<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
Form 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 2000
[ ] Transition report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-10997
WEST COAST BANCORP
(Exact name of registrant specified in its charter)
Oregon 93-0810577
(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
5335 Meadows Road, Suite 201, Lake Oswego, Oregon 97035
(Address of principal executive offices) (Zip code)
(503) 684-0884
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No. [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, no par value, outstanding on October 31, 2000: 16,554,917
<PAGE> 2
TABLE OF CONTENTS
PART I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
----
<S> <C>
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999.....................................3
Consolidated Statements of Income -
Three months and nine months ended September 30, 2000 and 1999...............4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999................................5
Consolidated Statements of Changes in Stockholders' Equity...................6
Notes to Consolidated Financial Statements...................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................23
PART II. Other Information
Item 1. Legal Proceedings...........................................................24
Item 6. Exhibits and Reports on Form 8-K............................................25
Signatures..........................................................................25
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1.
WEST COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 54,829,906 $ 47,148,168
Interest-bearing deposits in other banks 1,272,695 17,024,548
Federal funds sold 8,913,000 2,800,000
--------------- ---------------
Total cash and cash equivalents 65,015,601 66,972,716
Trading assets 1,006,123 1,000,943
Investment securities:
Investments available for sale 248,224,905 255,609,218
Loans held for sale 3,295,557 8,309,188
Loans 1,004,169,860 976,297,233
Allowance for loan loss (14,090,032) (13,479,752)
--------------- ---------------
Loans, net 990,079,828 962,817,481
Premises and equipment, net 29,312,495 30,654,447
Intangible assets 2,046,494 2,337,049
Other assets 28,876,741 26,986,340
--------------- ---------------
Total assets $ 1,367,857,744 $ 1,354,687,382
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES:
Deposits:
Demand $ 208,756,890 $ 194,338,293
Savings and interest-bearing demand 507,434,591 542,532,667
Certificates of deposit 382,809,472 343,926,889
--------------- ---------------
Total deposits 1,099,000,953 1,080,797,849
Short-term borrowings 93,063,000 79,512,500
Other liabilities 11,139,276 11,895,821
Long-term borrowings 45,057,605 65,688,557
--------------- ---------------
Total liabilities 1,248,260,834 1,237,894,727
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY:
Preferred stock: no par value, none issued;
10,000,000 shares authorized
Common stock: no par value, 55,000,000 shares
authorized; 16,643,317 and 15,344,857 shares issued
and outstanding, respectively 20,804,146 19,181,071
Additional paid-in capital 88,241,431 78,005,788
Retained earnings 12,455,456 23,007,819
Accumulated other comprehensive loss (1,904,123) (3,402,023)
--------------- ---------------
Total stockholders' equity 119,596,910 116,792,655
--------------- ---------------
Total liabilities and stockholders' equity $ 1,367,857,744 $ 1,354,687,382
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 23,455,141 $ 20,351,721 $ 69,135,346 $ 60,800,117
Interest on taxable investment securities 2,748,326 2,505,274 8,317,164 7,258,134
Interest on nontaxable investment securities 1,043,360 1,081,540 3,170,959 3,336,863
Interest from other banks 44,244 48,107 118,988 198,103
Interest on federal funds sold 30,644 6,292 34,173 32,575
------------ ------------ ------------ ------------
Total interest income 27,321,715 23,992,934 80,776,630 71,625,792
INTEREST EXPENSE:
Savings and interest-bearing demand 4,320,746 4,069,001 12,579,371 12,064,987
Certificates of deposit 5,625,883 4,491,744 15,113,591 13,475,619
Short-term borrowings 1,775,496 253,679 5,247,253 469,230
Long-term borrowings 771,451 244,329 2,564,562 741,994
------------ ------------ ------------ ------------
Total interest expense 12,493,576 9,058,753 35,504,777 26,751,830
------------ ------------ ------------ ------------
NET INTEREST INCOME 14,828,139 14,934,181 45,271,853 44,873,962
PROVISION FOR LOAN LOSS 280,000 450,000 1,648,000 1,410,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 14,548,139 14,484,181 43,623,853 43,463,962
NONINTEREST INCOME:
Service charges on deposit accounts 1,358,493 1,119,006 3,925,382 3,421,344
Other service charges, commissions and fees 1,261,787 1,099,076 3,610,198 3,212,028
Trust revenue 469,534 451,825 1,538,987 1,567,685
Gains on sales of loans 335,975 725,696 840,902 2,971,362
Loan servicing fees 128,468 112,962 388,568 353,079
Other 163,646 509,123 414,340 1,066,355
Net gains (losses) on sales of securities -- (68,887) (221,575) 135,477
------------ ------------ ------------ ------------
Total noninterest income 3,717,903 3,948,801 10,496,802 12,727,330
NONINTEREST EXPENSE:
Salaries and employee benefits 6,070,337 6,630,620 18,566,995 20,068,533
Equipment 1,376,750 1,178,971 4,024,058 3,655,544
Occupancy 1,006,025 990,924 2,940,115 2,733,246
Professional fees 510,291 403,284 1,332,554 1,085,942
Marketing 429,805 376,803 1,174,873 1,288,062
Communications 346,447 350,677 1,046,234 1,169,073
Printing and office supplies 202,969 272,501 637,603 813,307
Litigation settlement charges -- -- 4,946,055 --
Restructuring charges -- -- -- 707,863
Other noninterest expense 2,391,537 2,060,943 6,656,640 5,574,141
------------ ------------ ------------ ------------
Total noninterest expense 12,334,161 12,264,723 41,325,127 37,095,711
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 5,931,881 6,168,259 12,795,528 19,095,581
PROVISION FOR INCOME TAXES 1,943,697 1,911,816 4,043,979 5,963,644
------------ ------------ ------------ ------------
NET INCOME $ 3,988,184 $ 4,256,443 $ 8,751,549 $ 13,131,937
============ ============ ============ ============
Basic earnings per share $ 0.24 $ 0.25 $ 0.52 $ 0.77
Diluted earnings per share $ 0.24 $ 0.25 $ 0.52 $ 0.75
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,751,549 $ 13,131,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment 2,954,787 2,661,474
Amortization of intangibles 290,555 293,438
Net (gain) loss on sales of available for sale securities 221,575 (135,477)
Provision for loan loss 1,648,000 1,410,000
Increase in interest receivable (477,904) (2,889,645)
Increase in other assets (1,412,497) (756,070)
Net cash provided by loans held for sale 5,013,631 9,153,083
Decrease in interest payable (442,708) (3,846)
Decrease in other liabilities (313,837) (1,180,488)
Tax benefit associated with stock options 154,601 716,945
Increase in trading assets (5,180) --
------------ ------------
Net cash provided by operating activities 16,382,572 22,401,351
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available for sale securities 2,311,309 34,119,428
Proceeds from sales of available for sale securities 8,930,891 31,719,162
Purchase of available for sale securities (2,581,562) (79,882,922)
Loans made to customers greater than principal collected on loans (28,910,346) (56,575,260)
Net capital expenditures (1,612,835) (2,796,304)
------------ ------------
Net cash used in investing activities (21,862,543) (73,415,896)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand, savings and interest
bearing transaction accounts (20,679,479) (34,894,618)
Net increase in certificates of deposit 38,882,583 4,932,404
Net decrease in long-term borrowings (20,630,953) (1,178,571)
