<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, 1998
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
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 October 31, 1998: 14,211,074
<PAGE> 2
TABLE OF CONTENTS
PART I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997..................................3
Consolidated Statements of Income -
Three months and nine months ended September 30, 1998 and 1997............4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 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......................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............23
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.........................................24
Signatures ..............................................................25
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1.
WEST COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks ....................... $ 84,293,751 $ 97,769,331
Interest-bearing deposits in other banks ...... 1,244,644 1,048,327
Federal funds sold ............................ -- --
--------------- ---------------
Total cash and cash equivalents .......... 85,538,395 98,817,658
Investment securities:
Investment available for sale ................. 243,558,504 191,189,957
Investment held to maturity ................... 2,878,746 2,987,256
--------------- ---------------
Total investment securities .............. 246,437,250 194,177,213
Loans held for sale ................................. 13,306,975 10,457,247
Loans ............................................... 827,213,047 776,941,389
Allowance for loan loss ............................. (12,096,258) (10,450,584)
--------------- ---------------
Loans, net .................................... 815,116,789 766,490,805
Premises and equipment, net ......................... 31,074,024 27,850,076
Intangible assets ................................... 2,828,319 3,157,300
Other assets ........................................ 17,604,050 17,436,250
--------------- ---------------
Total assets ............................. $ 1,211,905,802 $ 1,118,386,549
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand ........................................ $ 189,878,888 $ 162,567,731
Savings and interest-bearing demand ........... 526,089,289 495,890,935
Certificates of deposits ...................... 332,834,321 300,022,929
--------------- ---------------
Total deposits ........................... 1,048,802,498 958,481,595
Short-term borrowings ............................... 9,700,000 29,249,000
Other liabilities ................................... 8,720,454 7,069,962
Long-term borrowings ................................ 31,088,531 22,445,674
--------------- ---------------
Total liabilities ........................ 1,098,311,483 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, 50,000,000 shares
authorized; shares issued and outstanding
14,207,899 and 12,606,009 respectively ........ 17,759,874 15,757,511
Additional paid-in capital .......................... 66,654,104 43,213,086
Retained earnings ................................... 26,658,801 40,599,130
Accumulated other comprehensive income .............. 2,521,540 1,570,591
--------------- ---------------
Total stockholders' equity .................... 113,594,319 101,140,318
--------------- ---------------
Total liabilities and stockholders' equity $ 1,211,905,802 $ 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 Nine months ended
September 30, September 30,
----------------------------------- ----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
INTEREST INCOME (Unaudited)
<S> <C> <C> <C> <C>
Interest and fees on loans ................. $ 20,932,081 $ 19,695,260 $ 61,580,301 $ 57,731,845
Interest on taxable investment securities .. 2,247,770 1,667,606 6,358,165 4,616,872
Interest on nontaxable investment securities 1,024,178 585,119 2,888,270 1,720,232
Interest from other banks .................. 292,116 672,223 1,237,205 1,028,251
Interest on federal funds sold ............. 321,426 15,948 356,572 44,833
------------ ------------ ------------ ------------
Total interest income ................ 24,817,571 22,636,156 72,420,513 65,142,033
INTEREST EXPENSE
Savings and interest-bearing demand ........ 4,257,626 4,923,340 12,264,022 11,961,564
Certificates of deposit .................... 4,552,781 3,091,129 13,214,674 10,177,701
Short-term borrowings ...................... 3,617 17,312 403,883 447,581
Long-term borrowings ....................... 459,583 244,606 1,378,486 964,990
------------ ------------ ------------ ------------
Total interest expense ............... 9,273,607 8,276,387 27,261,065 23,551,836
------------ ------------ ------------ ------------
NET INTEREST INCOME ........................ 15,543,964 14,359,769 45,159,448 41,590,197
PROVISION FOR LOAN LOSS .................... 485,000 632,500 2,465,415 2,942,500
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS .............. 15,058,964 13,727,269 42,694,033 38,647,697
NONINTEREST INCOME
Gains on sales of loans .................... 1,221,244 591,171 4,196,425 1,446,480
Service charges on deposit accounts ........ 1,176,609 1,000,198 3,383,962 2,951,158
Other service charges, commissions and fees 1,257,285 876,022 2,913,359 2,336,569
Gains on sale of servicing rights .......... -- 214,103 -- 1,659,420
Trust revenue .............................. 576,540 413,847 1,881,084 1,215,226
Loans servicing fees ....................... 128,960 178,187 441,441 657,754
Other ...................................... 242,120 69,137 643,631 278,364
Net gains (losses) on sales of securities .. (497) (10,369) 250,484 (56,755)
------------ ------------ ------------ ------------
Total noninterest income ............. 4,602,261 3,332,296 13,710,386 10,488,216
NONINTEREST EXPENSE
Salaries and employee benefits ............. 7,532,563 6,712,131 22,271,507 18,761,522
Equipment .................................. 1,384,183 1,185,672 3,961,079 3,415,997
Occupancy .................................. 853,299 768,186 2,472,430 2,349,209
Restructuring charges ...................... 1,918,350 -- 1,918,350 --
Communications ............................. 440,977 315,629 1,189,457 866,719
Professional fees .......................... 398,642 237,706 1,179,341 1,246,305
Marketing .................................. 359,168 252,531 1,109,102 924,847
Printing and office supplies ............... 288,804 359,903 1,048,460 933,766
FDIC insurance ............................. 29,506 26,027 87,175 74,828
Other noninterest expense .................. 1,647,681 1,470,675 5,653,489 4,377,437
------------ ------------ ------------ ------------
Total noninterest expense ............ 14,853,173 11,328,460 40,890,390 32,950,630
INCOME BEFORE INCOME TAXES ................. 4,808,052 5,731,105 15,514,029 16,185,283
PROVISION FOR INCOME TAXES ................. 1,504,743 1,598,009 5,108,253 5,389,700
------------ ------------ ------------ ------------
NET INCOME ................................. $ 3,303,309 $ 4,133,096 $ 10,405,776 $ 10,795,583
============ ============ ============ ============
AVERAGE NUMBER OF COMMON EQUIVALENT SHARES
OUTSTANDING ................................ 14,664,000 14,353,000 14,688,000 14,225,000
Basic ................................ $ .23 $ .30 $ .74 $ .79
Diluted .............................. $ .23 $ .29 $ .71 $ .76
</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,
--------------------------------
1998 1997
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income ...................................................... $ 10,405,776 $ 10,795,583
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment ... 2,313,150 2,127,134
Amortization of intangibles ............................... 328,981 266,351
Net (gain) loss on sales of available for sale investments (250,484) 56,755
Provision for loan losses ................................. 2,465,415 2,942,500
Increase in interest receivables .......................... (1,507,100) (1,327,486)
(Increase) decrease in other assets ....................... 1,339,300 (1,529,169)
Net cash used by loans held for sale ...................... (2,849,728) (1,870,292)
Decrease in interest payable .............................. (229,424) (69,242)
Increase (decrease) in other liabilities .................. 1,879,916 (1,678,238)
Tax benefit associated with stock options ................. 1,454,687 --
------------- -------------
Net cash provided by operating activities ............ 15,350,489 9,713,896
CASH FLOWS FOR INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ........................................ 37,930,970 18,136,305
Held to maturity .......................................... 108,510 77,011
Proceeds from sales of available for sale investment securities . 4,906,135 23,830,401
Purchase of investment securities:
Available for sale ........................................ (94,004,219) (89,261,945)
Held to maturity .......................................... -- (100,000)
Acquisition of intangible ....................................... -- (781,403)
Loans made to customers greater than principal collected on loans (51,091,399) (46,341,159)
Capital expenditures ............................................ (5,537,098) (2,551,236)
------------- -------------
Net cash used in investing activities ..................... (107,687,101) (96,992,026)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest
bearing transaction accounts .............................. 57,509,511 106,306,060
Net increase in proceeds from sales of certificates of deposits
greater than payments for maturing time deposits .......... 32,811,392 33,346,711
Proceeds from long-term borrowings .............................. 11,000,000 10,500,000
Payments on long-term borrowings ................................ (2,357,143) (20,351,382)
Net decrease in short-term borrowings ........................... (19,549,000) (9,572,431)
Sales of common stock, net ...................................... 1,708,238 1,513,966
Dividends paid and cash paid for fractional shares .............. (2,065,649) (1,669,759)
------------- -------------
Net cash provided by financing activities ................. 79,057,349 120,073,165
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............ (13,279,263) 32,795,035
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 98,817,658 59,174,506
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 85,538,395 $ 91,969,541
============= =============
</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
Additional Other
Common Stock 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, $.16 per common
Shares .......................... -- -- -- (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 ........................ -- -- -- 10,405,776 -- 10,405,776
Net unrealized gains on investments
Available for sale .............. -- -- -- -- 950,949 950,949
Cash dividends, $.15 per common
Share ........................... -- -- -- (2,064,074) -- (2,064,074)
Sale of common stock pursuant to
Stock options plans ............. 323,114 403,892 1,546,820 -- -- 1,950,712
Redemption of stock pursuant to
Stock option plans .............. (12,763) (15,953) (226,521) -- -- (242,474)
10 percent stock dividend ......... 1,291,627 1,614,534 20,666,032 (22,280,566) -- --
Cash paid for fractional shares ... (88) (110) -- (1,465) -- (1,575)
Tax benefit associated with stock
options ......................... -- -- 1,454,687 -- -- 1,454,687
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, September 30, 1998 ....... 14,207,899 $ 17,759,874 $ 66,654,104 $ 26,658,801 $ 2,521,540 $ 113,594,319
============= ============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
1. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of West Coast Bancorp ("Bancorp or the Company") which operates 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
corporation, 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 and nine months ended September 30, 1998 are not necessarily
indicative of results to be anticipated for the year ending December 31, 1998,
or other future periods.
