December 31, 1999. Growth during 2001 and 2000 was primarily due to strategic emphasis on developing the income property and commercial real estate portion of the portfolio. At December 31, 2001, nonaccrual loans in this category totaled $434,000 ($336,000 at December 31, 2000). At December 31, 2001 and 2000, there were no restructured loans in this category.

8

Bancorp’s underwriting standards specify the following ranges of loan-to-value ratios for real estate loans, based on the financial strength of the borrower: 80% - 90% for loans secured by owner-occupied residences; 90% - 100% for loans secured by presold residences; 80% for other residential loans; and 65% - 75% for commercial real estate loans.

Bancorp originates SBA real estate loans on owner-occupied properties where the maturities may be up to 20 years, and the loan-to-value ratio may reach 90% of appraised value or cost, whichever is lower. Up to 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 frequently sold to secondary-market investors. At December 31, 2001, the amount of the non-guaranteed portion of these loans retained by Bancorp was not material.

Installment Loans

Bancorp does not actively solicit consumer loans, but makes such loans primarily as a convenience to existing customers. Included in the installment loan category are personal lines of credit, and consumer installment loans (such as for automobile purchases). Consumer loans may be secured or unsecured. Collections depend principally on the borrower’s financial condition or cash flow.

Installment loans were $11.2 million at December 31, 2001 compared to $9.4 million at December 31, 2000 and $8.4 million at December 31, 1999. These modest levels of installment loans to individuals were primarily due to Bancorp’s focus on lending to businesses and professionals and significant competition for consumer loans from the many credit unions, banks and finance companies in Bancorp’s market areas. At December 31, 2001, nonaccrual loans in this category totaled $10,000. There were no nonaccrual loans in this category at December 31, 2000. At December 31, 2001 and 2000, there were no restructured loans in this category.

Commitments and Contingent Liabilities

In the ordinary course of business, Bancorp enters into various types of transactions that include commitments to extend credit and standby letters of credit. Credit standards applied to commitments are the same as those used in all lending processes, and these commitments are included in lending risk evaluations. Collateral for these commitments may include cash, accounts receivable, inventory, equipment, securities and/or real estate.

Credit Authority and Loan Limits

All loans and other credit facilities are subject to credit and collateral approval procedures and loan amount limitations. Loan officers and lending unit managers have individual authority to approve loans in amounts up to established limits, ranging from $25,000 to $750,000. Credit requests in excess of those limits, or not in conformance with lending policies, are reviewed by successive levels of approval authority according to the total amounts involved. These authority levels include, by ascending approval limits, Credit Administration officers, the Senior Loan Committee, and the Director Loan Committee of Centennial’s Board of Directors. The Senior Loan Committee consists of senior management of Centennial. The Director Loan Committee has eight members including six non-employee directors, the President and CEO of Bancorp and Centennial, and Centennial’s Senior Credit Officer. All loans to executive officers and directors of Bancorp or Centennial must be approved by the Director Loan Committee and are reported to Centennial’s Board of Directors. Loans to these individuals in excess of $500,000 must be approved by Centennial’s Board of Directors.

Under Oregon law, permissible loans from a financial institution to one borrower are generally limited to 15% of the institution’s Tier 1 and Tier 2 capital, as defined by regulation. However, loans and other obligations up to an additional 10% of the institution’s capital may be made to the borrower if the obligations are secured by a first lien on real estate, and the obligation does not exceed 80% of the fair market value of the real estate as determined by an independent appraisal. At December 31, 2001, Centennial’s legal lending limit was $14.7 million (or $24.5 million if secured by a first lien on real estate). However, for internal policy purposes, Centennial’s lending limit is set at $7.0 million (or $9.0 million if secured by a first lien on real estate).

Loan pricing decisions are based on an evaluation of credit risk, cost of funds, operating and administrative costs, an allowance for loan losses, desired profit margin and other factors. Bancorp uses a computer-based pricing model that analyzes a borrower’s contribution to net earnings and return on equity.

Centennial sells loan participations to accommodate borrowers whose financing needs exceed lending limits, to diversify risk and manage liquidity. Centennial occasionally purchases participations in loans from correspondent banks. Policy prohibits aggregate purchased participations in excess of 10% of the loan portfolio.

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Non-performing Assets

Non-performing 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 non-performing assets at the end of each of the last five years:

		December 31,
(Dollars in thousands)		2001			2000			1999			1998			1997
Non-performing loans:
	Loans past due 90 days or more	$	—		$	481		$	2,163		$	1,043		$	402
	Nonaccrual loans		7,694			7,268			579			3,841			873
	Total non-performing loans		7,694			7,749			2,742			4,884			1,275
	Other real estate owned		1,104			602			413			105			—
	Total non-performing assets	$	8,798		$	8,351		$	3,155		$	4,989		$	1,275
Allowance for loans losses		$	10,506		$	9,150		$	6,165		$	4,451		$	3,349
Ratio of total non-performing assets to total assets			1.08	%		.98	%		.43	%		.87	%		.26	%
Ratio of total non-performing loans to total loans			1.15	%		1.09	%		.46	%		1.13	%		.38	%
Ratio of allowance for loan losses to total non-performing loans			137	%		118	%		225	%		91	%		263	%

The accrual of interest on a loan is discontinued when the future collection 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, interest previously accrued but uncollected is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. If interest on nonaccrual loans had been accrued, such income would have been approximately $659,000 in 2001, $1,226,000 in 2000 and $97,000 in 1999. Total interest income of $193,000, $318,000 and $27,500 was recognized on nonaccrual loans during 2001, 2000 and 1999, respectively.

OREO consists of real estate acquired through foreclosure or by a deed in lieu of foreclosure. Properties in OREO are carried at the lower of net realizable value or the principal balance of the related loan. Any excess of the loan balance over fair value of the property is charged to the allowance for loan losses. At December 31, 2001, OREO totaled $1,104,000 and consisted of three commercial properties. At December 31, 2000, OREO consisted of one commercial property and one residential property and totaled $602,000.

Analysis of the Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of the losses inherent in the loan portfolio. The allowance is based primarily on management’s evaluation of the overall quality and risk characteristics of Bancorp’s loan portfolio, which is dependent upon numerous interrelated factors including present non-performing and delinquent loans, borrowers’ perceived abilities to repay, value of collateral, general and local economic conditions and historical loan loss experience.

The Director Loan Committee reviews the adequacy of the allowance for loan losses quarterly. Although determination of the adequacy of the allowance involves substantial subjective judgment based on the Committee’s analysis of the risk characteristics of the entire loan portfolio, the Committee also uses a combination of quantitative methods to analyze the adequacy of the allowance.

One part of the analysis uses credit risk ratings and related loss factor multipliers to calculate a range of potential losses in the portfolio. Credit contingencies, including letters of credit and commitments, are also analyzed by applying loss factor multipliers according to contingency type.

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A second part of the analysis measures impairment and provides a specific valuation allowance for potential loss. The amount of impairment is specifically determined for all loans of $100,000 or more that are identified as impaired. A loan is considered impaired when, based on current information and events, it is probable that all amounts due (both principal and interest) will be unable to be collected according to the contractual terms of the loan agreement. All collateral-dependent loans are measured for impairment based on the estimated fair value of the collateral. The measurement of other impaired loans is based on the present value of expected future cash flows discounted at the historical effective interest rate.

The amounts calculated by the quantitative methods are then compared by the Committee to the allowance for loan losses in evaluating the adequacy of the allowance. Although a range is determined quantitatively, the final amount of the allowance involves subjective judgment including the risk characteristics of the entire loan portfolio, the current economic environment, and the current regulatory environment.

Management believes the allowance for loan losses is adequate to cover anticipated losses and is in accordance with accounting principles generally accepted in the United States. There can be no assurance, however, that management will not decide to increase the allowance for loan losses or that regulators will not require the allowance to be increased, either of which events could adversely affect results of operations. Further, there can be no assurance that actual loan losses will not exceed the allowance.

The following table sets forth information regarding changes in the allowance for loan losses for each of the last five years:

			At or for the year ended December 31,
(Dollars in thousands)			2001			2000			1999			1998			1997
Loans and loans held for sale at year-end			$	666,221		$	713,770		$	599,828		$	432,014		$	340,625
Average loans and loans held for sale				680,539			671,877			502,272			387,914			299,976
Allowance for loan losses, beginning of year				9,150			6,165			4,451			3,349			2,600
Charge-offs:
	Commercial and other			(1,580	)		(649	)		(559	)		(370	)		(556	)
	Real estate — construction			(956	)		(200	)		—			—			—
	Real estate — mortgage			(51	)		—			(110	)		—			—
	Installment			(80	)		(58	)		(3	)		(82	)		(2	)
		Total charge-offs		(2,667	)		(907	)		(672	)		(452	)		(558	)
Recoveries:
	Commercial and other			64			91			43			43			55
	Real estate — construction			—			—			—			—			—
	Real estate — mortgage			1			—			—			—			—
	Installment			8			1			43			11			2
		Total recoveries		73			92			86			54			57
Net loans charged off				(2,594	)		(815	)		(586	)		(398	)		(501	)
Loan loss provision				3,950			3,800			2,300			1,500			1,250
Allowance for loan losses at year-end			$	10,506		$	9,150		$	6,165		$	4,451		$	3,349
Ratio of net loans charged off to average loans outstanding				(.38	)%		(.12	)%		(.12	)%		(.10	)%		(.17	)%
Ratio of allowance for loan losses to loans at year-end				1.58	%		1.28	%		1.03	%		1.04	%		.98	%

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Loan losses are charged against the allowance for loan losses when ultimate recovery is unlikely. Experience has shown that, at any particular time, loan losses may exist in a loan portfolio that have not yet been identified. For this reason, although management analyzes specific loans in determining the adequacy of its allowance for loan losses, it does not allocate the allowance to specific groups or categories of loans. Management estimates, however, that the allocation of the allowance for loan losses by loan category, and the loans in each category as a percentage of total gross loans, at the end of each of the last five years was as set forth in the following table:

(Dollars in thousands)		2001				2000				1999				1998				1997
Commercial and other		$	6,756	41.9	%	$	5,500	39.8	%	$	3,700	38.1	%	$	2,701	39.1	%	$	1,999	45.2	%
Real estate — construction			2,500	31.9			2,750	36.7			1,850	37.9			1,350	34.9			1,000	26.6
Real estate — mortgage			950	24.5			650	22.2			450	22.6			275	24.4			250	26.2
Installment			200	1.7			150	1.3			100	1.4			75	1.6			50	2.0
Unallocated			100	—			100	—			65	—			50	—			50	—
	Total	$	10,506	100.0	%	$	9,150	100.0	%	$	6,165	100.0	%	$	4,451	100.0	%	$	3,349	100.0	%

Investment Activities

The primary objectives of the investment portfolio are to maintain liquidity and to generate after-tax profits consistent with the risk guidelines established by the Board of Directors. At December 31, 2001, Voyageur Asset Management, Inc. of Minneapolis, Minnesota advised Bancorp with respect to the investment portfolio. Bancorp has no other relationship with Voyageur Asset Management, Inc.

The following table provides the carrying values of the investment portfolio at the end of each of the last three years:

(In thousands)		2001		2000		1999
U.S. Treasury securities		$	—	$	500	$	1,399
U.S. Government agencies			15,035		37,816		26,534
States and political subdivisions			23,139		16,259		27,316
Corporate bonds			5,175		2,033		2,205
Mortgage-backed securities			32,523		3,199		1,905
Other			628		556		—
	Total investment securities	$	76,500	$	60,363	$	59,359

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The following table provides the carrying values, maturities and weighted average yields of the investment securities at December 31, 2001, all of which are classified as available for sale:

		Carrying		Weighted
		value (fair		average
(Dollars in thousands)		market value)		yield
Type and maturity
U.S. Government agencies
Due after 1 but within 5 years		$	15,035		4.47	%
States and political subdivisions
Due within 1 year			2,059		4.89
Due after 1 but within 5 years			14,184		3.48
Due after 5 but within 10 years			386		5.58
Due after 10 years			6,510		5.00
	Total states and political subdivisions		23,139		4.08
Corporate bonds
Due within 1 year			255		6.36
Due after 1 but within 5 years			4,920		5.20
	Total corporate bonds		5,175		5.25
Mortgage-backed securities
Due after 1 but within 5 years			1,305		5.50
Due after 10 years			31,218		5.88
	Total mortgage-backed securities		32,523		5.86
Other			628		N/A
	Total investment securities	$	76,500		5.00	%(1)

(1) Excludes weighted average yield of other securities.

Deposits

Centennial offers a variety of accounts for depositors designed to attract short-term and long-term deposits. These accounts include certificates of deposit (“CDs”), savings accounts, money market accounts, checking and interest-checking accounts and individual retirement accounts. These accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits.

Centennial offers a special account for customers age 50 or older called the “50+ Account.” This account is designed to attract customers in this age group who generally have higher than average deposits and favorable ability to repay borrowings. Centennial 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 lending activities.

The following table presents the average balances for each major category of deposits and the weighted average interest rates paid for interest-bearing deposits for the years ended December 31, 2001, 2000 and 1999:

		2001					2000					1999
		Average					Average					Average
(Dollars in thousands)		Balance		Rate			Balance		Rate			Balance		Rate
Noninterest-bearing demand		$	140,098		N/A		$	115,545		N/A		$	106,317		N/A
Interest-bearing demand			260,067		.59	%		252,620		3.46	%		231,861		2.99	%
Savings			71,329		.56			47,499		4.85			28,379		3.26
CDs			244,823		5.47			233,335		5.90			167,702		5.13
	Total	$	716,317		3.16	%	$	648,999		3.82	%	$	534,259		3.08	%

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The following table shows the dollar amount of CDs that had balances of $100,000 or more at December 31, 2001 and 2000:

			December 31,
(In thousands)			2001		2000
CDs $100,000 or over with remaining maturity:
	Three months or less		$	37,466	$	59,076
	Over three months through twelve months			47,010		53,489
	Over one year through three years			3,644		14,057
	Over three years			128		238
		Total	$	88,248	$	126,860

Short-Term Borrowings

Short-term borrowings consisted of the following at December 31, 2001, 2000 and 1999:

	December 31,
(In thousands)	2001		2000		1999
Securities sold under agreement to repurchase	$	7,051	$	4,134	$	8,214
Federal funds purchased		—		9,000		19,600
FHLB cash management advance program		—		22,600		25,740
FHLB borrowings under promissory note agreements		—		23,900		21,000
Total short-term borrowings	$	7,051	$	59,634	$	74,554

The following table sets forth certain information with respect to Bancorp’s short-term borrowings at December 31 and during each of 2001, 2000 and 1999:

	December 31,
(Dollars in thousands)	2001			2000			1999
Amount outstanding at year-end	$	7,051		$	59,634		$	74,554
Weighted average interest rate at year-end		3.45	%		6.30	%		5.42	%
Maximum amount outstanding at any month-end during the year	$	63,315		$	98,935		$	74,554
Daily average amount outstanding during the year	$	21,494		$	63,690		$	26,356
Average weighted interest rate during the year		5.73	%		6.54	%		5.33	%

Long-Term Debt

At December 31, 2001, Bancorp’s long-term debt consisted of $10 million advanced from the Federal Home Loan Bank of Seattle to Centennial. Interest on the debt is payable monthly at 3.61%. The debt matures on December 31, 2003 and is secured by all of Centennial’s assets. At December 31, 2000 and 1999, Bancorp had no long-term debt.

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Return on Equity and Assets

The following table sets forth Bancorp’s return on daily average assets and equity, and dividend payout ratio for 2001, 2000 and 1999:

(Dollars in thousands)	2001			2000			1999
Net income	$	14,206		$	14,203		$	12,106
Average total assets		840,423			800,332			635,003
Return on average assets		1.69	%		1.77	%		1.91	%
Net income	$	14,206		$	14,203		$	12,106
Average equity		96,495			82,807			69,440
Return on average equity		14.72	%		17.15	%		17.43	%
Average total equity	$	96,495		$	82,807		$	69,440
Average total assets		840,423			800,332			635,003
Average total equity to assets ratio		11.48	%		10.35	%		10.94	%
Dividends declared per share	$	.08		$	.00		$	.00
Basic earnings per share		.56			.57			.48
Dividend payout ratio		14.29	%		N/A			N/A

Employees

Bancorp has no employees other than its executive officers, who are also employees of Centennial. At December 31, 2001, Centennial had 323 employees, 270 of whom work full time. Selective hiring and development of staff is a high priority. 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 financial, service and marketing goals.

No employees are covered by collective bargaining agreements, and management believes that Bancorp’s relationship with its employees is good.

Competition

The community banking business is highly competitive. Bancorp competes primarily with other commercial banks, as well as savings and loan associations, finance companies, money market funds, brokerage firms, credit unions and other nonfinancial institutions. Many of these competitors have substantially greater resources than Bancorp. Many of Bancorp’s competitors also have substantially higher lending limits and offer certain services, including trust and international banking services that Bancorp does not provide. The larger institutions in Bancorp’s markets have competitive advantages in that they have higher public visibility and are able to maintain advertising and marketing activities on a much larger scale than Bancorp can economically sustain.

During the past several years, Bancorp has capitalized on the marketing opportunities created by the consolidation of the banking industry, as the larger institutions were perceived to de-emphasize the small- to medium-size business and professional market, which is Bancorp’s primary focus. Several banks, which focus on the same type of customers as Bancorp does, have been formed in Bancorp’s market areas during the last few years. This growing number of community banks and a new emphasis by larger institutions on this market segment have intensified competition.

With the enactment of the Gramm-Leach-Bliley Act (“GLB Act”) in 1999, competition has further intensified from institutions outside the traditional banking system, such as investment banking firms, insurance companies and consumer finance companies. Bancorp cannot predict what future changes in the competitive environment, or what changes in the financial condition of Bancorp, may occur as a direct or indirect result of the GLB Act.

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SUPERVISION AND REGULATION

Bancorp and Centennial are extensively regulated under federal and Oregon law. These laws and regulations are primarily intended to protect depositors and the deposit insurance fund, not the shareholders. 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 Centennial.

The Gramm-Leach-Bliley Act

In November 1999, Congress enacted the GLB Act, also known as the Financial Services Modernization Act. The GLB Act made substantial changes that directly affect the banking industry. The GLB Act removed several state and federal barriers to affiliation among banks, insurance companies, securities firms, and other financial services providers, and created an entity known as a “financial holding company” (“FHC”). A bank holding company may elect to become an FHC and, as an FHC, engage in a broader range of financial and other activities than is permissible for the traditional bank holding company.

In order to qualify as an FHC, each depository institution subsidiary of the bank holding company must be rated as “well capitalized” and “well managed.” Also, in order to commence any of the new activities authorized by the GLB Act or acquire control of a company engaged in such activities, the holding company must qualify as an FHC and each depository institution subsidiary of the FHC or its affiliates must have received at least a “satisfactory” rating in its most recent examination under the Community Reinvestment Act of 1977 (the “CRA”).

FHCs are permitted to engage in activities defined by the GLB Act as “financial in nature” including, among others, insurance underwriting and agency activities, investment advisory services, merchant banking, investment banking and underwriting activities, and dealing or making a market in securities. Bank holding companies that do not qualify for, or have not elected, FHC status are limited to those non-banking activities determined by the Board of Governors of the Federal Reserve System (the “FRB”) to be “so closely related to banking as to be a proper incident thereto” prior to adoption of the GLB Act. FHCs that do not continue to meet all of the requirements for FHC status may not be able to undertake new activities or acquisitions that are “financial in nature,” or could lose their ability to continue activities that are not generally permissible for bank holding companies.

In addition, the GLB Act provides for expanded activities for “financial subsidiaries” of national banks. Financial subsidiaries may engage in financial activities except for insurance underwriting, real estate development or investment, and merchant banking, all of which may only be engaged in by a subsidiary of an FHC. In order to have a financial subsidiary, the national bank and each of its depository institution affiliates must be “well capitalized” and “well managed,” and the total assets of all financial subsidiaries may not exceed the lesser of 45% of the consolidated total assets of the parent bank or $50 billion. In addition, the national bank must meet certain rating requirements if it is one of the 100 largest insured banks and engages in financial activities as a principal.

