ITEM 1. DESCRIPTION OF BUSINESS -----------------------
GENERAL
Centennial Bancorp, an Oregon corporation, was organized under the name Valley West Bancorp in 1981 to become a bank holding company. In 1982, Centennial Bank and Valley State Bank, both Oregon state-chartered banks, merged and continued business as Centennial Bank. Immediately following the merger, Valley West Bancorp acquired all the common stock of Centennial Bank. In May 1990, Valley West Bancorp changed its name to Centennial Bancorp.
Centennial Bancorp ("Bancorp") has two wholly owned subsidiaries: Centennial Bank and Centennial Mortgage Co. ("Centennial Mortgage"). From July 1993 until its sale in August 1995, Bancorp also owned Harding Fletcher Co.
("Harding Fletcher"), a mortgage banking subsidiary. Unless the context clearly suggests otherwise, references in this Annual Report on Form 10-K to "Bancorp" include Centennial Bancorp and its subsidiaries.
All share and per-share information has been restated to give retroactive effect to a 100% common stock split declared in January 1998, a 5% common stock split declared in July 1998, a 10% common stock split declared in January 1999, and for various stock splits and stock dividends declared in prior years.
CENTENNIAL BANK
Centennial Bank is a full-service commercial bank organized under the Oregon Bank Act. Centennial Bank provides a broad range of depository and lending services to commercial, industrial, and agricultural enterprises, financial institutions, governmental entities and individuals. Centennial Bank directs its deposit-taking and lending activities primarily to the communities in which its branches are located. Its primary marketing focus is on small- to medium-sized businesses and on professionals in those communities. Centennial Bank does not provide trust services.
At December 31, 1998, based on total assets, Centennial Bank was the 10th largest bank of the 53 commercial banks maintaining offices in Oregon. At that date, Centennial Bank had 14 branches: three in Eugene; one in adjacent Springfield; two full-service and five limited-service branches in Portland, Oregon; one each in Tigard and Beaverton, suburbs of Portland; and a branch in Cottage Grove. Eugene and Springfield are at the southern end of the Willamette Valley on Interstate 5, with Cottage Grove located approximately 20 miles further south. Centennial Bank opened the Tigard office in 1994, acquired the Cottage Grove office in 1994, and opened the Lloyd District office in Portland in January 1997. The Tanasbourne Office in Beaverton opened in December 1997 in temporary facilities and in September 1998 moved to its permanent location. The Airport Road Office in Portland opened in August 1998.
In January 1999, Centennial Bank opened its fourth full- service branch in the Eugene area, the Oakway Center Office.
In July 1997, Centennial Bank opened four limited-service branches in the Portland metropolitan area. These limited-service branches were formerly operated by Wells Fargo in retirement centers. Another limited-service retirement center branch, formerly operated by Key Bank, opened in January 1998. Centennial Bank offers a full array of deposit services and safety deposit boxes during reduced hours to residents of the retirement centers.
As a result of an agreement announced in August 1998, by year end Centennial Bank also had placed 18 automated teller machines (ATMs) in Bi-Mart stores located in Oregon and Washington. The ATMs give Centennial customers increased access to automated banking in the Bank's growing market area.
In December 1998, Centennial Bank announced an agreement to purchase Northwest National Bank's Hazel Dell branch located in Vancouver, Washington. Centennial Bank has received regulatory approval for the transaction which is expected to close in the Spring of 1999.
Also in December 1998, Centennial Bank announced plans to open a new full-service branch in Salem, Oregon and has leased a site in the downtown Salem area.
Centennial Bank provides personalized, quality financial services to its customers and believes this dedication to service has enabled it to maintain a stable and relatively low-cost retail deposit base, while generating a substantial volume of loans. Total deposits increased from $419 million at December 31, 1997 to $484 million at December 31, 1998. Net loans and loans held for sale increased from $337 million at December 31, 1997 to $428 million at December 31, 1998.
Deposit accounts at Centennial Bank are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"). Centennial Bank is not a member of the Federal Reserve System. It is a merchant depository for MasterCard and VISA. Centennial Bank also offers tax-deferred annuities and mutual funds through a contract arrangement with Financial Marketing Group, Inc. of Portland, Oregon. Its revenues from this activity are not significant.
CENTENNIAL MORTGAGE
Centennial Mortgage began operations in 1987, originating conventional and federally insured residential mortgage loans for sale in the secondary market. Centennial Bank regularly provides interim financing, generally for 30 to 60 days, for loans originated by Centennial Mortgage. Centennial Mortgage originated $213.2 million, $111.6 million and $67.2 million of mortgages in 1998, 1997 and 1996, respectively. Mortgage loans generally are sold without recourse. Prior to 1996, mortgage loans were generally sold with no servicing rights retained. However, during 1996, Centennial Bank obtained Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation approval to service federally insured mortgage loans and began retaining servicing rights for mortgage loans originated by Centennial Mortgage. During the third quarter of 1997, management questioned the feasibility of in-house servicing of mortgage loans and subsequently decided to contract with a third-party to perform the servicing function for the loans in the servicing portfolio. Centennial Mortage then again began selling mortgage loans with servicing rights released. Under certain circumstances, Centennial Mortgage may be obligated to repurchase loans sold in the secondary market.
Centennial Mortgage has two offices in Eugene, Oregon, and three offices in the Portland, Oregon area. Its first Portland area office opened in Lake Oswego in 1993. That office relocated to the Centennial Bank building in Tigard, Oregon in 1995 but returned to Lake Oswego in April 1998 to accommodate the space needs of Centennial Bank at the Tigard location. In December 1997, Centennial Mortgage opened an office in the Sunnyside Road area of southeast Portland in a leased facility. The Tanasbourne office opened in November 1998 and shares space with Centennial Bank in a new facility at the Tanasbourne Town Center in Beaverton, Oregon. The second Eugene office opened in January 1999 and shares leased space with the Oakway Center Office of Centennial Bank.
Centennial Mortgage has a residential mortgage construction lending department which establishes relationships with home builders in the Eugene/Springfield and Portland-area markets and attempts to generate additional permanent loan activity as the houses-under-construction are sold. Increases in interest rates could adversely affect demand for construction lending, as well as the ability of borrowers to sell the houses when completed, and thus could adversely impact Centennial Mortgage's permanent mortgage lending activity.