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. RESTRUCTURING CHARGES
In September 1998, Bancorp announced its plan to combine its four
separate banking affiliates into a single banking entity to be operated under
the name West Coast Bank. Bancorp anticipates one-time costs of approximately $5
million to cover costs of the consolidation, including the severance program,
signage, data conversions and other marketing/branching, regulatory and
administrative costs. Of the one-time expenses, $1,918,350 has been recognized
in the third quarter of 1998 with the remaining costs to be expensed as incurred
in the next several quarters. The following table summarizes the restructuring
charges incurred in the third quarter.
<TABLE>
<CAPTION>
September 30, 1998
------------------
<S> <C>
Balance, accrued restructuring charges, beginning of period -
Provision for restructure charges $1,918,350
Utilization:
Cash 48,000
Noncash -
----------
Total Utilization 48,000
----------
Balance, accrued restructuring charges, end of period $1,870,350
==========
</TABLE>
Total restructuring charges of $1,918,350 were recorded to cover
anticipated costs of $1,730,000 for the severance program and personnel related
expenditures, with the remaining $188,350 in costs reserved for marketing and
professional fees incurred but not yet paid. As a result of the consolidation,
Bancorp expects to reduce employment by approximately 100 administrative and
back office positions. The consolidation is expected to be completed by the year
ended 1998 following regulatory approval.
7
<PAGE> 8
5. ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). Statement 133 cannot be applied retroactively. SFAS No. 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).
The implementation of this statement is not anticipated to have a
material effect on Bancorp's financial position or net income.
6. STOCKHOLDERS' EQUITY
The Board of Directors declared a quarterly cash dividend of $.055
per share during the third quarter of 1998. In addition, dividends of $.045 per
share were declared in the first and second quarters of 1998. A 10% stock
dividend was also declared in the third quarter of 1998. 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.
7. 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 $27,490,489 and $23,621,078 for interest in the nine
months ended September 30, 1998 and 1997, respectively. Income taxes paid were
$3,370,934 and $6,238,016 in the nine months ended September 30, 1998 and 1997
respectively.
8. COMPREHENSIVE INCOME
Bancorp has adopted SFAS No. 130 "Reporting Comprehensive Income" as
of the quarter ended 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 Nine months ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 3,303,309 $ 4,133,096 $10,405,776 $10,795,583
Net change in unrealized gains (losses)
on available for sale investments 913,169 428,997 950,949 334,167
----------- ----------- ----------- -----------
Comprehensive income $ 4,216,478 $ 4,562,093 $11,356,725 $11,129,750
=========== =========== =========== ===========
</TABLE>
8
<PAGE> 9
9. 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. Bancorp for the periods reported had no reconciling items
between net income and income available to common shareholders. 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 September 30, 1998
----------- ----------- -----
<S> <C> <C> <C>
Basic earnings per share................ $ 3,303,309 14,177,998 $0.23
Stock options........................... 485,588
Diluted earnings per share.............. $ 3,303,309 14,663,586 $0.23
</TABLE>
<TABLE>
<CAPTION>
Three Months ended September 30, 1997
----------- ----------- -----
<S> <C> <C> <C>
Basic earnings per share................ $ 4,133,096 13,626,952 $0.30
Stock options........................... 726,519
Diluted earnings per share.............. $ 4,133,096 14,353,471 $0.29
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
----------- ----------- -----
<S> <C> <C> <C>
Basic earnings per share................ $10,405,776 14,077,611 $0.74
Stock options........................... 610,776
Diluted earnings per share.............. $10,405,776 14,688,387 $0.71
Nine months ended September 30, 1997
----------- ----------- -----
Basic earnings per share................ $10,795,583 13,597,145 $0.79
Stock options........................... 627,437
Diluted earnings per share.............. $10,795,583 14,224,582 $0.76
</TABLE>
10. RECLASSIFICATION
Certain reclassifications of prior year amounts have been made to
conform to current classifications.
9
<PAGE> 10
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. In addition to
historical information, this quarterly report contains certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("PSLRA"). This statement is included for the express purpose of
availing Bancorp of the protections of the safe harbor provisions of the PSLRA.
The forward looking statements contained in this report are subject to factors,
risks, and uncertainties that may cause actual results to differ materially from
those projected. Important factors that might cause such a material difference
include, but are not limited to, those discussed in this section of the report.
In addition, the following items are among the factors that could cause actual
results to differ materially from the forward looking statements in this report:
general economic conditions, including their impact on capital expenditures;
business conditions in the banking industry; the regulatory environment; new
legislation; rapidly changing technology and evolving banking industry
standards; competitive standards; competitive factors, including increased
competition with community, regional, and national financial institutions;
fluctuating interest rate environments; and similar matters. Readers are
cautioned not to place undue reliance on these forward looking statements, which
reflect Management's analysis only as of the date of the statement. Bancorp
undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date of this
report. Readers should carefully review the risk factors described in this and
other documents Bancorp files from time to time with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Three months ended September 30, 1998 and 1997
Net Income. Bancorp reported net income of $3,303,309 or $.23 per
diluted share, for the three months ended September 30, 1998, compared to
$4,133,096 or $.29 per diluted share for the three months ended September 30,
1997. A one-time $1.9 million restructuring charge ($1.2 million after income
taxes) impacted the third quarter 1998 results due to the company's recently
announced consolidation of its subsidiary banks. In addition, the 1997 third
quarter results were favorably impacted by a non-recurring gain on sale of
servicing rights of $214,103 ($141,000 after income taxes). After adjusting for
the third quarter non-recurring events, adjusted operating net income was
$4,550,000 or $.31 per diluted share, up 14% compared to adjusted operating net
income of $3,992,000 or $.28 per diluted share, in the like quarter of 1997. Net
interest income increased in the third quarter of 1998 over the comparable
period in 1997 due to higher average interest earning assets. Noninterest income
increased mainly due to gains on sales of loans, an increased customer base,
higher transaction volumes, and increases in fee assessments. Expenses increased
mainly due to restructuring charges, an increased customer base, higher
transaction volumes, product expansion costs, and other costs related to growth
and expansion.
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 or flattening of the interest rate yield curve could adversely
affect net interest income. In contrast, a declining interest rate environment
or steepening of the interest rate yield curve 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.
10
<PAGE> 11
Net interest income on a tax equivalent basis for the three months
ended September 30, 1998 increased $1,410,377 or 9.62%, to $16,071,571 from
$14,661,194 for the same period in 1997. Average interest earning assets
increased by $141.4 million, or 14.79%, to $1.1 billion from $956.2 million for
the same period in 1997, while average interest bearing liabilities increased
$111.8 million or 14.54%. The average net interest spread decreased from 5.25%
to 4.98%, mainly due to decreased average earning asset yields which declined 36
basis points from 9.52% to 9.16%. The low/flat interest rate yield curve has
caused variable rate repricing on assets over the period, which along with
increased competitive pricing have lead to the decreasing asset yields. In
addition, certain fixed rate loan customers have refinanced their loans at the
lower rates over the period. Average rates paid decreased only 9 basis points to
4.18% in the third quarter of 1998 from 4.27% for the same period in 1997.
