<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 March 31, 1998
[ ] 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 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 April 30, 1998: 12,841,835
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. Financial Information
Item 1. Financial Statements Page
----
<S> <C>
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997............................................... 3
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997......................................... 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997......................................... 5
Consolidated Statements of Changes in Stockholders' Equity......................... 6
Notes to Consolidated Financial Statements......................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 15
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................................... 16
Signatures......................................................................... 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1.
WEST COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks ......................... $ 50,373,236 $ 97,769,331
Interest-bearing deposits in other banks ........ 64,817,505 1,048,327
Federal funds sold .............................. 9,100,000 --
--------------- ---------------
Total cash and cash equivalents ............... 124,290,741 98,817,658
Investment securities:
Investments available for sale .................. 189,712,336 191,189,957
Investments held to maturity .................... 2,983,130 2,987,256
--------------- ---------------
Total investment securities ................... 192,695,466 194,177,213
Loans held for sale ............................... 6,271,672 10,457,247
Loans ............................................. 804,001,946 776,941,389
Allowance for loan loss ........................... (11,789,594) (10,450,584)
--------------- ---------------
Loans, net ...................................... 792,212,352 766,490,805
Premises and equipment, net ....................... 29,332,847 27,850,076
Intangible assets ................................. 3,042,013 3,157,300
Other assets ...................................... 19,599,795 17,436,250
--------------- ---------------
Total assets .................................. $ 1,167,444,886 $ 1,118,386,549
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand .......................................... $ 172,095,158 $ 162,567,731
Savings and interest-bearing demand ............. 511,875,929 495,890,935
Certificates of deposits ........................ 313,323,487 300,022,929
--------------- ---------------
Total deposits ................................ 997,294,574 958,481,595
Short-term borrowings ............................. 23,461,000 29,249,000
Other liabilities ................................. 9,288,407 7,069,962
Long-term borrowings .............................. 32,659,959 22,445,674
--------------- ---------------
Total liabilities ............................. 1,062,703,940 1,017,246,231
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
12,776,738 and 12,606,009 respectively ........... 15,970,923 15,757,511
Additional paid-in capital ........................ 44,600,024 43,213,086
Retained earnings ................................. 42,705,257 40,599,130
Accumulated other comprehensive income ............ 1,464,742 1,570,591
--------------- ---------------
Total stockholders' equity ...................... 104,740,946 101,140,318
--------------- ---------------
Total liabilities and stockholders' equity .... $ 1,167,444,886 $ 1,118,386,549
=============== ===============
</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
March 31
--------------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans ................. $ 20,212,888 $ 18,521,819
Interest on taxable investment securities .. 2,046,749 1,337,479
Interest on nontaxable investment securities 894,940 566,178
Interest from other banks .................. 545,870 223,501
Interest on federal funds sold ............. 6,352 13,965
------------ ------------
Total interest income .................... 23,706,799 20,662,942
INTEREST EXPENSE
Savings and interest-bearing demand ........ 3,960,533 3,382,092
Certificates of deposit .................... 4,282,430 3,482,610
Short-term borrowings ...................... 284,726 140,220
Long-term borrowings ....................... 456,401 426,570
------------ ------------
Total interest expense ................... 8,984,090 7,431,492
------------ ------------
NET INTEREST INCOME ........................ 14,722,709 13,231,450
PROVISION FOR LOAN LOSS .................... 1,485,415 1,397,000
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS .................. 13,237,294 11,834,450
NONINTEREST INCOME
Gains on sales of loans .................... 1,094,397 351,805
Gain on sale of servicing rights ........... -- 1,326,343
Service charges on deposit accounts ........ 1,086,118 955,385
Other service charges, commissions and fees 789,004 666,897
Trust revenue .............................. 786,477 395,704
Loan servicing fees ........................ 143,412 279,858
Other ...................................... 168,088 157,361
Net gains (losses) on sales of securities .. 100,886 (27,312)
------------ ------------
Total noninterest income ................. 4,168,382 4,106,041
NONINTEREST EXPENSE
Salaries and employee benefits ............. 7,265,763 5,894,381
Equipment .................................. 1,213,493 1,054,406
Occupancy .................................. 814,138 807,379
Professional fees .......................... 420,644 585,816
Printing and office supplies ............... 408,482 314,638
Marketing .................................. 387,236 299,702
Communications ............................. 376,800 264,076
FDIC insurance ............................. 28,737 25,287
Other noninterest expense .................. 2,239,769 1,421,884
------------ ------------
Total noninterest expense ................ 13,155,062 10,667,569
INCOME BEFORE INCOME TAXES ................. 4,250,614 5,272,922
------------ ------------
PROVISION FOR INCOME TAXES ................. 1,504,007 1,923,265
