<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
Form 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended March 31, 1999
[ ] 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 April 30, 1999: 14,131,805
<PAGE> 2
TABLE OF CONTENTS
PART I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998..............................3
Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998........................4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998........................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..............................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......23
PART II. Other Information
Item 101. Legal Proceeding.................................................24
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>
March 31, December 31,
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks ...................... $ 73,637,110 $ 80,923,069
Interest-bearing deposits in other banks ..... 1,150,872 568,825
--------------- ---------------
Total cash and cash equivalents .......... 74,787,982 81,491,894
Investment securities:
Investments available for sale ............... 247,050,071 253,271,239
Investments held to maturity ................. -- 2,695,531
--------------- ---------------
Total investment securities .............. 247,050,071 255,966,770
Loans held for sale ............................... 6,242,677 15,972,711
Loans ............................................. 879,517,870 862,052,215
Allowance for loan loss ........................... (12,721,650) (12,452,694)
--------------- ---------------
Loans, net ................................... 866,796,220 849,599,521
Premises and equipment, net ....................... 29,970,632 29,689,405
Intangible assets ................................. 2,629,541 2,727,564
Other assets ...................................... 20,024,711 19,975,557
--------------- ---------------
Total assets ............................. $ 1,247,501,834 $ 1,255,423,422
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand ....................................... $ 197,467,375 $ 205,408,337
Savings and interest-bearing demand .......... 564,031,841 559,211,508
Certificates of deposits ..................... 339,931,568 343,837,191
--------------- ---------------
Total deposits ........................... 1,101,430,784 1,108,457,036
Other liabilities ................................. 9,193,217 9,481,233
Long-term borrowings .............................. 19,867,128 20,259,985
--------------- ---------------
Total liabilities ........................ 1,130,491,129 1,138,198,254
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
14,171,720 and 14,235,931 respectively ....... 17,714,650 17,794,914
Additional paid-in capital ........................ 64,221,068 66,474,468
Retained earnings ................................. 32,993,313 29,392,264
Accumulated other comprehensive income ............ 2,081,674 3,563,522
--------------- ---------------
Total stockholders' equity ................... 117,010,705 117,225,168
--------------- ---------------
Total liabilities and stockholders' equity $ 1,247,501,834 $ 1,255,423,422
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1999 1998
----------- -----------
INTEREST INCOME (Unaudited)
<S> <C> <C>
Interest and fees on loans ...................... $20,077,974 $20,212,888
Interest on taxable investment securities ....... 2,523,907 2,046,749
Interest on nontaxable investment securities .... 1,130,328 894,940
Interest from other banks ....................... 72,127 545,870
Interest on federal funds sold .................. 8,615 6,352
----------- -----------
Total interest income ...................... 23,812,951 23,706,799
INTEREST EXPENSE
Savings and interest-bearing demand ............. 3,947,007 3,960,533
Certificates of deposit ......................... 4,493,936 4,282,430
Short-term borrowings ........................... 110,918 284,726
Long-term borrowings ............................ 256,272 456,401
----------- -----------
Total interest expense ..................... 8,808,133 8,984,090
----------- -----------
NET INTEREST INCOME ............................. 15,004,818 14,722,709
PROVISION FOR LOAN LOSS ......................... 510,000 1,485,415
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 14,494,818 13,237,294
NONINTEREST INCOME
Gains on sales of loans ......................... 1,235,766 1,094,397
Service charges on deposit accounts ............. 1,158,041 1,086,118
Other service charges, commissions and fees ..... 1,031,125 789,004
Trust revenue ................................... 528,028 786,477
Loans servicing fees ............................ 155,965 143,412
Other ........................................... 484,230 168,088
Net gains on sales of securities ................ 102,905 100,886
----------- -----------
Total noninterest income ................... 4,696,060 4,168,382
NONINTEREST EXPENSE
Salaries and employee benefits .................. 6,962,929 7,265,763
Equipment ....................................... 1,267,592 1,213,493
Occupancy ....................................... 875,317 814,138
Communications .................................. 425,788 376,800
Marketing ....................................... 359,398 387,236
Professional fees ............................... 327,604 420,644
Printing and office supplies .................... 288,542 408,482
Restructuring charges ........................... 404,573 --
Other noninterest expense ....................... 1,834,249 2,268,506
----------- -----------
Total noninterest expense .................. 12,745,992 13,155,062
INCOME BEFORE INCOME TAXES ...................... 6,444,886 4,250,614
PROVISION FOR INCOME TAXES ...................... 2,064,810 1,504,007
----------- -----------
NET INCOME ...................................... $ 4,380,076 $ 2,746,607
=========== ===========
Basic earnings per share ................... $ .31 $ .20
Diluted earnings per share ................. $ .30 $ .19
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------------
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................... $ 4,380,076 $ 2,746,607
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment ............. 807,535 699,136
Amortization of intangibles ......................................... 98,023 115,287
Net (gain) on sales of available for sale investments ............... (102,905) (100,886)
Provision for loan losses ........................................... 510,000 1,485,415
Increase in interest receivables .................................... (193,552) (384,118)
Decrease (increase) in other assets ................................. 144,398 (2,340,249)
Net cash provided by loans held for sale ............................ 9,730,034 4,185,575
(Decrease) increase in interest payable ............................. (60,158) 149,839
(Decrease) increase in other liabilities ............................ (227,858) 2,629,428
Tax benefit associated with stock options ........................... 302,330 759,726