Bancorp's net interest margin for the three months ended September 30, 1998 was
5.81%, a decrease of 27 basis points from 6.08% for the comparable period of
1997. Bancorp expects to see further declines in its interest margin. Continued
anticipated refinance activity caused by the low interest rate environment,
continued strong competition in the markets it serves, and other economic
factors, could further impact the company's net interest margin. 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>
Analysis of Net Interest Income Three Months Ended
September 30, Increase
-------------------------------------------
1998 1997 (Decrease) Change
---------------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C>
Interest and fee income (1).................... $ 25,345,178 $ 22,937,581 $ 2,407,597 10.50%
Interest expense............................... 9,273,607 8,276,387 997,220 12.05%
---------------- ---------------- ----------------
Net interest income............................ $ 16,071,571 $ 14,661,194 $ 1,410,377 9.62%
================ ================ ================
Average interest earning assets................ $ 1,097,639,437 $ 956,244,512 $ 141,394,925 14.79%
Average interest bearing liabilities........... $ 880,656,497 $ 768,850,376 $ 111,806,121 14.54%
Average yields earned (2)...................... 9.16% 9.52% (0.36)
Average rates paid (2)......................... 4.18% 4.27% (0.09)
Net interest spread (2)........................ 4.98% 5.25% (0.27)
Net interest margin (2)........................ 5.81% 6.08% (0.27)
</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, 1998 and 1997
have been annualized.
Provision for Loan Loss. Bancorp recorded provisions for loan losses
for the third quarter of 1998 and 1997 of $485,000 and $632,500 respectively.
Bancorp previously reported its provision for loan losses of $495,000 for the
second quarter of 1998 and $447,000 for the first quarter, net of the one time
merger-related increase in the provision for loan losses of $1,038,000. Net
charge-offs for the third quarter of 1998 were $392,000, compared to net
charge-offs of $442,000 for the same period in 1997. At September 30, 1998, the
percentage of non-performing assets was 0.36% of total assets compared to 0.45%
one year earlier. Bancorp's loan loss reserve, as a percentage of total loans
was 1.46% at September 30, 1998 compared to 1.30% as of September 30, 1997.
Noninterest Income. Noninterest income for the third quarter of 1998
was $4,602,261, up $1,269,965 or 38.11% from $3,332,296 in the like period in
1997. Gains on sales of loans increased $630,073 to $1,221,244 in 1998 over
1997. The gains represented 27% of non-interest income during the third quarter
of 1998, compared to 18% in the third quarter of 1997. The increase in sales of
loans was due mainly to increased activity in the commercial brokerage and
residential real estate programs. Service charges on deposit accounts increased
to $1,176,609, a 17.64% increase over the same period in 1997 caused mainly by
increases in volumes of customers serviced and increases in fee assessments.
Other service charges, commissions, and fees increased $381,263 or 43.52% 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. 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 prior period sales of servicing rights on loans,
while other noninterest income increased during the period.
11
<PAGE> 12
Noninterest Expense. Noninterest expenses for the third quarter ended
September 30, 1998, were $14,853,173, an increase of $3,524,713 or 31.11% over
the same period in 1997. A one time $1.9 million restructuring charge impacted
the third quarter 1998 noninterest expenses, due to the company's recently
announced consolidation of its subsidiary banks. Bancorp's salaries and employee
benefits, equipment, occupancy, communications, and other expenses are higher in
the third quarter of 1998 over the same period in 1997, due mainly to growth and
expansion including additions of new branches, products and services over the
period. Salaries and employee benefits increased $820,432 or 12.22% in the third
quarter of 1998, due to increases in personnel over the same period in 1997.
Equipment expense increased $198,511 or 16.74% in the third quarter of 1998 over
1997. Bancorp continues to invest in technological improvements and expansion.
Communication and other expenses increased in line with the continued growth of
Bancorp. Printing and office supplies decreased in the third quarter of 1998
over the like period in 1997. Professional fees incurred for services from
outside consultants, accountants, and attorneys are up $160,936 in the third
quarter of 1998 compared to the third quarter of 1997.
Nine months Ended September 30, 1998 and 1997
Net Income. For the nine months ended September 30, 1998, Bancorp's
net income was $10,405,776, a decrease of $389,807 from $10,795,583 for the same
period in 1997, a 3.61% decrease. A one-time $1.9 million restructuring charge
($1.2 million after income taxes) impacted the third quarter of 1998 results due
to the company's recently announced consolidation of its subsidiary banks. In
addition, net income in 1998 includes first quarter 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 September 30, 1997
includes a non-recurring pretax gain on sale of servicing rights of $1,659,420
and a one-time increase to the provision for loan losses of $675,000 related to
a previous bank acquisition made by Centennial Bank. After adjusting for these
non-recurring items and the non-recurring third quarter 1998 restructuring
charges, the nine months' 1998 operating net income was $12,713,000, or $.87 per
diluted share, an increase of 25 percent over 1997 adjusted operating net income
of $10,146,000, or $.71 per diluted share. Net interest income increased mainly
due to higher average interest earning assets. Noninterest income increased
mainly due to gains on sales of loans, an increased customer base, and higher
transaction volumes. Expenses increased mainly due to an increased customer
base, higher transaction volumes, branch expansion costs, acquisition related
costs, and other costs related to growth.
Net Interest Income. Net interest income on a tax equivalent basis
for the nine months ended September 30, 1998 increased $4,170,968 or 9.82%, to
$46,647,345 from $42,476,377 for the same period in 1997. Average interest
earning assets increased by $154.4 million, or 17.00%, to $1.06 billion from
$908.1 million for the same period in 1997. Average interest bearing liabilities
increased $125.0 million or 16.91% over the same period. The average net
interest spread decreased from 5.46% to 5.08%, due to decreased average earning
asset yields which declined 42 basis points from 9.72% to 9.30%. The low/flat
interest rate yield curve has caused variable rate repricing on assets over the
period, which along with increased competitive pricing have lead to the
decreasing asset yields. In addition, certain fixed rate loan customers have
refinanced their loans at the lower rates over the period. Bancorp expects to
see further declines in its interest margin. Continued anticipated refinance
activity caused by the low interest rate environment, continued strong
competition in the markets it serves, and other economic factors could further
impact the company's net interest margin. Average rates paid decreased only 4
basis points to 4.22% through September 1998 from 4.26% for the same period in
1997. Bancorp's net interest margin for the nine months ended September 30, 1998
was 5.87%, a decrease of 38 basis points from 6.25% for the comparable period of
1997. 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>
Analysis of Net Interest Income Nine months Ended
September 30, Increase
-------------------------------------------
1998 1997 (Decrease) Change
---------------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C>
Interest and fee income (1).................... $ 73,908,410 $ 66,028,213 $ 7,880,197 11.93%
Interest expense............................... 27,261,065 23,551,836 3,709,229 15.75%
---------------- ---------------- ----------------
Net interest income............................ $ 46,647,345 $ 42,476,377 $ 4,170,968 9.82%
================ ================ ================
Average interest earning assets................ $ 1,062,528,117 $ 908,136,828 $ 154,391,289 17.00%
Average interest bearing liabilities........... $ 864,149,832 $ 739,137,812 $ 125,012,020 16.91%
Average yields earned (2)...................... 9.30% 9.72% (0.42)
Average rates paid (2)......................... 4.22% 4.26% (0.04)
Net interest spread (2)........................ 5.08% 5.46% (0.38)
Net interest margin (2)........................ 5.87% 6.25% (0.38)
</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, 1998 and 1997
have been annualized.
12
<PAGE> 13
Provision for Loan Loss. Management's policy is to maintain an
adequate allowance for loan loss based on historical trends, current 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 through September 1998 and 1997 of $2,465,415 and
$2,942,500, respectively. The provision for loan loss through September 30, 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 September
30, 1997 provision for loan loss is a one-time increase of $675,000 related to a
previous bank acquisition made by Centennial Bank. Net charge-offs through
September 30, 1998 were $820,000, compared to net charge-offs of $1,456,000 for
the same period in 1997. At September 30, 1998, the percentage of non-performing
assets was 0.36% of total assets compared to 0.45% one year earlier. Bancorp's
loan loss reserve, as a percentage of total loans was 1.46% at September 30,
1998 compared to 1.30% as of September 30, 1997.
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 September 30, 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 nine months ended
September 30, 1998 was $13,710,386 up $3,222,170 from $10,488,216 or 30.72% over
the like period in 1997. Gains on sales of loans increased $2,749,945 to
$4,196,425 in 1998 over 1997. The gains represent 31% of noninterest income in
1998 compared to 14% in the same period of 1997. The increase in sales of loans
was due to increased activity in the commercial brokerage and residential real
estate programs. Service charges on deposit accounts increased to $3,383,962 for
the nine months ended September 30, 1998, a 14.67% increase over the same period
in 1997, caused mainly by increases in volumes of customers serviced and
increases in fee assessments. Other service charges, commissions, and fees
increased $576,790 or 24.69% 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. Included in the September 30,
1997 noninterest income is a non-recurring gain on sale of servicing rights of
$1,659,420. 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 of servicing rights,
while other noninterest income increased in 1998 over 1997.