Net increase in short-term borrowings 13,550,500 67,774,500
Redemption of common stock for stock repurchase plan (5,684,627) (8,352,745)
Net proceeds from issuance of common stock 1,174,631 1,541,718
Dividends paid and cash paid for fractional shares (3,089,799) (2,552,132)
------------ ------------
Net cash provided by financing activities 3,522,856 27,270,556
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,957,115) (23,743,989)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 66,972,716 81,491,894
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65,015,601 $ 57,747,905
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------- Paid-In
Shares Amount Capital
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1998 14,235,931 $ 17,794,914 $ 66,474,468
Comprehensive income:
Net income -- -- --
Other comprehensive income (loss), net of tax:
Net unrealized investment losses -- -- --
Cumulative effect of change in accounting
principal -- -- --
Reclassification adjustments for realized
gains included in net income -- -- --
Other comprehensive loss, net of tax -- -- --
Comprehensive income -- -- --
Cash dividends, $.21 per common share -- -- --
Issuance of common stock pursuant to option plans 277,875 347,344 1,914,874
Redemption of stock pursuant to options (36,866) (46,083) (620,233)
Common stock repurchased and retired (533,206) (666,508) (8,919,681)
10% stock dividend 1,401,926 1,752,408 18,400,279
Cash paid for fractional shares (803) (1,004) --
Tax benefit associated with stock options -- -- 756,081
------------- ------------- -------------
BALANCE, December 31, 1999 15,344,857 19,181,071 78,005,788
Comprehensive income:
Net income -- -- --
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- --
Comprehensive income -- -- --
Cash dividends, $.18 per common share -- -- --
10% stock dividend 1,517,110 1,896,388 14,317,725
Issuance of common stock pursuant to option plans 226,649 283,311 891,320
Redemption of stock pursuant to options (14,270) (17,838) (159,370)
Issuance of common stock pursuant to
restricted stock plans 113,362 141,703 988,453
Deferred compensation net of amortized expense -- -- (966,912)
Common stock repurchased and retired (544,391) (680,489) (4,990,174)
Tax benefit associated with stock options -- -- 154,601
------------- ------------- -------------
BALANCE, September 30, 2000 16,643,317 $ 20,804,146 $ 88,241,431
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1998 $ 29,392,264 $ 3,563,522 $ 117,225,168
Comprehensive income:
Net income 17,332,036 -- 17,332,036
Other comprehensive income (loss), net of tax:
Net unrealized investment losses -- -- (7,046,537)
Cumulative effect of change in accounting
principal -- -- 131,369
Reclassification adjustments for realized
gains included in net income -- -- (50,377)
-------------
Other comprehensive loss, net of tax -- (6,965,545) (6,965,545)
-------------
Comprehensive income -- -- 10,366,491
=============
Cash dividends, $.21 per common share (3,553,257) -- (3,553,257)
Issuance of common stock pursuant to option plans -- -- 2,262,218
Redemption of stock pursuant to options -- -- (666,316)
Common stock repurchased and retired -- -- (9,586,189)
10% stock dividend (20,152,687) -- --
Cash paid for fractional shares (10,537) -- (11,541)
Tax benefit associated with stock options -- -- 756,081
------------- ------------- -------------
BALANCE, December 31, 1999 23,007,819 (3,402,023) 116,792,655
Comprehensive income:
Net income 8,751,549 -- 8,751,549
Other comprehensive income, net of tax:
Net unrealized investment gains -- 1,497,900 1,497,900
-------------
Comprehensive income -- -- 10,249,449
=============
Cash dividends, $.18 per common share (3,089,799) -- (3,089,799)
10% stock dividend (16,214,113)
Issuance of common stock pursuant to option plans -- -- 1,174,631
Redemption of stock pursuant to options -- -- (177,208)
Issuance of common stock pursuant to
restricted stock plans -- 1,130,156
Deferred compensation net of amortized expense -- -- (966,912)
Common stock repurchased and retired -- -- (5,670,663)
Tax benefit associated with stock options -- -- 154,601
------------- ------------- -------------
BALANCE, September 30, 2000 $ 12,455,456 $ (1,904,123) $ 119,596,910
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of West Coast Bancorp (Bancorp or Company) which operates its wholly-owned
subsidiaries, West Coast Bank (Bank), West Coast Trust, Centennial Funding
Corporation and Totten, Inc., after elimination of intercompany transactions and
balances.
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals necessary for fair presentation of results of operations for the
interim periods included herein have been made. The results of operations for
the three and nine month periods ended September 30, 2000 are not necessarily
indicative of results to be anticipated for the year ending December 31, 2000,
or other future periods.
2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. STOCKHOLDERS' EQUITY
The Board of Directors declared a quarterly cash dividend of $.065 per
share during the third quarter of 2000. A 10 percent stock dividend was also
declared in the third quarter of 2000 and 1999. In addition, cash dividends of
$.059 were declared in the first and second quarter of 2000. All per share
amounts have been restated to retroactively reflect stock dividends.
4. 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 $35,947,000 and $26,756,000 for interest in the nine months
ended September 30, 2000 and 1999, respectively. Income taxes paid were
$3,363,500 and $5,685,000 in the nine months ended September 30, 2000 and 1999,
respectively.
7
<PAGE> 8
5. CONTINGENCIES AND LITIGATION
Edward and Marianne Fischer v. West Coast Bank, Multnomah County Circuit
Court, Case No. 9905-04969. On May 11, 1999, a husband and wife who loaned $4.6
million to a construction company filed suit in the Circuit Court of the State
of Oregon for the County of Multnomah against the Bank alleging that they
suffered damages as the result of the Bank failure to provide take-out funding
to the construction company. The construction company defaulted on the $4.6
million loan. The loan was secured by an approximate 500 acre tract of land in
Lincoln County, Oregon ("Lincoln County Property").
On March 16, 2000, the Bank entered into a Settlement and Loan Purchase
Agreement with Plaintiffs. Under the Agreement, the Bank paid to Plaintiffs $5.4
million, in exchange for Plaintiffs' transfer of all their rights, title and
interest in the loan and the Lincoln County Property and a release of all
Plaintiffs' claims against the Bank and its affiliates.
Based on an appraisal of the property and related carrying, disposition,
and other cost estimates, the Bank currently estimates the net book value of the
Lincoln County Property at approximately $551,000. Accordingly, in connection
with this settlement and its valuation of its interest in the Lincoln County
Property, the Company expensed in its first quarter results the net effect of
approximately $5 million, for this non-recurring item.
The Bank has foreclosed on the Lincoln County Property pursuant to a
sheriff's sale at which the Bank purchased the property. The Bank now has a
deficiency claim against B.A.S.S. for approximately $2.7 million plus interest
and costs. B.A.S.S. filed counterclaims against the Bank seeking damages in
excess of $5 million. The Bank denies any liability to B.A.S.S. and will defend
itself accordingly. Very little discovery has been taken regarding the B.A.S.S.
counterclaims. Due to the uncertainties inherent in litigation, and the nascent
stage of discovery, there are no assurances that this matter will not ultimately
result in a loss that could materially affect the Company. However Bank
management does not at this time expect a material loss.
6. COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
(Dollars in thousands) 2000 1999 2000 1999
---------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 2,797 $ 12 $ 2,604 $(8,062)
Tax (provision) benefit (1,099) (5) (970) 3,075
------- ------- ------- -------
Unrealized holding gains (losses) arising during the period, after tax 1,698 7 1,634 (4,987)
Less: Unrealized gains from change in accounting principle -- -- -- 213
Tax provision -- -- -- (82)
------- ------- ------- -------
Unrealized gains from change in accounting principle, net of tax -- -- -- 131
Plus: Reclassification adjustment for realized gains (losses)
on sale of securities -- (69) (221) 135
Tax benefit (provision) -- 27 85 (51)
------- ------- ------- -------
Net realized (losses) gains -- (42) (136) 84
------- ------- ------- -------
Other comprehensive income (loss), net of tax $ 1,698 $ (35) $ 1,498 $(4,772)
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
7. EARNINGS PER SHARE
The following table reconciles the numerator and denominator of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Weighted
Average Per Share
Net Income Shares Amount
---------------------------------------
Three months ended September 30, 2000
---------------------------------------
<S> <C> <C> <C>
Basic earnings ............... $3,988,184 16,711,266 $0.24
Stock options ................ 78,834
Diluted earnings ............. $3,988,184 16,790,100 $0.24
Three months ended September 30, 1999
---------------------------------------
Basic earnings ............... $4,256,443 16,961,248 $0.25
Stock options ................ 350,413
Diluted earnings ............. $4,256,443 17,311,661 $0.25
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average Per Share
Net Income Shares Amount
-----------------------------------------
Nine months ended September 30, 2000
-----------------------------------------
<S> <C> <C> <C>
Basic earnings ............... $8,751,549 16,821,069 $0.52
Stock options ................ 133,276
Diluted earnings ............. $8,751,549 16,954,345 $0.52
Nine months ended September 30, 1999
-----------------------------------------
Basic earnings ............... $13,131,937 17,059,197 $0.77
Stock options ................ 417,612
Diluted earnings ............. $13,131,937 17,476,809 $0.75
</TABLE>
For the periods reported, Bancorp had no reconciling items between net income
and income available to common shareholders.
8. RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to
conform to current classifications.
9
<PAGE> 10
9. SEGMENT AND RELATED INFORMATION
Bancorp accounts for intercompany fees and services at an estimated fair
value according to regulatory requirements for the service provided.
Intercompany items relate primarily to the use of accounting, human resources,
data processing and marketing services provided. All other accounting policies
are the same as those described in the summary of significant accounting
policies in Bancorp's 1999 annual report.
Summarized financial information concerning Bancorp's reportable
segments and the reconciliation to Bancorp's consolidated results is shown in
the following table. The "Other" column includes Bancorp's trust operations and
corporate-related items. 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" segments.
<TABLE>
<CAPTION>
(Dollars in thousands) Three months ended September 30, 2000
---------------------- --------------------------------------------------------------
Banking Other Intersegment Consolidated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income ............... $ 27,297 $ 39 $ (15) $ 27,321
Interest expense .............. 12,508 -- (15) 12,493
---------- ---------- ---------- ----------
Net interest income ...... 14,789 39 -- 14,828
---------- ---------- ---------- ----------
Provision for loan loss ....... 280 -- -- 280
Noninterest income ............ 3,282 471 (35) 3,718
Noninterest expense ........... 11,932 437 (35) 12,334
---------- ---------- ---------- ----------
Income before income taxes 5,859 73 -- 5,932
Provision for income taxes .... 1,916 28 -- 1,944
---------- ---------- ---------- ----------
Net income .................... $ 3,943 $ 45 $ -- $ 3,988
========== ========== ========== ==========
Depreciation and amortization . $ 1,080 $ 1 $ -- $ 1,081
Assets ........................ $1,366,586 $ 5,782 $ (4,510) $1,367,858
Loans, net .................... $ 990,080 $ -- $ -- $ 990,080
Deposits ...................... $1,102,941 $ -- $ (3,940) $1,099,001
Equity ........................ $ 114,842 $ 4,755 $ N/A $ 119,597
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) Three months ended September 30, 1999
---------------------- ---------------------------------------------------------------
Banking Other Intersegment Consolidated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income ............... $ 23,968 $ 51 $ (26) $ 23,993
Interest expense .............. 9,085 -- (26) 9,059
---------- ---------- ---------- ----------
Net interest income ...... 14,883 51 -- 14,934
---------- ---------- ---------- ----------
Provision for loan loss ....... 450 -- -- 450
Noninterest income ............ 3,604 459 (114) 3,949
Restructuring charges ......... -- -- -- --
Noninterest expense ........... 11,730 649 (114) 12,265
---------- ---------- ---------- ----------
Income before income taxes 6,307 (139) -- 6,168
Provision for income taxes .... 1,962 (50) -- 1,912
---------- ---------- ---------- ----------
Net income .................... $ 4,345 $ (89) $ -- $ 4,256
========== ========== ========== ==========
Depreciation and amortization . $ 1,013 $ 1 $ -- $ 1,014
Assets ........................ $1,288,860 $ 6,384 $ (4,658) $1,290,586
Loans, net .................... $ 904,765 $ -- $ -- $ 904,765
Deposits ...................... $1,083,049 $ -- $ (4,554) $1,078,495
Equity ........................ $ 110,238 $ 6,701 $ N/A $ 116,939
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
(Dollars in thousands) Nine months ended September 30, 2000
---------------------- --------------------------------------------------------------
Banking Other Intersegment Consolidated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income ............... $ 80,708 $ 124 $ (56) $ 80,776
Interest expense .............. 35,557 3 (56) 35,504
---------- ---------- ---------- ----------
Net interest income ...... 45,151 121 -- 45,272
---------- ---------- ---------- ----------
Provision for loan loss ....... 1,648 -- -- 1,648
Noninterest income ............ 9,051 1,549 (103) 10,497
Noninterest expense ........... 39,963 1,465 (103) 41,325
---------- ---------- ---------- ----------
Income before income taxes 12,591 205 -- 12,796
Provision for income taxes .... 3,966 78 -- 4,044
---------- ---------- ---------- ----------
Net income .................... $ 8,625 $ 127 $ -- $ 8,752
========== ========== ========== ==========
Depreciation and amortization . $ 3,241 $ 4 $ -- $ 3,245
Assets ........................ $1,366,586 $ 5,782 $ (4,510) $1,367,858
Loans, net .................... $ 990,080 $ -- $ -- $ 990,080
Deposits ...................... $1,102,941 $ -- $ (3,940) $1,099,001
Equity ........................ $ 114,842 $ 4,755 $ N/A $ 119,597
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) Nine months ended September 30, 1999
---------------------- ---------- ---------- ---------- ----------
Banking Other Intersegment Consolidated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income ............... $ 71,548 $ 156 $ (78) $ 71,626
Interest expense .............. 26,830 -- (78) 26,752
---------- ---------- ---------- ----------
Net interest income ...... 44,718 156 -- 44,874
---------- ---------- ---------- ----------
Provision for loan loss ....... 1,410 -- -- 1,410
Noninterest income ............ 11,361 1,611 (245) 12,727
Restructuring charges ......... 708 -- -- 708
Noninterest expense ........... 34,717 1,916 (245) 36,388
---------- ---------- ---------- ----------
Income before income taxes 19,244 (149) -- 19,095
Provision for income taxes .... 6,017 (54) -- 5,963
---------- ---------- ---------- ----------
Net income .................... $ 13,227 $ (95) $ -- $ 13,132
========== ========== ========== ==========
Depreciation and amortization . $ 2,935 $ 20 $ -- $ 2,955
Assets ........................ $1,288,860 $ 6,384 $ (4,658) $1,290,586
Loans, net .................... $ 904,765 $ -- $ -- $ 904,765
Deposits ...................... $1,083,049 $ -- $ (4,554) $1,078,495
Equity ........................ $ 110,238 $ 6,701 $ N/A $ 116,939
</TABLE>
11
<PAGE> 12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENT DISCLOSURE
In addition to historical information, this quarterly report contains
certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (PSLRA). This statement is included for
the express purpose of availing Bancorp of the protections of the safe harbor
provisions of the PSLRA. The forward looking statements contained in this report
are subject to factors, risks, and uncertainties that may cause actual results
to differ materially from those projected. Important factors that might cause
such a material difference include, but are not limited to, those discussed in
this section of the report. In addition, the following items are among the
factors that could cause actual results to differ materially from the forward
looking statements in this report: general economic conditions, including their
impact on capital expenditures; business conditions in the banking industry; the
regulatory environment; new legislation; vendor quality and efficiency; employee
retention factors; 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 filing. 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 we file from time to time with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Three months ended September 30, 2000 and 1999
Net Income. Bancorp reported net income of $3,988,000, or $.24 per
diluted share, for the three months ended September 30, 2000, compared to
$4,256,000, or $.25 per diluted share, for the three months ended September 30,
1999. Net interest income decreased slightly in the third quarter of 2000 over
the comparable period in 1999, due mainly to increased volumes and average rates
paid on interest bearing liabilities, as well as changes in the mix of interest
bearing liabilities partly offset by higher loan volumes and average rates
earned on interest earning assets. Noninterest income decreased mainly due to
lower revenues generated from sales of loans, partly offset by higher service
charges on deposit accounts and sales of investment products. Additionally, in
the third quarter of 1999, Bancorp recognized a gain on sale of certain real
estate assets. Total noninterest expenses increased slightly in the third
quarter of 2000 over the like period in 1999, due to increased equipment
expense, check processing fees and professional fees, offset in part by lower
compensation costs.