------------- -------------
Net cash provided by operating activities ....................... 15,387,923 9,945,760
CASH FLOWS FOR INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale .................................................. 17,557,231 8,888,175
Held to maturity .................................................... -- 4,126
Proceeds from sales of available for sale investment securities .......... 7,900,393 2,820,000
Purchase of investment securities:
Available for sale .................................................. (17,919,868) (10,235,517)
Loans made to customers greater than principal collected on loans ........ (17,706,699) (27,206,962)
Capital expenditures ..................................................... (1,088,762) (2,181,907)
------------- -------------
Net cash used in investing activities ............................... (11,257,705) (27,912,085)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand, savings and interest
bearing transaction accounts ........................................ (3,120,629) 25,512,421
Net (decrease) increase in proceeds from sales of certificates of deposits
greater than payments for maturing time deposits .................... (3,905,623) 13,300,558
Proceeds from long-term borrowings ....................................... -- 11,000,000
Payments on long-term borrowings ......................................... (392,857) (785,715)
Net decrease in short-term borrowings .................................... -- (5,788,000)
Redemption of common stock for stock repurchase plan ..................... (3,059,444) --
Sales of common stock, net ............................................... 423,450 840,734
Dividends paid and cash paid for fractional shares ....................... (779,027) (640,590)
------------- -------------
Net cash (used) provided by financing activities .................... (10,834,130) 43,439,408
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ..................... (6,703,912) 25,473,083
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................... 81,491,894 98,817,658
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 74,787,982 $ 124,290,741
============= =============
</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, 1997 .... 12,606,009 $ 15,757,511 $ 43,213,086 $ 40,599,130 $ 1,570,591 $ 101,140,318
Comprehensive income:
Net income .................... -- -- -- 14,058,671 -- 14,058,671
Other comprehensive income,
net of tax:
Net unrealized investment
gains .................... -- -- -- -- -- 2,207,313
Reclassification adjustment
for gains included
in net income ........... -- -- -- -- -- (214,382)
-------------
Other comprehensive
income, net of tax ....... -- -- -- -- 1,992,931 1,992,931
-------------
Comprehensive income .......... 16,051,602
=============
Cash dividends, $.21
per common share ......... -- -- -- (2,972,623) -- (2,972,623)
Sale of common stock
pursuant to
stock options plans ...... 412,485 515,606 2,209,761 -- -- 2,725,367
Redemption of stock
pursuant to
stock options plans ...... (23,422) (29,278) (440,805) -- -- (470,083)
Common stock repurchased
and retired .............. (50,000) (62,500) (966,530) -- -- (1,029,030)
10 percent stock dividend ..... 1,291,627 1,614,535 20,666,030 (22,280,565) -- --
Cash paid for fractional shares (768) (960) -- (12,349) -- (13,309)
Tax benefit associated
with stock options ....... -- -- 1,792,926 -- -- 1,792,926
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1998 .... 14,235,931 $ 17,794,914 $ 66,474,468 $ 29,392,264 $ 3,563,522 $ 117,225,168
Comprehensive income:
Net income .................... -- -- -- 4,380,076 -- 4,380,076
Other comprehensive
income, net of tax:
Net unrealized
investment gains ......... -- -- -- -- -- (1,676,545)
Cumulative effect
of change in
accounting principle ...... -- -- -- -- -- 131,369
Reclassification
adjustment for gains
included in net income ... -- -- -- -- -- 63,328
-------------
Other comprehensive
(loss), net of tax ....... -- -- -- -- (1,481,848) (1,481,848)
-------------
Comprehensive income .......... 2,898,229
=============
Cash dividends,
$.055 per common share ... -- -- -- (779,027) -- (779,027)
Sale of common
stock pursuant to
stock options plans ......... 101,858 127,322 613,869 -- -- 741,191
Redemption of stock
pursuant to
stock option plans .......... (16,069) (20,086) (297,655) -- -- (317,741)
Common stock repurchased
and retired .............. (150,000) (187,500) (2,871,944) -- -- (3,059,444)
Tax benefit associated
with stock options ....... -- -- 302,330 -- -- 302,330
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, March 31, 1999 ....... 14,171,720 $ 17,714,650 $ 64,221,068 $ 32,993,313 $ 2,081,674 $ 117,010,705
============= ============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of West Coast Bancorp (Bancorp or the Company) which operates its wholly-owned
subsidiaries, West Coast Bank, West Coast Trust, Centennial Funding Corporation
and Totten, Inc. after elimination of intercompany transactions and balances.
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals necessary for fair presentation of results of operations for the
interim periods included herein have been made. The results of operations for
the three months ended March 31, 1999 are not necessarily indicative of results
to be anticipated for the year ending December 31, 1999, 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. ACCOUNTING CHANGES
In 1998, Financial Accounting Standards Board issued SFAS NO. 133,
"Accounting for Derivative Instruments and Hedging Activities". The statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statements of financial position and measure
those instruments at fair value.
Effective January 1, 1999, Bancorp adopted SFAS NO. 133, "Accounting
for Derivative Instruments and Hedging Activities". The adoption of SFAS 133 did
not materially impact the financial position or results of operations of
Bancorp. Bancorp does not currently utilize derivative instruments in its
operations, and does not engage in hedging activities. Under the provisions of
SFAS NO. 133, and in connection with the adoption of SFAS 133, Bancorp
reclassified investment securities carried at $2,695,531 with a market value of
$2,909,000 from the held to maturity classification to the available for sale
classification. As a result of this transfer, an unrealized gain of $131,000,
net of tax, was recognized in accumulated other comprehensive income as a
cumulative effect of change in accounting principle.
7
<PAGE> 8
5. 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, regulatory and
administrative costs. Since the initiation of the restructuring plan in
September 1998, Bancorp has expensed $4.173 million of these costs with the
remaining costs to be expensed as incurred, mainly in the second quarter of
1999. Of the one-time expenses, $404,573 has been recognized in the first
quarter of 1999. The following table summarizes the accrued restructuring
charges utilized in the first quarter.
