<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-------------------------
Form 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1997
[ ] Transition report under section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-10997
WEST COAST BANCORP
(Exact name of registrants specified in its charter)
Oregon 93-0810577
(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
5335 S.W. Meadows Road Suite 201, Lake Oswego, Oregon 97035
(Address of Principal executive offices) (Zip code)
(503) 684-0884
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, no par value, outstanding on October 31, 1997: 10,113,967
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. Financial Statements Page
<S> <C>
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996....................................................3
Consolidated Statements of Income -
Three months and nine months ended September 30, 1997 and 1996............................. 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996.............................................. 5
Consolidated Statements of Changes in Stockholders' Equity................................. 6
Notes to Consolidated Financial Statements................................................. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................ 9
PART II. Other Information
Item 6 - Exhibits and Reports on Form 8-K..................................................17
Signatures .............................................................................18
</TABLE>
2
<PAGE> 3
WEST COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and due from banks.......................................... $ 29,160,877 $ 30,817,183
Interest-bearing deposits in other banks......................... 14,743,365 12,141,497
Federal funds sold............................................... 6,988,000 23,000
------------- -------------
Total cash and cash equivalents................................ 50,892,242 42,981,680
Investment securities:
Investments available for sale................................... 153,694,405 107,168,494
Investments held to maturity..................................... 2,596,143 2,623,154
------------- ------------
Total investment securities ................................... 156,290,548 109,791,648
Loans held for sale................................................ 3,420,198 2,563,703
Loans ............................................................. 573,736,247 535,792,573
Allowance for loan loss ........................................... (8,395,415) (7,037,636)
------------- -------------
Loans, net....................................................... 565,340,832 528,754,937
Premises and equipment, net........................................ 18,356,687 17,716,365
Intangible assets.................................................. 549,260 197,189
Other assets....................................................... 14,073,194 10,337,512
------------- -------------
Total assets................................................... $808,922,961 $712,343,034
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand........................................................... $124,773,637 $105,836,128
Savings and interest-bearing demand.............................. 368,263,553 319,263,258
Certificates of deposits ........................................ 215,507,951 179,802,711
------------- -------------
Total deposits................................................. 708,545,141 604,902,097
Short-term borrowings.............................................. 81,308 3,709,324
Other liabilities.................................................. 6,299,130 8,003,722
Long-term borrowings............................................... 18,731,388 28,582,770
-------------- -------------
Total liabilities.............................................. 733,656,967 645,197,913
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock: no par value, none issued;
10,000,000 shares authorized
Common stock: No par value, 15,000,000 shares
authorized; shares issued and outstanding
10,112,506 and 6,702,572 respectively ........................... 12,640,633 8,378,215
Additional paid-in capital......................................... 31,597,765 35,476,302
Retained earnings.................................................. 29,754,752 22,363,318
Net unrealized gains on investments available for sale ............ 1,272,844 927,286
-------------- --------------
Total stockholders' equity....................................... 75,265,994 67,145,121
------------- -------------
Total liabilities and stockholders' equity..................... $808,922,961 $712,343,034
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................. $14,498,830 $12,834,034 $42,255,066 $35,216,066
Interest on taxable investment securities.. 1,505,535 1,195,517 4,149,858 3,675,887
Interest on nontaxable investment securities 568,028 631,613 1,669,737 1,962,302
Interest from other banks.................. 484,301 41,819 785,341 147,078
Interest on federal funds sold............. 15,948 75,119 44,833 373,844
----------- ----------- ----------- -----------
Total interest income.................... 17,072,642 14,778,102 48,904,835 41,375,177
INTEREST EXPENSE
Savings and interest-bearing demand........ 3,033,992 2,604,560 8,364,719 7,224,106
Certificates of deposit.................... 2,912,818 2,203,727 8,111,718 6,346,643
Short-term borrowings...................... 1,263 192,305 88,968 411,532
Long-term borrowings....................... 244,606 164,859 964,990 512,652
------------ ------------ ------------- ------------
Total interest expense................... 6,192,679 5,165,451 17,530,395 14,494,933
----------- ----------- ------------ -----------
NET INTEREST INCOME........................ 10,879,963 9,612,651 31,374,440 26,880,244
PROVISION FOR LOAN LOSS ................... 631,000 631,000 1,731,000 1,554,987
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS.................. 10,248,963 8,981,651 29,643,440 25,325,257
NONINTEREST INCOME
Other service charges, commissions and fees 1,177,954 765,161 2,951,779 2,098,639
Service charges on deposit accounts........ 736,973 652,390 2,162,934 1,952,139
Trust revenue.............................. 413,847 333,985 1,215,226 1,006,991
Gains on sales of loans.................... 409,466 379,534 959,551 922,211
Loan servicing fees........................ 125,563 119,925 369,547 364,085
Other...................................... 60,705 167,074 232,256 305,020
Net gains (losses) on sales of securities.. 2,423 28,271 (43,963) (19,496)
------------ ----------- ------------ -----------
Total noninterest income................. 2,926,931 2,446,340 7,847,330 6,629,589
NONINTEREST EXPENSE