Noninterest Expense. Noninterest expenses for the nine months ended
September 30, 1998, were $40,890,390, an increase of $7,939,760 or 24.10% over
the same period in 1997. A one-time $1.9 million restructuring charge impacted
the 1998 non-interest expenses, due to the company's recently announced
consolidation of its subsidiary banks. In addition, non-interest expenses
through September 30, 1998 include $569,000 of expenditures in relation to the
transition of the acquisition 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, communications, marketing, printing and office supplies,
and other expenses are higher in the first nine months 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 $3,509,985 or 18.71% through the third quarter of 1998, due
to increases in salaries and personnel over the same period in 1997. Equipment
expense increased $545,082 or 15.96% in 1998 over 1997. Bancorp continues to
invest in technological improvements and expansion. Occupancy, marketing and
printing and office supplies expense increased through the third quarter of 1998
over the like period in 1997 due to growth and 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 $66,964
in the first three quarters of 1998 compared to the same period in 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.
13
<PAGE> 14
RESTRUCTURING CHARGES
For the three months ended September 30, 1998 Bancorp recognized
$1,918,350 in restructuring charges related to its plan to consolidate its four
separate banking affiliates into one entity. As a result of the consolidation,
Bancorp expects to reduce employment by approximately 100 administrative and
back office positions. Bancorp anticipates one-time costs of approximately $5
million to cover costs of the consolidation, including the severance program,
signage, data conversions and other marketing/branching, regulatory and
administrative costs. In the third quarter of 1998, approximately $1.7 million
was recorded to cover the cost of the severance program, with the residual
charges relating marketing, professional fees and administrative costs. Bancorp
expects to record the remaining one-time costs in the following several
quarters.
Bancorp expects that the consolidation will save approximately $6
million annually or 12% of its current ongoing overhead expenses. The cost
savings will come from the reductions in staff and related overhead, a
simplified corporate structure, a reduced regulatory burden and synergies
created by unified marketing efforts and name branding. The plan calls for
two-thirds of the cost savings to be substantially achieved by third quarter
1999, with the remaining savings to be achieved early in the year 2000.
Bancorp's liquidity has not been materially affected by cash outlays
related to one-time restructuring charges. Bancorp does not anticipate that
future restructuring charges will have a material effect on Bancorp's liquidity.
INCOME TAXES
During the first nine months of 1998, due to a decrease in net income
before taxes and changes 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 $1.049 billion at September 30, 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 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, expansion, 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,
FHLB, and other 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, customer management of cash resources prior to
year 2000 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.
14
<PAGE> 15
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 $113,594,319 at September 30, 1998,
from $101,140,318 at December 31, 1997, an increase of $12,454,001, or 12.31%,
over that period of time. At September 30, 1998, Bancorp's shareholders' equity,
as a percentage of total assets, was 9.37%, compared to 9.04% at December 31,
1997. The increase was primarily the result of Bancorp's equity base growing
faster than assets. Equity grew at 12.31% over the period from December 31,
1997, to September 30, 1998, while assets grew by 8.36% over the same period.
As the following table indicates, Bancorp currently exceeds the
regulatory capital minimum requirements.
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------
(Dollars in thousands)
Amount Ratio
------------- -----------
<S> <C> <C>
Tier 1 capital.......................................... $ 108,897 11.56%
Tier 1 capital minimum requirement...................... 37,676 4.00%
------------- -----
Excess over minimum Tier 1 capital.................... $ 71,221 7.56%
============= ======
Total capital........................................... $ 120,674 12.81%
Total capital minimum requirement....................... 75,352 8.00%
------------- -----
Excess over minimum total capital..................... $ 45,322 4.81%
============= =====
Risk-adjusted assets.................................... $ 941,897
=============
Leverage ratio.......................................... 9.23%
Minimum leverage requirement............................ 3.00%
-----
Excess over minimum leverage ratio.................... 6.23%
=====
Risk-adjusted total assets.............................. $ 1,179,506
=============
</TABLE>
15
<PAGE> 16
LOAN PORTFOLIO
Interest earned on the loan portfolio is the primary source of income
for Bancorp. Net loans represented 67.26% and 68.54% of total assets as of
September 30, 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. December 31, 1997 loan classification balances have been
adjusted to retroactively reflect current loan classification.
<TABLE>
<CAPTION>
September 30, 1998 December 31,1997
------------------------- ------------------------------
(Dollars in thousands)
Amount Percent Amount Percent
------- ------- ------ -------
<S> <C> <C> <C> <C>
Commercial........................................... $161,567 19.82% $150,197 19.60%
Real estate construction............................. 115,723 14.20 112,378 14.66
Real estate mortgage................................. 112,423 13.79 116,228 15.16
Real estate commercial............................... 368,950 45.26 323,320 42.18
Installment and other consumer....................... 68,550 8.41 74,819 9.76
-------- ------- -------- ------
Total loans.......................................... 827,213 101.48% 776,942 101.36%
Allowance for loan losses............................ (12,096) (1.48) (10,451) (1.36)
-------- ------- -------- -------
Total loans, net..................................... $815,117 100.00% $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.
Because of 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.
16
<PAGE> 17
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, 1998 December 31, 1997
-------------------- ------------------ -----------------
<S> <C> <C>
Loans on nonaccrual status.............................................. $3,475 $4,245
Loans past due greater than 90 days but not on nonaccrual status........ 132 44
Other real estate owned................................................. 784 494
---- ----
Total nonperforming assets.............................................. $4,391 $4,783
====== ======
Percentage of nonperforming assets to total assets...................... .36% .43%
=== ===
</TABLE>
See "Loan Loss Allowance and Provisions"
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, 1998 December 31, 1997
-------------------- ------------------ -----------------
<S> <C> <C>
Loans outstanding at end of period................................ $ 827,213 $ 776,942
Average loans outstanding during the period....................... $ 807,391 $ 751,284
Allowance for loan losses, beginning of period.................... $ 10,451 $ 8,491
Recoveries........................................................ 297 242
Loans charged off................................................. (1,117) (2,218)
----------- -----------
Net loans charged off............................................. (820) (1,976)
Provision for loan losses......................................... 2,465 3,936
----------- -----------
Allowance for loan losses, end of period.......................... $ 12,096 $ 10,451
=========== ===========
Ratio of net loans charged off
to average loans outstanding (1)................................ .14% .26%
Ratio of allowance for loan losses
to loans at end of period....................................... 1.46% 1.35%
</TABLE>
(1) The ratios for the nine months ended September 30, 1998 have been
annualized.
Forecasted loan growth will lead to expected future increase 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.
17
<PAGE> 18
INVESTMENT PORTFOLIO
The following table shows the carrying value of the Banks' portfolio
of investments:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1998 1997
-------------------- ---------------- -------------
<S> <C> <C>
Investments available for sale (At Fair Value)
U.S. Treasury securities.............................................. $ 6,676 $ 9,571
U.S. Government agency securities..................................... 90,797 76,512
Corporate securities.................................................. 35,422 24,802
Mortgage-backed securities............................................ 8,564 8,444
Obligations of state and political subdivisions....................... 92,818 63,822
Other securities...................................................... 9,281 8,039
------------ ------------
Total.......................................................... $ 243,558 $ 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....................... 2,879 2,987
Other securities...................................................... --- ---
------------ ------------
Total.......................................................... $ 2,879 $ 2,987
Total Investment Portfolio..................................... $ 246,437 $ 194,177
============ ============
</TABLE>
YEAR 2000 ISSUES
Introduction
The 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, since most programs and
systems were designed to store calendar years in the 1900s by assuming the "19"
and storing only the last two digits of the year. For example, these automated
systems would recognize a year stored as "00" as the year "1900," rather than as
the year 2000. If these automated systems are not appropriately re-coded,
updated, or replaced before the year 2000, they will likely confuse data, crash,
or fail in some manner. In addition, many software programs and automated
systems will fail to recognize the year 2000 as a leap year. The problem is not
limited to computer systems. Year 2000 issues will potentially affect every
system that has an embedded microchip, such as automated teller machines,
elevators, and vaults.
The year 2000 challenge is especially problematic for financial
institutions, since many transactions, such as interest accruals and payments,
are date sensitive. It also may affect the operations of third parties with whom
Bancorp does business, including the Company's vendors, suppliers, utility
companies, and customers.
The Company's State of Readiness
The Company is committed to addressing these year 2000 challenges in
a prompt and responsible manner and has dedicated resources to do so. Management
has completed an assessment of its automated systems and has implemented a plan
to resolve these issues, including purchasing appropriate computer technology.