<TABLE>
<CAPTION>
(Dollars in Thousands) March 31, 1999
- ---------------------- --------------
<S> <C>
Balance, accrued restructuring charges, December 31, 1998 $1,760
Provision for restructure charges ....................... --
Utilization:
Cash ............................................... 589
Noncash ............................................ --
------
Total Utilization ....................................... 589
------
Balance, accrued restructuring charges, end of period ... $1,171
======
</TABLE>
Total restructuring charges of $1.92 million were accrued in the fourth
quarter of 1998 to cover anticipated costs of $1.73 million for the severance
program and personnel related expenditures, with the remaining $188,000 in costs
reserved for marketing and professional fees incurred but not yet paid. As of
March 31, 1999, Bancorp has an accrual for the restructuring charges of $1.171
million of which $1.151 million is for severance and employment costs and the
remaining amount is for unpaid professional fees. During the first quarter of
1999 $583,000 of the severance and employee related program costs and $6,000 of
the marketing and professional fees have been charged against the accrual. As a
result of the consolidation, Bancorp expects to reduce employment by
approximately 100 administrative and back office positions.
6. STOCKHOLDERS' EQUITY
The Board of Directors declared a quarterly cash dividend of $.055 per
share during the first quarter of 1999. A dividend of $.045 per share was
declared in the first quarter of 1998. A 10 percent stock dividend was also
declared in the third quarter of 1998. 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 $8,868,000 and $8,834,000 for interest in the three months
ended March 31, 1999 and 1998, respectively. Income taxes paid were $510,000 and
$20,934 in the three months ended March 31, 1999 and 1998 respectively.
8. CONTINGENCIES AND LITIGATION
During the normal course of business, the Company from time-to-time is
subject to routine litigation incidental to its business. The Bank and Bancorp
are defendants in a lawsuit seeking damages in excess of $4.6 million or
specific performance, based on an alleged financing commitment made by the Bank
to the plaintiffs. The Bank denies the existence of any agreement or commitment
to plaintiffs. Due to the nature and uncertainties inherent in litigation,
there are no assurances that these matters would not at some point in the
future have a material effect on the Company. However, at this time, management
believes that the probable resolution of those matters will not materially
affect the financial position of the Company.
8
<PAGE> 9
9. COMPREHENSIVE INCOME
Bancorp adopted SFAS No. 130 "Reporting Comprehensive Income" in 1998.
This statement established standards for reporting and displaying comprehensive
income and its components. The following table displays the components of other
comprehensive income:
<TABLE>
<CAPTION>
Three Months ended March 31,
---------------------------
(Dollars in thousands) 1999 1998
---------- ---------
<S> <C> <C>
Unrealized gains on securities:
Unrealized holding losses arising during the period ........... $(2,692) $ (281)
Tax benefit .................................................. 1,016 113
------- -------
Unrealized holdings losses arising during the period, after tax (1,676) (168)
Cumulative effect of change in accounting principle ........... 213 --
Tax expense ................................................... (82) --
------- -------
Cumulative effect of change in accounting principle after tax . 131 --
Less: Reclassification adjustment for gains realized in income 103 101
Tax expense ................................................... (40) (39)
------- -------
Net unrealized gains .......................................... 63 62
------- -------
Other comprehensive (loss) .................................... $(1,482) $ (106)
======= =======
</TABLE>
10. EARNINGS PER SHARE
The following table reconciles the numerator and denominator of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Weighted
Average Per-Share
Net Income Shares Amount
----------------------------------------------
Three Months ended March 31, 1999
----------------------------------------------
<S> <C> <C> <C>
Basic earnings per share . $4,380,076 14,176,402 $ 0.31
Stock options ............ 405,189
Diluted earnings per share $4,380,076 14,581,591 $ 0.30
Three Months ended March 31, 1998
----------------------------------------------
<S> <C> <C> <C>
Basic earnings per share . $2,746,607 13,913,278 $ 0.20
Stock options ............ 754,771
Diluted earnings per share $2,746,607 14,668,049 $ 0.19
</TABLE>
Bancorp for the periods reported had no reconciling items between net
income and income available to common shareholders.
11. SEGMENT AND RELATED INFORMATION
Bancorp adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in 1998 which established standards for the
way enterprises report information about operating segments.
During 1998, Bancorp operated four community banks until December 1998
when these banks were consolidated into one banking entity. Until late in 1998
separate management teams managed the four banks, relying on common support
services offered though the parent company. The four banks operated in Oregon
and Washington, where the economic and regulatory factors were similar for the
banks; three of the four banks shared the Portland, Oregon market. The banks
used similar means of branch networks, marketing and technology to deliver
similar loan and deposit products and services. Following the consolidation to a
single banking entity, the bank operates 41 branch offices, and has realigned
management resources into a single team. Through the consolidation to a one bank
structure, Bancorp has aggregated its historical banking operations into a
single segment as shown below.
9
<PAGE> 10
Bancorp accounts for intercompany fees and services at an estimated
fair value according to regulatory requirements for the service provided.
Intercompany items relate primarily to the use of accounting, human resources,
data processing and marketing services provided. All other accounting policies
are the same as those described in the summary of significant accounting
policies in Bancorp's 1998 annual report.
Summarized financial information concerning Bancorp's reportable
segments and the reconciliation to Bancorp's consolidated results is shown in
the following table. The "Other" column includes Bancorp's trust operations and
corporate-related items. In 1998, these items included support services such as
accounting, human resources, data processing and marketing provided at the
parent. During 1999, these support services are operating within the banking
unit. Investment in subsidiaries is netted out of the presentations below. The
"Intersegment" column identifies the intersegment activities of revenues,
expenses and other assets, between the "Banking" and "Other" segment.