Insured state banks may control or hold an interest in a subsidiary that engages in activities as a principal that would only be permissible for a national bank to conduct through a financial subsidiary, so long as the bank and all insured depository affiliates are “well capitalized” after meeting certain capital deduction and financial statement disclosure requirements. In addition, an insured state bank may retain its interests in subsidiaries controlled or acquired before the enactment of the GLB Act. Oregon law permits commercial banks chartered by the state to engage in any activity permissible for national banks, so Centennial may form subsidiaries to engage in financial activities to the same extent as a national bank.

Privacy Provisions

The GLB Act also includes extensive consumer privacy provisions. These provisions mandate full disclosure by all financial institutions to consumers of the institution’s policies and practices regarding the sharing of non-public information with both affiliates and other third parties. Consumers must receive notice of and an opportunity to “opt out” of disclosure of non-public personal information to non-affiliated third parties. Disclosures of an institution’s privacy policy are required at the time a customer relationship is established, and at least annually for so long as the relationship continues.

Effective July 1, 2001, Bancorp was to implement an information security program pursuant to the interagency guidelines for establishing administrative, technical and physical safeguards for customer records and information. Management believes that Bancorp is in compliance with the guidelines.

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The USA Patriot Act

Under the USA Patriot Act of 2001, adopted by the U.S. Congress on October 26, 2001 to combat terrorism, FDIC-insured banks and commercial banks that establish, maintain, administer or manage a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering through those accounts.

Centennial Bancorp

General

Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to regulation, supervision and examination by the FRB. Bancorp is required to file an annual report and such other reports as the FRB may require.

Acquisitions

As a bank holding company, Bancorp is required to obtain the prior approval of the FRB before: (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company, if after such acquisition, Bancorp would own or control, directly or indirectly, more than 5% of the voting shares of the bank or bank holding company; (2) merging or consolidating with another bank holding company; or (3) acquiring all, or substantially all, of the assets of any other bank. The FRB may not approve any acquisition, merger or consolidation that would have a substantial anti-competitive result, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. The FRB also considers managerial, capital and other financial factors in acting on acquisition or merger applications. Bancorp also is required to obtain the prior approval of the Director of the Oregon Department of Consumer and Business Services (the “Oregon Director”) before acquiring direct or indirect ownership or control of 25% or more of the voting shares of an Oregon state-chartered bank or bank holding company.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”) allows adequately capitalized and managed bank holding companies to acquire banks in any state. Such acquisitions must comply with any applicable state law requiring a bank to be in existence for a minimum period of time before the acquisition. Oregon law allows such acquisitions with respect to banks that have been providing banking services for at least three years. Therefore, Bancorp and Centennial could be acquired by a bank holding company or an FHC located outside Oregon following receipt of necessary regulatory approvals. Under the Interstate Banking Act, Bancorp could acquire banks or bank holding companies in other states.

Permissible Activities

A bank holding company may not engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, a non-banking activity, unless the activity was determined by the FRB to be closely related to banking or managing banks prior to the enactment of the GLB Act. The FRB has identified certain non-banking activities in which a bank holding company may engage with notice to, or prior approval by, the FRB.

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 non-bank businesses. The guidelines require a minimum ratio of total capital to risk-weighted assets of 8%. At December 31, 2001, Bancorp’s ratio of total capital to risk-weighted assets was 13.1%.

The FRB also uses a leverage ratio to evaluate the capital adequacy of bank holding companies. The leverage ratio is the ratio of “Tier 1” capital (generally, tangible common shareholders’ equity, perpetual preferred stock and minority interests in consolidated subsidiaries) to adjusted average total assets. The FRB requires a minimum leverage ratio of 3%. However, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, the FRB expects an additional cushion of at least 1% to 2%. Bancorp’s leverage ratio at December 31, 2001 was 11.2%.

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If Bancorp fails to meet capital guidelines, the FRB may institute appropriate supervisory or enforcement actions. As discussed below, Centennial 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, should Centennial become undercapitalized.

Centennial

General

Centennial is an Oregon state-chartered bank; its deposits are insured by the FDIC. Accordingly, Centennial files financial and other reports periodically with, and is regularly examined by, both the Oregon Director and the FDIC. Centennial 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, since management believes that Centennial 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. Prior to opening a new branch in Washington, Centennial must receive approval from the FDIC, the Oregon Director and the Director of the Department of Financial Institutions in the state of Washington (the “Washington Director”). Centennial currently has 23 branches, the most recent of which opened in February 2002.

Acquisitions of Oregon banks and bank holding companies by out-of-state banks, holding companies and other financial institutions are permitted if the bank being acquired has been providing banking services for a period of at least three years prior to the effective date of the acquisition and upon receipt of the approval of the Oregon Director. Other conditions set forth in Oregon law also must be satisfied. Approval of the FRB and/or the FDIC is also required.

The Interstate Banking Act permits banks to merge with banks across state lines, thereby creating out-of-state branches, without regard to whether such transactions are prohibited under the law of any state. Oregon permits interstate bank mergers. Banks are able to establish branches in other states only through interstate mergers, as described above, unless the state where the branch is proposed to be opened has opted in to de novo interstate branching. Neither Oregon nor Washington has opted in to de novo branching.

Community Reinvestment Act

Enacted in 1977, the federal Community Reinvestment Act (the “CRA”) has become increasingly important to financial institutions, including their holding companies. Under the GLB Act, a satisfactory CRA rating for each depository institution is required before a bank holding company may elect to be one of the newly created FHCs. The CRA allows regulators to reject an application to make an acquisition or establish a branch unless the applicant has performed satisfactorily under the CRA. 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 regularly conduct CRA examinations to assess the performance of financial institutions. Centennial has received satisfactory ratings in its most recent CRA examinations.

Transactions With Affiliates

Centennial is subject to certain FRB restrictions on transactions among related parties. The Federal Reserve Act limits the amount of certain transactions, including loans to and investments in affiliates of Centennial, 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 subsidiary.

The Federal Reserve Act also requires that certain transactions between Centennial and its affiliates be on terms substantially the same, or at least as favorable to Centennial, 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.

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In addition, the Federal Reserve Act requires that the aggregate amount of an institution’s loans to officers, directors and principal shareholders (and their affiliates) is limited to the amount of its unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate.

A violation of any of the foregoing restrictions may result in the assessment of civil fines on a bank or a person participating in the conduct of the affairs of such bank or the imposition of a cease and desist order.

Dividend Restrictions

Dividends paid by Centennial provide substantially all Bancorp’s cash flow. FDICIA provides that a bank cannot pay a dividend if it will reduce the bank’s capital ratios below the regulatory minimums required to be considered “adequately capitalized.” Under Oregon law, an Oregon state-chartered bank may not pay a cash dividend in an amount greater than unreserved retained earnings, after first deducting to the extent not already charged against earnings or reflected in a reserve, (1) all bad debts, which are debts on which interest is unpaid and past due at least six months, unless the debt is fully secured and in the process of collection; (2) all other assets charged off as required by the Oregon Director or a state or federal examiner; and (3) all accrued expenses, interest and taxes of the bank.

Examinations

The FDIC, the Oregon Director and the Washington Director periodically examine and evaluate Centennial. Based upon such evaluations, the examining regulator may revalue the assets of an insured institution and require that it charge off or reduce the carrying value of specific assets or establish a specific allowance to compensate for the difference between the value determined by the regulator and the book value of such assets.

Capital Adequacy

Federal regulations establish minimum requirements for the capital adequacy of depository institutions. The regulators may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. Banks with capital ratios below the required minimums are subject to certain administrative actions, including prompt corrective action, the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing.

The federal risk-based capital guidelines require a ratio of Tier 1 or core capital to total risk-weighted assets of 4% and a ratio of total capital to total risk-weighted assets of 8%. The leverage capital guidelines require that banks maintain Tier 1 capital of no less than 4% of total adjusted average assets, except in the case of certain highly rated banks for which the minimum requirement is 3% of total adjusted assets. At December 31, 2001, Centennial’s leverage ratio, Tier 1 capital to risk-weighted assets ratio and total capital to risk-weighted assets ratio were 10.7%, 11.4% and 12.7%, 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. Bancorp’s maximum liability under such guarantee would be the lesser of 5% of Centennial’s total assets at the time it became undercapitalized or the amount necessary for Centennial to be considered “adequately capitalized.”

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 is considered “well capitalized.”

Reserve Requirements

The FRB requires that all depository institutions maintain reserves on transaction accounts, such as demand deposits, savings deposits subject to automatic transfers, and negotiable order of withdrawal accounts. The reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank and must equal 3% of the first $41.3 million of net transaction accounts and $1.2 million plus 10% of the amount over $41.3 million. There is no reserve requirement on non-personal time deposits. At December 31, 2001, Centennial met its reserve requirements.

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Internal Operating Requirements

Bancorp and Centennial are subject to federal regulations addressing, among other things: (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) ratio of classified assets to capital; (7) minimum earnings; and (8) compensation and benefit standards for management officials. These regulations add further to the cost of compliance and impose record-keeping requirements on Centennial and Bancorp.

The consumer lending activities of Centennial are subject to certain state and federal laws and regulations that prohibit discrimination based on race, gender, age, marital status and other specified classifications, and that 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.

Deposit Insurance Premiums

As an FDIC-insured institution and member of the Bank Insurance Fund (“BIF”), Centennial is subject to quarterly deposit insurance premium assessments. The FDIC uses a risk-related premium system that applies premium rates according to an institution’s risk category. Capital ratios and examination ratings are the primary determinants of risk category assignments. The FDIC sets rate schedules semi-annually based on an analysis of several factors including probable fund losses, operating needs and the impact of assessments on BIF members. At December 31, 2001, Centennial was not subject to a BIF assessment.

In addition to any BIF assessment, Centennial is also subject to an assessment that helps support the FSLIC Resolution Fund (“FRF”). The FRF was established in 1989 to liquidate the remaining Federal Savings & Loan Insurance Corporation assets and liabilities resulting from thrift failures prior to that date. The assessment is one-fifth of the assessment rate imposed on Savings Association Insurance Fund members for the same purpose. At December 31, 2001, the annualized assessment rate for Centennial was 1.82 basis points of assessable deposits.

Bancorp’s FDIC insurance assessment expenses totaled $243,000 in 2001 and $303,000 in 2000. The decrease of $60,000 in 2001 occurred primarily because Centennial’s capital level, according to regulatory standards, changed from “adequately capitalized” to “well capitalized,” making Centennial no longer subject to the BIF assessment. Although “well capitalized” at the end of 2000, the change in capitalization did not affect Centennial’s FDIC assessment until mid-2001 because of the lag time that is a normal part of the FDIC’s assessment rate and risk classification review process. Management expects a further decrease in FDIC assessments during 2002 due to Centennial’s continuing “well capitalized” status.

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 FHCs, 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 subsidiary cannot be predicted.

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Item 2. DESCRIPTION OF PROPERTIES

The primary properties owned by Bancorp include a four-story, 36,000 square foot office building in Eugene, Oregon and a three-story, 21,000 square foot office building in Tigard, Oregon. Each building houses one Centennial branch and one Commercial Banking Center as well as various administrative and operational support functions. The Tigard building also houses a Centennial Mortgage office. The Tigard building is subject to a 50-year ground lease that is renewable for two additional 10-year periods. Bancorp also owns six other properties that house bank branches. One of those properties, the Springfield Office, is also subject to a ground lease.

All other Bancorp facilities occupy leased space. See Note 9 to Bancorp’s Consolidated Financial Statements for summary information concerning payments and future obligations under non-cancelable operating leases.

Management considers all Bancorp facilities adequate for current and anticipated future use.

Item 3. LEGAL PROCEEDINGS

Periodically, and in the ordinary course of business, various claims and lawsuits are brought by and against Bancorp. As of the date of this Annual Report, Bancorp was not a party to any legal proceedings management believes are material.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

None.

Item 5. MARKET FOR BANCORP’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Bancorp’s common stock is quoted on the Nasdaq National Market under the symbol “CEBC.” At February 22, 2002, Bancorp had 24,898,734 shares of common stock outstanding held by 1,166 shareholders of record.

The high, low and closing stock prices were as follows:

		March		June		September		December
Quarter ended		31		30		30		31
2001
Common stock price per share:
	High	$	8.11	$	8.39	$	8.86	$	7.56
	Low		6.01		6.35		6.55		6.43
	Close		7.26		7.48		7.18		7.03
Cash dividends declared			—		0.02		0.03		0.03
2000
Common stock price per share:
	High	$	10.60	$	8.15	$	6.90	$	8.19
	Low		6.25		4.81		4.54		4.77
	Close		7.56		6.82		4.96		7.22
Cash dividends declared			—		—		—		—

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Item 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data of Bancorp.

(Dollars in thousands,
except per-share amounts)	2001			2000			1999			1998			1997
Income Statement Data
Interest income	$	72,577		$	78,635		$	58,468		$	49,849		$	40,104
Interest expense		23,904			28,981			17,868			15,837			13,566
Net interest income		48,673			49,654			40,600			34,012			26,538
Loan loss provision		3,950			3,800			2,300			1,500			1,250
Noninterest income		6,180			3,767			3,527			4,184			3,195
Noninterest expense		27,949			26,715			22,801			19,349			14,851
Income before income taxes		22,954			22,906			19,026			17,347			13,632
Provision for income taxes		8,748			8,703			6,919			5,912			4,329
Net income		14,206			14,203			12,107			11,435			9,303
Balance Sheet Data
Investment securities		76,500			60,363			59,359			76,793			83,904
Loans, net		655,715			704,620			593,663			427,563			337,276
Total assets		814,615			852,975			726,738			572,050			492,573
Total deposits		693,120			696,494			573,041			483,866			419,282
Short term borrowings		7,051			59,634			74,554			20,600			7,716
Long-term debt		10,000			—			—			—			10,000
Shareholders’ equity		99,173			90,183			74,329			63,717			51,810
Share Data
Basic earnings per common share	$	.56		$	.57		$	.48		$	.46		$	.38
Diluted earnings per common share		.55			.55			.47			.44			.36
Book value per common share		3.99			3.57			2.97			2.57			2.43
Cash dividends per common share		.08			—			—			—			—
Basic weighted shares outstanding		25,175			25,119			24,963			24,744			24,519
Diluted weighted shares outstanding		25,717			25,695			25,768			25,878			25,619
Asset Quality Ratios
Loan loss allowance to ending total loans		1.58	%		1.28	%		1.03	%		1.04	%		.98	%
Non-performing assets to ending total assets		1.08			.98			.43			.87			.26
Net loan charge-offs to average loans		.38			.12			.12			.10			.17
Selected Other Ratios
Return on average shareholders’ equity		14.72			17.15			17.43			20.16			20.25
Return on average total assets		1.69			1.77			1.91			2.18			2.12
Net interest spread		5.46			5.92			6.31			6.25			6.03
Net interest margin		6.37			6.84			7.15			7.22			6.92
Efficiency ratio		50.95			50.01			51.67			50.66			49.95

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Highlights

Bancorp reported net income of $14.2 million, or $.56 per basic share, for the year ended December 31, 2001. This amount was consistent with net income for the year ended December 31, 2000 of $14.2 million, or $.57 per basic share. Net income in 2000 represented a 17.3% increase from 1999 net income of $12.1 million, or $.48 per basic share. The consistent earnings during the year ended December 31, 2001 as compared to December 31, 2000 primarily reflect the growth in average interest-earning assets from 2000 to 2001, offset by the decrease in the average rates earned on these assets. During 2001, average interest-earning assets increased $34.3 million, or 4.7%, to $771.6 million as compared to $737.2 million in 2000.

During 2001, Bancorp continued to expand by opening two new limited-service retirement center branches in the Portland area, and by announcing plans to open a full-service branch in Gresham, Oregon during February 2002. In addition to the branch expansion, Centennial expanded the range of products offered to its customers, by developing new online banking capabilities and a 24/7 phone banking service. Strategic alliances were formed to offer online business insurance products, equipment leasing services, and corporate retirement plan services.

Centennial continued to demonstrate a commitment to shareholders, by issuing two stock splits during 2001, and implementing a cash dividend program. In January 2001, Bancorp declared an 11-for-10 (10%) stock split. In July 2001, Bancorp declared a quarterly cash dividend of $0.02 per share, and a 21-for-20 (5%) stock split. In September 2001, Bancorp declared a cash dividend of $0.03 per share. In December 2001, Bancorp declared a quarterly cash dividend of $0.03 per share. In January 2002, Bancorp declared a 21-for-20 (5%) stock split.

Results of Operations — Years Ended December 31, 2001, 2000 and 1999

Net Interest Income (on a tax-equivalent basis)

Impacted by a slowing economy and declining interest rates, Bancorp’s net interest income decreased to $49.1 million in 2001 as compared to $50.4 million in 2000 and $41.3 million in 1999. During 2001, average interest-earning assets increased to $771.6 million as compared to average interest-earning assets of $737.2 million in 2000 and $578.4 million in 1999. At the same time, average interest-bearing liabilities increased to $597.7 million in 2001 from $597.1 million in 2000 and $454.3 million in 1999.

The average yield earned on interest-earning assets decreased by 1.31% (131 basis points) in 2001 and increased by .53% in 2000, while the average rates paid on interest-bearing liabilities decreased by .85% in 2001 and increased by  .92% in 2000. Net interest margin for 2001 decreased .47% to 6.37% from 6.84%, primarily due to a .46% decrease in net interest spread to 5.46% in 2001 from 5.92% in 2000. Net interest margin in 2000 decreased .31% to 6.84% from 7.15% in 1999, primarily due to a .39% decrease in net interest spread to 5.92% in 2000 from 6.31% in 1999.

During 2001, Bancorp experienced a decrease in loan demand, due to the weakening economy in the market areas served and an effort to reduce risk exposure in certain sectors. Because of the shrinking loan base, borrowings were further reduced during 2001, while deposits were maintained. During 2000, Bancorp supported continuing strong loan growth with increased deposits, which mainly resulted from continuing business expansion, the maturing of newer branches and aggressive marketing. In addition, deposit growth, along with operating cash flow, allowed reduced dependence on short-term borrowings.

Provision for Loan Losses

Management’s policy is to maintain an adequate allowance for loan losses. In 2001, Bancorp charged a $4.0 million loan loss provision to income, as compared to $3.8 million in 2000 and $2.3 million in 1999. The larger loan loss provisions in 2001 and 2000 primarily reflect the specifically identified and “inherent” risks of Bancorp’s loan portfolio, and the weakening economy. In 2001, loan charge-offs, net of recoveries, were $2.6 million, as compared to loan charge-offs, net of recoveries, of $815,000 in 2000 and $586,000 in 1999.

Bancorp’s allowance for loan losses was $10.5 million at December 31, 2001, as compared to $9.2 million and $6.2 million at December 31, 2000 and December 31, 1999, respectively. The ratio of the allowance for loan losses to total non-performing loans was 137%, 118% and 225% at December 31, 2001, 2000 and 1999, respectively. The increase in the allowance ratio at December 31, 2001 was a reflection of the weakening economy. The decrease in the allowance ratio at December 31, 2000 was mainly the result of increased nonaccrual totals, which were concentrated in real-estate loans to two borrowers.

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Bancorp’s impaired loans totaled $23.7 million at December 31, 2001, as compared to $15.2 million at December 31, 2000 and $5.8 million at December 31, 1999. The 2001 increase was concentrated in four accounts involving issues for which action plans specific to each borrower were developed.

Noninterest Income

Noninterest income increased $2.4 million to $6.2 million in 2001 as compared to 2000 and increased $240,000 to $3.8 million in 2000 as compared to 1999. The 2001 increase resulted primarily from increased gains on sales of securities, and gains on sales of loans. The increase in 2000 resulted from significantly higher other income, which was partially offset by lower gains on sales of loans.

Gains on sales of securities increased by $603,000 during 2001, as compared to 2000, from $268,000 to $871,000. These increased gains were primarily attributable to the aggressive approach taken by Centennial in repositioning the investment portfolio in conjunction with Bancorp’s overall asset/liability management.

Gains on sales of loans increased by $985,000 during 2001, from $741,000 to $1.7 million, mainly due to increased volumes of residential mortgage loans that were caused, in part, by declining interest rates during 2001. Gains on sales of loans decreased $254,000 in 2000 as compared to 1999, mainly due to interest rate increases.

In 2001, Centennial announced the initiation of a merchant banking group to provide alliance-based products and services to Centennial customers. Fees generated from merchant banking supplemented the growth in other noninterest income of $449,000, to $1.7 million in 2001. In 2000, other noninterest income increased by $436,000 to $1.2 million, as compared to 1999, due primarily to a strategic focus to develop merchant services income.