The Company's year 2000 compliance plan ("Y2K Plan") has five phases. These
phases are (1) project management, (2) awareness, (3) assessment, (4) testing,
and (5) renovation and implementation. The Company has substantially completed
phases one through four, although appropriate follow-up activities are
continuing to occur, and the Company is currently focusing on the fifth phase of
the Y2K Plan.
Project Management. The Company has assigned primary responsibility
for year 2000 project management to its Chief Information Officer.
The Company has also formed a year 2000 compliance committee,
consisting of appropriate representatives from its critical
operational areas, to assist the Chief Information Officer in
implementing the Y2K Plan. In addition, Bancorp provides quarterly
reports to its board of directors and to the boards of directors of
each of its subsidiaries, in order to assist them in overseeing the
Company's year 2000 readiness.
18
<PAGE> 19
Awareness. The Company has completed several projects designed to
promote awareness of year 2000 issues throughout our organization and
our customer base. These projects include mailing information
brochures to deposit and loan customers, providing training for
lending officers, and other staff, assigning a compliance officer to
answer customer questions, responding to vendor, customer, and
shareholder inquiries, and providing year 2000 information and
progress updates on Bancorp's web site.
Assessment. Assessment is the process of identifying all
mission-critical applications, including information technology and
non-information technology systems, that could potentially be
negatively affected by dates in the year 2000 and beyond. The
Company's assessment phase is substantially complete. Systems
examined during this phase included telecommunications systems,
account-processing applications, and other software and hardware used
in connection with customer accounts.
The Company's operations, like those of many other
companies, are intertwined with the operations of certain of its
business partners. Accordingly, the Company's operations could be
materially affected, if the operations of those companies who provide
the Company with mission critical applications, systems, and services
are materially affected. For example, the Company depends upon
vendors who provide equipment, technology, and software to it in
connection with its business operations. Failure of these software
vendors to achieve year 2000 readiness could substantially affect the
operations of the Company. In addition, lawsuits and other financial
challenges materially affecting the financial viability of these
vendors could materially affect the Company. In response to this
concern, the Company has identified and contacted those vendors who
provide our mission-critical applications. The Company is assessing
their year 2000 compliance efforts and will continue to monitor their
progress as the year 2000 approaches.
The Company's lending personnel have examined its current
loan portfolios and identified our key business customers. The
Company has contacted these customers and requested information
regarding their preparation for the year 2000. The Company is
currently assessing the responses received from these customers and
following up as appropriate to identify the risk of loan defaults due
to the effects of the year 2000 on the businesses of key business
customers. This assessment process is expected to be complete by the
end of October, 1998; however, certain follow-up activities may
continue throughout 1998 and 1999 as issues arise. For example, the
Company is monitoring on a quarterly basis those business borrowers
who appear to have higher risk than others with respect to year 2000
issues. In addition, the Company will continue to assess new loan
applicants for year 2000 risks. For more information see below, under
"The Risks of the Company's Year 2000 Issues."
Testing. Updating and testing of the Company's mission-critical
automated systems is currently underway. All mission-critical systems
will be tested to verify that dates in the year 2000 are being
appropriately recognized and processed. Testing of the Company's
current mission-critical automated systems was substantially
completed by September 30, 1998. Testing of renovations and new
systems will continue throughout 1998 and 1999.
Renovation and Implementation. This phase involves obtaining and
implementing renovated software applications provided by our vendors.
As these applications are received and implemented, the Company will
test them for year 2000 compliance. This phase also involves
upgrading and replacing automated systems where appropriate and will
continue throughout 1998 and 1999. Although this phase will be
substantially complete before the end of 1999, additional follow-up
activities may take place in the year 2000 and beyond.
19
<PAGE> 20
Estimated Costs to Address the Company's Year 2000 Issues
The total financial effect of these year 2000 challenges on the
Company cannot be predicted 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. The Company will
upgrade or replace certain automated systems before the year 2000; however some
of these systems would have been replaced before the year 2000, without regard
to year 2000 compliance issues, due to technology updates and Company expansion.
The Company's estimated budget under its Y2K Plan is set forth in the table
below(1). The costs below represent approximately 9% of the Company's
information technology budget for 1998 and approximately 10% of the 1999
information technology budget. The Company currently plans to use normal
operating funds for payment of its year 2000 expenses. Year-to-date, the Company
has spent approximately $105,000 of the 1998 costs estimated below.
Bancorp's estimated budget for year 2000 costs and expenses is as follows:
<TABLE>
<CAPTION>
Item 1998 1999 Total
----
-------- -------- --------
<S> <C> <C> <C>
Anticipated Personnel Costs $100,000 $105,000 $205,000
Telephone Banking Equipment (2) -- 75,000 75,000
Personal Computers (2) 59,500 87,500 147,000
ATM Upgrades -- 25,000 25,000
Third Party Consulting (3) 30,000 35,000 65,000
-------- -------- --------
Totals $189,500 327,500 $517,000
</TABLE>
(1) The Company may incur additional costs complying with requirements of its
regulatory agencies related to year 2000 issues. Management cannot predict these
costs at this time, so they have not been included in the table above, other
than with respect to anticipated personnel costs.
(2) This represents the replacement cost of certain equipment the Company has
identified to date as requiring replacement. The majority of this equipment was
scheduled for replacement regardless of year 2000 issues, due to age,
operability, and changing Company requirements.
(3) Bancorp has engaged a consulting firm to write a comprehensive testing plan
for the Company. Expenses for 1999 relate to consulting Bancorp may seek to
review and audit the Company's year 2000 compliance progress.
Based on the estimates set forth above and the information the
Company has received to date from its critical system providers and vendors,
Management does not believe that expenses related to meeting the Company's year
2000 challenges will have a material effect on the operations or financial
performance of the Company. However, factors beyond the control of management,
such as the effects on vendors of our mission-critical software and systems, the
effects of year 2000 issues on the economy, and the development of the risks
identified below under "The Risks of the Company's Year 2000 Issues," among
other things, could have a material effect on the operations or financial
performance of the Company.
20
<PAGE> 21
The Risks of the Company's Year 2000 Issues
The year 2000 presents certain risks to the Company and its
operations. Some of these risks are present because the Company purchases
technology applications from other parties who face year 2000 challenges. Other
of these risks are inherent in the business of banking or are risks faced by
many companies with stock traded on a national stock exchange. Although it is
impossible to identify every possible risk that the Company may face moving into
the millennium, Management has to date identified the following potential risks:
1. Commercial banks, such as the Banks, may experience a contraction in
their deposit base, if a significant amount of deposited funds are
withdrawn by customers prior to the year 2000, and interest rates may
increase in the latter part of 1999. This potential deposit
contraction could make it necessary for the Banks to change their
sources of funding and could materially impact future earnings. The
Company has incorporated a contingency plan for addressing this
situation, should it occur, into its asset and liability management
policies. This plan includes maintaining the ability to borrow funds
in an amount at least equal to 50% of the Company's allowed borrowing
from the Federal Home Loan Bank of Seattle. Significant demand for
funds by other banks could reduce the amount of funds available for
the Company to borrow. If insufficient funds are available from a
Federal Home Loan Bank or other correspondents, the Company may also
sell investment securities or other liquid assets to meet liquidity
needs. Despite these efforts, a significant deposit contraction could
materially impact the Company's earnings or future operations,
particularly if funds availability at the Federal Home Loan Bank is
impaired or higher interest rates for the Banks' funding sources lead
to a decrease in the Company's net interest margin.
2. The Banks lend significant amounts to businesses in their market
areas. If these businesses are adversely affected by year 2000
issues, their ability to repay loans could be impaired. This
increased credit risk could affect the Company's financial
performance. During the assessment phase of the Company's Y2K Plan,
each of the Banks identified their significant borrowers. Management
is currently monitoring the year 2000 compliance efforts of these
credit customers as described above under the "Assessment" segment of
the "Introduction." Based on the risks the Company has identified to
date, Management currently believes the Company's loan loss reserves
are adequate to absorb potential losses from loan defaults due to
year 2000 risks. However, as the Company continues to assess risk in
this area, it may increase loan loss reserves in the future.
3. The Company's operations, like those of many other companies, can be
affected by the year-2000-triggered failures of other companies upon
whom the Company depends for the functioning of its automated
systems. Accordingly, the Company's operations could be materially
affected, if the operations of those companies who provide the
Company with mission critical applications, systems, and services are
materially affected. As described above, the Company has identified
its mission-critical vendors and is monitoring their year 2000
compliance progress. For more information, see "The Company's Year
2000 Readiness," above.
4. All companies with stock traded on a national stock exchange,
including Bancorp, could experience a drop in stock price as
investors change their investment portfolios or sell stock prior to
the millennium. At this time, it is impossible to predict whether or
not this will in fact be the case with respect to the stock of
Bancorp or any other company.