------------ ------------
NET INCOME ................................. $ 2,746,607 $ 3,349,657
============ ============
AVERAGE NUMBER OF COMMON EQUIVALENT SHARES
OUTSTANDING ................................ 13,335,000 12,848,000
EARNINGS PER SHARE
Basic .............................. $ .22 $ .27
Diluted ............................ $ .21 $ .26
</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>
Three months ended
March 31,
-----------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 2,746,607 $ 3,349,657
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment ...................... 699,136 629,817
Amortization of intangibles .................................................. 115,287 80,385
Net (gain) loss on sales of available for sale investments ................... (100,886) 27,312
Provision for loan losses .................................................... 1,485,415 1,397,000
Increase in interest receivables ............................................. (384,118) (396,477)
Increase in other assets ..................................................... (1,779,427) (3,258,786)
Net cash provided by loans held for sale ..................................... 4,185,575 3,114,521
Increase (decrease) in interest payable ...................................... 149,839 (12,925)
Increase (decrease) in other liabilities ..................................... 2,068,606 (1,852,714)
Tax benefit associated with stock options .................................... 759,726 --
------------- -------------
Net cash provided by operating activities ............................... 9,945,760 3,077,790
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ........................................................... 8,888,175 5,576,346
Held to maturity ............................................................. 4,126 41,732
Proceeds from sales of available for sale investment securities ................ 2,820,000 5,915,922
Purchase of investment securities:
Available for sale ........................................................... (10,235,517) (27,398,017)
Held to maturity ............................................................. -- (100,000)
Loans made to customers greater than principal collected on loans .............. (27,206,962) (17,571,018)
Capital expenditures ........................................................... (2,181,907) (1,147,618)
------------- -------------
Net cash used in investing activities ...................................... (27,912,085) (34,682,653)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest
bearing transaction accounts ................................................. 25,512,421 13,922,335
Net increase in proceeds from sales of
certificates of deposits greater than payments for maturing time deposits .... 13,300,558 4,829,637
Proceeds from long-term borrowings ............................................. 11,000,000 10,180,000
Payments on long-term borrowings ............................................... (785,715) (8,779,954)
Net (decrease) increase in short-term borrowings ............................... (5,788,000) 12,689,212
Sales of common stock, net ..................................................... 840,734 44,482
Dividends paid and cash paid for fractional shares ............................. (640,590) (522,154)
------------- -------------
Net cash provided by financing activities .................................. 43,439,408 32,363,558
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 25,473,083 758,695
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 98,817,658 59,174,506
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 124,290,741 $ 59,933,201
============= =============
</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>
Accumulated
Common Stock Additional Other
---------------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 ......... 8,992,541 $ 11,240,676 $ 44,819,357 $ 28,477,489 $ 843,142 $ 85,380,664
Net income ......................... -- -- -- 14,438,513 -- 14,438,513
Net unrealized gains on investments
available for sale .............. -- -- -- -- 727,449 727,449
Cash dividends, $.18 per common
share ........................... -- -- -- (2,305,154) -- (2,305,154)
Sale of common stock pursuant to
stock option plans .............. 262,516 328,145 2,055,883 -- -- 2,384,028
Redemption of stock pursuant to
stock option plans .............. (19,507) (24,384) (526,964) -- -- (551,348)
Stock Split in the form of a 50
percent dividend ................ 3,370,835 4,213,544 (4,213,544) -- -- --
Cash paid for fractional shares .... (376) (470) -- (11,718) -- (12,188)
Tax benefit associated with stock
options ......................... -- -- 1,078,354 -- -- 1,078,354
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1997 ......... 12,606,009 15,757,511 43,213,086 40,599,130 1,570,591 101,140,318
Net income ......................... -- -- -- 2,746,607 -- 2,746,607
Net unrealized losses on investments
available for sale .............. -- -- -- -- (105,849) (105,849)
Cash dividends, $.05 per common
share ........................... -- -- -- (639,015) -- (639,015)
Sale of common stock pursuant to
stock option plans .............. 171,175 213,969 636,074 -- -- 850,043
Redemption of stock pursuant to
stock option plans .............. (358) (448) (8,860) -- -- (9,308)
Cash paid for fractional shares .... (88) (110) -- (1,465) -- (1,575)
Tax benefit associated with stock
options ......................... -- -- 759,726 -- -- 759,726
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, March 31, 1998 ............ 12,776,738 $ 15,970,922 $ 44,600,026 $ 42,705,257 $ 1,464,742 $ 104,740,947
============= ============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
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, including its branches operated under the
trade name Valley Commercial Bank, The Bank of Vancouver, Centennial Bank,
(collectively, the "Banks"), Centennial Funding, Totten Inc., and West Coast
Trust, 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 ended March 31, 1998 are not necessarily indicative of results
to be anticipated for the year ending December 31, 1998.