Salaries and employee benefits............. 4,865,691 4,384,962 13,892,388 12,003,958
Equipment.................................. 758,767 620,036 2,095,731 1,759,308
Occupancy.................................. 598,004 595,962 1,859,032 1,658,597
ATM and Bankcard........................... 487,794 324,295 1,026,833 767,501
Professional Fees.......................... 183,537 387,948 973,520 1,466,424
Marketing.................................. 249,120 157,005 711,655 528,979
Communications............................. 244,477 153,547 664,061 443,506
Printing and office supplies............... 201,966 176,357 613,605 582,568
FDIC insurance............................. 20,091 2,661 57,259 7,772
Other noninterest expense.................. 1,004,813 817,645 2,710,531 2,274,507
----------- ----------- ----------- -----------
Total noninterest expense................ 8,614,260 7,620,418 24,604,615 21,493,120
INCOME BEFORE INCOME TAXES................. 4,561,634 3,807,573 12,886,155 10,461,726
PROVISION FOR INCOME TAXES ................ 1,307,538 1,175,531 4,183,475 3,384,223
----------- ----------- ----------- ------------
NET INCOME................................. $3,254,096 $2,632,042 $ 8,702,680 $ 7,077,503
=========== =========== ============ ============
AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING.............. 10,364,676 10,263,980 10,360,030 10,259,334
EARNINGS PER SHARE
Primary............................ $.31 $.26 $.84 $.69
Fully Diluted...................... $.31 $.26 $.84 $.69
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1997 1996
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income ................................................................ $ 8,702,680 $ 7,077,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment ................. 1,254,974 1,153,254
Amortization of intangibles ............................................. 75,258 64,576
Net loss on sales of available for sale investments ..................... 43,963 19,496
Provision for loan losses ............................................... 1,731,000 1,554,987
(Increase) decrease in interest receivables ............................. (1,248,337) 45,044
Increase in other assets ................................................ (2,487,345) (2,543,244)
(Decrease) increase in interest payable ................................. (27,461) 62,926
(Decrease) increase in other liabilities ................................ (1,677,131) 1,462,476
------------ ------------
Net cash provided by operating activities ........................... 6,367,601 8,897,018
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ...................................................... 15,942,829 25,673,350
Held to maturity ........................................................ 27,011 5,347,783
Proceeds from sales of available for sale investment securities ........... 22,606,593 11,635,543
Purchase of investment securities:
Available for sale ...................................................... (84,773,738) (28,257,820)
Held to maturity ........................................................ -- (267,664)
Acquisition of intangibles ................................................ (427,329) --
Loans made to customers greater than principal collected on loans ......... (39,173,390) (99,781,344)
Capital expenditures ...................................................... (1,895,296) (2,327,437)
------------ ------------
Net cash used in investing activities ................................. (87,693,320) (87,977,589)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest
bearing transaction accounts ............................................ 67,937,804 62,345,486
Net increase in proceeds from sales of
certificates of deposits greater than payments for maturing time deposits 35,705,240 19,868,717
Proceeds from long-term borrowings ........................................ 10,500,000 4,000,000
Payments on long-term borrowings .......................................... (20,351,382) (2,997,850)
Net decrease in short-term borrowings ..................................... (3,628,016) (1,766,904)
Sales of common stock, net ................................................ 383,881 313,743
Dividends paid and cash paid for fractional shares ........................ (1,311,246) (1,061,011)
------------ ------------
Net cash provided by financing activities ............................. 89,236,281 80,702,181
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................. 7,910,562 1,621,610
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................ 42,981,680 44,035,359
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 50,892,242 $ 45,656,969
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional Net Unrealized Gains
Common Stock Paid-In Retained (Losses) Investments
Share Amount Capital Earnings Available for Sale Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 ......... 5,308,813 $ 6,636,016 $ 36,532,496 $ 14,036,510 $ 1,775,245 $ 58,980,267
Net income ......................... -- -- -- 9,802,015 -- 9,802,015
Net unrealized losses on investments
available for sale .............. -- -- -- -- (847,959) (847,959)
Cash dividends, $.15 per common
share ........................... -- -- -- (1,461,310) -- (1,461,310)
Purchase of common stock pursuant
to employee stock ownership plan 4,518 5,648 77,396 -- -- 83,044
Sale of common stock pursuant to
stock option plans .............. 56,377 70,471 533,391 -- -- 603,862
Stock Split in the form of a 25
percent dividend ................ 1,333,585 1,666,981 (1,666,981) -- -- --
Cash paid for fractional shares .... (721) (901) -- (13,897) -- (14,798)
---------- ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 ......... 6,702,572 8,378,215 35,476,302 22,363,318 927,286 67,145,121
Net income ......................... -- -- -- 8,702,680 -- 8,702,680
Net unrealized gains on investments
available for sale .............. -- -- -- -- 345,558 345,558
Cash dividends, $.13 per common
share .......................... -- -- -- (1,311,246) -- (1,311,246)
Sale of common stock pursuant to
stock option plans .............. 39,099 48,874 335,007 -- -- 383,881
Stock split in the form of a 50
percent dividend ................ 3,370,835 4,213,544 (4,213,544) -- -- --
---------- ------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 1997 ........ 10,112,506 $ 12,640,633 $ 31,597,765 $ 29,754,752 $ 1,272,844 $ 75,265,994
========== ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Notes to Consolidated Financial Statements
1. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of West Coast Bancorp (Bancorp) and its wholly-owned subsidiaries, The
Commercial Bank, The Bank of Newport, The Bank of Vancouver and West Coast Trust
Company, Inc., after elimination of intercompany transactions and balances.