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1999
Banking Other Intersegment Consolidated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income ............... $ 23,797 $ 40 $ (24) $ 23,813
Interest expense .............. 8,832 -- (24) 8,808
---------- ---------- ---------- ----------
Net interest income ...... 14,965 40 -- 15,005
---------- ---------- ---------- ----------
Provision for loan loss ....... 510 -- -- 510
Non-Interest income ........... 4,206 555 (65) 4,696
Restructuring charges ......... 405 -- -- 405
Noninterest expense ........... 11,746 660 (65) 12,341
---------- ---------- ---------- ----------
Income before income taxes 6,510 (65) -- 6,445
Provision for income taxes .... 2,087 (22) -- 2,065
---------- ---------- ---------- ----------
Net income .................... $ 4,423 $ (43) $ -- $ 4,380
========== ========== ========== ==========
Depreciation and amortization . $ 895 $ 11 $ -- $ 906
Assets ........................ $1,245,672 $ 8,024 $ (6,194) $1,247,502
Loans, net .................... $ 866,796 $ -- $ -- $ 866,796
Deposits ...................... $1,107,533 $ -- $ (6,102) $1,101,431
Equity ........................ $ 107,363 $ 9,648 $ n/a $ 117,011
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1998
Banking Other Intersegment Consolidated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income ............... $ 23,678 $ 42 $ (13) $ 23,707
Interest expense .............. 8,993 4 (13) 8,984
---------- ---------- ---------- ----------
Net interest income ...... 14,685 38 -- 14,723
---------- ---------- ---------- ----------
Provision for loan loss ....... 1,513 (28) -- 1,485
Non-Interest income ........... 3,339 2,523 (1,694) 4,168
Restructuring charges ......... -- -- -- --
Noninterest expense ........... 11,664 3,185 (1,694) 13,155
---------- ---------- ---------- ----------
Income before income taxes 4,847 (596) -- 4,251
Provision for income taxes .... 1,683 (179) -- 1,504
---------- ---------- ---------- ----------
Net income .................... $ 3,164 $ (417) $ -- $ 2,747
========== ========== ========== ==========
Depreciation and amortization . $ 704 $ 110 $ -- $ 814
Assets ........................ $1,159,788 $ 12,601 $ (4,944) $1,167,445
Loans, net .................... $ 792,212 $ -- $ -- $ 792,212
Deposits ...................... $1,001,951 $ -- $ (4,656) $ 997,295
Equity ........................ $ 93,483 $ 11,258 $ n/a $ 104,741
</TABLE>
12. RECLASSIFICATION
Certain reclassifications of prior year amounts have been made to
conform to current classifications.
10
<PAGE> 11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENT DISCLOSURE
In addition to historical information, this 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 March 31, 1999 and 1998
Net Income. Bancorp reported net income of $4,380,076 or $.30 per
diluted share, for the three months ended March 31, 1999, compared to $2,746,607
or $.19 per diluted share for the three months ended March 31, 1998. The 1999
first quarter results include a $405,000 restructuring charge ($255,000 after
tax) resulting from Bancorp's consolidation of its subsidiary banks. In
addition, the 1998 first quarter results were impacted by non-recurring merger
related costs of $1,607,000 ($1,060,000 after taxes). After adjusting for the
first quarter non-recurring events, adjusted operating net income was $4,635,000
or $.32 per diluted share, up 22% compared to adjusted operating net income of
$3,807,000 or $.26 per diluted share, in the first quarter of 1998. Net interest
income increased in the first quarter of 1999 over the comparable period in 1998
due to higher average interest earning assets off set by a declining net
interest margin. Noninterest income increased mainly due to gains on sales of
loans, an increased customer base, higher transaction volumes, and increases in
fee assessments. Total noninterest expenses decreased mainly due to staff
reductions and other savings associated with Bancorp's consolidation of its
subsidiaries.
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 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 the market rates of interest or flattening interest rate
yield curve could adversely affect net interest income. In contrast, a
decreasing interest rate environment or steepening interest rate yield curve may
slightly improve Bancorp's margin. Competition, the economy, and the status of
the interest rate environment also impact Bancorp's net interest income in any
period.
11
<PAGE> 12
Net interest income on a tax equivalent basis for the three months
ended March 31, 1999 increased $313,000 or 2.05%, to $15,587,000 from
$15,274,000 for the same period in 1998. The increased net interest income was
caused mainly by asset growth, off set by a declining net interest margin.
Average interest earning assets increased by $110.9 million, or 10.75%, to $1.14
billion in the first quarter of 1999 from $1.03 billion for the same period in
1998, while average interest bearing liabilities increased $71.0 million or
8.35%. The average net interest spread decreased from 5.23% to 4.80%, mainly due
to decreased average earning asset yields, which declined 84 basis points from
9.51% to 8.67%. The low/flat interest rate yield curve has caused variable rate
repricing on assets over the period, which along with recent new asset
generation and 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 41 basis
points to 3.87% in the first quarter of 1999 from 4.28% for the same period in
1998. Bancorp's net interest margin for the three months ended March 31, 1999
was 5.54%, a decrease of 43 basis points from 5.97% for the comparable period of
1998. The decrease in Bancorp's net interest margin and related yields or
spreads are due mainly to a changing interest rate environment, increased
pricing competition, and a shift in some of its asset mix. Given these factors,
Bancorp could 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.
Analysis of Net Interest Income The following table presents
information regarding yields on interest-earning assets, expense on
interest-bearing liabilities, and net yields on interest-earning assets for the
periods indicated on a tax equivalent basis:
<TABLE>
<CAPTION>
Three Months Ended
(Dollars in thousands) March 31, Increase
------------------------------------
1999 1998 (Decrease) Change
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest and fee income (1) ........ $ 24,395 $ 24,168 $ 227 0.94%
Interest expense ................... 8,808 8,894 (86) (0.97%)
------------- ------------- -------------
Net interest income ................ $ 15,587 $ 15,274 $ 313 2.05%
============= ============= =============
Average interest earning assets .... $ 1,141,734 $ 1,030,868 $ 110,866 10.75%
Average interest bearing liabilities $ 921,925 $ 850,863 $ 71,062 8.35%
Average interest earning assets/
interest bearing liabilities .. 123.84% 121.16% 2.68
Average yields earned (2) .......... 8.67% 9.51% (0.84)
Average rates paid (2) ............. 3.87% 4.28% (0.41)
Net interest spread (2) ............ 4.80% 5.23% (0.43)
Net interest margin (2) ............ 5.54% 5.97% (0.43)
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) These ratios for the three months ended March 31, 1999 and 1998 have
been annualized.
