<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
Form 10-Q/A
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 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 July 31, 2000: 15,424,635
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999..........................................3
Consolidated Statements of Income -
Three months and six months ended June 30, 2000 and 1999.....................4
Consolidated Statements of Cash Flows -
Six months ended June 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 4. Submissions of Matters to a Vote of Security Holders........................25
Item 6. Exhibits and Reports on Form 8-K............................................26
Signatures..........................................................................26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1.
WEST COAST BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 54,884,855 $ 47,148,168
Interest-bearing deposits in other banks 1,560,961 17,024,548
Federal funds sold 2,200,000 2,800,000
--------------- ---------------
Total cash and cash equivalents 58,645,816 66,972,716
Trading assets 907,569 1,000,943
Investment securities:
Investments available for sale 239,962,845 255,609,218
Loans held for sale 4,957,452 8,309,188
Loans 1,009,572,539 976,297,233
Allowance for loan loss (14,083,531) (13,479,752)
--------------- ---------------
Loans, net 995,489,008 962,817,481
Premises and equipment, net 29,874,653 30,654,447
Intangible assets 2,142,895 2,337,049
Other assets 27,918,806 26,986,340
--------------- ---------------
Total assets $ 1,359,899,044 $ 1,354,687,382
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 197,117,779 $ 194,338,293
Savings and interest-bearing demand 496,190,399 542,532,667
Certificates of deposits 370,319,401 343,926,889
--------------- ---------------
Total deposits 1,063,627,579 1,080,797,849
Short-term borrowings 123,700,000 79,512,500
Other liabilities 9,557,554 11,895,821
Long-term borrowings 45,093,319 65,688,557
--------------- ---------------
Total liabilities 1,241,978,452 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, 50,000,000 shares
authorized; shares issued and outstanding
15,431,117 and 15,344,857, respectively 19,288,896 19,181,071
Additional paid-in capital 76,467,611 78,005,788
Retained earnings 25,766,113 23,007,819
Accumulated other comprehensive loss (3,602,028) (3,402,023)
--------------- ---------------
Total stockholders' equity 117,920,592 116,792,655
--------------- ---------------
Total liabilities and stockholders' equity $ 1,359,899,044 $ 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 Six months ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 23,041,832 $ 20,370,422 $ 45,680,205 $ 40,448,396
Interest on taxable investment securities 2,721,729 2,228,953 5,568,838 4,752,860
Interest on nontaxable investment securities 1,059,554 1,124,995 2,127,599 2,255,323
Interest from other banks 24,174 77,869 74,744 149,996
Interest on federal funds sold 809 17,668 3,529 26,283
------------ ------------ ------------ ------------
Total interest income 26,848,098 23,819,907 53,454,915 47,632,858
INTEREST EXPENSE:
Savings and interest-bearing demand 4,080,971 4,048,979 8,258,625 7,995,986
Certificates of deposit 4,916,014 4,489,939 9,487,708 8,983,875
Short-term borrowings 1,906,648 104,633 3,471,757 215,551
Long-term borrowings 901,283 241,393 1,793,111 497,665
------------ ------------ ------------ ------------
Total interest expense 11,804,916 8,884,944 23,011,201 17,693,077
------------ ------------ ------------ ------------
NET INTEREST INCOME 15,043,182 14,934,963 30,443,714 29,939,781
PROVISION FOR LOAN LOSS 693,000 450,000 1,368,000 960,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 14,350,182 14,484,963 29,075,714 28,979,781
NONINTEREST INCOME:
Service charges on deposit accounts 1,353,360 1,144,297 2,566,889 2,302,338
Other service charges, commissions and fees 1,250,319 1,081,827 2,348,411 2,112,952
Trust revenue 515,785 587,832 1,069,453 1,115,860
Gains on sales of loans 86,248 1,009,900 504,927 2,245,666
Loan servicing fees 131,593 84,152 260,100 240,117
Other 111,374 73,002 250,694 557,232
Net gains (losses) on sales of securities (221,575) 101,459 (221,575) 204,364
------------ ------------ ------------ ------------
Total noninterest income 3,227,104 4,082,469 6,778,899 8,778,529
NONINTEREST EXPENSE:
Salaries and employee benefits 6,351,720 6,474,984 12,496,658 13,437,913
Equipment 1,334,096 1,208,981 2,647,308 2,476,573
Occupancy 994,187 867,005 1,934,090 1,742,322
Professional fees 603,046 355,054 822,263 682,658
Marketing 391,743 551,861 745,068 911,259
Communications 329,077 392,608 699,787 818,396
Printing and office supplies 194,285 252,264 434,634 540,806
Litigation settlement charges -- -- 4,946,055 --
Restructuring charges -- 303,290 -- 707,863
Other noninterest expense 2,193,146 1,678,949 4,265,103 3,513,198
------------ ------------ ------------ ------------
Total noninterest expense 12,391,300 12,084,996 28,990,966 24,830,988
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 5,185,986 6,482,436 6,863,647 12,927,322
PROVISION FOR INCOME TAXES 1,674,246 1,987,018 2,100,282 4,051,828
------------ ------------ ------------ ------------
NET INCOME $ 3,511,740 $ 4,495,418 $ 4,763,365 $ 8,875,494
============ ============ ============ ============