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals necessary for fair presentation of results of operations for the
interim periods included herein have been made. The results of operations for
the three months and nine months ended September 30, 1997 are not necessarily
indicative of results to be anticipated for the year ending December 31, 1997.
6
<PAGE> 7
2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. BUSINESS COMBINATIONS
Effective July 1, 1996, West Coast Bancorp completed its acquisition of
Vancouver Bancorp of Vancouver, Washington. Its principal business activities
were conducted through the Bank of Vancouver which has continued as a
wholly-owned subsidiary of West Coast Bancorp. The historical consolidated
financial statements have been restated and include the accounts and results of
operations of the merger as pooling-of-interest combination.
4. ACCOUNTING CHANGES
In February of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). The Bank is required to adopt SFAS 128 in the fourth quarter of 1997 and
will restate at that time earnings per share data for prior periods to conform
with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current earnings per share reporting requirements and
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing net income by
the weighted average common shares outstanding of 10,092,610 and 9,992,704
during the three months ended September 30, 1997 and 1996, respectively. The
year-to-date average common shares outstanding were 10,074,032 and 9,979,345
during the nine months ended September 30, 1997 and 1996 respectively. Diluted
earnings per share reflects the potential dilution that could occur if common
shares were issued pursuant to the exercise of options under Bancorp's Stock
Option Plans.
Pro forma amounts for basic and diluted earnings per share assuming SFAS
128 had been in effect are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share $.32 $.26 $.86 $.71
Diluted earnings per share $.31 $.26 $.84 $.69
</TABLE>
5. NET INCOME PER COMMON SHARE
The Board of Directors declared a quarterly cash dividend of $.05 per
post split share during the third quarter of 1997. In addition, dividends of
$.04 and $.04 were declared in the first and second quarters of 1997. A stock
split in the form of a 50 percent dividend was declared during the third quarter
of 1997. All per share amounts have been restated to retroactively reflect stock
dividends and stock splits previously reported.
6. SUPPLEMENTAL CASH FLOW INFORMATION
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 purchased and sold for one-day periods.
Bancorp paid $17,557,856 and $14,432,007, for interest in the nine
months ended September 30, 1997 and 1996, respectively. Income taxes paid were
$4,719,929 and $3,337,067 in the nine months ended September 30, 1997 and 1996,
respectively.
7. RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to
conform to current classifications.
7
<PAGE> 8
8. SUBSEQUENT EVENTS (unaudited)
On October 30, 1997, Bancorp entered into a Plan and Agreement of Merger
(the "Agreement") with Centennial Holdings, Ltd. of Olympia. Under the
Agreement, Centennial Holding's subsidiary, Centennial Bank, will become a
wholly-owned subsidiary of West Coast Bancorp.
The transaction which is expected to close in the first quarter of 1998,
is subject to approval by Centennial Holdings, Ltd. and West Coast Bancorp
shareholders and applicable regulatory agencies. The transaction will be
accounted for as a pooling-of-interests under generally accepted accounting
principles.