HARDING FLETCHER
In 1993, Bancorp formed a subsidiary to acquire certain assets of Harding Fletcher, a commercial mortgage banker. Harding Fletcher arranged commercial real estate loans, which were funded by insurance companies and other institutional investors. In 1995, Bancorp sold substantially all of the assets of Harding Fletcher for $741,000. During 1997, Bancorp accepted a negotiated payoff of the receivable balance.
BANCORP CONSOLIDATED STATISTICAL INFORMATION
Bancorp incorporates by reference the following financial and statistical information from its Annual Report to Shareholders for the year ended December 31, 1998:
Centennial Bancorp Annual Report to Shareholders Page No. -------------------
Investment securities 14 Loans and allowance for loan losses 15 Deposits 16
NET INTEREST INCOME
For most financial institutions, including Bancorp, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in "volume," "spread" and "margin." Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. During 1998, 1997 and 1996, Bancorp's average interest-earning assets were $483 million, $399 million and $323 million, respectively. During these same years, Bancorp's net interest margin was 7.22%, 6.92% and 6.70%, respectively.
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table sets forth for 1998, 1997 and 1996 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for Bancorp.
MARKET AREAS
Centennial Bank's primary market area, with four well-established branches, is the Eugene/Springfield area at the southern end of Oregon's Willamette Valley. The populations of Eugene and Springfield total approximately 185,000. The area's economy depends primarily upon U.S., state and local governments, educational institutions, forest products, general manufacturing (especially small manufacturing and high-technology industries), health care and tourism. The U.S. government is the area's largest employer, closely followed by PeaceHealth Corporation and the University of Oregon.
With four full-service and five limited-service offices opened since 1994, the Portland metropolitan area is an increasingly important secondary market for Centennial Bank. The Portland metropolitan area has a diverse economy and a population of approximately 1.25 million. The Portland area continues to provide Centennial Bank with excellent growth opportunity and also allows dilution of loan portfolio risk due to the economic diversity of the metropolitan area.
Centennial Bank also has a branch office in Cottage Grove, Oregon, located approximately 20 miles south of Eugene and Springfield. The population of Cottage Grove totals approximately 8,000. Its economy depends primarily upon forest products, general manufacturing, agriculture and tourism.
LENDING ACTIVITIES
GENERAL
Bancorp provides a broad range of commercial and real estate lending services. Currently, the primary focus of Bancorp's lending activities is to provide commercial loans to small- to medium-sized businesses with annual revenues up to $50 million, and to professionals. Most of Bancorp's loans are made to customers in the trade areas served by branch offices.
Bancorp also makes construction loans and secured real estate loans, most of which are sold in the secondary markets. Bancorp makes consumer loans, primarily to accommodate existing customers, but does not actively pursue such lending.
Bancorp strives to maintain sound loan underwriting standards with written loan policies, conservative individual and branch limits and, depending on the size of the commitment, reviews by Centennial Bank's Administrative Loan and Asset/Liability committees. Underwriting standards are designed to achieve a high-quality loan portfolio, compliance with lending regulations and the desired
mix of loan maturities and industry concentrations. Management further seeks to minimize credit losses by closely monitoring the financial condition of its borrowers and the value of collateral. In-house legal counsel assists in loan documentation and collections.
LOAN PORTFOLIO COMPOSITION
The following table sets forth information with respect to the composition of Bancorp's loan portfolio (loans and loans held for sale) by type of loan at December 31 for each of the last five years:
Of Bancorp's $119.8 million of loans that mature after one year, a total of $112.1 million (93.6%) are fixed-rate loans, and a total of $7.7 million (6.4%) are variable-rate loans.
At December 31, 1998, $138 million of Bancorp's loans (approximately 32% of its loan portfolio) had fixed interest rates and $294 million (approximately 68%) had variable interest rates.
COMMERCIAL LOANS
Commercial loans that are not secured by real estate represent the largest category of Bancorp's loans. Bancorp's areas of emphasis include, but are not limited to, loans to small- to medium-sized businesses and to professionals. Bancorp provides a wide range of commercial business loans, including lines of credit for working capital and term loans for the acquisition of equipment and other purposes. Collateral generally includes equipment, accounts receivable and inventory. Where warranted by the overall financial condition of the borrower, loans may be made on an unsecured basis.
At December 31, 1998, approximately 71% of Bancorp's commercial loans had floating or adjustable interest rates; the remaining 29% 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, 1998 were $163.9 million, compared to $147.1 million at December 31, 1997 and $116.8 million at December 31, 1996. Management believes the increases in 1998 and 1997 were primarily the result of Centennial Bank's business development program, the favorable Oregon economy and the expansion of business through additional branch offices. Non-accrual loans in this category totaled $776,000 at December 31, 1998 ($858,000 at December 31, 1997); there were no restructured loans at December 31, 1998 or 1997.
REAL ESTATE CONSTRUCTION LOANS
Construction loans represent Bancorp's second largest category of loans. Bancorp makes construction loans to individuals and contractors to construct single-family primary residences or second homes and, to a much lesser extent, small multi-family residential projects. The construction loans represent custom homes, pre-sold homes and homes that are not pre-sold. These loans generally have maturities of six to nine months. Interest rates are typically adjustable, although fixed-rate loans are also made under appropriate conditions. Centennial Bank provides funding for all the construction loans originated by Centennial Mortgage, and Centennial Mortgage provides monitoring and reporting services on all construction loans made by Centennial Bank.
Construction financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. The risk of loss on construction loans depends largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, Bancorp might have to advance funds beyond the amount originally committed to permit completion of the project and to protect its security position. Bancorp might also be confronted, at or prior to maturity of the loan, with a project with insufficient value to ensure full repayment. Bancorp's underwriting, monitoring and disbursement practices with respect to construction financing are intended to ensure that sufficient funds are available to complete construction projects. Bancorp endeavors to limit its risk through its underwriting procedures by using only approved, qualified appraisers, by dealing only with qualified builders/borrowers, and by closely monitoring the construction projects through the process of completion and sale.
At December 31, 1998, real estate construction loans had increased to $151.2 million from $89.1 million at December 31, 1997 and $66.2 million at December 31, 1996. The increases were primarily attributable to strong growth in commercial real estate construction lending resulting from an expansion of Centennial Mortgage's business strategy. The December 31, 1998 non-accrual total for this category was $2.3 million and was concentrated in loans to one borrower. The borrower filed bankruptcy, and Centennial Bank has initiated legal action to liquidate those loans. Management is regularly monitoring the related collateral values which are currently considered adequate to support outstanding balances. There were no restructured loans at December 31, 1998 in this category. At December 31, 1997, there were no non-accrual or restructured loans in this category.