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 February 28, 1998, Bancorp completed its acquisition of
Centennial Holdings, Ltd. in Olympia, Washington. Its principal business
activities were conducted through Centennial Bank, which has continued as a
wholly-owned commercial bank subsidiary of Bancorp. The merger was accounted for
as a pooling-of-interests. The historical consolidated financial statements have
been restated and include the accounts and results of operations of Centennial
Holdings, Ltd.
4. STOCKHOLDERS' EQUITY
The Board of Directors declared a quarterly cash dividend of $.05 per
share during the first quarter of 1998. A dividend of $.04 was declared in the
first quarter 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.
5. 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 $8,834,251 and $7,444,417, for interest in the three months
ended March 31, 1998 and 1997, respectively. Income taxes paid were $20,934 and
$500,000 in the three months ended March 31, 1998, and 1997 respectively.
7
<PAGE> 8
6. COMPREHENSIVE INCOME
Bancorp has adopted SFAS No. 130 "Reporting Comprehensive Income" for
the quarter ending March 31, 1998. This statement established standards for the
reporting and display of comprehensive income and its components in the
financial statements. For Bancorp, comprehensive income includes net income
reported on the income statement and changes in the fair value of its
available-for-sale investments reported as a component of shareholders' equity.
The following table presents net income adjusted by the change in unrealized
gains or losses on the available-for-sale investments as a component of
comprehensive income:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net income $ 2,746,607 $ 3,349,657
Net change in unrealized gains (losses)
on available for sale investments (105,849) (761,153)
----------- -----------
Comprehensive income $ 2,640,758 $ 2,588,504
=========== ===========
</TABLE>
7. EARNINGS PER SHARE
Bancorp adopted SFAS No. 128, "Earnings Per Share", effective December
15, 1997. As a result, Bancorp's earnings per share for all periods have been
restated. The following table reconciles the numerator and denominator of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Weighted
Average Per-Share
Net Income Shares Amount
---------- ---------- -------
Three months ended March 31, 1998
-------------------------------------------
<S> <C> <C> <C>
Basic earnings per share ........ $2,746,607 12,648,385 $ 0.22
---------- ---------- -------
Stock options ................... 686,208
Diluted earnings per share ...... $2,746,607 13,334,593 $ 0.21
<CAPTION>
Three months ended March 31, 1997
-------------------------------------------
<S> <C> <C> <C>
Basic earnings per share ........ $3,349,657 12,341,117 $ 0.27
---------- ---------- -------
Stock options ................... 507,074
Diluted earnings per share ...... $3,349,657 12,848,191 $ 0.26
</TABLE>
Bancorp for the periods reported had no reconciling items between net
income and income available to common shareholders.
8. RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to
conform to current classifications.
8
<PAGE> 9
Item 2. 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 in this report.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Net Income. Bancorp reported net income of $2,746,607 or $.21 per diluted
share, for the three months ended March 31, 1998. These results reflect the
recent acquisition of Centennial Holdings, Ltd., of Olympia, Washington. Net
income through March 31, 1998 includes pretax merger related costs of $569,000
in transition expenses and a merger related increase in the provision for loan
losses of $1,038,000. Net income through March 31, 1997 was $3,349,657 or $.26
per diluted share. This includes a one time pretax gain on sale of servicing
rights of $1,326,343 and a one time increase to the provision for loan losses of
$675,000 related to a previous Centennial acquisition. Noninterest income
increased mainly due to an increased customer base, higher transaction volumes,
and increases due to the sales of loans. Expenses increased mainly due to an
increased customer base, higher transaction volumes, branch expansion costs, and
other costs 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 tends to be 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.