Centennial Holdings, Ltd. is a bank holding company, headquartered in
Olympia, Washington. Its principal business activities are conducted through
Centennial Bank, a Washington state chartered, full-service commercial bank,
whose deposits are insured by the Federal Deposit Insurance Corporation. At
December 31, 1996, Centennial Holdings Ltd. had assets totaling $228.0 million
and equity capital totaling $18.4 million. Centennial Holdings Ltd. earned
$1,874,449 and $2,358,562 for the years ending December 31, 1996 and 1995,
respectively. Centennial Bank's primary service areas are the counties of Lewis,
Thurston, Mason and Pierce in Washington. Centennial Bank emphasizes real estate
related loans to small businesses located within its market area.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of Bancorp's consolidated financial condition
and results of operations should be read in conjunction with the selected
consolidated financial and other data, the consolidated financial statements and
related notes included elsewhere herein.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996
Net Income. Bancorp reported net income of $3,254,096 or $.31 per fully
diluted share, for the three months ended September 30, 1997. This represents a
24% increase in net income, as compared to $2,632,042 or $.26 per fully diluted
share, for the three months ended September 30, 1996. Increased net income was
primarily the result of increased net interest income due to growth in interest
earning assets. Noninterest income rose mainly due to an increased customer base
and higher transaction volumes. Expenses increased mainly due to new branch
expansion costs and other costs directly related to growth.
Net Interest Income. Net interest income is the difference between
interest income (principally from loan and investment securities) and interest
expense (principally on customer deposits and borrowings). Changes in net
interest income result from changes in volume, net interest spread and net
interest margin. Volume refers to the average dollar level of interest earning
assets and interest bearing liabilities. Net interest spread refers to the
differences between the average yield on interest earning assets and the average
cost of interest bearing liabilities. Net interest 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.
Bancorp's profitability, like that of many financial institutions, is dependent
to a large extent upon net interest income. Since Bancorp is liability
sensitive, as interest bearing liabilities mature or reprice more quickly than
interest earning assets in a given period, a significant increase in the market
rates of interest could adversely affect net interest income. In contrast, a
declining interest rate environment could favorably impact Bancorp's margin.
Net interest income on a tax equivalent basis for the three months ended
September 30, 1997 increased $1,234,556 or 12.42%, to $11,172,583 from
$9,938,027 for the same period in 1996. Average interest earning assets
increased by $126.5 million, or 20.73%, to $736.6 million from $610.1 million
for the same period in 1996. Average interest bearing liabilities increased
$96.9 million or 19.59% over the same period. The average net interest spread
decreased from 5.70% to 5.20%,which was mainly caused by decreased average
earning yields, due to a shift in asset mix with a greater percentage of earning
assets in investment securities and cash equivalents. Bancorp's net interest
margin for the three months ended September 30, 1997 was 6.02%, a decrease of 46
basis points from 6.48% for the comparable period of 1996. Average rates paid
were constant at 4.15% over both periods ended 1997 and 1996.
Analysis of Net Interest Income. The following table presents
information regarding yields on interest earning assets, expense on interest
bearing liabilities, and net yields on interest earning assets for the periods
indicated on a tax equivalent basis:
<TABLE>
<CAPTION> Three Months Ended
September 30,
------------------------------- Increase
1997 1996 (Decrease) Change
------------ ------------ ----------- ------
<S> <C> <C> <C> <C>
Interest and fee income(1).......... $ 17,365,262 $ 15,103,478 $ 2,261,784 14.98%
Interest expense.................... 6,192,679 5,165,451 1,027,228 19.89%
------------ ------------- ----------- -----
Net interest income................. $ 11,172,583 $ 9,938,027 $ 1,234,556 12.42%
============ ============= =========== =======
Average interest earning assets..... $736,602,344 $610,133,689 $126,468,655 20.73%
Average interest bearing liabilities $591,849,783 $494,912,339 $96,937,444 19.59%
Average yields earned(2)............ 9.35% 9.85% (0.50)
Average rates paid(2)............... 4.15% 4.15% -
Net interest spread(2).............. 5.20% 5.70% (0.50)
Net interest margin(2).............. 6.02% 6.48% (0.46)
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) These ratios for the three months ended September 30, 1997 and 1996 have
been annualized.
9
<PAGE> 10
Provision for Loan Losses. Management's policy is to maintain an
adequate allowance for loan loss based on historical trends, current and
economic forecasts and statistical analysis of the loan portfolio, as well as
detailed review of individual loans, and current loan performance. Bancorp
recorded provisions for loan losses for the third quarter of 1997 and 1996 of
$631,000 and $631,000 respectively. Net charge-offs for the third quarter of
1997 were $98,000, compared to net charge-offs of $77,000 for the same period in
1996. At September 30, 1997, the percentage of non-performing assets was 0.41%
of total assets.
Management has in place a comprehensive loan approval process and asset
quality monitoring system. Management continues its efforts to collect amounts
previously charged off and to originate new loans of high quality. Management
believes that the allowance for loan losses at September 30, 1997 was adequate
to absorb potential loss exposure in the portfolio. Further additions to the
allowance for loan losses could become necessary, depending upon the performance
of Bancorp's loan portfolio or changes in economic conditions, as well as growth
within the loan portfolio. See "Loan Loss Allowance and Provision".