REAL ESTATE MORTGAGE LOANS
Real estate mortgage loans represent Bancorp's third largest category of loans. Of the $94.7 million of real estate mortgage loans outstanding at December 31, 1998, $73.2 million consisted of income property loans and commercial loans secured by real estate, primarily the borrowers' business property. 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. Real estate mortgage loans
outstanding increased to $94.7 million at December 31, 1998 from $87.6 million at December 31, 1997 and $70.1 million at December 31, 1996. These increases were primarily the result of favorable mortgage interest rates, the demand for housing in the market areas served by Bancorp, the expansion of Centennial Mortgage business through additional branch offices, as well as the factors contributing to commercial loan growth cited above. At December 31, 1998, non-accrual loans in this category totaled $726,000 ($10,000 at December 31, 1997). At December 31, 1998 and 1997, there were no restructured loans in this category.
At December 31, 1998, $52 million (or approximately 54.9%) of Bancorp's real estate mortgage loans had fixed interest rates and $42.7 million (or approximately 45.1%) had floating or adjustable interest rates. Maturities of the real estate mortgage loans retained by Bancorp usually range from one to ten years.
Bancorp's underwriting standards specify the following maximum loan-to-value ratios for real estate loans: 90% for loans secured by owner-occupied residences, 85% for other residential loans and for construction loans, and 85% for commercial real estate loans. Management believes that Bancorp's current real estate mortgage portfolio does not present a material risk of loan losses.
Bancorp originates SBA real estate loans on owner-occupied properties where the maturities may be up to 20 years, and the loan-to-value ratio may reach 90% of appraised value or cost, whichever is lower. Up to 75% of the amount of these loans is guaranteed or insured by an agency of the U.S. Government. The guaranteed portion of these loans is typically sold to secondary-market investors. At December 31, 1998, the amount of the non-guaranteed portion of these loans retained by Bancorp was not material.
INSTALLMENT LOANS
Bancorp does not actively solicit consumer loans, but makes such loans primarily as a convenience to existing customers. Bancorp includes in its installment loan category personal lines of credit, as well as consumer installment loans (such as for automobile purchases). Consumer loans may be secured or unsecured. Collections depend principally on the borrower's financial condition or cash flow.
Installment loans were $7.1 million at December 31, 1998 compared to $6.6 million at December 31, 1997 and $6.4 million at December 31, 1996. These modest levels of installment loans to individuals were primarily due to Bancorp's focus on lending to businesses and professionals and significant
competition for consumer loans from the many credit unions, banks and finance companies in the market areas served by Bancorp. At December 31, 1998, there were no non-accrual loans in this category ($5,000 at December 31, 1997). At December 31, 1998 and 1997, 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 as described in Note 8 to Bancorp's Consolidated Financial Statements, which are incorporated by reference from Bancorp's 1998 Annual Report to Shareholders. Bancorp applies the same credit standards to these commitments as it uses in all its lending processes and has included these commitments in its lending risk evaluations. Collateral for these commitments may include cash, accounts receivable, inventory, equipment, securities and/or real estate.
CREDIT AUTHORITY AND LOAN LIMITS
All Bancorp loans and other credit facilities are subject to credit and collateral approval procedures and loan amount limitations. Individual loan officers and branch managers have authority to approve loans in amounts up to established limits, generally ranging from $25,000 to $50,000. Loans in excess of branch limits, or not in conformance with credit or collateral criteria, are reviewed by Centennial Bank's Administrative Loan Committee. The Asset/Liability Committee, a majority of whom are non-officer directors of Centennial Bank, reviews loan applications over established Administrative Loan Committee limits. All loans in excess of $25,000 to executive officers and directors of Bancorp or any of its subsidiaries must be approved by the Asset/Liability Committee and ratified by Centennial Bank's Board of Directors.
Under Oregon law, permissible loans from a financial institution to one borrower are generally limited to 15% of the institution's aggregate paid-up and unimpaired capital and surplus. At December 31, 1998, Centennial Bank's permissible loan limit was $5.25 million (or $8.75 million if the loan was secured by a first lien on real estate).
Loan pricing decisions are based on an evaluation of risk, cost of funds, operating and administrative costs, an allowance for loan losses, desired profit margin and other factors. Loan risk is based in part on a risk rating assigned to each loan. Bancorp uses a computerized pricing system that analyzes a borrower's total contribution to net interest income.
Centennial Bank sells loan participations to accommodate borrowers whose financing needs exceed Centennial Bank's lending limits, and to diversify risk. Centennial Bank occasionally purchases participations in loans from correspondent banks. Centennial Bank's policies prohibit aggregate purchased participations in excess of 10% of Centennial Bank's loan portfolio.
NON-PERFORMING ASSETS
Non-performing assets consist of loans past due 90 days or more, non-accrual loans, restructured loans and other real estate owned ("OREO"). The following table sets forth information concerning Bancorp's non-performing assets at the end of each of the last five years:
Bancorp's total non-performing assets increased by $3.7 million during 1998 and decreased by $625,000 during 1997. Total non-performing assets, as a percentage of total assets, increased to .87% at December 31, 1998 from .26% at December 31, 1997 and .47% at December 31, 1996. Non-performing loans, as a percentage of total loans, increased to 1.13% at December 31, 1998 from .38% at December 31, 1997 and .71% at December 31, 1996.
The accrual of interest on a loan is discontinued when, in management's judgment, the future collection of principal or interest is in doubt. Loans placed on non-accrual status may or may not be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed
on non-accrual status, Bancorp's policy is to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such loans is credited to loan principal if, in the opinion of management, full collection of principal is doubtful. If interest on non-accrual loans had been accrued, such income would have been $272,600 in 1998, $102,600 in 1997 and $117,500 in 1996. Total interest income of $141,600 was recognized on non-accrual loans during 1998; no such income was recognized in 1997 and 1996.
Restructured loans are those for which concessions have been granted due to the borrower's weakened financial condition or other factors. Such concessions may include reduction of interest rates below rates otherwise available to that borrower or deferral of interest or principal. Interest on restructured loans is accrued at the restructured rate when it is anticipated that no loss of original principal will occur. Bancorp had no restructured loans at December 31, 1998, 1997 or 1996.