Basic earnings per share $ 0.23 $ 0.29 $ 0.31 $ 0.57
Diluted earnings per share $ 0.23 $ 0.28 $ 0.31 $ 0.56
</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>
Six months ended
June 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,763,365 $ 8,875,494
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises and equipment 1,970,154 1,744,825
Amortization of intangibles 194,154 196,046
Net (gain) loss on sales of available for sale investments 221,575 (204,364)
Provision for loan losses 1,368,000 960,000
(Increase ) decrease in interest receivable (141,759) 421,338
Increase in other assets (790,707) (2,364,815)
Net cash provided by loans held for sale 3,351,736 11,638,968
(Decrease) increase in interest payable (638,739) 954,494
Decrease in other liabilities (1,699,528) (3,690,086)
Tax benefit associated with stock options 122,944 416,492
Decrease in trading assets 93,374 --
------------ ------------
Net cash provided by operating activities 8,814,569 18,948,392
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available for sale securities 6,867,199 37,685,303
Proceeds from sales of available for sale securities 8,930,891 11,732,703
Purchase of available for sale securities (573,297) (32,278,385)
Loans made to customers greater than principal collected on loans (34,039,527) (40,041,112)
Net capital expenditures (1,190,360) (2,400,515)
------------ ------------
Net cash used in investing activities (20,005,094) (25,302,006)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand, savings and interest
bearing transaction accounts (43,562,782) (34,071,701)
Net increase in certificates of deposit 26,392,512 14,416,720
Net decrease in long-term borrowings (20,595,238) (785,714)
Net increase in short-term borrowings 44,187,500 14,300,000
Redemption of common stock for stock repurchase plan (2,574,320) (5,778,001)
Net proceeds from issuance of common stock 1,021,024 720,302
Dividends paid and cash paid for fractional shares (2,005,071) (1,553,619)
------------ ------------
Net cash (used in) provided by financing activities 2,863,625 (12,752,013)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,326,900) (19,105,627)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 66,972,716 81,491,894
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 58,645,816 $ 62,386,267
============ ============
</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>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998 14,235,931 $ 17,794,914 $ 66,474,468 $ 29,392,264
Comprehensive income:
Net income -- -- -- 17,332,036
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, $.23 per common share -- -- -- (3,553,257)
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 (20,152,687)
Cash paid for fractional shares (803) (1,004) -- (10,537)
Tax benefit associated with stock options -- -- 756,081 --
------------- ------------- ------------- -------------
BALANCE, December 31, 1999 15,344,857 19,181,071 78,005,788 23,007,819
Comprehensive income:
Net income -- -- -- 4,763,365
Other comprehensive loss, net of tax:
Net unrealized investment losses -- -- -- --
Comprehensive income -- -- -- --
Cash dividends, $.13 per common share -- -- -- (2,005,071)
Issuance of common stock pursuant to option plans 211,331 264,164 853,179 --
Redemption of stock pursuant to options (14,270) (17,838) (159,370) --
Issuance of common stock pursuant to
deferred compensation and restricted stock
plans, net 115,899 144,874 (63,985) --
Common stock repurchased and retired (226,700) (283,375) (2,290,945) --
Tax benefit associated with stock options -- -- 122,944 --
------------- ------------- ------------- -------------
BALANCE, June 30, 2000 15,431,117 $ 19,288,896 $ 76,467,611 $ 25,766,113
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income (Loss) Total
-------------- -------------
<S> <C> <C>
BALANCE, December 31, 1998 $ 3,563,522 $ 117,225,168
Comprehensive income:
Net income -- 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, $.23 per common share -- (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 -- --
Cash paid for fractional shares -- (11,541)
Tax benefit associated with stock options -- 756,081
------------- -------------
BALANCE, December 31, 1999 (3,402,023) 116,792,655
Comprehensive income:
Net income -- 4,763,365
Other comprehensive loss, net of tax:
Net unrealized investment losses (200,005) (200,005)
-------------
Comprehensive income -- 4,563,360
=============
Cash dividends, $.13 per common share -- (2,005,071)
Issuance of common stock pursuant to option plans -- 1,117,343
Redemption of stock pursuant to options -- (177,208)
Issuance of common stock pursuant to
deferred compensation and restricted stock
plans, net -- 80,889
Common stock repurchased and retired -- (2,574,320)
Tax benefit associated with stock options -- 122,944
------------- -------------
BALANCE, June 30, 2000 $ (3,602,028) $ 117,920,592
============= =============
</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 six month periods ended June 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 first and second quarters of 2000. A dividend of $.05 was
declared in the first and second quarters of 1999. A 10 percent stock dividend
was also declared in the third quarter of 1999. All per share amounts have been
restated to retroactively reflect stock dividends and stock splits previously
reported.
