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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission file number 0-10997
WEST COAST BANCORP
(Exact name of registrant as specified in its charter)
Oregon 93-0810577
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5335 Meadows Road - Suite 201 97035
Lake Oswego, Oregon (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (503) 684-0884
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of Registrant's Common Stock
held by non-affiliates of the Registrant on February 28, 1999, was $279,804,787.
The number of shares of Registrant's Common Stock outstanding on
February 28, 1999, was 14,167,331.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the West Coast Bancorp Definitive Proxy Statement dated
March 23, 1999 are incorporated by reference into Part III of Form 10-K.
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INDEX
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PART I PAGE
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Item 1. BUSINESS..........................................................2
General......................................................2
Recent Developments..........................................2
Subsidiaries.................................................3
Employees....................................................4
Competition..................................................4
Governmental Policies........................................4
Supervision and Regulation...................................5
Item 2. PROPERTIES........................................................8
Item 3. LEGAL PROCEEDINGS.................................................9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............9
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................10
Item 6. SELECTED FINANCIAL DATA..........................................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................12
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................53
PART III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............53
Item 11. EXECUTIVE COMPENSATION...........................................53
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................53
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................53
PART IV
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Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.........................................................54
SIGNATURES...................................................................55
EXHIBIT INDEX................................................................56
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PART I
ITEM 1. BUSINESS
GENERAL
West Coast Bancorp ("Bancorp," "Company," or the "registrant,") an
Oregon corporation and a bank holding company, was organized in August of 1981
under the name "Commercial Bancorp." Commercial Bancorp acquired West Coast
Bancorp, a one-bank holding company based in Newport, Oregon, on February 28,
1995. The combined corporation retained the name "West Coast Bancorp," and moved
its headquarter office to Lake Oswego, Oregon.
Bancorp remains headquartered in Lake Oswego, and its principal
business activities are conducted through its full-service, commercial bank
subsidiary West Coast Bank ("Bank"), an Oregon State-chartered bank with
deposits insured by the Federal Deposit Insurance Corporation ("FDIC"). At
December 31, 1998, the Bank had facilities in 31 cities and towns in western
Oregon and western Washington, operating a total of 37 full-service and three
limited-service branches. Bancorp also operates West Coast Trust Company, Inc.,
an Oregon trust company that provides agency, fiduciary, and other related trust
services. The market value of assets managed for others at December 31, 1998
totaled $260.4 million.
Bancorp's four former commercial bank subsidiaries were merged
together under the name West Coast Bank, effective December 31, 1998 (the
"Consolidation"). For more information regarding the Consolidation, see below
under "Recent Developments."
RECENT DEVELOPMENTS
RESULTS
For the year ended December 31, 1998, the operations of the
registrant on a combined basis earned net income of $14.1 million, or $0.96 per
diluted share. The combined equity of the registrant at December 31, 1998, was
$117.2 million, with 14.2 million common shares outstanding and a book value of
$8.23 per share. Net loans of $849.6 million at December 31, 1998, represented
approximately 67.67 percent of total assets. Deposits total $1.1 billion at
year-end 1998. For more information regarding Bancorp's results, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Financial Statements and Supplementary Data," contained in this
report.
THE CONSOLIDATION
During 1998, Bancorp was the parent bank holding company of four
wholly owned, full-service commercial Bank subsidiaries: (1) The Bank of
Newport, Newport, Oregon, (2) The Commercial Bank, Salem, Oregon, (3) Bank of
Vancouver, Vancouver, Washington, and (4) Centennial Bank, Olympia, Washington.
On December 31, 1998, The Commercial Bank, Bank of Vancouver, and Centennial
Bank were merged into The Bank of Newport, which changed its name to West Coast
Bank. Each Bank branch now operates under the name West Coast Bank, although
some signage changes are still underway. Each former bank subsidiary operated
under the advisement of its own local board of directors. These boards were
disbanded upon closing of the Consolidation. The board of directors of the Bank
currently consists of the same members as the Bancorp board of directors. In
exchange for their agreement not to compete with the Bank, certain members of
the former bank boards were appointed as Directors Emeritus of the Bank board to
serve until June 30, 1999.
MANAGEMENT DEVELOPMENTS
Lee S. Stenseth, former President and Chief Executive Officer ("CEO")
of Bank of Vancouver, retired in May of 1998. Ronald T. DeLude was hired to
replace Mr. Stenseth as President and CEO of Bank of Vancouver. As part of the
Consolidation, Mr. DeLude was promoted to Chief Operating Officer of Bancorp and
the Bank.
Also, as part of the Consolidation: (1) Victor L. Bartruff was
appointed President and CEO of the Bank; (2) Timothy P. Dowling, former
President and CEO of The Bank of Newport was appointed to Regional
Vice-President of the Bank, serving the Bank's Coast/Willamette region, (2)
Daniel Yerrington, former President of Centennial Bank, was appointed to
Regional Vice-President, serving the Bank's South Puget Sound region, and (3)
Edgar B. Martin, former President and CEO of The Commercial Bank, retired in
December of 1998.
ACQUISITION OF CENTENNIAL HOLDINGS, LTD. ("CHL")
On February 28, 1998, Bancorp acquired CHL of Olympia, Washington, the parent
bank holding company of Centennial Bank, a full-service commercial bank
organized in 1974. CHL's principal business activities were conducted through
Centennial Bank, which operated eight branches and two real estate offices in
southwestern Washington. As part of Bancorp's acquisition of CHL, Centennial
Bank became a wholly owned subsidiary of Bancorp. The transaction was accounted
for as a pooling of interests
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under generally accepted accounting principles. As discussed above, Centennial
Bank was consolidated into West Coast Bank on December 31, 1998.
FUTURE EXPANSION STRATEGY
Bancorp remains committed to community banking and intends West Coast Bank to
remain community-focused. Bancorp's strategic vision continues to include
expansion throughout the west. Bancorp will continue to seek acquisition
opportunities with community banks that share its business philosophies. Bancorp
also intends to grow through development of new branch locations. Consistent
with this strategy, Bancorp opened a new branch in McMinnville, Oregon on
January 25, 1999.
SUBSIDIARIES
THE BANK
West Coast Bank was originally organized in 1925 under the name "The
Bank of Newport," and its head office is currently located in Lake Oswego,
Oregon. The Bank conducts business through 40 branches located in western Oregon
and southwestern Washington. The Oregon branches are located in the following
cities and towns: Salem--four branches, Keizer--three branches, Newberg--two
branches, Newport-two branches, Clackamas, Dallas, Depoe Bay, Forest Grove,
Hillsboro, King City, Lake Oswego, Lincoln City, Molalla, Monmouth, North
Plains, Portland, Silverton, Stayton, Sublimity, Tigard, Toledo, Waldport,
Wilsonville, and Woodburn. The Bank's Washington branches are located in the
following cities and towns: Vancouver-two branches, Olympia-two branches,
Centralia, Chehalis, Hoodsport, Lacey, and Shelton. At December 31, 1998, the
Bank had deposits totaling $1.108 billion and net loans totaling $849.6 million.
The primary business strategy of the Bank is to provide community
banking and related services to individuals, professionals, and small to
medium-sized businesses. The Bank emphasizes customer relationships, high
quality service, and individual attention to customer needs. Small to
medium-sized business, the mature market consumer, real estate construction, and
commercial customers are a significant focus. The Bank offers deposit accounts,
safe-deposit boxes, consumer loans, commercial and residential real estate
loans, commercial loans, including operating lines secured by accounts
receivable and inventory, and other traditional bank products. The Bank's
portfolio has some concentration in real estate-secured loans, construction
loans, and agricultural and light manufacturing-related businesses.
Deposit products include regular and interest or package checking
accounts, savings accounts, certificates of deposit, and money market accounts.
Consumer credit products include residential first and second mortgages,
automobile loans, credit cards, lines of credit, and other products. Lending
services include short to intermediate-term loans, inventory financing,
equipment leasing, revolving lines of credit, and other types of credit. The
Bank also offers a VISA credit card program as part of its retail banking
services.
The Bank emphasizes the importance of establishing high quality,
long-term relationships with customers and seeks to implement new products and
services to meet their banking needs and to exceed their banking expectations.
For example, the Bank offers (1) trust services through its affiliate West Coast
Trust, (2) courier services to our small business customers, (3) a Progressive
Banking Program (which uses designated customer deposits exclusively for loans
to and short-term investments in small businesses, affordable housing, and
community development), (4) 24-hour telephone banking, and (5) ExecuBanc
(24-hour access to electronic banking for business customers). Automated teller
machines are available in 38 branch and other locations offering 24-hour
transaction services, including cash withdrawals, deposits, account transfers,
and balance inquiries. The Bank offers electronic banking services through
telephone and personal computers. The Bank also offers securities and insurance
products through an arrangement with a third party broker/dealer. These products
include tax-deferred annuities, single premium whole life insurance, and other
insurance investment products and securities products.
Bancorp also operates a commercial real estate loan brokerage
division, which originates and brokers commercial real estate loans to other
banks, insurance companies pension funds, and other sophisticated investors.
BANK LOCATION
The principal office of the Bank is located at 5335 Meadows Road,
Suite 201, Lake Oswego, OR 97035 (503) 684-0884.
WEST COAST TRUST COMPANY
West Coast Trust provides trust services to individuals,
partnerships, corporations, and institutions. West Coast Trust acts as fiduciary
of estates and conservatorships, and as a trustee under various wills, trust,
and pension and profit-sharing plans.
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These trust and annuity services are available and offered through a third party
broker-dealer with offices at branches of West Coast Bancorp affiliates. The
main office of West Coast Trust is located at 301 Church Street, Salem, OR 97301
(503) 399-2993.
TOTTEN, INC.
Totten, Inc. ("Totten"), a Washington corporation, is a subsidiary of
Bancorp that serves as trustee under deeds of trust and holds certain real
estate licenses. Totten was formerly a subsidiary of CHL and became a wholly
owned subsidiary of the Bancorp following Bancorp's acquisition of CHL.
BV CORPORATION
In 1996, Bank of Vancouver incorporated BV Corporation ("BV"), a
Washington Corporation, to serve as trustee under deeds of trust. Since BV and
Totten served duplicative functions, BV was merged into Totten on December 31,
1998. Totten was the surviving corporation in this merger, and BV no longer
exists as a separate entity.
CENTENNIAL FUNDING CORPORATION
In September of 1995, CHL acquired all of the outstanding stock of
Centennial Funding Corporation, a Washington corporation and an FHA-approved
mortgage lender that makes home loans and residential development loans.
Following Bancorp's acquisition of CHL, Centennial Funding Corporation became a
wholly owned subsidiary of Bancorp.
ELD, INC.
ELD, Inc, a Washington corporation, is a wholly owned subsidiary of
West Coast Bank. ELD, Inc. was incorporated by Centennial Bank in October, 1990
to conduct real estate reconveyances and to hold certain other property
classified as other real estate owned. Following the Consolidation, ELD became
West Coast Bank's subsidiary.
EMPLOYEES
At December 31, 1998, Bancorp and its subsidiaries had approximately
652 full-time equivalent employees. None of these employees are represented by
labor unions. A number of benefit programs are available to eligible employees,
including group medical plans, paid sick leave, paid vacation, group life
insurance, 401(k) plans, deferred compensation plans, stock option plans, and an
optional employee stock purchase plan.
COMPETITION
The Bank competes with other banks, as well as with savings and loan
associations, savings banks, credit unions, mortgage companies, investment
banks, insurance companies, securities brokerages, and other financial
institutions. Banking in Oregon and Washington is dominated by several
significant banking institutions, including U.S. Bank, Wells Fargo Bank, Bank of
America, and Washington Mutual Savings Bank, which together account for a
majority of the total commercial and savings bank deposits in Oregon and
Washington. These competitors offer a greater number of branch locations (with
statewide branch networks in the case of the two largest competitors), the
ability to offer higher lending limits, and a variety of services not offered by
the Bank. Bancorp has attempted to offset some of the advantages of the larger
competitors by arranging participations with other banks for loans above its
legal lending limits. Emphasis is placed on local banking featuring quality
service, local responsive decision making, money reinvested into the community,
and participation in nationwide services such as VISA, The Exchange, Interlink,
Plus, and Accel.
Bancorp anticipates that the level of consolidation among financial
institutions in its market area will continue. Other financial institutions,
many with substantially greater resources than Bancorp, compete in the
acquisition market against Bancorp. Some of these institutions, among other
items, have greater access to capital markets, larger cash reserves and a more
liquid currency than Bancorp.
Although Bancorp has been able to compete effectively in the
financial services business in its markets to date, there can be no assurance
that it will be able to continue to do so in the future.
GOVERNMENTAL POLICIES
The earnings and growth of Bancorp, the Bank and Bancorp's other
subsidiaries, as well as their existing and future business activities, are
affected not only by general economic conditions, but also by the fiscal and
monetary policies of the Federal government and its agencies, particularly the
Board of Governors of the Federal Reserve System ("FRB"). The FRB
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implements national monetary policies (intended to curb inflation and combat
recession) by its open-market operations in United States Government securities,
by adjusting the required level of reserves for financial institutions subject
to its reserve requirements, and by varying the discount rates applicable to
borrowings by the banks from the Federal Reserve Bank. The actions of the FRB in
these areas influence the growth of bank loans, investments and deposits, and
also affect interest rates charged on loans and deposits. As banking is a
business which depends largely on interest rate differentials (in general, the
difference between the interest rates paid by the Bank on their deposits and
their other borrowings and the interest rates received by the Bank on loans
extended to their customers and on securities held in the Bank investment
portfolios), the influence of economic conditions and monetary policies on
interest rates will directly affect earnings. The nature and impact of any
future changes in monetary policies cannot be predicted.
SUPERVISION AND REGULATION
GENERAL
INTRODUCTION
Bancorp is extensively regulated under federal and state law. These
laws and regulations are primarily intended to protect depositors, not
shareholders. The discussion below describes and summarizes certain statutes and
regulations. These descriptions and summaries are qualified in their entirety by
reference to the particular statute or regulation. Changes in applicable laws or
regulations may have a material effect on the business and prospects of Bancorp.
The operations of Bancorp may also be affected by changes in the policies of
banking and other government regulators. Bancorp cannot accurately predict the
nature or extent of the effects on its business and earnings that fiscal or
monetary policies, or new federal or state laws, may have in the future.
FEDERAL BANK HOLDING COMPANY REGULATION
General. Bancorp is a bank holding company as defined in the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and is therefore subject
to regulation, supervision and examination by the FRB. In general, the BHCA
limits the business of bank holding companies to owning or controlling banks and
engaging in other activities closely related to banking. Bancorp must file
reports with the FRB and must provide it with such additional information as it
may require.
Holding Company Bank Ownership. The BHCA requires every bank holding
company to obtain the prior approval of the FRB before (1) acquiring, directly
or indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares, (2) acquiring all or substantially all of the assets of another
bank or bank holding company, or (3) merging or consolidating with another bank
holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA
also prohibits a bank holding company from acquiring or retaining direct or
indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank or bank holding company, or from engaging directly
or indirectly in activities other than those of banking, managing or controlling
banks, or providing services for its subsidiaries. The principal exceptions to
these prohibitions involve certain non-bank activities which, by statute or by
FRB regulation or order, have been identified as activities closely related to
the business of banking or of managing or controlling banks. In making this
determination, the FRB considers whether the performance of such activities by a
bank holding company can be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in the efficient use of
resources, which can be expected to outweigh the risks of possible adverse
effects, such as decreased or unfair competition, conflicts of interest or
unsound banking practices. The Economic Growth and Regulatory Reduction Act of
1996 amended the BHCA to eliminate the requirement that a bank holding company
seek prior FRB approval before engaging in certain permissible nonbanking
activities, if the holding company is well-capitalized and meets certain other
specified criteria.
Transactions with Affiliates. Subsidiary banks of a bank holding
company are subject to restrictions imposed by the Federal Reserve Act on
extensions of credit to the holding company or its subsidiaries, on investments
in their securities and on the use of their securities as collateral for loans
to any borrower. These regulations and restrictions may limit Bancorp's ability
to obtain funds from the Bank for its cash needs, including, funds for payment
of dividends, interest and operational expenses.
Tying Arrangements. Bancorp and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example, with
certain exceptions, neither Bancorp nor its subsidiaries may condition an
extension of credit to a customer on either (1) a requirement that the customer
obtain additional services provided by it or (2) an agreement by the customer to
refrain from obtaining other services from a competitor. Effective April 21,
1997, the FRB also adopted significant amendments to its anti-tying rules that:
(1) remove FRB-imposed anti-tying restrictions on bank holding companies and
their non-bank subsidiaries; (2) allow banks greater flexibility
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to package products with their affiliates; and (3) establish a safe harbor from
the tying restrictions for certain foreign transactions. These amendments are
designed to enhance competition in banking and nonbanking products and allow
banks and their affiliates to provide more efficient, lower cost service to
their customers.
Support of Subsidiary Banks. Under FRB policy, a bank holding company
is expected to act as a source of financial and managerial strength to, and
commit resources to support, each of its subsidiary banks. Any capital loans a
bank holding company makes to its subsidiary banks are subordinate to deposits
and to certain other indebtedness of those subsidiary banks. The Crime Control
Act of 1990 provides that, in the event of a bank holding company's bankruptcy,
the bankruptcy trustee will assume any commitment the bank holding company has
made to a federal bank regulatory agency to maintain the capital of a subsidiary
bank and this obligation will be entitled to a priority of payment.
State Law Restrictions. As an Oregon corporation, Bancorp is subject
to certain limitations and restrictions under applicable Oregon corporate law.
For example, state law restrictions in Oregon include limitations and
restrictions relating to: indemnification of directors, distributions to
shareholders, transactions involving directors, officers or interested
shareholders, maintenance of books, records, and minutes, and observance of
certain corporate formalities.
CONTROL TRANSACTIONS
The Change in Bank Control Act of 1978, as amended, prohibits a
person or group of persons from acquiring "control" of a bank holding company
unless the FRB has been given 60 days' prior written notice of the proposed
acquisition, and within that time period, the FRB has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days the
period during which such a disapproval may be issued. An acquisition may be made
before the expiration of the disapproval period if the FRB issues written notice
of its intent not to disapprove the action. Under a rebuttable presumption
established by the FRB, the acquisition of 10% or more of a class of voting
stock of a bank holding company with a class of securities registered under
Section 12 of the Exchange Act would, under the circumstances set forth in the
presumption, constitute the acquisition of control.
In addition, any company would be required to obtain the approval of
the FRB under the BHCA before acquiring 25% (5% if the company is a bank holding
company) or more of the outstanding shares of Bancorp or to otherwise obtain
control over the Bancorp.
FEDERAL AND STATE REGULATION OF THE BANK
General. The Bank is an Oregon commercial bank with deposits insured
by the FDIC and is subject to the supervision and regulation of the Oregon
Department of Consumer and Business Services, the Washington Department of
Financial Institutions, and the FDIC. These agencies have the authority to
prohibit banks from engaging in what they believe constitute unsafe or unsound
banking practices.
CRA. The Community Reinvestment Act ("CRA") requires that, in
connection with examinations of financial institutions within their
jurisdiction, the FRB or the FDIC evaluate the record of the financial
institution in meeting the credit needs of its local communities, including low
and moderate income neighborhoods, consistent with the safe and sound operation
of the institution. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders or any related interests
of such persons. Extensions of credit (1) must be made on substantially the same
terms, including interest rates and collateral as, and follow credit
underwriting procedures that are not less stringent than, those prevailing at
the time for comparable transactions with persons not covered above and who are
not employees, and (2) must not involve more than the normal risk of repayment
or present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
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Regulation of Management. Federal law (1) sets forth circumstances
under which officers or directors of a bank may be removed by the institution's
federal supervisory agency; (2) places restraints on lending by a bank to its
executive officers, directors, principal shareholders, and their related
interests; and (3) prohibits management personnel of a bank from serving as a
director or in other management positions of another financial institution whose
assets exceed a specified amount or which has an office within a specified
geographic area.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement
Act ("FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Management believes that the Bank meets all such standards.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Interstate Act") permits nationwide interstate banking and branching
under certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit these purchases. Additionally, banks are permitted to merge with banks
in other states, as long as the home state of neither merging bank has opted out
under the legislation. The Interstate Act requires regulators to consult with
community organizations before permitting an interstate institution to close a
branch in a low-income area.
Under recent FDIC regulations, banks are prohibited from using their
interstate branches primarily for deposit production. The FDIC has accordingly
implemented a loan-to-deposit ratio screen to ensure compliance with this
prohibition.
Oregon and Washington each enacted "opting in" legislation in
accordance with the Interstate Act provisions allowing banks to engage in
interstate merger transactions, subject to certain "aging" requirements. Both
states restrict an out-of-state bank from opening de novo branches. However,
once an out-of-state bank has acquired a bank within the state, either through
merger or acquisition of all or substantially all of the bank's assets, the
out-of-state bank may open additional branches within the state.
DEPOSIT INSURANCE
The deposits of The Bank are currently insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF") administered by
the FDIC. The Bank is required to pay semiannual deposit insurance premium
assessments to the FDIC.
FDICIA included provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
FDICIA also permits the FDIC to make special assessments on insured depository
institutions in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources or for any other purpose the FDIC deems necessary. The FDIC has
implemented a risk-based insurance premium system under which banks are assessed
insurance premiums based on how much risk they present to the BIF. Banks with
higher levels of capital and a low degree of supervisory concern are assessed
lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern.
DIVIDENDS
The principal source of Bancorp's cash reserves are dividends
received from the Bank. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends in a manner that would constitute an unsafe or
unsound banking practice. In addition, a bank may not pay cash dividends if
doing so would reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Oregon Laws also limit a
bank's ability to pay dividends. Under these restrictions, as of December 31,
1998, the Bank could have declared dividends of approximately $24 million in the
aggregate, without obtaining prior regulatory approval.
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CAPITAL ADEQUACY
Federal bank regulatory agencies use capital adequacy guidelines in
the examination and regulation of bank holding companies and banks. If capital
falls below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities.
The FDIC and FRB use risk-based capital guidelines for banks and bank
holding companies. These are designed to make such capital requirements more
sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the FRB has noted
that bank holding companies contemplating significant expansion programs should
not allow expansion to diminish their capital ratios and should maintain ratios
well in excess of the minimum. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier I capital. Tier I
capital for bank holding companies includes common shareholders' equity, certain
qualifying perpetual preferred stock and minority interests in equity accounts
of consolidated subsidiaries, less intangibles.
The FRB also employs a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The FRB requires a minimum leverage ratio of 3%. However,
for all but the most highly rated bank holding companies and for bank holding
companies seeking to expand, the FRB expects an additional cushion of at least
1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed
to the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized," depending on the category to which they are
assigned, are subject to certain mandatory supervisory corrective actions.
EFFECTS OF GOVERNMENT MONETARY POLICY
The earnings and growth of Bancorp are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the FRB. The FRB can and does implement national
monetary policy for such purposes as curbing inflation and combating recession,
but its open market operations in U.S. government securities, control of the
discount rate applicable to borrowings from the FRB, and establishment of
reserve requirements against certain deposits, influence the growth of bank
loans, investments and deposits, and also affect interest rates charged on loans
or paid on deposits. The nature and impact of future changes in monetary
policies and their impact on Bancorp cannot be predicted with certainty.
CHANGES IN BANKING LAWS AND REGULATIONS
The laws and regulations that affect banks and bank holding companies
are currently undergoing significant changes. This year, legislation was
proposed in Congress which contained proposals to alter the structure,
regulation, and competitive relationships of the nation's financial
institutions. Although the legislation was not passed in the 1998 general
session of Congress, similar legislation may be proposed in the coming years
and, if enacted into law, such bills could have the effect of increasing or
decreasing the cost of doing business, limiting or expanding permissible
activities (including activities in the insurance and securities fields), or
affecting the competitive balance among banks, savings associations, and other
financial institutions. Some of these bills may reduce the extent of federal
deposit insurance, broaden the powers or the geographical range of operations of
bank holding companies, alter the extent to which banks could engage in
securities activities, and change the structure and jurisdiction of various
financial institution regulatory agencies. Whether or in what form such
legislation may be adopted, or the extent to which the business of Bancorp might
be affected thereby, cannot be predicted with certainty.