Net Interest Income. Net interest income is the difference between
interest income (principally from loan and investment securities) and interest
expense (principally on customer deposits and borrowings). Changes in net
interest income result from changes in volume, net interest spread, and net
interest margin. Volume is the average dollar level of interest earning assets
and interest bearing liabilities. Net interest spread is the differences between
the average yield on interest earning assets and the average cost of interest
bearing liabilities. Net interest margin is net interest income divided by
average interest earning assets and is influenced by the level and relative mix
of interest earning assets and interest bearing liabilities. Bancorp's
profitability, like that of many financial institutions, is dependent to a large
extent upon net interest income. Bancorp is liability sensitive, meaning that
interest bearing liabilities mature or reprice more quickly than interest
earning assets in a given period. Therefore, a significant increase in the
market rates of interest could adversely affect net interest income. In
contrast, a decreasing interest rate environment, or a less inverse or
steepening interest rate yield curve may slightly improve Bancorp's margin.
Competition, the economy, and the status of the interest rate environment also
impact Bancorp's net interest income in any period.
12
<PAGE> 13
Net interest income on a tax equivalent basis for the three months ended
September 30, 2000, decreased $101,000, or 0.07%, to $15,390,000 from
$15,491,000 for the same period in 1999. The decrease was due mainly to
increases in volumes and rates paid on interest bearing liabilities as well as
changes in the mix of interest bearing liabilities, partly offset by increases
in both volume and yields on interest earning assets. Average yields on earning
assets increased to 8.83% in the third quarter of 2000 from 8.42% in 1999.
Average interest earning assets increased $99.2 million, or 8.57%, to $1.26
billion in the third quarter of 2000, from $1.16 billion for the same period in
1999, while average interest bearing liabilities increased $98.9 million or
10.64%. Average rates paid on interest bearing liabilities increased 96 basis
points in the third quarter of 2000, to 4.83% from 3.87% for the like period in
1999. The average net interest spread decreased from 4.55% to 4.00% in the third
quarter of 2000 compared to 1999, mainly due to increases in average volumes and
rates paid on interest bearing liabilities. Bancorp's net interest margin for
the three months ended September 30, 2000, was 4.87%, a decrease of 44 basis
points from 5.31% for the comparable period of 1999. 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 asset mix,
and an increased dependence on borrowed funds during the period. Given these
factors, and the interest rate environment, continued strong competition in the
markets it serves, and other economic factors, Bancorp could see further
decreases in net interest margin.
Analysis of Net Interest Income The following table presents information
regarding yields on interest-earning assets, expense on interest-bearing
liabilities, and net yields on interest-earning assets for the periods indicated
on a tax equivalent basis:
<TABLE>
<CAPTION>
Three months ended
(Dollars in thousands) September 30,
---------------------------------- Increase
2000 1999 (Decrease) Change
------------- ------------- ------------- -----
<S> <C> <C> <C> <C>
Interest and fee income (1) ........ $ 27,884 $ 24,550 $ 3,334 13.58%
Interest expense ................... 12,494 9,059 3,435 37.92%
------------- ------------- -------------
Net interest income ................ $ 15,390 $ 15,491 $ (101) 0.07%
============= ============= =============
Average interest earning assets .... $ 1,256,343 $ 1,157,133 $ 99,210 8.57%
Average interest bearing liabilities $ 1,028,226 $ 929,331 $ 98,895 10.64%
Average interest earning assets/
interest bearing liabilities .. 122.19% 124.51% (2.32)
Average yields earned (2) .......... 8.83% 8.42% 0.41
Average rates paid (2) ............. 4.83% 3.87% 0.96
Net interest spread (2) ............ 4.00% 4.55% (0.55)
Net interest margin (2) ............ 4.87% 5.31% (0.44)
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 35%
tax equivalent basis in 2000 and 34% in 1999.
(2) These ratios for the three months ended September 30, 2000 and 1999
have been annualized.
Provision for Loan Loss. Bancorp recorded provisions for loan losses for
the third quarter of 2000 and 1999 of $280,000 and $450,000, respectively. Net
charge-offs for the third quarter of 2000 were $274,000, compared to net
charge-offs of $575,000 for the same period in 1999. At September 30, 2000, the
percentage of non-performing assets was 0.35% of total assets, compared to 0.41%
one year earlier. Bancorp's allowance for loan losses, as a percentage of total
loans was 1.40% at September 30, 2000, compared to 1.41% at September 30, 1999.
Noninterest Income. Noninterest income for the third quarter of 2000 was
$3,718,000, down $231,000, or 5.85%, from $3,949,000 in the like period in 1999.
Gains on sales of loans decreased $390,000, to $336,000 in 2000, from $726,000
in 1999. The decrease in gains on sales of loans was due mainly to decreased
sales activity in the secondary residential real estate programs, predominantly
caused by the higher interest rate environment in 2000. Service charges on
deposit accounts increased to $1,358,000, an 21.40% increase over the same
period in 1999, caused mainly by fluctuations in customer activity and deposit
volume, as well as increased fees and fee collection efforts. Other service
charges, commissions, and fees increased $163,000, to $1,262,000, from
$1,099,000 or 14.80%, in 2000 over 1999. The increase in other service charges,
commissions, and fees was due to increased sales activity, resulting in higher
net revenues for investment sales commissions and merchant bankcard activities.