OREO consists of real estate acquired by Bancorp through foreclosure or by a deed in lieu of foreclosure. Properties in OREO are carried at the lower of net realizable value or the principal balance of the related loan. Any excess of the loan balance over fair value of the property is charged to the allowance for loan losses. At December 31, 1998, OREO totaled $105,400 and consisted of one property. At December 31, 1997 and 1996, Bancorp held no OREO.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of the losses inherent in the loan portfolio. The allowance is based primarily on management's evaluation of the overall quality and risk characteristics of Bancorp's loan portfolio, which is dependent upon numerous interrelated factors including present non-performing and delinquent loans, borrowers' perceived abilities to repay, value of collateral, general and local economic conditions and historical loan loss experience.
Centennial Bank's Asset/Liability Committee reviews the adequacy of the allowance for loan losses quarterly. Although determination of the adequacy of the allowance involves substantial subjective judgment based on the Committee's analysis of the risk characteristics of the entire loan portfolio, the Committee also uses three quantitative methods to analyze the adequacy of the allowance. Under the first method, management assigns a specific percentage to each non-performing, substandard or doubtful loan in Bancorp's loan portfolio to calculate a total amount of average anticipated loan losses.
The second method uses the risk-weighted ratings (from one through five) developed by the FDIC, with management assigning a percentage to the loans in the various risk categories (using .0025% for loans in the lowest risk category up to 50% for loans in the highest risk category) to calculate an alternative amount of possible losses.
The third method is in accordance with the requirements of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), which Bancorp adopted on January 1, 1995. Under SFAS 114, a loan is considered impaired based on current information and events if it is probable that Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. This policy is generally consistent with Bancorp's non-accrual policy. Bancorp also specifically examines all loans greater than $100,000 that are identified on an internal watch list. Loans which are over 90 days contractually delinquent and loans which have developed inherent problems prior to being 90 days delinquent may be considered impaired. An insignificant delay or shortfall in the amount of payments is not an event that, when considered in isolation, would automatically cause a loan to be considered impaired for purposes of SFAS 114. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.
The amounts calculated by the quantitative methods are then compared by the Committee to the allowance for loan losses in evaluating the adequacy of the allowance.
Management believes that Bancorp's allowance for loan losses is adequate to cover anticipated losses and is in accordance with generally accepted accounting principles. There can be no assurance, however, that management will not decide to increase the allowance for loan losses or that regulators will not require Bancorp to increase the allowance, either of which events could adversely affect Bancorp's results of operations. Further, there can be no assurance that Bancorp's actual loan losses will not exceed its allowance.
Anticipated loan losses are charged against the allowance for loan losses when, in management's opinion, ultimate recovery is unlikely or when bank examiners require a charge-off. As the actual amount of loss with respect to specific loans is often dependent upon future events (including liquidation of collateral), Bancorp cannot accurately predict precisely what losses, if any, will be sustained with respect to specific loans. Historical experience has also shown that, at any particular time, loan losses may exist in a loan portfolio that have not yet been identified. For these reasons, although management analyzes specific loans in determining the adequacy of its allowance for loan losses, it does not normally allocate the allowance to specific groups or categories of loans. Management estimates, however, that the allocation of the
allowance for loan losses by loan category at the end of each of the last five years was as set forth below:
The following table details the carrying value of Bancorp's impaired loans, in accordance with SFAS 114, by type of loan at December 31, 1998 and 1997:
INVESTMENT ACTIVITIES
Bancorp's investment portfolio is comprised of U.S. government securities, municipal securities, mortgage-backed securities, corporate bonds and equity securities.
Bancorp's primary investment objectives are to maintain liquidity and to generate after-tax profits consistent with the risk guidelines established by the Board of Directors. At December 31, 1998 and 1997, Blount Investment Group of Eugene, Oregon, advised Bancorp with respect to the investment portfolio. Centennial Bank has extended loans to Blount Investment Group and its affiliates. Such loans are made on terms, including interest rates and collectibility, no more favorable to the borrowers than loans to other borrowers.
All of the securities held in the investment portfolio were classified as available-for-sale at December 31, 1998 and 1997. Those securities will be sold as necessary to provide liquidity and to respond to interest rate changes. Because these securities are carried at their market value, fluctuations in interest rates could affect the carrying value of these securities and, therefore, the reported shareholders' equity of Bancorp.
The following table provides the carrying values of Bancorp's investment portfolio at the end of each of the last three years. See Note 2 to Bancorp's Consolidated Financial Statements for more information about investment securities held at December 31, 1998, 1997 and 1996.
December 31, ------------------------------------- 1998 1997 1996 ------- ------- -------- (In thousands) U.S. Treasury securities $ 1,435 $ 1,417 $ 1,405 U.S. Government agencies 39,263 34,415 32,594 States and political subdivisions 29,578 39,434 39,135 Corporate bonds 2,311 2,301 2,249 Mortgage-backed securities 4,206 6,337 7,271 ------- ------- -------- Total debt securities 76,793 83,904 82,654 Federal Home Loan Bank stock 5,084 4,711 4,366 ------- ------- -------- Total investment securities $81,877 $88,615 $87,020 ======= ======= ========
The following table provides the carrying values, principal amounts, maturities and weighted average yields of Bancorp's investment securities at December 31, 1998, all of which are classified as available-for-sale:
DEPOSITS
Centennial Bank offers a variety of accounts for depositors designed to attract short-term and long-term deposits. These accounts include certificates of deposit ("CDs"), savings accounts, money market accounts, checking and interest checking accounts and individual retirement accounts. These accounts generally earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Centennial Bank does not pay brokerage commissions to attract deposits.
Centennial Bank has developed a special account for customers age 50 or older called the "50+ Account." The 50+ Account is designed to attract customers in this age group who generally have higher than average deposits and favorable ability to repay borrowings. Centennial Bank also markets to small- to medium-sized businesses and to professionals in its commercial lending program. These types of customers also create substantial deposits, resulting in low-cost funds being available for Centennial Bank's lending activities. Management believes that Centennial Bank's percentage of demand deposits (relative to total deposits) is among the highest in Oregon.