Competition, the economy, and the status of the interest rate environment also
impact Bancorp's net interest income in any period.
Net interest income on a tax equivalent basis for the three months ended
March 31, 1998 increased $1,660,622 or 12.28%, to $15,183,739 from $13,523,117
for the same period in 1997. Average interest earning assets increased by $165.6
million, or 19.14%, to $1.03 billion from $865.3 million for the same period in
1997. Average interest bearing liabilities increased $138.1 million or 19.38%
over the same period. The average net interest spread decreased from 5.59% to
5.23%, mainly due to decreased average earning yields and a shift in earning
asset mix to shorter term assets in the first quarter of 1998 compared to 1997.
Bancorp's net interest margin for the three months ended March 31, 1998 was
5.97%, a decrease of 37 basis points from 6.34% for the comparable period of
1997. Average rates paid increased to 4.28% in the first quarter of 1998 from
4.23% for the same period in 1997.
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
March 31,
----------------------------------- Increase
1998 1997 (Decrease) Change
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Interest and fee income(1) ......... $ 24,167,829 $ 20,954,609 $ 3,213,220 15.33%
Interest expense ................... 8,984,090 7,431,492 1,552,598 20.89%
-------------- -------------- -------------- ----------
Net interest income ................ $ 15,183,739 $ 13,523,117 $ 1,660,622 12.28%
============== ============== ============== ==========
Average interest earning assets .... $1,030,867,971 $ 865,289,303 $ 165,578,668 19.14%
Average interest bearing liabilities $ 850,863,055 $ 712,724,765 $ 138,138,290 19.38%
Average yields earned(2) ........... 9.51% 9.82% (0.31)
Average rates paid(2) .............. 4.28% 4.23% 0.05
Net interest spread(2) ............. 5.23% 5.59% (0.36)
Net interest margin(2) ............. 5.97% 6.34% (0.37)
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) These ratios for the three months ended March 31, 1998 and 1997 have
been annualized.
9
<PAGE> 10
Provision for Loan Loss. 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 first quarter of 1998 and 1997 of $1,485,415
and $1,397,000 respectively. The provision for loan loss through March 31, 1998
includes an increase at Centennial Bank of $1,038,000 to bring the allowance for
loan loss methodology in line with Bancorp practices. Included in the March 31,
1997 provision for loan loss is a one time increase of $675,000 related to a
previous Centennial acquisition. Net charge-offs for the first quarter of 1998
were $146,000, compared to net charge-offs of $766,000 for the same period in
1997. At March 31, 1998, the percentage of non-performing assets was 0.37% of
total assets.
Management has in place a comprehensive loan approval process and an 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 March 31, 1998, 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 first quarter of 1998 was
$4,168,382 up $62,341 or 1.52 % over the like period in 1997. Included in the
March 31, 1997 noninterest income is a one time gain on sale of servicing rights
of $1,326,343 at Centennial Bank. Net of the one time gain on sale of servicing
rights, noninterest income was up $1.4 million or 50%. Gains on sales of loans
increased $742,592 to $1,094,397 in 1998 over 1997. The increase in sales of
loans was due to increased activity in the residential real estate programs.
Other service charges, commissions, and fees increased $122,107 or 18.31% in
1998 over 1997. 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
$1,086,118, a 13.68% increase over the same period in 1997. Trust revenue
increased in 1998 over 1997, due mainly to an increased customer base, assets
managed, and transaction volumes. Loan servicing fees decreased, due mainly to
the previously mentioned sale, while other noninterest income increased in 1998
over 1997.
Noninterest Expense. Noninterest expenses for the first quarter ended March
31, 1998, were $13,155,062, an increase of $2,487,493 or 23.32% over the same
period in 1997. Noninterest expenses through March 31, 1998, include $569,000 of
expenditures in relation to the transition of Centennial Bank into Bancorp. The
majority of these expenses are related to employment, computer hardware and
software expenditures, and conversion costs. Bancorp's salaries and employee
benefits, equipment, occupancy, printing and office supplies, marketing,
communications and other expenses are higher in the first quarter of 1998 over
the same period in 1997, due mainly to growth and expansion including additions
of new products, branch locations, and services over the period. Salaries and
employee benefits increased $1,371,382 or 23.27% through the first quarter of
1998, due to increases in salaries and personnel over the same period in 1997.