5. Bancorp's subsidiary West Coast Trust provides investment advisory
services to certain customers, including an open-end mutual fund
administered by an investment company registered under the Investment
Advisors Act of 1940. Management is currently assessing the material
risks of the activities of West Coast Trust and is monitoring the
year 2000 compliance activities of the investment company
administering the open-end mutual fund.
6. The Company's ability to operate effectively in the year 2000 could
be affected by communications abilities and access to utilities, such
as electricity, water, telephone, and others, to the extent access is
interrupted due to the effects of year 2000 issues on these and other
utilities.
21
<PAGE> 22
The Company's Contingency Plans
In addition to the contingency plans described above under "The Risks
of the Company's Year 2000 Issues," the Company is developing a Business
Interruption Contingency Plan ("BIC Plan"). This BIC Plan is currently in
incomplete draft form, and the Company expects to complete it by the end of the
first quarter of 1999. The BIC Plan will contain information pertinent to
maintaining the successful operation of each major business line of the Company.
Based on the Company's current assessment, it is anticipated that the BIC Plan
will address such matters as (1) Company policies and procedures relating to
staffing and employee resources during the critical time periods before and
after the year 2000, (2) maintenance of external and internal communications,
(3) plans for maintaining critical business operations, (4) steps for
contingency plan implementation, (4) timelines or timing guidelines for
contingency plan implementation, and (5) guidelines or procedures to be followed
if it becomes necessary to implement a contingency plan with respect to a major
business line. In addition, if the Company identifies a material problem with a
mission-critical system, the Company will develop an appropriate contingency
plan for operation or recovery, as possible and appropriate, should that system
fail in the year 2000. Certain circumstances may occur for which there are no
satisfactory contingency plans. For more information see above under "The Risks
of the Company's Year 2000 Issues."
FORWARD LOOKING STATEMENTS
The discussion above, entitled "Year 2000 Issues," including without
limitation the section entitled "Risks of the Company's Year 2000 Issues,"
includes certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 ("PSLRA"). This statement is included
for the express purpose of availing Bancorp of the protections of the safe
harbor provisions of the PSLRA. Management's ability to predict results or
effects of issues related to the year 2000 is inherently uncertain, and is
subject to factors that may cause actual results to differ materially from those
projected. Factors that could affect the actual results include, without
limitation, (1) the possibility that protection procedures, contingency plans,
and remediation efforts will not operate as intended, (2) the possibility that
the Company may fail to timely or completely identify all software or hardware
applications requiring remediation or other risks or issues related to the year
2000, (3) unexpected costs or events, (4) failures of communications abilities
or utility companies serving the Company, (5) fluctuating interest rates, and
(6) the uncertainty associated with the impact of year 2000 issues on the
banking industry and on the Company's customers, vendors, and others with whom
it does business. Readers are cautioned not to place undue reliance on these
forward looking statements.
22
<PAGE> 23
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 for 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 or a flattening interest rate yield curve could
adversely affect net interest income. In contrast, a decreasing rate environment
or a steepening interest rate yield curve 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.
23
<PAGE> 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Restated Articles of Incorporation
10.1 Agreement and Plan of Merger dated September 30, 1998
27 Financial Data Schedules for Form 10-Q.
(b) During the nine months ended September 30, 1998, West Coast Bancorp filed
the following current report on Form 8-K:
Form 8-K filed September 24, 1998 regarding West Coast
Bancorp's plan to combine its four separate banking
subsidiaries into a single bank.
24
<PAGE> 25
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: November 13, 1998 /s/ Victor L. Bartruff
----------------------
Victor L. Bartruff
President and Chief Executive Officer
Dated: November 13, 1998 /s/ Donald A. Kalkofen
----------------------
Donald A. Kalkofen
Executive Vice President and Chief
Financial Officer
25
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
WEST COAST BANCORP*
ARTICLE I
NAME
The name of the corporation is WEST COAST BANCORP.
ARTICLE II
CAPITALIZATION
The corporation is authorized to issue 60,000,000 shares of stock
divided into two classes as follows:
A. Common Stock. 50,000,000 shares of common stock which shall have unlimited
voting rights, subject only to such voting rights as may be specified in
respect of preferred stock, and shall have the right to receive the net
assets of the corporation upon dissolution, subject only to prior payment
of such amount of the net assets of the corporation as may be specified in
respect of shares of preferred stock.
B. Preferred Stock. 10,000,000 shares of preferred stock issuable from time to
time in one or more series as permitted by law and the provisions of the
articles of incorporation as may be determined from time to time by the
board of directors (or a committee of the board of directors or an officer
duly authorized to take such action) and stated in a resolution or
resolutions providing for the issuance of shares of such series prior to
the issuance of any such shares:
1. Issuance in Series. The board of directors (or a committee of the
board of directors or an officer duly authorized to take such action)
shall have the authority to fix and determine, subject to the
provisions hereof, the rights and preferences of the shares of any
series so established, including, without limitation, the rate of
dividend, whether the dividend shall be cumulative, whether shares may
be redeemed and, if so, the redemption price and the terms and
conditions of the redemption, the amount payable upon shares in the
event of voluntary or involuntary liquidation, sinking fund
provisions, if any, for the redemption or purchase of shares, the
terms and conditions, if any, on which shares may be converted, and
voting rights, if any.
2. Dividends. The holders of shares of preferred stock of a series shall
be entitled to receive dividends, out of funds legally available
therefor, at the rate and at the time or times as may be provided in
respect of a particular series of preferred stock. If such dividends
shall be cumulative, and if dividends shall not have been paid, then
the deficiency shall
1
<PAGE> 2
be fully paid or the dividends declared and set apart for payment
before any dividends on the common stock shall be paid or declared and
set apart for payment. Unless otherwise provided in respect of a
particular series of preferred stock, the holders of the preferred
stock shall not be entitled to receive any dividends thereon other
than the dividends referred to in this section.
3. Redemption. The preferred stock of a series may be redeemed in such
amount, and at such time or times, if any, as may be provided in
respect of a particular series of preferred stock. In any event,
preferred stock may be repurchased by the corporation to the extent
legally permissible.
4. Liquidation. In the event of any liquidation, dissolution, or winding
up of the affairs of the corporation, whether voluntary or
involuntary, then, before any distribution shall be made to the
holders of the common stock, the holders of the preferred stock of a
series shall be entitled to be paid the preferential amount or amounts
as may be provided in respect of a particular series of preferred
stock per share and dividends accrued thereon to the date of such
payment. The holders of the preferred stock shall not be entitled to
receive any distributive amounts upon the liquidation, dissolution, or
winding up of the affairs of the corporation other than the
distributive amounts referred to in this section, unless otherwise
provided in respect of a particular series of preferred stock.
5. Conversion. Shares of a particular series of preferred stock may be
convertible or converted into common stock or other securities of the
corporation on such terms and conditions as may be provided in respect
of that series.
6. Voting Rights. Holders of preferred stock of a series shall have such
voting rights not in excess of one vote per share as may be provided
in respect of a particular series of preferred stock.
C. Preemptive Rights. Shareholders shall have no preemptive right to acquire
shares or other securities of the corporation which would otherwise be
available to the shareholders pursuant to ORS 60.174.
D. Cumulative Rights. Shareholders do not have cumulative voting rights with
respect to the election of directors of the corporation.
ARTICLE III
BOARD OF DIRECTORS
A. Number of Directors. The board of directors shall consist of not fewer than
eight (8) or more than twenty (20) directors. The exact number within such
minimum and maximum limits shall be fixed and determined by resolutions
approved by at least a 75 percent vote of the total number of directors
then in office. The board of directors may fill vacancies on the board of
directors,
2
<PAGE> 3
whether caused by resignation, death or otherwise; provided, that at no
time shall the total number exceed twenty (20).
B. Classes of Board. The board of directors shall be divided into three
classes: Class A, Class B, and Class C, which shall be as nearly equal in
number as possible. Each director shall serve for a term ending on the date
of the third annual meeting of shareholders following the annual meeting at
which such director was elected or when his or her successor has been duly
elected and qualified, or until his or her earlier resignation, removal
from office, or death.
In the event of any increase or decrease in the authorized number of
directors (1) each director then serving as such shall nevertheless
continue as a director of the class in which he or she is a member until
the expiration of his or her current term, or his or her earlier
resignation, removal from office or death, and (2) the newly created or
eliminated directorships resulting from such increase or decrease shall be
apportioned by the board of directors among three classes of directors so
as to maintain such classes as nearly equal as possible.