The following table presents the average balances for each major category of deposits and the weighted average interest rates paid for interest-bearing deposits for the years ended December 31, 1998, 1997 and 1996:
The following table shows the dollar amount of CDs that had balances of $100,000 or more at December 31, 1998 and 1997:
SHORT-TERM BORROWINGS
At December 31, 1998, Bancorp's short-term borrowings consisted of securities sold under agreements to repurchase totaling $16.1 million and federal funds purchased totaling $4.5 million. Securities sold under agreement to repurchase are due on demand, but generally range in duration from one to eighty-nine days.
At December 31, 1997, Bancorp's short-term borrowings consisted of securities sold under agreements to repurchase totaling $7.7 million.
At December 31, 1996, Bancorp's short-term borrowings consisted of securities sold under agreements to repurchase totaling $4.3 million and advances from the Federal Home Loan Bank of Seattle totaling $8.0 million which matured and were repaid in May 1997.
The following table sets forth certain information with respect to short-term borrowings at December 31 and during each of 1998, 1997 and 1996:
LONG-TERM DEBT At December 31, 1998, Bancorp had no long-term debt.
At December 31, 1997 and 1996, Bancorp's long-term debt consisted of $10.0 million of funds advanced from the Federal Home Loan Bank of Seattle to Centennial Bank. Interest on the debt was payable monthly at the rate of 6.14%. The debt matured and was paid August 6, 1998. The loan was secured by Federal Home Loan Bank of Seattle stock, funds on deposit with the Federal Home Loan Bank of Seattle, investments and loans.
During 1996, Bancorp's long-term debt also consisted of $9.2 million of 7.0% Convertible Redeemable Exchangeable Subordinated Debentures due May 1, 2004 (the "Debentures"). During 1996, Bancorp issued a call for redemption of the Debentures. Holders of the Debentures voluntarily converted $9,163,000 of the Debentures into 2,029,568 shares of Bancorp's common stock. The amount of debt converted, net of unamortized issue costs, was credited to common stock and additional paid-in capital. Bancorp redeemed the remaining $37,000 of the Debentures for cash.
RETURN ON EQUITY AND ASSETS
The following table sets forth Bancorp's return on daily average assets and equity for 1998, 1997 and 1996:
CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board ("FASB") has issued several accounting pronouncements which Bancorp has recently adopted or will be required to adopt in future fiscal reporting periods.
SFAS NO. 130
Beginning in the year ended December 31, 1998, Bancorp retroactively adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 established standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. Accordingly, any unrealized gains or losses on available-for-sale securities are recognized as a component of comprehensive income.
SFAS NO. 131
Beginning in the year ended December 31, 1998, Bancorp retroactively adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131, in general, requires that a public business enterprise report financial and descriptive information about its material reportable operating segments and also establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by key management personnel in deciding how to allocate resources and in assessing performance.
Management believes that, based on the materiality standards of SFAS 131, Bancorp primarily operates in one business segment. In addition, the related disclosures of SFAS 131 are included within Bancorp's Consolidated Financial Statements and Notes as applicable.
SFAS NO. 132
Beginning in the year ended December 31, 1998, Bancorp retroactively adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS Nos. 87, 88 and 106" (SFAS 132). SFAS 132 revises and standardizes employers' disclosures about pension and other postretirement benefit plans. SFAS 132 did not materially affect the disclosures in Bancorp's Consolidated Financial Statements and Notes.
SFAS NO. 133
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), was issued. SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. At December 31, 1998, Bancorp had no derivative instruments or hedging activities.
SFAS NO. 134
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS 134), was issued. SFAS 134 is effective for the first fiscal quarter beginning after December 15, 1998. At December 31, 1998, Bancorp had not entered into any transaction to which SFAS 134 would apply.
COMPETITION
Commercial banking in Oregon is highly competitive with respect to both loans and deposits. Centennial Bank competes principally with other commercial banks, savings and loan associations, credit unions, mortgage companies, and other financial institutions with respect to the scope and type of services offered, interest rates paid on deposits and pricing of loans, among other factors.
Many of these competitors have substantially greater resources than Centennial Bank and have branches in more locations. Certain of these competitors have larger lending capabilities due to their greater size, and provide other services that Centennial Bank does not offer.
Centennial Bank competes for loans principally through the range and quality of the services it provides. Centennial Bank believes its personal service philosophy and its focus on small- to medium-sized businesses and on professionals enables it to compete effectively with other financial institutions for the loans and deposits it seeks. To serve customers whose borrowing requirements exceed its lending limits, Centennial Bank arranges participations with other lenders.
During the past several years, many financial institutions in Oregon have merged or consolidated. Management believes that, in many cases, the acquiring institutions have shifted the focus of the acquired banks away from the small- to medium-sized businesses that are at the core of Bancorp's marketing efforts. Bancorp intends to capitalize on this banking environment.
EMPLOYEES
Centennial Bancorp has no employees other than its executive officers, who are also employees of Centennial Bank. At December 31, 1998, Centennial Bank and Centennial Mortgage had 188 and 44 full-time equivalent employees, respectively. Bancorp places a high priority on selective hiring and development of staff. Staff development involves training in customer service, marketing and regulatory compliance. Bancorp has adopted extensive incentive programs for employees that focus and are dependent on the achievement of certain of Bancorp's financial, service and marketing goals.
None of Bancorp's employees is covered by collective bargaining agreements, and management believes that Bancorp's relationship with its employees is good.
SUPERVISION AND REGULATION
Bancorp and Centennial Bank are extensively regulated under federal and Oregon law. These laws and regulations are primarily intended to protect depositors and the deposit insurance fund, not shareholders of Bancorp. The following information is qualified in its entirety by reference to applicable statutory and regulatory provisions. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of Bancorp and its subsidiaries.
CENTENNIAL BANCORP
GENERAL
Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "FRB"). Bancorp is required to file an annual report and such other reports as the FRB may require.
ACQUISITIONS
As a bank holding company, Bancorp is required to obtain the prior approval of the FRB before: (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 substantially all of the assets of any other bank. The FRB may not approve any acquisition, merger or consolidation that would have a substantial anti-competitive result, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. The FRB also considers managerial, capital and other financial factors in acting on acquisition or merger applications. Bancorp also is required to obtain the prior approval of the Director of the Oregon Department of Consumer and Business Services (the "Oregon Director") before acquiring direct or indirect ownership or control of 25% or more of the voting shares of an Oregon state-chartered bank or bank holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") allows adequately capitalized and managed bank holding companies to acquire banks in any state. Such acquisitions must comply with any applicable state law requiring a bank to be in existence for a minimum period of time before the acquisition. Oregon law allows such acquisitions with respect to banks that have been providing banking services for at least three years. Therefore, Bancorp and Centennial Bank could be acquired by a bank holding company 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 has been determined by the FRB to be closely related to banking or managing banks. The FRB has identified certain non-banking activities in which a bank holding company may engage with notice to, or prior approval by, the FRB. Management believes that all activities conducted by Centennial Mortgage are permitted non-banking activities.