Equipment expense increased $159,087 or 15.09% in 1998 over 1997 in the first
quarter as Bancorp continues to keep pace with increased technology improvements
and expansion. Occupancy costs increased slightly in 1998 over 1997. Marketing
and printing and office supplies expense increased in the first quarter of 1998
over the like period in 1997 due to increased efforts to promote products and
services in new and current markets. Professional fees incurred for services
from outside consultants, accountants, and attorneys are down $165,172 in the
first quarter of 1998 compared to the first quarter of 1997. Communication and
other expenses increased in line with the continued growth of Bancorp. Other
noninterest expenses are up due to merger related transition expenses of
$569,000 and continued growth.
INCOME TAXES
During the first three months of 1998, due to a decrease in pre-tax income
and a change in the mix of taxable and nontaxable income items, the provision
for income taxes decreased from that of 1997. It is anticipated that Bancorp's
tax expense will increase in future periods, both due to an increase in income
before taxes and a smaller percentage of Bancorp's income being generated from
tax exempt items. Any future merger related capitalized costs may also increase
Bancorp tax provisions.
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
("FHLB"), 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
$997.3 million at March 31, 1998, up from $958.5 million at December 31, 1997.
Bancorp does not generally accept brokered deposits. A concerted effort has been
made to attract
10
<PAGE> 11
deposits in the market area it serves through competitive pricing and delivery
of a quality product. Increases over the period are due to 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 include Federal Funds purchased and borrowings from the FHLB.
CAPITAL RESOURCES
The Board of Governors of the Federal Reserve System ("FRB") and the Federal
Deposit Insurance Corporation ("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 $104,740,946 at March 31, 1998, from
$101,140,318 at December 31, 1997, an increase of $3,600,628, or 3.56%, over
that period of time. At March 31, 1998, Bancorp's shareholders' equity, as a
percentage of total assets, was 8.97%, compared to 9.04% at December 31, 1997.
The decrease was primarily the result of Bancorp's asset base growing faster
than equity. Equity grew at 3.56% over the period from December 31, 1997, to
March 31, 1998, while assets grew by 4.39% over the same period.
As the following table indicates, Bancorp currently exceeds the regulatory
capital minimum requirements.
<TABLE>
<CAPTION>
March 31, 1998
(Dollars in thousands) ------------------------------
Amount Ratio
---------- ----------
<S> <C> <C>
Tier 1 capital .............................. $ 100,946 11.51%
Tier 1 capital minimum requirement .......... 35,089 4.00
---------- ----------
Excess over minimum Tier 1 capital ........ $ 65,857 7.51%
========== ==========
Total capital ............................... $ 111,922 12.76%
Total capital minimum requirement ........... 70,178 8.00
---------- ----------
Excess over minimum total capital ......... $ 41,744 4.76%
========== ==========
Risk-adjusted assets ........................ $ 877,228
==========
Leverage ratio .............................. 9.09%
Minimum leverage requirement ................ 3.00
----------
Excess over minimum leverage ratio ........ 6.09%
==========
Risk adjusted total assets .................. $1,110,217
==========
</TABLE>
11
<PAGE> 12
LOAN PORTFOLIO
Interest earned on the loan portfolio is the primary source of income for
Bancorp. Net loans represented 67.86% and 68.54% of total assets as of March 31,
1998 and December 31, 1997, respectively. 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>
March 31, 1998 December 31, 1997
------------------------- -------------------------
(Dollars in thousands) Amount Percent Amount Percent
- ---------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial ................... $ 188,250 23.76% $ 181,508 23.68%
Real estate construction ..... 110,303 13.92 110,601 14.43
Real estate mortgage ......... 99,321 12.54 99,555 12.99
Real estate commercial ....... 324,171 40.92 298,902 38.99
Installment and other consumer 81,957 10.35 86,376 11.27
--------- --------- --------- ---------
Total loans .................. 804,002 101.49% 776,942 101.36%
Allowance for loan losses .... (11,790) (1.49) (10,451) (1.36)
--------- ---------
Total loans, net ............. $ 792,212 100.00% $ 766,491 100.00%
========= ========= ========= =========
</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 or 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) March 31, 1998 December 31, 1997
- ---------------------- -------------- -----------------
<S> <C> <C>
Loans on nonaccrual status ......................................... $3,582 $4,245
Loans past due greater than 90 days but not on nonaccrual status ... 147 44
Other real estate owned ............................................ 603 494