ITEM 2. PROPERTIES
The principal properties of the registrant are comprised of the
banking facilities owned by the Bank. The Bank owns a total of 24 buildings
hosting its branch offices and owns the land under 21 of those buildings. Some
significant properties owned by the Bank are as follows:
(1) Land, administrative offices and drive-up teller facilities in Salem,
Oregon with approximately 40,000 square feet of space;
8
<PAGE> 10
(2) A building with approximately 8,000 square feet of space and the land
under it in Salem, Oregon, containing administrative offices for the
Bank's human resources, security, and risk management and compliance
personnel;
(3) Land and the building housing a branch and administrative offices in
Newport, Oregon, consisting of approximately 15,640 square feet of
space;
(4) A building in Vancouver, Washington that is leased to another party
under a ground lease at a monthly rental of $6,771;
(5) A building and the land under it in Lacey, Washington that is home to
the Bank's Lacey branch and contains some administrative offices in
approximately 12,000 square feet of space; and
(6) A building and land in Shelton, Washington with approximately 7,500
square feet that contains data processing and communications
equipment.
The Bank leases office space in Lake Oswego, Oregon, for its
headquarter offices. The Bank also leases a building and land in Salem, Oregon,
where the Bank's data center is located. In addition, the Bank leases space at
approximately 19 other locations for branch and other offices. The aggregate
monthly rental on all properties leased by Bancorp and the Bank is approximately
$101,500.
West Coast Trust's main office is in Salem where it leases space from
the Bank. West Coast Trust also has offices in Portland, Oregon, Newport,
Oregon, Vancouver, Washington, and Olympia, Washington where it leases space
from the Bank.
ELD, Inc. holds a one-third partnership interest in a building and
land in Sequim, Washington. This interest was acquired before Bancorp purchased
ELD's former parent Centennial Bank. Bancorp is currently seeking to divest of
its interest in this property.
ITEM 3. LEGAL PROCEEDINGS
The Company received a letter in March of 1999 asserting a potential
claim with respect to an alleged loan commitment. No lawsuit related to the
matter has yet been filed against the Bank. Counsel for the Bank has advised us
that if this matter is eventually litigated, it is unlikely that any liability,
if any, imposed on the Bank would exceed the Bank's applicable insurance
coverage limits. Management is currently in contact with its insurance carrier
to confirm coverage, and management does not consider this asserted claim
material at this time.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
9
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK PRICE AND DIVIDENDS
West Coast Bancorp common stock trades on The Nasdaq Stock Market
under the symbol "WCBO" and its primary market makers are: Black & Company; Dain
Rauscher, Inc.; Herzog, Heine, Geduld, Inc.; Hoefer & Arnett, Inc.; Keefe,
Bruyette & Woods, Inc.; Pacific Crest Securities; Piper Jaffray Companies, Inc.,
and Spear, Leeds & Kellogg. The respective high and low sale prices of West
Coast Bancorp's common stock for the periods indicated are shown below. The
prices below do not include retail mark-ups, mark-downs or commissions, and may
not represent actual transactions. The per share information has been adjusted
retroactively for all stock dividends and splits previously issued. As of
December 31, 1998, there were approximately 4,800 shareholders of record of
Bancorp common stock.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- -------------------------------------------
Market Price Market Price
---------------------- Cash dividend ---------------------- Cash dividend
High Low Declared High Low Declared
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $24.77 $21.82 $0.05 $13.79 $10.61 $0.04
2nd Quarter $24.77 $19.83 $0.05 $19.39 $12.65 $0.04
3rd Quarter $22.50 $14.43 $0.06 $18.79 $15.38 $0.04
4th Quarter $22.88 $14.77 $0.06 $25.00 $16.36 $0.05
</TABLE>
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with West
Coast Bancorp's (Bancorp or the Company) consolidated financial statements and
the accompanying notes presented in this report. The per share information has
been adjusted retroactively for all stock dividends and splits previously
issued.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Year ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income........................... $ 97,053 $ 89,065 $ 75,586 $ 62,968 $ 49,852
Interest expense.......................... 36,431 32,262 26,596 22,959 14,205
------------ ------------ ------------ ------------ ------------
Net interest income.................... 60,622 56,803 48,990 40,009 35,647
Provision for loan loss................... 2,900 3,936 2,571 1,200 891
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan loss........................... 57,722 52,867 46,419 38,809 34,756
Noninterest income........................ 19,159 14,150 9,875 9,606 9,478
Noninterest expense....................... 56,098 45,394 38,814 33,653 32,610
------------ ------------ ------------ ------------ ------------
Income before income taxes................ 20,783 21,623 17,480 14,762 11,624
Provision for income taxes................ 6,724 7,184 5,804 4,154 3,509
------------ ------------ ------------ ------------ ------------
Net income................................ $ 14,059 $ 14,439 $ 11,676 $ 10,608 $ 8,115
============ ============ ============ ============ ============
Per share data:
Basic earnings per share............... $ 1.00 $ 1.06 $ 0.87 $ 0.81 $ 0.65
Diluted earnings per share............. $ 0.96 $ 1.01 $ 0.85 $ 0.79 $ 0.64
Cash dividends......................... $ 0.21 $ 0.17 $ 0.14 $ 0.14 $ 0.12
Period end book value.................. $ 8.23 $ 7.29 $ 6.29 $ 5.52 $ 4.59
Average common equivalent shares
outstanding......................... 14,676,144 14,273,233 13,761,103 13,392,761 12,752,760
Total assets.............................. $ 1,255,423 $ 1,117,826 $ 940,297 $ 766,658 $ 645,602
Total deposits............................ $ 1,108,457 $ 958,482 $ 806,300 $ 664,385 $ 553,719
Total long-term borrowings................ $ 20,260 $ 22,446 $ 28,583 $ 10,188 $ 10,046
Net loans................................. $ 849,599 $ 766,491 $ 711,374 $ 512,599 $ 415,405
Stockholders' equity...................... $ 117,225 $ 101,140 $ 85,381 $ 72,660 $ 60,130
Financial ratios:
Return on average assets............... 1.21% 1.43% 1.39% 1.51% 1.33%
Return on average equity............... 12.97% 15.75% 14.93% 16.33% 14.72%
Average equity to assets............... 9.30% 9.10% 9.29% 9.22% 9.02%
Dividend payout ratio.................. 21.14% 15.97% 16.36% 16.83% 18.81%
Efficiency ratio (1)................... 68.84% 62.77% 64.47% 65.86% 69.77%
Net loans to assets.................... 67.67% 68.57% 75.65% 66.86% 64.34%
Yield on earning assets (1)............ 9.16% 9.70% 9.99% 10.07% 9.26%
Average rates paid..................... 4.16% 4.25% 4.22% 4.40% 3.24%
Net interest spread (1)................ 5.00% 5.45% 5.77% 5.67% 6.02%
Net interest margin (1)................ 5.79% 6.23% 6.54% 6.48% 6.70%
Nonperforming assets to total assets... 0.46% 0.43% 0.28% 0.22% 0.13%
Allowance for loan loss to total
loans................................ 1.44% 1.35% 1.18% 1.26% 1.40%
Allowance for loan loss to
nonperforming assets................ 217.41% 218.50% 320.40% 397.32% 671.93%
</TABLE>
(1) Interest earned in nontaxable securities has been computed on a 34% tax
equivalent basis.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD LOOKING STATEMENT DISCLOSURE
In addition to historical information, this annual 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
Years Ended December 31, 1998, 1997 and 1996.
OVERVIEW. In both 1998 and 1996, Bancorp completed an acquisition
transaction that extended its market into Washington and increased its market
positioning. Bancorp's assets increased nearly 150 percent in the past three
years from $517 million, (before these pooling transactions) at December 31,
1995, to $1.255 billion in assets at December 31, 1998. This rapid growth is
attributable in nearly equal parts to these acquisitions and the Company's
strong internal growth. During the past three years, net income has been
impacted by certain nonrecurring costs associated with these acquisition
transactions. In addition, in 1998, Bancorp began the process of consolidating
its four banking companies into a single entity called West Coast Bank. The
Company's 1998 financial results have been impacted by the related nonrecurring
restructuring costs.
Bancorp's net income for 1998 was $14.1 million, compared with $14.4
million in 1997 and $11.7 million in 1996. The Company's net income during 1998
was reduced by $1.1 million for charges associated with its acquisition of
Centennial Holdings, Ltd. (CHL), WA. These charges were for conversion costs of
$569,000 (pretax), and an increase in the provision for loan losses of $1.0
million (pretax) to bring the CHL's allowance for loan loss methodology in line
with Bancorp practices. In addition, nonrecurring restructuring charges of $2.4
million ($3.8 million pretax) were incurred in 1998. The 1997 results were
favorably impacted by a $1.095 million gain on sale of servicing rights offset
by merger expenditures of $905,000. Net income in 1996 was impacted by $280,000
in merger-related expenditures from the acquisition of Vancouver Bancorp, WA.
Bancorp's diluted earnings per share for the three years ended 1998
were $0.96, $1.01, and $0.85.
Net interest income on a tax equivalent basis totaled $62.7 million
for the year ended December 31, 1998, a 7.92% increase over $58.1 million for
the same period in 1997, which was a 15.37% increase over 1996. Growth of
noninterest income was due to increased customer bases and transaction volumes.
Noninterest expenses increased primarily due to bank branch expansion,
merger-related expenditures and reorganization and consolidation costs.
NET INTEREST INCOME. During the years ended December 31, 1998, 1997
and 1996, average interest earning assets grew to $1.082 billion, from $931.6
million and $769.9 million, respectively. For the same periods, average interest
bearing liabilities were $875.4 million, $758.6 million and $630.3 million,
respectively. The percentage of interest earning assets to interest bearing
liabilities increased to 123.61% in 1998 from 122.8% in 1997 and 122.16% in
1996. During the same periods Bancorp's net interest margins were 5.79%, 6.23%
and 6.54%, respectively; the decreases in Bancorp's net interest margin and
related yields or spreads are due mainly to a changing interest rate
environment, increased pricing competition, a shift in some of its asset mix,
and an increase of long-term funding sources. Given these factors, Bancorp
expects there to be continued pressure on its net interest margins and spreads.
Net interest income on a tax-equivalent basis increased $4.6 million, or 7.92%,
to $62.7 million in 1998 from $58.1 million in 1997 and $50.3 million in 1996.
The increased net interest income was caused mainly by earning assets growth.
Average interest earning assets increased 16.15% in 1998 from 1997 and 20.99% in
1997 over 1996.
12
<PAGE> 14
Bancorp experienced a decrease in the net interest spread of 45 basis
points in 1998 to 5.00% from 5.45% in 1997 which was down 32 basis points from
5.77% in 1996. The average yield earned on interest earning assets was 9.16% in
1998, 9.70% in 1997 and 9.99% in 1996. Average interest bearing liabilities
increased $116.8 million, or 15.39%, to $875.4 million for the period ended
December 31, 1998, from $758.6 million in 1997 and $630.3 million in 1996, while
the average rates paid were 4.16%, 4.25%, and 4.22%, respectively. Bancorp's
loan portfolio experienced growth in 1998 ending the year at $862.1 million, up
$85.2 million from $776.9 million at December 31, 1997. Bancorp's deposit base
grew to $1.108 billion at December 31, 1998, up $149.5 million or 15.6% from
$958.5 million at the end of 1997. Bancorp also had a shift in its asset mix
from the loan portfolio to investment securities during 1998; in general,
Bancorp's investment securities have shorter maturities and yield lower interest
rate returns than those associated with the loan portfolio.
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>
Year Ended December 31, Increase Change
------------------------------------- ----------------------- --------------------
(Dollars in thousands) 1998 1997 1996 98-97 97-96 98-97 97-96
- ---------------------- ----------- ---------- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest and fee income(1).............. $ 99,108 $ 90,340 $ 76,937 $ 8,768 $ 13,403 9.71% 17.42%
Interest expense........................ $ 36,431 $ 32,262 $ 26,596 $ 4,169 $ 5,667 12.92% 21.31%
Net interest income(1).................. $ 62,677 $ 58,078 $ 50,341 $ 4,599 $ 7,736 7.92% 15.37%
----------- ---------- ---------- ---------- ---------- ------ ------
Average interest earning assets......... $ 1,082,035 $ 931,578 $ 769,934 $ 150,457 $ 161,644 16.15% 20.99%
Average interest bearing liabilities.... $ 875,368 $ 758,614 $ 630,277 $ 116,754 $ 128,337 15.39% 20.36%
Average interest earning assets/
interest bearing liabilities ........ 123.61% 122.80% 122.16% 0.81 0.64
Average yields earned(1) ............... 9.16% 9.70% 9.99% (0.54) (0.29)
Average rates paid...................... 4.16% 4.25% 4.22% (0.09) 0.03
Net interest spread(1).................. 5.00% 5.45% 5.77% (0.45) (0.32)
Net interest margin(1).................. 5.79% 6.23% 6.54% (0.44) (0.31)
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
13
<PAGE> 15
Average Balances and Average Rates Earned and Paid. The following
table sets forth, for the periods indicated, information with regard to (1)
average balances of assets and liabilities, (2) the total dollar amounts of
interest income on interest earning assets and interest expense on interest
bearing liabilities, (3) resulting yields or costs, (4) net interest income, and
(5) net interest spread. Nonaccrual loans have been included in the tables as
loans carrying a zero yield. Loan fees are recognized as income using the
interest method over the life of the loan.
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
-------------------- -------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1)
---------- ------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning balances
due from banks............. $ 31,178 $ 1,575 5.05% $ 29,195 $ 1,624 5.56%
Federal funds sold........... 7,667 422 5.50 1,026 53 5.15
Taxable securities........... 138,387 8,896 6.43 104,375 6,833 6.55
Nontaxable securities(2)..... 77,536 6,044 7.80 43,231 3,751 8.68
Loans, including fees(3)..... 827,267 82,171 9.93 753,721 78,079 10.36
---------- ------- ---------- -------
Total interest earning
assets.................... 1,082,035 99,108 9.16% 931,548 90,340 9.70%
Allowance for loan loss...... (11,971) (9,474)
Premises and equipment....... 29,273 26,327
Other assets................. 66,625 58,461
---------- ----------
Total assets............... $1,165,962 $1,006,862
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
EQUITY:
Savings and interest
bearing demand deposits.... $ 514,287 $16,460 3.20% $ 455,882 $16,382 3.59%
Certificates of deposit...... 322,671 17,798 5.52 272,242 14,075 5.17
Short-term borrowings........ 7,081 359 5.08 7,943 527 6.63
Long-term borrowings......... 31,329 1,814 5.79 22,547 1,278 5.67
---------- ------- ---------- -------
Total interest bearing
liabilities.............. 875,368 36,431 4.16% 758,614 32,262 4.25%
Demand deposits.............. 175,688 147,770
Other liabilities............ 6,474 8,822
---------- ----------
Total liabilities.......... 1,057,530 915,206
Shareholders' equity......... 108,432 91,656
---------- ----------
Total liabilities and
shareholders' equity..... $1,165,962 $1,006,862
========== ==========
Net interest income.......... $62,677 $58,078
======= =======
Net interest spread.......... 5.00% 5.45%
==== ====
<CAPTION>
(Dollars in thousands) 1996
-------------------- ----------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate(1)
----------- --------- -------
<S> <C> <C> <C>
ASSETS:
Interest earning balances
due from banks............. $ 10,277 $ 542 5.28%
Federal funds sold........... 6,719 408 6.07
Taxable securities........... 84,260 5,454 6.38
Nontaxable securities(2)..... 44,410 3,974 8.95
Loans, including fees(3)..... 624,268 66,559 10.66
--------- -------
Total interest earning
assets.................... 769,934 76,937 9.99%
Allowance for loan loss...... (7,112)
Premises and equipment....... 24,890
Other assets................. 51,074
---------
Total assets............... $ 838,786
=========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
EQUITY:
Savings and interest
bearing demand deposits.... $ 380,198 $13,265 3.49%
Certificates of deposit...... 223,379 11,642 5.21
Short-term borrowings........ 13,828 799 5.77
Long-term borrowings......... 12,872 890 6.92
--------- -------
Total interest bearing
liabilities.............. 630,277 26,596 4.22%
Demand deposits.............. 124,851
Other liabilities............ 6,664
---------
Total liabilities.......... 761,792
Shareholders' equity......... 76,994
---------
Total liabilities and
shareholders' equity..... $ 838,786
=========
Net interest income.......... $50,341
=======
Net interest spread.......... 5.77%
====
</TABLE>
(1) Yield/rate calculations have been based on more detailed information
than presented and therefore may not recompute exactly due to rounding.
(2) Interest earned on nontaxable securities has been computed on a 34
percent tax equivalent basis.
(3) Includes balances for loans held for sale.
14
<PAGE> 16
Analysis of Change in Interest Differential. The following table sets
forth the amounts of the changes in consolidated net interest income
attributable to changes in volume and to changes in interest rates. Changes not
due solely to volume or rate are allocated to rate and changes due to new
product lines are allocated to volume.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1998 versus 1997 1997 versus 1996
--------------------------------------- ---------------------------------------
Total Total
Increase (Decrease) Increase Increase (Decrease) Increase
Due to (Decrease) Due to (Decrease)
------------------------ ---------- ------------------------ ----------
(Dollars in thousands) Volume Rate Volume Rate
- ---------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest earning balances due
from banks........................... $ 110 $ (159) $ (49) $ 998 $ 84 $ 1,082
Federal funds sold..................... 343 26 369 (346) (9) (355)
Investment security income:
Interest on taxable securities....... 2,227 (164) 2,063 1,302 77 1,379
Interest on nontaxable
securities (TEA)(1).................. 2,977 (684) 2,293 (106) (117) (223)
Loans, including fees on loans......... 7,615 (3,523) 4,092 13,805 (2,285) 11,520
--------- --------- --------- --------- --------- ---------
Total interest income TEA(1)......... 13,272 (4,504) 8,768 15,653 (2,250) 13,403
Interest expense:
Savings and interest bearing demand.... 2,099 (2,021) 78 2,639 478 3,117
Certificates of deposit................ 2,607 1,116 3,723 2,547 (114) 2,433
Short-term borrowings.................. (57) (111) (168) (340) 68 (272)
Long-term borrowings................... 498 38 536 669 (281) 388
--------- --------- --------- --------- --------- ---------
Total interest expense............... 5,147 (978) 4,169 5,515 151 5,666
--------- --------- --------- --------- --------- ---------
Net interest spread(1)............... $ 8,125 $ (3,526) $ 4,599 $ 10,138 $ (2,401) $ 7,737
========= ========= ========= ========= ========= =========
</TABLE>
(1) Tax-exempt income has been adjusted to a tax-equivalent basis at a 34
percent rate.
PROVISION FOR LOAN LOSSES. Bancorp recorded provisions for loan
losses of $2,900,415, $3,936,000 and $2,570,987 for the years ended December 31,
1998, 1997 and 1996 respectively. Bancorp's provision was impacted during 1998
by a $1.0 million provision related to the CHL acquisition to bring the
allowance for loan loss methodology in-line with Bancorp practices. During 1997
the provision was impacted by subsequent portfolio activity related to an
acquisition previously made by CHL. CHL increased its provision in 1997 by
$675,000, directly related to the loans acquired and recorded net charge-offs in
1997 including those related to the acquired loans of $1.3 million. The 1997 CHL
net charge-offs were substantially higher than those experienced in 1996 of
$487,000, prior to this acquisition. In total, Bancorp incurred net charge-offs
of $898,000, $1,976,000, and $1,194,000, in 1998, 1997 and 1996 respectively.
The allowance for loan loss as a percentage of loan totals at December 31, 1998
and 1997 was 1.44% and 1.35% of total loans, respectively and Bancorp's
allowance for loan losses represented 217.41% of its non-performing assets as of
December 31, 1998, compared to 218.50% at December 31, 1997.
NONINTEREST INCOME. Noninterest income for the year ended December
31, 1998 was $19 million up from $14.1 million in 1997 and $9.9 million in 1996.
In 1998, gains on sales of loans increased $4 million to $6,362,308 from
$2,383,000 in 1997, which was an increase from $1,220,769 reported in 1996. In
1998, Bancorp benefited from the low interest rate environment that increased
significantly the refinance activity on loans sold into the secondary market.
Service charges on deposit accounts, other service charges, commissions and
fees, and trust revenues increased over the last three years, due to an
increased customer base and transaction volumes serviced. Loan servicing fees
have declined in recent years as the Bank has chosen not to add to this
portfolio, but rather recognize added revenue on the initial sale of the loans.
Other noninterest income fluctuated over the three year period with some
non-recurring activity, and the growth of the company. During 1997 and 1996,
Bancorp recognized gains on the sale of servicing rights of $1,659,420 and
$269,107, respectively. During 1998 no such sale of servicing rights occurred.
Net securities gains were $347,797 in 1998, with net losses in 1997 of $85,446
and net gains of $8,555 in 1996. Overall increases in noninterest income were
due to increased market presence in existing and expanding markets.
NONINTEREST EXPENSE. Noninterest expenses have increased during the
last three years to $56.1 million in 1998 from $45.4 million in 1997 and $38.9
million in 1996. Increases in salaries, equipment, occupancy, communications,
marketing, printing and office supplies, and other noninterest expenses have
been caused mainly by Bancorp's expansion of its branch system and services and
the costs associated with entering new markets. Bancorp's branch system grew to
40 office locations at the end of 1998 from 34 at the end of 1995. Bancorp
intends to continue to grow through strategically placed offices in 1999 and
beyond. In general, the opening of new branches results in higher costs for
Bancorp, which are not offset until a certain level of growth in deposits and
loans is achieved. Thus, at least initially, new branches tend to have an
adverse effect on results of operations, until earnings grow to cover overhead.
Bancorp opened one new branch during 1998 and substantially completed the work
on a second branch, which opened in January, 1999. At the end of 1998, Bancorp
employed 652 full-time equivalent employees, compared to 645 in 1997 and 611 in
1996. Other increases in noninterest expense generally were caused by higher
operating
15
<PAGE> 17
activity levels associated with Bancorp's internal growth. During 1998, Bancorp
expensed $3.8 million related to the consolidation of its four separate
commercial banks into one bank, see restructuring charge disclosure that
follows. Readers are referred to management's "Forward Looking Statements
Disclosure" in connection with this section.
RESTRUCTURING CHARGES
The 1998 results have been impacted by one-time costs resulting from
the consolidation of the company's affiliate banks into one entity, called West
Coast Bank. The consolidation was completed on December 31, 1998, and new signs
on the branch facilities are being installed in the first two months of 1999.
Bancorp anticipates incurring approximately $5 million in aggregate costs for
the consolidation, including costs related to a severance plan, signage, data
conversions, marketing, regulatory and administrative costs. As of December 31,
1998, the company has expended $3.8 million related to the consolidation efforts
and anticipates the remaining costs to be expensed as incurred in the first two
quarters of 1999. Approximately 50% of the costs incurred to date are employee
program and severance related, which were accrued for in the third quarter of
1998. The accruals are being charged as payments are made. As part of the
restructure, the company has invested in new network computer systems and has
therefore recorded a write-down during the fourth quarter of approximately $1.1
million related to the replaced equipment no longer in use. In addition, the
company prepaid $20 million of its existing long-term debt that was required to
meet certain liquidity requirements under its previous structure, but is not
needed under the current single banking organization. The prepayment penalty of
approximately $517,000 was incurred in the fourth quarter as part of the
restructure charges.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Balance, accrued restructuring charges, beginning of period $ --
Provision for restructure charges 1,918,000
Utilization:
Cash 158,000
Noncash --
----------
Total Utilization 158,000
----------
Balance, accrued restructuring charges, end of period $1,760,000
==========
</TABLE>
Bancorp accrued $1.92 million in restructuring charges to cover
anticipated costs of $1.73 million for the severance program and personnel
related expenditures, with the remaining $188,000 for marketing and professional
fees related to the restructuring. These amounts were incurred but not paid at
the time the accrual was made. During 1998, $13,000 of the severance related
program costs and $145,000 of the marketing and professional fees have been paid
and charged against the accrual. As of December 31, 1998, Bancorp has an accrual
for the restructuring charges of $1.76 million, of which $1.73 million is for
severance and employee related costs and the remaining amount is for unpaid
professional fees for work incurred.