Noninterest Expense

Noninterest expense increased $1.2 million to $27.9 million in 2001 as compared to 2000, and increased $3.9 million to $26.7 million in 2000 as compared to 1999. The 2001 increase resulted primarily from increases in legal and professional fees, and increases in other noninterest expenses, partially offset by a decrease in business development expenses. The increase in 2000 was primarily attributable to increased staffing and facilities expenses.

Legal and professional expenses increased by $738,000 during 2001, as compared to 2000, from $770,000 to $1.5 million. This increase was primarily due to increased accounting fees paid to title companies.

In 2001, other noninterest expenses grew from $2.9 million to $3.5 million, primarily due to increased costs associated with the OREO properties.

Business development expenses decreased from $993,000 in 2000 to $618,000 in 2001, due primarily to an effort made to reduce controllable business development costs.

Due to Bancorp’s growth and rising per-employee costs during 2000, salaries and employee benefit expenses increased $2.3 million to $16.6 million as compared to 1999, and premises and equipment expense increased $760,000 to $4.1 million as compared to 1999.

Provision for Income Taxes

Bancorp’s provision for income taxes was $8.7 million in 2001, $8.7 million in 2000 and $6.9 million in 1999. Bancorp’s effective tax rates for financial reporting were 38.1% in 2001, 38.0% in 2000 and 36.4% in 1999. The effective tax rate varies from federal statutory rates primarily because of nontaxable interest income and state income taxes.

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Liquidity and Sources of Funds

Bancorp’s primary sources of funds are customer deposits, borrowings, loan repayments, sales and repayments of investment securities, sales of loans and operating cash flow. Scheduled loan and investment securities repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan and investment security prepayments, which are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions and other factors, are not. Bancorp’s primary uses of funds include new loan advances, customer deposit withdrawals, purchases of investment securities and capital expenditures. The repurchase of Bancorp’s common stock and the payment of cash dividends were also significant uses of funds during 2001.

Bancorp’s deposits decreased slightly to $693.1 million at December 31, 2001 from $696.5 million at December 31, 2000 and increased from $573.0 million at December 31, 1999, while net loans and loans held for sale decreased to $655.7 million at December 31, 2001 from $704.6 million at December 31, 2000 and increased from $593.7 million at December 31, 1999.

Centennial maintains, on an unsecured basis, federal funds lines with correspondent banks as a backup source of temporary liquidity. At December 31, 2001, available and unused federal funds lines totaled $49.0 million. At December 31, 2000, Centennial had federal funds lines totaling $44.0 million with $9.0 million outstanding.

Centennial additionally maintains a funding line with the Federal Home Loan Bank of Seattle (“FHLB”). The borrowing availability is primarily based on Centennial’s holdings of various real estate related assets, and is limited to 10% of total assets. At December 31, 2001, Centennial had a $44.3 million FHLB borrowing limit ($57.0 million at December 31, 2000) with $10.0 million outstanding ($46.5 million outstanding at December 31, 2000). Advances are secured by the FHLB stock owned by Centennial and by all its other assets.

At December 31, 2001, Centennial also had a fully available $22.5 million ($35.0 million fully available at December 31, 2000) secured discount window line of credit with the Federal Reserve Bank of San Francisco.

Capital Resources

Total shareholders’ equity increased to $99.2 million at December 31, 2001 from $90.2 million and $74.3 million at December 31, 2000 and 1999, respectively. Total shareholders’ equity increased during 2001 and 2000 due to net income, unrealized gains on available-for-sale securities and stock option exercises. Somewhat offsetting the increase to shareholders’ equity in 2001 was the declaration of $2.1 million in cash dividends. Bancorp shareholders’ equity (Tier 1 capital) was 11.2% of average assets in 2001 as compared to 9.9% in 2000. Centennial’s shareholder equity (Tier 1 capital) was 10.7% of average assets in 2001 as compared to 9.1% in 2000.

In January 2000, Bancorp’s Board of Directors authorized the repurchase of up to an aggregate of 5% of Bancorp’s then outstanding common stock over a two-year period. The repurchase program, which expired January 2002, was authorized in response to the investment opportunity created by a perceived market under-valuation of Bancorp stock. During 2000, Bancorp repurchased 65,835 shares at a cost of approximately $490,000. During 2001, Bancorp repurchased 512,182 shares at a cost of approximately $3.7 million.

In January 2002, Bancorp’s Board of Directors approved a new stock repurchase program that, over the next two years and depending on market price and other considerations, authorizes the purchase of up to an aggregate of 5% of Bancorp’s outstanding common stock as of December 31, 2001.

Effects of Inflation and Changing Prices

The primary impact of inflation on Bancorp’s operations is increased operating overhead. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution’s performance than the effects of general inflation. Interest rates are affected by inflation, but neither the timing nor the magnitude of interest rate fluctuations coincides with changes in an inflation index.

For these reasons, management believes that references to other information regarding interest rates earned and paid, interest-earning assets and interest-bearing liabilities will be of greater assistance than inflation-adjusted presentations in understanding Bancorp’s ability to react to changing interest rates and inflationary trends.

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss to future earnings, which may result from changes in market prices and rates. Bancorp’s primary market risk exposure is the interest-rate risk associated with its investing, lending, deposit and borrowing activities. Interest-rate risk is the risk that changes in interest rates will adversely affect earnings. The risk of loss to earnings in a given period develops when the degree and timing of rate changes varies among rate-sensitive assets and liabilities.

Centennial’s senior management, through the Management Asset and Liability Committee, actively monitors and manages interest-rate sensitivity with the overall objective of achieving consistent, high quality earnings while controlling interest-rate risk within formal policy guidelines. The Asset and Liability Committee of the Board of Directors reviews interest-sensitivity reports and related matters monthly. All significant interest rate risk issues including policy exceptions are presented to Centennial’s Board of Directors for review.

Centennial’s risk of loss to earnings is measured using a computer-based system. An income simulation model is used to determine earnings sensitivity by applying +/-2% rate changes to one-year earnings projections. The earnings projections involve numerous assumptions including those concerning future portfolio growth and mix, interest rates, market and economic trends, and customer behavior. The application of rate changes also involves many assumptions about the basic components of interest-rate risk. Although management believes all assumptions and estimates used are reasonable, actual results may vary substantially.

The following table summarizes Centennial’s after-tax earnings sensitivity as of December 31, 2001:

Interest Rate Change	Change in Net Income
-2% +2%	$    -245,000     -1,105,000

The following table summarizes Centennial’s after-tax earnings sensitivity as of December 31, 2000:

Interest Rate Change	Change in Net Income
-2% +2%	$   -2,866,000     +1,547,000

At December 31, 2001, Centennial was liability sensitive to positive rate changes as compared to asset sensitive at December 31, 2000. This reversal of sensitivity developed because, as a result of the Federal Reserve’s rapid and substantial easing of market rates during the year, a large amount of Centennial’s variable-rate loans were at floor rates above current market rates, causing them to react like fixed-rate loans within the positive rate-change parameter specified.

Because of uncertainties about customer behavior, refinance activity, absolute and relative loan and deposit pricing levels, competitor pricing and market behavior, product volumes and mix, and other unknown changes in economic events affecting movements and volatility in market rates, there can be no assurance that simulation results are reliable indicators of interest-rate risk under such conditions.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

The management of Bancorp is responsible for the preparation, content and integrity of the consolidated financial statements and other statistical data and analyses compiled for this annual report. The consolidated financial statements and related notes have been prepared in conformity with generally accepted accounting principles and, in the judgment of management, present fairly Bancorp’s consolidated financial position, results of operations and cash flows. Management also believes that consolidated financial information presented elsewhere in this annual report is consistent with that in the consolidated financial statements. The amounts contained in the consolidated financial statements are based on management’s best estimates and judgments.

Management is also responsible for establishing and maintaining a system of internal control designed to provide assurance as to the protection of assets and the integrity of the consolidated financial statements and the regulatory reporting process. This system of controls includes self-monitoring mechanisms, written policies and procedures, proper delegation of authority and organizational division of responsibility, and the careful selection and training of qualified personnel. Management also maintains a code of ethics that addresses among other things, conflicts of interest, compliance with laws and regulations, and prompt reporting of any failure or circumvention of controls. An effective internal audit function periodically tests the system of internal control. Management takes action to correct control deficiencies as they are identified. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Management believes that the system of internal control provides reasonable assurances that consolidated financial transactions are recorded properly to permit the preparation of reliable consolidated financial statements and regulatory reports.

Bancorp’s independent auditors, Symonds, Evans & Company, P.C., have been engaged to render an opinion on the consolidated financial statements and to assist in carrying out the audit program described above. Their opinion on the consolidated financial statements is based on procedures performed in accordance with auditing standards generally accepted in the United States, including tests of the accounting records to the extent necessary to allow them to report on the fairness of the consolidated financial statements. Symonds, Evans & Company, P.C., has full access to the Audit Committee and the Board of Directors.

Management has made an assessment of Bancorp’s internal control, compliance with laws and regulations, and procedures over financial reporting. Based on that assessment, management believes that Bancorp maintained an effective system of internal control for financial reporting and complied with designated laws and regulations as of and for the year ended December 31, 2001.

/s/ TED R. WINNOWSKI	/s/ NEAL T. MCLAUGHLIN
Ted R. Winnowski	Neal T. McLaughlin
President and Chief Executive Officer	Executive Vice President and Chief Financial Officer

27

REPORT OF SYMONDS, EVANS & COMPANY, P.C., INDEPENDENT AUDITORS

To the Board of Directors and

Shareholders of Centennial Bancorp

We have audited the accompanying consolidated balance sheets of Centennial Bancorp and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centennial Bancorp and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

/s/ SYMONDS, EVANS & COMPANY, P.C.

Portland, Oregon
January 18, 2002

28

CENTENNIAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

				2001		2000
Assets
Cash and cash equivalents:
	Cash and due from banks			$	36,350,215	$	38,213,844
	Federal funds sold				3,910,000		3,465,000
		Total cash and cash equivalents			40,260,215		41,678,844
Investment securities available-for-sale					76,499,705		60,362,569
Loans, net					643,321,169		693,729,855
Mortgage loans held for sale					12,393,968		10,890,003
Federal Home Loan Bank stock					6,244,100		5,832,800
Premises and equipment, net					15,358,894		15,367,393
Intangible assets, net					7,457,450		8,145,878
Accrued interest and other assets					13,079,531		16,967,620
		Total assets		$	814,615,032	$	852,974,962
Liabilities and Shareholders’ Equity
Liabilities:
	Deposits:
		Demand		$	164,974,596	$	130,898,788
		Interest-bearing demand			257,976,599		244,647,939
		Savings			62,568,237		53,878,931
		Time			207,600,818		267,068,684
			Total deposits		693,120,250		696,494,342
	Borrowings				17,051,067		59,634,083
	Accrued interest and other liabilities				5,271,190		6,663,542
			Total liabilities		715,442,507		762,791,967
Shareholders’ equity:
	Preferred stock				—		—
	Common stock, 24,876,907 and 25,241,432 shares issued and outstanding at December 31, 2001 and 2000, respectively				27,213,622		30,535,794
	Retained earnings				71,920,666		59,826,586
	Accumulated other comprehensive income (loss)				38,237		(179,385	)
			Total shareholders’ equity		99,172,525		90,182,995
			Total liabilities and shareholders’ equity	$	814,615,032	$	852,974,962

See accompanying notes.

29

CENTENNIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

			2001		2000		1999
Interest and dividend income:
	Interest and fees on loans		$	67,706,109	$	74,847,846	$	54,133,662
	Taxable interest on investment securities			2,961,303		1,904,742		2,227,213
	Nontaxable interest on investment securities			855,515		1,450,290		1,433,205
	Dividends on Federal Home Loan Bank stock			411,555		364,000		385,100
	Interest on federal funds sold			628,691		60,728		280,334
	Deposits with banks			14,315		7,970		8,303
		Total interest and dividend income		72,577,488		78,635,576		58,467,817
Interest expense:
Deposits:
	Interest-bearing demand and savings			9,277,744		11,045,108		7,865,362
	Time			13,394,364		13,772,392		8,596,805
Borrowings				1,232,438		4,163,980		1,405,250
		Total interest expense		23,904,546		28,981,480		17,867,417
Net interest income				48,672,942		49,654,096		40,600,400
Loan loss provision				3,950,000		3,800,000		2,300,000
Net interest income after loan loss provision				44,722,942		45,854,096		38,300,400
Noninterest income:
	Service charges on deposit accounts			1,923,374		1,548,647		1,459,402
	Gains on sales of loans, net			1,726,766		741,463		995,823
	Gains on sales of investment securities, net			871,371		268,017		298,625
	Other			1,658,419		1,208,986		773,432
		Total noninterest income		6,179,930		3,767,113		3,527,282
Noninterest expense				27,948,963		26,715,433		22,801,627
Income before income taxes				22,953,909		22,905,776		19,026,055
Provision for income taxes				8,747,558		8,703,197		6,919,290
Net income			$	14,206,351	$	14,202,579	$	12,106,765
Basic earnings per common share			$	.56	$	.57	$	.48
Diluted earnings per common share			$	.55	$	.55	$	.47
Weighted average common shares outstanding:
	Basic			25,175,330		25,118,721		24,963,356
	Diluted			25,716,723		25,695,489		25,767,660

See accompanying notes.

30

CENTENNIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2001, 2000 and 1999

											Accumulated
											other						Total
		Number			Common			Retained			comprehensive			Comprehensive			shareholders'
		of shares			stock			earnings			income (loss)			income (loss)			equity
Balances at December 31, 1998			24,810,832		$	29,690,949		$	33,517,242		$	508,950					$	63,717,141
Comprehensive income:
	Net income		—			—			12,106,765			—		$	12,106,765			12,106,765
	Other comprehensive loss - unrealized losses on investment securities of $2,005,005 (net of income taxes of approximately $1,345,000), net of reclassification adjustment for gains on sales of investment securities included in net income of $190,015 (net of income taxes of approximately $109,000)		—			—			—			(2,195,020	)		(2,195,020	)		(2,195,020	)
Comprehensive income			—			—			—			—		$	9,911,745			—
Stock options exercised			206,000			383,619			—			—						383,619
Tax benefit of stock options exercised			—			316,256			—			—						316,256
Balances at December 31, 1999			25,016,832			30,390,824			45,624,007			(1,686,070	)					74,328,761
Comprehensive income:
	Net income		—			—			14,202,579			—			14,202,579			14,202,579
	Other comprehensive income - unrealized gains on investment securities of $1,673,204 (net of income taxes of approximately $1,026,000), net of reclassification adjustment for gains on sales of investment securities included in net income of $166,171 (net of income taxes of approximately $102,000)		—			—			—			1,506,685			1,506,685			1,506,685
Comprehensive income			—			—			—			—		$	15,709,264			—
Stock options exercised			290,435			495,496			—			—						495,496
Tax benefit of stock options exercised			—			139,803			—			—						139,803
Repurchases of common stock			(65,835	)		(490,329	)		—			—						(490,329	)
Balances at December 31, 2000			25,241,432			30,535,794			59,826,586			(179,385	)					90,182,995
Comprehensive income:
	Net income		—			—			14,206,351			—			14,206,351			14,206,351
	Other comprehensive income - unrealized gains on investment securities of $749,158 (net of income taxes of approximately $468,000), net of reclassification adjustment for gains on sales of investment securities included in net income of $531,536 (net of income taxes of approximately $340,000)		—			—			—			217,622			217,622			217,622
Comprehensive income			—			—			—			—		$	14,423,973			—
Stock options exercised			147,657			281,860			—			—						281,860
Tax benefit of stock options exercised			—			102,783			—			—						102,783
Cash dividends declared ($.08 per share)			—			—			(2,112,271	)		—						(2,112,271	)
Repurchases of common stock			(512,182	)		(3,706,815	)		—			—						(3,706,815	)
Balances at December 31, 2001			24,876,907		$	27,213,622		$	71,920,666		$	38,237					$	99,172,525

See accompanying notes.

31

CENTENNIAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999

					2001			2000			1999
Cash flows from operating activities:
	Net income				$	14,206,351		$	14,202,579		$	12,106,765
		Adjustments to reconcile net income to net cash provided by operating activities:
				Gains on sales of mortgage loans and investment securities, net		(2,598,137	)		(1,009,480	)		(1,294,448	)
				Dividends on Federal Home Loan Bank stock		(411,555	)		(364,000	)		(385,100	)
				Loan loss provision		3,950,000			3,800,000			2,300,000
				Deferred income taxes		(800,997	)		(1,327,747	)		(935,809	)
				Depreciation and amortization		2,562,574			2,404,180			2,356,296
				Originations of mortgage loans held for sale		(225,314,122	)		(142,042,227	)		(152,458,419	)
				Proceeds from sales of mortgage loans held for sale		225,536,923			138,049,027			158,337,944
				Changes in certain assets and liabilities:
				Accrued interest and other assets		4,664,197			(2,848,651	)		(12,391,249	)
				Accrued interest and other liabilities		(2,103,307	)		1,850,041			946,919
				Net cash provided by operating activities		19,691,927			12,713,722			8,582,899
Cash flows from investing activities:
	Investment securities available-for-sale:
			Purchases			(131,311,269	)		(16,230,725	)		(11,202,082	)
			Maturities			34,354,964			2,626,655			2,312,850
			Proceeds from sales			81,804,917			15,278,447			23,071,850
	Net decrease (increase) in loans					46,458,686			(110,022,071	)		(173,283,354	)
	Purchases of premises and equipment, net					(1,634,474	)		(1,160,182	)		(4,901,376	)
				Net cash provided by (used in) investing activities		29,672,824			(109,507,876	)		(164,002,112	)
Cash flows from financing activities:
	Net increase (decrease) in deposits					(3,374,092	)		123,452,859			89,175,187
	Increase (decrease) in borrowings, net					(42,583,016	)		(14,919,884	)		53,953,896
	Payment of cash dividends					(1,401,317	)		—			—
	Proceeds from exercise of stock options					281,860			495,496			383,619
	Repurchases of common stock					(3,706,815	)		(490,329	)		—
				Net cash provided by (used in) financing activities		(50,783,380	)		108,538,142			143,512,702
Net increase (decrease) in cash and cash equivalents						(1,418,629	)		11,743,988			(11,906,511	)
Cash and cash equivalents at beginning of year						41,678,844			29,934,856			41,841,367
Cash and cash equivalents at end of year					$	40,260,215		$	41,678,844		$	29,934,856

See accompanying notes.

32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Description of business and summary of significant accounting policies

Principles of consolidation

The accompanying consolidated financial statements include the accounts of Centennial Bancorp, a bank holding company, and its wholly owned subsidiary, Centennial Bank (“Centennial”) (collectively, “Bancorp”). Effective May 31, 2001, Centennial Mortgage Co., a wholly owned subsidiary of Bancorp at that date, was merged into Centennial. Centennial provides residential and commercial financing, banking and other services. All significant intercompany accounts and transactions have been eliminated in consolidation.

Method of accounting

Bancorp prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States and prevailing practices within the banking industry. Bancorp utilizes the accrual method of accounting, which recognizes income when earned and expenses when incurred. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from 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. At December 31, 2001 and 2000, Bancorp met the Federal Reserve Bank requirements.

Supplemental disclosures of cash flow information

During 2001, 2000 and 1999, noncash transactions resulted from changes in unrealized gains (losses) on investment securities available-for-sale, net of income taxes, and the income tax benefit of stock options exercised, as disclosed in the accompanying consolidated statements of changes in shareholders’ equity.

During 2001, 2000 and 1999, Bancorp paid approximately $24,860,000, $28,200,000 and $17,647,000, respectively, in interest expense.

During 2001, 2000 and 1999, Bancorp paid approximately $9,375,000, $9,708,000 and $8,443,000, respectively, in income taxes.

Investment securities available-for-sale

Investment securities available-for-sale are reported at fair value with changes in unrealized gains and losses excluded from earnings and reported as other comprehensive income or loss, net of income taxes.

Gains and losses on sales of investment securities available-for-sale are recognized on a specific identification basis. Premiums and discounts on investment securities available-for-sale are recognized in interest income using the interest method generally over the period to maturity. Premiums and discounts on mortgage-backed securities are amortized using the interest method over a period that anticipates prepayments of principal.