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 $23,650,000 and $16,739,000 for interest in the six months
ended June 30, 2000 and 1999, respectively. Income taxes paid were $2,260,000
and $3,985,000 in the six months ended June 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 and Bancorp alleging that
they suffered damages as the result of the Bank and Bancorp's failure to provide
take-out funding to the construction company. The construction company defaulted
on the $4.6 million loan. The loan is secured by an approximate 500 acre tract
of land in Lincoln County, Oregon ("Lincoln County Property"). Plaintiffs
asserted claims against the Bank for breach of contract, promissory estoppel,
fraud, promissory fraud and conversion, and for compensatory damages in excess
of $4.6 million. Plaintiffs subsequently amended their complaint to remove
Bancorp as a defendant and to include a claim for punitive damages against the
Bank in excess of $5 million.
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 $539,000. 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 Company is in the process of foreclosing its interest in the Lincoln
County Property and pursuing its rights against the construction company under
the loan agreement. The construction company has recently filed a counterclaim
against the Bank seeking damages in excess of $5 million. This counterclaim has
been filed in Lincoln County Circuit Court, Case No. 992167. The Bank denies any
liability to the construction company and will defend itself accordingly. Due to
the nature and uncertainties inherent in litigation, there are no assurances
that this matter will not ultimately result in a loss that could materially
affect the Company. However Company management does not expect a material loss
at this time.
This section may contain "forward looking statements." Please see item 1
of Part II other information of this report entitled "Legal Proceedings" for
risk factors and uncertainties that may affect these statements. Readers are
cautioned not to place undue reliance on these statements which reflect
management's analysis only as of the date of the statement.
6. COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 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 $ 729 $(5,382) $ (193) $(8,074)
Tax (provision) benefit (285) 2,064 129 3,080
------- ------- ------- -------
Unrealized holding gains (losses) arising during the period, after tax 444 (3,318) (64) (4,994)
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 (221) 101 (221) 204
Tax benefit (provision) 85 (38) 85 (78)
------- ------- ------- -------
Net realized (losses) gains (136) 63 (136) 126
------- ------- ------- -------
Other comprehensive income (loss), net of tax $ 308 $(3,255) $ (200) $(4,737)
======= ======= ======= =======
</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 June 30, 2000
---------------------------------------------
<S> <C> <C> <C>
Basic earnings per share...... $ 3,511,740 15,328,078 $ 0.23
Stock options................. 101,084
Diluted earnings per share.... $ 3,511,740 15,429,162 $ 0.23
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1999
---------------------------------------------
<S> <C> <C> <C>
Basic earnings per share...... $ 4,495,418 15,514,104 $ 0.29
Stock options................. 365,168
Diluted earnings per share.... $ 4,495,418 15,879,272 $ 0.28
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average Per Share
Net Income Shares Amount
---------------------------------------------
Six months ended June 30, 2000
---------------------------------------------
<S> <C> <C> <C>
Basic earnings per share...... $ 4,763,365 15,342,339 $ 0.31
Stock options................. 143,022
Diluted earnings per share.... $ 4,763,365 15,485,361 $ 0.31
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
---------------------------------------------
<S> <C> <C> <C>
Basic earnings per share...... $ 8,875,494 15,553,852 $ 0.57
Stock options................. 407,191
Diluted earnings per share.... $ 8,875,494 15,961,043 $ 0.56
</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 June 30, 2000
------------------------------------------------------------
Banking Other Intersegment Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income .................. $ 26,826 $ 41 $ (19) $ 26,848
Interest expense ................. 11,822 2 (19) 11,805
---------- ---------- ---------- ----------
Net interest income ......... 15,004 39 -- 15,043
---------- ---------- ---------- ----------
Provision for loan loss .......... 693 -- -- 693
Noninterest income ............... 2,744 518 (35) 3,227
Noninterest expense .............. 11,942 484 (35) 12,391
---------- ---------- ---------- ----------
Income before income taxes ... 5,113 73 -- 5,186
Provision for income taxes ....... 1,647 27 -- 1,674
---------- ---------- ---------- ----------
Net income ....................... $ 3,466 $ 46 $ -- $ 3,512
========== ========== ========== ==========
Depreciation and amortization .... $ 1,089 $ 2 $ -- $ 1,091
Assets ........................... $1,358,638 $ 4,446 $ (3,185) $1,359,899
Loans, net ....................... $ 995,489 $ -- $ -- $ 995,489
Deposits ......................... $1,066,254 $ -- $ (2,626) $1,063,628
Equity ........................... $ 113,820 $ 4,101 $ N/A $ 117,921
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) Three months ended June 30, 1999
------------------------------------------------------------
Banking Other Intersegment Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income .................. $ 23,783 $ 65 $ (28) $ 23,820
Interest expense ................. 8,913 -- (28) 8,885