The company expects that the consolidation will save approximately $6
million annually, related to reductions in overhead. The cost savings will come
from reductions in staff and related overhead, a simplified corporate structure,
a reduced regulatory burden, and pricing and other synergies created by unified
marketing efforts and name branding. As of year-end 1998, the company is on
track with its plan and approximately 25% of the anticipated 100 staff related
reductions have occurred. Plans are in place to continue to reduce staff levels
to reach the desired goals. Certain of the companies operations are being
consolidated into centralized locations during 1999 and additional staffing
reductions will be realized following these changes. The company estimates that
it has in place approximately 25% of the cost savings anticipated from the plan.
The plan calls for two-thirds of the cost savings to be substantially achieved
by the third quarter of 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.
Readers are referred to management's "Forward Looking Statements Disclosure" in
connection with this section.
INCOME TAXES
Income tax expense for 1998 was $6,724,375 or 32 percent of income
before income taxes, 1997 was $7,183,673 or 33 percent of income before income
taxes and 1996 was $5,803,407 or 33 percent of income before income taxes.
Income tax expense has fluctuated over time due to state income tax credits and
capitalization of certain merger related expenditures for income tax purposes,
as well as changes in the income before income taxes of the company. It is
anticipated that Bancorp's tax expense will increase in future years, both due
to increased income before income 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's tax provisions. Readers are
referred to management's "Forward Looking Statements Disclosure" in connection
with this section.
16
<PAGE> 18
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is the primary source of income
for Bancorp. Net loans represented 67.67% of total assets as of December 31,
1998.
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.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
- ---------------------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Commercial loans ............. $ 150,206 17.68% $ 150,197 19.60% $ 146,632 20.61%
Real estate construction ..... 118,171 13.91 112,378 14.66 87,257 12.27
Real estate-mortgage ......... 113,661 13.38 116,228 15.16 124,230 17.46
Real estate-commercial ....... 414,169 48.75 323,320 42.18 274,048 38.52
Installment and other
consumer ................... 65,845 7.75 74,819 9.76 87,698 12.33
--------- --------- ---------
Total loans .............. 862,052 101.47 776,942 101.36 719,865 101.19
Allowance for loan loss ...... (12,453) (1.47) (10,451) (1.36) (8,491) (1.19)
--------- ------ --------- ------ --------- ------
Total loans, net ......... $ 849,599 100.00% $ 766,491 100.00% $ 711,374 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1994
---- ----
(Dollars in thousands) Amount Percent Amount Percent
- ---------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Commercial loans ............. $ 109,565 21.38% $ 110,166 26.52%
Real estate construction ..... 65,163 12.71 47,014 11.32
Real estate-mortgage ......... 87,164 17.00 88,012 21.19
Real estate-commercial ....... 193,035 37.66 134,531 32.38
Installment and other
consumer ................... 64,234 12.53 41,531 10.00
--------- ---------
Total loans .............. 519,161 101.28 421,254 101.41
Allowance for loan loss ...... (6,562) (1.28) (5,849) (1.41)
--------- ------ --------- ------
Total loans, net ......... $ 512,599 100.00% $ 415,405 100.00%
========= ====== ========= ======
</TABLE>
The maturity distribution of selected categories of Bancorp's loan
portfolio at December 31, 1998, and the interest sensitivity are estimated in
the following table.
<TABLE>
<CAPTION>
Commercial Real Estate
(Dollars in thousands) Loans Construction Total
- --------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Maturity distribution:
Due within one year...................................... $ 115,924 $ 103,749 $ 219,673
Due after one through five years......................... 28,974 9,753 38,727
Due after five years..................................... 5,308 4,669 9,977
------------ ------------ ------------
Total.................................................. $ 150,206 $ 118,171 $ 268,377
============ ============ ============
Interest sensitivity:
Fixed-interest rate loans................................ $ 41,065 $ 16,501 $ 57,566
Floating or adjustable interest rate loans(1)............ 109,141 101,670 210,811
------------ ------------ ------------
Total.................................................. $ 150,206 $ 118,171 $ 268,377
============ ============ ============
</TABLE>
(1) Some loans contain provisions which place maximum or minimum limits
on interest rate charges.
The following table presents information with respect to
nonperforming assets.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- ---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status .............. $ 4,565 $ 4,245 $ 2,228 $ 1,050 $ 500
Loans past due 90 days or more but not on
nonaccrual status ..................... 42 44 97 296 180
Other real estate owned ................. 1,121 494 324 306 190
---------- ---------- ---------- ---------- ----------
Total nonperforming assets .......... $ 5,728 $ 4,783 $ 2,649 $ 1,652 $ 870
========== ========== ========== ========== ==========
Percentage of nonperforming assets to
total assets .......................... 0.46% 0.43% 0.28% 0.22% 0.13%
Total assets ............................ $1,255,423 $1,117,826 $ 940,297 $ 766,658 $ 645,602
</TABLE>
17
<PAGE> 19
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. Interest income foregone on nonaccrual loans was
approximately $434,000 at December 31, 1998.
At December 31, 1998, there was no concentration of loans exceeding
10 percent of the total loans to a multiple number of borrowers engaged in a
similar business. At December 31, 1998 and 1997 Bancorp had $4,628,000 and $0 of
bankers acceptances, respectively.
As of December 31, 1998, the Band 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.
<TABLE>
<CAPTION>
Dollars in thousands December 31,
-------------------- -----------
1998
--------
<S> <C>
Balance, beginning of period ........ $ 12,678
New loans an advances(1) ............ 15,641
Principal payments and payoffs(1).... (8,446)
--------
Balance, end of period .............. $ 19,873
========
</TABLE>
(1) Included in new loans and advances and principal payments and payoffs
is $7.1 million of consolidated and refinanced loans.
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.
18
<PAGE> 20
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.
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.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- ---------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of period ............ $ 862,052 $ 776,942 $ 719,865 $ 519,161 $ 421,254
Average loans outstanding during the period.... $ 816,240 $ 751,284 $ 619,205 $ 483,129 $ 391,940
Allowance for loan loss, beginning of period... $ 10,451 $ 8,491 $ 6,562 $ 5,849 $ 5,145
Recoveries:
Commercial .................................. 298 218 169 63 276
Real estate ................................. 47 5 11 -- 2
Installment and consumer .................... 63 52 76 24 73
--------- --------- --------- --------- ---------
Total recoveries ............................ $ 408 $ 275 $ 256 $ 87 $ 351
Loans charged off:
Commercial .................................. 853 1,305 965 301 386
Real estate ................................. 39 204 62 19 24
Installment and consumer .................... 414 742 423 254 128
--------- --------- --------- --------- ---------
Total loans charged off ..................... $ 1,306 $ 2,251 $ 1,450 $ 574 $ 538
--------- --------- --------- --------- ---------
Net loans charged off ......................... (898) (1,976) (1,194) (487) (187)
Reserves added through purchase acquisition.... -- -- 552 -- --
Provision for loan loss ....................... 2,900 3,936 2,571 1,200 891
--------- --------- --------- --------- ---------
Allowance for loan loss, end of period ........ $ 12,453 $ 10,451 $ 8,491 $ 6,562 $ 5,849
========= ========= ========= ========= =========
Ratio of net loans charged off to average
loans outstanding ........................... .11% .26% .19% .10% .05%
</TABLE>
19
<PAGE> 21
At December 31, 1998, our allowance for loan loss was $12.4 million,
or 1.44 percent of total loans, and 217.41 percent of total nonperforming
assets, compared with an allowance for credit losses at December 31, 1997 or
$10.5 million, or 1.35 percent of total loans, and 218.50 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.
At December 31, 1998 and 1997, Bancorp's recorded investment in
certain loans that were considered to be impaired were $4,423,000 and
$4,091,000, respectively, all of which was classified as non-performing. Of
these impaired loans, $555,000 and $702,000 had a related valuation allowance of
$150,000 and $352,000, respectively, while $3,868,000 and $3,389,000 did not
require a valuation allowance. The balance of the allowance for loan loss in
excess of these specific reserves is available to absorb losses from all loans.
The average recorded investment in certain impaired loans for the years ended
December 31, 1998 and 1997 was approximately, $3,633,000 and $1,207,000,
respectively. For the years ended December 31, 1998 and 1997, interest income
recognized on impaired loans totaled $384,000 and $161,000, respectively, all of
which was recognized on a cash basis.
During the first quarter of 1998 Bancorp recorded a $1.0 million
provision related to the CHL acquisition to bring the allowance for loan loss
methodology in-line with Bancorp practices.
At December 31, 1998, our allowance for credit losses was $12.4
million, consisting of a $11.3 million formula allowance, a $117,000 specific
allowance and a $1.0 million unallocated allowance.
During 1998, net loans charged off were $898,000, compared to
$1,976,000 during 1997. During 1997, charge-offs were impacted by subsequent
portfolio activity related to an acquisition by CHL. CHL increased its provision
in 1997 by $675,000, directly related to the loans acquired and recorded net
charge-offs in 1997 including those related to the acquired loans of $1.3
million.
The percentage of net loans charged off to average loans outstanding
was 0.11 percent at December 31, 1998 which was down from 0.26 percent and 0.19
percent for the years ended December 31, 1997 and 1996, respectively. Charges of
loans reflect the realization of losses in the portfolio that were recognized
previously through provisions for credit losses.
At December 31, 1998, the provision for loans loss exceeded the net
loans charged off during the year, reflecting management's belief, based on the
foregoing analysis, that there are additional losses inherent in the portfolio.
There can be no assurance that the averse impact of any of these
conditions on us 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.
MARKET RISK
Interest rate, credit and operations credit risks are the most
significant market risks impacting Bancorp's performance. Other types of market
risk, such as foreign currency exchange rate risk and commodity price risk, do
not arise in the normal course of Bancorp's business activities. Bancorp relies
on loan reviews, prudent loan underwriting standards and an adequate allowance
of loan loss to mitigate credit risk.
Bancorp uses an asset/liability management simulation model to
measure interest rate risk. The model quantifies interest rate risk through
simulating forecasted net interest income over a 12-month time period under
various rate scenarios as well as monitoring the change in the present value of
equity under the same rate scenarios. The present value of equity is defined as
the difference between the market value of current assets less current
liabilities. By measuring the change in the present value of equity under
different rate scenarios, management is able to identify interest rate risk that
may not be evident in simulating changes in forecasted net interest income.
20
<PAGE> 22
Forecasting Bancorp's net interest income over the next 12 months
using historical growth trends and the current interest rate environment,
Bancorp would expect that continuation of the current flat interest rate yield
curve would continue to exert pressure on Bancorp's net interest margin. A flat
yield curve environment exists when there is a historically small difference
between the short maturity end of the yield curve and the long maturity end of
the yield curve. The average 3-month treasury bill yield in December 1998 was
4.50% compared to 5.06% on the 30-year treasury bill. The relatively small
difference, in this case 56 basis points, constitutes a flat yield curve
environment. This type of environment offers fewer opportunities to improve
Bancorp's margin than when the yield curve is steeper, with a larger difference
between the short and long ends of the yield curve.
The following table presents an analysis of the approximate percent
change in projected net interest income over a 12-month period along with the
approximate change in the present value of equity relative to earnings in the
current interest rate environment. All percent changes are compared to the
current interest rate yield curve. The change in interest rates assumes an
immediate, parallel and sustained shift in the interest rate yield curve. This
table does not consider flattening or steepening yield curve effects.
<TABLE>
<CAPTION>
Percent Change in Percent Change in
Change in Interest Rates Net Interest Income Present Value of Equity
------------------------ ------------------- -----------------------
<S> <C> <C>
-200 Basis Points +1.63% +5.88%
-100 Basis Points +0.72% +3.11%
+100 Basis Points -1.05% -3.82%
+200 Basis Points -2.17% -7.32%
</TABLE>
Readers are referred to management's "Forward Looking Statement
Disclosure" in connection with this section.
As illustrated in the above table, 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 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's attempts 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
due to 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. The acquisition of Centennial Holdings, Ltd., during 1998, decreased
Bancorp's liability sensitivity.
21
<PAGE> 23
INTEREST RATE SENSITIVITY (GAP) TABLE
The primary objective of Bancorp's asset/liability management is to
maximize net interest income while maintaining acceptable levels of
interest-rate sensitivity. The Company seeks to meet this objective through
influencing the maturity and repricing characteristics of its assets and
liabilities.
The following table sets forth the estimated maturity and repricing
and the resulting interest rate gap between interest earning assets and interest
bearing liabilities at December 31, 1998. The amounts in the table are derived
from internal data from the Bank based on maturities and next repricing dates
including contractual repayments.
<TABLE>
<CAPTION>
Estimated Maturity or Repricing at December 31, 1998
---------------------------------------------------------------------------
(Dollars in thousands) Due After
- ---------------------- 0-3 Months 4-12 Months 1-5 Years Five Years Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Interest earning balances due from banks.......... $ 569 $ -- $ -- $ -- $ 569
Investments available for sale(1)(2) ............. 30,057 44,121 102,117 76,976 253,271
Investments held to maturity...................... -- 1,805 891 2,696
Loans held for sale............................... 15,973 -- -- -- 15,973
Loans, including fees............................. 335,925 170,198 306,625 49,304 862,052
---------- ---------- ---------- ---------- ----------
Total interest earning assets................... $ 382,524 $ 214,319 $ 410,547 $ 127,171 $1,134,561
========== ========== ========== ==========
Allowance for loan loss........................... (12,453)
Cash and due from banks........................... 80,923
Other assets...................................... 52,392
----------
Total assets.................................... 1,255,423
==========
Interest Bearing Liabilities:
Savings and interest demand deposits(3)........... $ 62,665 $ 189,599 $ 306,948 $ -- $ 559,212
Certificates of deposit........................... 104,918 182,513 51,196 5,210 343,837
Borrowings(2) .................................... 427 1,282 18,538 13 20,260
---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities.............. $ 168,010 $ 373,394 $ 376,682 $ 5,223 $ 923,309
========== ========== ========== ==========
Other liabilities................................. 214,889
----------
Total liabilities................................. 1,138,198
Shareholders' equity.............................. 117,225
----------
Total liabilities & shareholders' equity........ $1,255,423
==========
Interest sensitivity gap.......................... $ 214,514 $ (159,075) $ 33,865 $ 121,948 $ 211,252
Cumulative interest sensitivity gap............... $ 214,514 $ 55,439 $ 89,304 $ 211,252
Cumulative interest sensitivity gap
as a percentage of total assets................. 17% 4% 7% 17%
</TABLE>
(1) Equity investments have been placed in the 0-3 month category.
(2) Repricing is based on anticipated call dates, and may vary from
contractual maturities.
(3) Repricing is based on historical average lives.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities and periods of repricing, they may react differently to
changes in market interest rates. Also, interest rates on assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other assets and liabilities may follow changes in market interest
rates. Given these shortcomings, management believes that rate risk is best
measured by simulation modeling as opposed to measuring interest rate risk
through interest rate gap measurement.
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.
22
<PAGE> 24
Deposits are Bancorp's primary source of new funds. Total deposits
were $1.108 billion at December 31, 1998, up from $958.5 million at December 31,
1997. Bancorp does not generally accept brokered deposits. A concerted effort
has been made to attract 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 due to
the 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 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 percent and a ratio of total capital to total risk-weighted assets of
8 percent or greater. In addition, the leverage ratio of tier one capital to
total assets less intangibles is required to be at least 3 percent. As of
December 31, 1998, Bancorp and all of its subsidiary banks are considered "Well
Capitalized" per the regulatory risk based capital guidelines.
Shareholders' equity increased to $117.2 million at December 31, 1998
from $101.1 million at December 31, 1997 an increase of $16.1 million, or
15.90%, over that period of time. At December 31, 1998, Bancorp's shareholders'
equity, as a percentage of total assets, was 9.34%, compared to 9.05% at
December 31, 1997. The change was primarily a result of income recognition plus
cash from the exercise of stock options and the change in net value of Bancorp's
available for sale investment portfolio which in aggregate outpaced the growth
of assets. In a rising interest rate environment, the value of Bancorp's
available for sale portfolio will decline, thus negatively impacting equity. The
opposite would occur in a falling rate environment. Equity grew at 15.90% over
the period from December 31, 1997 to December 31, 1998, while assets grew by
12.31% over the same period.
As the following table indicates, Bancorp currently exceeds the
regulatory minimum capital ratio requirements.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------
(Dollars in thousands) Amount Ratio
---------------------- ----------- ------
<S> <C> <C>
Tier 1 capital................................................. $ 111,562 11.54%
Tier 1 capital minimum requirement............................. 38,670 4.00
----------- ------
Excess Tier 1 capital.......................................... $ 72,892 7.54%
=========== ======
Total capital.................................................. $ 123,647 12.79%
Total capital minimum requirement.............................. 77,340 8.00
----------- ------
Excess total capital........................................... $ 46,307 4.79%
=========== ======
Risk-adjusted assets........................................... $ 966,508
===========
Leverage ratio................................................. 9.13%
Minimum leverage requirement................................... 3.00
------
Excess leverage ratio.......................................... 6.13%
======
Adjusted total assets.......................................... $ 1,222,267
===========
</TABLE>
23
<PAGE> 25
INVESTMENT PORTFOLIO
The following table shows the amortized cost and fair value of
Bancorp's investments.
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- --------------------- ----------------------- ----------------------- -----------------------
Amortized Amortized Amortized
Available for sale Cost Fair Value Cost Fair Value Cost Fair Value
- ------------------ -------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities .................. $ 5,999 $ 6,065 $ 9,540 $ 9,572 $ 12,766 $ 12,775
U.S. Agency securities .................... 87,971 88,856 76,280 76,513 40,402 40,330
Obligations of state and political
subdivisions ............................ 103,445 107,689 61,718 63,822 35,483 37,144
Other Securities .......................... 50,103 50,661 41,097 41,283 27,539 27,317
-------- -------- -------- -------- -------- --------
Total ................................. $247,518 $253,271 $188,635 $191,190 $116,190 $117,566
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ---------------------- ----------------------- ----------------------- ------------------------
Amortized Amortized Amortized
Held to maturity Cost Fair Value Cost Fair Value Cost Fair Value
- ---------------- -------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ......... $ -- $ -- $ -- $ -- $ -- $ --
U.S. Agency securities ........... -- -- -- -- -- --
Obligations of state and political
subdivisions ................... 2,696 2,909 2,987 3,046 3,293 3,325
Other Securities ................. -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total ........................ $2,696 $2,909 $2,987 $3,046 $3,293 $3,325
====== ====== ====== ====== ====== ======
</TABLE>
At December 31, 1998 the net unrealized gains on the investment
portfolio was $5,966,000 representing 2.33% of the total portfolio. Management
has no current plans to sell any of these securities that would result in a
material impact on the results of operation.
The following table summarized the contractual maturities and weighted average
yields of investment securities.
<TABLE>
<CAPTION>
After 5 Due
One Year One Thru thru 10 after 10
(Dollars in thousands) Or Less Yield 5 Years Yield Years Yield Years Yield Total Yield
- --------------------- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities..... $ 3,010 5.98% $ 3,055 5.94% $ -- -- $ -- -- $ 6,065 5.96%
U.S. Agency securities....... 10,131 5.22% 29,909 5.95% 46,831 6.59% 1,985 6.17% 88,856 6.21%
Obligations of state and
political subdivisions(1).. 2,431 8.92% 19,687 7.81% 52,184 7.45% 36,083 7.26% 110,385 7.48%
Other Securities(2).......... 14,533 7.13% 23,459 6.28% 9,322 6.28% 3,347 6.10% 50,661 6.51%
------- ------- -------- ------- --------
Total(1)................... $30,105 6.52% $76,110 6.53% $108,337 6.98% $41,415 7.11% $255,967 6.81%
======= ======= ======== ======= ========
</TABLE>
(1) Yields are stated on a federal tax-equivalent basis at 34 percent.
(2) Does not reflect anticipated maturity from prepayments on
mortgage-based and asset-based securities. Anticipated lives are
shorter than contractual maturities.
DEPOSITS AND BORROWINGS
The following table summarizes the average amount of, and the average
rate paid on, each of the deposit and borrowing categories for the periods
shown.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------
(Dollars in thousands) Average Balance Rate Paid Average Balance Rate Paid Average Balance Rate Paid
- ---------------------- --------------- --------- --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Demand ........................ $ 175,688 -- $ 147,770 -- $ 124,851 --
Savings and interest
bearing demand............... 514,287 3.20% 455,882 3.59% 380,198 3.49%
Certificates of deposit ....... 322,671 5.52% 272,242 5.17% 223,379 5.21%
Short-term borrowings ......... 7,081 5.08% 7,943 6.63% 13,828 5.77%
Long-term borrowings .......... 31,329 5.79% 22,547 5.67% 12,872 6.92%
---------- ---------- ----------
Total deposits
and borrowings......... $1,051,056 $ 906,384 $ 755,128
========== ========== ==========
</TABLE>
As of December 31, 1998 time deposit liabilities are presented below
at the earlier of the next repricing date or maturity.
24
<PAGE> 26
<TABLE>
<CAPTION>
Time Deposits
of $100,000 or More(1) Other Time Deposits(2)
------------------------- ----------------------
(Dollars in thousands) Amount Percent Amount Percent
- -------------------- -------- ------- --------- ------
<S> <C> <C> <C> <C>
Reprice/mature in three months or less........................ $ 33,125 35.48% $ 64,571 25.78%
Reprice/mature after three months through six months.......... 28,385 30.40 58,693 23.43
Reprice/mature after six months through one year.............. 20,364 21.81 78,109 31.19
Reprice/mature after one year through five years.............. 10,062 10.78 43,139 17.22
Reprice/mature after five years............................... 1,435 1.53 5,953 2.38
-------- ------ --------- ------
Total................................................... $ 93,371 100.00% $ 250,465 100.00%
======== ====== ========= ======
</TABLE>
(1) Time deposits of $100,000 or more represent 8.42% of total deposits
as of December 31, 1998.
(2) All other time deposits represent 22.60% of total deposits as of
December 31, 1998.
As of December 31, 1998 other borrowings had the following times
remaining to maturity.
<TABLE>
<CAPTION>
Due after
Due in three Due after
three months one year
months through through Due after
(Dollars in thousands) or less one year five years five years Total
- ---------------------- ------- -------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Short-term borrowings ..... $ -- $ -- $ -- $ -- $ --
Long-term borrowings ...... 393 1,179 18,688 -- 20,260
------- ------- ------- --------- -------
Total borrowings .... $ 393 $ 1,179 $18,688 $ -- $20,260
</TABLE>
(1) Based on contractual maturities, and may vary based on possible call dates.
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.
25
<PAGE> 27
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 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 continuing to follow-up as appropriate in
order to identify events that may increase the assessed risk. 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 continues. 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, and the Company found no material
year 2000 compliance issues that could not be remedied before the year 2000. In
order to verify results, a second round of testing is currently underway using
an alternative testing methodology. This second round of testing is expected to
be substantially complete by mid-April of 1999. 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
-------- -------- --------
Total .................................. $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.
26
<PAGE> 28
(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.
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." In 1998, management found
the Company's loan loss reserves adequate to absorb potential losses
from loan defaults due to year 2000 risks. However, as the Company
continues to monitor risk in this area, it may increase 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.
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.
27
<PAGE> 29
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 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 as we transition from 1999 to 2000. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the pages
indicated:
<TABLE>
<S> <C>
Report of Independent Public Accountants..............................29
Consolidated Balance Sheets...........................................30
Consolidated Statements of Income.....................................31
Consolidated Statements of Cash Flows.................................32
Consolidated Statements of Stockholders' Equity.......................33
Notes to Consolidated Financial Statements............................34
</TABLE>
28
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of West Coast Bancorp:
We have audited the accompanying consolidated balance sheets of West
Coast Bancorp (an Oregon corporation) as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of West Coast Bancorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1997 and 1996 financial
statements of Centennial Holdings, Ltd., a company acquired during 1998 in a
transaction accounted for as a pooling of interests, as discussed in Note 2.