Declines in the fair value of investment securities available-for-sale below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses. Management believes that all unrealized losses on investment securities available-for-sale as of December 31, 2001 and 2000 are temporary.

Loans

Loans are reported at their outstanding principal balance less the allowance for loan losses and deferred loan fees. The allowance for loan losses represents management’s recognition of the assumed risks of extending credit and the quality of the existing loan portfolio. The allowance is maintained at a level considered adequate to provide for estimated loan losses based on management’s assessment of various factors affecting the portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on historical loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral and guarantees, and current economic conditions. The allowance is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The allowance for loan losses is increased by charges to income and decreased by chargeoffs, net of recoveries.

33

Credit policies require an evaluation of each borrower’s creditworthiness on a case-by-case basis. In the course of evaluating a borrower’s creditworthiness, management determines a requisite amount of collateral support. The type of collateral held varies, but may include real estate, equipment, accounts receivable and inventories. Personal guaranties of the borrower may also be obtained in addition to the collateral. Management believes that the loan portfolio is diversified among industry groups and does not contain a direct concentration of loans in a single industry (other than the construction industry) that exceeds 10% of the portfolio. It is management’s opinion that the allowance for loan losses is adequate to absorb known and inherent risks in the loan portfolio. However, actual results may differ from these estimates.

Loans are considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. An impaired loan must be valued using the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the loan’s underlying collateral or related guaranty. Bancorp primarily measures impairment on all large balance nonaccrual loans (typically commercial and commercial real estate loans) based on the estimated fair value of the underlying collateral or related guaranty. In certain other cases, impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Amounts deemed impaired are either specifically allocated for in the allowance for loan losses or reflected as a partial charge-off of the loan balance. Smaller balance homogeneous loans (typically installment loans) are collectively evaluated for impairment. Accordingly, Bancorp does not separately identify individual installment loans for impairment disclosures.

The accrual of interest on impaired loans is discontinued when the repayment of principal and interest is doubtful. When the accrual of interest is discontinued, all unpaid accrued interest is reversed. The interest on these loans is accounted for on the cash-basis or the cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loan origination fees, net of origination costs, are deferred and recognized as an adjustment of the yield of the related loan.

Interest income on all loans is accrued as earned using the simple interest method.

Various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require adjustments to the allowance based on their judgment of the information available to them at the time of their examinations.

Mortgage loans

Centennial originates conventional and federally insured residential mortgage loans for resale in the secondary market. Mortgage loans are sold without recourse; however, these sales are subject to technical underwriting exceptions and related repurchase risks. Such risks are considered in the determination of the allowance for loan losses.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value. Market value is determined on an aggregate loan basis.

At December 31, 2001, 2000 and 1999, Bancorp held servicing rights to approximately $35,604,000, $42,638,000 and $36,842,000, respectively, in mortgage loans which had been sold into the secondary market. Such mortgage loans are not included in the accompanying consolidated balance sheets. The net amount of capitalized mortgage servicing rights (approximately $281,000 and $386,000 at December 31, 2001 and 2000, respectively) is included in accrued interest and other assets in the accompanying consolidated balance sheets.

Federal Home Loan Bank stock

Bancorp’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at par value, which approximates fair value. As a member of the FHLB system, Bancorp maintains a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets or FHLB advances. At December 31, 2001, Bancorp met its minimum required investment of approximately $500,000. Bancorp may request redemption at par value of any FHLB stock in excess of the minimum required investment. Stock redemptions are at the discretion of FHLB.

34

Premises and equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed principally using the straight-line method over the shorter of the estimated useful lives of the assets or terms of the leases. Amortization of leasehold improvements is included in depreciation and amortization expense in the accompanying consolidated financial statements.

Intangible assets

In connection with a branch acquisition in Clark County, Washington in 1999, Bancorp recorded intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions.” Such intangible assets are being amortized on a straight-line method over a period of approximately 15 years. It is Bancorp’s policy to review intangible assets for impairment whenever events or changes in circumstances indicate that it may not recover its investment in the underlying assets or liabilities that gave rise to such intangible assets. Amortization of intangible assets in 2001, 2000 and 1999 was approximately $688,000, $688,000 and $487,000, respectively.

Advertising

Advertising costs are generally charged to expense during the year in which they are incurred.

Income taxes

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Recently issued accounting standards

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” These statements make significant changes to the accounting for business combinations and goodwill. SFAS No. 141 eliminates the pooling-of-interests method of accounting and requires that the purchase method of accounting be used for business combinations initiated after June 30, 2001. SFAS No. 142 discontinues the practice of amortizing goodwill and requires that goodwill be continually evaluated for impairment and be written-down when appropriate. SFAS No. 142 also requires that other intangible assets that have been separately identified and accounted for continue to be amortized over a determinable useful life. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Management is currently evaluating the impact that SFAS No. 142 will have on its consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Bancorp does not expect that adoption of SFAS No. 143 will have a material effect on Bancorp’s consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and provides guidance on the classification and accounting for such assets when held for sale or abandonment. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Bancorp does not expect that adoption of SFAS No. 144 will have a material effect on the Bancorp’s consolidated financial statements.

Reclassifications

Certain amounts in 2000 and 1999 have been reclassified to conform with the 2001 presentation. Net income was not affected by these reclassifications.

35

2.     Investment securities available-for-sale

Investment securities available-for-sale consisted of the following at December 31, 2001 and 2000:

				Gross		Gross
		Amortized		unrealized		unrealized		Estimated
		cost		gains		losses		fair value
2001
U.S. Government and agency securities		$	14,750,756	$	297,849	$	13,889	$	15,034,716
Obligations of state and political subdivisions			23,241,046		144,848		246,858		23,139,036
Corporate bonds			5,086,140		95,116		6,066		5,175,190
Mortgage-backed securities			32,747,658		51,826		276,196		32,523,288
Other			617,338		10,137		—		627,475
	Total	$	76,442,938	$	599,776	$	543,009	$	76,499,705
2000
U.S. Treasury securities		$	499,783	$	—	$	173	$	499,610
U.S. Government and agency securities			38,157,018		1,709		343,069		37,815,658
Obligations of state and political subdivisions			16,216,658		168,118		125,476		16,259,300
Corporate bonds			2,061,947		—		29,478		2,032,469
Mortgage-backed securities			3,202,684		—		3,402		3,199,282
Other			513,261		46,189		3,200		556,250
Total		$	60,651,351	$	216,016	$	504,798	$	60,362,569

The amortized cost and estimated fair value of investment securities available-for-sale at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Amortized		Estimated
		cost		fair value
Due in 1 year or less		$	2,282,114	$	2,313,480
Due after 1 through 5 years			33,710,779		34,138,640
Due after 5 through 10 years			378,405		386,747
Due after 10 years			6,706,644		6,510,075
Mortgage-backed securities			32,747,658		32,523,288
Other			617,338		627,475
	Total	$	76,442,938	$	76,499,705

At December 31, 2001, investment securities available-for-sale with an estimated fair value of approximately $12,628,000 (approximately $23,880,000 at December 31, 2000) were pledged to collateralize public deposits, and investment securities available-for-sale with an estimated fair value of approximately $9,526,000 (approximately $29,235,000 at December 31, 2000) were pledged to collateralize borrowings (see Note 6).

Gross realized gains and losses on sales of investment securities during the years ended December 31, 2001, 2000 and 1999 were as follows:

	Gross		Gross
	realized		realized		Net gains
	gains		losses		on sales
2001	$	876,999	$	5,628	$	871,371
2000		268,017		—		268,017
1999		298,625		—		298,625

36

3. Loans

Loans consisted of the following at December 31, 2001 and 2000:

	2001			2000
Real estate — mortgage	$	163,524,775		$	147,737,507
Real estate — construction		212,576,779			261,726,951
Commercial		259,961,349			273,866,755
Installment		11,187,783			9,379,311
Lease financing		4,833,024			4,606,838
Other		1,743,580			5,562,841
		653,827,290			702,880,203
Less allowance for loan losses		(10,506,121	)		(9,150,348	)
Loans, net	$	643,321,169		$	693,729,855

Bancorp is located, and conducts its business primarily, within the greater Portland metropolitan area; Lane County, Oregon; and Clark County, Washington. A substantial portion of Bancorp’s loans are collateralized by real estate in these geographic areas and, accordingly, the ultimate collectibility of a substantial portion of the loan portfolio is susceptible to changes in the local market conditions.

Transactions in the allowance for loan losses for the years ended December 31, 2001, 2000 and 1999 were as follows:

	2001			2000			1999
Balance at beginning of year	$	9,150,348		$	6,164,507		$	4,450,614
Loan loss provision		3,950,000			3,800,000			2,300,000
Loans charged-off		(2,667,143	)		(906,319	)		(671,827	)
Recoveries of loans previously charged-off		72,916			92,160			85,720
Balance at end of year	$	10,506,121		$	9,150,348		$	6,164,507

At December 31, 2001 and 2000, Bancorp had approximately $23,716,000 and $15,214,000, respectively, in impaired loans. The specific valuation allowance related to these impaired loans totaled approximately $3,744,000 and $2,253,000 at December 31, 2001 and 2000, respectively. The average recorded investment in impaired loans for the years ended December 31, 2001, 2000 and 1999 was approximately $19,465,000, $9,518,000 and $5,525,000, respectively. Interest income recognized on impaired loans for the years ended December 31, 2001, 2000, and 1999 was approximately $1,278,000, $595,000, and $417,000, respectively.

Loans on nonaccrual status at December 31, 2001 were approximately $7,694,000 ($7,268,000 at December 31, 2000). Interest income, which would have been realized on such nonaccrual loans outstanding at year-end if the loans had remained current, was approximately $659,000, $1,226,000 and $97,000 during the years ended December 31, 2001, 2000 and 1999, respectively. Loans contractually past due 90 days or more on which interest continued to accrue were approximately $529,000 at December 31, 2000 (none at December 31, 2001).

4. Premises and equipment

Premises and equipment consisted of the following at December 31, 2001 and 2000:

	2001			2000
Land	$	2,948,046		$	2,948,046
Buildings and leasehold improvements		13,302,139			13,123,772
Furniture and equipment		11,294,264			9,919,282
		27,544,449			25,991,100
Less accumulated depreciation and amortization		(12,185,555	)		(10,623,707	)
Premises and equipment, net	$	15,358,894		$	15,367,393

5. Time deposits

Time deposits in excess of $100,000 aggregated approximately $81,048,000 and $112,358,000 at December 31, 2001 and 2000, respectively.

At December 31, 2001, the scheduled annual maturities of all time deposits were approximately as follows:

2002	$	191,298,000
2003		14,709,000
2004		1,210,000
2005		248,000
2006		30,000
Thereafter		106,000
	$	207,601,000

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6. Borrowings

Borrowings and the related weighted average interest rates consisted of the following at December 31, 2001 and 2000:

	2001					2000
			Weighted					Weighted
			average					average
	Amount		interest rate			Amount		interest rate
Securities sold under agreement to repurchase	$	7,051,067		3.45	%	$	4,134,083		6.30	%
FHLB borrowings under promissory note agreements		10,000,000		3.61			23,900,000		6.43
Federal funds purchased		—		—			9,000,000		6.40
FHLB cash management advance program		—		—			22,600,000		6.83
	$	17,051,067				$	59,634,083

Securities sold under agreement to repurchase are due on demand and are secured by investment securities available-for-sale. FHLB borrowings under promissory note agreements are due in December 2003 and are secured by Bancorp’s total assets.

At December 31, 2001, Bancorp has remaining available borrowings from the FHLB of approximately $34,316,000. In addition, $49,000,000 of federal funds lines are maintained with correspondent banks as a backup source of liquidity. Bancorp also maintains a secured discount window line of credit with the Federal Reserve Bank of San Francisco, whereby Bancorp had available borrowings of $22,500,000 as of December 31, 2001.

7. Off-balance-sheet financial instruments

In the ordinary course of business, Bancorp enters into various transactions, which include commitments to extend credit and standby and commercial letters of credit, that are not included in the accompanying consolidated balance sheets. Bancorp applies the same credit standards to these commitments as it uses in all of its lending processes and includes these commitments in its lending risk evaluations. At December 31, 2001 and 2000, Bancorp had no commitments to extend credit at below-market interest rates and held no derivative financial instruments.

Bancorp’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

Bancorp’s off-balance-sheet financial instruments at December 31, 2001 and 2000 were approximately as follows:

	2001		2000
Commitments to extend credit	$	206,494,000	$	236,915,000
Standby and commercial letters of credit		5,541,000		6,330,000

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 if certain conditions of the contract are violated. Although subject to drawdown, many of these commitments are expected to expire or terminate without funding. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Collateral relating to these commitments varies, but may include cash, accounts receivable, inventories, equipment, securities and real estate.

Standby and commercial letters of credit are conditional commitments issued 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 upon default of performance. Collateral for standby and commercial letters of credit is based on an individual evaluation of each customer’s creditworthiness, but may include cash, accounts receivable, inventories, equipment, securities and real estate.

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8. Estimated fair value of financial instruments

Bancorp primarily uses quoted market prices or present value techniques to estimate the fair value of its fixed rate financial instruments. The carrying amounts of variable and administered rate financial instruments are considered reasonable estimates of fair value. Valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts that could be realized in a current market exchange.

In addition, as Bancorp normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments but which have significant value. These include such off-balance-sheet items as core deposit intangibles. Bancorp does not believe that it would be practicable to estimate a representational fair value for these types of items at December 31, 2001 and 2000.

Because the estimated fair value disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent Bancorp’s underlying value.

The following methods and assumptions are used to estimate the fair value of financial instruments:

Cash and cash equivalents: The carrying amount approximates the estimated fair value.

Investment securities available-for-sale: The estimated fair value is based on quoted market prices or the market values for comparable securities.

Loans: The estimated fair value of fixed-rate loans is estimated by discounting the contractual cash flows of the loans using December 31, 2001 and 2000 origination rates. The resulting amounts are adjusted to estimate the effects of changes in credit quality of borrowers since the loans were originated.

Mortgage loans held for sale: The estimated fair value represents the anticipated proceeds from sale of the loans.

FHLB stock: The carrying amount approximates the estimated fair value.

Deposits: The estimated fair value of demand deposits, consisting of checking, savings and certain interest-bearing demand deposit accounts, is represented by the amounts payable on demand. The estimated fair value of time deposits is calculated by discounting the scheduled cash flows using the December 31, 2001 and 2000 rates offered on these instruments.

Borrowings: The carrying amount approximates the estimated fair value.

The estimated fair value of Bancorp’s significant on-balance sheet financial instruments at December 31, 2001 and 2000 were approximately as follows:

		2001				2000
				Estimated				Estimated
		Carrying		fair		Carrying		fair
		value		value		value		value
Financial assets:
	Cash and cash equivalents	$	40,260,000	$	40,260,000	$	41,679,000	$	41,679,000
	Investment securities available-for-sale		76,500,000		76,500,000		60,363,000		60,363,000
	Loans and mortgage loans held for sale, net		655,715,000		664,134,000		704,620,000		700,265,000
	FHLB stock		6,244,000		6,244,000		5,833,000		5,833,000
Financial liabilities:
	Deposits		693,120,000		695,242,000		696,494,000		697,573,000
	Borrowings		17,051,000		17,051,000		59,634,000		59,634,000

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9. Commitments and contingencies

Bancorp leases certain land and facilities under noncancelable operating leases, generally for terms of 5 to 50 years, some of which include renewal options and escalation clauses. At December 31, 2001, the aggregate minimum rental commitments under operating leases that have initial or remaining noncancelable lease terms in excess of one year were approximately as follows:

2002		$	1,187,000
2003			1,070,000
2004			1,068,000
2005			1,084,000
2006			1,060,000
Thereafter			7,485,000
	Total minimum lease payments	$	12,954,000

Total rent expense was approximately $1,920,000, $1,709,000 and $1,213,000 in 2001, 2000 and 1999, respectively.

In the ordinary course of business, litigation arises from normal banking activities. In the opinion of management, the ultimate outcome of these matters will not have a material adverse effect on Bancorp’s consolidated financial position, results of operations or cash flows.

10. Noninterest expense

Noninterest expense was comprised of the following for the years ended December 31, 2001, 2000 and 1999:

	2001		2000		1999
Salaries and employee benefits	$	16,712,483	$	16,585,759	$	14,293,013
Premises and equipment		4,114,709		4,075,364		3,315,826
Business development		617,987		992,994		830,097
Legal and professional		1,508,559		770,639		657,816
Data processing		828,798		685,479		665,704
Other		4,166,427		3,605,198		3,039,171
Total -noninterest expense	$	27,948,963	$	26,715,433	$	22,801,627

11. Income taxes

The provision (credit) for income taxes was comprised of the following for the years ended December 31, 2001, 2000 and 1999:

		2001			2000			1999
Current:
	Federal	$	7,885,493		$	8,223,672		$	6,482,551
	State		1,663,062			1,807,272			1,372,548
Deferred			(800,997	)		(1,327,747	)		(935,809	)
Provision for income taxes		$	8,747,558		$	8,703,197		$	6,919,290

The provision for income taxes results in effective tax rates that are different than the federal income tax statutory rate. The nature of the differences for the years ended December 31, 2001, 2000 and 1999 were as follows:

	2001		2000		1999
Expected federal income tax provision at statutory rates		$8,033,869	$	8,017,022	$	6,659,004
State income tax, net of federal effect		1,027,415		1,006,825		843,341
Tax-exempt interest income		(292,769)		(498,153)		(478,504	)
Other, net		(20,957)		177,503		(104,551	)
Provision for income taxes		$8,747,558	$	8,703,197	$	6,919,290

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The components of the net deferred tax assets at December 31, 2001 and 2000 were as follows:

		2001		2000
Deferred tax assets
Nonqualified benefit plans		$	749,413	$	716,865
Allowance for loan losses			4,227,156		3,446,345
Net unrealized losses on investment securities			—		126,076
Other, net			830,965		769,293
	Total deferred tax assets		5,807,534		5,058,579
Deferred tax liabilities
Mortgage servicing rights			110,309		151,795
FHLB stock dividends			1,168,628		1,006,887
Other, net			350,344		371,711
	Total deferred tax liabilities		1,629,281		1,530,393
Net deferred tax assets		$	4,178,253	$	3,528,186

Management believes, primarily based upon historical performance, that the net deferred tax assets will be recognized in the normal course of operations and, accordingly, has not reduced net deferred tax assets by a valuation allowance.

The exercise of nonstatutory stock options, which have been granted under Bancorp’s stock option plans (see Note 13), gives rise to compensation that is included in the taxable income of the applicable directors or employees and is deductible by Bancorp for federal and state income tax purposes. Such compensation results from increases in the fair market value of Bancorp’s common stock subsequent to the date of grant of the applicable stock options. In accordance with accounting principles generally accepted in the United States, such compensation is not recognized as an expense for financial accounting purposes, and the related tax benefits are recorded as an increase to common stock.

12. Transactions with related parties

Certain officers and directors (and the companies with which they are associated) are customers of, and have had banking transactions with, Bancorp in the ordinary course of business. In addition, Bancorp expects to continue to have such banking transactions in the future. All loans and commitments to loan to such parties are generally made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. In the opinion of management, these transactions do not involve more than the normal risk of collectibility or present any other unfavorable features.

Activity with respect to loans to directors, their affiliates and executive officers of Bancorp for the year ended December 31, 2001 was as follows:

Balance at January 1, 2001	$	6,842,661
Additions or renewals		10,285,024
Amounts collected or renewed		(9,867,795	)
Balance at December 31, 2001	$	7,259,890

In addition, included in commitments in Note 7 are approximately $2,367,000 of commitments to extend credit to directors, their affiliates, and executive officers of Bancorp at December 31, 2001 ($1,401,000 at December 31, 2000).

13. Stock options

Bancorp has a 1993 Non-employee Director Stock Option Plan (“Director Plan”); a 1993 Incentive Stock Option Plan (“Incentive Plan”); and a 1995 Stock Incentive Plan (“Option Plan”).

Director Plan

Under the Director Plan, shares of common stock are reserved for issuance at their fair market value at the date of grant to non-employee directors of Bancorp and its subsidiary. Generally, options become exercisable over a period of three years of subsequent service. The options expire in a maximum of ten years from the date of grant. At December 31, 2001, 175,058 of the 177,509 options outstanding were exercisable, and 162,405 shares were reserved for future grant.