Noninterest Income. Noninterest income for the third quarter of 1997 was
$2,926,931 up $480,591 or 19.65 % over the like period in 1996. Other service
charges, commissions, and fees increased $412,793 or 53.95% in 1997 over 1996.
The increases in other service charges, commissions, and fees were due to strong
growth in the merchant bankcard program and sales of investment products.
Service charges on deposit accounts increased to $736,973, a 12.97% increase
over the same period in 1996. Trust revenue increased 23.91% in 1997 over 1996,
due mainly to an increased customer base, assets managed, and transaction
volumes. Gains on sales of loans increased $29,932 to $409,466 or 7.89% in 1997
over 1996. The increase in sales of loans was due to increased activity in the
residential real estate programs. Loan servicing fees increased slightly while
other noninterest income decreased in 1997 over 1996.
Noninterest Expense. Noninterest expenses for the third quarter ended
September 30, 1997, were $8,614,260, an increase of $993,842 or 13.04% over the
same period in 1996. Salaries and employee benefits, equipment, occupancy, ATM
and Bankcard, communication, marketing expenses and other expenses are higher in
the third quarter of 1997 due mainly to expansion of the Bank's branch system
and the additions of new products and services over the period. In general,
opening new branches results in higher costs for Bancorp which are not offset
until a certain level of growth in deposits and loans is achieved. Thus, at
least initially, new branches tend to have an adverse effect on results of
operations, until earnings grow to cover overhead. Salaries and employee
benefits increased $480,729 or 10.96% due to increases in personnel over 1996.
Equipment expense increased $138,731 or 22.37% in 1997 over 1996 in the third
quarter as Bancorp continues to keep pace with increased technology improvements
and expansion. Occupancy costs increased slightly in the three months ended
September 1997 over 1996. ATM and bankcard expenses increased 50.42% due to
strong growth in transaction volumes in the merchant bankcard program. Marketing
and printing expenses increased in 1997 over 1996 due to increased efforts to
promote products and services in current and new markets. Professional fees are
down $204,411 due to merger costs incurred in 1996 that did not reoccur in 1997.
FDIC Insurance and other non-interest expense increased in line with the
continued growth of the organization.
10
<PAGE> 11
Nine months Ended September 30, 1997 and 1996
Net Income. For the nine months ended September 30, 1997, Bancorp's net
income was $8,702,680, an increase of $1,625,177 from $7,077,503 for same period
in 1996, a 22.96% increase. Fully diluted earnings per share for the nine month
period ended September 30, 1997 was $0.84 compared to $0.69 in 1996. Net
interest income totaled $31,374,440 for the nine months ended September 30,
1997, a 16.72% increase from the same period in 1996.
Net Interest Income. During the nine month period ended September 30,
1997 and 1996, average interest earning assets were $698.7 million and $581.8
million, respectively. During the same periods, average interest bearing
liabilities grew to $565.2 million from $473.6 million, respectively.
Additionally, during the same periods, net interest margins decreased to 6.17%
from 6.40% respectively due mainly to an increased cost of funds and a decreased
average yield earned on interest earning assets due to a shift in asset mix with
a greater percentage of earning assets in investment securities and cash
equivalents. Net interest income on a tax-equivalent basis increased $4,343,481,
or 15.57%, to $32,234,608 in the nine months of 1997 from $27,891,127 in 1996.
The increased net interest income was caused mainly by the increased earning
asset growth. Average interest earning assets increased 20.08% over the period
while the average yield earned decreased 21 basis points to 9.52% at September
30, 1997 from 9.73% in 1996. The changing interest rate environment and asset
mix in 1997 also led to a decrease in the net interest spread of 27 basis points
to 5.37% from 5.64 in 1996. Average interest bearing liabilities increased $91.6
million, or 19.33%, to $565.2 million for the period ended September 30, 1997,
while the average rates paid increased 6 basis points to 4.15%.
Analysis of Net Interest Income. The following table presents
information regarding yields on interest-earning assets, expense on
interest-bearing liabilities, and net yields on interest-earning assets for the
periods indicated on a tax equivalent basis:
<TABLE>
Nine Months Ended
September 30,
------------------------------ Increase
1997 1996 (Decrease) Change
------------- ------------- ------------- ------
<S> <C> <C> <C> <C>
Interest and fee income(1) ......... $ 49,765,003 $ 42,386,060 $ 7,378,943 17.41%
Interest expense ................... 17,530,395 14,494,933 3,035,462 20.94%
------------- ------------- ------------- -----
Net interest income ................ $ 32,234,608 $ 27,891,127 $ 4,343,481 15.57%
============= ============= ============= =====
Average interest earning assets .... $ 698,661,307 $ 581,844,847 $ 116,816,460 20.08%
Average interest bearing liabilities $ 565,179,726 $ 473,610,849 $ 91,568,877 19.33%
Average yields earned(2) ........... 9.52% 9.73% (0.21)
Average rates paid(2) .............. 4.15% 4.09% 0.06
Net interest spread(2) ............. 5.37% 5.64% (0.27)
Net interest margin(2) ............. 6.17% 6.40% (0.23)
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) These ratios for the nine months ended September 30, 1997 and 1996 have been
annualized.