Such statements are included in West Coast Bancorp's consolidated balance sheet
as of December 31, 1997, and consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 1997 and
1996 and reflect 24% of consolidated assets as of December 31, 1997, and 25% of
consolidated interest revenues in both 1997 and 1996. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for Centennial Holdings, Ltd., is
based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of West Coast Bancorp as of December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 26, 1999
29
<PAGE> 31
WEST COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
- ----------------------- --------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks .............................. $ 80,923,069 $ 97,769,331
Interest-bearing deposits in other banks ............. 568,825 1,048,327
--------------- ---------------
Total cash and cash equivalents ................. 81,491,894 98,817,658
Investment securities:
Investments available for sale ....................... 253,271,239 191,189,957
Investments held to maturity ......................... 2,695,531 2,987,256
--------------- ---------------
Total investment securities ..................... 255,966,770 194,177,213
Loans held for sale ........................................ 15,972,711 10,457,247
Loans ...................................................... 862,052,215 776,941,389
Allowance for loan loss .................................... (12,452,694) (10,450,584)
--------------- ---------------
Loans, net ........................................... 849,599,521 766,490,805
Premises and equipment, net ................................ 29,689,405 27,850,076
Intangible assets .......................................... 2,727,564 3,157,300
Other assets ............................................... 19,975,557 16,875,428
--------------- ---------------
Total assets .................................... $ 1,255,423,422 $ 1,117,825,727
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand ............................................... $ 205,408,337 $ 162,567,731
Savings and interest-bearing demand .................. 559,211,508 495,890,935
Certificates of deposits ............................. 343,837,191 300,022,929
--------------- ---------------
Total deposits .................................. 1,108,457,036 958,481,595
Short-term borrowings:
Federal funds purchased ............................. -- 4,500,000
Other short-term borrowings ......................... -- 24,749,000
--------------- ---------------
Total short-term borrowings ............... -- 29,249,000
Other liabilities .......................................... 9,481,233 6,509,140
Long-term borrowings ....................................... 20,259,985 22,445,674
--------------- ---------------
Total liabilities ............................... 1,138,198,254 1,016,685,409
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 and 15,000,000 shares
authorized respectively; shares issued and outstanding
14,235,931 and 12,606,009 respectively ............... 17,794,914 15,757,511
Additional paid-in capital ................................. 66,474,468 43,213,086
Retained earnings .......................................... 29,392,264 40,599,130
Net unrealized gains on investments available for sale ..... 3,563,522 1,570,591
--------------- ---------------
Total stockholders' equity ...................... 117,225,168 101,140,318
--------------- ---------------
Total liabilities and stockholders' equity ...... $ 1,255,423,422 $ 1,117,825,727
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
30
<PAGE> 32
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ----------------------- ------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees and loans ...................... $ 82,171,277 $ 78,079,125 $ 66,559,294
Interest on taxable investment securities ........ 8,895,706 6,832,807 5,453,524
Interest on nontaxable investment securities...... 3,989,038 2,475,253 2,623,063
Interest from other banks ........................ 1,574,710 1,624,468 542,400
Interest on federal funds sold ................... 422,007 52,895 407,822
------------ ------------ ------------
Total interest income ...................... 97,052,738 89,064,548 75,586,103
INTEREST EXPENSE
Savings and interest-bearing demand .............. 16,458,978 16,382,717 13,264,438
Certificates of deposit .......................... 17,797,740 14,075,162 11,642,310
Short-term borrowings ............................ 359,453 526,825 798,418
Long-term borrowings ............................. 1,814,474 1,277,771 890,291
------------ ------------ ------------
Total interest expense ..................... 36,430,645 32,262,475 26,595,457
------------ ------------ ------------
NET INTEREST INCOME .............................. 60,622,093 56,802,073 48,990,646
PROVISION FOR LOAN LOSS .......................... 2,900,415 3,936,000 2,570,987
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS .................... 57,721,678 52,866,073 46,419,659
NONINTEREST INCOME
Gains on sales of loans .......................... 6,362,308 2,383,000 1,220,769
Service charges on deposit accounts............... 4,620,055 4,079,442 3,495,418
Other service charges, commissions and fees....... 3,872,843 3,141,490 1,928,843
Trust revenue .................................... 2,542,744 1,669,350 1,360,430
Loans servicing fees ............................. 634,269 841,604 1,047,407
Gains on sale of servicing rights ................ -- 1,659,420 269,107
Other ............................................ 779,270 461,113 544,721
Net gains (losses) on sales of securities ........ 347,797 (85,446) 8,555
------------ ------------ ------------
Total noninterest income ................... 19,159,286 14,149,973 9,875,250
NONINTEREST EXPENSE
Salaries and employee benefits ................... 29,913,335 25,433,258 21,944,700
Equipment ........................................ 5,318,072 4,731,711 3,287,668
Occupancy ........................................ 3,234,296 3,097,089 3,060,484
Professional fees ................................ 1,626,440 1,890,732 2,248,986
Communications ................................... 1,533,416 1,164,619
.................................................. 869,313
Marketing ........................................ 1,379,151 1,307,028 1,075,035
Printing and office supplies ..................... 1,334,724 1,225,094 1,221,418
Restructuring charges ............................ 3,768,035 -- --
Other noninterest expense ........................ 7,990,449 6,544,329 5,107,434
------------ ------------ ------------
Total noninterest expense .................. 56,097,918 45,393,860 38,815,038
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ....................... 20,783,046 21,622,186 17,479,871
PROVISION FOR INCOME TAXES ....................... 6,724,375 7,183,673 5,803,407
------------ ------------ ------------
NET INCOME ....................................... $ 14,058,671 $ 14,438,513 $ 11,676,464
============ ============ ============
Basic earnings per share ................... $ 1.00 $ 1.06 $ 0.87
Diluted earnings per share ................. $ 0.96 $ 1.01 $ 0.85
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
31
<PAGE> 33
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ----------------------- ------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 14,058,671 $ 14,438,513 $ 11,676,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment ...... 3,179,164 2,704,623 2,460,162
Amortization of intangibles .................................. 429,736 405,298 309,465
Net (gain) loss on sales of available for sale investments ... (347,797) 85,446 (8,555)
Provision for loan losses .................................... 2,900,415 3,936,000 2,570,987
Increase in interest receivables ............................. (934,842) (1,475,925) (358,071)
Increase in other assets ..................................... (2,165,287) (1,159,870) (757,108)
Net cash used by loans held for sale ......................... (5,515,464) (4,574,591) (556,443)
(Decrease) increase in interest payable ...................... (217,777) 5,496 354,692
Increase (decrease) in other liabilities ..................... 3,189,870 (3,585,624) 2,518,329
Tax benefit associated with stock options .................... 1,792,926 1,078,354 --
------------- ------------- -------------
Net cash provided by operating activities .................... 16,369,615 11,857,720 18,209,922
CASH FLOWS FOR INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ........................................... 30,842,244 30,298,430 37,446,234
Held to maturity ............................................. 291,725 405,898 5,959,848
Proceeds from sales of investment securities available for sale.. 12,548,867 29,628,309 20,081,081
Purchase of investment securities:
Available for sale ........................................... (103,131,665) (132,908,127) (37,975,869)
Held to maturity ............................................. -- (100,000) (249,964)
Loans made to customers greater than principal
collected on loans ........................................... (86,009,131) (179,569,154)
................................................................. (59,052,632)
Capital expenditures, net ....................................... (5,018,493) (4,546,261) (3,605,372)
------------- ------------- -------------
Net cash used in investing activities ........................ (150,476,453) (136,274,383) (157,913,196)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest-bearing
transaction .................................................. 106,161,179 104,797,784 79,923,036
Net increase in proceeds from sales of certificates of deposits
greater than payments for maturing time deposits ............. 43,814,262 47,383,620 30,703,325
Proceeds from long-term borrowings .............................. 21,000,000 15,000,000 22,000,000
Payments on long-term borrowings ................................ (23,185,689) (21,137,096) (3,604,993)
Net (decrease) increase in short-term borrowings ................ (29,249,000) 19,305,261 (1,870,306)
Net proceeds from issuance of common stock ...................... 2,255,284 1,832,680 1,013,344
Cash paid for acquisition of banking assets ..................... -- (805,092) (887,473)
Redemption of common stock for stock repurchase plan ............ (1,029,030) -- --
Dividends paid and cash paid for fractional shares .............. (2,985,932) (2,317,342) (1,925,342)
------------- ------------- -------------
Net cash provided by financing activities .................... $ 116,781,074 $ 164,059,815 $ 125,351,591
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ (17,325,764) 39,643,152 (14,351,683)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 98,817,658 59,174,506 73,526,189
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................ $ 81,491,894 $ 98,817,658 $ 59,174,506
============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
32
<PAGE> 34
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
--------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995....................... 7,319,954 $9,149,942 $43,152,911 $18,725,466
Comprehensive income:
Net income..................................... -- -- -- 11,676,464
Other comprehensive income, net of tax:
Net unrealized investment losses............. -- -- -- --
Reclassification adjustments for
gains included in net income............. -- -- -- --
Other comprehensive income, net of tax......... -- -- -- --
Comprehensive income.............................
Cash dividends, $.14 per common share............ -- -- -- (1,910,544)
Purchase of common stock pursuant
to employee stock ownership plan............... 4,518 5,648 77,396 --
Acquisition of First American State Bank......... 228,792 285,990 2,458,747 --
Sale of common stock pursuant to option plans.... 98,605 123,256 807,044 --
Stock split in the form of a 25% dividend........ 1,333,585 1,666,981 (1,666,981) --
Cash paid for fractional shares.................. (721) (901) -- (13,897)
---------- ----------- ----------- -----------
BALANCE, December 31, 1996....................... 8,984,733 11,230,916 44,829,117 28,477,489
Comprehensive income:
Net income..................................... -- -- -- 14,438,513
Other comprehensive income, net of tax:
Net unrealized investment gains.............. -- -- -- --
Reclassification adjustments for
losses included in net income............ -- -- -- --
Other comprehensive income, net of tax......... -- -- -- --
Comprehensive income.............................
Cash dividends, $.17 per common share............ -- -- -- (2,305,154)
Sale of common stock pursuant to option plans.... 270,324 337,905 2,046,123 --
Redemption of stock pursuant to options.......... (19,507) (24,384) (526,964) --
Stock split in the form of a 50% dividend........ 3,370,835 4,213,544 (4,213,544) --
Cash paid for fractional shares.................. (376) (470) -- (11,718)
Tax benefit associated with stock options........ -- -- 1,078,354 --
---------- ----------- ----------- -----------
BALANCE, December 31, 1997....................... 12,606,009 15,757,511 43,213,086 40,599,130
Comprehensive income:
Net income..................................... -- -- -- 14,058,671
Other comprehensive income, net of tax:
Net unrealized investment gains.............. -- -- -- --
Reclassification adjustments for gains
included in net income................... -- -- -- --
Other comprehensive income, net of tax......... -- -- -- --
Comprehensive income.............................
Cash dividends, $.21 per common share............ -- -- -- (2,972,623)
Sale of common stock pursuant to option plans.... 412,485 515,606 2,209,761 --
Redemption of stock pursuant to options.......... (23,422) (29,278) (440,805) --
Common stock repurchased and retired............. (50,000) (62,500) (966,530) --
10 % stock dividend.............................. 1,291,627 1,614,535 20,666,030 (22,280,565)
Cash paid for fractional shares.................. (768) (960) -- (12,349)
Tax benefit associated with stock options........ -- -- 1,792,926 --
---------- ----------- ----------- -----------
BALANCE, December 31, 1998....................... 14,235,931 $17,794,914 $66,474,468 $29,392,264
========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
----------------------------
<S> <C> <C>
BALANCE, December 31, 1995....................... $1,631,766 $72,660,085
Comprehensive income:
Net income..................................... -- 11,676,464
Other comprehensive income, net of tax:
Net unrealized investment losses............. -- (783,351)
Reclassification adjustments for
gains included in net income............. -- (5,273)
------------
Other comprehensive income, net of tax......... (788,624) (788,624)
------------
Comprehensive income............................. 10,887,840
============
Cash dividends, $.14 per common share............ -- (1,910,544)
Purchase of common stock pursuant
to employee stock ownership plan............... -- 83,044
Acquisition of First American State Bank......... -- 2,744,737
Sale of common stock pursuant to option plans.... -- 930,300
Stock split in the form of a 25% dividend........ -- --
Cash paid for fractional shares.................. -- (14,798)
---------- ------------
BALANCE, December 31, 1996....................... 843,142 85,380,664
Comprehensive income:
Net income..................................... -- 14,438,513
Other comprehensive income, net of tax:
Net unrealized investment gains.............. -- 674,780
Reclassification adjustments for
losses included in net income............ -- 52,669
------------
Other comprehensive income, net of tax......... 727,449 727,449
------------
Comprehensive income............................. 15,165,962
============
Cash dividends, $.17 per common share............ -- (2,305,154)
Sale of common stock pursuant to option plans.... -- 2,384,028
Redemption of stock pursuant to options.......... -- (551,348)
Stock split in the form of a 50% dividend........ -- --
Cash paid for fractional shares.................. -- (12,188)
Tax benefit associated with stock options........ -- 1,078,354
---------- ------------
BALANCE, December 31, 1997....................... 1,570,591 101,140,318
Comprehensive income:
Net income..................................... -- 14,058,671
Other comprehensive income, net of tax:
Net unrealized investment gains.............. -- 2,207,313
Reclassification adjustments 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)
Sale of common stock pursuant to option plans.... -- 2,725,367
Redemption of stock pursuant to options.......... -- (470,083)
Common stock repurchased and retired............. -- (1,029,030)
10 % stock dividend.............................. -- --
Cash paid for fractional shares.................. -- (13,309)
Tax benefit associated with stock options........ -- 1,792,926
---------- ------------
BALANCE, December 31, 1998....................... $3,563,522 $117,225,168
========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
33
<PAGE> 35
WEST COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
NATURE OF OPERATIONS. Bancorp operates 40 offices in western Oregon
and Washington. The Bank's activities include the usual lending and deposit
functions of commercial banks. West Coast Trust provides agency, trust and
related services.
INVESTMENT SECURITIES. Investment securities are classified as either
available for sale or held to maturity. Available for sale securities are
carried at fair value with unrealized gains and losses, net of any tax effect,
added to or deducted directly from stockholders' equity. Held to maturity
securities are carried at amortized cost.
LOANS HELD FOR SALE. Loans held for sale are carried at the lower of
cost or market. Market value is determined in the aggregate.
LOANS. 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. 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. Loan fees are
offset against operating expense to the extent these fees cover the direct
expense of originating loans. Fees in excess of origination costs are deferred
and amortized to income over the related loan period.
Impaired loans are measured 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.
ALLOWANCE FOR LOAN LOSS. The allowance for loan loss is based on
management's estimates. Actual losses may vary from current estimates. These
estimates are reviewed periodically and, as adjustments become necessary, are
reported in earnings in the periods in which they become known. Losses are
charged and recoveries are credited to the allowance.
ACCOUNTING CHANGES. In 1995, Bancorp adopted Statement of Financial
Accounting Standard (SFAS) No. 122, "Accounting to Mortgage Servicing Rights,"
which requires recognition as separate assets rights to service mortgage loans
for others, however those rights are acquired. It further requires the
assessment of its capitalized mortgage servicing rights for impairment based on
the fair value of those rights. Impairment should be recognized through a
valuation allowance. This statement applies to financial statements for fiscal
years beginning after December 15, 1995. The implementation of this statement
did not have a material effect on Bancorp's reported financial position or net
income in 1996.
In 1995, Bancorp adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires disclosures about stock-based compensation
arrangements regardless of the method used to account for them. Bancorp has
opted to continue to apply the accounting provisions of Opinion No. 25, and
therefore discloses the difference between compensation cost included in net
income and the related cost measured by the fair value based method defined by
SFAS No. 123, including tax effects, that would have been recognized in the
income statement if the fair value method had been used.
In 1997, Bancorp adopted SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share (EPS). It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. The implementation
of this statement did not have a material effect on Bancorp's reported financial
position or net income in 1997. EPS for 1996 was restated to conform with this
statement.
34
<PAGE> 36
In 1998, Bancorp adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This display is presented
in the consolidated statement of equity and related notes.
In 1998, Financial Accounting Standards Board issued SFAS NO. 133,
"Accounting for Derivative Instruments and Hedging Activities," which Bancorp is
required to adopt for years beginning after June 15, 1999. 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. Bancorp does not anticipate that the
implementation of this statement will have a material effect on Bancorp's
reported financial position or net income.
PREMISES AND EQUIPMENT. Premises and equipment are stated at cost,
less accumulated depreciation. The provision for depreciation is computed on the
straight-line method over the estimated useful lives of the related assets,
which range from 3 to 40 years. Improvements are capitalized and depreciated
over their estimated useful lives. Minor repairs, maintenance, and improvements
are charged to operations as incurred. When property is replaced or otherwise
disposed of, the cost of such assets and the related accumulated depreciation
are removed from their respective accounts. Related profit or loss, if any, is
recorded in the Consolidated Statement of Income.
OTHER BORROWINGS. Federal funds purchased and securities sold under
agreements to repurchase generally mature within one to four days from the
transaction date. Other short-term borrowed funds mature within one year from
the transaction date. Other long-term borrowed funds extend beyond one year.
INCOME TAXES. Income taxes are accounted for using the asset and
liability method. Under this method, a deferred tax asset or liability is
determined based on the enacted tax rates that will be in effect when the
differences between the financial statement carrying amounts and tax bases of
existing assets and liabilities are expected to be reported in Bancorp income
tax returns. The deferred tax provision for the year is equal to the net change
in the deferred tax asset from the beginning to the end of the year, less
amounts applicable to the change in value related to investments available for
sale. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
TRUST DEPARTMENT ASSETS. Assets (other than cash deposits) held by
West Coast Trust in fiduciary or agency capacities for its trust customers are
not included in the accompanying Consolidated Balance Sheets, since such items
are not assets of West Coast Trust.
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 $36,648,000, $32,257,000, and $26,337,000, for
interest in 1998, 1997, and 1996, respectively. Income taxes paid were
$4,650,000, $7,987,000, and $5,218,000 in 1998, 1997, and 1996, respectively.
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.
RECLASSIFICATIONS. Certain reclassifications of prior year amounts
have been made to conform to current classifications.
35
<PAGE> 37
2. BUSINESS COMBINATIONS
On July 1, 1996, Bancorp acquired Vancouver Bancorp parent of Bank of
Vancouver, headquartered in Vancouver, Washington. Shareholders of Vancouver
Bancorp were issued 1,049,000 new shares of Bancorp common stock, and an
additional 234,000 shares were reserved for options previously granted,
providing for a total stock transaction valued at closing at $11.6 million. The
transaction was accounted for as a pooling-of-interest under generally accepted
accounting principles.
On February 28, 1998, Bancorp acquired Centennial Holdings, Ltd.,
(CEB) of Olympia, Washington. Shareholders of Centennial Holdings were issued
2,657,000 new shares of Bancorp common stock, and an additional 148,000 shares
were made available for options previously granted, providing for a total stock
transaction valued at closing at $66 million. The transaction was accounted for
as a pooling of interest under generally accepted accounting principles.
The following data summarizes the results of operations of the
previously separate companies for the periods 1997 and 1996 before the
acquisition. Certain reclassifications of prior period components have been made
to conform to current classifications and consistent presentations. Intercompany
transactions have been eliminated from the data provided.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------------
(Dollars in thousands, except per share data) CEB Bancorp CEB Bancorp
- --------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income.................................. $ 22,387 $ 66,678 $ 18,962 $ 56,624
Interest expense................................. 8,315 23,947 6,762 19,834
------------- ------------- ------------- -------------
Net interest income........................ 14,072 42,731 12,200 36,790
Provision for loan loss.......................... 1,740 2,196 396 2,175
Noninterest income............................... 4,329 9,821 2,019 7,856
Noninterest expense.............................. 12,839 32,555 10,986 27,828
------------- ------------- ------------- -------------
Income before income taxes................. 3,822 17,801 2,837 14,643
Provision for income taxes....................... 1,249 5,935 963 4,841
------------- ------------- ------------- -------------
Net income................................. $ 2,573 $ 11,866 $ 1,874 $ 9,802
============= ============= ============= =============
Assets........................................ $ 267,875 $ 849,951 $ 227,954 $ 712,343
Deposits......................................... $ 244,529 $ 713,953 $ 201,398 $ 604,902
Equity........................................... $ 21,870 $ 79,270 $ 18,236 $ 67,145
</TABLE>
On June 6, 1996 CEB acquired First American State Bank in a business
combination accounted for as a purchase. First American was a full-service bank
with two branches in Lewis County, and at the date of acquisition, had
approximately $33 million of assets, $22 million of loans, $29 million of
deposits, and stockholders' equity of $3.4 million. The results of operations of
First American are included in the accompanying financial statements since the
date of acquisition. The cost of the acquisition was $5.4 million, which
exceeded the fair value of the net assets acquired by $1.8 million. The excess
is being amortized on the straight-line basis over the estimated remaining lives
of the underlying assets.
3. CONSOLIDATION AND RESTRUCTURING CHARGES
As of December 31, 1998, Bancorp completed its consolidation of its four
separate banking affiliates into a single banking organization. During 1998,
Bancorp accrued $1.92 million in restructuring charges to cover anticipated
costs of $1.73 million for the severance program and personnel related
expenditures, with the remaining $188,000 for marketing and professional fees
related to the restructuring. These amounts were incurred but not paid at the
time the accrual was made. During 1998, $13,000 of the severance related program
costs and $145,000 of the marketing and professional fees have been paid and
charged against the accrual. As of December 31, 1998, Bancorp has an accrual for
the restructuring charges of $1.76 million, of which $1.73 million is for
severance and employee related costs and the remaining amount is for unpaid
professional fees for work incurred. The consolidation is expected to reduce
employment by approximately 100 positions or 13% of Bancorp's total work force.
The reductions are primarily comprised of administrative and back office
positions. As of December 31, 1998, approximately 25% of the anticipated staff
related reductions have occurred. Additionally, in connection with its
restructuring plan, the company has invested in new network computer systems and
has therefore recorded a write-down related to the replaced equipment no longer
in use. The write-down of $1.1 million was incurred during 1998 and is included
in the restructuring charge. During the year, the company also prepaid $20
million of its long-term debt that was required to meet certain liquidity needs
of the individual banks under its previous structure, but was no longer required
under the reorganized single bank structure. The prepayment penalty of $517,000
was incurred during 1998 and is included in the restructuring charge. Other
costs related to the restructuring of approximately $300,000, primarily data
conversion, marketing, regulatory and administrative, were paid during 1998 and
included in restructuring costs. Total restructuring costs charged to expense
during 1998 totaled $3.8 million.