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Incentive Plan

Under the Incentive Plan, officers of Bancorp and its subsidiary may be granted options to purchase shares of common stock. The option price is the fair market value at the date of grant. Generally, options become exercisable over a period of five years of subsequent service. The options expire in a maximum of ten years from the date of grant. At December 31, 2001, all of the 129,119 options outstanding were exercisable, and 1,256 shares were reserved for future grant.

Option Plan

Under the Option Plan, Bancorp employees, directors and consultants may be granted nonstatutory stock options or restricted stock awards, and Bancorp employees may be granted incentive stock options. The exercise prices of nonstatutory stock options and the price to be paid for restricted stock is established by a committee of Bancorp’s Board of Directors (the “Board”). The exercise price of incentive stock options must be no less than the fair market value of the underlying shares on the date of grant. Options granted under the Option Plan expire on such date as established by a committee of the Board. However, incentive stock options expire in a maximum of ten years from the date of grant. At December 31, 2001, 1,420,287 options were outstanding under the Option Plan, consisting of 682,336 incentive stock options and 737,951 nonstatutory stock options. At December 31, 2001, a total of 1,021,688 of the options outstanding were exercisable, and 405,075 shares were reserved for future grant. Bancorp has not granted any restricted stock awards under the Option Plan.

Transactions involving option activity for the years ended December 31, 2001, 2000 and 1999 are summarized as follows:

	2001					2000					1999
				Weighted-					Weighted-					Weighted-
				average					average					average
	Options			exercise		Options			exercise		Options			exercise
	outstanding			price		outstanding			price		outstanding			price
Balance at beginning of year		1,687,259		$	5.37		1,809,667		$	4.63		1,753,677		$	3.65
Granted		214,953			7.11		183,501			6.92		270,181			9.16
Forfeited		(27,640	)		7.51		(15,474	)		7.06		(8,191	)		10.97
Exercised		(147,657	)		1.91		(290,435	)		1.71		(206,000	)		1.86
Balance at end of year		1,726,915		$	5.85		1,687,259		$	5.37		1,809,667		$	4.63

Information regarding the number, weighted-average remaining contractual life and weighted-average exercise price of options by range of exercise price at December 31, 2001 is as follows:

	Options outstanding						Options exercisable
			Weighted-
			average		Weighted-				Weighted-
Range of			remaining		average				average
exercise	Number		contractual		exercise		Number		exercise
price	of options		life (years)		price		of options		price
Under $5.00		721,257		7.5	$	2.46		721,257	$	2.46
$5.01—$10.00		806,753		10.9		7.69		474,593		8.10
$10.01—$15.00		198,905		6.9		10.65		130,015		10.64
		1,726,915		9.1	$	5.85		1,325,865	$	5.28

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Exercisable options at December 31, 2000 and 1999 totaled 1,194,257 and 1,195,118, respectively.

No compensation cost has been recognized for the options issued under the stock option plans, as Bancorp adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation. “ Had compensation cost been determined based on the fair value of the options at the date of grant, consistent with the provisions of SFAS No. 123, Bancorp’s pro forma net income and pro forma earnings per common share would have been as follows for the years ended December 31, 2001, 2000 and 1999:

	2001		2000		1999
Net income:
— as reported	$	14,206,351	$	14,202,579	$	12,106,765
— pro forma		13,491,542		13,550,176		11,753,038
Basic earnings per common share:
— as reported	$	.56	$	.57	$	.48
— pro forma		.54		.54		.47
Diluted earnings per common share:
— as reported	$	.55	$	.55	$	.47
— pro forma		.52		.53		.46

The pro forma effect on net income for 2001, 2000 and 1999 is not representative of the pro forma effect in future years, because compensation expense related to grants made prior to December 31, 1994 — and which vest in subsequent years — is not considered. For purposes of the above pro forma information, the fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	2001			2000			1999
Risk-free interest rate		5.5	%		5.0	%		6.3	%
Expected life (in years)		7.3			7.3			7.3
Expected volatility		34.5	%		36.4	%		32.6	%
Expected dividend yield		1.6	%		0.0	%		0.0	%

The effect of applying the fair-value-based method to stock options granted in the years ended December 31, 2001, 2000 and 1999 resulted in a weighted-average grant date fair value of $2.82, $3.17 and $4.58, respectively.

14.     Shareholders’ equity

At December 31, 2001 and 2000, Bancorp had 10,000,000 shares of no par value authorized but unissued preferred stock, which was comprised of 5,000,000 shares each of voting and nonvoting stock. At December 31, 2001 and 2000, Bancorp had 50,000,000 shares of no par value authorized common stock.

In January 2000, Bancorp authorized the repurchase of up to an aggregate of 5% of its then outstanding common stock over a two-year period. During the years ended December 31, 2001 and 2000, Bancorp repurchased 512,182 and 65,835 shares of common stock, respectively.

In December 2001, Bancorp approved a new repurchase program, authorizing the repurchase of up to an aggregate of 5% of its currently outstanding common stock over a two-year period.

During the years ended December 31, 2001, 2000 and 1999, Bancorp had various stock splits. In addition, on January 16, 2002, the Board declared a 5% stock split, payable on February 22, 2002, to Bancorp shareholders of record at the close of business on February 1, 2002. All information in the accompanying consolidated financial statements and footnotes has been adjusted to give retroactive effect to all stock splits.

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15.     Basic and diluted earnings per common share

The numerators and denominators used in computing basic and diluted earnings per common share for the years ended December 31, 2001, 2000 and 1999 can be reconciled as follows:

			Net income		Shares		Per-share
			(numerator)		(denominator)		amount
2001
Basic earnings per common share —
	Income available to common shareholders		$	14,206,351		25,175,330	$	.56
		Effect of assumed conversion of stock options		—		541,393
		Diluted earnings per common share	$	14,206,351		25,716,723	$	.55
2000
Basic earnings per common share —
	Income available to common shareholders		$	14,202,579		25,118,721	$	.57
		Effect of assumed conversion of stock options		—		576,768
		Diluted earnings per common share	$	14,202,579		25,695,489	$	.55
1999
Basic earnings per common share —
	Income available to common shareholders		$	12,106,765		24,963,356	$	.48
		Effect of assumed conversion of stock options		—		804,304
		Diluted earnings per common share	$	12,106,765		25,767,660	$	.47

16. Employee benefit plan

Bancorp has an employee savings and profit sharing plan (the “Plan”), which covers all fulltime employees over age 21 with one year of service. The Plan allows employees to contribute from 2% to 15% of their salary on a tax-deferred basis. Bancorp’s matching contributions are determined annually by the Board of Directors, up to a maximum of 6% of each employee’s compensation. In addition to the matching contributions, Bancorp may also make discretionary contributions to the Plan. Bancorp’s contributions charged to operations related to the Plan totaled approximately $400,000 in 2001 ($460,000 in 2000 and $400,000 in 1999).

17. Regulatory matters

Bancorp and Centennial are subject to the regulations of certain federal and state agencies and receive periodic examinations by those regulatory authorities. In addition, Bancorp and Centennial are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s or Centennial’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancorp and Centennial must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Bancorp’s and Centennial’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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Quantitative measures established by regulation to ensure capital adequacy require Bancorp and Centennial to maintain minimum amounts and ratios (set forth in the tables below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (all as defined in the regulations). Management believes that, at December 31, 2001, Bancorp and Centennial met or exceeded all capital adequacy requirements.

At December 31, 2001, Bancorp and Centennial were “well capitalized” under the regulatory framework. There are no conditions or events since the notifications from the regulators that management believes would change Bancorp’s or Centennial’s regulatory capital categorization.

Bancorp’s actual and required capital amounts and ratios are presented in the table below:

													Regulatory minimum
													to be "well capitalized"
								Regulatory minimum to be					under prompt corrective
			Actual					"adequately capitalized"					action provisions
			Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2001:
	Total Capital
		(to Risk-Weighted Assets)	$	101,289,000		13.1	%	$	61,627,000		8.0	%	$	77,034,000		10.0	%
	Tier 1 Capital
		(to Risk-Weighted Assets)		91,649,000		11.9			30,813,000		4.0			46,220,000		6.0
	Tier 1 Capital
		(to Average Assets)		91,649,000		11.2			32,734,000		4.0			40,918,000		5.0
December 31, 2000:
	Total Capital
		(to Risk-Weighted Assets)	$	91,269,000		11.0	%	$	66,396,000		8.0	%	$	82,996,000		10.0	%
	Tier 1 Capital
		(to Risk-Weighted Assets)		82,119,000		9.9			33,198,000		4.0			49,797,000		6.0
	Tier 1 Capital
		(to Average Assets)		82,119,000		9.9			33,102,000		4.0			41,377,000		5.0

Centennial’s actual and required capital amounts and ratios are presented in the table below:

													Regulatory minimum
													to be "well capitalized"
								Regulatory minimum to be					under prompt corrective
			Actual					"adequately capitalized"					action provisions
			Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2001:
	Total Capital
		(to Risk-Weighted Assets)	$	97,277,000		12.7	%	$	61,455,000		8.0	%	$	76,819,000		10.0	%
	Tier 1 Capital
		(to Risk-Weighted Assets)		87,663,000		11.4			30,728,000		4.0			46,091,000		6.0
	Tier 1 Capital
		(to Average Assets)		87,663,000		10.7			32,651,000		4.0			40,814,000		5.0
December 31, 2000:
	Total Capital
		(to Risk-Weighted Assets)	$	83,520,000		10.1	%	$	65,951,000		8.0	%	$	82,439,000		10.0	%
	Tier 1 Capital
		(to Risk-Weighted Assets)		74,370,000		9.0			32,976,000		4.0			49,463,000		6.0
	Tier 1 Capital
		(to Average Assets)		74,370,000		9.1			32,831,000		4.0			41,039,000		5.0

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18. Parent company financial information

Condensed financial information for Centennial Bancorp
(Parent company only) is presented as follows:

CONDENSED BALANCE SHEETS (Unconsolidated)

		December 31,
		2001		2000
Assets
Cash and cash equivalents, deposited with Centennial		$	3,570,033	$	195,368
Time deposit with a financial institution			100,000		—
Equity securities available-for-sale			627,475		556,250
Equipment, net			44,354		55,810
Deferred tax assets			580,490		504,318
Investment in subsidiary, at cost plus equity in earnings			95,151,877		88,255,567
Other assets			552,545		3,160,883
	Total assets	$	100,626,774	$	92,728,196
Liabilities and shareholders’ equity
Accrued liabilities		$	1,454,249	$	2,545,201
Shareholders’ equity			99,172,525		90,182,995
	Total liabilities and shareholders’ equity	$	100,626,744	$	92,728,196

CONDENSED STATEMENTS OF INCOME (Unconsolidated)

							Years ended December 31,
				2001			2000			1999
Income:
	Interest income from subsidiary			$	48,414		$	15,955		$	103,815
	Other income				157,865			—			—
			Total income		206,279			15,955			103,815
Expenses:
	Salaries and employee benefits				550,984			677,004			702,931
	Other				456,439			424,068			343,936
			Total expenses		1,007,423			1,101,072			1,046,867
Loss before income tax benefit, dividends from Centennial and equity in undistributed net earnings of subsidiary					(801,144	)		(1,085,117	)		(943,052	)
		Income tax benefit			321,865			419,680			366,030
		Loss before dividends from Centennial and equity in undistributed net earnings of subsidiary			(479,279	)		(665,437	)		(577,022	)
		Dividends from Centennial			6,000,000			—			—
		Equity in undistributed net earnings of subsidiary			8,685,630			14,868,016			12,683,787
Net income				$	14,206,351		$	14,202,579		$	12,106,765

46

CONDENSED STATEMENTS OF CASH FLOWS (Unconsolidated)

					Years ended December 31,
					2001			2000			1999
Cash flows from operating activities:
	Net income				$	14,206,351		$	14,202,579		$	12,106,765
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization				97,244			99,187			101,490
		Net earnings of subsidiary				(14,685,630	)		(14,868,346	)		(12,683,787	)
		Dividends from Centennial				6,000,000			—			—
		Deferred income taxes				(76,172	)		853,177			(873,249	)
		Changes in certain assets and liabilities:
		Other assets				4,561,050			(2,734,683	)		(382,763	)
		Accrued liabilities				(1,801,906	)		1,179,031			55,518
				Net cash provided by (used in) operating activities		8,300,937			(1,269,055	)		(1,676,026	)
Cash flows used in investing activities:
			Purchase of equity securities available-for-sale			—			(513,260	)		—
Cash flows from financing activities:
			Payment of cash dividends			(1,401,317	)		—			—
			Proceeds from exercise of stock options			281,860			495,496			383,619
			Repurchases of common stock			(3,706,815	)		(490,329	)		—
				Net cash provided by (used in) financing activities		(4,826,272	)		5,167			383,619
Net increase (decrease) in cash and cash equivalents						3,474,665			(1,777,148	)		(1,292,407	)
Cash and cash equivalents at beginning of year						195,368			1,972,516			3,264,923
Cash and cash equivalents at end of year					$	3,670,033		$	195,368		$	1,972,516

47

Quarterly Financial Data (Unaudited)

(Dollars in thousands,		First		Second		Third		Fourth		Fifth
except per-share amounts)		Quarter		Quarter		Quarter		Quarter		Quarter
2001
Interest income		$	19,986	$	18,549	$	17,688	$	16,354	$	72,577
Interest expense			7,872		6,695		5,317		4,020		23,904
Net interest income			12,114		11,854		12,371		12,334		48,673
Loan loss provision			950		975		1,050		975		3,950
Noninterest income			1,399		1,550		1,408		1,823		6,180
Noninterest expense			6,767		7,244		7,051		6,887		27,949
Income before income taxes			5,796		5,185		5,678		6,295		22,954
Net income			3,651		3,173		3,461		3,921		14,206
Earnings per share:
	Basic	$	.14	$	.13	$	.13	$	.16	$	.56
	Diluted	$	.14	$	.13	$	.13	$	.15	$	.55
2000
Interest income		$	17,887	$	19,606	$	20,538	$	20,604	$	78,635
Interest expense			6,130		6,884		7,778		8,189		28,981
Net interest income			11,757		12,722		12,760		12,415		49,654
Loan loss provision			750		750		1,050		1,250		3,800
Noninterest income			865		858		858		1,186		3,767
Noninterest expense			6,631		7,380		6,518		6,186		26,715
Income before income taxes			5,241		5,450		6,050		6,165		22,906
Net income			3,255		3,381		3,744		3,823		14,203
Earnings per share:
	Basic	$	.13	$	.14	$	.15	$	.15	$	.57
	Diluted	$	.13	$	.13	$	.14	$	.15	$	.55

48

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF BANCORP

The information called for by this item will be contained in Centennial Bancorp’s definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2002, and is incorporated herein by reference.

Item 11. EXECUTIVE COMPENSATION

The information called for by this item will be contained in Centennial Bancorp’s definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2002, and is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by this item will be contained in Centennial Bancorp’s definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2002, and is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this item will be contained in Centennial Bancorp’s definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2002, and is incorporated herein by reference.

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this Annual Report on Form 10-K.

(1)  Financial Statements.

The financial statements are set forth under Item 8 of this report on Form 10-K.

(2)  Financial Statement Schedules.

Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

(3)  Exhibits.

See the Exhibit Index on page 51

We will furnish you with a copy of any exhibit upon written request and upon payment of $.25 per page, which represents Centennial Bancorp’s reasonable expenses in furnishing the exhibit requested. Written requests to obtain any exhibit should be sent to Neal T. McLaughlin, Executive Vice President and Chief Financial Officer, Centennial Bancorp, One SW Columbia Street, Suite 900, Portland, Oregon, 97258.

(b)  Bancorp filed no reports on Form 8-K during the quarter ended December 31, 2001.

49

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 11, 2002	By /s/ Ted R. Winnowski Ted R. Winnowski, President, Chief Executive Officer and Director

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 11, 2002	By /s/ Ted R. Winnowski Ted R. Winnowski, President, Chief Executive Officer and Director
		CHIEF FINANCIAL OFFICER
DATED:	March 11, 2002	By /s/ Neal T. McLaughlin Neal T. McLaughlin Executive Vice President and Chief Financial Officer
		DIRECTORS:
DATED:	March 11, 2002	By /s/ Dan Giustina Dan Giustina, Director
DATED:	March 11, 2002	By /s/ Cordy H. Jensen Cordy H. Jensen, Director
DATED:	March 11, 2002	By /s/ Robert L. Newburn Robert L. Newburn, Director
DATED:	March 11, 2002	By /s/ Brian B. Obie Brian B. Obie, Director
DATED:	March 11, 2002	By /s/ Richard C. Williams Richard C. Williams, Director

50

Exhibit Index

Exhibit

3.1	Restated Articles of Incorporation (filed as Exhibit 3.1 to registrant’s Form 10-K Report for the year ended December 31, 1998, and incorporated herein by reference)
3.2	Bylaws, as restated (filed as Exhibit 3.2 to registrant’s Form 10-K Report for the year ended December 31, 2000, and incorporated herein by reference)
10.1*	Registrant’s 1993 Incentive Stock Option Plan, restated as of April 13, 1994 (filed as Exhibit B to registrant’s Proxy Statement for the 1994 annual shareholder meeting, filed April 29, 1994, and incorporated herein by reference)
10.2*	Registrant’s Nonemployee Director’s Stock Option Plan (filed as Exhibit 10.2 to registrant’s Form 10-K Report for the year ended December 31, 1991, and incorporated herein by reference)
10.3*	Registrant’s 1993 Stock Option Plan for Nonemployee Directors, restated as of April 13, 1994 (filed as Exhibit A to registrant’s Proxy Statement for the 1994 annual shareholder meeting, filed April 29, 1994, and incorporated herein by reference)
10.4*	Restated 1995 Stock Incentive Plan (filed as Exhibit A to registrant’s Proxy Statement for the 1998 annual shareholder meeting, filed April 13, 1998, and incorporated herein by reference)
10.5*	Nonstatutory (Nonqualified) Stock Option Agreement dated November 22, 1995, between registrant and Richard C. Williams (filed as Exhibit 10.10 to registrant’s Form 10-K for the year ended December 31, 1995, and incorporated herein by reference)(This option agreement has been amended to permit the exercise of vested options at any time during the term of the option notwithstanding the termination of Mr. Williams employment with registrant)
10.6	Ground Lease, dated as of February 10, 1994, between registrant and Pacific Realty Associates, L.P. (filed as Exhibit 10.10 to registrant’s Registration Statement on SB-2, filed March 28, 1994, and incorporated herein by reference)
10.7	Advances, Security and Deposit Agreement, dated February 5, 1999, between Centennial Bank and the Federal Home Loan Bank of Seattle (filed as Exhibit 10.7 to registrant’s Form 10-K for the year ended December 31, 1999, and incorporated herein by reference)
10.8*	Centennial Bank Deferred Compensation Plan, dated effective January 1, 1996 (filed as Exhibit 10.13 to registrant’s Form 10-K for the year ended December 31, 1996, and incorporated herein by reference)
10.9*	Participation Agreement for use with Centennial Bank Deferred Compensation Plan (filed as Exhibit 10.14 to registrant’s Form 10-K for the year ended December 31, 1996, and incorporated herein by reference)
10.10*	Employment Agreement dated July 29, 1997 between Thaddeus (Ted) Winnowski and Centennial Bank (filed as Exhibit 10.17 to registrant’s Form 10-Q Report for the quarter ended September 30, 1997, and incorporated herein by reference)
10.11*	Employment Agreement dated October 1, 1995, between Richard C. Williams and registrant (filed as Exhibit 10.3 to registrant’s Form 10-K for the year ended December 31, 1995, and incorporated herein by reference)
10.12*	First Amendment to Employment Agreement dated December 1, 1997, between Richard C. Williams and registrant (filed as Exhibit 10.18 to registrant’s Form 10-K for the year ended December 31, 1997, and incorporated herein by reference)
10.13*	Second Amendment to Employment Agreement dated May 5, 2000, between Richard C. Williams and registrant (filed as Exhibit 10 to registrant’s Form 10-Q Report for the quarter ended June 30, 2000, and incorporated herein by reference)
10.14	Pledge, Security and Safekeeping Agreement dated September 30, 1997, between Centennial Bank and the Federal Home Loan Bank of Seattle (filed as Exhibit 10.13 to registrant’s Form 10-K for the year ended December 31, 1999, and incorporated herein by reference)
10.15	Letter of Agreement for a Borrower-in-Custody dated May 4, 2000, between Centennial Bank and the Federal Reserve Bank of San Francisco (filed as Exhibit 10.14 to registrant’s Form 10-K for the year ended December 31, 2000, and incorporated herein by reference)
10.16*	Incentive Stock Option Agreement dated January 20, 1998 between Thaddeus (Ted) Winnowski and registrant (filed as Exhibit 10.16 to registrant’s Form 10-K for the year ended December 31, 2000, and incorporated herein by reference)
10.17*	Nonstatutory Stock Option Agreement dated January 20, 1998, between Thaddeus (Ted) Winnowski and registrant (filed as Exhibit 10.17 to registrant’s Form 10-K for the year ended December 31, 2000, and incorporated herein by reference)
10.18*	Nonstatutory Stock Option Agreement dated January 20, 1999, between Thaddeus (Ted) Winnowski and registrant (filed as Exhibit 10.18 to registrant’s Form 10-K for the year ended December 31, 2000, and incorporated herein by reference)
10.19*	Nonstatutory Stock Option Agreement dated January 20, 1999, between Thaddeus (Ted) Winnowski and registrant (filed as Exhibit 10.19 to registrant’s Form 10-K for the year ended December 31, 2000, and incorporated herein by reference)
10.20*	Incentive Stock Option Agreement dated January 3, 2000, between Thaddeus (Ted) Winnowski and registrant (filed as Exhibit 10.20 to registrant’s Form 10-K for the year ended December 31, 2000, and incorporated herein by reference)
10.21*	Incentive Stock Option Agreement dated January 2, 2001, between Thaddeus (Ted) Winnowski and registrant
10.22*	Incentive Stock Option Agreement dated December 19, 2001, between Thaddeus (Ted) Winnowski and registrant
10.23*	Form of severance agreement dated May 15, 2001, between registrant and certain of its officers (filed as Exhibit 10.21 to registrant’s Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference)
20.1	Portions of definitive proxy statement for 2002 annual shareholder meeting (to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report)
21.1	Subsidiaries of registrant
23.1	Consent of Symonds, Evans & Company, P.C., Independent Auditors
99.1	Certain Factors to Consider in Connection with Forward-Looking Statements

* Management contract or compensatory plan or arrangement.