Trust revenue increased slightly during the third quarter of 2000, as compared
to the same period in 1999, due in part to fee adjustments and changes in the
market value of assets managed. Loan servicing fees increased slightly in 2000
compared to the like period in 1999. Other noninterest income decreased in the
third quarter of 2000, compared to 1999 due mainly to the sale of real estate
property in the third quarter of 1999. No securities were sold in the third
quarter of 2000, compared with a loss on sales of securities of $69,000 in the
third quarter of 1999.
13
<PAGE> 14
Noninterest Expense. Noninterest expense for the third quarter ending
September 30, 2000 was $12,334,000, a decrease of $69,000, or 0.57%, over the
same period in 1999. Bancorp's salaries and employee benefits decreased
$561,000, or 8.45%, to $6,070,000 in the third quarter of 2000, from $6,631,000
for the like period in 1999. Salary and employee benefit expense has declined
primarily as a result of decreases in the level of staffing in the period, and
lower variable compensation costs, offset by severance costs and changes in
salary and compensation structure. At September 30, 2000, Bancorp employed 567
staffing positions compared to 656 at September 30, 1999. Bancorp's staffing
reductions have been primarily administrative in nature. Bancorp has continued
to expand its products, services, and branch network over the previous year.
Equipment and occupancy expenses increased in the third quarter of 2000 compared
to the same period in 1999, due in part to the opening of two new branches and
improvements to certain branch locations. Equipment expense increased $198,000
or 16.78% in the third quarter of 2000 over 1999, as Bancorp has continued to
invest in technological improvements and expansion. Bancorp introduced
internet-based banking for business customers during the third quarter of 2000.
Occupancy expenses were higher in the third quarter of 2000 over the same period
in 1999, due mainly to growth and expansion, including additions of new
branches, a new loan servicing center, and other products and services.
Professional fees incurred for services from directors, outside consultants,
accountants, and attorneys, increased to $510,000 in the third quarter of 2000,
compared to $403,000 in the third quarter of 1999, due primarily to increased
utilization of outside consultants to enhance information systems, streamline
product offerings and improve operational processes. Marketing expenses
increased slightly in the third quarter of 2000 over the same period in 1999. In
2000, Bancorp has adjusted its marketing strategy associated with marketing its
new bank name and company expansion. Communication expense and printing and
office supplies expense decreased slightly in the third quarter of 2000 compared
to 1999, due to improved utilization of communication technology and data lines.
Other noninterest expenses were higher in the quarter ended September 30, 2000,
due to changes in check processing, increases in other loan expenses and other
enhancements to services provided.
Nine months ended September 30, 2000 and 1999
Net Income. Bancorp reported net income of $8,752,000, or $.52 per
diluted share, for the nine months ended September 30, 2000, compared to
$13,132,000, or $.75 per diluted share, for the nine months ended September 30,
1999. The 2000 year to date results include a nonrecurring charge of $4,946,000
($3,051,000 after income taxes) related to litigation settlement charges in the
first quarter of 2000. The 2000 year-to-date results also include after tax
non-recurring charges of $586,000 relating to severance expenses and losses on
the sale of investments. The 1999 year-to-date results include $888,000 in
non-recurring and restructuring charges ($558,000 after tax) resulting from
marketing costs to promote the West Coast Bank name and restructuring expenses
associated with Bancorp's consolidation of its subsidiary banks. The 1999 year
to date results also include after tax gains on sales of securities of $84,000.
After adjusting for year to date non-recurring events, adjusted operating net
income for the first nine months of 2000 was $12,389,000 or $.73 per diluted
share, compared to adjusted 1999 results of $13,605,000 or $.78 per diluted
share. Net interest income increased in the first nine months of 2000 over the
comparable period in 1999, due mainly to higher loan volumes partly offset by
increased volumes and average rates paid on interest bearing liabilities, as
well as changes in the mix of interest bearing liabilities. Noninterest income
decreased mainly due to lower revenues generated from sales of loans and sales
of securities, partially offset by higher service charges. Total noninterest
expenses increased due to the litigation settlement charges and higher check
processing fees, offset partially by decreased salaries and employee benefits.
14
<PAGE> 15
Net Interest Income. Net interest income on a tax equivalent basis for
the nine months ended September 30, 2000, increased $386,000, or 0.83%, to
$46,979,000 from $46,593,000 for the same period in 1999. The increase in net
interest income was due mainly to increases in volumes of interest earning
assets offset partly by volumes and rates paid on interest bearing liabilities
as well as changes in the mix of interest bearing liabilities. Average yields on
earning assets increased to 8.76% in the first nine months of 2000, compared to
8.52% one year earlier. Average interest earning assets increased $107.7
million, or 9.36%, to $1.26 billion in first nine months of 2000, from $1.15
billion for the same period in 1999, while average interest bearing liabilities
increased $108.4 million or 11.67%. Average rates paid on interest bearing
liabilities increased 72 basis points in the first nine months of 2000 to 4.58%
from 3.86% for the like period in 1999. The average net interest spread
decreased from 4.66% to 4.18% in the first nine months of 2000 compared to 1999,
mainly due to increases in average volumes and rates paid on interest bearing
liabilities. Bancorp's net interest margin for the nine months ended September
30, 2000, was 4.99%, a decrease of 42 basis points from 5.41% for the comparable
period of 1999. The decrease in Bancorp's net interest margin and related yields
or spreads are due mainly to a changing interest rate environment, increased
pricing competition, a shift in its asset mix, and an increased dependence on
borrowed funds during the period. Given these factors, and the interest rate
environment, continued strong competition in the markets it serves, and other
economic factors, Bancorp could see further decreases in net interest margin.
Analysis of Net Interest Income The following table presents information
regarding yields on interest-earning assets, expense on interest-bearing
liabilities, and net yields on interest-earning assets for the periods indicated
on a tax equivalent basis:
<TABLE>
<CAPTION>
Nine months ended
(Dollars in thousands) September 30,
---------------------- ---------------------------------- Increase
2000 1999 (Decrease) Change
------------- ------------- ------------- ------
<S> <C> <C> <C> <C>
Interest and fee income (1) ........ $ 82,484 $ 73,345 $ 9,139 12.46%
Interest expense ................... 35,505 26,752 8,753 32.72%
------------- ------------- -------------
Net interest income ................ $ 46,979 $ 46,593 $ 386 0.83%
============= ============= =============
Average interest earning assets .... $ 1,258,190 $ 1,150,525 $ 107,665 9.36%
Average interest bearing liabilities $ 1,035,785 $ 927,414 $ 108,371 11.67%
Average interest earning assets/
interest bearing liabilities .. 121.47% 124.06% (2.59)
Average yields earned (2) .......... 8.76% 8.52% 0.24
Average rates paid (2) ............. 4.58% 3.86% 0.72
Net interest spread (2) ............ 4.18% 4.66% (0.48)
Net interest margin (2) ............ 4.99% 5.41% (0.42)
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 35%
tax equivalent basis in 2000 and 34% in 1999.
(2) These ratios for the nine months ended September 30, 2000 and 1999
have been annualized.