---------- ---------- ---------- ----------
Net interest income ......... 14,870 65 -- 14,935
---------- ---------- ---------- ----------
Provision for loan loss .......... 450 -- -- 450
Noninterest income ............... 3,551 596 (65) 4,082
Restructuring charges ............ 303 -- -- 303
Noninterest expense .............. 11,241 606 (65) 11,782
---------- ---------- ---------- ----------
Income before income taxes .. 6,427 55 -- 6,482
Provision for income taxes ....... 1,968 19 -- 1,987
---------- ---------- ---------- ----------
Net income ....................... $ 4,459 $ 36 $ -- $ 4,495
========== ========== ========== ==========
Depreciation and amortization .... $ 972 $ 8 $ -- $ 980
Assets ........................... $1,242,641 $ 6,928 $ (5,078) $1,244,491
Loans, net ....................... $ 888,681 $ -- $ -- $ 888,681
Deposits ......................... $1,094,204 $ -- $ (5,402) $1,088,802
Equity ........................... $ 107,263 $ 7,906 $ N/A $ 115,169
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
(Dollars in thousands) Six months ended June 30, 2000
------------------------------------------------------------
Banking Other Intersegment Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income .................. $ 53,411 $ 85 $ (41) $ 53,455
Interest expense ................. 23,049 3 (41) 23,011
---------- ---------- ---------- ----------
Net interest income ......... 30,362 82 -- 30,444
---------- ---------- ---------- ----------
Provision for loan loss .......... 1,368 -- -- 1,368
Noninterest income ............... 5,769 1,078 (68) 6,779
Noninterest expense .............. 28,031 1,028 (68) 28,991
---------- ---------- ---------- ----------
Income before income taxes .. 6,732 132 -- 6,864
Provision for income taxes ....... 2,050 50 -- 2,100
---------- ---------- ---------- ----------
Net income ....................... $ 4,682 $ 82 $ -- $ 4,764
========== ========== ========== ==========
Depreciation and amortization .... $ 2,161 $ 3 $ -- $ 2,164
Assets ........................... $1,358,638 $ 4,446 $ (3,185) $1,359,899
Loans, net ....................... $ 995,489 $ -- $ -- $ 995,489
Deposits ......................... $1,066,254 $ -- $ (2,626) $1,063,628
Equity ........................... $ 113,820 $ 4,101 $ N/A $ 117,921
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) Six months ended June 30, 1999
------------------------------------------------------------
Banking Other Intersegment Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income .................. $ 47,580 $ 105 $ (52) $ 47,633
Interest expense ................. 17,745 -- (52) 17,693
---------- ---------- ---------- ----------
Net interest income ......... 29,835 105 -- 29,940
---------- ---------- ---------- ----------
Provision for loan loss .......... 960 -- -- 960
Noninterest income ............... 7,757 1,152 (131) 8,778
Restructuring charges ............ 708 -- -- 708
Noninterest expense .............. 22,987 1,267 (131) 24,123
---------- ---------- ---------- ----------
Income before income taxes .. 12,937 (10) -- 12,927
Provision for income taxes ....... 4,055 (3) -- 4,052
---------- ---------- ---------- ----------
Net income ....................... $ 8,882 $ (7) $ -- $ 8,875
========== ========== ========== ==========
Depreciation and amortization .... $ 1,922 $ 19 $ -- $ 1,941
Assets ........................... $1,242,641 $ 6,928 $ (5,078) $1,244,491
Loans, net ....................... $ 888,681 $ -- $ -- $ 888,681
Deposits ......................... $1,094,204 $ -- $ (5,402) $1,088,802
Equity ........................... $ 107,263 $ 7,906 $ N/A $ 115,169
</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 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; 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 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 we file from time to time with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Three months ended June 30, 2000 and 1999
Net Income. Bancorp reported net income of $3,512,000, or $.23 per
diluted share, for the three months ended June 30, 2000, compared to $4,496,000,
or $.28 per diluted share, for the three months ended June 30, 1999. The second
quarter 2000 results include severance expenses and losses on sales of
securities of $586,000, after tax. The second quarter 1999 results include
non-recurring and restructuring charges of $304,000 after taxes, resulting from
expenses associated with Bancorp's consolidation of its subsidiary banks, and
$66,000 after tax gain on sale of securities. After adjusting for second quarter
non-core, non-recurring events, adjusted operating net income in the second
quarter of 2000 was $4,098,000 or $.27 per diluted share, compared to adjusted
1999 results of $4,734,000 or $.30 per diluted share. Net interest income
increased slightly in the second quarter 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, partly
offset by higher service charges on deposit accounts and sales of investment
products. Total noninterest expenses increased due to non-recurring severance
charges, increased check processing fees and professional fees, offset in part
by lower marketing and communication 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, 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
June 30, 2000, increased $100,000, or 0.06%, to $15,614,000 from $15,514,000 for
the same period in 1999. The increase was due mainly to increases in volumes of
interest earning assets partly offset by increases in both volume and rates, as
well as change in mix of interest bearing liabilities. Average yields on earning
assets increased to 8.76% in the second quarter of 2000 from 8.49% in 1999.