Provision for Loan Loss. Bancorp recorded provisions for loan losses
for the first quarter of 1999 and 1998 of $510,000 and $1,485,415 respectively.
Bancorp's provision was impacted in the first quarter of 1998 by a one time
merger-related increase in the provision for loan losses of $1,038,000 related
to the Centennial Holdings LTD. acquisition, to bring its allowance for loan
loss methodology in line with Bancorp practices. Net charge-offs for the first
quarter of 1999 were $241,000, compared to net charge-offs of $146,000 for the
same period in 1998. At March 31, 1999, the percentage of non-performing assets
was 0.41% of total assets, compared to 0.37% one year earlier. Bancorp's
allowance for loan losses, as a percentage of total loans was 1.45% at March 31,
1999, compared to 1.47% as of March 31, 1998.
Noninterest Income. Noninterest income for the first quarter of 1999
was $4,696,060, up $527,678 or 12.66% from $4,168,382 in the like period in
1998. Gains on sales of loans increased $141,369 to $1,235,766 in 1999 over
1998, representing 27% of the noninterest income increase in the period. The
increase in gains on 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 $1,158,041, a 6.62% increase over the same period
in 1998, caused mainly by increases in volumes of customers serviced and
increases in fee assessments. Other service charges, commissions, and fees
increased $242,121 or 30.69% in 1999 over 1998. The increases in other service
charges, commissions, and fees were due to strong growth in the merchant
bankcard program, sales of investment products, and increased ATM related
service charges. Trust revenue decreased in the first quarter of 1999, as
compared to the same period in 1998, due in part to the activity and declines in
segments of the equity market activities and its associated fee income. Loan
servicing fees and other noninterest income increased in 1999 over 1998. Net
gains on the sales of securities were $102,905 through March 31, 1999, compared
to $100,886 for the same period one year earlier.
12
<PAGE> 13
Noninterest Expense. Noninterest expenses for the first quarter ended
March 31, 1999, were $12,745,992, a decrease of $409,070 or 3.11% over the same
period in 1998. A restructuring charge of $404,573 impacted the first quarter
1999 noninterest expenses, due to the company's recent consolidation of its
subsidiary banks, and the March 31, 1998 expenses include $569,000 related to an
acquisition. Bancorp's salaries and employee benefits decreased $302,834, or
4.35%, to $6,962,929 through March 31, 1999, from $7,265,763 for the like period
in 1998. Salary and employee benefit expense has declined as a result of
Bancorp's restructuring efforts. At March 31, 1999, Bancorp employed 662
staffing positions compared to 714 at March 31, 1998. Equipment, occupancy,
communications, and other expenses are higher in the first quarter of 1999 over
the same period in 1998, due mainly to growth and expansion including additions
of new branches, products and services over the period. Equipment expense
increased $54,099 or 4.46% in the first quarter of 1999 over 1998. Bancorp
continues to invest in technological improvements and expansion. Marketing
expense decreased slightly in 1999 compared to 1998. Professional fees incurred
for services from outside consultants, accountants, and attorneys are down
$93,040 in the first quarter of 1999 compared to the first quarter of 1998.
Printing and office supplies decreased in the first quarter of 1999 over the
like period in 1998. Other noninterest expense decreased $436,514 in the first
quarter of 1999 compared to like period in 1998, due mainly to merger related
expenses of $569,000 recognized in the first quarter of 1998.
RESTRUCTURING CHARGES
For the three months ended March 31, 1999, Bancorp recognized $404,573
in restructuring charges related to its consolidation of its four separate
banking affiliates into one entity. The consolidation was completed on December
31, 1998, and new signs on the branch facilities were installed in the first
quarter of 1999. In the two quarters since the plan was announced, Bancorp has
released, identified, or notified over forty percent of the anticipated 100
staff positions to be reduced. Bancorp anticipates one-time costs of
approximately $5 million to cover costs of the consolidation, including the
severance plan, signage, data conversions and other marketing, regulatory and
administrative items.
Bancorp expects that the consolidation will save approximately $6
million annually. 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 three months of 1999, due to an increase in net income
before taxes and changes in the mix of taxable and nontaxable income items, the
provision for income taxes increased from that of 1998. 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 provision.
13
<PAGE> 14
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
$1.101 billion at March 31, 1999, down from $1.108 billion at December 31, 1998.
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.
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.
CAPITAL RESOURCES
The Federal Reserve Bank "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%. As of March 31, 1999, Bancorp
and the Bank are considered "Well Capitalized" per the regulatory risk based
capital guidelines.
Shareholders' equity decreased to $117.0 million at March 31,1999, from
$117.2 million at December 31, 1998, a decrease of $200,000 over that period of
time. The decrease is mainly a function of Bancorp, through its previously
announced stock repurchase plan, acquiring back shares of common stock. At March
31, 1999, Bancorp's shareholders' equity, as a percentage of total assets, was
9.38%, compared to 9.34% at December 31, 1998. The decrease was primarily the
result of Bancorp's equity base decreasing less than a decrease in total assets.
Equity decreased .2% over the period from December 31, 1998, to March 31, 1999,
while assets decreased by .6% over the same period. As the following table
indicates, Bancorp currently exceeds the regulatory capital minimum
requirements.