------ ------
Total nonperforming assets ......................................... $4,332 $4,783
====== ======
Percentage of nonperforming assets to total assets ................. .37% .43%
====== ======
</TABLE>
See "Loan Loss Allowance and Provision"
12
<PAGE> 13
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>
Three months ended Year ended
(Dollars in thousands) March 31, 1998 December 31, 1997
- ---------------------- -------------- -----------------
<S> <C> <C>
Loans outstanding at end of period ........... $ 804,002 $ 776,942
Average loans outstanding during the period .. $ 793,663 $ 751,284
Allowance for loan losses, beginning of period $ 10,451 $ 8,491
Recoveries ................................... 193 242
Loans charged off ............................ (339) (2,218)
--------- ---------
Net loans charged off ........................ (146) (1,976)
Provision for loan losses .................... 1,485 3,936
--------- ---------
Allowance for loan losses, end of period ..... $ 11,790 $ 10,451
========= =========
Ratio of net loans charged off
to average loans outstanding(1) ............ .07% .26%
Ratio of allowance for loan losses
to loans at end of period .................. 1.47% 1.35%
</TABLE>
(1) The ratios for the three months ended March 31, 1998 have been annualized.
Increases in the provision for loan losses in the three months ended March
31, 1998 were due mainly to increases in loan growth and a merger related
increase of $1,038,000 at Centennial Bank in the first quarter of 1998 to bring
the allowance for loan loss methodology in line with Bancorp practices. 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, 1998 or any future periods.
13
<PAGE> 14
INVESTMENT PORTFOLIO
The following table shows the carrying value of the Banks' portfolio of
investments:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
(Dollars in thousands)
Investments available for sale (At Fair Value)
U.S. Treasury securities ........................ $ 8,575 $ 9,571
U.S. Government agency securities ............... 66,959 76,512
Corporate securities ............................ 26,337 24,802
Mortgage-backed securities ...................... 9,146 8,444
Obligations of state and political subdivisions . 69,894 63,822
Other securities ................................ 8,801 8,039
-------- --------
Total ......................................... $189,712 $191,190
======== ========
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 . 2,983 2,987
Other securities ................................ -- --
-------- --------
Total ......................................... $ 2,983 $ 2,987
======== ========
Total Investment Portfolio .................... $192,695 $194,177
======== ========
</TABLE>
YEAR 2000 ISSUES
The upcoming year 2000 creates challenges with respect to the automated
systems used by financial institutions and other companies. Many software
programs are not able to recognize the year 2000, due to the practice of using
only two digits to represent years in the 1900's, and some software programs do
not recognize the year 2000 as a leap year. This challenge is especially
problematic for financial institutions, since many transactions, such as
interest accruals and payments, are date sensitive. In addition, the problem is
not limited to computer systems, but will potentially affect every system that
has an embedded microchip, such as automated teller machines, elevators, and
vaults. It also may affect the operations of third parties with whom Bancorp and
the Banks do business.
Bancorp and the Banks are committed to addressing these challenges in a
prompt and responsible manner and have dedicated resources to do so. Management
has completed an assessment of its automated systems and has implemented a
program to complete all necessary steps to resolve these issues, including
purchasing appropriate computer technology. As part of this program, management
will monitor the efforts and success of its suppliers, service providers, and
large corporate customers, in meeting their year 2000 challenges. Updating and
testing of Bancorp's and the Banks' automated systems is currently underway and
will be substantially complete well before the millennium. Bancorp and the Banks
may also incur additional expenses related to compliance with regulatory
requirements related to the year 2000 problem.
The total financial effect of these year 2000 challenges on Bancorp and
the Banks is impossible to predict with certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of these
efforts cannot be predicted until the year 2000 actually arrives. However,
management does not believe that expenses related to year 2000 challenges will
have a material effect on the operations or financial performance of Bancorp or
the Banks.
FORWARD LOOKING STATEMENTS
This document contains certain forward looking statements, all
of which are based on current expectations. Actual results may differ
materially, and therefore readers are cautioned not to place undue reliance on
these forward looking statements.