Average interest earning assets increased $106.5 million, or 9.24%, to $1.26
billion in the second quarter of 2000, from $1.15 billion for the same period in
1999, while average interest bearing liabilities increased $109.2 million or
11.73%. Average rates paid on interest bearing liabilities increased 73 basis
points in the second quarter of 2000, to 4.56% from 3.83% for the like period in
1999. The average net interest spread decreased from 4.66% to 4.20% in the
second 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 June 30, 2000, was 4.99%, a decrease of 41
basis points from 5.40% 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) June 30,
--------------------------------- Increase
2000 1999 (Decrease) Change
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Interest and fee income (1) ........ $ 27,419 $ 24,399 $ 3,020 12.38%
Interest expense ................... 11,805 8,885 2,920 32.86%
------------- ------------- -------------
Net interest income ................ $ 15,614 $ 15,514 $ 100 0.06%
============= ============= =============
Average interest earning assets .... $ 1,259,041 $ 1,152,563 $ 106,478 9.24%
Average interest bearing liabilities $ 1,040,123 $ 930,914 $ 109,209 11.73%
Average interest earning assets/
interest bearing liabilities .. 121.05% 123.81% (2.76)
Average yields earned (2) .......... 8.76% 8.49% 0.27
Average rates paid (2) ............. 4.56% 3.83% 0.73
Net interest spread (2) ............ 4.20% 4.66% (0.46)
Net interest margin (2) ............ 4.99% 5.40% (0.41)
</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 June 30, 2000 and 1999 have
been annualized.
Provision for Loan Loss. Bancorp recorded provisions for loan losses for
the second quarter of 2000 and 1999 of $693,000 and $450,000, respectively. Net
charge-offs for the second quarter of 2000 were $674,000, compared to net
charge-offs of $113,000 for the same period in 1999. At June 30, 2000, the
percentage of non-performing assets was 0.32% of total assets, compared to 0.36%
one year earlier. Bancorp's allowance for loan losses, as a percentage of total
loans was 1.40% at June 30, 2000, compared to 1.45% at June 30, 1999.
Noninterest Income. Noninterest income for the second quarter of 2000
was $3,227,000, down $855,000, or 20.95%, from $4,082,000 in the like period in
1999. Gains on sales of loans decreased $924,000, to $86,000 in 2000, from
$1,010,000 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 $1,353,000, an 18.27% 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 $168,000, to $1,250,000, from
$1,082,000 or 15.57%, 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 second 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 and other noninterest income
increased in the second quarter of 2000, compared to 1999. A loss of $221,000
was incurred on securities sold in the second quarter of 2000, while net gains
on the sales of securities were $101,000 in the second quarter of 1999.
13
<PAGE> 14
Noninterest Expense. Noninterest expense for the second quarter ending
June 30, 2000 was $12,391,000, an increase of $306,000, or 2.53%, over the same
period in 1999. A restructuring charge of $483,000 ($303,000 after income
taxes), impacted second quarter 1999 noninterest expense, due to the Company's
consolidation of its subsidiary banks. Bancorp's salaries and employee benefits
decreased $123,000, or 1.90%, to $6,352,000 in the second quarter of 2000, from
$6,475,000 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, offset by severance costs and changes in salary structure. At June 30,
2000, Bancorp employed 591 staffing positions compared to 649 at June 30, 1999.
Bancorp's staffing reductions have been primarily administrative in nature, and
Bancorp has continued to expand its products, services, and branch network over
the previous year. Equipment and occupancy expenses increased in the second
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 $125,000 or 10.35% in the second quarter of 2000 over 1999, as
Bancorp has continued to invest in technological improvements and expansion.
Bancorp introduced internet-based banking during the second quarter of 2000.