51

[Centennial Bank Logo]

52 EX-10.21 3 y58200ex10-21.txt INCENTIVE STOCK OPTION AGREEMENT Exhibit 10.21 INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT is made effective as of January 2, 2001 between CENTENNIAL BANCORP, an Oregon corporation (the "Company"), and THADDEUS (TED) R. WINNOWSKI (the "Optionee"). Pursuant to the Company's Restated 1995 Stock Incentive Plan (the "Plan"), the Company has granted Optionee an incentive stock option to purchase shares of the Company's Common Stock, without par value (the "Common Stock"), in the amount indicated below. NOW, THEREFORE, in consideration of the promises and the mutual covenants contained in this Option Agreement, the parties agree as follows: 1. Grant. The Company grants to Optionee, upon the terms and conditions set forth below, the right and option (the "Option") to purchase 29,348 shares of Common Stock at an exercise price of $8.75 per share (the "Exercise Price"), subject to the terms and conditions of the Plan, which are incorporated herein by reference. In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall govern. The Option is intended to qualify as an Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Term of Option. Subject to reductions in the term of the Option as provided in the Plan and this Option Agreement, the Option shall continue in effect until 10 years from the date of this Option Agreement and may be exercised during such term only in accordance with the provisions of the Plan and this Option Agreement. 3. Vesting. 3.1 Timing of Exercise. The Option may be exercised in accordance with the following schedule: (a) on the first anniversary of the date hereof, one-third of the shares purchasable under the Option may be purchased, in whole or in part, at any time thereafter until the Option expires; and (b) continuing on each of the second and third anniversaries of the date hereof, an additional one-third of the shares purchasable under the Option may be purchased at any time thereafter until the Option expires. 3.2 Special Vesting Provisions. Notwithstanding the foregoing, in the event that Optionee's employment with the Company terminates on account of (i) death; (ii) Disability; or (iii) termination of Optionee's Employment Agreement with the Company, dated July 29, 1997 (the "Employment Agreement") by the Company without Cause or by Optionee with Good Reason, Optionee shall have the right to purchase all of the shares purchasable under the Option in accordance with Section 4. Furthermore, in the event that the Company incurs a Change of Control, Optionee shall have the right to purchase all of the shares purchasable under the Option. Employment by a parent or subsidiary of the Company shall be deemed to be employment by the Company. The definitions in the Employment Agreement apply for purposes of this Section 3.2. 4. Exercise of Option. 4.1 Right to Exercise. While Optionee is employed by the Company, the Option is exercisable during its term in accordance with Section 3 and the applicable provisions of the Plan and this Option Agreement. In the event that the Optionee's employment with the Company or a parent or subsidiary of the Company terminates for any reason during the term of the Option, the Option may be exercised at any time prior to the earlier of the expiration date of the Option or the expiration of one year after the termination date, but only to the extent that the Option was vested and exercisable under Section 3 at the date of termination. In such event, to the extent that the Option was not exercised within the applicable period, all further rights to purchase shares pursuant to the Option shall cease and terminate at the expiration of such period. Notwithstanding the Option's designation as an Incentive Stock Option, the Option will not qualify for favorable tax treatment as an Incentive Stock Option if the Option is exercised more than three months after the Optionee's termination of service as an employee (or more than one year after termination in the event of termination due to disability or death), or after the Optionee has been on leave of absence for more than 90 days, unless the Optionee's reemployment rights are guaranteed by statute or contract. 4.2 Method of Exercise. The Option is exercisable by delivery of an exercise notice, which notice shall state the election to exercise the Option, the number of shares of Common Stock in respect of which the Option is being exercised (the "Exercised Shares") and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. In addition, Optionee agrees to execute, as a condition of Option exercise, such agreements respecting the Exercised Shares as the Committee, in its reasonable discretion, determines to be required under the terms of agreements to which the Company is a party or otherwise advisable and in the best interests of the Company. The exercise notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Chief Financial Officer of the Company. The exercise notice shall be accompanied by payment of the aggregate Exercise Price as to all the Exercised Shares. The Option shall be deemed to be exercised upon receipt by the Company of such fully executed exercise notice accompanied by such aggregate Exercise Price. For income tax purposes the Exercised Shares shall be considered transferred to Optionee on the date the Option is exercised with respect to such Exercised Shares. 5. Conditions. The obligations of the Company under this Option Agreement shall be subject to the approval of such state or federal authorities or agencies as may have jurisdiction in the matter. The Company will 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 and any national securities 2 exchange on which the Common Stock may then be listed, in connection with the issuance or sale of any shares acquired pursuant to this Option Agreement or the listing of such shares on any such exchange. The Company shall not be obligated to issue or deliver shares of Common Stock under this Option Agreement if, upon advice of its legal counsel, such issuance or delivery would violate state or federal securities laws. 6. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of Optionee: (a) cash; or (b) check; or (c) delivery of such documentation as the Committee and Optionee's broker shall require to effect an exercise of the Option and delivery to the Company of the sale or margin loan proceeds required to pay the aggregate Exercise Price of the Exercised Shares; or (d) surrender of other shares of Common Stock which have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 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. Upon notification of the amount due and prior to or concurrently with delivery of the certificate representing the shares, the Optionee shall pay to the Company any amounts necessary to satisfy applicable federal, state, and local withholding tax requirements. 7. Provisions Relating to Transferability. 7.1 Restriction on Transfer. The Option is not transferable by Optionee other than by will or the laws of descent and distribution and, during the Optionee's lifetime, may be exercised only by the Optionee. 7.2 Exercise by Legal Representative or Successor. Whenever the word "Optionee" is used in any provision of this Option Agreement under circumstances when the provision should logically be construed to apply to the Optionee's guardian, legal representative, executor, administrator, or the person or persons to whom the Option may be transferred by testamentary disposition or by the laws of descent and distribution, the word "Optionee" shall be deemed to include such person or persons. 8. Adjustment in Option Shares. In the event any change is made after May 1999 to the Company's outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the 3 outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the total number of Option Shares subject to this Option and (ii) the Exercise Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 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 or in lieu of having the Option continue unchanged, 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. 9. Legends. Certificates representing the shares subject to this Option 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. 10. Employment. Nothing in the Plan or in this Option Agreement shall (i) confer upon the Optionee any right with respect to employment with the Company or any affiliate of the Company or (ii) interfere in any way with the right of the Company or any affiliate of the Company to terminate the Optionee's employment. In all matters with respect to Optionee's employment, the terms and conditions of the Employment Agreement shall control. 11. The Plan. The Option is subject to the terms and conditions of the Plan. 12. Definitions. Any capitalized term in this Option Agreement which is not defined herein and which is defined in the Plan shall have the same definition as in the Plan. 13. Governing Law. To the extent that federal laws (such as the Code and the federal securities laws) do not otherwise control, the Plan and this Option Agreement shall be construed in accordance with the laws of the state of Oregon. 14. Headings. Headings contained in this Option Agreement are for reference purposes and shall not affect the meaning or interpretation of this Option Agreement. 15. General. Optionee and the Company agree that the Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan and Option Agreement. 4 The parties have signed this Agreement on the dates specified below, with this Agreement to take effect as of the date first specified above. OPTIONEE: CENTENNIAL BANCORP /s/ Thaddeus R. Winnowski /s/ Richard C. Williams ------------------------- ---------------------------------- Thaddeus R. Winnowski Chairman of the Board of Directors 5 EX-10.22 4 y58200ex10-22.txt INCENTIVE STOCK OPTION AGREEMENT Exhibit 10.22 INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT is made effective as of December 19, 2001 between CENTENNIAL BANCORP, an Oregon corporation (the "Company"), and THADDEUS (TED) R. WINNOWSKI (the "Optionee"). Pursuant to the Company's Restated 1995 Stock Incentive Plan (the "Plan"), the Company has granted Optionee an incentive stock option to purchase shares of the Company's Common Stock, without par value (the "Common Stock"), in the amount indicated below. NOW, THEREFORE, in consideration of the promises and the mutual covenants contained in this Option Agreement, the parties agree as follows: 1. Grant. The Company grants to Optionee, upon the terms and conditions set forth below, the right and option (the "Option") to purchase 32,355 shares of Common Stock at an exercise price of $7.42 per share (the "Exercise Price"), subject to the terms and conditions of the Plan, which are incorporated herein by reference. In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall govern. The Option is intended to qualify as an Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Term of Option. Subject to reductions in the term of the Option as provided in the Plan and this Option Agreement, the Option shall continue in effect until 10 years from the date of this Option Agreement and may be exercised during such term only in accordance with the provisions of the Plan and this Option Agreement. 3. Vesting. 3.1 Timing of Exercise. The Option may be exercised in accordance with the following schedule: (a) on the first anniversary of the date hereof, one-third of the shares purchasable under the Option may be purchased, in whole or in part, at any time thereafter until the Option expires; and (b) continuing on each of the second and third anniversaries of the date hereof, an additional one-third of the shares purchasable under the Option may be purchased at any time thereafter until the Option expires. 3.2 Special Vesting Provisions. Notwithstanding the foregoing, in the event that Optionee's employment with the Company terminates on account of (i) death; (ii) Disability; or (iii) termination of Optionee's Employment Agreement with the Company, dated July 29, 1997 (the "Employment Agreement") by the Company without Cause or by Optionee with Good Reason, Optionee shall have the right to purchase all of the shares purchasable under the Option in accordance with Section 4. Furthermore, in the event that the Company incurs a Change of Control, Optionee shall have the right to purchase all of the shares purchasable under the Option. Employment by a parent or subsidiary of the Company shall be deemed to be employment by the Company. The definitions in the Employment Agreement apply for purposes of this Section 3.2. 4. Exercise of Option. 4.1 Right to Exercise. While Optionee is employed by the Company, the Option is exercisable during its term in accordance with Section 3 and the applicable provisions of the Plan and this Option Agreement. In the event that the Optionee's employment with the Company or a parent or subsidiary of the Company terminates for any reason during the term of the Option, the Option may be exercised at any time prior to the earlier of the expiration date of the Option or the expiration of one year after the termination date, but only to the extent that the Option was vested and exercisable under Section 3 at the date of termination. In such event, to the extent that the Option was not exercised within the applicable period, all further rights to purchase shares pursuant to the Option shall cease and terminate at the expiration of such period. Notwithstanding the Option's designation as an Incentive Stock Option, the Option will not qualify for favorable tax treatment as an Incentive Stock Option if the Option is exercised more than three months after the Optionee's termination of service as an employee (or more than one year after termination in the event of termination due to disability or death), or after the Optionee has been on leave of absence for more than 90 days, unless the Optionee's reemployment rights are guaranteed by statute or contract. 4.2 Method of Exercise. The Option is exercisable by delivery of an exercise notice, which notice shall state the election to exercise the Option, the number of shares of Common Stock in respect of which the Option is being exercised (the "Exercised Shares") and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. In addition, Optionee agrees to execute, as a condition of Option exercise, such agreements respecting the Exercised Shares as the Committee, in its reasonable discretion, determines to be required under the terms of agreements to which the Company is a party or otherwise advisable and in the best interests of the Company. The exercise notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Chief Financial Officer of the Company. The exercise notice shall be accompanied by payment of the aggregate Exercise Price as to all the Exercised Shares. The Option shall be deemed to be exercised upon receipt by the Company of such fully executed exercise notice accompanied by such aggregate Exercise Price. For income tax purposes the Exercised Shares shall be considered transferred to Optionee on the date the Option is exercised with respect to such Exercised Shares. 5. Conditions. The obligations of the Company under this Option Agreement shall be subject to the approval of such state or federal authorities or agencies as may have jurisdiction in the matter. The Company will 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 and any national securities 2 exchange on which the Common Stock may then be listed, in connection with the issuance or sale of any shares acquired pursuant to this Option Agreement or the listing of such shares on any such exchange. The Company shall not be obligated to issue or deliver shares of Common Stock under this Option Agreement if, upon advice of its legal counsel, such issuance or delivery would violate state or federal securities laws. 6. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of Optionee: (a) cash; or (b) check; or (c) delivery of such documentation as the Committee and Optionee's broker shall require to effect an exercise of the Option and delivery to the Company of the sale or margin loan proceeds required to pay the aggregate Exercise Price of the Exercised Shares; or (d) surrender of other shares of Common Stock which have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 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. Upon notification of the amount due and prior to or concurrently with delivery of the certificate representing the shares, the Optionee shall pay to the Company any amounts necessary to satisfy applicable federal, state, and local withholding tax requirements. 7. Provisions Relating to Transferability. 7.1 Restriction on Transfer. The Option is not transferable by Optionee other than by will or the laws of descent and distribution and, during the Optionee's lifetime, may be exercised only by the Optionee. 7.2 Exercise by Legal Representative or Successor. Whenever the word "Optionee" is used in any provision of this Option Agreement under circumstances when the provision should logically be construed to apply to the Optionee's guardian, legal representative, executor, administrator, or the person or persons to whom the Option may be transferred by testamentary disposition or by the laws of descent and distribution, the word "Optionee" shall be deemed to include such person or persons. 8. Adjustment in Option Shares. In the event any change is made after May 1999 to the Company's outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the 3 outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the total number of Option Shares subject to this Option and (ii) the Exercise Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 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 or in lieu of having the Option continue unchanged, 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. 9. Legends. Certificates representing the shares subject to this Option 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. 10. Employment. Nothing in the Plan or in this Option Agreement shall (i) confer upon the Optionee any right with respect to employment with the Company or any affiliate of the Company or (ii) interfere in any way with the right of the Company or any affiliate of the Company to terminate the Optionee's employment. In all matters with respect to Optionee's employment, the terms and conditions of the Employment Agreement shall control. 11. The Plan. The Option is subject to the terms and conditions of the Plan. 12. Definitions. Any capitalized term in this Option Agreement which is not defined herein and which is defined in the Plan shall have the same definition as in the Plan. 13. Governing Law. To the extent that federal laws (such as the Code and the federal securities laws) do not otherwise control, the Plan and this Option Agreement shall be construed in accordance with the laws of the state of Oregon. 14. Headings. Headings contained in this Option Agreement are for reference purposes and shall not affect the meaning or interpretation of this Option Agreement. 15. General. Optionee and the Company agree that the Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan and Option Agreement. 4 The parties have signed this Agreement on the dates specified below, with this Agreement to take effect as of the date first specified above. OPTIONEE: CENTENNIAL BANCORP /s/ Thaddeus R. Winnowski /s/ Richard C. Williams ------------------------- ---------------------------------- Thaddeus R. Winnowski Chairman of the Board of Directors 5 EX-21.1 5 y58200ex21-1.txt SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 CENTENNIAL BANCORP LIST OF SUBSIDIARIES Names Under State of Which Name Incorporation Does Business Centennial Bank Oregon Centennial Mortgage EX-23.1 6 y58200ex23-1.txt CONSENT OF SYMONDS, EVANS & COMPANY, P.C. Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in each of Centennial Bancorp's Form S-8 Registration Statement Nos. 33-44701, 33-86650 and 333-32081 of our report dated January 18, 2002 with respect to the consolidated financial statements of Centennial Bancorp and subsidiary included in the Annual Report on Form 10-K for the year ended December 31, 2001. SYMONDS, EVANS & COMPANY, P.C. Portland, Oregon March 8, 2002 EX-99.1 7 y58200ex99-1.txt CERTAIN FACTORS TO CONSIDER EXHIBIT 99.1 Certain Factors to Consider in Connection with Forward-Looking Statements March 2002 From time to time, Centennial Bancorp ("Bancorp," "we," "us" or "our") and our representatives may make forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995 (the "Act")) regarding, among other things, expected future revenues or earnings, projections, plans, future performance and other estimates relating to us. Forward-looking statements may be included in our reports filed under the Securities Exchange Act of 1934, as amended, in press releases or in oral statements made with the approval of an authorized executive officer or director of Bancorp. We invoke to the fullest extent possible the protection of the Act and the judicially created "bespeaks caution" doctrine with respect to such statements. Accordingly, we are filing this Exhibit 99.1, which lists certain factors that may cause our actual results to differ materially from the results indicated in our forward-looking statements. The following list is not necessarily exhaustive. Bancorp and our subsidiary, Centennial Bank, operate in a rapidly changing environment, and new risk factors emerge periodically. There can be no assurance that this Exhibit lists all material risks to us at any specific time. Our actual results may differ materially from those described in our forward-looking statements as a result of various factors, including those listed below. Readers are cautioned not to unduly rely on any forward-looking statement, which speaks only as of the date on which it is made. We do not intend to update our forward-looking statements. CHANGES IN INTEREST RATES OR GENERAL ECONOMIC CONDITIONS COULD REDUCE OUR PROFITS OR SLOW OUR GROWTH Our results of operations and those of our subsidiary may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate market values, rapid changes in interest rates or changes in the monetary and fiscal policies of the federal government. Our profitability depends on the difference between the amount of interest we earn on investments and loans, and the amount of interest we pay on deposits and other liabilities. This difference is referred to as interest rate spread. Any decline in the economy in our market areas could have an adverse effect on us. Like most financial institutions, our net interest spread and margin will be affected by general economic conditions and other factors that influence interest rates. Our assets and liabilities will be affected differently by a given change in interest rates. For example, an increase or decrease in rates, the terms of our loans, or the mix of adjustable- and fixed-rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. A change in market interest rates can also have a significant impact on our ability to grow. Changes in rates may encourage depositors to withdraw deposit account funds to invest in other alternatives, which may limit the funds available to us for making loans. Additionally, changes in rates could discourage businesses and customers from seeking new loans or could encourage them to pay off existing loans with us through a refinancing with another financial institution. We cannot predict or control changes in interest rates. Negative developments in the economy, or our inability to respond to such changes, could adversely affect Bancorp and our subsidiary. Most of the loans originated by Centennial Bank are made to borrowers within the greater Portland and the Eugene/Springfield, Oregon areas. The bank also has branch offices in Vancouver, Washington and Salem, Oregon. Adverse changes in economic conditions in the Portland/Vancouver or Eugene/Springfield areas could impair our ability to collect loans and could otherwise have a negative effect on our financial condition. WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY We intend to continue to pursue an aggressive growth strategy focused primarily upon our ability to develop new account relationships, to establish new Centennial Bank branches in Oregon and Washington, to make acquisitions, and to generate loans and deposits. The success of our growth strategy will depend on our ability to manage applicable risks, control costs and provide competitive products and services while expanding our geographic presence by branching or acquiring other banks or branches of banks. There can be no assurance that we will be successful in increasing our volume of loans and deposits at acceptable risk levels and upon acceptable terms, expanding our asset base, managing the costs and implementation risks associated with our growth strategy, integrating any acquired institutions or branches or preventing deposit erosion at acquired institutions or branches. Also, there can be no assurance that our expansion plans, when implemented, will be profitable. Acquisitions and branching by Bancorp will be subject to regulatory approvals, and there can be no assurance that we will succeed in securing such approvals. Our ability to pursue our growth strategy may also be adversely affected by general economic conditions. As part of our overall growth strategy, we from time to time consider acquiring other banks. Any acquisition by Bancorp would create risks and uncertainties, including the possible issuance of additional shares of common stock to pay for such acquisition, which issuance may result in dilution to our current shareholders, the diversion of management's attention to acquisition negotiations and, if an acquisition is consummated, our ability to effectively assimilate the acquired bank and branches. While we seek to improve our capacity to use technological innovations, our growth strategy is based more on the belief that customer demand for personal contact and strategically placed branch offices will continue for the foreseeable future. Thus, we continue to expand our branch network and the availability to customers of well-trained and highly motivated personnel at a time when many banks are consolidating their branch networks and automating customer responses. There can be no assurance that our strategy will be successful or that technological advances by our competitors will not result in our loss of customer relationships. As a result of our strategy, certain of our costs for providing banking services may be higher than those of many of our competitors for the foreseeable future. Bancorp's growth strategy requires, among other things, expanded operational systems, the implementation of new control procedures, and success in hiring and retaining skilled employees. We believe that our capital, borrowings and expected earnings will be sufficient to support our operations and anticipated expansion and to meet all regulatory requirements for the foreseeable future. There can be no assurance that we will be successful in implementing, or will have the necessary regulatory capital to implement, our growth strategy. OUR CUSTOMERS MAY NOT REPAY THEIR LOANS The risk of borrowers not paying their loans is inherent in commercial banking. Loan defaults may have a material adverse effect on our earnings and overall financial condition. The risk of loss is affected by general economic conditions, the type of loan, the borrower's overall ability to repay the loan, and the quality of the collateral, if any, provided to us to secure the loan. We offer a full range of loans to our customers. Some types of loans carry a greater risk of default than other loans. Bancorp's loan portfolio consists primarily of commercial loans (not secured by real estate), real estate construction loans and real estate mortgage loans (including commercial loans secured by real estate). Commercial loans that are secured by property other than real estate generally are considered to involve a higher degree of risk than loans secured by real estate, primarily because the non-real-estate collateral may be difficult to repossess and liquidate. We focus on small- to medium-sized businesses. This results in a larger concentration by Bancorp of loans to such businesses. As a result, we may assume greater lending risks than institutions that tend to make loans to larger businesses or institutions that make loans primarily to consumers. Because payment of commercial loans is typically dependent on the success of the borrower's business, commercial loans are affected more by adverse general economic conditions than real estate loans. Construction lending also is subject to substantial risks. It is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. The risk of loss on construction loans depends largely on the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may have to advance funds beyond the amount we originally committed to permit completion of the project and to protect our security position. We may also be confronted, at or prior to maturity of the loan, with a project of insufficient value to ensure full repayment, particularly if the demand for the type of property being built decreases during the construction period. In addition, if the borrower is unable to obtain permanent financing in a timely manner, the borrower may not be able to repay the construction loan. WE MAY NOT ADEQUATELY ALLOW FOR LOAN LOSSES Our allowance for loan losses is maintained at a level we consider adequate to absorb anticipated losses. The amount of future losses, however, may be affected by changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and future losses may exceed our current estimates. There can be no assurance that our allowance will be adequate to cover our actual losses. WE MAY BE LIABLE IF CENTENNIAL BANK IS UNDERCAPITALIZED Under federal law, a bank holding company may be required to guarantee a capital plan filed by an undercapitalized bank subsidiary with its primary regulator. If the bank defaults under the plan, the holding company may be required to contribute to the capital of the bank an amount equal to the lesser of 5% of the bank's assets at the time it became undercapitalized or the amount necessary for the bank to be considered "adequately capitalized." We are the sole shareholder of Centennial Bank. WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN OUR MARKETS The banking and mortgage lending businesses in Oregon and Washington are highly competitive. We compete for loans and deposits with other commercial banks, savings banks, savings and loan associations, finance companies, money market funds, brokerage firms, credit unions and other nonfinancial institutions. Many of these competitors have substantially greater resources than Bancorp. Many of our competitors have substantially higher lending limits than we do and offer certain services, including trust and international banking services, that we do not provide. The larger institutions in our markets have competitive advantages over us in that they have higher public visibility and are able to maintain advertising and marketing activities on a much larger scale than we can economically sustain. By law, lending limits are dependent upon the capital of the financial institution, giving larger banks an additional competitive advantage with respect to loan applications that are in excess of Centennial Bank's legal lending limits. During the past several years, we capitalized on the marketing opportunities created by the consolidation of the banking industry, as the larger institutions were perceived to de-emphasize the small- to medium-size business and professional market, which is our primary focus. Several banks, which focus on the same types of customers as we do, have been formed in our market areas during the last few years. This growing number of community banks and a new emphasis by larger institutions on this market segment has intensified competition. In addition, out-of-state banks and bank holding companies headquartered anywhere in the United States are permitted to acquire Oregon state-chartered banks that have been operating for three or more years. Statewide branch banking also is permitted in Oregon and Washington. As a result of such interstate banking and branch banking, Centennial Bank may experience increased competition in its market areas. In addition, the Gramm-Leach-Bliley Act, enacted in November 1999 (the "GLB Act"), eliminated several barriers to affiliation among providers of financial services and affects the competitive environment in which Bancorp operates in substantial and unpredictable ways. The GLB Act permits certain business combinations between banks, insurance companies, securities firms, and other financial service providers that were not permitted previously. Using the "financial holding company" structure created by the GLB Act, insurance companies and securities firms now compete more directly with banks and bank holding companies, and may acquire existing financial institutions. The GLB has increased capitalization among financial institutions. Bancorp cannot predict what further changes in the competitive environment, or what changes in the financial condition of Bancorp, may occur as a direct or indirect result of the GLB Act. WE MAY NOT BE ABLE TO IMPLEMENT TECHNOLOGICAL IMPROVEMENTS REQUIRED BY OUR CUSTOMERS The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, effective use of technology increases efficiency and enables banks to reduce costs. Our future success will depend in part on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements and highly skilled technical personnel. To be competitive, we may need to spend significant amounts on computer hardware and software, and for technical personnel. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. GOVERNMENT REGULATION MAY LIMIT OUR OPERATIONS AND REDUCE OUR REVENUES OR PROFITS Bancorp and Centennial Bank are subject to extensive federal and state legislation, regulation and supervision. These and other restrictions limit the manner in which we may conduct our businesses and obtain financing. These laws are intended primarily to protect depositors and are not for the benefit of shareholders. In addition, the burdens and restrictions imposed by federal and state banking regulations may place Centennial Bank at a competitive disadvantage compared to competitors who are less regulated. Legislation and regulations have had and will continue to have a significant impact on the banking industry. Several regulatory agencies and state legislatures are in the process of responding to changes required or suggested by the GLB Act, which was enacted in November 1999. We cannot determine the ultimate effect that the GLB Act, or the regulations implemented and the legislation enacted as a result of that act, will have on our operating structure, financial condition or results of operations. Some legislative and regulatory changes may increase our costs of doing business, assist competitors or otherwise adversely affect our operations. We are unable to predict the nature or extent of the effects on our business and earnings that any fiscal or monetary policies, or new federal or state legislation or regulations, may have in the future. IF WE FAIL TO RETAIN OUR KEY EMPLOYEES, OUR GROWTH AND PROFITABILITY COULD BE ADVERSELY AFFECTED. We rely on experienced client relationship managers and on officers, directors and employees who have strong relationships with the community to generate new business. If a significant number of our employees were to leave, our profitability and growth could be adversely affected. WE ARE SUBJECT TO RESTRICTIONS ON CHANGES IN CONTROL THAT COULD MAKE IT DIFFICULT TO OBTAIN A PREMIUM FOR YOUR INVESTMENT. We are subject to provisions of the Oregon Bank Act, which require approval by the Director of the Oregon Department of Consumer and Business Services prior to the creation or transfer of a controlling interest (i.e., 25% of a class of voting stock) in Bancorp or Centennial Bank. If a bank holding company acquires more than 5% of Bancorp or Centennial Bank, the acquisition needs the prior approval of the Board of Governors of the Federal Reserve Board (the "FRB"). In addition, under federal law, a person (i.e., an individual, an entity that is not a bank holding company, or a group of persons acting in concert) may not acquire control of Bancorp or Centennial Bank without prior notice to the FRB and/or the Federal Deposit Insurance Corporation. Under federal law, if a person acquires 10% or more of our common stock, there is a rebuttable presumption that such person controls us. In addition, several of our officers are subject to employment or severance agreements that provide for significant payments in the event their employment terminates following a change-in-control of Bancorp or Centennial Bank. These and other factors may inhibit takeover bids or other attempts to acquire us, decreasing the ability of shareholders to obtain a premium for their shares as a result of an acquisition. WE ARE REGULARLY INVOLVED IN LEGAL PROCEEDINGS Periodically, and in the ordinary course of business, various claims and lawsuits are brought by and against us and our subsidiary, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real estate loans and other issues incident to our business. -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.21