Provision for Loan Loss. Bancorp recorded provisions for loan losses for
the nine months ended September 30, 2000 and 1999 of $1,648,000 and $1,410,000,
respectively. Net charge-offs through September 30, 2000 were $1,038,000,
compared to net charge-offs of $930,000 for the same period in 1999
Noninterest Income. Noninterest income for the first nine months of 2000
was $10,497,000, down $2,230,000, or 17.53%, from $12,727,000 in the like period
in 1999. Gains on sales of loans decreased $2,130,000, to $841,000 in 2000, from
$2,971,000 in 1999. The decrease in gains on sales of loans was due mainly to
decreased sales activity in the secondary residential real estate programs,
predominantly caused by the higher interest rate environment in 2000. Service
charges on deposit accounts increased to $3,925,000, an 14.73% increase over the
same period in 1999, caused mainly by fluctuations in customer activity and
deposit volume, as well as increased fees and fee collection efforts. Other
service charges, commissions, and fees increased $398,000, to $3,610,000, from
$3,212,000 or 12.40%, in 2000 over 1999. The increase in other service charges,
commissions, and fees was due to increased sales activity, resulting in higher
net revenues for brokerage commissions and merchant bankcard activities. Trust
revenue decreased slightly during the first nine months of 2000, as compared to
the same period in 1999, due in part to fee adjustments and changes in the
market value of assets managed. Loan servicing fees increased slightly the first
nine months in 2000, compared to 1999. Other noninterest income decreased in
2000, compared to 1999, due to gains on sales of certain real estate assets in
the nine months ended 1999. A loss on securities sold of $221,000 was incurred
during the first nine months of 2000, while net gains on the sales of securities
were $135,000 in 1999.
15
<PAGE> 16
Noninterest Expense. Noninterest expenses for the nine months ended
September 30, 2000 were $41,325,000, an increase of $4,229,000, or 11.40%, over
the same period in 1999. A one-time expense related to litigation settlement
charges of $4,946,000 ($3,051,000 after income taxes) impacted the first nine
months of 2000, while a restructuring charge of $888,000 ($558,000 after income
taxes) impacted 1999 due to the Company's consolidation of its subsidiary banks.
Bancorp's salaries and employee benefits decreased $1,502,000, or 7.48%, to
$18,567,000 in 2000, from $20,069,000 for the like period in 1999. Salary and
employee benefit expense has declined primarily as a result of decreases in the
level of staffing in the period and significantly lower variable compensation
costs, offset in part by severance costs and changes in salary and compensation
structure. Equipment expenses increased in the first nine months of 2000
compared to the same period in 1999, due in part to the opening of two new
branches and improving certain branch locations. Equipment expense increased
$369,000 or 10.08% in the first nine months of 2000 over 1999, as Bancorp has
continued to invest in technological improvements and expansion. Occupancy
expenses were higher in the first nine months of 2000 compared with the same
period in 1999, due mainly to growth and expansion including additions of new
branches, a new loan servicing center, and products and services over the
period. Communication expense decreased in the first nine months of 2000
compared to 1999. Marketing expenses decreased in the first nine months of 2000
over the same period in 1999. In 2000, Bancorp has adjusted its marketing
strategy associated with marketing its new bank name and company expansion.
Professional fees incurred for services from directors, outside consultants,
accountants, and attorneys, increased to $1,333,000 in the first nine months of
2000, compared to $1,086,000 during the same period in 1999, due in part to
increased utilization of outside consultants to enhance information systems and
improve operational processes. Other noninterest expenses were higher in the
first nine months of 2000 due primarily to increased expenses for check
processing and enhanced courier services.
RESTRUCTURING CHARGES
The year to date 1999 results were impacted by one-time costs resulting
from the consolidation of our subsidiary banks into one entity, called West
Coast Bank. The consolidation was completed on December 31, 1998, and the
conversions were completed in 1999. Of the one-time expenses, $708,000 was
recognized in the first three quarters of 1999. There were no restructuring
charges incurred in 2000.
During 1999, we completed and worked on the system and data conversions,
signage changes, name branding, staff reductions, corporate reorganizations, the
opening of a new loan servicing center and the consolidation of loan processing,
etc. We expended a total of $4.63 million in costs for the consolidation,
including costs related to a severance plan, signage, data conversions,
marketing, regulatory and administrative costs. Accrued and unpaid restructuring
charges were $315,000 at December 31, 1999. All accruals for related
restructuring charges were utilized during the first quarter of 2000. These
items were recognized as expenses in the results of operations through December
31, 1999. We initially anticipated these costs of the consolidation at $5
million. We were successful in maintaining the restructuring costs below our
original forecast.
The following table summarizes accrued restructuring charge activity:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 2000
---------------------- ------------------
<S> <C>
Balance, accrued restructuring charges, December 31, 1999 ....... $315
Provision for restructure charges third quarter 2000 ............ --
Utilization first quarter 2000:
Cash ....................................................... 315
Noncash .................................................... --
----
Total Utilization ............................................... 315
----
Balance, accrued restructuring charges, September 30, 2000 ...... $ --
====
</TABLE>
Our original forecast, established in 1998, anticipated that the
consolidation would save approximately $6 million annually. The cost savings
were identified as coming 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. The plan
called 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.
16
<PAGE> 17
INCOME TAXES
During the first nine months of 2000, due to a decrease in net income
before taxes and changes in the mix of taxable and nontaxable income items, the
provision for income taxes decreased from 1999. We anticipate that Bancorp's tax
expense will increase in future periods, both due to an increase in income
before taxes and a smaller percentage of Bancorp's income being generated from
tax exempt items.
LIQUIDITY AND SOURCES OF FUNDS
Bancorp's primary sources of funds are customer deposits, maturities of
investment securities, sales of Available for Sale securities, loan sales, loan
repayments, net income, advances from the Federal Home Loan Bank of Seattle
("FHLB"), and the use of Federal Funds markets. Scheduled loan repayments are
relatively stable sources of funds, while deposit inflows and unscheduled loan
prepayments are not. Deposit inflows and unscheduled loan prepayments are
influenced by general interest rate levels, interest rates available on other
investments, competition, economic conditions, and other factors.
Deposits are Bancorp's primary source of new funds. Total deposits were
$1.099 billion at September 30, 2000, compared to $1.081 billion at December 31,
1999. At September 30, 2000, Bancorp used no brokered deposits, but we may
accept such deposits in the future. We have focused on attracting deposits in
the market area we serve through competitive pricing and delivery of a quality
product.
Management anticipates that Bancorp will continue relying on customer
deposits, maturity of investment securities, sales of Available for Sale
securities, loan sales, loan repayments, net income, Federal Funds markets,
FHLB, and other borrowings to provide liquidity. Deposit balances will be
influenced by changes in the banking industry, interest rates available on other
investments, general economic conditions, competition, and other factors.
Borrowings may be used on a short-term basis to compensate for reductions in
other sources of funds. Borrowings may also be used on a long-term basis to
support expanded lending activities and to match maturities or repricing
intervals of assets. The sources of such funds will include Federal Funds
purchased, repurchase agreements, and borrowings from the FHLB.
17
<PAGE> 18
CAPITAL RESOURCES
The Federal Reserve Bank (FRB) and the Federal Deposit Insurance
Corporation (FDIC) have established minimum requirements for capital adequacy
for bank holding companies and member banks. The requirements address both
risk-based capital and leveraged capital. The regulatory agencies may establish
higher minimum requirements if, for example, a corporation has previously
received special attention or has a high susceptibility to interest rate risk.