C. Removal from Office. No director may be removed from office without cause
except by a vote of 66 2/3 percent of the shares then entitled to vote at
an election of directors. Except as otherwise provided by law, cause for
removal shall exist only if the board of directors has reasonable grounds
to believe that the corporation has suffered or will suffer substantial
injury as a result of the gross negligence, willful misconduct, or
dishonesty of the director whose removal is proposed.
ARTICLE IV
DIRECTOR LIABILITY
Directors of the corporation shall not be liable to the corporation or
its shareholders for monetary damages for conduct as directors except to
the extent that the Oregon Business Corporation Act, as it now exists or
may hereafter be amended, prohibits elimination or limitation of director
liability. No repeal or amendment of this Article V or of the Oregon
Business Corporation Act shall adversely affect any right or protection of
a director for actions or omissions prior to the repeal or amendment.
ARTICLE V
INDEMNIFICATION
The corporation shall indemnify each of its directors to the fullest
extent permissible under the Oregon Business Corporation Act, as the same
exists or may hereafter be amended, against all expense, liability, and
loss (including, without limitation, attorneys' fees) incurred or suffered
by such person by reason of or arising from the fact that such person is or
was a director of the corporation, or is or was serving at the request of
the corporation as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise, and such
indemnification shall continue
3
<PAGE> 4
as to a person who has ceased to be a director, officer, partner, trustee,
employee, or agent and shall inure to the benefit of his or her heirs,
executors, and administrators. The corporation may, in its bylaws or as
otherwise authorized by its board of directors, provide indemnification to
officers, employees, and agents of the corporation to the extent permitted
by law. The indemnification provided in this Article VI shall not be
exclusive of any other rights to which any person may be entitled under any
statute, bylaw, agreement, resolution of shareholders or directors,
contract, or otherwise.
ARTICLE VI
SHAREHOLDER APPROVAL OF CERTAIN TRANSACTIONS
A. Except as set forth in Section B of this Article VI:
1. any transaction or series of related transactions to which the
corporation or any of its subsidiaries is a party, the consummation of
which would result in a Change of Control of the corporation (as
hereinafter defined); or
2. any sale, lease, exchange, or other disposition of all or
substantially all of the property, with or without goodwill, of the
corporation and its subsidiaries to any other corporation, person,
trust, partnership, limited liability company, or other entity;
shall require the affirmative vote of the holders of shares representing at
least 66 1/3 percent of all classes of capital stock of the corporation
then entitled to vote at an election of directors, considered for the
purposes of this Article VI as one class.
For the purposes of this Article VI, a "Change in Control" of the
corporation would occur if:
(a) any "person" (as such term is used in Sections 13(d) and
14(d) or any successor provisions of the Securities Exchange Act of 1934
and the Securities and Exchange Commission's rules and regulations
pursuant thereto, as in effect from time to time (collectively, the
"Exchange Act")), other than the corporation, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the corporation representing 30 percent or
more of the combined voting power of the corporation's then outstanding
securities; or
(b) the corporation is merged or consolidated with another
corporation and as a result of such merger or consolidation less than 50
percent of the outstanding voting securities of the surviving or
resulting corporation would be owned in the aggregate by persons or
entities who were shareholders of the corporation immediately prior to
such merger or consolidation, other than shareholders who are
"affiliates" (as defined in Rule 12b-2 under the Exchange Act) of any
party to such merger or consolidation; or
4
<PAGE> 5
(c) the transaction is of the type that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A
under the Exchange Act.
Also for purposes of this Article VI, the term "substantially all of the
property, with or without goodwill, of the corporation and its
subsidiaries" shall mean those properties and assets involved in any single
transaction or series of related transactions having an aggregate fair
market value of more than a majority of the total consolidated assets of
the corporation and its subsidiaries.
B. The provisions of this Article VI shall not apply to any transaction or
series of transactions described in Section A of this Article VI if, prior
to the consummation of such transaction or transactions, the board of
directors of the corporation shall have approved the transaction or
transactions by the affirmative vote of more than 75 percent of the
directors. The board of directors of this corporation shall have the power
and duty to determine for the purposes of this Article VI, on the basis of
information known to the corporation, whether any transaction or series of
transactions is subject to the voting requirements of this Article VI. Any
such determination made in good faith shall be conclusive and binding for
all purposes of this Article VI.
C. No amendment to the articles of incorporation of this corporation shall
amend, alter, change, or repeal any of the provisions of this Article VI
unless the amendment effecting such amendment, alteration, change, or
repeal (i) shall be approved by more than 75 percent of the directors, or
(ii) shall receive the affirmative vote of 66 2/3 percent of all classes of
stock of the corporation entitled to vote at an election of directors,
considered for the purposes of this Article VI as one class.
D. Nothing contained in this Article VI shall be construed to relieve any
beneficial owner of shares of the corporation from any fiduciary obligation
imposed by law.
ARTICLE VII
CONSIDERATION OF NON-MONETARY FACTORS
The board of directors of the corporation, when evaluating any offer of
another party to (a) make a tender or exchange for any equity security of
the corporation, (b) merge or consolidate the corporation with another
corporation or association, or (c) purchase or otherwise acquire all or
substantially all of the properties and assets of the corporation, may, in
connection with the exercise of its judgment in determining what is in the
best interests of the corporation and its stockholders, give due
consideration to all relevant factors, including without limitation the
social and economic effects on the employees, customers, suppliers, and
other constituents of the corporation and its subsidiaries and on the
communities in which the corporation and its subsidiaries operate or are
located.
* Restated by the corporation's Board of Directors on September 24,
1998, to incorporate the amendment adopted by the corporation's
Shareholders on April 24, 1998, and to make certain appropriate clarifying
amendments permitted under ORS 60.434.
5
<PAGE> 1
EXHIBIT 10.1
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Agreement") between THE BANK OF
NEWPORT ("Newport"), COMMERCIAL BANK ("Commercial"), BANK OF VANCOUVER
("Vancouver") and CENTENNIAL BANK ("Centennial") is dated as of September 30,
1998.
RECITALS
A. Newport, Commercial, Vancouver and Centennial (collectively, the "Banks")
are all wholly owned subsidiaries of West Coast Bancorp ("WCB"), a business
corporation duly organized, validly existing and in good standing under
federal and Oregon State laws. WCB is also a registered bank holding company
under the Bank Holding Company Act of 1956, as amended.
B. Newport is an Oregon state-chartered commercial bank duly organized, validly
existing, and in good standing under federal and Oregon State laws. The
names and locations of Newport's principal office and all other offices and
branches are listed in Schedule A.
C. Commercial is also an Oregon state-chartered bank duly organized, validly
existing and in good standing under federal and Oregon State laws. The names
and locations of Commercial's principal office and all other offices and
branches are listed in Schedule A.
D. Vancouver is a Washington state-chartered commercial bank duly organized,
validly existing, and in good standing under federal and Washington State
laws. The names and locations of Vancouver's principal office and all other
offices and branches are listed in Schedule A.
E. Centennial is also a Washington state-chartered commercial bank duly
organized, validly existing, and in good standing under federal and
Washington State laws. The names and locations of Centennial's principal
office and all other offices and branches are listed in Schedule A.
F. The Banks each wish to merge Commercial, Vancouver and Centennial with and
into Newport on the terms and conditions set forth in this Agreement. The
Board of Directors of each of the Banks has approved this Agreement and has
authorized its execution and delivery.
Therefore, the parties agree as follows:
AGREEMENT
1. MERGER TERMS.
1.1 Merger. Subject to the terms of this Agreement, Commercial,
Vancouver, and Centennial will merge with and into Newport
("Merger"), and after the Merger,
1
<PAGE> 2
Newport will be the surviving Oregon State-chartered commercial
bank ("Resulting Bank").
1.2 Closing. Closing of the Merger ("Closing") will take place at
5:00 p.m. ("Effective Time") on the Closing Date. The Closing
Date will be a mutually agreed to date following approval of the
Merger in accordance with Sections 3 and 4 and expiration of all
applicable waiting periods.
1.3 Transaction. At the Effective Time, under ORS 711.040, RCW
30.49, and 12 USC Section 1828(c) and related rules and
regulations:
a. Commercial, Vancouver, and Centennial Shares. All shares of
Commercial, Vancouver and Centennial capital stock issued
and outstanding immediately before the Effective Time will
be canceled.
b. Newport Shares. All shares of Newport capital stock issued
and outstanding immediately before the Effective Time will
continue as issued and outstanding shares of the Resulting
Bank.
c. Capital. The amount of capital and the number and par value
of shares applicable to the Resulting Bank at the Effective
Time are set forth in Schedule C.