Provision for Loan Losses. Bancorp recorded a provision for loan losses
of $1,731,000 in the first nine months of 1997, compared to $1,554,987 in the
same period in 1996. The increase in the provision is due mainly to increases in
outstanding loans over the period. Bancorp incurred net charge-offs of $374,000
in 1997, compared to $716,000 during 1996. The allowance for loan losses as a
percentage of loan totals at September 30, 1997 and 1996 were 1.46% and 1.29% of
total loans, respectively.
11
<PAGE> 12
Non-Interest Income. Non-interest income for the nine months ended
September 30, 1997 was $7,847,330, an increase of $1,217,741 or 18.37%, from
$6,629,589 for the same period in 1996. Other service charges, commissions and
fees, service charges on deposit accounts, and trust revenue increased during
the period due to an increased customer base and transaction volumes. Gains on
sales of loans increased $37,340 as a result of increased activity in Bancorp's
residential real estate department. Loan servicing fees remained stable during
the period. Overall increases in non-interest income were due to increased
market presence in existing and expanding market services.
Non-Interest Expense. Non-interest expense increased 14.48% during the
first nine months of 1997 over the same period in 1996. The increase in
operating expense resulted from additional costs associated with entering new
markets. The largest increase was in the area of salaries and benefits, which
increased to $13,892,388 in 1997 from $12,003,958, up 15.73% from the same
period in 1996. The number of full time equivalent employees increased during
1997 to 504 from 461 in 1996. In general, the opening of new branches results in
higher costs for Bancorp which are not offset until a certain level of growth in
deposits and loans is achieved. Thus, at least initially, new branches tend to
have an adverse effect on results of operations, until earnings grow to cover
overhead. Professional fees were lower during the period due to non reoccurring
merger costs. FDIC deposit insurance increased slightly in the period due to the
increase in overall deposits. Other increases in non-interest expense generally
were caused by higher operating activity levels associated with Bancorp's
growth.
INCOME TAXES
During the first nine months of 1997, due to an increase in pre-tax
income and a change in the mix of taxable and nontaxable income items, the
provision for income taxes increased from that of 1996. During the third quarter
of 1997, Bancorp benefited from a reduction in the Oregon State tax rate.
Bancorp will see additional benefit from the tax rate reduction in the fourth
quarter of 1997.
LIQUIDITY AND SOURCES OF FUNDS
Bancorp's primary sources of funds are customer deposits, maturities of
investment securities, sales of "Available for Sale" securities, loan sales,
loan repayments, net income, advances from the Federal Home Loan Bank of
Seattle, and the use of Federal Funds markets. Scheduled loan repayments are
relatively stable sources of funds while deposit inflows and unscheduled loan
prepayments are not. Deposit inflows and unscheduled loan prepayments are
influenced by general interest rate levels, interest rates available on other
investments, competition, economic conditions, and other factors.
Deposits are Bancorp's primary source of new funds. Total deposits were
$708.5 million at September 30, 1997, up from $604.9 million at December 31,
1996. Bancorp does not generally accept brokered deposits. A concerted effort
has been made to attract deposits in the market area it serves through
competitive pricing and delivery of a quality product. Increases over the period
are due to the opening of new branch facilities, the acquisition of $7.5 million
in deposits acquired from Wells Fargo Bank in July 1997, marketing efforts, and
new business development programs initiated by Bancorp.
Management anticipates that Bancorp will continue relying on customer
deposits, maturity of investment securities, sales of "Available for Sale"
securities, loan sales, loan repayments, net income, Federal Funds markets, and
FHLB borrowings to provide liquidity. Although deposit balances have shown
historical growth, such balances may be influenced by changes in the banking
industry, interest rates available on other investments, general economic
conditions, competition and other factors. Borrowings may be used on a short
term basis to compensate for reductions in other sources of funds. Borrowings
may also be used on a long term basis to support expanded lending activities and
to match maturities or repricing intervals of assets. The sources of such funds
will be Federal Funds purchased and borrowings from the FHLB.
12
<PAGE> 13
CAPITAL RESOURCES
The FRB and FDIC have established minimum requirements for capital
adequacy for bank holding companies and member banks. The requirements address
both risk-based capital and leveraged capital. The regulatory agencies may
establish higher minimum requirements if, for example, a corporation has
previously received special attention or has a high susceptibility to interest
rate risk. The FRB and FDIC risk-based capital guidelines require banks and bank
holding companies to have a ratio of tier one capital to total risk-weighted
assets of at least 4%, and a ratio of total capital to total risk-weighted
assets of 8% or greater. In addition, the leverage ratio of tier one capital to
total assets less intangibles is required to be at least 3%.