36
<PAGE> 38
4. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
(Dollars in thousands) AVAILABLE FOR SALE
- ---------------------- -------------------------------------------------------------------------
Amortized Unrealized Unrealized
1998 Cost Gross Gains Gross Losses Fair Value
- ---- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................ $ 5,999 $ 66 $ -- $ 6,065
U.S. Government agency securities................... 87,971 993 108 88,856
Corporate securities................................ 34,161 580 59 34,682
Mortgage-backed securities.......................... 6,480 60 23 6,517
Obligations of state and political
subdivisions...................................... 103,445 4,375 131 107,689
Equity and other securities......................... 9,462 -- -- 9,462
-------------- -------------- -------------- --------------
Total.......................................... $ 247,518 $ 6,074 $ 321 $ 253,271
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) HELD TO MATURITY
- ---------------------- -------------------------------------------------------------------------
Amortized Unrealized Unrealized
1998 Cost Gross Gains Gross Losses Fair Value
- ---- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Obligations of state and political
subdivisions...................................... $ 2,696 $ 213 $ -- $ 2,909
-------------- -------------- -------------- --------------
Total.......................................... $ 2,696 $ 213 $ -- $ 2,909
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) AVAILABLE FOR SALE
- ---------------------- -------------------------------------------------------------------------
Amortized Unrealized Unrealized
1997 Cost Gross Gains Gross Losses Fair Value
- ---- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................ $ 9,540 $ 35 $ 3 $ 9,572
U.S. Government agency securities................... 76,280 438 205 76,513
Corporate securities................................ 24,624 181 3 24,802
Mortgage-backed securities.......................... 8,450 54 61 8,443
Obligations of state and political
subdivisions...................................... 61,718 2,166 62 63,822
Equity and other securities......................... 8,023 15 -- 8,038
-------------- -------------- -------------- --------------
Total.......................................... $ 188,635 $ 2,889 $ 334 $ 191,190
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) HELD TO MATURITY
- ---------------------- -------------------------------------------------------------------------
Amortized Unrealized Unrealized
1997 Cost Gross Gains Gross Losses Fair Value
- ---- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Obligations of state and political subdivisions..... $ 2,987 $ 62 $ 3 $ 3,046
-------------- -------------- -------------- --------------
Total.......................................... $ 2,987 $ 62 $ 3 $ 3,046
============== ============== ============== ==============
</TABLE>
Gross gains of $357,226, $52,010, and $87,748 and gross losses of
$9,429, $137,456, and $79,193, were realized on sales of investment securities
in 1998, 1997, and 1996, respectively. Securities with a fair value of
approximately $28,788,000 at December 31, 1998, were pledged to secure public
deposits. No outstanding mortgage-backed securities were classified as high-risk
at December 31, 1998.
37
<PAGE> 39
5. MATURITIES OF INVESTMENTS
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------------------------
1998 Amortized Amortized
- ---- Cost Fair Value Cost Fair Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
U.S Treasury securities
One year or less ........................... $ 3,000 $ 3,010 $ -- $ --
One year through five years ................ 2,999 3,055 -- --
After five through ten years ............... -- -- -- --
Due after ten years ........................ -- -- --
-------- -------- -------- --------
Total ................................. 5,999 6,065 -- --
U.S. Government agency securities
One year or less ........................... 10,116 10,131 -- --
One year through five years ................ 29,646 29,909 -- --
After five through ten years ............... 46,210 46,831 -- --
Due after ten years ........................ 1,999 1,985 -- --
-------- -------- -------- --------
Total ................................. 87,971 88,856 -- --
Corporate Securities
One year or less ........................... 5,057 5,072 -- --
One year through five years ................ 22,212 22,505 -- --
After five through ten years ............... 6,892 7,105 -- --
Due after ten years ........................ -- -- --
-------- -------- -------- --------
Total ................................. 34,161 34,682 -- --
Obligations of state and political subdivisions
One year or less ........................... 2,196 2,226 205 208
One year through five years ................ 17,432 18,082 1,605 1,760
After five through ten years ............... 49,313 51,535 649 689
Due after ten years ........................ 34,504 35,846 237 252
-------- -------- -------- --------
Total ................................. 103,445 107,689 2,696 2,909
Sub-total ............................. 231,576 237,292 2,696 2,909
Mortgage-backed securities .................... 6,480 6,517 -- --
Equity investments ............................ 9,462 9,462 -- --
-------- -------- -------- --------
Total securities ...................... $247,518 $253,271 $ 2,696 $ 2,909
======== ======== ======== ========
</TABLE>
38
<PAGE> 40
6. LOANS AND ALLOWANCE FOR LOAN LOSS
The loan portfolio consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Commercial loans ............... $ 150,206 $ 150,197
Real estate - construction ..... 118,171 112,378
Real estate - mortgage ......... 113,661 116,228
Real estate - commercial ....... 414,169 323,320
Installment and other consumer.. 65,845 74,819
--------- ---------
Total loans .............. 862,052 776,942
Allowance for loan loss ........ (12,453) (10,451)
--------- ---------
Total loans, net ......... $ 849,599 $ 766,491
========= =========
</TABLE>
The following is an analysis of the changes in the allowance for loan
loss:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of period ......... $ 10,451 $ 8,491 $ 6,562
Provision for loan loss .............. 2,900 3,936 2,571
Reserves added through acquisition ... -- -- 552
Losses charged to the allowance ...... (1,306) (2,251) (1,450)
Recoveries credited to the allowance.. 408 275 256
-------- -------- --------
Balance, end of period ............... $ 12,453 $ 10,451 $ 8,491
======== ======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued,
amounted to approximately $4,565,000, $4,245,000, and $2,228,000, at December
31, 1998, 1997, and 1996, respectively. Interest income foregone on non-accrual
loans was approximately $434,000, $432,000, and $333,000, in 1998, 1997, and
1996, respectively.
At December 31, 1998 and 1997, Bancorp's recorded investment in
certain loans that were considered to be impaired was $4,423,000 and $4,091,000,
respectively, all of which was classified as non-performing. Of these impaired
loans, $555,000 and $702,000 had a related valuation allowance of $150,000 and
$352,000, respectively, while $3,868,000 and $3,389,000 did not require a
valuation allowance. The balance of the allowance for loan loss in excess of
these specific reserves is available to absorb losses from all loans. The
average recorded investment in certain impaired loans for the years ended
December 31, 1998 and 1997 was approximately, $3,633,000 and $1,207,000,
respectively. For the years ended December 31, 1998 and 1997, interest income
recognized on impaired loans totaled $384,000 and $161,000, respectively, all of
which was recognized on a cash basis.
As of December 31, 1998, 1997 and 1996, the Bank had loans to persons
serving as directors, officers, principle shareholders and their related
interests totaling $19,873,000, $12,678,000 and $8,799,000, respectively. These
loans were made substantially on the same terms, including interest rates,
maturities and collateral as those made to other customers of the Banks.
The Bank grants commercial and residential loans to customers
primarily throughout Oregon and Washington. Although the Bank has a diversified
loan portfolio, a substantial portion of the portfolio belongs to debtors whose
ability to honor their contracts is dependent upon the economics of Oregon
and/or Washington.
7. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Land ..................................... $ 4,599 $ 4,599
Buildings and improvements ............... 20,525 19,925
Furniture and equipment .................. 21,485 17,083
Construction in progress ................. 466 1,671
-------- --------
47,075 43,278
Accumulated depreciation ................. (17,386) (15,428)
-------- --------
Total ............................... $ 29,689 $ 27,850
======== ========
</TABLE>
Depreciation included in net occupancy and equipment expense amounted
to $3,179,000, and $2,705,000 and $2,460,000 for the years ended December 31,
1998, 1997, and 1996, respectively.
39
<PAGE> 41
8. CERTIFICATES OF DEPOSIT
Included in certificates of deposit are certificates in denominations
of $100,000 or greater, totaling $93,371,000 and $75,155,000 at December 31,
1998 and 1997, respectively. Interest expense relating to certificates of
deposits in denominations of $100,000 or greater was $3,731,000, 3,808,000, and
$3,076,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
9. BORROWINGS
Short-term borrowings generally consist of a Cash Management Account
(CMA) line of credit for overnight funding with the Federal Home Loan Bank
(FHLB), and Federal Funds Purchased overnight from correspondent banks. No
short-term borrowings were outstanding at December 31, 1998.
Long-term borrowings, as of December 31, 1998, consist of amortizing
notes and putable advances with the FHLB totaling $20,259,985. Bancorp has two
amortizing notes totaling $2,259,985, that have original terms of seven years
and mature between April of 2000, and January of 2001. Rates on the amortizing
notes range from 4.98% to 5.42%. Bancorp also has $18 million in putable
advances from the FHLB. The putable advances have terms of five years with
quarterly put options starting September 1999 with a final maturity in December
2003; rates on these advances range from 4.53% to 5.68%. Principal payments due
on Bancorp's borrowings in 1999 are $1.6 million, in 2000 are $667,000, in 2001
are $22,000, and in 2002 are $18 million with no balances due thereafter.
10. BALANCES WITH THE FEDERAL RESERVE BANK
The Bank is required to maintain cash reserves or deposits with the
Federal Reserve Bank equal to a percentage of reservable deposits. The average
required reserves for the Bank was $2,676,000 during 1998.
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases land and office space under thirty leases, of
which twenty-seven are long-term noncancellable operating leases that expire
between 1999 and 2011. At the end of the respective lease terms, Bancorp may
renew the leases at fair rental value. At December 31, 1998, minimum future
lease payments under these leases and other operating leases were:
<TABLE>
<CAPTION>
(Dollars in thousands) Minimum Future
Year Lease Payment
----------------------------------- --------------
<S> <C>
1999 .............................. $1,231
2000 .............................. 1,158
2001 .............................. 913
2002 .............................. 688
2003 .............................. 517
Thereafter ........................ 1,683
------
Total ........................ $6,190
======
</TABLE>
Rental expense for all operating leases was $1,201,000, 1,221,000,
and $1,164,000, for the years ended December 31, 1998, 1997, and 1996,
respectively.
40
<PAGE> 42
12. INCOME TAXES
The provision for income taxes attributable to income for the last
three years consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
(Dollars in thousands) 1998 1997 1996
- ---------------------- ------- ------- -------
<S> <C> <C> <C>
Current
Federal ................ $ 6,866 $ 7,608 $ 5,243
State .................. 1,148 624 871
------- ------- -------
8,014 8,232 6,114
Deferred
Federal ................ (1,105) (982) (247)
State .................. (185) (66) (63)
------- ------- -------
(1,290) (1,048) (310)
Total
Federal ................ 5,761 6,626 4,996
State .................. 963 558 808
------- ------- -------
Total .............. $ 6,724 $ 7,184 $ 5,804
======= ======= =======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities for the last three
years are presented below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(Dollars in thousands) 1998 1997 1996
- ---------------------- ------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan loss ................. $ 4,079 $ 3,113 $ 2,301
Deferred income ......................... 34 93 173
Net operating loss ...................... -- -- 13
Reorganization costs .................... 33 57 84
Deferred employees benefits ............. 1,268 486 364
Other ................................... -- 30 60
------- ------- -------
Total deferred tax assets ........... 5,414 3,779 2,995
Deferred tax liabilities:
Accumulated depreciation ................ 876 556 732
Federal Home Loan Bank stock dividends .. 1,035 788 574
Net unrealized gains on investments
available for sale .................. 2,189 984 534
Intangible assets ...................... 662 780 871
Mortgage servicing rights .............. -- -- 239
Other .................................. 16 120 92
------- ------- -------
Total deferred tax liabilities ...... 4,778 3,228 3,042
------- ------- -------
Net deferred tax assets/liabilities ..... $ 636 $ 551 $ (47)
======= ======= =======
</TABLE>
The financial tax rate of the provision for income taxes varies from
the federal income tax statutory rate. The reasons for the variance are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
(Dollars in thousands) 1998 1997 1996
- ---------------------- ------- ------- -------
<S> <C> <C> <C>
Expected federal income tax provision at 34 percent ....... $ 7,066 $ 7,351 $ 5,943
State income tax, net of federal income tax effect ........ 518 369 541
Interest on obligations of state and political subdivisions
exempt from federal tax ................................. (1,192) (756) (799)
Other, net ................................................ 332 220 119
------- ------- -------
Total ................................................... $ 6,724 $ 7,184 $ 5,804
======= ======= =======
</TABLE>
41
<PAGE> 43
13. STOCKHOLDERS' EQUITY AND REGULATORY REQUIREMENTS
Authorized capital of West Coast Bancorp includes 10,000,000 shares
of Preferred Stock no par value, none of which were issued at December 31, 1998.
During 1998, Bancorp increased its no par value common stock authorized shares
from 15,000,000 shares to 50,000,000 shares. On September 25, 1998, the Board of
Directors declared a 10 percent dividend payable to shareholders of record
October 6, 1998. All share and per share amounts have been restated to
retroactively reflect the stock dividend as well as all previous stock dividends
and splits.
In December 1998, Bancorp announced a stock repurchase program. Under
the plan the company will buy up to 1.5 million shares of the company's common
stock. The plan repurchases will be limited by the anticipated timing of stock
option exercises as well as other parameters. The company intends to use
existing funds and/or long-term borrowings to finance the repurchases. The
repurchased common shares will be available for use under the company's existing
stock option plans. As of December 31, 1998, 50,000 common shares had been
repurchased for $1,029,000, an average purchase price of $20.58 per share.
The Federal Reserve Board (FRB) and Federal Deposit Insurance
Corporation (FDIC) have established minimum requirements for capital adequacy
for bank holding companies and member banks. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Bancorp and its
significant bank subsidiaries must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet
items. 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 average assets less intangibles is required to be at least 3%. Well
capitalized guidelines require banks and bank holding companies to maintain tier
one capital of at least 6%, total risk based capital of at least 10% and a
leverage ratio of at least 5%. Bancorp and its significant bank subsidiaries'
capital components, classification, risk weightings and other factors are also
subject to qualitative judgements by regulators. Failure to meet minimum capital
requirements can initiate certain action by regulators that, if undertaken,
could have a material effect on Bancorp's financial statements. As of December
31, 1998, Bancorp and its subsidiary bank are considered "Well Capitalized"
under current risk based capital regulatory guidelines. Management believes that
no events or changes in conditions have occurred which would significantly
change Bancorp's capital position.
The following table presents selected risk adjusted capital
information as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------- -----------------------------------------------
Amount Required Amount Required
For Minimum For Minimum
(Dollars in thousands) Actual Capital Adequacy Actual Capital Adequacy
- -------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Amount Ratio Amount
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital
- ------------------------
West Coast Bancorp $111,562 11.54% $ 38,670 $ 97,161 11.38% $ 34,151
West Coast Bank 99,797 10.33% 38,644 88,238 10.36% 34,069
Total Capital
- ------------------------
West Coast Bancorp $123,647 12.79% $ 77,340 $107,380 12.57% $ 68,340
West Coast Bank 111,872 11.59% 77,220 98,213 11.53% 68,144
Leverage Ratio
- ------------------------
West Coast Bancorp $111,562 9.13% $ 36,658 $ 97,161 9.02% $ 32,315
West Coast Bank 99,797 8.21% 36,467 88,238 8.18% 32,361
</TABLE>
42
<PAGE> 44
14. 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
------------------------------------------------------------
<S> <C> <C> <C>
For the year ended 1998
-----------------------
Basic earnings per share ........... $14,058,671 14,115,564 $ 1.00
Stock options ...................... 560,580
Diluted earnings per share ......... $14,058,671 14,676,144 $ 0.96
For the year ended 1997
-----------------------
Basic earnings per share ........... $14,438,513 13,649,055 $ 1.06
Stock options ...................... 624,178
Diluted earnings per share ......... $14,438,513 14,273,233 $ 1.01
For the year ended 1996
-----------------------
Basic earnings per share ........... $11,676,464 13,370,255 $ 0.87
Stock options ...................... 390,848
Diluted earnings per share ......... $11,676,464 13,761,103 $ 0.85
</TABLE>
Bancorp for the periods reported had no reconciling items between net
income and income available to common shareholders.
15. COMPREHENSIVE INCOME
Bancorp adopted SFAS No. 130 "Reporting Comprehensive Income," in
1998 which established standards for reporting and displaying comprehensive
income and its components. The following table displays the components of other
comprehensive for the last three years:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
(Dollars in thousands) 1998 1997 1996
- ---------------------- ------- ------- -------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period .............. $ 3,412 $ 1,125 $(1,274)
Tax (expenses) benefit ................................................... (1,205) (450) 491
------- ------- -------
Unrealized holdings gains (losses) arising during the period, after tax... 2,207 675 (783)
Less: Reclassification adjustment for gains (losses) realized in income
tax (expenses) benefit ................................................ 348 (85) 8
Less: Reclassification adjustment for gains (losses) realized after tax... (134) 32 (3)
------- ------- -------
Net unrealized gains (losses) ............................................ 214 (53) 5
======= ======= =======
Other comprehensive income (loss) ........................................ $ 1,993 $ 728 $ (788)
======= ======= =======
</TABLE>
43
<PAGE> 45
16. EMPLOYEE BENEFIT PLANS
During 1998, West Coast Bancorp employee benefits included a plan
established under section 401(k) of the Internal Revenue Code for certain
qualified employees (the 401(k) plan). Employee contributions up to 15 percent
of salaries under the Internal Revenue Code guidelines, can be made under the
401(k) plan, of which Bancorp matches 50 percent of the employees' contributions
up to a maximum of 6 percent of the employee's salary. Bancorp may also elect to
make discretionary contributions to the plan. Employees vest immediately in
their own contributions and earnings thereon and vest in Bancorp's contributions
over five years of eligible service. As of December 31, 1998, Bancorp has merged
acquired companies' plans into its own plan. Bancorp's expenses totaled
$398,000, $603,000 and $331,000 for 1998, 1997, and 1996 respectively, of which
$0, $200,000, and $0, respectively, were discretionary.
In 1996, Bancorp adopted a non-qualified Deferred Compensation Plan
for Directors and a non-qualified Deferred Compensation Plan for Executive
Officers (Deferred Compensation Plans) as supplemental benefit plans which
permit directors and selected officers to elect to defer receipt of all or any
portion of their future salary, bonus or directors' fees. In addition, the
Deferred Compensation Plans restore benefits lost by employees under the 401(k)
plan due to specified Internal Revenue Code restrictions on the maximum benefits
that may be paid under those plans. All contributions are invested at the
employees' direction among a variety of investment alternatives. Amounts
contributed to these plans to restore benefits otherwise limited by the Code
restrictions have been included in the 401(k) plan contribution expense reported
in the previous paragraph.
Bancorp's expenses related to retirement benefits with certain
present and former employees, were $153,000, $206,000 and $207,000 for 1998,
1997 and 1996, respectively. Certain of these retirement benefits are directly
or indirectly funded through the purchase of corporate owned life insurance
policies. The recorded cash surrender value of these policies was $1,626,000 and
$2,173,000 at December 31, 1998 and 1997, respectively.
Prior to its acquisition, Centennial Holdings, LTD sponsored a
non-contributory employee stock ownership plan (ESOP) that covered certain
employees meeting eligibility requirements. The contributions to the ESOP were
discretionary and were charged against compensation expense amounts were
$176,000 and $50,000 in 1997 and 1996. Contributions were used to acquire
Centennial Holdings, LTD common stock. The ESOP owned 194,292 and 189,895 shares
at December 31, 1997 and 1996 respectively. During 1998 the ESOP assets were
merged into Bancorp's 401(k) plan.
17. STOCK OPTION PLANS
Bancorp's stock option plans include the Combined 1991 Employee Stock
Option Plan and Non-Qualified Stock Option Plan (1991 Plan), the 1995 Directors
Stock Option Plan (1995 Plan), the 1989 and 1985 Non-Qualified Stock Option
Plans and the 1989 and 1985 Qualified Stock Option Plans (1985 and 1989 Plans).
The 1991 Plan allows for a maximum number of shares available for grant not to
exceed 2 percent of the shares of Bancorp's outstanding common stock on January
1st of each such year. The 1995 Plan authorizes the issuance of 660,000 shares
of common stock. No additional grants may be made under the 1985 and 1989 Plans.
Substantially all stock options have an exercise price that is not
less than the fair market value of Bancorp's stock on the date the option were
granted. The majority of the options previously granted under the 1991 and 1989
Plans are exercisable immediately following the effective date of the grant with
certain options granted under the 1991 plan exercisable in one year. Certain
options previously granted under the 1995 Plan are exercisable over 1 to 4 year
periods. Substantially all options previously granted under the 1985 Plans
become exercisable at a rate of 2 percent a month for 50 months, or equally over
a four year period; all options previously issued under the 1985 plan were fully
vested as of December 31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996
1998 Weighted 1997 Weighted 1996 Weighted
Common Avg. Ex. Common Avg. Ex. Common Avg. Ex.
Shares Price Shares Price Shares Price
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year ..... 1,444,766 $ 8.14 1,448,193 $ 6.47 1,253,424 $ 5.75
Granted ..................... 248,397 20.63 331,928 14.66 358,653 9.01
Exercised ................... (444,762) 6.13 (312,814) 7.34 (148,959) 6.23
Forfeited ................... (63,124) 11.42 (22,541) 8.36 (14,925) 7.25
------------- ------------- ------------- ------------- ------------- -------------
Balance, end of year ........... 1,185,277 $ 11.34 1,444,766 $ 8.14 1,448,193 $ 6.47
============= ============= ============= ============= ============= =============
Exercisable, end of year ....... 943,973 1,162,493 1,244,933
Fair value of options granted... $ 6.45 $ 7.32 $ 3.42
</TABLE>
44
<PAGE> 46
17. STOCK OPTION PLANS (Continued)
As of December 31, 1998, outstanding stock options consist of the following:
<TABLE>
<CAPTION>
Exercise Options Weighted Avg. Weighted Avg. Options Weighted Avg.
Price Range Outstanding Exercise Price Remaining Life Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.09 -- $ 4.73 200,154 $ 4.08 4.04 200,154 $ 4.08
5.34 -- 7.71 237,093 6.64 5.84 235,596 6.65
7.72 -- 8.97 220,592 8.85 7.39 179,782 8.85
9.51 -- 15.15 277,448 14.20 8.20 151,941 14.50
$18.56 -- $22.95 249,990 20.65 9.57 176,500 21.50
- -------------------------------------------------------------------------------------------------------------------------------
Total 1,185,277 $ 11.34 7.17 943,973 $ 10.57
</TABLE>
Bancorp accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS Statement No. 123, Bancorp's net
income and earnings per share would have been reduced to the following proforma
amounts:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income: As reported $ 14,058,671 $ 14,438,513 $ 11,676,464
Proforma 12,339,613 13,613,968 10,391,299
Basic earnings per common share As reported $ 1.00 $ 1.06 $ 0.87
Proforma 0.87 1.00 0.78
Diluted earnings per share As reported 0.96 1.01 0.85
Proforma 0.84 0.95 0.76
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The following table presents the
assumptions used in the fair value calculation:
<TABLE>
<CAPTION>
Non-Qualified Director Options Employee Options
---------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
---------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk Free interest rates 4.30% 6.36%-6.60% 6.48%-6.62% 4.30%-5.70% 5.73%-6.83% 6.23%-6.67%
Expected dividend 1.05% 0.79% 1.32% 1.05% 0.79% 1.32%
Expected lives, in years 4 5 5 4 6 6
Expected volatility 41% 43% 33% 41% 43% 33%
</TABLE>
Due to the discretionary nature of stock option grants, the
compensation cost included in the 1998, 1997 and 1996 proforma net income per
SFAS No. 123, may not be representative of that expected in future years.
45
<PAGE> 47
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires the disclosure of the fair value of financial
instruments. A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that conveys or imposes the contractual
right or obligation to either receive or deliver cash or another financial
instrument. Examples of financial instruments included in Bancorp's balance
sheet are cash, federal funds sold or purchased, debt and equity securities,
loans, demand, savings and other interest-bearing deposits, notes and
debentures. Examples of financial instruments which are not included in the
Bancorp balance sheet are commitments to extend credit and standby letters of
credit.
Fair value is defined as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation, and is best evidenced by a quoted market price
if one exists.
The statement requires the fair value of deposit liabilities with no
stated maturity, such as demand deposits, NOW and money market accounts, to
equal the carrying value of these financial instruments and does not allow for
the recognition of the inherent value of core deposit relationships when
determining fair value. While the statement does not require disclosure of the
fair value of nonfinancial instruments, such as Bancorp's premises and
equipment, its banking and trust franchises and its core deposit relationships,
Bancorp believes these nonfinancial instruments have significant fair value.