Occupancy expenses were higher in the second 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 $603,000 in the second quarter of 2000,
compared to $355,000 in the second quarter of 1999, due in part to increased
utilization of outside consultants to enhance information systems, streamline
product offerings and improve operational processes. Marketing expenses and
printing and office supplies expenses decreased in the second 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 decreased $64,000 in the second 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 June 30, 2000, due
to changes in check processing, other loan expenses and other enhancements to
services provided.
Six months ended June 30, 2000 and 1999
Net Income. Bancorp reported net income of $4,763,000, or $.31 per
diluted share, for the six months ended June 30, 2000, compared to $8,875,000,
or $.56 per diluted share, for the six months ended June 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 $128,000. After adjusting
for first and second quarter non-recurring events, adjusted operating net income
for the first six months of 2000 was $8,400,000 or $.54 per diluted share,
compared to adjusted 1999 results of $9,305,000 or $.58 per diluted share. Net
interest income increased in the first six 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.
Net Interest Income. Net interest income on a tax equivalent basis for
the six months ended June 30, 2000, increased $488,000, or 1.57%, to $31,590,000
from $31,102,000 for the same period in 1999. The increase in net interest
income was due mainly to increases in volumes of interest earning assets partly
offset by increases in both volume and rates, as well as change in mix of
interest bearing liabilities. Average yields on earning assets increased to
8.72% in the first six months of 2000, compared to 8.58% one year earlier.
Average interest earning assets increased $111.9 million, or 9.76%, to $1.26
billion in first six months of 2000, from $1.15 billion for the same period in
1999, while average interest bearing liabilities increased $113.2 million or
12.22%. Average rates paid on interest bearing liabilities increased 60 basis
points in the first six months of 2000 to 4.45% from 3.85% for the like period
in 1999. The average net interest spread decreased from 4.73% to 4.27% in the
first six 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 six months ended June 30, 2000, was 5.05%, a decrease of 42 basis
points from 5.47% 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.
14
<PAGE> 15
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>
Six months ended
(Dollars in thousands) June 30,
--------------------------------- Increase
2000 1999 (Decrease) Change
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Interest and fee income (1) ........ $ 54,601 $ 48,795 $ 5,806 11.90%
Interest expense ................... 23,011 17,693 5,318 30.06%
------------- ------------- -------------
Net interest income ................ $ 31,590 $ 31,102 $ 488 1.57%
============= ============= =============
Average interest earning assets .... $ 1,259,123 $ 1,147,178 $ 111,945 9.76%
Average interest bearing liabilities $ 1,039,606 $ 926,441 $ 113,165 12.22%
Average interest earning assets/
interest bearing liabilities .. 121.12% 123.83% (2.71)
Average yields earned (2) .......... 8.72% 8.58% 0.14
Average rates paid (2) ............. 4.45% 3.85% 0.60
Net interest spread (2) ............ 4.27% 4.73% (0.46)
Net interest margin (2) ............ 5.05% 5.47% (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 six months ended June 30, 2000 and 1999 have
been annualized.
Provision for Loan Loss. Bancorp recorded provisions for loan losses for
the six months ended June 30, 2000 and 1999 of $1,368,000 and $960,000,
respectively. Net charge-offs through June 30, 2000 were $764,000, compared to
net charge-offs of $355,000 for the same period in 1999.
Noninterest Income. Noninterest income for the first six months of 2000
was $6,779,000, down $2,000,000, or 22.78%, from $8,779,000 in the like period
in 1999. Gains on sales of loans decreased $1,741,000, to $505,000 in 2000, from
$2,246,000 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 $2,567,000, an 11.49% 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 $235,000, to $2,348,000, from
$2,113,000 or 11.14%, 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 six 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
six months in 2000, compared to 1999. Other noninterest income decreased in
2000, compared to 1999, due to gains of sales of certain real estate assets in
the six months ended 1999. A loss on securities sold of $221,000 was incurred
during the first six months of 2000, while net gains on the sales of securities
were $204,000 in 1999.
15
<PAGE> 16
Noninterest Expense. Noninterest expenses for the six months ended June
30, 2000 were $28,991,000, an increase of $4,160,000, or 16.75%, 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 six 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 $941,000, or 7.00%, to
$12,497,000 in 2000, from $13,438,000 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, offset in part by severance costs and changes
in salary structure. Equipment and occupancy expenses increased in the first six
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 $171,000 or 6.89% in the first six months of 2000 over 1999, as
Bancorp has continued to invest in technological improvements and expansion.