CAPITAL ADEQUACY
The federal bank regulatory agencies monitor the capital adequacy of bank holding companies and have adopted risk-based capital adequacy guidelines to evaluate bank holding companies and banks. If an institution's capital falls below the minimum levels established by these guidelines, the bank holding
company may be denied approval to acquire or establish additional banks or non-bank businesses. The guidelines require a minimum ratio of total capital to risk-weighted assets of 8%. At December 31, 1998, Bancorp's ratio of total capital to risk-weighted assets was 12.02%.
The FRB also uses a leverage ratio to evaluate the capital adequacy of bank holding companies. The leverage ratio applicable to Bancorp requires the ratio of "Tier 1" capital (generally, tangible common stockholders' equity, perpetual preferred stock and minority interests in consolidated subsidiaries) to adjusted average total assets to be not less than 3% and up to 5% or higher depending on Bancorp's general capital condition. Bancorp's leverage ratio at December 31, 1998 was 10.9%.
If Bancorp fails to meet capital guidelines, the FRB may institute appropriate supervisory or enforcement actions. As discussed below, Centennial Bank is also subject to capital adequacy requirements. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), Bancorp could be required to guarantee the capital restoration plan of Centennial Bank, should Centennial Bank become undercapitalized. In addition, the Oregon Director has the authority to require Bancorp to contribute additional capital to Centennial Bank if its capital becomes impaired.
CENTENNIAL BANK
GENERAL
Centennial Bank is an Oregon state-chartered bank, the deposits of which are insured by the FDIC. Accordingly, Centennial Bank files financial and other reports periodically with, and is regularly examined by, both the Oregon Director and the FDIC. Centennial Bank is not a member of the Federal Reserve System.
PERMISSIBLE ACTIVITIES
Under FDICIA, no state bank may engage in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the insurance fund. This limitation should not affect Centennial Bank, since management believes that Centennial Bank is not presently involved in any such activities.
BRANCHING AND ACQUISITIONS
Banks are permitted to conduct business through branches after application to and approval of the FDIC and the Oregon Director, if they make certain findings regarding the financial history and condition of the bank and the appropriateness of the branch in the community to be served. Centennial Bank currently has 15 branches, the most recent of which opened in February 1999. Centennial Bank has received regulatory approval to open a branch in Salem, Oregon and to acquire Northwest National Bank's Hazel Dell branch, which will be Centennial Bank's first branch in the state of Washington.
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. Oregon has not opted in to DE NOVO branching.
COMMUNITY REINVESTMENT ACT
Enacted in 1977, the federal Community Reinvestment Act (the "CRA") has become increasingly important to financial institutions, including their holding companies. The CRA allows regulators to reject an application to make an acquisition or establish a branch unless the applicant has performed satisfactorily under the CRA. Citizens and interest groups have standing before the FRB to assert noncompliance with the CRA. Satisfactory performance means adequately meeting the credit needs of the communities the applicant serves, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. The applicable federal regulators now regularly conduct CRA examinations to assess the performance of financial institutions. Centennial Bank has received satisfactory ratings in its most recent CRA examinations.
TRANSACTIONS WITH AFFILIATES
Centennial Bank is subject to certain FRB restrictions on transactions among related parties. The Federal Reserve Act limits the amount of certain transactions, including loans to and investments in affiliates of Centennial Bank, requires certain levels of collateral for such loans, and limits the amount of advances to third parties that may be collateralized by the securities of Bancorp or its subsidiaries.
The Federal Reserve Act also requires that certain transactions between Centennial Bank and its affiliates to be on terms substantially the same, or at least as favorable to Centennial Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies.
In addition, the Federal Reserve Act requires that the aggregate amount of an institution's loans to officers, directors and principal shareholders (and their affiliates) is limited to the amount of its unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate.
A violation of any of the foregoing restrictions may result in the assessment of civil fines on a bank or a person participating in the conduct of the affairs of such bank or the imposition of a cease and desist order.
DIVIDEND RESTRICTIONS
Dividends paid by Centennial Bank provide substantially all Bancorp's cash flow. Under federal law, prior to the declaration of any dividend by Centennial Bank, the approval of the principal regulator is required if the total of all dividends declared in any calendar year exceeds the total of Centennial Bank's net profits for that year combined with its retained net profits for the preceding two years. In addition, FDICIA provides that a bank cannot pay a dividend if it will cause the bank to be "undercapitalized." Under Oregon law, Centennial Bank is subject to restrictions on the payment of cash dividends to its shareholders (i.e., to Bancorp). An Oregon state-chartered bank may not pay a cash dividend in an amount greater than the bank's net unreserved retained earnings, after first deducting (1) to the extent not already charged against earnings or reflected in a reserve, all bad debts, which are debts on
which interest is unpaid and past due at least six months; (2) all other assets charged off as required by the Oregon Director or a state or federal examiner; and (3) all accrued expenses, interest and taxes of the bank. At December 31, 1998, $21.1 million was available for declaration of dividends by Centennial Bank to Bancorp without prior regulatory approval.
EXAMINATIONS
The FDIC and the Oregon Director periodically examine and evaluate state-chartered banks. Based upon such evaluations, the examining regulator may revalue the assets of an insured institution and require that it charge off or reduce the carrying value of specific assets or establish a specific allowance to compensate for the difference between the value determined by the regulator and the book value of such assets.
CAPITAL ADEQUACY
Federal regulations establish minimum requirements for the capital adequacy of depository institutions. The regulators may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. Banks with capital ratios below the required minimums are subject to certain administrative actions, including prompt corrective action, the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing.
The federal risk-based capital guidelines for banks require a ratio of Tier 1 or core capital to total risk-weighted assets of 4% and a ratio of total capital to total risk-weighted assets of 8%. The leverage capital guidelines require that banks maintain Tier 1 capital of no less than 5% of total adjusted assets, except in the case of certain highly rated banks for which the minimum requirement is 3% of total adjusted assets. At December 31, 1998, Centennial Bank's leverage ratio, Tier 1 capital to risk-weighted assets ratio and total risk-based capital to risk-weighted assets ratio were 9.8%, 10.1% and 10.9%, respectively.