Bancorp has estimated fair value based on quoted market prices where
available. In cases where quoted market prices were not available, fair values
were based on the quoted market price of a financial instrument with similar
characteristics, the present value of expected future cash flows or other
valuation techniques that utilize assumptions which are highly subjective and
judgmental in nature. Subjective factors include, among other things, estimates
of cash flows, the timing of cash flows, risk and credit quality characteristics
and interest rates. Accordingly, the results may not be precise and modifying
the assumptions may significantly affect the values derived. In addition, fair
values established utilizing alternative valuation techniques may or may not be
substantiated by comparison with independent markets. Further, fair values may
or may not be realized if a significant portion of the financial instruments
were sold in a bulk transaction or a forced liquidation. Therefore any aggregate
unrealized gains or losses should not be interpreted as a forecast of future
earnings or cash flows. Furthermore, the fair values disclosed should not be
interpreted as the aggregate current value of Bancorp.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents - The carrying amount is a reasonable
estimate of fair value.
Investment Securities - For securities held for investment purposes,
fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans - The fair value of loans is estimated by discounting the
future cash flows using the current rate at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Deposit Liabilities - The fair value of demand deposits, savings
accounts and other deposits is the amount payable on demand at the reporting
date. The fair value of certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Short-term borrowings - The carrying amount is a reasonable estimate
of fair value given the short-term nature of these financial instruments.
Long-term borrowings - The fair value of the long-term borrowings is
estimated by discounting the future cash flows using the current rate at which
similar borrowings with similar remaining maturities could be made.
Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees - The fair value of commitments, standby letters of credit and
financial guarantees is not significant.
46
<PAGE> 48
18. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of financial instruments at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Carrying Value Fair Value
- ---------------------- -------------- -----------
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents ........ $ 81,492 $ 81,492
Investment securities ............ 255,967 256,180
Loans ...................... 878,025
Allowance for loan losses... (12,453)
-----------
Net Loans ........................ 865,572 885,324
FINANCIAL LIABILITIES
Deposits ......................... $ 1,108,457 $ 1,112,423
Short-term borrowings ............ -- --
Long-term borrowings ............. 20,260 20,458
</TABLE>
The estimated fair value of financial instruments at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Carrying Value Fair Value
- ---------------------- -------------- ----------
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents ........ $ 98,818 $ 98,818
Investment securities ............ 194,177 194,236
Loans ...................... 787,399
Allowance for loan losses... (10,451)
---------
Net Loans ........................ 776,948 785,200
FINANCIAL LIABILITIES
Deposits ......................... $ 958,482 $ 959,604
Short-term borrowings ............ 29,249 29,249
Long-term borrowings ............. 22,446 22,379
</TABLE>
47
<PAGE> 49
19. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank has financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the Consolidated
Balance Sheets.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as for on-balance sheet instruments.
Management does not anticipate any material loss as a result of these
transactions.
<TABLE>
<CAPTION>
Contract or
Notional Amount
---------------
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Real estate secured for commercial construction or land development ..... $ 83,575,000
Revolving open-end lines secured by 1-4 family residential properties.... 20,924,000
Credit card lines ....................................................... 25,527,000
Other ................................................................... 101,244,000
Standby letters of credit and financial guarantees ................................. 2,917,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Many of the commitments may expire without
being drawn upon, therefore the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the customer. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued to
guarantee a customer's performance or payment to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
20. PARENT COMPANY ONLY FINANCIAL DATA
The following sets forth the condensed financial information of West
Coast Bancorp on a stand-alone basis:
<TABLE>
<CAPTION>
Statement of Condition
(Unconsolidated)
December 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Assets
Cash and due from the subsidiary banks ........... $ 1,587 $ 2,076
Advances to subsidiaries ......................... 4,629 280
Investment securities ............................ -- 4
Investment in the subsidiaries ................... 107,437 94,166
Other assets ..................................... 4,426 6,735
-------- --------
Total assets ................................ $118,079 $103,261
======== ========
Liabilities and stockholders' equity
Balances due to subsidiaries ..................... $ 18 $ --
Short-term borrowings ............................ -- --
Long-term borrowings ............................. -- 425
Other liabilities ................................ 836 1,696
-------- --------
Total liabilities ........................... 854 2,121
Stockholders' equity ................................... 117,225 101,140
-------- --------
Total liabilities and stockholders' equity... $118,079 $103,261
======== ========
</TABLE>
48
<PAGE> 50
20. PARENT COMPANY ONLY FINANCIAL DATA (Continued)
Statement of Condition
(Unconsolidated)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income
Cash dividends from subsidiaries ............... $ 5,358 $ 5,438 $ 6,091
Other income from the subsidiaries ............. 7,097 5,007 4,268
Other income ................................... 367 274 149
-------- -------- --------
Total income .............................. 12,822 10,719 10,508
Expenses
Interest expense ............................... (21) 130 163
Other expense .................................. 11,617 8,525 7,050
-------- -------- --------
Total expense ........................ 11,596 8,655 7,213
Income before income taxes and equity in undistributed
earnings of the banks .......................... 1,226 2,064 3,295
Income tax benefit ................................... 1,593 1,087 1,151
-------- -------- --------
Net income before equity in undistributed earnings
of the banks ................................... 2,819 3,151 4,446
Equity in undistributed earnings of the banks ........ 11,240 11,288 7,230
-------- -------- --------
Net income ........................... $ 14,059 $ 14,439 $ 11,676
======== ======== ========
</TABLE>
Statement of Cash Flows
(Unconsolidated)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 14,059 $ 14,439 $ 11,676
Adjustments to reconcile net income to net cash
provide by operating activities:
Undistributed earnings of subsidiaries ........................ (11,240) (11,288) (7,230)
Increase (decrease) in advances to subsidiaries ............... (4,349) (235) 36
(Increase) decrease in other assets ........................... 2,310 (3,024) (2,350)
Increase (decrease) in balances due to subsidiaries ........... 18 (10) 8
(Decrease) increase in other liabilities ...................... (860) 563 515
Tax benefit associated with stock options ..................... 1,793 1,078 --
-------- -------- --------
Net cash provided by operating activities ................ 1,730 1,524 2,655
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributions to subsidiaries ........................ (38) -- (1,853)
Sale (purchase) of investments available for sale .......... 4 43 (44)
-------- -------- --------
Net cash (used) provided by investing activities.... (34) 43 (1,897)
CASH FROM FINANCING ACTIVITIES:
Net payments on long-term borrowings .......................... (425) (1,755) 450
Net proceeds from issuance of common stock .................... 2,255 1,833 1,013
Cash paid for acquisition of banking assets ................... -- (378) (887)
Repurchase of common stock .................................... (1,029) -- --
Dividends paid and cash paid for fractional shares ............ (2,986) (2,317) (1,925)
-------- -------- --------
Net cash used for financing activities ................... (2,185) (2,617) (1,349)
Net decrease in cash and cash equivalents ........................... (489) (1,050) (591)
Cash and cash equivalents at beginning of year ...................... 2,076 3,126 3,717
-------- -------- --------
Cash and cash equivalents at end of year ............................ $ 1,587 $ 2,076 $ 3,126
======== ======== ========
</TABLE>
49
<PAGE> 51
21. 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 operated 40 branch offices, and has realigned
management resources into a single team. Due to the similarities in the nature
of the four banks and the consolidation to a single banking company Bancorp has
aggregated its banking operations into a single segment presented below.
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 by the parent company. All other
accounting policies are the same as those described in the summary of
significant accounting policies.
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 including support services such as accounting, human
resources, data processing and marketing. 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>
1998
------------------------------------------------------------------
Banking Other Intersegment Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Interest income ...................... $ 96,982 $ 139 $ (68) $ 97,053
Interest expense ..................... 36,520 (21) (68) 36,431
----------- ----------- ----------- -----------
Net interest income .............. 60,462 160 -- 60,622
----------- ----------- ----------- -----------
Provision for loan loss .............. 2,928 (28) -- 2,900
Noninterest income ................. 16,114 10,088 (7,043) 19,159
Restructure charge ................. 3,768 -- -- 3,768
Noninterest expense .................. 44,944 14,429 (7,043) 52,330
----------- ----------- ----------- -----------
Income before income taxes....... 24,936 (4,153) -- 20,783
Provision for income taxes ........... 8,325 (1,601) -- 6,724
----------- ----------- ----------- -----------
$ 16,611 $ (2,552) $ -- $ 14,059
=========== =========== =========== ===========
Depreciation and amortization....... $ 2,914 $ 695 $ -- $ 3,609
Assets ................................ $ 1,253,684 $ 8,787 $ (7,048) $ 1,255,423
Loans, net ......................... $ 849,600 $ -- $ -- $ 849,600
Deposits ........................... $ 1,110,834 $ -- $ (2,377) $1 ,108,457
Equity ................................ $ 105,447 $ 11,778 $ n/a $ 117,225
</TABLE>
50
<PAGE> 52
21. SEGMENT AND RELATED INFORMATION (Continued)
<TABLE>
<CAPTION>
1997
Banking Other Intersegment Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Interest income ................... $ 88,874 $ 255 $ (64) $ 89,065
Interest expense .................. 32,137 189 (64) 32,262
----------- ----------- ----------- -----------
Net interest income ........... 56,737 66 -- 56,803
----------- ----------- ----------- -----------
Provision for loan loss ........... 3,936 -- -- 3,936
Noninterest income .............. 12,326 6,907 (5,083) 14,150
Restructure charge .............. -- -- -- --
Noninterest expense ............... 39,887 10,590 (5,083) 45,394
----------- ----------- ----------- -----------
Income before income taxes.... 25,240 (3,617) -- 21,623
Provision for income taxes ........ 8,408 (1,224) -- 7,184
----------- ----------- ----------- -----------
$ 16,832 $ (2,393) $ -- $ 14,439
=========== =========== =========== ===========
Depreciation and amortization.... $ 2,671 $ 439 $ -- $ 3,110
Assets ............................. $ 1,112,975 $ 8,927 $ (4,076) $ 1,117,826
Loans, net ...................... $ 766,491 $ -- $ -- $ 766,491
Deposits ........................ $ 961,555 $ -- $ (3,073) $ 958,482
Equity ............................. $ 92,207 $ 8,933 $ n/a $ 101,140
</TABLE>
<TABLE>
<CAPTION>
1996
Banking Other Intersegment Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Interest income ................... $ 74,691 $ 944 $ (49) $ 75,586
Interest expense .................. 26,386 259 (49) 26,596
--------- --------- --------- ---------
Net interest income ........... 48,305 685 -- 48,990
--------- --------- --------- ---------
Provision for loan loss ........... 2,565 6 2,571
Noninterest income .............. 9,280 4,992 (4,397) 9,875
Restructure charge .............. -- -- -- --
Noninterest expense ............... 34,741 8,470 (4,397) 38,814
--------- --------- --------- ---------
Income before income taxes.... 20,279 (2,799) -- 17,480
Provision for income taxes ........ 6,954 (1,150) -- 5,804
--------- --------- --------- ---------
$ 13,325 $ (1,649) $ -- $ 11,676
========= ========= ========= =========
Depreciation and amortization.... $ 2,328 $ 442 $ -- $ 2,770
Assets ............................. $ 931,809 $ 12,820 $ (4,332) $ 940,297
Loans, net ...................... $ 706,917 $ -- $ -- $ 711,374
Deposits ........................ $ 810,544 $ -- $ (4,244) $ 806,300
Equity ............................. $ 79,049 $ 6,332 $ n/a $ 85,381
</TABLE>
51
<PAGE> 53
22. QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) March 31, June 30, September 30, December 31,
- --------------------------------------------- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1998
Interest income .................................. $23,707 $23,896 $24,818 $24,632
Interest expense ................................. 8,985 9,003 9,274 9,169
------- ------- ------- -------
Net interest income ........................ 14,722 14,893 15,544 15,463
Provision for loan loss .......................... 1,485 495 485 435
Noninterest income ............................... 4,168 4,940 4,602 5,449
Noninterest expense .............................. 13,155 12,882 14,853 15,208
------- ------- ------- -------
Income before income taxes ................. 4,250 6,456 4,808 5,269
Provision for income taxes ....................... 1,503 2,100 1,505 1,616
------- ------- ------- -------
Net income ................................. $ 2,747 $ 4,356 $ 3,303 $ 3,653
======= ======= ======= =======
Earnings per common share:
Basic ....................... $ 0.20 $ 0.31 $ 0.23 $ 0.26
Diluted ..................... $ 0.19 $ 0.30 $ 0.23 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) March 31, June 30, September 30, December 31,
- -------------------------------------------- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1997
Interest income .................................. $20,663 $21,843 $22,636 $23,923
Interest expense ................................. 7,431 7,844 8,276 8,711
------- ------- ------- -------
Net interest income ........................ 13,232 13,999 14,360 15,212
Provision for loan loss .......................... 1,396 913 633 994
Noninterest income ............................... 4,106 3,050 3,117 3,877
Noninterest expense .............................. 10,668 10,955 11,113 12,658
------- ------- ------- -------
Income before income taxes ................. 5,274 5,181 5,731 5,437
Provision for income taxes ....................... 1,924 1,868 1,598 1,794
------- ------- ------- -------
Net income ................................. $ 3,350 $ 3,313 $ 4,133 $ 3,643
======= ======= ======= =======
Earnings per common share:
Basic ....................... $ 0.25 $ 0.24 $ 0.30 $ 0.26
Diluted ..................... $ 0.24 $ 0.23 $ 0.29 $ 0.25
</TABLE>
52
<PAGE> 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning directors and certain executive officers
of Bancorp, see INFORMATION WITH RESPECT TO NOMINEES AND DIRECTORS WHOSE TERMS
EXPIRE" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and
"COMPLIANCE WITH SECTION 16(a) FILING REQUIREMENTS" in Bancorp's 1999 Annual
Meeting Proxy Statement ("Proxy Statement"), which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation, see "INFORMATION
WITH RESPECT TO NOMINEES AND DIRECTORS WHOSE TERMS CONTINUE - COMPENSATION OF
DIRECTORS" and "EXECUTIVE COMPENSATION" in the Proxy Statement, which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning the security ownership of certain
beneficial owners and management, see "INFORMATION WITH RESPECT TO NOMINEES AND
DIRECTORS WHOSE TERMS EXPIRE and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" in the Proxy Statement, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related
transactions, see "INFORMATION WITH RESPECT TO NOMINEES AND DIRECTORS WHOSE
TERMS CONTINUE" and "TRANSACTIONS WITH MANAGEMENT" in the Proxy Statement, which
is incorporated herein by reference.
53
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
List of Financial Statements and Financial Statement Schedules
(a)(1) and (2) Financial Statements:
The financial statements and related documents listed in the index
set forth in Item 8 of this report are filed as part of this report.
All other schedules to the consolidated financial statements required
by Regulation S-X are omitted because they are not applicable, not material or
because the information is included in the consolidated financial statements or
related notes.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 56 of this
report.
(b) During the three months ended December 31, 1998 Bancorp filed the
following current report on Form 8-K: Form 8-K filed December 9,
1998, relating the adoption of a Stock Repurchase Plan.
(c) Exhibits:
The response to this portion of Item 14 is submitted as a separate
section of this report entitled, "Index to Exhibits."
(d) Financial Statement Schedules:
None
54
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 25th day of
March, 1999.
WEST COAST BANCORP
(Registrant)
By: /s/ Victor L. Bartruff
-----------------------------------
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 25th day of March, 1999.
<TABLE>
<S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Victor L. Bartruff President and CEO and Director
- ----------------------------------------------
Victor L. Bartruff
PRINCIPAL FINANCIAL OFFICER:
/s/ Donald A. Kalkofen Executive Vice President and Chief Financial Officer
- ----------------------------------------------
Donald A. Kalkofen
PRINCIPAL ACCOUNTING OFFICER:
/s/ Kevin M. McClung Vice President and Controller
- ----------------------------------------------
Kevin M. McClung
REMAINING DIRECTORS:
/s/ Lloyd D. Ankeny /s/ C. Douglas McGregor
- ---------------------------------------------- ----------------------------------------------
Lloyd D. Ankeny C. Douglas McGregor
/s/ Phillip G. Bateman /s/ Robert D. Morrison
- ---------------------------------------------- ----------------------------------------------
Phillip G. Bateman Robert D. Morrison
/s/ William B. Loch /s/ James J. Pomajevich
- ---------------------------------------------- ----------------------------------------------
William B. Loch James J. Pomajevich
/s/ Jack E. Long /s/ Gary D. Putnam
- ---------------------------------------------- ----------------------------------------------
Jack E. Long Gary D. Putnam, Chairman
/s/ J.F. Ouderkirk
- ----------------------------------------------
J.F. Ouderkirk
</TABLE>
55
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ---------- -------
<S> <C>
3.1 Restated Articles of Incorporation of the Registrant(1)
3.2 Restated Bylaws of the Registrant
3.3 Amendment to Bylaws dated March 15, 1999
3.4 Amendment to Bylaws dated February 24, 1999
4 The Registrant has incurred long-term indebtedness as to which
the amount involved is less than ten percent of the total assets
of the Registrant and its subsidiaries on a consolidated basis.
The Registrant agrees to furnish instruments relating to such
indebtedness to the Commission upon its request.
10.1 Salary Continuation Agreement between the Registrant and Victor
L. Bartruff dated January 1, 1997(2)
10.2 Salary Continuation Agreement between the Registrant and Rodney
B. Tibbatts dated January 1, 1997(2)
10.3 Salary Continuation Agreement between the Registrant and Donald
A. Kalkofen dated December 25, 1996(2)
10.4 Salary Continuation Agreement between Registrant and Cyndi
Haworth dated December 1, 1999.
10.5 401(k) Profit Sharing Plan(3)
10.6 Directors' Deferred Compensation Plan(3)
10.7 Executives' Deferred Compensation Plan(3)
10.8 Combined 1991 Incentive Stock Option Plan and 1991 Nonqualified
Stock Option Plan(4)
10.9 Form of Option Grant under Combined 1991 Incentive Stock Option
Plan and 1991 Nonqualified Stock Option Plan(4)
10.10 Directors Stock Option Plan(5)
10.11 Form of Directors Stock Option Agreement(5)
10.12 Incentive Stock Option Plan(5)
10.13 Nonqualified Stock Option Plan(5)
10.14 Incentive Stock Option and Nonstatutory Stock Option Plan of
Vancouver Bancorp(6)
10.15 Vancouver Bancorp Employee Stock Option Agreement(6)
10.16 Salary Continuation Agreement among Registrant and Thomas W.
Healy, dated as of October 30, 1997.(7)
10.17 Supplemental Letter from Registrant to Thomas W. Healy regarding
certain terms of Mr. Healy's continued employment, dated as of
October 30, 1997.(7)
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Dwyer, Pemberton LLP
27.1 Financial Data Schedule for Fiscal Year 1998
27.2 Financial Data Schedule for Fiscal Years 1997 and 1996
27.3 Financial Data Schedule for First, Second, and Third Quarters of
1998
27.4 Financial Data Schedule for First, Second, and Third Quarters of
1997
</TABLE>
- ----------------------------
(1) Incorporated by reference to Exhibit 3.1 of Registrant's Quarterly Report
on Form 10Q for the quarter ended June 30, 1998.
(2) Incorporated by reference to Exhibits 10.1, 10.2, and 10.3 of Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
(3) Incorporated by reference to Exhibits 99.1, 99.2 and 99.3 of Registrant's
S-8 Registration Statement--Registration No. 333-01651.
(4) Incorporated by reference to Exhibits 99.1 and 99.2 of Registrant's S-8
Registration Statement--Registration No. 333-01651.
(5) Incorporated by reference to Exhibits 99.1, 99.2, 99.3 and 99.5 of
Registrant's S-8 Registration Statement -- Registration No. 33-60259.
(6) Incorporated by reference to Exhibits 99.1, 99.3, and 99.4 of Registrant's
S-8 Registration Statement - Registration No. 333-09721.
(7) Incorporated by reference to Exhibits 10.23 and 10.24 of Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
56
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS OF
WEST COAST BANCORP
Dated March 15, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1 - Shareholders Meetings.....................................................1
1.1 Place..................................................................1
1.2 Annual Meeting.........................................................1
1.3 Special Meetings.......................................................1
1.4 Notices of Meetings....................................................1
1.5 Waiver of Notice.......................................................2
1.6 Adjourned Meetings.....................................................2
1.7 Quorum of Shareholders.................................................2
1.8 Voting of Shares.......................................................2
1.9 Action Without Meeting.................................................2
1.10 Stockholder Business...................................................2
SECTION 2 - Board of Directors........................................................3
2.1 Number and Qualifications..............................................3
2.2 Nominations for Director...............................................3
2.3 Vacancies..............................................................4
2.4 Regular Meetings.......................................................4
2.5 Special Meetings.......................................................4
2.6 Notice of Meetings.....................................................4
2.7 Waiver of Notice.......................................................4
2.8 Quorum of Directors; Attendance........................................5
2.9 Dissent by Directors...................................................5
2.10 Action Without Meeting.................................................5
2.11 Committees.............................................................5
SECTION 3 - Officers..................................................................6
3.1 Officers Enumerated; Election..........................................6
3.2 Qualifications.........................................................7
3.3 Chairman and Vice Chairman of the Board................................7
3.4 Chief Executive Officer................................................7
3.5 Co-Chief Executive Officers............................................7
3.6 President..............................................................7
3.7 Co-Presidents..........................................................7
3.8 Vice President.........................................................8
3.9 Secretary..............................................................8
3.10 Treasurer..............................................................8
3.11 Other Officers and Agents..............................................8
3.12 Removal of Officers....................................................8
3.13 Vacancies..............................................................8
3.14 Salaries...............................................................8
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 4 - Business of the Corporation...............................................8
4.1 Obligations............................................................9
4.2 Contracts..............................................................9
4.3 Loans to Corporation...................................................9
4.4 Checks and Drafts......................................................9
SECTION 5 - Indemnification...........................................................9
5.1 Definitions............................................................9
5.2 Directors and Officers................................................10
5.3 Employees and Agents..................................................10
5.4 Procedure for Seeking Indemnification or Advance......................10
5.5 Contract and Related Rights...........................................12
5.6 Exceptions............................................................13
5.7 Service for Other Entities............................................14
SECTION 6 - Stock....................................................................14
6.1 Certificate of Stock..................................................14
6.2 Transfer..............................................................14
6.3 Shareholders of Record................................................15
6.4 Loss or Destruction of Certificates...................................15
6.5 Record Date and Transfer Books........................................15
6.6 Regulations...........................................................15
SECTION 7 - Books and Records........................................................15
7.1 Records of Corporate Meetings and Share Register......................15
7.2 Reliance of Records...................................................16
7.3 Form of Records.......................................................16
SECTION 8 - Corporate Seal...........................................................16
SECTION 9 - Amendments...............................................................16
9.1 Action by Board.......................................................16
9.2 Amendment by Shareholders.............................................16
9.3 Amendments to Shareholder Quorum Requirements.........................16
9.4 Amendments to Board Quorum Requirements...............................16
</TABLE>
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<PAGE> 4
AMENDED AND RESTATED BYLAWS
OF
WEST COAST BANCORP
SECTION 1
Shareholders' Meetings
1.1 Place. Shareholders' meetings may be held at the principal office of
the corporation, or at any other location within or without the State of Oregon
as determined by the board of directors and stated in the notice of meeting.
1.2 Annual Meeting. The annual meeting of the shareholders of the
corporation for the election of directors to succeed those whose terms then
expire and for the transaction of any other business as may properly come before
the meeting will be held each year on a date and at a time selected by the board
of directors that is not later than five (5) months after the end of the
corporation's fiscal year. Failure to hold an election of directors at the
annual meeting of the shareholders within the time stated in these bylaws,
through oversight or otherwise, does not affect the validity of any corporate
action, and a meeting of the shareholders may be held at a later date for the
election of directors and for the transaction of any other business that may
properly come before the meeting. Any election held or other business transacted
at a later meeting will be as valid as if done or transacted at the annual
meeting of the shareholders. Any later meeting will be called in the same manner
as a special meeting of the shareholders, and notice of the time, place, and
purpose of the meeting will be given in the same manner as notice of a special
meeting of the shareholders.
1.3 Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, may be called by the president or by the board of
directors, and shall be called by the president if one or more written demands
for a meeting describing the purpose or purposes for which it is to be held are
signed, dated, and delivered to the secretary by the holders of at least 10
percent of all votes entitled to be cast on any issue proposed to be considered
at the meeting.