The FRB and FDIC risk-based capital guidelines require banks and bank holding
companies to have a ratio of tier one capital to total risk-weighted assets of
at least 4%, and a ratio of total capital to total risk-weighted assets of 8% or
greater. In addition, the leverage ratio of tier one capital to total assets
less intangibles is required to be at least 3%. As of September 30, 2000,
Bancorp and the Bank are considered "Well Capitalized" under the regulatory risk
based capital guidelines.
Shareholders' equity increased to $119.6 million at September 30, 2000,
from $116.8 million at December 31, 1999, an increase of $2.8 million. The
increase is due to net income, an increase in the unrealized gain on securities
available for sale, offset by cash dividends and Bancorp's activity in its stock
repurchase program. Unrealized gain At September 30, 2000, Bancorp's
shareholders' equity, as a percentage of total assets, was 8.74%, compared to
8.62% at December 31, 1999. The increase was primarily the result of Bancorp's
equity base increasing at a higher rate than total assets. Equity increased 2.4%
over the period from December 31, 1999, to September 30, 2000, while assets
increased by 1.0% over the same period. As the following table indicates,
Bancorp currently exceeds the regulatory capital minimum requirements.
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 2000
---------------------- ----------------------
Amount Ratio
---------- -----
<S> <C> <C> <C>
Tier 1 capital ..................... $ 119,929 10.76%
Tier 1 capital minimum requirement . 44,593 4.00%
---------- -----
Excess over minimum Tier 1 capital $ 75,336 6.76%
========== =====
Total capital ...................... $ 133,866 12.01%
Total capital minimum requirement .. 89,185 8.00%
---------- -----
Excess over minimum total capital $ 44,681 4.01%
========== =====
Risk-adjusted assets ............... $1,114,818
==========
Leverage ratio ..................... 8.83%
Minimum leverage requirement ....... 3.00%
-----
Excess over minimum leverage ratio 5.83%
=====
Risk-adjusted total assets ......... $1,358,101
==========
</TABLE>
18
<PAGE> 19
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is the primary source of
Bancorp's income. Net loans represented 72.4% of total assets as of September
30, 2000. A certain degree of credit risk is inherent in our lending activities.
This risk is managed through our credit administration and credit review
functions, which are designed to help ensure compliance with our credit
standards. Through the credit review function, the Bank is able to monitor all
credit-related policies and practices on a post approval basis, ensuring uniform
application. As part of our ongoing lending process, internal risk ratings are
assigned to each commercial and commercial real estate credit before the funds
are extended to the customer. Credit risk ratings are based on apparent credit
worthiness of the borrower at the time the loan is made. Large balance accounts
have the credit risk rating reviewed on at least an annual basis.
Although Bancorp strives to serve the credit needs of its service areas,
the primary focus is on real estate related and commercial credits. We make
substantially all our loans to customers located within our 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. As a
result of the nature of our 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 composition of the Banks' loan portfolio is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 2000 December 31, 1999
---------------------- ------------------------- -------------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Commercial ................... $ 158,912 16.05% $ 157,912 16.40%
Real estate construction ..... 115,884 11.70 124,102 12.89
Real estate mortgage ......... 99,018 10.00 101,579 10.55
Real estate commercial ....... 576,510 58.23 531,600 55.21
Installment and other consumer 53,846 5.44 61,104 6.35
----------- ------ ----------- ------
Total loans .................. 1,004,170 101.42 976,297 101.40
Allowance for loan losses .... (14,090) (1.42) (13,480) (1.40)
----------- ------ ----------- ------
Total loans, net ............. $ 990,080 100.00% $ 962,817 100.00%
=========== ====== =========== ======
</TABLE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Loans on nonaccrual status ..................................... $4,120 $4,316
Loans past due greater than 90 days but not on nonaccrual status 145 8
Other real estate owned ........................................ 544 325
------ ------
Total nonperforming assets ..................................... $4,809 $4,649
====== ======
Percentage of nonperforming assets to total assets ............. .35% .34%
</TABLE>
See "Loan Loss Allowance and Provision" for further discussion on the loan
portfolio.
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 or principal is doubtful or when the principal or
interest payment becomes 90 days past due. 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.
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<PAGE> 20
At September 30, 2000, we were not aware of any concentration of loans
exceeding 10 percent of the total loans to a multiple number of borrowers
engaged in a similar business. At September 30, 2000 and December 31, 1999, the
Bank had no bankers acceptances.
As of September 30, 2000, the Bank had outstanding loans to persons
serving as directors, officers, principal shareholders and their related
interests. These loans, when made, are substantially on the same terms,
including interest rates, maturities and collateral as those made to other
customers of the Bank.
LOAN LOSS ALLOWANCE AND PROVISION
A loan loss allowance has been established 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.
Our 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, income recognition and
guidelines concerning impaired loans.
During 1999, modifications to the allowance for loan losses included
identifying segments of the loan portfolio where the Bank may have larger credit
concentrations or exposure, and then allocating the allowance in these areas
based on loss factors deemed appropriate. We continue to look for ways to
enhance the allowance methodology, with increased detailed analysis, tracking
and review. The changes to the allowance methodology made during 1999 were to
enhance the overall identification and allocation of the reserves.
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. While historic charge-off activity is studied and used as a
base of information, management believes that the recent strength of the economy
has played a favorable role in reducing charge-off activity. Management believes
that commercial and commercial real estate loans have in the industry produced
significant losses in brief periods at particular points in economic cycles.
Therefore management believes it is appropriate to use a reserve higher than
recent charge-off experience would suggest in these categories of loans. This
decision is supported by what management perceives to be industry practices for
minimum reserve levels, and is intended to prevent an understatement of reserves
based upon over-reliance on recent, favorable economic conditions.
Loss factors are described as follows:
- Problem graded loan loss factors are obtained from historical
loss experience, and other relevant factors including trends in
past dues, non-accruals, and risk rating changes.
- Pooled loan loss factors, not individually graded loans, are
based on expected net charge-offs and other factors, including
trends in past dues, collateral values, and levels of Other Real
Estate Owned. Pooled loans are loans and leases that are
homogeneous in nature, such as consumer installment and
residential mortgage loans.
Specific allowances are established where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss may be incurred in an amount
different than 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,
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<PAGE> 21
- Loan growth rates and concentrations,
- Specific industry conditions within portfolio segments,
- Recent loss experience in particular segments of the portfolio,
- Interest rate environment,
- 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 and the credit review function. 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 the most recent information available.