14
<PAGE> 15
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK
Interest rate, credit, and operations risks are the most
significant market risks impacting Bancorp's performance. Other types of market
risk, such as foreign currency exchange rate risk and commodity price risk, do
not arise in the normal course of Bancorp's business activities. Bancorp relies
on loan reviews, prudent loan underwriting standards and an adequate allowance
of loan loss to mitigate credit risk.
Bancorp uses an asset/liability management simulation model to measure
interest rate risk. The model quantifies interest rate risk through simulating
forecasted net interest income over a 12-month time period under various rate
scenarios, as well as monitoring the change in the present value of equity under
the same rate scenarios. The present value of equity is defined as the
difference between the market value of current assets less current liabilities.
By measuring the change in the present value of equity under different rate
scenarios, management is able to identify interest rate risk that may not be
evident in simulating changes in forecasted net interest income.
Bancorp is currently slightly liability sensitive, meaning that interest
bearing liabilities mature or reprice more quickly than interest-earning assets
in a given period, therefore, a significant increase in market rates of interest
could adversely affect net interest income. In contrast, a decreasing rate
environment may slightly improve Bancorp's margin. Bancorp's strategy will be to
continue to limit its loss exposure through managing the repricing
characteristics of its assets and liabilities. Bancorp has also placed increased
emphasis on its non-interest revenue products to additionally stabilize earnings
strength.
It should be noted that the simulation model does not take into account
future management actions that could be undertaken, if there were a change in
actual market interest rates during the year. Also, certain assumptions are
required to perform modeling simulations that may have significant impact on the
results. These include assumptions regarding the level of interest rates and
balance changes on deposit products that do not have stated maturities. These
assumptions have been developed through a combination of industry standards and
future expected pricing behavior. The model also includes assumptions about
changes in the composition or mix of the balance sheet. The results derived from
the simulation model could vary significantly by external factors such as
changes in the prepayment assumptions, early withdrawals of deposits and
competition. Merger activity will also have an impact on Bancorp's
asset/liability position as new assets are acquired and added. The acquisition
of Centennial Holdings, Ltd. decreased Bancorp's liability sensitivity slightly.
Centennial Bank is currently slightly asset sensitive. Management has assessed
these risks and believes that there has been no material change since December
31, 1997.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedules for Form 10-Q.
(b) During the three months ended March 31, 1998, West Coast Bancorp filed the
following current report on Form 8-K:
Form 8-K filed March 3, 1998, relating to the acquisition of
Centennial Holdings, Ltd.
16
<PAGE> 17
SIGNATURES
As required by the Securities Exchange Act of 1934, this report is signed on
registrant's behalf by the undersigned authorized officers.
WEST COAST BANCORP
(Registrant)
Dated: May 13, 1998 /s/ Victor L. Bartruff
----------------------
Victor L. Bartruff
President and Chief Executive
Officer
Dated: May 13, 1998 /s/ Donald A. Kalkofen
----------------------
Donald A. Kalkofen
Executive Vice President and Chief
Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 50,373
<INT-BEARING-DEPOSITS> 64,818
<FED-FUNDS-SOLD> 9,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,712
<INVESTMENTS-CARRYING> 2,983
<INVESTMENTS-MARKET> 2,986
<LOANS> 804,002
<ALLOWANCE> 11,790
<TOTAL-ASSETS> 1,167,445
<DEPOSITS> 997,295
<SHORT-TERM> 23,461
<LIABILITIES-OTHER> 9,288
<LONG-TERM> 32,660
0
0
<COMMON> 15,971
<OTHER-SE> 88,770
<TOTAL-LIABILITIES-AND-EQUITY> 104,741
<INTEREST-LOAN> 20,213
<INTEREST-INVEST> 2,942
<INTEREST-OTHER> 552
<INTEREST-TOTAL> 23,707
<INTEREST-DEPOSIT> 8,243
<INTEREST-EXPENSE> 8,984
<INTEREST-INCOME-NET> 14,723
<LOAN-LOSSES> 1,485
<SECURITIES-GAINS> 101
<EXPENSE-OTHER> 13,155
<INCOME-PRETAX> 2,747
<INCOME-PRE-EXTRAORDINARY> 2,747
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,747
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
<YIELD-ACTUAL> 5.97
<LOANS-NON> 3,582
<LOANS-PAST> 147
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,451
<CHARGE-OFFS> 339
<RECOVERIES> 193
<ALLOWANCE-CLOSE> 11,790
<ALLOWANCE-DOMESTIC> 11,790
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