Shareholders' equity increased to $75,265,994 at September 30, 1997 from
$67,145,121 at December 31, 1996 an increase of $8,120,873, or 12.09%, over that
period of time. At September 30, 1997, Bancorp's shareholders' equity, as a
percentage of total assets, was 9.30%, compared to 9.43% at December 31, 1996.
The decrease was primarily the result of Bancorp's asset base growing faster
than equity. Equity grew at 12.09% over the period from December 31, 1996 to
September 30, 1997, while assets grew by 13.56% over the same period.
As the following table indicates, Bancorp currently exceeds the
regulatory capital minimum requirements.
<TABLE>
<CAPTION>
September 30, 1997
----------------------------
(Dollars in thousands)
Amount Ratio
--------- -----
<S> <C> <C> <C>
Tier 1 capital......................... $ 73,479 11.54%
Tier 1 capital minimum requirement..... 25,460 4.00
-------- -----
Excess over minimum Tier 1 capital... $48,019 7.54%
======= =====
Total capital.......................... $ 81,441 12.80%
Total capital minimum requirement...... 50,920 8.00
-------- -----
Excess over minimum total capital.... $ 30,521 4.80%
======== =====
Risk-adjusted assets................... $636,502
========
Leverage ratio......................... 9.31%
Minimum leverage requirement........... 3.00
-----
Excess over minimum leverage ratio... 6.31%
=====
Adjusted total assets.................. $789,443
========
</TABLE>
13
<PAGE> 14
LOAN PORTFOLIO
Interest earned on the loan portfolio is the primary source of income
for Bancorp. Net loans represented 69.89% of total assets as of September 30,
1997. Although the Banks strive to serve the credit needs of the service areas,
the primary focus is on real estate related and commercial credits. The Banks
make substantially all of their loans to customers located within the Banks'
service areas. The Banks have no loans defined as highly leveraged transactions
by the FRB. The following table presents the composition of the Banks' loan
portfolios, at the dates indicated:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
--------------------- --------------------
(Dollars in thousands) Amount Percent Amount Percent
- ---------------------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
Commercial..................................... $101,453 17.94% $97,515 18.44%
Real estate construction....................... 83,148 14.71 69,917 13.22
Real estate mortgage........................... 91,907 16.26 92,060 17.41
Real estate commercial......................... 259,531 45.91 235,935 44.62
Installment and other consumer................. 37,697 6.66 40,366 7.64
-------- ------ ------- ------
Total loans.................................... 573,736 101.48% 535,793 101.33%
Allowance for loan losses...................... (8,395) (7,038)
-------- --------
Total loans, net............................... $565,341 $528,755
========= ========
</TABLE>
LENDING AND CREDIT MANAGEMENT
Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. Owing to
the nature of the Banks' customer base and the growth experienced in the market
areas served, real estate is frequently a material component of collateral for
the Banks' loans. The expected source of repayment of these loans is generally
the operations of the borrower's business or personal income, but real estate
provides an additional measure of security. Risks associated with real estate
loans include fluctuating land values, local economic conditions, changes in tax
policies, and a concentration of loans within any one area.
The Banks mitigate risk on construction loans by generally lending funds
to customers who have been pre-qualified for long term financing and are using
experienced contractors approved by the Banks. The commercial real estate risk
is further mitigated by making the majority of commercial real estate loans to
owner-occupied users of the property.
Generally, no interest is accrued on loans when factors indicate
collection of interest is doubtful or when the principal or interest payment
becomes ninety days past due. Loans greater than ninety days past due and on
accruing status are both adequately collateralized and in the process of
collection.
The Banks manage the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities. The following table presents information with respect to
non-performing assets.
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 1997 December 31, 1996
- --------------------- ------------------ -----------------
<S> <C> <C>
Loans on nonaccrual status ..................................... $2,870 $1,884
Loans past due greater than 90 days but not on nonaccrual status 155 92
Other real estate owned ........................................ 331 --
------ ------
Total nonperforming assets ..................................... $3,356 $1,976
====== ======
Percentage of nonperforming assets to total assets ............. .41% .28%
====== ======
</TABLE>
See "Loan Loss Allowance and Provision"
14
<PAGE> 15
LOAN LOSS ALLOWANCE AND PROVISION
The provision for loan losses charged to operating expense is based on the
Banks' loan loss experience and such other factors that, in management's
judgment, deserve recognition in estimating loan losses. Management monitors the
loan portfolio to ensure that the allowance for loan losses is adequate to cover
outstanding loans. In determining the allowance for loan losses, management
considers the level of nonperforming loans, impaired loans, loan mix, recent
loan growth, historical loss experience for each loan category, potential
economic influences, and other relevant factors related to the loan portfolio.