At September 30, 2000, the Bank's allowance for loan losses was $14.1
million, consisting of a $13.4 million formula allowance, a $324,000 specific
allowance and a $429,000 unallocated allowance. At December 31, 1999, our
allowance for loan losses was $13.5 million, consisting of a $12.8 million
formula allowance, a $525,000 specific allowance and a $210,000 unallocated
allowance. The changes in the allocation of the allowance for loan losses in the
third quarter of 2000 were due primarily to additions to the loan portfolio,
turnover in our non-performing loans, and charge-off activity.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
(Dollars in thousands) September 30, 2000 December 31, 1999
---------------------- ------------------ -----------------
<S> <C> <C>
Loans outstanding at end of period .................... $ 1,004,170 $ 976,297
Average loans outstanding during the period ........... $ 1,000,489 $ 904,931
Allowance for loan losses, beginning of period ........ $ 13,480 $ 12,453
Recoveries:
Commercial .......................................... 46 129
Real Estate ......................................... 240 58
Installment and consumer ............................ 34 77
----------- -----------
Total recoveries .................................... 320 264
Loans charged off:
Commercial .......................................... 761 450
Real Estate ......................................... 55 487
Installment and consumer ............................ 542 490
----------- -----------
Total loans charged off ............................. 1,358 1,427
----------- -----------
Net loans charged off ................................. (1,038) (1,163)
Provision for loan losses ............................. 1,648 2,190
----------- -----------
Allowance for loan losses, end of period .............. $ 14,090 $ 13,480
=========== ===========
Ratio of net loans charged off
to average loans outstanding (1) .................... .14% .13%
Ratio of allowance for loan losses
to loans outstanding at end of period ............... 1.40% 1.38%
</TABLE>
(1) The ratio for the nine months ended September 30, 2000 has been
annualized.
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<PAGE> 22
At September 30, 2000, Bancorp's allowance for loan loss was $14.1
million, or 1.40% of total loans, and 293.00% of total nonperforming assets,
compared with an allowance for loan losses at December 31, 1999 of $13.5
million, or 1.38% of total loans, and 289.95% of total nonperforming assets.
During Bancorp's normal loan review procedures, a loan is considered to
be impaired when it is probable that we will be unable to collect all amounts
due according to the contractual terms of the loan agreement. A loan is usually
not considered to be impaired during a period of minimal delay (less than 90
days). 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. Impaired loans are currently
measured at lower of cost or fair value. Leases and certain large groups of
smaller balance homogeneous loans, are collectively measured for impairment, and
are excluded in the calculation of total impaired loans. 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.
During the third quarter of 2000, net loans charged off were $274,000,
compared to $575,000 for the same period in 1999. The annualized percentage of
net loans charged off year to date to average loans outstanding was 0.14% at
September 30, 2000, and September 30, 1999. Charged off loans reflect the
realization of losses in the portfolio that were recognized previously through
the provision for loan losses.
At September 30, 2000, the provision for loan 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 loan
portfolio. There can be no assurance that the adverse impact to Bancorp, if any,
of these conditions will not be in excess of the range set forth above. Readers
are referred to management's "Forward Looking Statement Disclosure" in
connection with this section.
INVESTMENT PORTFOLIO
The carrying value of the Banks' investment portfolio is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 2000 1999
---------------------- ------------ ------------
<S> <C> <C>
Investments available for sale (At Fair Value)
U.S. Treasury securities .............................. $ 0 $ 501
U.S. Government agency securities ..................... 103,445 100,408
Corporate securities .................................. 25,551 34,340
Mortgage-backed securities ............................ 9,362 9,235
Obligations of state and political subdivisions ....... 94,186 95,946
Equity and other securities ........................... 15,681 15,179
-------- --------
Total Investment Portfolio ..................... $248,225 $255,609
======== ========
</TABLE>
22
<PAGE> 23
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK
Interest rate, credit, and operations risks are the most significant
market risks impacting Bancorp's performance. Other types of market risk, such
as foreign currency exchange rate risk and commodity price risk, do not arise in
the normal course of Bancorp's business activities. Bancorp relies on loan
reviews, prudent loan underwriting standards and an adequate allowance for loan
loss to mitigate credit risk.
Asset/liability management simulation models are used to measure
interest rate risk. The models quantify interest rate risk through simulating
forecasted net interest income over a 12-month time horizon 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 assets less the market value of
liabilities. By measuring the change in the present value of equity under
different rate scenarios, management is able to identify interest rate risk that
may not be evident in simulating changes in forecasted net interest income.
Bancorp is currently liability sensitive, meaning that interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
given period, therefore, a significant increase in market rates of interest
could adversely affect net interest income. In contrast, a decreasing rate
environment, a less inverse or steepening interest rate yield curve may slightly
improve Bancorp's margin. Bancorp attempts to continue to limit its interest
rate risk exposure through managing repricing characteristics of its assets and
liabilities. The change in mix between borrowed funds and core deposits has
increased our liability sensitivity. Bancorp has placed increased emphasis on
variable rate loan product and non-interest revenue products less impacted by
changing interest rates to additionally stabilize earnings strength.
It should be noted that the simulation model does not take into account
future management actions that could be undertaken, if there were a change in
actual market interest rates during the year. Also, certain assumptions are
required to perform modeling simulations that may have significant impact on the
results. These include assumptions regarding the level of interest rates and
balance changes on deposit products that do not have stated maturities. These
assumptions have been developed through a combination of industry standards and
future expected pricing behavior. The model also includes assumptions about
changes in the composition or mix of the balance sheet. The results derived from
the simulation model could vary significantly by external factors such as
changes in the prepayment assumptions, early withdrawals of deposits and
competition. Any merger activity will also have an impact on Bancorp's
asset/liability position as new assets are acquired and added. Management has
assessed these risks and believes that there has been no material change since
December 31, 1999. Readers are referred to management's "Forward Looking
Statement Disclosure" in connection with this section.
23
<PAGE> 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
West Coast Bank v. B.A.S.S. Construction Co., et. al., Lincoln County
Circuit Court Case No. 992167. This case arose out of an earlier dispute with
Edward and Marianne Fischer that has now been settled. The Fischers loaned $4.6
million to B.A.S.S. Construction Company. The loan was secured by an approximate
500 acre tract of land in Lincoln County, Oregon ("Lincoln County Property").
B.A.S.S. defaulted on the $4.6 million loan. The Fischers then filed suit
against the Bank alleging that the Bank failed to provide promised take-out
funding to B.A.S.S. In March 2000 the Bank settled the Fischer case and obtained
the Fischers' rights to collect the $4.6 million loan to B.A.S.S. and to
foreclose on the Lincoln County Property.
The Bank has foreclosed on the Lincoln County Property pursuant to a
sheriff's sale at which the Bank purchased the property. The Bank now has a
deficiency claim against B.A.S.S. for approximately $2.7 million plus interest
and costs. B.A.S.S. filed counterclaims against the Bank seeking damages in
excess of $5 million. The Bank denies any liability to B.A.S.S. and will defend
itself accordingly. Very little discovery has been taken regarding the B.A.S.S.
counterclaims. Due to the uncertainties inherent in litigation, and the nascent
stage of discovery, there are no assurances that this matter will not ultimately
result in a loss that could materially affect the Company. However Bank
management does not at this time expect a material loss.
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 the Bank 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, facts and events currently unknown to
management that may surface in connection with the B.A.S.S. counterclaims or the
Lincoln County Property, and other risks inherent in litigation. 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. The Bank
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.
24
<PAGE> 25
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule for Form 10-Q.
(b) During the three months ended September 30, 2000, West Coast Bancorp
filed the following current report on Form 8-K:
None.
SIGNATURES
As required by the Securities Exchange Act of 1934, this report is signed on
registrant's behalf by the undersigned authorized officers.
WEST COAST BANCORP
(Registrant)
Dated: November 13, 2000 /s/ Robert D. Sznewajs
------------------------------------
Robert D. Sznewajs
Chief Executive Officer and President
Dated: November 13, 2000 /s/ Anders Giltvedt
------------------------------------
Anders Giltvedt
Executive Vice President and Chief
Financial Officer
25