Occupancy expenses were higher in the first six 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 six months of 2000 compared
to 1999. Marketing expenses decreased in the first six 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 $822,000 in the first six months of 2000, compared to
$683,000 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 six 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 and second 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) June 30, 2000
-------------
<S> <C>
Balance, accrued restructuring charges, December 31, 1999... $315
Provision for restructure charges second quarter 2000....... --
Utilization first quarter 2000:
Cash .................................................. 315
Noncash ............................................... --
----
Total Utilization .......................................... 315
----
Balance, accrued restructuring charges, June 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 six 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
$1.064 billion at June 30, 2000, compared to $1.081 billion at December 31,
1999. At June 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 June 30, 2000, Bancorp and
the Bank are considered "Well Capitalized" under the regulatory risk based
capital guidelines.
Shareholders' equity increased to $117.9 million at June 30, 2000, from
$116.8 million at December 31, 1999, an increase of $1.1 million. The increase
is due to net income, offset by cash dividends and Bancorp's activity in its
stock repurchase plan. At June 30, 2000, Bancorp's shareholders' equity, as a
percentage of total assets, was 8.67%, 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 .9% over the period from
December 31, 1999, to June 30, 2000, while assets increased by .4% over the same
period. As the following table indicates, Bancorp currently exceeds the
regulatory capital minimum requirements.
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, 2000
-------------------- ---------------------
Amount Ratio
---------- -----
<S> <C> <C>
Tier 1 capital ..................... $ 119,876 10.66%
Tier 1 capital minimum requirement . 44,997 4.00%
---------- -----
Excess over minimum Tier 1 capital $ 74,879 6.66%
========== =====
Total capital ...................... $ 133,937 11.91%
Total capital minimum requirement .. 89,993 8.00%
---------- -----
Excess over minimum total capital $ 43,944 3.91%
========== =====
Risk-adjusted assets ............... $1,124,914
==========
Leverage ratio ..................... 8.83%
Minimum leverage requirement ....... 3.00%
-----
Excess over minimum leverage ratio 5.83%
=====
Risk-adjusted total assets ......... $1,358,103
==========
</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 73.2% of total assets as of June 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>
June 30, 2000 December 31, 1999
(Dollars in thousands) ------------------------- -----------------------------
Amount Percent Amount Percent
----------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial ....................... $ 165,027 16.58% $ 157,912 16.40%
Real estate construction ......... 124,615 12.52 124,102 12.89
Real estate mortgage ............. 98,089 9.85 101,579 10.55
Real estate commercial ........... 566,363 56.88 531,600 55.21
Installment and other consumer ... 55,479 5.57 61,104 6.35
----------- ------ ----------- -----------
Total loans ...................... 1,009,573 101.40 976,297 101.40
Allowance for loan losses ........ (14,084) (1.40) (13,480) (1.40)
----------- ------ ----------- -----------
Total loans, net ................. $ 995,489 100.00% $ 962,817 100.00%
=========== ====== =========== ===========
</TABLE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Loans on nonaccrual status ................................. $4,071 $4,316
Loans past due greater than 90 days but not on nonaccrual
status ..................................................... 5 8
Other real estate owned .................................... 211 325
------ ------
Total nonperforming assets ................................. $4,287 $4,649
====== ======
Percentage of nonperforming assets to total assets ......... .32% .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 June 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 June 30, 2000 and December 31, 1999, the Bank
had no bankers acceptances.
As of June 30, 2000, the Bank had outstanding 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 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,
- Loan growth rates and concentrations,
20
<PAGE> 21
- 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 June 30, 2000, the Bank's allowance for loan losses was $14.1
million, consisting of a $13.7 million formula allowance, a $139,000 specific
allowance and a $210,000 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
second 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>
Six months ended Year ended
(Dollars in thousands) June 30, 2000 December 31, 1999
---------------- -----------------
<S> <C> <C>
Loans outstanding at end of period ................ $ 1,009,573 $ 976,297
Average loans outstanding during the period ....... $ 998,320 $ 904,931
Allowance for loan losses, beginning of period .... $ 13,480 $ 12,453
Recoveries:
Commercial ...................................... 43 129
Real Estate ..................................... 233 58
Installment and consumer ........................ 15 77
----------- -----------
Total recoveries ................................ 291 264
Loans charged off:
Commercial ...................................... 623 450
Real Estate ..................................... 31 487
Installment and consumer ........................ 401 490
----------- -----------
Total loans charged off ......................... 1,055 1,427
----------- -----------
Net loans charged off ............................. (764) (1,163)
Provision for loan losses ......................... 1,368 2,190
----------- -----------
Allowance for loan losses, end of period .......... $ 14,084 $ 13,480
=========== ===========
Ratio of net loans charged off
to average loans outstanding (1) ................ .15% .13%
Ratio of allowance for loan losses
to loans outstanding at end of period ........... 1.40% 1.38%
</TABLE>
(1) The ratio for the six months ended June 30, 2000 has been annualized.