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1999
-------------------------
Amount Ratio
---------- -----
<S> <C> <C>
Tier 1 capital ..................... $ 112,905 11.45%
Tier 1 capital minimum requirement . 39,455 4.00%
---------- -----
Excess over minimum Tier 1 capital $ 73,450 7.45%
========== =====
Total capital ...................... $ 125,240 12.70%
Total capital minimum requirement .. 78,911 8.00%
---------- -----
Excess over minimum total capital $ 46,329 4.70%
========== =====
Risk-adjusted assets ............... $ 986,385
==========
Leverage ratio ..................... 9.22%
Minimum leverage requirement ....... 3.00%
-----
Excess over minimum leverage ratio 6.22%
=====
Risk-adjusted total assets ......... $1,224,484
==========
</TABLE>
14
<PAGE> 15
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is the primary source of income
for Bancorp. Net loans represented 69.48% of total assets as of March 31, 1999.
Although the Bank strives to serve the credit needs of the service
areas, the primary focus is on real estate related and commercial credits. The
Bank makes substantially all its loans to customers located within its service
areas. The Bank has no loans defined as highly leveraged transactions by the
FRB.
Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. Owing to
the nature of the Bank's customer base and the growth experienced in the market
areas served, real estate is frequently a material component of collateral for
the Bank's loans. The expected source of repayment of these loans is generally
the cash flow of the project, operations of the borrower's business or personal
income. 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 Bank manages 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 the composition of the Banks' loan portfolios, at
the dates indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31,1998
------------------------- --------------------------
(Dollars in thousands)
Amount Percent Amount Percent
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Commercial ................... $ 159,326 18.38% $ 150,206 17.68%
Real estate construction ..... 129,916 14.99 118,171 13.91
Real estate mortgage ......... 105,837 12.21 113,661 13.38
Real estate commercial ....... 423,155 48.82 414,169 48.75
Installment and other consumer 61,284 7.07 65,845 7.75
--------- ------ --------- ------
Total loans .................. 879,518 101.47% 862,052 101.47%
Allowance for loan losses .... (12,722) (1.47) (12,453) (1.47)
--------- ------ --------- ------
Total loans, net ............. $ 866,796 100.00% $ 849,599 100.00%
========= ====== ========= ======
</TABLE>
The following table presents information with respect to nonperforming assets.
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1999 December 31, 1998
-------------------- -------------- -----------------
<S> <C> <C>
Loans on nonaccrual status ..................................... $3,932 $4,565
Loans past due greater than 90 days but not on nonaccrual status 166 42
Other real estate owned ........................................ 957 1,121
------ ------
Total nonperforming assets ..................................... $5,055 $5,728
====== ======
Percentage of nonperforming assets to total assets ............. .41% .46%
</TABLE>
See "Loan Loss Allowance and Provision"
Interest income on loans is accrued daily on the principal balance
outstanding. Generally, no interest is accrued on loans when factors indicate
collection of interest is doubtful or when the principal or interest payment
becomes 90 days past due. Increases in nonaccrual loans in recent years are due
substantially from growth in Bancorp's loan portfolio. The nonaccrual loans
consist of a number of loans in different categories and are largely secured.
For such loans, previously accrued but uncollected interest is charged against
current earnings, and income is only recognized to the extent payments are
subsequently received.
15
<PAGE> 16
As of March 31, 1999, the Bank had loans to persons serving as
directors, officers, principal shareholders and their related interests. These
loans were made substantially on the same terms, including interest rates,
maturities and collateral as those made to other customers of the Banks. At
March 31, 1999, Bancorp had $4,470,000 of bankers' acceptances. At March 31,
1999, there was no concentration of loans exceeding 10 percent of the total
loans to a multiple number of borrowers engaged in a similar business.
LOAN LOSS ALLOWANCE AND PROVISION
Bancorp maintains a loan loss allowance to absorb losses inherent in
the loan portfolio. The allowance is based on ongoing, quarterly assessments of
the probable estimated losses inherent in the loan portfolio, and to a lesser
extent, unused commitments to provide financing. Our methodology for assessing
the appropriateness of the allowance consists of several key elements, which
include:
-- The formula allowance,
-- Specific allowances for identified problem loans and portfolio
segments and
-- The unallocated allowance.
Bancorp's allowance incorporates the results of measuring impaired
loans as provided in: Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," and SFAS No 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These accounting standards prescribe the measurement methods,
income recognition and disclosures concerning impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans and certain unused commitments, in each case based on the
internal risk grade of those loans, pools of loans, or commitments. Changes in
risk grades of both performing and nonperforming loans affect the amount of the
formula allowance. Loss factors are based on our historical loss experience and
other such pertinent data and may be adjusted for significant factors that, in
management's judgement, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are described as follows:
-- Problem graded loan loss factors are obtained from four years
of historical loss experience. Bancorp is exploring the
utilization of a migration model to track historical loss
experience.
-- Pooled loan loss factors, not individually graded loans, are
based on expected net charge-offs for one year. Pooled loans
are loans and leases that are homogeneous in nature, such as
consumer installment and residential mortgage loans.
Specific allowances are established where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss may be incurred in excess of the
amount determined by the application of the formula allowance. The unallocated
allowance uses a more subjective method and considers such factors as the
following:
-- Existing general economic and business conditions affecting
our key lending areas,
-- Credit quality trends, including trends in nonperforming loans
expected to result from existing conditions,
-- Collateral values,
-- Loan volumes and concentrations,
-- Seasoning of the loan portfolio,
-- Specific industry conditions within portfolio segments,
-- Recent loss experience in particular segments of the
portfolio,
-- Duration of the current business cycle,
-- Bank regulatory examination results and
-- Findings of our internal credit examiners.
Executive credit management reviews these conditions quarterly in
discussion with our senior credit officers. If any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of this condition
may be reflected as a specific allowance applicable to this credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss concerning this condition is
reflected in the unallocated allowance.