1.4 Notices of Meetings. Written notice stating the date, time, and
place of the meeting, and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be given not less than ten (10) nor more
than sixty (60) days before the date of the meeting. Notice of any shareholders'
meeting may be given either personally or by mail, by or at the direction of the
president, the secretary, or the person or persons calling the meeting, to each
shareholder of record entitled to vote at the meeting and to others as required
by law. If mailed, the notice will be effective when deposited in the United
States mail with postage prepaid, addressed to the shareholder at his or her
address as it appears in the current records of the corporation.
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1.5 Waiver of Notice. Notice of any shareholders' meeting may be waived
at any time, either before or after the meeting, if the waiver is in writing,
signed by the shareholders entitled to notice, and delivered to the corporation.
A shareholder's attendance at a meeting waives objection to lack of notice or
defective notice of the meeting unless the shareholder objects at the beginning
of the meeting to holding the meeting or transacting business at the meeting. A
shareholder waives objection to consideration of a particular matter at a
meeting that is not within the purpose or purposes described in the meeting
notice unless the shareholder objects to considering the matter when it is
presented.
1.6 Adjourned Meetings. An adjournment or adjournments of any
shareholders' meeting may be taken until the time and place determined by those
present, without new notice being given, whether by reason of the failure of a
quorum to attend or otherwise.
1.7 Quorum of Shareholders. Shares entitled to vote as a separate voting
group may take action on a matter only if a quorum of those shares exists with
respect to the matter. A majority of the votes entitled to be cast on the matter
by voting group, represented in person or by proxy, shall constitute a quorum of
that voting group for action on that matter. If a quorum exists, action on a
matter, other than the election of directors, shall be approved by a voting
group if the votes cast within the voting group favoring the action exceed the
votes cast opposing the action unless the Oregon Business Corporation Act, the
articles of incorporation, or these bylaws require a greater number of
affirmative votes. Directors shall be elected by a plurality of the votes cast
by the shares entitled to vote in the election at a meeting at which a quorum is
present. Once a share is represented for any purpose at a meeting, it shall be
deemed present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting. Shareholders may participate in a meeting of the shareholders
by means of a conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other during the meeting.
Participation by such means will constitute presence in person at a meeting.
1.8 Voting of Shares. A shareholder may vote either in person or by
proxy executed in writing by the shareholder or his or her duly authorized
attorney-in-fact. No proxy will be valid after eleven (11) months from the date
of its execution, unless otherwise provided in the proxy. Any proxy shall be
filed with the secretary of the corporation before or at the time of the
meeting.
1.9 Action Without Meeting. Any action required or permitted to be taken
at a meeting of the shareholders of the corporation may be taken without a
meeting if a written consent resolution, setting forth the action taken, is
signed by all shareholders entitled to vote on the action and is delivered to
the corporation. Once delivered, the consent resolution will have the same force
and effect as a unanimous vote of the shareholders.
1.10 Stockholder Business. At any annual meeting of the shareholders,
only such business shall be conducted (other than procedural matters relating to
the conduct of the meeting) as shall have been brought before the meeting (a) by
or at the direction of the board of directors, (b) as specified in the notice of
such meeting, or (c) by any stockholder of record of the
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corporation who complies with the notice procedures set forth in this Section
1.10. For business to be properly brought before an annual meeting by any such
shareholder, the shareholder must give written notice thereof to the secretary,
either by personal delivery or by certified mail, postage prepaid, addressed to
the secretary at the corporation's executive offices not less than sixty (60)
days in advance of such meeting (provided that if the date of such annual
meeting of shareholders has not been publicly announced by the corporation more
than 90 days in advance of such meeting, such written notice must be given
within fifteen (15) days after the first public disclosure of the date of the
annual meeting, including, without limitation, disclosure of the meeting date
set forth in any document or exhibit thereto filed by the corporation with the
Securities and Exchange Commission). Each such notice shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the corporation's stock ledger of the shareholder
proposing such business, (c) a representation that such shareholder is a holder
of record of shares of the corporation entitled to vote at such meeting and
intends to appear at the meeting in person or by proxy to propose such business,
and (d) any material interest of such shareholder in the proposed business. The
chairman of an annual meeting shall, if the facts warrant, determine and declare
to the meeting that any such business was not properly brought before the
meeting and in accordance with the provisions of this Section 1.10, and if he
should so determine, he shall so declare to the meeting and such business not
properly brought before the meeting shall not be transacted.
SECTION 2
Board of Directors
2.1 Number and Qualifications. The business and affairs of the
corporation will be managed by a board of directors, the members of which need
not be shareholders of the corporation or residents of the State of Oregon. The
number of directors shall be fixed in the manner set forth in the articles of
incorporation.
2.2 Nominations for Director. Nominations for election to the board of
directors may be made by the board of directors or by any shareholder of any
outstanding class of capital stock of the corporation entitled to vote for the
election of directors. Nominations by the board of directors of candidates for
election to the Board shall be approved by at least a majority of the members of
the board of directors. Any shareholder entitled to vote for the election of
directors may nominate at a meeting persons for election as directors only if
written notice of such shareholder's intent to make such nomination is given,
either by personal delivery or by certified mail, postage prepaid, addressed to
the secretary at the corporation's executive offices not later than (i) with
respect to an election to be held at an annual meeting of shareholders, sixty
(60) days prior to the date of such meeting (provided that if the date of such
annual meeting of shareholders has not been publicly announced by the
corporation more than 90 days in advance of such meeting, such written notice
must be given within fifteen (15) days after the first public disclosure of the
date of the annual meeting, including without limitation, disclosure of the
meeting date set forth in any document or exhibit thereto filed by the
corporation with the
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Securities and Exchange Commission), and (ii) with respect to an election to be
held at a special meeting of shareholders for the election of directors, the
close of business on the seventh day following the date on which notice of such
meeting is first given to shareholders. Each such notice shall set forth: (a)
the name and address, as they appear on the corporation's stock ledger of the
shareholder who intends to make the nomination and the name and address of each
person to be nominated; (b) a representation that such shareholder is a holder
of record of shares of the corporation entitled to vote at such meeting and
intends to appear at the meeting in person or by proxy to nominate the person or
persons specified in the notice as directors; (c) a description of all
arrangements or understandings between such shareholder and each proposed
nominee and any other person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made by such shareholder; (d)
such other information regarding each nominee proposed by such shareholder as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission were such nominee to be
nominated by the board of directors; and (e) the consent of each proposed
nominee to serve as a director of the corporation if so elected. The chairman of
any meeting of shareholders to elect directors may refuse to permit the
nomination of any person to be made without compliance with the foregoing
procedure. No person may stand for election or re-election for director, if they
have attained the age of sixty-nine (69).
2.3 Vacancies. 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 is a member until
the expiration of his current term, or his 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 the three classes of directors so as to maintain such classes as nearly
equal as possible.
2.4 Regular Meetings. Regular meetings of the board of directors will be
held on the dates and at the times and places decided by the board of directors.
2.5 Special Meetings. Special meetings of the board of directors may be
held at any time and at any place whenever called by an executive officer or
director of the corporation.
2.6 Notice of Meetings. Notice of the annual or regular meetings of the
board of directors is not required. Notice of the date, time, and place of
special meetings of the board of directors must be given, by or at the direction
of the chairman of the board, the president, the secretary, or any person or
persons calling the meeting, by mail, facsimile, radio, telegram, or personal
communication over the telephone or otherwise, at least two (2) days prior to
the day on which the meeting is to be held. No notice need be given if the time
and place of the meeting has been fixed by resolution of the board of directors
and a copy of the resolution has been mailed to every director at least three
(3) days before the meeting.
2.7 Waiver of Notice. Notice of any meeting of the board of directors
may be waived at any time, either before or after a meeting, if the waiver is in
writing, signed by the director entitled to notice, and delivered to the
corporation. Notice is waived by any director attending or participating in a
meeting unless the director, at the beginning of the meeting or promptly on the
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director's arrival, objects to holding the meeting or transacting business at
the meeting and does not vote for or assent to any action taken at the meeting.
2.8 Quorum of Directors; Attendance. A majority of the number of
directors fixed in accordance with the articles of incorporation or bylaws from
time to time will constitute a quorum for the transaction of business. The act
of a majority the directors present at a meeting at which a quorum is present
will be the act of the board of directors unless a greater requirement is
imposed by law, the articles of incorporation, or these bylaws. Members of the
board of directors or any committee designated by the board of directors may
participate in a meeting of the Board or committee by means of a conference
telephone or similar communication equipment by which all persons participating
in the meeting can hear each other at the meeting. Participation by such means
will constitute presence in person at a meeting.
2.9 Dissent by Directors. A director of the corporation who is present
at a meeting of its board of directors at which action on any corporate matter
is taken will be presumed to have assented to the action unless (a) the director
objects at the beginning of the meeting, or promptly on his or her arrival, to
holding the meeting or transacting business at the meeting; (b) the director's
dissent or abstention from the action taken is entered in the minutes of the
meeting, or (c) the director delivers written notice of his or her dissent or
abstention to the presiding officer of the meeting before its adjournment or to
the corporation within a reasonable time after adjournment. The right of dissent
or abstention is not available to a director who votes in favor of the action
taken.
2.10 Action Without Meeting. Any action which may be or is required to
be taken at a meeting of the board of directors, or any action which may be
taken at a meeting of a committee designated by the board of directors, may be
taken without a meeting if a written consent resolution, setting forth the
action taken, is signed by all of the directors or all of the members of the
committee, as the case may be, and is delivered to the corporation. The fully
signed consent resolution will have the same force and effect as a unanimous
vote.
2.11 Committees. The board of directors, by resolution adopted by a
majority of the full board of directors, shall designate from among its members
an executive committee and may designate one or more other committees. Each must
consist of two (2) or more persons. The committees will be governed by the same
rules regarding meetings, actions without meetings, notices, waivers of notice,
and quorum and voting requirements applied to the board of directors. To the
extent provided in the resolution forming the committee, each committee may have
and may exercise all the authority of the board of directors, except that no
committee will have the authority to:
(a) Authorize or approve a distribution except as may be
permitted by paragraph (g) below;
(b) Approve or propose to shareholders action required to be
approved by shareholders;
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(c) Fill vacancies on the board of directors or on any of its
committees;
(d) Amend the articles of incorporation of the corporation
except as may be necessary to document a determination of the
relative rights, preferences, and limitations of a series of
shares as permitted by paragraph (h) below;
(e) Adopt, amend, or repeal the bylaws of the corporation;
(f) Approve a plan of merger not requiring shareholder approval;
(g) Authorize or approve reacquisition of shares, except within
limits presented by the board of directors; or
(h) Authorize or approve the issuance or sale or contract for
sale of shares, or determine the designation and relative
rights, preferences, and limitations of a class or series of
shares, except that the board of directors may authorize a
committee or an officer of the corporation to do so:
1. Pursuant to a stock option or other stock
compensation plan; or
2. By approving the maximum number of shares to be
issued and delegating the authority to determine all or
any part of the terms of the issuance or sale or
contract of sale and the designation and relative
rights, preferences, and limitations of the class or
series of shares.
The creation of delegation of authority to, or action by such a
committee of the Board will not operate to relieve the board of directors, or
any of its members, of any responsibility imposed by law.
SECTION 3
Officers
3.1 Officers Enumerated; Election. The officers of the corporation will
include a chief executive officer, president, secretary, and treasurer and one
or more vice presidents, as well as any assistants to the officers as the board
of directors may determine. The offices of president and chief executive officer
may be held by two (2) individuals as co-presidents and co-chief executive
officers. The board of directors, in its discretion, may also elect a chairman
of the board and a vice chairman of the board from among the members of the
board who shall not be deemed an officer of the corporation unless so designated
by the board of directors. All officers will be elected by the board of
directors.
3.2 Qualifications. None of the officers of the corporation need be a
director. Any two or more offices may be held by the same person.
3.3 Chairman and Vice Chairman of the Board. The chairman of the board,
if any, or, in the chairman's absence, the vice chairman of the board, if any,
will preside at all meetings
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of the board of directors and of the shareholders at which he or she is present,
and will perform any other duties assigned by the board of directors from time
to time.
3.4 Chief Executive Officer. Subject to the authority of the board of
directors, the chief executive officer will have general charge, supervision,
and control over the business and affairs of the corporation and will be
responsible for its management. The chief executive officer shall have the power
and shall perform the duties as are regularly and customarily performed by the
chief executive officer of a corporation and may delegate such duties as
appropriate to other officers of the corporation. The chief executive officer
will submit a report of the operations of the corporation for the preceding year
to the shareholders at their annual meeting. If no chairman of the board is
elected by the board of directors or in the absence of the chairman of the
board, the chief executive officer will preside at all meetings of the
shareholders, and of the board of directors if he or she is a member of the
board. Any shares of stock of another corporation held by the corporation will
be voted by the chief executive officer subject to direction from the board of
directors. The chief executive officer will perform any other duties assigned to
that office from time to time by the board of directors.
3.5 Co-Chief Executive Officers. The office of chief executive officer
may be shared by two (2) individuals. In the event that two person hold office
as co-chief executive officers, the co-chief executive officers shall determine
between themselves those areas of which each shall have primary responsibility,
it being understood that both of them shall be involved in and be responsible
for all major policy decisions and both of them shall have general oversight
over the business and affairs of the Combined Corporation. Any matters upon
which the co-chief executive officers are unable to agree shall be referred to
the Executive Committee. If one co-chief executive officer is absent or
disabled, the other shall exercise all the duties of that office.
3.6 President. The president, who also may be the chief executive
officer of the corporation, shall have such authority and shall exercise such
duties as shall, from time to time, be assigned to that office by the board of
directors or, as appropriate, the chief executive officer.
3.7 Co-Presidents. The office of president may be shared by two (2)
individuals, one of whom or both of whom may also be the chief executive officer
or co-chief executive officers of the corporation. In the event that two persons
hold office as co-presidents, the board of directors or, as appropriate, the
chief executive officer or co-chief executive officers shall determine those
areas of which each co-president shall have primary responsibility. Any matters
upon which the co-presidents are unable to agree shall be referred to the chief
executive officer or co-chief executive officers, if such person or persons are
not also a co-president or co-presidents, and otherwise to the Executive
Committee. If one co-president is absent or disabled, the other shall exercise
all the duties of that office.
3.8 Vice President. If the president is absent or disabled, the vice
president will have and may exercise and perform the authority and duties of the
president. In addition, the vice president will perform any other duties
assigned to that office by the board of directors, the chief executive officer,
or president from time to time. If more than one vice president is elected, the
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vice presidents will have the titles, seniority, and duties established for them
by the board of directors.
3.9 Secretary. The secretary will prepare and keep minutes of meetings
of shareholders and directors, will be responsible for authenticating records of
the corporation, and will exercise the usual authority pertaining to the office
of secretary. The secretary will keep and, when proper, affix the seal of the
corporation, if any, and will perform any other duties assigned to that office
by the board of directors, the CEO, or president from time to time.
3.10 Treasurer. The treasurer, who may also be the chief financial
officer, will have charge and custody of and be responsible for all funds and
securities of the corporation. The treasurer will deposit all such funds in the
name of the corporation in the depositories or invest them in the investments
designated or approved by the board of directors, and will authorize
disbursements of the funds of the corporation in payment of just demands against
the corporation or as may be ordered by the board of directors on securing
proper vouchers. The treasurer will render to the board of directors from time
to time, as may be required, an account of all transactions as treasurer; and
will perform any other duties assigned to that office from time to time by the
board of directors, the CEO, or president.
3.11 Other Officers and Agents. The board of directors may appoint other
officers and agents as it deems necessary or expedient. These other officers and
agents will exercise the authority and perform the duties prescribed for them by
the board of directors, which authority and duties may include, in the case of
the other officers, one or more of the duties of the named officers of the
corporation.
3.12 Removal of Officers. Any officer or agent may be removed by the
board of directors whenever in its judgment the best interests of the
corporation will be served by doing so. Removal will be without prejudice to the
contract rights, if any, of the person removed. Election or appointment of an
officer or agent will not of itself create contract rights.
3.13 Vacancies. Vacancies in any office arising from any cause may be
filled by the board of directors at any regular or special meeting.
3.14 Salaries. Salaries of all officers of the corporation appointed by
the board of directors will be fixed by the board of directors or by a person or
committee authorized by the board of directors.
SECTION 4
Business of the Corporation
4.1 Obligations. Any agreements or other documents requiring Board
approval will be valid if approved by the Board and signed by the chief
executive officer, president, or vice president and attested by the secretary or
an assistant secretary.
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4.2 Contracts. The board of directors may authorize any officer or agent
to enter into any contract or execute and deliver any instrument in the name of
and on behalf of the corporation. This authority may be general or confined to
specific instances.
4.3 Loans to Corporation. No loans will be contracted on behalf of the
corporation, and no evidence of indebtedness will be issued in its name, unless
authorized by the board of directors. This authority may be general or confined
to specific instances.
4.4 Checks and Drafts. All checks, drafts, or other orders for the
payment of money, notes, or other evidence of indebtedness issued in the name of
the corporation will be signed by the officer(s) or agent(s) of the corporation
and in the manner prescribed from time to time by the board of directors.
SECTION 5
Indemnification
5.1 Definitions. As used in this Section:
(a) "Act" mean the Oregon Business Corporations Act, now or
hereafter in force.
(b) "Corporation" means this corporation, and any domestic or
foreign predecessor entity which, in a merger or other
transaction, ceased to exist.
(c) "Director" means an individual who is or was a director of
the corporation or an individual who, while a director of the
corporation, is or was serving at the corporation's request 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.
"Director" includes the estate or personal representative of a
director, unless the context requires otherwise.
(d) "Expenses" include counsel fees.
(e) "Indemnitee" means an individual made a party to a
proceeding because the individual is or was a director, officer,
employee, or agent of the corporation and who possesses
indemnification rights pursuant to the Articles of
Incorporation, these bylaws, or other corporate action. It also
includes any individual entitled to indemnification pursuant to
this Section. It also includes the heirs, executors, and other
successors in interest of the above individuals.
(f) "Liability" means the obligation to pay a judgment,
settlement, penalty, fine, including any excise tax assessed
with respect to an employee benefit plan, or reasonable expenses
incurred with respect to a proceeding.
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(g) "Party" includes an individual who was, is , or is
threatened to be named a defendant or respondent in a
proceeding.
(h) "Proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal.
5.2 Directors and Officers. The corporation will indemnify its directors
and officers to the full extent permitted by the Act. However, the indemnity
will not apply on account of:
(a) Acts or omissions of a director or officer finally adjudged
to be intentional misconduct or a knowing violation of law;
(b) A proceeding by or in the right of the corporation in which
the director or officer was adjudged liable to the corporation;
or
(c) Any proceeding charging improper personal benefit to the
director or officer in which the director of officer was
adjudged liable on the basis that personal benefit was
improperly received by the director or officer.
The corporation will advance expenses for such persons pursuant to the
terms set forth in these bylaws, in a resolution of the Board of Directors, or
in a contract with any such person.
5.3 Employees and Agents. The corporation may, by action of the Board,
grant rights to indemnification and advancement of expenses to employees and
agents of the corporation within the same scope and effect allowed by the
provisions of this Section with respect to the indemnification and advancement
of expenses of directors and officers of the corporation or by the Act or
otherwise.
5.4 Procedure for Seeking Indemnification or Advance.
(a) Notification and Defense of Claim. An Indemnitee will
promptly notify the corporation in writing of any proceeding for
which indemnification is sought under this Section. In addition,
the Indemnitee will provide the corporation with information and
cooperation that the corporation may reasonably require and
which is within the Indemnitee's power.
With respect to any proceeding of which the Indemnitee has notified the
corporation:
1. The corporation will be entitled to participate in
the proceeding at its own expense; and
2. Except as otherwise provided below, to the extent
that it may wish, the corporation, jointly and any other
indemnifying party similarly notified, will be entitled
to assume the defense of the proceeding, with counsel
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satisfactory to the Indemnitee. The Indemnitee's consent
to such counsel will not be unreasonably withheld.
The corporation will not be entitled to assume the defense of any
proceeding brought by or on behalf of the corporation or as to which Indemnitee
has reasonably concluded that a conflict of interest may exist between the
corporation and the Indemnitee in the conduct of the defense.
After notice from the corporation to the Indemnitee of its election to
assume the defense, the corporation will not be liable to the Indemnitee under
this Section for any legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense. However, the fees and expenses of the
Indemnitee's counsel will be paid by the corporation if:
1. The employment of counsel by the Indemnitee has been
authorized by the corporation;
2. Indemnitee reasonably concludes that a conflict of interest
may exist between the corporation and the Indemnitee in the
conduct of the defense; or
3. The corporation did not in fact employ counsel to assume the
defense of the proceeding.
Notwithstanding the assumption of defense by the corporation in any
proceeding, the Indemnitee will continue to have the right to employ its counsel
in the proceeding, at the Indemnitee's expense.
(b) Information Required and Determination of Indemnification.
For the purpose of pursuing rights to indemnification under this
Section, the Indemnitee will submit to the Board an
Indemnification Statement, consisting of:
1. A sworn statement requesting indemnification; and
2. Any evidence that the Board may reasonably request of
all amounts for which indemnification is requested.
Submission of an Indemnification Statement to the Board will create a
presumption that the Indemnitee is entitled to indemnification and, if requested
in accordance with the following Subsection, advancement of expenses. The
corporation will, within sixty (60) calendar days after submission of the
Indemnification Statement (or twenty (20) calendar days in the case of
advancement of expenses), make the payments requested in the Indemnification
Statement to or for the benefit of the Indemnitee, unless within sixty (60) or
twenty (20) day period the corporation determines (in the manner provided below)
that the Indemnitee is not entitled to indemnification under this Section and
gives the Indemnitee notice in writing of such determination, which notice will
disclose with particularity the evidence on which the
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determination is based. Such determination will be based on clear and convincing
evidence, sufficient to rebut the foregoing presumption.
At the election of the President of the corporation, the foregoing
determination may be made as provided in ORS 60.404.
Any determination that the Indemnitee is not entitled to indemnification
and any failure to make the payments requested in the Indemnification Statement
will be subject to judicial review by any court of competent jurisdiction.
(c) Special Procedure Regarding Advances. An Indemnitee seeking
payment or reimbursement of expenses in advance of a final
disposition of the proceeding must furnish the corporation, as
part of the Indemnification Statement, with:
1. A written affirmation of the Indemnitee's good faith
belief that the Indemnitee has met the standard of
conduct required to be eligible for indemnification; and
2. A written undertaking, constituting an unlimited
general obligation of the Indemnitee, to repay the
advance if it is ultimately determined that the
Indemnitee did not meet the required standard of
conduct.
(d) Settlement. The corporation is not liable to indemnify
Indemnitee for any amounts paid in settlement of any proceeding
without the corporation's written consent. The corporation will
not settle any proceeding in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the corporation nor Indemnitee will
unreasonably withhold its consent to a proposed settlement.
5.5 Contract and Related Rights.
(a) Contract Rights. The right of an Indemnitee to
indemnification and advancement of expenses is a contract right
on which the Indemnitee will be presumed to have relied in
determining to serve or continue to serve in his or her capacity
with the corporation. Such right will continue as long as
Indemnitee is subject to any possible proceeding. Any amendment
to or repeal of this Section will not adversely affect any right
or protection of an Indemnitee with respect to any acts or
omissions of the Indemnitee occurring prior to the amendment or
repeal.
(b) Optional Insurance, Contracts, and Funding. The corporation
may:
1. Maintain insurance, at its expense, to protect itself
and any Indemnitee against any liability, whether or not
the corporation would have power to indemnify the
individual against the same liability under the Act;
12
<PAGE> 16
2. Enter into contracts with any Indemnitee in
furtherance of this Section and consistent with the Act;
and
3. Create a trust fund, grant a security interest, or
use other means (including, without limitation, a letter
of credit) to ensure the payment of amounts that may be
necessary to effect indemnification as provided in this
Section.