FDICIA requires federal banking regulators to take "prompt corrective action" with respect to a capital-deficient institution, including requiring a capital restoration plan and restricting certain growth activities of the institution. Bancorp could be required to guarantee any such capital restoration plan required of Centennial Bank. Bancorp's maximum liability under such guarantee would be the lesser of 5% of Centennial Bank's total assets at the
time it became undercapitalized or the amount necessary to bring Centennial Bank into compliance with the capital plan.
As an institution's capital decreases, the powers of the federal regulators increase, which can include mandated capital-raising activities, restrictions on interest rates paid, restrictions on transactions with affiliates, and removal of management. In addition, an institution generally is prohibited from paying dividends or management fees to control persons if the institution would be undercapitalized after any such payment.
Pursuant to FDICIA, regulations were adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized, severely undercapitalized and critically undercapitalized. Under the regulations, Centennial Bank is considered "well capitalized."
INTERNAL OPERATING REQUIREMENTS
In 1993, federal regulators adopted regulations addressing, among other things: (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) ratio of classified assets to capital; (7) minimum earnings; and (8) compensation and benefit standards for management officials. These regulations add further to the cost of compliance and impose record-keeping requirements on Centennial Bank and Bancorp.
The consumer lending activities of Centennial Bank are also regulated by numerous laws and regulations which impose race, sex, age, marital status and other specified classifications and impose other restrictions on credit and collection practices.
REAL ESTATE LENDING EVALUATIONS
Federal regulators have adopted uniform standards for evaluating loans secured by real estate or made to finance improvements to real estate. Banks are required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. The regulations establish loan-to-value ratio limitations on real estate loans, which are equal to or higher than the loan-to-value limitations established by Centennial Bank and Centennial Mortgage.
DEPOSIT INSURANCE PREMIUMS
The FDIC has adopted regulations establishing a risk-based deposit insurance premium schedule. Effective January 1, 1996, Centennial Bank's risk assessment classification was reduced to $.00, so Centennial Bank paid a minimum annual payment of $2,000 during 1996. This risk assessment classification was the lowest possible classification at the time. Classifications are reviewed semiannually. In addition, the FDIC has the power to impose special assessments to cover the cost of borrowings from the U.S. Treasury, the Federal Financing Bank, and Bank Insurance Fund member banks.
The Deposit Insurance Funds Act of 1996 ("Funds Act") eliminated the statutorily-imposed minimum assessment amount, effective January 1, 1997. The Funds Act also authorizes assessments on Bank Insurance Fund-assessable deposits (such as the Centennial Bank deposits) and stipulates that the rate of assessment must equal one-fifth the Financing Corporation assessment rate that is applied to deposits assessable by the Savings Association Insurance Fund. The Financing Corporation assessment rate for Bank Insurance Fund-assessable deposits is 1.296 basis points. The additional assessment authorized by the Funds Act increased Bancorp's FDIC insurance assessment expense to $50,000 and $45,000 in 1998 and 1997, respectively.
CENTENNIAL MORTGAGE
Centennial Mortgage is, by definition of the Housing and Urban Development, a non-supervised lender. Because Centennial Mortgage is a member of Bancorp's consolidated group, its accounts and activities are reviewed by the FRB in conjunction with its periodic examinations of Bancorp. Centennial Mortgage, like Centennial Bank, is indirectly affected by the monetary policies of the FRB, which may have a material adverse effect on its business and earnings.
Oregon law requires the licensing of certain persons engaging in mortgage brokering transactions. Centennial Mortgage is exempt from these requirements as a wholly owned subsidiary of a regulated bank holding company.
CHANGING REGULATORY STRUCTURE
The laws and regulations affecting banks and bank holding companies are in a state of flux. The rules and the regulatory agencies in this area have changed significantly over recent years, and there is reason to expect that similar changes will occur in the future. It is difficult to predict the outcome
of these changes. The Clinton Administration has announced a program to reduce the regulatory burden on banks and to streamline and consolidate regulatory oversight. However, the scope and effect of this program are not yet known.
One of the major additional burdens imposed on the banking industry by FDICIA is the increased authority of federal agencies to regulate the activities of federal and state banks and their holding companies. The FRB, the FDIC and the Oregon Director have extensive enforcement authority to police unsafe or unsound practices by depository institutions and their holding companies and to penalize them for violating applicable laws and regulations. FDICIA and other laws have expanded the agencies' authority in recent years, and the agencies have not yet fully tested the limits of their powers.
EFFECT OF ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policies of the FRB, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open-market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits.
FRB monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of Bancorp and its subsidiaries cannot be predicted.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTIES -------------------------
Bancorp's main offices are located at 675 Oak Street, Eugene, Oregon, in a four-floor facility (approximately 35,000 square feet) owned by Centennial Bank. Construction of the office building was completed in 1993. Bancorp and Centennial Bank occupy the lower two floors and the fourth floor of the building. Centennial Bank has entered into five-year leases with two tenants for a total of approximately 6,250 square feet of the building's third floor.
Centennial Bank is retaining for future use the remaining approximate 2,500 square feet of available space on the third floor.
In 1994, Bancorp entered into a long-term ground lease in Tigard, Oregon, a suburb of Portland, where Centennial Bank has a branch office. The ground lease has an initial term of 50 years and is renewable for two additional 10-year periods. Bancorp made lease payments of $6,667 per month in 1998. Construction of a three-story office building was completed in 1995 at a cost of $2.9 million. Centennial Bank occupies the first and second floors of the building. The third floor was leased to another company effective January 1996 pursuant to a five-year lease.
In July 1997, Centennial Bank completed its purchase of a $1.2 million parcel of land in the Tanasbourne area of Hillsboro, Oregon, a suburb of Portland. A temporary branch facility opened at the site during construction of the permanent facility which was completed August 1998 at a cost of $2.3 million. Centennial Bank also owns three other full-service branch facilities.
In March 1998, Centennial Bank entered into a lease for approximately 8,000 square feet of space in the Oakway Center Office building for the new Oakway Center branch. The lease has a ten-year term with initial base payments of $13,180 per month increasing by $400 per month annually thereafter.