                                                                   Exhibit 10.21

                        INCENTIVE STOCK OPTION AGREEMENT

         THIS AGREEMENT is made effective as of January 2, 2001 between
CENTENNIAL BANCORP, an Oregon corporation (the "Company"), and THADDEUS (TED) R.
WINNOWSKI (the "Optionee").

         Pursuant to the Company's Restated 1995 Stock Incentive Plan (the
"Plan"), the Company has granted Optionee an incentive stock option to purchase
shares of the Company's Common Stock, without par value (the "Common Stock"), in
the amount indicated below.

         NOW, THEREFORE, in consideration of the promises and the mutual
covenants contained in this Option Agreement, the parties agree as follows:

         1. Grant. The Company grants to Optionee, upon the terms and conditions
set forth below, the right and option (the "Option") to purchase 29,348 shares
of Common Stock at an exercise price of $8.75 per share (the "Exercise Price"),
subject to the terms and conditions of the Plan, which are incorporated herein
by reference. In the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall govern. The Option is intended to qualify as an
Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").

         2. Term of Option. Subject to reductions in the term of the Option as
provided in the Plan and this Option Agreement, the Option shall continue in
effect until 10 years from the date of this Option Agreement and may be
exercised during such term only in accordance with the provisions of the Plan
and this Option Agreement.

         3. Vesting.

                  3.1 Timing of Exercise. The Option may be exercised in
accordance with the following schedule: (a) on the first anniversary of the date
hereof, one-third of the shares purchasable under the Option may be purchased,
in whole or in part, at any time thereafter until the Option expires; and (b)
continuing on each of the second and third anniversaries of the date hereof, an
additional one-third of the shares purchasable under the Option may be purchased
at any time thereafter until the Option expires.

                  3.2 Special Vesting Provisions. Notwithstanding the foregoing,
in the event that Optionee's employment with the Company terminates on account
of (i) death; (ii) Disability; or (iii) termination of Optionee's Employment
Agreement with the Company, dated July 29, 1997 (the "Employment Agreement") by
the Company without Cause or by Optionee with Good Reason, Optionee shall have
the right to purchase all of the shares purchasable under the Option in
accordance with Section 4. Furthermore, in the event that the Company incurs a
Change of Control, Optionee shall have the right to

purchase all of the shares purchasable under the Option. Employment by a parent
or subsidiary of the Company shall be deemed to be employment by the Company.
The definitions in the Employment Agreement apply for purposes of this Section
3.2.

         4. Exercise of Option.

                  4.1 Right to Exercise. While Optionee is employed by the
Company, the Option is exercisable during its term in accordance with Section 3
and the applicable provisions of the Plan and this Option Agreement. In the
event that the Optionee's employment with the Company or a parent or subsidiary
of the Company terminates for any reason during the term of the Option, the
Option may be exercised at any time prior to the earlier of the expiration date
of the Option or the expiration of one year after the termination date, but only
to the extent that the Option was vested and exercisable under Section 3 at the
date of termination. In such event, to the extent that the Option was not
exercised within the applicable period, all further rights to purchase shares
pursuant to the Option shall cease and terminate at the expiration of such
period. Notwithstanding the Option's designation as an Incentive Stock Option,
the Option will not qualify for favorable tax treatment as an Incentive Stock
Option if the Option is exercised more than three months after the Optionee's
termination of service as an employee (or more than one year after termination
in the event of termination due to disability or death), or after the Optionee
has been on leave of absence for more than 90 days, unless the Optionee's
reemployment rights are guaranteed by statute or contract.

                  4.2 Method of Exercise. The Option is exercisable by delivery
of an exercise notice, which notice shall state the election to exercise the
Option, the number of shares of Common Stock in respect of which the Option is
being exercised (the "Exercised Shares") and such other representations and
agreements as may be required by the Company pursuant to the provisions of the
Plan. In addition, Optionee agrees to execute, as a condition of Option
exercise, such agreements respecting the Exercised Shares as the Committee, in
its reasonable discretion, determines to be required under the terms of
agreements to which the Company is a party or otherwise advisable and in the
best interests of the Company. The exercise notice shall be signed by Optionee
and shall be delivered in person or by certified mail to the Chief Financial
Officer of the Company. The exercise notice shall be accompanied by payment of
the aggregate Exercise Price as to all the Exercised Shares. The Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
exercise notice accompanied by such aggregate Exercise Price. For income tax
purposes the Exercised Shares shall be considered transferred to Optionee on the
date the Option is exercised with respect to such Exercised Shares.

         5. Conditions. The obligations of the Company under this Option
Agreement shall be subject to the approval of such state or federal authorities
or agencies as may have jurisdiction in the matter. The Company will 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 and any national securities

                                       2

exchange on which the Common Stock may then be listed, in connection with the
issuance or sale of any shares acquired pursuant to this Option Agreement or the
listing of such shares on any such exchange. The Company shall not be obligated
to issue or deliver shares of Common Stock under this Option Agreement if, upon
advice of its legal counsel, such issuance or delivery would violate state or
federal securities laws.

         6. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of Optionee:

                  (a) cash; or

                  (b) check; or

                  (c) delivery of such documentation as the Committee and
                  Optionee's broker shall require to effect an exercise of the
                  Option and delivery to the Company of the sale or margin loan
                  proceeds required to pay the aggregate Exercise Price of the
                  Exercised Shares; or

                  (d) surrender of other shares of Common Stock which have a
                  Fair Market Value on the date of surrender equal to the
                  aggregate Exercise Price of the Exercised Shares.

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. Upon
notification of the amount due and prior to or concurrently with delivery of the
certificate representing the shares, the Optionee shall pay to the Company any
amounts necessary to satisfy applicable federal, state, and local withholding
tax requirements.

         7. Provisions Relating to Transferability.

                  7.1 Restriction on Transfer. The Option is not transferable by
Optionee other than by will or the laws of descent and distribution and, during
the Optionee's lifetime, may be exercised only by the Optionee.

                  7.2 Exercise by Legal Representative or Successor. Whenever
the word "Optionee" is used in any provision of this Option Agreement under
circumstances when the provision should logically be construed to apply to the
Optionee's guardian, legal representative, executor, administrator, or the
person or persons to whom the Option may be transferred by testamentary
disposition or by the laws of descent and distribution, the word "Optionee"
shall be deemed to include such person or persons.

         8. Adjustment in Option Shares. In the event any change is made after
May 1999 to the Company's outstanding Common Stock by reason of any stock split,
stock dividend, combination of shares, exchange of shares, or other change
affecting the

                                       3

outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments shall be made to (i) the total number of Option Shares
subject to this Option and (ii) the Exercise Price payable per share in order to
reflect such change and thereby preclude a dilution or enlargement of benefits
hereunder. 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 or in lieu of having the Option continue unchanged,
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.

         9. Legends. Certificates representing the shares subject to this Option
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.

         10. Employment. Nothing in the Plan or in this Option Agreement shall
(i) confer upon the Optionee any right with respect to employment with the
Company or any affiliate of the Company or (ii) interfere in any way with the
right of the Company or any affiliate of the Company to terminate the Optionee's
employment. In all matters with respect to Optionee's employment, the terms and
conditions of the Employment Agreement shall control.

         11. The Plan. The Option is subject to the terms and conditions of the
Plan.

         12. Definitions. Any capitalized term in this Option Agreement which is
not defined herein and which is defined in the Plan shall have the same
definition as in the Plan.

         13. Governing Law. To the extent that federal laws (such as the Code
and the federal securities laws) do not otherwise control, the Plan and this
Option Agreement shall be construed in accordance with the laws of the state of
Oregon.

         14. Headings. Headings contained in this Option Agreement are for
reference purposes and shall not affect the meaning or interpretation of this
Option Agreement.

         15. General. Optionee and the Company agree that the Option is granted
under and governed by the terms and conditions of the Plan and this Option
Agreement. Optionee has reviewed the Plan and this Option Agreement in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option Agreement and fully understands all provisions of the Plan
and Option Agreement. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Committee upon any questions
relating to the Plan and Option Agreement.

                                       4

         The parties have signed this Agreement on the dates specified below,
with this Agreement to take effect as of the date first specified above.

         OPTIONEE:                            CENTENNIAL BANCORP

         /s/ Thaddeus R. Winnowski            /s/ Richard C. Williams
         -------------------------            ----------------------------------
         Thaddeus R. Winnowski                Chairman of the Board of Directors


                                       5

EX-10.22

                                                                   Exhibit 10.22

                        INCENTIVE STOCK OPTION AGREEMENT

         THIS AGREEMENT is made effective as of December 19, 2001 between
CENTENNIAL BANCORP, an Oregon corporation (the "Company"), and THADDEUS (TED) R.
WINNOWSKI (the "Optionee").

         Pursuant to the Company's Restated 1995 Stock Incentive Plan (the
"Plan"), the Company has granted Optionee an incentive stock option to purchase
shares of the Company's Common Stock, without par value (the "Common Stock"), in
the amount indicated below.

         NOW, THEREFORE, in consideration of the promises and the mutual
covenants contained in this Option Agreement, the parties agree as follows:

         1. Grant. The Company grants to Optionee, upon the terms and conditions
set forth below, the right and option (the "Option") to purchase 32,355 shares
of Common Stock at an exercise price of $7.42 per share (the "Exercise Price"),
subject to the terms and conditions of the Plan, which are incorporated herein
by reference. In the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall govern. The Option is intended to qualify as an
Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").

         2. Term of Option. Subject to reductions in the term of the Option as
provided in the Plan and this Option Agreement, the Option shall continue in
effect until 10 years from the date of this Option Agreement and may be
exercised during such term only in accordance with the provisions of the Plan
and this Option Agreement.

         3. Vesting.

                  3.1 Timing of Exercise. The Option may be exercised in
accordance with the following schedule: (a) on the first anniversary of the date
hereof, one-third of the shares purchasable under the Option may be purchased,
in whole or in part, at any time thereafter until the Option expires; and (b)
continuing on each of the second and third anniversaries of the date hereof, an
additional one-third of the shares purchasable under the Option may be purchased
at any time thereafter until the Option expires.

                  3.2 Special Vesting Provisions. Notwithstanding the foregoing,
in the event that Optionee's employment with the Company terminates on account
of (i) death; (ii) Disability; or (iii) termination of Optionee's Employment
Agreement with the Company, dated July 29, 1997 (the "Employment Agreement") by
the Company without Cause or by Optionee with Good Reason, Optionee shall have
the right to purchase all of the shares purchasable under the Option in
accordance with Section 4. Furthermore, in the event that the Company incurs a
Change of Control, Optionee shall have the right to

purchase all of the shares purchasable under the Option. Employment by a parent
or subsidiary of the Company shall be deemed to be employment by the Company.
The definitions in the Employment Agreement apply for purposes of this Section
3.2.