(c) Severability. If any provision or application of this
Section is invalid or unenforceable, the remainder of this
Section and its remaining applications will not be affected
thereby and will continue in full force and effect.
(d) Right of Indemnitee to Bring Suit. If a claim under this
Section for indemnification is not paid in full by the
corporation within sixty (60) days, or for advancement of
expenses is not paid in full by the corporation within twenty
(20) days, after an Indemnification Statement setting forth the
claim has been received by the corporation, the Indemnitee may
at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim. To the extent such suit
is successful, the Indemnitee will be entitled to recover from
the corporation the expense (to be prorated if the Indemnitee is
only partially successful) of prosecuting the claim.
Neither (1) the future of the corporation (including its Board of
Directors, shareholders, or independent legal counsel) to have made a
determination prior to the commencement of a proceeding that indemnification of,
or reimbursement or advance of expenses to, the Indemnitee is proper in the
circumstances, nor (2) an actual determination by the corporation (including its
Board of Directors, shareholders, or independent legal counsel) that the
Indemnitee is not entitled to indemnification or to the reimbursement or
advancement of expenses, will create a presumption that the Indemnitee is not so
entitled.
5.6 Exceptions. Notwithstanding any other provision of this Section, the
corporation will not be obligated pursuant to the terms of these bylaws to
indemnify or advance expenses to Indemnitee with respect to any proceeding:
(a) Claims Initiated by Indemnitee. Initiated or brought
voluntarily by Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right
of indemnification under these bylaws or any other statute or
law or as otherwise required under the Act. However,
indemnification or advancement of expenses may be provided by
the corporation in specific cases if the Board of Directors
finds it to be appropriate.
(b) Lack of Good Faith. Initiated or brought voluntarily by
Indemnitee to enforce or interpret these bylaws if a court of
competent jurisdiction determines that each of the material
assertions made by Indemnitee in such proceeding was not made in
good faith or was frivolous.
13
<PAGE> 17
(c) Insured Claims. For which any of the expenses or liabilities
for indemnification being sought have been paid directly to
Indemnitee by an insurance carrier under a policy of insurance
maintained by the corporation.
(d) Prohibited by Law. If the corporation is prohibited by the
Act, or other applicable law as then in effect from paying such
indemnification and/or advancement of expenses.
5.7 Service for Other Entities. The indemnification and advancement of
expenses provided under this Section will apply to directors, officers,
employees, or agents of the corporation for both (a) service in such capacities
for the corporation, and (b) service at the corporation's request 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. A person is considered to be serving an employee benefit plan at the
corporation's request if that person's duties to the corporation also impose
duties on, or otherwise involve services by, that person to the plan or to
participants or beneficiaries of the plan.
SECTION 6
Stock
6.1 Certificate of Stock. Certificates of stock will be issued in
numerical order. Each shareholder will be entitled to a certificate signed,
either manually or in facsimile, by the president or vice president and the
secretary, or by the board of directors. The certificate may be sealed with the
corporate seal. Every certificate of stock will state:
(a) The name of the corporation and the fact that the
corporation is incorporated under the laws of the State of
Oregon;
(b) The name of the registered holder of the shares represented
by the certificate; and
(c) The number and class of the shares and the designation of
the series, if any, represented by the certificate.
6.2 Transfer. Subject to any legend appearing on the certificate, shares
of stock may be transferred by delivery of the certificate, accompanied by
either an assignment in writing on the back of the certificate or a separate
written assignment and power of attorney to transfer the same, which in either
event is signed by the record holder of the certificate. No transfer will be
valid, except as between the parties to the transfer, until the transfer is made
on the books of the corporation. Except as otherwise specifically provided in
these bylaws, no shares of stock will be transferred on the books of the
corporation until the outstanding certificate or certificates representing the
transferred stock have been surrendered to the corporation accompanied by an
assignment as above.
14
<PAGE> 18
6.3 Shareholders of Record. The corporation will be entitled to treat
the holder of record on the books of the corporation of any share or shares of
stock as the holder in fact of those shares for all purposes, including the
payment of dividends on and the right to vote the stock, unless provided
otherwise by the board of directors.
6.4 Loss or Destruction of Certificates. If any certificate of stock is
lost or destroyed, another may be issued in its place on proof of loss or
destruction and on the giving of a satisfactory bond of indemnity to the
corporation. A new certificate may be issued without requiring any bond when, in
the judgment of the board of directors, it is proper to do so.
6.5 Record Date and Transfer Books. For the purpose of determining
shareholders entitled to notice of or vote at any meeting of shareholders or any
adjournment thereof, or entitled to receive payment of any dividend, or in order
to make a determination of shareholders for any other proper purpose, the board
of directors will make in advance a record date for any such determination of
shareholders. The record date in any case will not be more than seventy (70)
days and, in the case of a meeting of shareholders, not less than ten (10) days
prior to the date on which the particular action requiring the determination of
shareholders is to be taken. If no record date is fixed for these purposes, the
date on which notice of the meeting is mailed or the date on which the
resolution of the board of directors declaring the dividend is adopted, as the
case may be, will be the record date for the determination of shareholders.
6.6 Regulations. The board of directors will have the power and
authority to make all rules and regulations it deems expedient concerning the
issue, transfer, conversion, and registration of certificates for shares of
stock of the corporation not inconsistent with these bylaws, the articles of
incorporation, or the laws of the United States or the State of Oregon.
SECTION 7
Books and Records
7.1 Records of Corporate Meetings and Share Register. The corporation
will keep at either its principal place of business, its registered office, or
another place permitted by law, as the board of directors may designate, (a)
books and records of account and minutes or records of all of the proceedings of
the board of directors, director committees, and shareholders, and (b) a record
of shareholders, giving the names of the shareholders and showing their
respective addresses and the number and class of shares held by each.
7.2 Reliance of Records. Any person dealing with the corporation may
rely on a copy of any of the records of the proceedings, resolutions, or votes
of the board of directors, director committees, or shareholders when certified
by the president, vice president, or secretary.
7.3 Form of Records. All books and records may be kept on paper or in
electronic or other format.
15
<PAGE> 19
SECTION 8
Corporate Seal
The corporation may adopt, but will not be required to adopt, a
corporate seal. If a seal is adopted, it will be circular and will include the
name of the corporation and the words "corporate seal."
SECTION 9
Amendments
9.1 Action by Board. The board of directors may amend or repeal the
bylaws unless:
(a) The articles of incorporation or the provisions of law
reserve this power exclusively to the shareholders in whole or
in part; or
(b) The shareholders in amending or adopting a particular bylaw
provide expressly that the board of directors may not amend or
repeal that bylaw.
9.2 Amendment by Shareholders. The shareholders may amend or repeal the
bylaws even though the bylaws may also be amended and repealed by its board of
directors.
9.3 Amendments to Shareholder Quorum Requirements. If expressly
authorized by the articles of incorporation, the shareholders may adopt or amend
a bylaw that fixes a greater quorum or voting requirement for shareholders, or
voting groups of shareholders, than is required by law. The adoption or
amendment of a bylaw that adds, changes, or deletes a greater quorum or voting
requirement for shareholders must meet the same quorum requirement and be
adopted by the same vote and voting groups required to take action under the
quorum and voting requirement then in effect or the quorum or voting requirement
proposed to be adopted, whichever is greater. A bylaw that fixes a greater
quorum or voting requirement for shareholders under this Section 9.3 may not be
adopted, amended, or repealed by the board of directors.
9.4 Amendments to Board Quorum Requirements. A bylaw provision that
fixes a greater quorum or voting requirement for the board of directors may be
amended or repealed:
(a) If the provision was originally adopted by the shareholders,
only by the shareholders; or
(b) If the provision was originally adopted by the board of
directors, either by the shareholders or by the board of
directors.
A bylaw provision adopted or amended by the shareholders that fixes a
greater quorum or voting requirement for the board of directors may provide that
it may be amended or repealed only by a specified vote of either the
shareholders or the board of directors.
16
<PAGE> 1
EXHIBIT 3.3
AMENDMENT TO BYLAWS
OF
WEST COAST BANCORP
APPROVED BY THE BOARD OF DIRECTORS
AT A MEETING HELD ON MARCH 15, 1999
[AMENDMENT TO SECTION 2.2]
The Board approves the amendment to Section 2.2 of the Bylaws to change
the vote required to approve board candidates from 75 percent to a majority, by
amending the second sentence of Section 2.2 as follows:
"Nominations by the board of directors of candidates for
election to the Board shall be approved by at least a majority
of the members of the board of directors."
<PAGE> 1
EXHIBIT 3.4
AMENDMENT TO BYLAWS
OF
WEST COAST BANCORP
APPROVED BY THE BOARD OF DIRECTORS
AT A MEETING HELD ON FEBRUARY 24, 1999
[AMENDMENT TO SECTION 2.2]
Section 2.2 of the Bylaws is amended by revising the last sentence as
follows:
No person may stand for election or re-election for director, if
they have attained the age of sixty nine (69).
<PAGE> 1
EXHIBIT 10.4
CONFIDENTIAL
SALARY CONTINUATION AGREEMENT
THIS SALARY CONTINUATION AGREEMENT ("Agreement") is dated as of December
1, 1996 (the "Effective Date"). The parties to the Agreement ("Parties"') are
WEST COAST BANCORP, an Oregon corporation ("Bancorp"), and CYNTHIA J. HAWORTH
("Executive").
A. Bancorp currently receives the exclusive services of certain employees
including Executive, and both Bancorp and Executive desire to continue
Executive's services in the event of a change in the control of Bancorp,
thereby allowing Bancorp to maximize the benefits obtainable from any
such change.
B. To encourage Executive's continued services, Bancorp desires to provide
a salary continuation benefit to Executive.
In consideration of the mutual promises, covenants, agreements and
undertakings contained in this Agreement, the parties agree as follows:
1. EFFECTIVE DATE AND TERM. As of the Effective Date, this Agreement shall
be a binding obligation of the parties, not subject to revocation or
amendment except by mutual consent or in accordance with its terms. The
term of this Agreement ("Term") shall commence as of the Effective Date
and shall end one (1) year thereafter, provided however, that this
Agreement shall be automatically renewed for successive one year
periods, unless the Board of Directors of Bancorp do not approve such
renewal and provide written notice to Executive of such event, or
Executive gives written notice to Bancorp not less than thirty (30) days
prior to any such anniversary date of Executive's election not to extend
the term beyond its then scheduled expiration date. Notwithstanding the
preceding, if a definitive agreement providing for a Change in Control
(as defined below) is entered into on or before the expiration of the
Term, the term of this Agreement shall be extended to twelve (12) months
after the consummation of such Change in Control.
2. COMMITMENT OF EXECUTIVE. In the event that any person extends any
proposal or offer which is intended to or may result in a Change in
Control, as defined below (a "Change in Control Proposal"), Executive
shall, at Bancorp's request, assist Bancorp in evaluating such proposal
or offer. Further, as a condition to receipt of the Salary Continuation
Payment defined below, Executive agrees not to resign Executive's
position with Bancorp during any period from the receipt of a specific
Change in Control Proposal up to the consummation or abandonment of the
transaction contemplated by such Proposal.
3. SALARY CONTINUATION PAYMENT.
(a) Amount of Payment--Termination Event After Change in Control.
Except as otherwise provided in this Section, in the case of a
Termination Event After a Change in Control, as defined in
Section 4, Executive shall receive a salary continuation payment
(the "Salary Continuation Payment") equal to the sum of
-1-
<PAGE> 2
the Regular Salary Continuation Payment and the Bonus
Continuation Payment. The Regular Salary Continuation Payment
shall equal Executive's regular monthly salary in effect as of
the date of termination of employment (as reportable on
Executive's IRS Form W-2, but including the amount of any
voluntary deferrals of salary, and excluding any expense
allowances or reimbursements, any bonuses, any gain from
exercise of stock options, or any other similar non-recurring
payments) which would be payable to Executive but for the
termination from the date of termination of Executive's
employment to the date twelve (12) months after the Change in
Control. The Bonus Continuation Payment shall equal (i) the most
recent annual bonus paid to Executive, multiplied by (ii) (x)
the number of days during which Executive was employed but as to
which no annual bonus has been paid plus the number of days from
the date of termination of employment to the date twelve (12)
months after the Change in Control divided by (y) 365.
(b) Limitation on Payment. Notwithstanding anything in this
Agreement to the contrary, the Salary Continuation Payment shall
not exceed an amount equal to One Dollar ($1.00) less than the
amount which would cause the payment, together with any other
payments received from Bancorp, to be a "parachute payment" as
defined in Section 280G(b)(2)(A) of the Internal Revenue Code.
4. TERMINATION EVENT AFTER CHANGE IN CONTROL. A Termination Event After a
Change in Control shall be deemed to occur upon, and only upon, one or
more of the following:
(a) Termination of Executive's employment by Executive for Good
Reason (as defined herein) within twelve (12) months after a
Change In Control;
(b) Termination of Executive's employment by Bancorp other than for
Cause, Disability, or Retirement (each of which is defined
below) within twelve (12) months after a Change In Control; or
(c) Termination of Executive's employment by Bancorp other than for
Cause, Disability, or Retirement prior to a Change In Control if
such termination occurs either (i) on or after announcement, by
Bancorp or any other party, of a contemplated Change In Control
or an intended Change In Control, or (ii) on or after the date a
contemplated or intended Change In Control should have been
announced in conformity with applicable securities or other
laws, but only if in either case a Change In Control occurs
within twelve (12) months after such termination of Executive's
employment.
5. DEFINITIONS.
(a) Cause. "Cause" shall mean only any one or more of the following:
(i) Willful misfeasance or gross negligence in the
performance of Executive's duties; or
(ii) Conviction of a crime in connection with such duties.
-2-
<PAGE> 3
(b) Disability. "Disability" shall mean a physical or mental
impairment which renders Executive incapable of substantially
performing the duties required under this Agreement, and which
is expected to continue rendering Executive so incapable for the
reasonably foreseeable future.
(c) Retirement. "Retirement" shall mean voluntary termination by
Executive in accordance with Bancorp's retirement policies,
including early retirement, if applicable to their salaried
employees.
(d) Good Reason. "Good Reason" shall mean only any one or more of
the following:
(i) Any reduction of Executive's salary or any reduction or
elimination of any compensation or benefit plan
benefiting Executive, which reduction or elimination is
not of general application to substantially all
employees of Bancorp or such employees of any successor
entity or of any entity in control of Bancorp;
(ii) A relocation or transfer of Executive's place of
employment which would reasonably require Executive to
commute more than twenty (20) miles each way from
Executive's principal residence; or
(iii) A material diminution in the responsibilities or duties
of Executive.
(e) Change In Control. "Change in Control" shall mean either of the
following:
(i) A Person or Entity (as defined below) acquiring or
otherwise becoming the owner (as a result of a purchase,
merger, stock exchange, or otherwise) of more than fifty
percent (50%) of the outstanding common stock of
Bancorp, or
(ii) The merger of Bancorp into any corporation, or the
merger of any corporation into Bancorp, where more than
fifty percent (50%) of the stock of such corporation or
Bancorp, as the case may be, (the "Surviving
Corporation") is owned by other than the owners of the
common stock of Bancorp prior to such merger.
(f) Person or Entity. "Person or Entity" shall include any one or
more persons and/or entities acting in concert with respect to
their interests in the Surviving Corporation.
6. OTHER COMPENSATION AND TERMS OF EMPLOYMENT. This Agreement is not an
employment agreement. Accordingly, except with respect to the Salary
Continuation Payment, this Agreement shall have no effect on the
determination of any compensation payable by Bancorp to Executive, or
upon any of the other terms of Executive's employment with Bancorp. The
specific arrangements referred to herein are not intended to exclude any
other benefits which may be available to Executive upon a termination of
employment with Bancorp pursuant to employee benefit plants of Bancorp
or otherwise.
-3-
<PAGE> 4
7. WITHHOLDING. All payments required to be made by Bancorp hereunder to
Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as Bancorp may reasonably
determine should be withheld pursuant to any applicable law or
regulation.
8. ASSIGNABILITY. Bancorp may assign this Agreement and its rights
hereunder in whole, but not in part, to any corporation, bank or other
entity with or into which Bancorp may hereafter merge or consolidate or
to which Bancorp may transfer all or substantially all of its assets, if
in any such case said corporation, bank or other entity shall by
operation of law or expressly in writing assume all obligations of
Bancorp hereunder as fully as if it had been originally made a party
hereto, but may not otherwise assign this Agreement or its rights
hereunder. Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
9. GENERAL PROVISIONS.
(a) Choice of Law. This Agreement is made with reference to and is
intended to be construed in accordance with the laws of the
State of Oregon.
(b) Arbitration. Any dispute, controversy or claim arising out of or
in connection with, or relating to, this Agreement or any breach
or alleged breach hereof, shall, upon the request of any party
involved, be submitted to, and settled by, arbitration pursuant
to the rules then in effect of the American Arbitration
Association (or under any other form of arbitration mutually
acceptable to the parties so involved). Any award rendered shall
be final and conclusive upon the parties and a judgment thereon
may be entered in the highest court of the forum having
jurisdiction. The arbitrator shall render a written decision,
naming the substantially prevailing party in the action, and
shall award such party all costs and expenses incurred,
including reasonable attorneys' fees.
(c) Attorney Fees. In the event of any breach of or default under
this Agreement which results in either party incurring attorney
or other fees, costs or expenses (including in arbitration), the
prevailing party shall be entitled to recover from the
non-prevailing party any and all such fees, costs and expenses,
including attorney fees.
(d) Successors. This Agreement shall be binding upon and inure to
the benefit of the Parties and each of their respective
affiliates, legal representatives, successors and assigns.
(e) Construction. This Agreement contains the entire agreement among
the Parties with respect to its subject matter, and may be
amended or modified only in a writing executed by all of the
Parties. Its language is and will be deemed to be the language
chosen by the Parties jointly to express their mutual intent. No
rule of construction based on which party drafted the Agreement
or certain of its provisions will be applied against any party.
This Agreement may be amended only in a writing signed by the
parties.
-4-
<PAGE> 5
(f) Captions. The captions of the respective sections of this
Agreement have been included for convenience of reference only.
They shall not be construed to modify or otherwise affect in any
respect any of the provisions of the Agreement.
(g) Counterparts. This Agreement may be executed in one or more
counterparts by the parties hereto. All counterparts shall be
construed together and shall constitute one Agreement.
EXECUTED by each of the parties effective as of the date first stated
above.
BANCORP:
WEST COAST BANCORP,
an Oregon corporation
By: /s/ Lester Green
------------------------------------
Its: Chairman
EXECUTIVE:
/s/ Cynthia J. Haworth
----------------------------------------
CYNTHIA J. HAWORTH
-5-
<PAGE> 1
EXHIBIT 21
SCHEDULE OF SUBSIDIARIES
Following is a list of the registrant's subsidiaries at February 28, 1999.
State of Incorporation
Name of Organization
----------------------
West Coast Bank Oregon
Centennial Funding Corp Washington
ELD Inc. Washington
Totten, Inc Washington
West Coast Trust Oregon
57
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included (or incorporated by reference) in this Form
10-K, into the Company's previously filed Registration Statement File Nos.
333-09721, 333-01651, 333-01649 and 033-60259.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 22, 1999
58
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included (or incorporated by reference) in this Form
10-K, into the Company's previously filed Registration Statement File Nos.
333-09721, 333-01651, 333-01649 and 033-60259.
DWYER, PEMBERTON LLP
Tacoma, Washington
March 22, 1999
59
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<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<CASH> 50,373 82,511 84,294
<INT-BEARING-DEPOSITS> 64,818 3,412 1,244
<FED-FUNDS-SOLD> 9,100 0 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 189,712 204,036 243,559
<INVESTMENTS-CARRYING> 2,983 2,970 2,879
<INVESTMENTS-MARKET> 2,986 3,063 2,935
<LOANS> 804,002 820,787 827,213
<ALLOWANCE> (11,790) (12,004) (12,096)
<TOTAL-ASSETS> 1,167,445 1,162,255 1,211,906
<DEPOSITS> 997,295 1,013,270 1,048,802
<SHORT-TERM> 23,461 1,397 9,700
<LIABILITIES-OTHER> 9,288 6,058 8,720
<LONG-TERM> 32,660 31,874 31,089
0 0 0
0 0 0
<COMMON> 15,971 16,085 17,760
<OTHER-SE> 88,770 93,571 95,834
<TOTAL-LIABILITIES-AND-EQUITY> 104,741 1,162,255 1,211,906
<INTEREST-LOAN> 20,213 40,648 61,580
<INTEREST-INVEST> 2,942 5,974 9,246
<INTEREST-OTHER> 552 981 1,595
<INTEREST-TOTAL> 23,707 47,603 72,421
<INTEREST-DEPOSIT> 8,243 16,668 25,479
<INTEREST-EXPENSE> 8,984 17,987 27,261
<INTEREST-INCOME-NET> 14,723 29,616 45,160
<LOAN-LOSSES> 1,485 1,980 2,465
<SECURITIES-GAINS> 101 251 250
<EXPENSE-OTHER> 13,155 26,037 13,460
<INCOME-PRETAX> 2,747 10,706 15,514
<INCOME-PRE-EXTRAORDINARY> 2,747 7,102 15,514
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,747 7,102 10,406
<EPS-PRIMARY> .20 .51 .74
<EPS-DILUTED> .19 .48 .71
<YIELD-ACTUAL> 5.97 5.10 5.08
<LOANS-NON> 3,582 2,748 3,475
<LOANS-PAST> 147 256 132
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 10,451 10,451 10,451
<CHARGE-OFFS> 339 632 1,117
<RECOVERIES> 193 205 297
<ALLOWANCE-CLOSE> 11,790 12,004 12,096
<ALLOWANCE-DOMESTIC> 11,790 12,004 12,096
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 44,138 48,939 44,289
<INT-BEARING-DEPOSITS> 15,715 9,850 40,693
<FED-FUNDS-SOLD> 81 7,599 6,988
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 132,684 135,146 165,139
<INVESTMENTS-CARRYING> 3,351 3,336 3,316
<INVESTMENTS-MARKET> 3,374 3,345 3,328
<LOANS> 736,670 749,787 764,750
<ALLOWANCE> (9,122) (9,786) (9,977)
<TOTAL-ASSETS> 973,383 992,475 1,069,752
<DEPOSITS> 825,052 875,271 945,953
<SHORT-TERM> 22,633 1,943 371
<LIABILITIES-OTHER> 8,224 7,102 8,342
<LONG-TERM> 29,983 17,017 18,731
0 0 0
0 0 0
<COMMON> 11,248 11,264 15,660
<OTHER-SE> 76,243 79,878 80,695
<TOTAL-LIABILITIES-AND-EQUITY> 973,383 992,475 1,069,752
<INTEREST-LOAN> 18,522 38,037 57,732
<INTEREST-INVEST> 1,904 4,084 6,337
<INTEREST-OTHER> 237 385 1,073
<INTEREST-TOTAL> 20,663 42,506 65,142
<INTEREST-DEPOSIT> 6,765 14,125 22,139
<INTEREST-EXPENSE> 7,431 15,276 23,552
<INTEREST-INCOME-NET> 13,232 27,230 41,590
<LOAN-LOSSES> 1,397 2,310 2,943
<SECURITIES-GAINS> (27) (46) (57)
<EXPENSE-OTHER> 10,668 21,622 32,735
<INCOME-PRETAX> 5,273 10,454 16,185
<INCOME-PRE-EXTRAORDINARY> 5,273 10,454 16,185
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,350 6,662 10,796
<EPS-PRIMARY> .25 .49 .74
<EPS-DILUTED> .24 .47 .71
<YIELD-ACTUAL> 5.59 5.57 5.46
<LOANS-NON> 1,974 2,493 3,963
<LOANS-PAST> 44 254 157
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 8,491 8,491 8,491
<CHARGE-OFFS> 796 1,063 1,565
<RECOVERIES> 31 48 109
<ALLOWANCE-CLOSE> 9,122 9,786 9,977
<ALLOWANCE-DOMESTIC> 9,122 9,786 9,977
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