In addition, management utilizes internal loan grading as part of its analysis.
The following table summarizes the Banks' allowance for loan losses and
charge-off and recovery activity:
<TABLE>
<CAPTION>
Nine months ended Year ended
(Dollars in thousands) September 30, 1997 December 31, 1996
- ---------------------- ------------------- -----------------
<S> <C> <C>
Loans outstanding at end of period ........... $ 573,736 $ 535,793
Average loans outstanding during the period .. $ 552,541 $ 466,623
Allowance for loan losses, beginning of period $ 7,038 $ 5,569
Recoveries ................................... 78 194
Loans charged off ............................ (452) (900)
--------- ---------
Net loans charged off ........................ (374) (706)
Provision for loan losses .................... 1,731 2,175
--------- ---------
Allowance for loan losses, end of period ..... $ 8,395 $ 7,038
========= =========
Ratio of net loans charged off
to average loans outstanding(1) ............ .09% .15%
Ratio of allowance for loan losses
to loans at end of period .................. 1.46% 1.31%
</TABLE>
(1) The ratios for the nine months ended September 30, 1997 have been
annualized.
Increases in the provision for loan losses in the nine months ended
September 1997 were due mainly to increases in loan growth. In addition, further
forecasted loan growth will lead to expected future increases in the provision
for loan losses. Historical activity in loans charged off or recoveries are not
necessarily indicative of activity to be anticipated for the year ending
December 31, 1997.
15
<PAGE> 16
INVESTMENT PORTFOLIO
The following table shows the carrying value of the Banks' portfolio of
investments:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Dollars in thousands) ------------- ------------
<S> <C> <C>
Investments available for sale (At Fair Value)
U.S. Treasury securities............................. $ 3,811 $ 8,827
U.S. Government agency securities.................... 73,408 38,338
Corporate securities................................. 19,757 3,358
Mortgage-backed securities........................... 9,782 14,978
Obligations of state and political subdivisions...... 41,544 36,617
Other securities..................................... 5,393 5,050
-------- --------
Total.............................................. $153,695 $107,168
======== ========
Investments held to maturity (At Historical Cost)
U.S. Treasury securities............................. $ - $ -
U.S. Government agency securities.................... - -
Corporate securities................................. - -
Mortgage-backed securities........................... - -
Obligations of state and political subdivisions...... 2,596 2,623
Other securities..................................... - -
-------- --------
Total.............................................. $ 2,596 $ 2,623
======== ========
Total Investment Portfolio......................... $156,291 $109,791
======== ========
</TABLE>
16
<PAGE> 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Article 9 Financial Data Schedules for Form 10-Q.
(b) During the three months ended September 30, 1997, West Coast Bancorp
filed the following current report on Form 8-K:
None.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements 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.
WEST COAST BANCORP
(Registrant)
Dated: November 13, 1997 /s/ Victor L. Bartruff
----------------------
Victor L. Bartruff
President and Chief Executive Officer
Dated: November 13, 1997 /s/ Donald A. Kalkofen
----------------------
Donald A. Kalkofen
Executive Vice President and
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 29,161
<INT-BEARING-DEPOSITS> 14,743
<FED-FUNDS-SOLD> 6,988
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 153,694
<INVESTMENTS-CARRYING> 2,596
<INVESTMENTS-MARKET> 2,639
<LOANS> 573,736
<ALLOWANCE> 8,395
<TOTAL-ASSETS> 808,923
<DEPOSITS> 708,545
<SHORT-TERM> 81
<LIABILITIES-OTHER> 6,299
<LONG-TERM> 18,731
0
0
<COMMON> 12,641
<OTHER-SE> 62,625
<TOTAL-LIABILITIES-AND-EQUITY> 808,923
<INTEREST-LOAN> 42,255
<INTEREST-INVEST> 5,820
<INTEREST-OTHER> 830
<INTEREST-TOTAL> 48,905
<INTEREST-DEPOSIT> 16,476
<INTEREST-EXPENSE> 17,530
<INTEREST-INCOME-NET> 31,375
<LOAN-LOSSES> 1,731
<SECURITIES-GAINS> (44)
<EXPENSE-OTHER> 24,604
<INCOME-PRETAX> 12,886
<INCOME-PRE-EXTRAORDINARY> 12,886
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,703
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<YIELD-ACTUAL> 6.17
<LOANS-NON> 2,870
<LOANS-PAST> 155
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,038
<CHARGE-OFFS> 452
<RECOVERIES> 78
<ALLOWANCE-CLOSE> 8,395
<ALLOWANCE-DOMESTIC> 8,395
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