16
<PAGE> 17
The allowance for credit losses is based upon estimates of probable
losses inherent in the loan portfolio. The amount actually observed for these
losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. By assessing the probable estimated losses inherent
in the loan portfolio on a quarterly basis, we are able to adjust specific and
inherent loss estimates based upon any more recent information that has become
available.
Recently acquired loan portfolios are reviewed and an overall
assessment is made using Bancorp's methodology as to the adequacy of the loan
portfolios, and any necessary adjustments to the allowance are made as they are
identified. A detailed review of the acquired loan portfolio follows, and
Bancorp's loan grading system is then applied to the portfolio. Any further
adjustments to the allowance are recorded in the period they are identified.
The following table summarizes the Banks' allowance for loan losses,
charge-offs and recovery activity:
<TABLE>
<CAPTION>
Three months ended Year ended
(Dollars in thousands) March 31, 1999 December 31, 1998
-------------------- ------------------ -----------------
<S> <C> <C>
Loans outstanding at end of period ........... $ 879,518 $ 862,052
Average loans outstanding during the period .. $ 869,146 $ 816,240
Allowance for loan losses, beginning of period $ 12,453 $ 10,451
Recoveries:
Commercial ................................. 4 298
Real Estate ................................ 23 47
Installment and consumer ................... 27 63
--------- ---------
Total recoveries ........................... 54 408
Loans charged off:
Commercial ................................. 116 853
Real Estate ................................ 76 39
Installment and consumer ................... 103 414
--------- ---------
Total loans charged off .................... 295 1,306
--------- ---------
Net loans charged off ........................ (241) (898)
Provision for loan losses .................... 510 2,900
--------- ---------
Allowance for loan losses, end of period ..... $ 12,722 $ 12,453
========= =========
Ratio of net loans charged off
to average loans outstanding (1) ........... .11% .11%
Ratio of allowance for loan losses
to loans at end of period .................. 1.45% 1.44%
</TABLE>
(1) The ratio for the three months ended March 31, 1999 has been
annualized.
At March 31, 1999, Bancorp's allowance for loan loss was $12.7 million,
or 1.45 percent of total loans, and 251.67 percent of total nonperforming
assets, compared with an allowance for loan losses at December 31, 1998 of $12.4
million, or 1.44 percent of total loans, and 217.41 percent of total
nonperforming assets.
Bancorp, during its normal loan review procedures considers a loan to
be impaired when it is probable that Bancorp will be unable to collect all
amounts due according to the contractual terms of the loan agreement. A loan is
not considered to be impaired during a period of minimal delay (less than 90
days). Bancorp measures impaired loans based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair market
value of the collateral if the loan is collateral dependent. Loans that are
currently measured at fair value or at lower of cost or fair value, leases and
certain large groups of smaller balance homogeneous loans that are collectively
measured for impairment are excluded. Impaired loans are charged to the
allowance when management believes, after considering economic and business
conditions, collection efforts and collateral position, that the borrower's
financial condition is such that collection of principal is not probable.
17
<PAGE> 18
During the first quarter of 1999, net loans charged off were $241,000,
compared to $898,000 during the full year of 1998. The percentage of net loans
charged off to average loans outstanding was 0.11 percent at March 31, 1999, and
at December 31, 1998. Charged off loans reflect the realization of losses in the
portfolio that were recognized previously through the provision for loan losses.
At March 31, 1999, the provision for loan loss exceeded the net loans
charged off during the period, reflecting managements belief, based on the
foregoing analysis, that there are additional losses inherent in the loan
portfolio. There can be no assurance that the adverse impact of any of these
conditions on Bancorp will not be in excess of the range set forth above.
Readers are referred to management's "Forward Looking Statement Disclosure" in
connection with this section.
INVESTMENT PORTFOLIO
The following table shows the carrying value of the Banks' portfolio of
investments:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1999 1998
-------------------- -------- ------------
<S> <C> <C>
Investments available for sale (At Fair Value)
U.S. Treasury securities ........................ $ 4,040 $ 6,065
U.S. Government agency securities ............... 94,906 88,856
Corporate securities ............................ 24,452 34,682
Mortgage-backed securities ...................... 5,612 6,517
Obligations of state and political subdivisions . 108,397 107,689
Other securities ................................ 9,643 9,462
-------- --------
Total .................................... $247,050 $253,271
Investments held to maturity (At Historical Cost)
Obligations of state and political subdivisions . $ -- $ 2,696
-------- --------
Total .................................... $ -- $ 2,696
Total Investment Portfolio ............... $247,050 $255,967
======== ========
</TABLE>
Under the provisions of SFAS NO. 133, and in connection with the
adoption of SFAS 133, Bancorp reclassified investment securities carried at
$2,695,531 with a market value of $2,909,000 from the held to maturity
classification to the available for sale classification in the first quarter of
1999.
18
<PAGE> 19
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.
These challenges are especially problematic for financial institutions,
since many transactions, such as interest accruals and payments, are date
sensitive. The operations of third parties with whom Bancorp does business,
including the Company's vendors, suppliers, utility companies, and customers,
may also be affected.
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's Chief Information Officer has primary
responsibility for year 2000 project management. 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, the Company's board of directors is
provided with quarterly reports, in order to assist them in overseeing the
Company's year 2000 readiness.
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 the Company's web site. A second information brochure is
currently being distributed to Bank customers.
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.
Last year, the Company's lending personnel examined its
current loan portfolios and identified our key business customers. The Company
contacted these customers and requested information regarding their preparation
for the year 2000. The Company then assessed the responses received to identify
the risk of loan defaults due to the effects of the year 2000 on the businesses
of key business customers. 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."