In August 1998, Centennial Bank entered into a lease for approximately 3,500 square feet of the One Airport Center building for the new Airport Road Office in Portland, Oregon. The lease has an initial term of five years and is renewable for two additional three-year periods. Lease payments were $5,808 per month in 1998.
Centennial Bank leases facilities for two other full-service branch offices with lease payments totaling $10,328 per month in 1998. In addition, the Bank leases space for five limited-service retirement center offices with lease payments totaling $3,125 per month in 1998. Centennial Bank also has storage and parking leases with payments totaling $1,906 per month in 1998.
In January 1998, Centennial Mortgage entered into a lease for approximately 6,650 square feet of space in the Kruse Woods III office building for its Portland Office. The building is located in Lake Oswego, Oregon, a Portland suburb. The lease has a six-year term and initial base payments of $13,581 per month with scheduled increases to a maximum of $15,521 per month
beginning in year five. Centennial Mortgage also has leases for its Eugene and Sunnyside (Clackamas, Oregon) offices with lease payments totaling $8,986 per month in 1998.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
Periodically, and in the ordinary course of business, various claims and lawsuits are brought by and against Bancorp, such as claims to enforce liens, condemnation proceedings on properties in which Bancorp holds security interests, clams involving the making and servicing of real property loans, and other issues incident to Bancorp's business.
As of the date of this Annual Report, Bancorp was not a party to any legal proceedings management believes are material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
None.
PART II
The information called for by Items 5, 6, 7, 7A, 8 and 9 of Part II is included in Centennial Bancorp's Annual Report to Shareholders for the year ended December 31, 1998, and is incorporated herein by reference as follows:
PART III
ITEM 10.
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 May 19, 1999, and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ----------------------
The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on May 19, 1999, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on May 19, 1999, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
The information called for by this item will be contained in Centennial Bancorp's definitive proxy statement for the annual meeting of shareholders to be held on May 19, 1999, and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ----------------------------------------------------------------
(a) The following documents are filed as part of this Annual Report on Form 10-K.
(1) Financial Statements.
The financial statements required in this Annual Report are listed below and are included in Centennial Bancorp's Annual Report to Shareholders for the year ended December 31, 1998, and are incorporated herein by reference:
(2) Financial Statement Schedules.
All financial statement schedules are omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or notes thereto.
(3) Exhibits.
3.1 Restated Articles of Incorporation
3.2 Bylaws, as restated (filed as Exhibit 3.2 to registrant's Form 10-K Report for the year ended December 31, 1992, and incorporated herein by reference)
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* Deferred Compensation Agreement between Centennial Bank and Ron R. Peery (filed as Exhibit 10.3 to registrant's Form 10-Q Report for the quarter ended June 30, 1989, and incorporated herein by reference)
10.5* Restated 1995 Stock Incentive Plan (filed as Exhibit 10.9 to registrant's Form 10-K for the year ended December 31, 1996, and incorporated herein by reference)
10.6* Nonstatutory (Nonqualified) Stock Option Agreement dated November 22, 1995, between registrant and Richard C. Williams (filed as Exhibit 10.10 to registrant's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference)
10.7 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)
10.8 Advances, Security and Deposit Agreement, dated May 28, 1991, between Centennial Bank and the Federal Home Loan Bank of Seattle (filed as Exhibit 10.11 to registrant's Registration Statement on SB-2, filed March 28, 1994, and incorporated herein by reference)
10.9* 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)
10.10* 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)
10.11* 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)
10.12* 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)
10.13* 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)
11.1 Earnings per Share Computation
13.1 Portions of 1998 Annual Report to Shareholders (which are incorporated by reference in this Form 10-K Annual Report)
16.1 Letter dated November 5, 1998 from PricewaterhouseCoopers LLP to the Securities and Exchange Commission (filed as Exhibit 16 to registrant's Form 8-K Report filed November 5, 1998 and incorporated herein by reference)
20.1 Portions of definitive proxy statement for 1999 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 (filed as Exhibit 21.1 to registrant's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference)
23.1 Consent of Symonds, Evans & Larson, P.C., Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.1 Financial Data Schedule as of December 31, 1998
99.1 Safe Harbor for Forward-Looking Statements under Private Securities Litigation Reform Act of 1995: Certain Cautionary Statements
- - ---------------
* Management contract or compensatory plan or arrangement.
Upon written request to Michael J. Nysingh, Chief Financial Officer, Centennial Bancorp, Post Office Box 1560, Eugene, Oregon, 97440, shareholders will be furnished a copy of any exhibit, upon payment of $.25 per page, which represents Centennial Bancorp's reasonable expenses in furnishing the exhibit requested.
(b) On November 5, 1998 Bancorp filed Form 8-K to report a change of independent accountant effective October 30, 1998.
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 25, 1999 By /s/ Richard C. Williams ---- ---------------------------- Richard C. Williams, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR
DATED: March 25, 1999 By /s/ Richard C. Williams ---- ------------------------------------ Richard C. Williams, President, Chief Executive Officer and Director
CHIEF FINANCIAL OFFICER
DATED: March 26 , 1999 By /s/ Michael J. Nysingh ---- ------------------------------------ Michael J. Nysingh Chief Financial Officer
DIRECTORS:
DATED: March 26 , 1999 By /s/ Dan Giustina ---- ------------------------------------ Dan Giustina, Director
DATED: March 19 , 1999 By /s/ Cordy H. Jensen ---- ------------------------------------ Cordy H. Jensen, Director
DATED: March 24 , 1999 By /s/ Robert L. Newburn ----- ------------------------------------ Robert L. Newburn, Director
DATED: March 30 , 1999 By /s/ Brian B. Obie ---- ------------------------------------ Brian B. Obie, Director
DATED: March 25, 1999 By /s/ Ted Winnowski ---- ------------------------------------ Ted Winnowski, Director
EXHIBIT INDEX -------------
Exhibit* - - --------
3.1 Restated Articles of Incorporation
11.1 Earnings per Share Computation
13.1 Portions of 1998 Annual Report to Shareholders (which are incorporated by reference into this Form 10-K Annual Report)
23.1 Consent of Symonds, Evans & Larson, P.C., Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.1 Financial Data Schedule as of December 31, 1998
99.1 Safe Harbor for Forward-Looking Statements under Private Securities Litigation Reform Act of 1995:Certain Cautionary Statements
- - ---------------
* See Item 14(a)(3) of this Annual Report for a list of all exhibits, including those incorporated by reference.