1.4 Resulting Bank. The Resulting Bank's name will be "West Coast
Bank," and the Newport branches which currently operate under
the assumed business name of "Valley Commercial Bank" will
discontinue the use of such name. Newport's charter will become
the Resulting Bank's charter. The proposed Articles of
Incorporation for the Resulting Bank are attached to this
Agreement as Exhibit 1 and will be filed with the Oregon
Secretary of State at the Effective Time. The Resulting Bank's
principal office will be located at 5335 S.W. Meadows Road, Lake
Oswego, Oregon, and all current offices of the Banks, listed in
Schedule A, will become offices of the Resulting Bank. The
Resulting Bank will be a wholly owned subsidiary of WCB with the
same number of issued and outstanding shares as the issued and
outstanding shares of Newport immediately before the Effective
Time.
1.5 Transfer of Interests. At the Effective Time, as provided in ORS
711.040 and RCW 30.49, all of the Banks' assets, rights,
interests, and liabilities will be transferred to the Resulting
Bank.
1.6 Resulting Bank Directors. The names of the members of the
Resulting Bank's Board of Directors (collectively, the
"Resulting Directors"), effective at the Effective Time, are
listed in Schedule B. The Resulting Directors will serve on the
Resulting Bank's Board of Directors until the next annual
meeting of the Resulting Bank's shareholders or until their
successors have been elected and
2
<PAGE> 3
qualified. Nothing in this Subsection 1.6 or this Agreement
restricts in any way any rights of the Resulting Bank's
shareholders and directors at any time after the Effective Time
to nominate, elect, select or remove the Resulting Bank's
directors.
1.7 Resulting Bank Officers. The names of the Resulting Bank's
executive officers (collectively, the "Resulting Officers") are
listed in Schedule B. Nothing in this Subsection 1.7 or this
Agreement restricts in any way any rights of the Resulting
Bank's shareholders and directors at any time after the
Effective Time to nominate, elect, select or remove the
Resulting Bank's executive officers. The parties agree that the
official titles of the officers listed in Schedule B may be
changed by WCB before Closing without notice to the parties.
2. SHAREHOLDER APPROVAL.
The Merger and this Agreement are subject to approval by WCB, as the
sole shareholder of each of the Banks. If WCB does not approve the Merger and
this Agreement, this Agreement is void, and the parties are relieved of their
obligations and responsibilities under this Agreement.
3. DIRECTOR APPROVAL.
The Merger and this Agreement are subject to approval by the Director of
the Financial Institutions Division of the Oregon Department of Consumer and
Business Services and the Director of the Division of Banking of the Washington
Department of Financial Institutions (collectively, the "Directors"). If the
Directors do not approve the Merger and this Agreement, this Agreement is void,
and the parties are relieved of their obligations and responsibilities under
this Agreement.
4. OTHER APPROVALS.
The Merger and this Agreement are subject to approval by the Federal
Deposit Insurance Corporation and all other regulatory agencies having
jurisdiction with respect to the Merger. If these agencies do not approve the
Merger and this Agreement, this Agreement is void, and the parties are relieved
of their obligations and responsibilities under this Agreement.
5. TERMINATION.
The parties may terminate this Agreement at any time before the Closing
Date by mutual consent.
6. MISCELLANEOUS PROVISIONS.
6.1 Binding Effect. This Agreement is binding and inures to the
benefit of the parties and their respective successors and
assigns.
3
<PAGE> 4
6.2 Assignment. The parties may not assign this Agreement or any
rights under this Agreement, unless the other parties consent in
writing to the assignment.
6.3 Amendment and Waiver. Except as this Agreement otherwise
expressly provides, it contains the parties' entire
understanding. No modification or amendment of its terms or
conditions is effective unless in writing and signed by the
parties, or their respective duly authorized agents.
6.4 Section Headings. The section headings included in this
Agreement are for reference and convenience only and are not a
substantive part of this Agreement.
6.5 Counterparts. This Agreement may be executed in one or more
counterparts. Each of these counterparts are deemed an original,
and all counterparts taken together constitute one and the same
document.
6.6 Governing Law. The parties intend this Agreement to be governed
by Oregon State law, except to the extent Washington State or
Federal law may govern certain matters.
[SIGNATURES APPEAR ON THE FOLLOWING PAGES]
4
<PAGE> 5
This Agreement is executed as of September 30, 1998.
THE BANK OF NEWPORT
By /s/ Timothy P. Dowling
-----------------------------
Timothy P. Dowling
Its: President and CEO
STATE OF OREGON )
) ss.
COUNTY OF LINCOLN )
On this day 30th day of September, 1998, before me personally appeared
TIMOTHY P. DOWLING, to me known to be the President and Chief Executive Officer
of The Bank of Newport, the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes therein mentioned, and
on oath stated that he was authorized to execute the said instrument, and that
the seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Rebecca L. Rariden
---------------------------
Signature)
Rebecca L. Rariden
---------------------------
(Please print name legibly)
NOTARY PUBLIC in and for the State of
Oregon, residing at 536 SW 4th,
Newport. My commission expires:
9/28/01.
5
<PAGE> 6
COMMERCIAL BANK
By /s/ Edgar B. Martin
----------------------------
Edgar B. Martin
Its: President and CEO
STATE OF OREGON )
) ss.
COUNTY OF MARION )
On this day 30th day of September, 1998, before me personally appeared
EDGAR B. MARTIN, to me known to be the President and Chief Executive Officer of
Commercial Bank, the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes therein mentioned, and
on oath stated that he was authorized to execute the said instrument, and that
the seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Kimberly D. Sealey
-----------------------------
(Signature)
Kimberly D. Sealey
-----------------------------
(Please print name legibly)
NOTARY PUBLIC in and for the State
of Oregon, residing at Salem,
Oregon. My commission expires:
7/19/2001.
6
<PAGE> 7
BANK OF VANCOUVER
By /s/ Ronald T. DeLude
---------------------------
Ronald T. DeLude
Its: President and CEO
STATE OF OREGON )
) ss.
COUNTY OF CLACKAMAS )
On this day 30th day of September, 1998, before me personally appeared
RONALD T. DELUDE to me known to be the President and Chief Executive Officer of
Bank of Vancouver, the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes therein mentioned, and
on oath stated that he was authorized to execute the said instrument, and that
the seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Nina C. Rowe
---------------------------------
(Signature)
Nina C. Rowe
---------------------------------
(Please print name legibly)
NOTARY PUBLIC in and for the State
of Oregon, residing at Lake Oswego.
My commission expires: 9/22/2001.
7
<PAGE> 8
CENTENNIAL BANK
By /s/ Daniel D. Yerrington
----------------------------
Daniel D. Yerrington
Its: President and COO
STATE OF WASHINGTON )
) ss.
COUNTY OF THURSTON )
On this day 30th day of September, 1998, before me personally appeared
DANIEL D. YERRINGTON, to me known to be the President and Chief Operations
Officer of Centennial Bank, the corporation that executed the within and
foregoing instrument, and acknowledged said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute the said
instrument, and that the seal affixed, if any, is the corporate seal of said
corporation.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Andrea S. Werner
----------------------------------
(Signature)
Andrea S. Werner
----------------------------------
(Please print name legibly)
NOTARY PUBLIC in and for the State
of Washington, residing at Olympia.
My commission expires: 5/15/99.
8
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 84,294
<INT-BEARING-DEPOSITS> 1,244
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 243,559
<INVESTMENTS-CARRYING> 2,879
<INVESTMENTS-MARKET> 2,935
<LOANS> 827,213
<ALLOWANCE> 12,096
<TOTAL-ASSETS> 1,211,906
<DEPOSITS> 1,048,802
<SHORT-TERM> 9,700
<LIABILITIES-OTHER> 8,720
<LONG-TERM> 31,089
0
0
<COMMON> 17,760
<OTHER-SE> 95,834
<TOTAL-LIABILITIES-AND-EQUITY> 1,211,906
<INTEREST-LOAN> 61,580
<INTEREST-INVEST> 9,246
<INTEREST-OTHER> 1,595
<INTEREST-TOTAL> 72,421
<INTEREST-DEPOSIT> 25,479
<INTEREST-EXPENSE> 27,261
<INTEREST-INCOME-NET> 45,160
<LOAN-LOSSES> 2,465
<SECURITIES-GAINS> 250
<EXPENSE-OTHER> 13,460
<INCOME-PRETAX> 15,514
<INCOME-PRE-EXTRAORDINARY> 15,514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,406
<EPS-PRIMARY> .74
<EPS-DILUTED> .71
<YIELD-ACTUAL> 5.08
<LOANS-NON> 3,475
<LOANS-PAST> 132
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,451
<CHARGE-OFFS> 1,117
<RECOVERIES> 297
<ALLOWANCE-CLOSE> 12,096
<ALLOWANCE-DOMESTIC> 12,096
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