19
<PAGE> 20
TESTING. Updating and testing of the Company's mission-critical
automated systems is currently underway. During the first round of testing, all
mission-critical systems were tested to verify that dates in the year 2000 are
being appropriately recognized and processed. A second round of testing,
conducted to verify first round results using an alternative methodology, is
also substantially complete. To date, testing has revealed no material year 2000
compliance issues related to mission-critical automated systems that cannot be
remedied before the year 2000. The Company plans to conduct a final round of
testing on its mission-critical automated systems during the fourth quarter of
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
mission-critical automated systems where appropriate and will continue
throughout 1999. Although the Company expects this phase to be substantially
complete by early in the fourth quarter of 1999, with a final round of testing
to follow in 1999, additional follow-up activities may take place in the year
2000 and beyond.
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; although some of these systems
would have been replaced without regard to year 2000 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 represented approximately 9%
of the Company's information technology budget for 1998 and will represent about
10% of the 1999 information technology budget. The Company currently plans to
continue to use normal operating funds for payment of its year 2000 expenses.
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) 29,500 117,500 147,000
ATM Upgrades -- 25,000 25,000
Third Party Consulting (3) 30,000 35,000 65,000
-------- -------- --------
Totals $234,500 $282,500 $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 engaged a consulting firm to write a comprehensive testing plan for
the Company in 1998. Expenses for 1999 relate to costs associated with proxy
testing of certain systems and 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 Bank, 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 Bank to change its 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 strategies. 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
Bank's funding sources lead to a decrease in the Company's net interest
margin.
2. The Bank lends significant amounts to businesses in its 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. Management is
currently monitoring the year 2000 compliance efforts of its
significant business loan customers as described above under the
"Assessment" segment of the "Introduction." To date, as a precaution,
Management has increased the Company's loan loss reserves by about
$450,000 to provide for potential losses from loan defaults due to year
2000 risks. As the Company continues to monitor risk in this area, it
may increase or decrease loan loss reserves as appropriate 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. Management also continues to monitor the year
2000 compliance activities of the third party broker-dealer that sells
certain non-deposit investment products to customers of the Bank and
West Coast Trust.
6. The Company's ability to serve customers in the year 2000 could be
affected by factors outside its control, such as communications
abilities and access to utilities, such as electricity, water,
telephone, and others, to the extent access or service 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 being finalized, and the Company expects to submit it to its
board of directors for final approval during the second 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, (5)
timelines or timing guidelines for contingency plan implementation, and (6)
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
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK
Interest rate, credit, and operations risks are the most significant
market risks impacting Bancorp's performance. Other types of market risk, such
as foreign currency exchange rate risk and commodity price risk, do not arise in
the normal course of Bancorp's business activities. Bancorp relies on loan
reviews, prudent loan underwriting standards and an adequate allowance 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.
Further, the effects of a flattening yield curve could more adversely affect
Bancorp's margin than any benefits received from a decreasing rate environment.
Bancorp attempts 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. Any merger activity will also have an impact on Bancorp's
asset/liability position as new assets are acquired and added. Management has
assessed these risks and believes that there has been no material change since
December 31, 1998.
23
<PAGE> 24
PART II. OTHER INFORMATION
Item 101. Legal Proceedings
On May 11, 1999, the Bank and Bancorp were served with a summons and
complaint with respect to an alleged financing commitment. The lawsuit, filed by
Edward A. Fischer and Marianne M. Fischer ("Plaintiffs"), is currently pending
in the Circuit Court of the State of Oregon for the County of Multnomah.
Plaintiffs are seeking damages in excess of $4.6 million or specific performance
of the alleged agreement. The Bank denies the existence of any agreement or
commitment to Plaintiffs.
Based on the facts known at this time, counsel for the Bank has advised
that any losses, if any, arising out of this matter would probably not exceed
the Bank's applicable insurance coverage limits. Management is currently in
contact with Bancorp's insurance carrier regarding this matter. To date, the
insurance carrier has neither confirmed nor denied coverage.
This section 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 section 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, (1) facts and events currently unknown to
management that may surface as the subject matters discussed are further
investigated, (2) common law, rights, and legal and equitable remedies that may
be uncovered when the issues raised above are further researched, and (3)
uncertainties inherent in the legal process. 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule for Form 10-Q.
(b) During the three months ended March 31, 1999, West Coast Bancorp filed the
following current report on Form 8-K:
None
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: May 13, 1999 /s/ Victor L. Bartruff
----------------------------------------
Victor L. Bartruff
President and Chief Executive Officer
Dated: May 13, 1999 /s/ Donald A. Kalkofen
----------------------------------------
Donald A. Kalkofen
Executive Vice President and
Chief Financial Officer
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 73,637
<INT-BEARING-DEPOSITS> 1,151
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 247,050
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 879,518
<ALLOWANCE> 12,722
<TOTAL-ASSETS> 1,247,502
<DEPOSITS> 1,101,431
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,193
<LONG-TERM> 19,867
17,715
0
<COMMON> 0
<OTHER-SE> 99,296
<TOTAL-LIABILITIES-AND-EQUITY> 1,247,502
<INTEREST-LOAN> 20,078
<INTEREST-INVEST> 3,654
<INTEREST-OTHER> 81
<INTEREST-TOTAL> 23,813
<INTEREST-DEPOSIT> 8,441
<INTEREST-EXPENSE> 367
<INTEREST-INCOME-NET> 15,005
<LOAN-LOSSES> 510
<SECURITIES-GAINS> 103
<EXPENSE-OTHER> 12,746
<INCOME-PRETAX> 6,445
<INCOME-PRE-EXTRAORDINARY> 4,380
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,380
<EPS-PRIMARY> .31
<EPS-DILUTED> .30
<YIELD-ACTUAL> 5.54
<LOANS-NON> 3,932
<LOANS-PAST> 166
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,453
<CHARGE-OFFS> 295
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 12,722
<ALLOWANCE-DOMESTIC> 12,722
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