         4. Exercise of Option.

                  4.1 Right to Exercise. While Optionee is employed by the
Company, the Option is exercisable during its term in accordance with Section 3
and the applicable provisions of the Plan and this Option Agreement. In the
event that the Optionee's employment with the Company or a parent or subsidiary
of the Company terminates for any reason during the term of the Option, the
Option may be exercised at any time prior to the earlier of the expiration date
of the Option or the expiration of one year after the termination date, but only
to the extent that the Option was vested and exercisable under Section 3 at the
date of termination. In such event, to the extent that the Option was not
exercised within the applicable period, all further rights to purchase shares
pursuant to the Option shall cease and terminate at the expiration of such
period. Notwithstanding the Option's designation as an Incentive Stock Option,
the Option will not qualify for favorable tax treatment as an Incentive Stock
Option if the Option is exercised more than three months after the Optionee's
termination of service as an employee (or more than one year after termination
in the event of termination due to disability or death), or after the Optionee
has been on leave of absence for more than 90 days, unless the Optionee's
reemployment rights are guaranteed by statute or contract.

                  4.2 Method of Exercise. The Option is exercisable by delivery
of an exercise notice, which notice shall state the election to exercise the
Option, the number of shares of Common Stock in respect of which the Option is
being exercised (the "Exercised Shares") and such other representations and
agreements as may be required by the Company pursuant to the provisions of the
Plan. In addition, Optionee agrees to execute, as a condition of Option
exercise, such agreements respecting the Exercised Shares as the Committee, in
its reasonable discretion, determines to be required under the terms of
agreements to which the Company is a party or otherwise advisable and in the
best interests of the Company. The exercise notice shall be signed by Optionee
and shall be delivered in person or by certified mail to the Chief Financial
Officer of the Company. The exercise notice shall be accompanied by payment of
the aggregate Exercise Price as to all the Exercised Shares. The Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
exercise notice accompanied by such aggregate Exercise Price. For income tax
purposes the Exercised Shares shall be considered transferred to Optionee on the
date the Option is exercised with respect to such Exercised Shares.

         5. Conditions. The obligations of the Company under this Option
Agreement shall be subject to the approval of such state or federal authorities
or agencies as may have jurisdiction in the matter. The Company will 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 and any national securities

                                       2

exchange on which the Common Stock may then be listed, in connection with the
issuance or sale of any shares acquired pursuant to this Option Agreement or the
listing of such shares on any such exchange. The Company shall not be obligated
to issue or deliver shares of Common Stock under this Option Agreement if, upon
advice of its legal counsel, such issuance or delivery would violate state or
federal securities laws.

         6. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of Optionee:

                  (a) cash; or

                  (b) check; or

                  (c) delivery of such documentation as the Committee and
                  Optionee's broker shall require to effect an exercise of the
                  Option and delivery to the Company of the sale or margin loan
                  proceeds required to pay the aggregate Exercise Price of the
                  Exercised Shares; or

                  (d) surrender of other shares of Common Stock which have a
                  Fair Market Value on the date of surrender equal to the
                  aggregate Exercise Price of the Exercised Shares.

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. Upon
notification of the amount due and prior to or concurrently with delivery of the
certificate representing the shares, the Optionee shall pay to the Company any
amounts necessary to satisfy applicable federal, state, and local withholding
tax requirements.

         7. Provisions Relating to Transferability.

                  7.1 Restriction on Transfer. The Option is not transferable by
Optionee other than by will or the laws of descent and distribution and, during
the Optionee's lifetime, may be exercised only by the Optionee.

                  7.2 Exercise by Legal Representative or Successor. Whenever
the word "Optionee" is used in any provision of this Option Agreement under
circumstances when the provision should logically be construed to apply to the
Optionee's guardian, legal representative, executor, administrator, or the
person or persons to whom the Option may be transferred by testamentary
disposition or by the laws of descent and distribution, the word "Optionee"
shall be deemed to include such person or persons.

         8. Adjustment in Option Shares. In the event any change is made after
May 1999 to the Company's outstanding Common Stock by reason of any stock split,
stock dividend, combination of shares, exchange of shares, or other change
affecting the

                                       3

outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments shall be made to (i) the total number of Option Shares
subject to this Option and (ii) the Exercise Price payable per share in order to
reflect such change and thereby preclude a dilution or enlargement of benefits
hereunder. 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 or in lieu of having the Option continue unchanged,
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.

         9. Legends. Certificates representing the shares subject to this Option
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.

         10. Employment. Nothing in the Plan or in this Option Agreement shall
(i) confer upon the Optionee any right with respect to employment with the
Company or any affiliate of the Company or (ii) interfere in any way with the
right of the Company or any affiliate of the Company to terminate the Optionee's
employment. In all matters with respect to Optionee's employment, the terms and
conditions of the Employment Agreement shall control.

         11. The Plan. The Option is subject to the terms and conditions of the
Plan.

         12. Definitions. Any capitalized term in this Option Agreement which is
not defined herein and which is defined in the Plan shall have the same
definition as in the Plan.

         13. Governing Law. To the extent that federal laws (such as the Code
and the federal securities laws) do not otherwise control, the Plan and this
Option Agreement shall be construed in accordance with the laws of the state of
Oregon.

         14. Headings. Headings contained in this Option Agreement are for
reference purposes and shall not affect the meaning or interpretation of this
Option Agreement.

         15. General. Optionee and the Company agree that the Option is granted
under and governed by the terms and conditions of the Plan and this Option
Agreement. Optionee has reviewed the Plan and this Option Agreement in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option Agreement and fully understands all provisions of the Plan
and Option Agreement. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Committee upon any questions
relating to the Plan and Option Agreement.

                                       4

         The parties have signed this Agreement on the dates specified below,
with this Agreement to take effect as of the date first specified above.

         OPTIONEE:                          CENTENNIAL BANCORP

         /s/ Thaddeus R. Winnowski          /s/ Richard C. Williams
         -------------------------          ----------------------------------
         Thaddeus R. Winnowski              Chairman of the Board of Directors


                                       5

EX-21.1

                                  EXHIBIT 21.1

                               CENTENNIAL BANCORP
                              LIST OF SUBSIDIARIES


                                                           Names Under
                                 State of                     Which
            Name               Incorporation              Does Business

     Centennial Bank              Oregon               Centennial Mortgage

EX-23.1

                                                                    Exhibit 23.1

                         CONSENT OF INDEPENDENT AUDITORS


We consent to the incorporation by reference in each of Centennial Bancorp's
Form S-8 Registration Statement Nos. 33-44701, 33-86650 and 333-32081 of our
report dated January 18, 2002 with respect to the consolidated financial
statements of Centennial Bancorp and subsidiary included in the Annual Report on
Form 10-K for the year ended December 31, 2001.

SYMONDS, EVANS & COMPANY, P.C.

Portland, Oregon
March 8, 2002

EX-99.1

                                  EXHIBIT 99.1

                    Certain Factors to Consider in Connection
                         with Forward-Looking Statements

                                   March 2002


         From time to time, Centennial Bancorp ("Bancorp," "we," "us" or "our")
and our representatives may make forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995 (the "Act"))
regarding, among other things, expected future revenues or earnings,
projections, plans, future performance and other estimates relating to us.
Forward-looking statements may be included in our reports filed under the
Securities Exchange Act of 1934, as amended, in press releases or in oral
statements made with the approval of an authorized executive officer or director
of Bancorp.

         We invoke to the fullest extent possible the protection of the Act and
the judicially created "bespeaks caution" doctrine with respect to such
statements. Accordingly, we are filing this Exhibit 99.1, which lists certain
factors that may cause our actual results to differ materially from the results
indicated in our forward-looking statements.

         The following list is not necessarily exhaustive. Bancorp and our
subsidiary, Centennial Bank, operate in a rapidly changing environment, and new
risk factors emerge periodically. There can be no assurance that this Exhibit
lists all material risks to us at any specific time.

         Our actual results may differ materially from those described in our
forward-looking statements as a result of various factors, including those
listed below. Readers are cautioned not to unduly rely on any forward-looking
statement, which speaks only as of the date on which it is made. We do not
intend to update our forward-looking statements.

CHANGES IN INTEREST RATES OR GENERAL ECONOMIC CONDITIONS COULD REDUCE OUR
PROFITS OR SLOW OUR GROWTH

         Our results of operations and those of our subsidiary may be materially
and adversely affected by changes in prevailing economic conditions, including
declines in real estate market values, rapid changes in interest rates or
changes in the monetary and fiscal policies of the federal government. Our
profitability depends on the difference between the amount of interest we earn
on investments and loans, and the amount of interest we pay on deposits and
other liabilities. This difference is referred to as interest rate spread. Any
decline in the economy in our market areas could have an adverse effect on us.
Like most financial institutions, our net interest spread and margin will be
affected by general economic conditions and other factors that influence
interest rates. Our assets and liabilities will be affected differently by a
given change in interest rates. For example, an increase or decrease in rates,
the terms of our loans, or the mix of adjustable- and fixed-rate loans in our
portfolio could have a positive or negative effect on our net income, capital
and liquidity. A change in market interest rates can also have a significant
impact on our ability to grow. Changes in rates may encourage depositors to
withdraw deposit account funds to invest in other alternatives, which may limit
the funds available to us for making loans. Additionally, changes in rates could
discourage businesses and customers from seeking new loans or could encourage
them to pay off existing loans with us through a refinancing with another
financial institution. We cannot predict or control changes in interest rates.
Negative developments in the economy, or our inability to respond to such
changes, could adversely affect Bancorp and our subsidiary.

         Most of the loans originated by Centennial Bank are made to borrowers
within the greater Portland and the Eugene/Springfield, Oregon areas. The bank
also has branch offices in Vancouver, Washington and Salem, Oregon. Adverse
changes in economic conditions in the Portland/Vancouver or Eugene/Springfield
areas could impair our ability to collect loans and could otherwise have a
negative effect on our financial condition.

WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY

         We intend to continue to pursue an aggressive growth strategy focused
primarily upon our ability to develop new account relationships, to establish
new Centennial Bank branches in Oregon and Washington, to make acquisitions, and
to generate loans and deposits. The success of our growth strategy will depend
on our ability to manage applicable risks, control costs and provide competitive
products and services while expanding our geographic presence by branching or
acquiring other banks or branches of banks. There can be no assurance that we
will be successful in increasing our volume of loans and deposits at acceptable
risk levels and upon acceptable terms, expanding our asset base, managing the
costs and implementation risks associated with our growth strategy, integrating
any acquired institutions or branches or preventing deposit erosion at acquired
institutions or branches. Also, there can be no assurance that our expansion
plans, when implemented, will be profitable. Acquisitions and branching by
Bancorp will be subject to regulatory approvals, and there can be no assurance
that we will succeed in securing such approvals. Our ability to pursue our
growth strategy may also be adversely affected by general economic conditions.

         As part of our overall growth strategy, we from time to time consider
acquiring other banks. Any acquisition by Bancorp would create risks and
uncertainties, including the possible issuance of additional shares of common
stock to pay for such acquisition, which issuance may result in dilution to our
current shareholders, the diversion of management's attention to acquisition
negotiations and, if an acquisition is consummated, our ability to effectively
assimilate the acquired bank and branches.

         While we seek to improve our capacity to use technological innovations,
our growth strategy is based more on the belief that customer demand for
personal contact and strategically placed branch offices will continue for the
foreseeable future. Thus, we continue to expand our branch network and the
availability to customers of well-trained and highly motivated personnel at a
time when many banks are consolidating their branch networks and automating
customer responses. There can be no assurance that our strategy will be
successful or that technological advances by our competitors will not result in
our loss of customer relationships. As a result of our strategy, certain of our
costs for providing banking services may be higher than those of many of our
competitors for the foreseeable future.

         Bancorp's growth strategy requires, among other things, expanded
operational systems, the implementation of new control procedures, and success
in hiring and retaining skilled employees. We believe that our capital,
borrowings and expected earnings will be sufficient to support our operations
and anticipated expansion and to meet all regulatory requirements for the
foreseeable future. There can be no assurance that we will be successful in
implementing, or will have the necessary regulatory capital to implement, our
growth strategy.

OUR CUSTOMERS MAY NOT REPAY THEIR LOANS

         The risk of borrowers not paying their loans is inherent in commercial
banking. Loan defaults may have a material adverse effect on our earnings and
overall financial condition. The risk of loss is affected by general economic
conditions, the type of loan, the borrower's overall ability to repay the loan,
and the quality of the collateral, if any, provided to us to secure the loan. We
offer a full range of loans to our customers. Some types of loans carry a
greater risk of default than other loans.

         Bancorp's loan portfolio consists primarily of commercial loans (not
secured by real estate), real estate construction loans and real estate mortgage
loans (including commercial loans secured by real estate). Commercial loans that
are secured by property other than real estate generally are considered to
involve a higher degree of risk than loans secured by real estate, primarily
because the non-real-estate collateral may be difficult to repossess and
liquidate. We focus on small- to medium-sized businesses. This results in a
larger concentration by Bancorp of loans to such businesses. As a result, we may
assume greater lending risks than institutions that tend to make loans to larger
businesses or institutions that make loans primarily to consumers. Because
payment of commercial loans is typically dependent on the success of the
borrower's business, commercial loans are affected more by adverse general
economic conditions than real estate loans.

         Construction lending also is subject to substantial risks. It is
generally considered to involve a higher degree of risk than long-term financing
on improved, occupied real estate. The risk of loss on construction loans
depends largely on the accuracy of the initial estimate of the property's value
at completion of construction or development and the estimated cost (including
interest) of construction. If the estimate of construction costs proves to be
inaccurate, we may have to advance funds beyond the amount we originally
committed to permit completion of the project and to protect our security
position. We may also be confronted, at or prior to maturity of the loan, with a
project of insufficient value to ensure full repayment, particularly if the
demand for the type of property being built decreases during the construction
period. In addition, if the borrower is unable to obtain permanent financing in
a timely manner, the borrower may not be able to repay the construction loan.

WE MAY NOT ADEQUATELY ALLOW FOR LOAN LOSSES

         Our allowance for loan losses is maintained at a level we consider
adequate to absorb anticipated losses. The amount of future losses, however, may
be affected by changes in economic, operating and other conditions, including
changes in interest rates, which may be beyond our control, and future losses
may exceed our current estimates. There can be no assurance that our allowance
will be adequate to cover our actual losses.

WE MAY BE LIABLE IF CENTENNIAL BANK IS UNDERCAPITALIZED

         Under federal law, a bank holding company may be required to guarantee
a capital plan filed by an undercapitalized bank subsidiary with its primary
regulator. If the bank defaults under the plan, the holding company may be
required to contribute to the capital of the bank an amount equal to the lesser
of 5% of the bank's assets at the time it became undercapitalized or the amount
necessary for the bank to be considered "adequately capitalized." We are the
sole shareholder of Centennial Bank.

WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN OUR MARKETS

         The banking and mortgage lending businesses in Oregon and Washington
are highly competitive. We compete for loans and deposits with other commercial
banks, savings banks, savings and loan associations, finance companies, money
market funds, brokerage firms, credit unions and other nonfinancial
institutions. Many of these competitors have substantially greater resources
than Bancorp. Many of our competitors have substantially higher lending limits
than we do and offer certain services, including trust and international banking
services, that we do not provide. The larger institutions in our markets have
competitive advantages over us in that they have higher public visibility and
are able to maintain advertising and marketing activities on a much larger scale
than we can economically sustain. By law, lending limits are dependent upon the
capital of the financial institution, giving larger banks an additional
competitive advantage with respect to loan applications that are in excess of
Centennial Bank's legal lending limits.

         During the past several years, we capitalized on the marketing
opportunities created by the consolidation of the banking industry, as the
larger institutions were perceived to de-emphasize the small- to medium-size
business and professional market, which is our primary focus. Several banks,
which focus on the same types of customers as we do, have been formed in our
market areas during the last few years. This growing number of community banks
and a new emphasis by larger institutions on this market segment has intensified
competition.

         In addition, out-of-state banks and bank holding companies
headquartered anywhere in the United States are permitted to acquire Oregon
state-chartered banks that have been operating for three or more years.
Statewide branch banking also is permitted in Oregon and Washington. As a result
of such interstate banking and branch banking, Centennial Bank may experience
increased competition in its market areas.

         In addition, the Gramm-Leach-Bliley Act, enacted in November 1999 (the
"GLB Act"), eliminated several barriers to affiliation among providers of
financial services and affects the competitive environment in which Bancorp
operates in substantial and unpredictable ways. The GLB Act permits certain
business combinations between banks, insurance companies, securities firms, and
other financial service providers that were not permitted previously. Using the
"financial holding company" structure created by the GLB Act, insurance
companies and securities firms now compete more directly with banks and bank
holding companies, and may acquire existing financial institutions. The GLB has
increased capitalization among financial institutions. Bancorp cannot predict
what further changes in the competitive environment, or what changes in the
financial condition of Bancorp, may occur as a direct or indirect result of the
GLB Act.

WE MAY NOT BE ABLE TO IMPLEMENT TECHNOLOGICAL IMPROVEMENTS REQUIRED BY OUR
CUSTOMERS

         The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, effective use of technology increases
efficiency and enables banks to reduce costs. Our future success will depend in
part on our ability to address the needs of our customers by using technology to
provide products and services that will satisfy customer demands for convenience
as well as create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in technological
improvements and highly skilled technical personnel. To be competitive, we may
need to spend significant amounts on computer hardware and software, and for
technical personnel. There can be no assurance that we will be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers.

GOVERNMENT REGULATION MAY LIMIT OUR OPERATIONS AND REDUCE OUR REVENUES OR
PROFITS

         Bancorp and Centennial Bank are subject to extensive federal and state
legislation, regulation and supervision. These and other restrictions limit the
manner in which we may conduct our businesses and obtain financing. These laws
are intended primarily to protect depositors and are not for the benefit of
shareholders. In addition, the burdens and restrictions imposed by federal and
state banking regulations may place Centennial Bank at a competitive
disadvantage compared to competitors who are less regulated.

         Legislation and regulations have had and will continue to have a
significant impact on the banking industry. Several regulatory agencies and
state legislatures are in the process of responding to changes required or
suggested by the GLB Act, which was enacted in November 1999. We cannot
determine the ultimate effect that the GLB Act, or the regulations implemented
and the legislation enacted as a result of that act, will have on our operating
structure, financial condition or results of operations.

         Some legislative and regulatory changes may increase our costs of doing
business, assist competitors or otherwise adversely affect our operations. We
are unable to predict the nature or extent of the effects on our business and
earnings that any fiscal or monetary policies, or new federal or state
legislation or regulations, may have in the future.

IF WE FAIL TO RETAIN OUR KEY EMPLOYEES, OUR GROWTH AND PROFITABILITY COULD BE
ADVERSELY AFFECTED.

         We rely on experienced client relationship managers and on officers,
directors and employees who have strong relationships with the community to
generate new business. If a significant number of our employees were to leave,
our profitability and growth could be adversely affected.

WE ARE SUBJECT TO RESTRICTIONS ON CHANGES IN CONTROL THAT COULD MAKE IT
DIFFICULT TO OBTAIN A PREMIUM FOR YOUR INVESTMENT.

         We are subject to provisions of the Oregon Bank Act, which require
approval by the Director of the Oregon Department of Consumer and Business
Services prior to the creation or transfer of a controlling interest (i.e., 25%
of a class of voting stock) in Bancorp or Centennial Bank. If a bank holding
company acquires more than 5% of Bancorp or Centennial Bank, the acquisition
needs the prior approval of the Board of Governors of the Federal Reserve Board
(the "FRB"). In addition, under federal law, a person (i.e., an individual, an
entity that is not a bank holding company, or a group of persons acting in
concert) may not acquire control of Bancorp or Centennial Bank without prior
notice to the FRB and/or the Federal Deposit Insurance Corporation. Under
federal law, if a person acquires 10% or more of our common stock, there is a
rebuttable presumption that such person controls us. In addition, several of our
officers are subject to employment or severance agreements that provide for
significant payments in the event their employment terminates following a
change-in-control of Bancorp or Centennial Bank.

These and other factors may inhibit takeover bids or other attempts to acquire
us, decreasing the ability of shareholders to obtain a premium for their shares
as a result of an acquisition.

WE ARE REGULARLY INVOLVED IN LEGAL PROCEEDINGS

         Periodically, and in the ordinary course of business, various claims
and lawsuits are brought by and against us and our subsidiary, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real estate loans and
other issues incident to our business.