21
<PAGE> 22
At June 30, 2000, Bancorp's allowance for loan loss was $14.1 million,
or 1.40% of total loans, and 328.53% 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 second quarter of 2000, net loans charged off were $674,000,
compared to $113,000 for the same period in 1999. The annualized percentage of
net loans charged off year to date to average loans outstanding was 0.15% and
0.05% at June 30, 2000, and at June 30, 1999, respectively. Charged off loans
reflect the realization of losses in the portfolio that were recognized
previously through the provision for loan losses.
At June 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>
June 30, December 31,
(Dollars in thousands) 2000 1999
-------- -----------
<S> <C> <C>
Investments available for sale (At Fair Value)
U.S. Treasury securities ............................ $ 500 $ 501
U.S. Government agency securities ................... 97,468 100,408
Corporate securities ................................ 23,303 34,340
Mortgage-backed securities .......................... 8,686 9,235
Obligations of state and political subdivisions ..... 94,496 95,946
Equity and other securities ......................... 15,510 15,179
-------- --------
Total Investment Portfolio ................... $239,963 $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 or a steepening interest rate yield curve may slightly improve
Bancorp's margin. Bancorp attempts to continue to limit its loss exposure
through managing the repricing characteristics of its assets and liabilities.
The present reliance on borrowed funds and their re-pricing characteristics has
increased our liability sensitivity. Changes in the re-pricing characteristics
of newly generated loans during the past year have added to the liability
sensitivity. Bancorp has also placed increased emphasis on those 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.
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 and Bancorp alleging that
they suffered damages as the result of the Bank and Bancorp's failure to provide
take-out funding to the construction company. The construction company defaulted
on the $4.6 million loan. The loan is secured by an approximate 500 acre tract
of land in Lincoln County, Oregon ("Lincoln County Property"). Plaintiffs
asserted claims against the Bank for breach of contract, promissory estoppel,
fraud, promissory fraud and conversion, and for compensatory damages in excess
of $4.6 million. Plaintiffs subsequently amended their complaint to remove
Bancorp as a defendant and to include a claim for punitive damages against the
Bank in excess of $5 million.
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 $539,000. 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 Company is in the process of foreclosing its interest in the Lincoln
County Property and pursuing its rights against the construction company under
the loan agreement. The construction company has recently filed a counterclaim
against the Company seeking damages in excess of $5 million. This counterclaim
has been filed in Lincoln County Circuit Court, Case No. 992167. The Bank denies
any liability to the construction company and will defend itself accordingly.
Due to the nature and uncertainties inherent in litigation, there are no
assurances that this matter will not ultimately result in a loss that could
materially affect the Company. However Company management does not expect a
material loss 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 in connection with the Lincoln County Property, (2)
environmental factors and issues that may affect the Lincoln County Property,
(3) any defenses raised or other matters occurring that prevent or delay the
Bank's ability to foreclose its interest in the Lincoln County Property, if it
chooses to foreclose this interest, (4) factors affecting the real estate market
and property values in Lincoln County, Oregon, (5) actual market or sale values
of property can differ from appraised values, (6) fluctuating interest rates,
and (7) 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. 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.
24
<PAGE> 25
Item 4. Submissions of Matters to a Vote of Security Holders.
(a) West Coast Bancorp's Annual Shareholders' Meeting was held on April 27,
2000.
(b) Not Applicable
(c) A brief description of each matter voted upon at the Annual
Shareholders' Meeting held on April 27, 2000 and number of votes cast
for, against or withheld, including a separate tabulation with respect
to each nominee for office is presented below:
(1) Election of (4) Directors for terms expiring in 2003 or when their
successors have been elected and qualified.
Director:
Robert D. Sznewajs
Votes cast for: 12,281,107
Votes cast against: -
Votes abstaining: 333,694
Lloyd D. Ankeny -
Votes cast for: 11,781,607
Votes cast against: -
Votes abstaining: 833,194
C. Douglas McGregor -
Votes cast for: 11,773,590
Votes cast against: -
Votes abstaining: 841,211
(2)Approve adoption of 2000 Restricted Stock Plan.
Votes cast for: 9,808,055
Votes cast against: 2,600,929
Votes abstaining: 205,818
(d) None
25
<PAGE> 26
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 June 30, 2000, West Coast Bancorp filed
the following current report on Form 8-K:
Form 8-K filed April 3, 2000 related to the settlement of a pending
lawsuit.
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: August 14, 2000 /s/ Robert D. Sznewajs
-----------------------------------------
Robert D. Sznewajs
Chief Executive Officer and President
Dated: August 14, 2000 /s/ Anders Giltvedt
-----------------------------------------
Anders Giltvedt
Executive Vice President and Chief
Financial Officer
26
