-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RR7UV8K5ycEsYf1GVfTTyLWjCoADUPfXGMwxeSJnWbxZyrXzHXzD5kZV1KZFzPOX Ox7vKPv93f2rwAjIREMVaw== 0000891020-98-001615.txt : 19981116 0000891020-98-001615.hdr.sgml : 19981116 ACCESSION NUMBER: 0000891020-98-001615 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEST COAST BANCORP /NEW/OR/ CENTRAL INDEX KEY: 0000717059 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 930810577 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10997 FILM NUMBER: 98747411 BUSINESS ADDRESS: STREET 1: 5335 SW MEADOWS RD STREET 2: SUITE 201 CITY: LAKE OSWEGO STATE: OR ZIP: 97035 BUSINESS PHONE: 5036840884 MAIL ADDRESS: STREET 1: 5335 SW MEADOWS RD STREET 2: SUITE 201 CITY: LAKE OSWEGO STATE: OR ZIP: 97035 FORMER COMPANY: FORMER CONFORMED NAME: COMMERCIAL BANCORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------- Form 10-Q [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 1998 [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-10997 WEST COAST BANCORP (Exact name of registrants specified in its charter) Oregon 93-0810577 (State or other jurisdiction (IRS Employer incorporation or organization) Identification No.) 5335 Meadows Road, Suite 201, Lake Oswego, Oregon 97035 (Address of Principal executive offices) (Zip code) (503) 684-0884 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No. ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, no par value, outstanding on October 31, 1998: 14,211,074 2 TABLE OF CONTENTS PART I. Financial Information
Item 1. Financial Statements Page Consolidated Balance Sheets - September 30, 1998 and December 31, 1997..................................3 Consolidated Statements of Income - Three months and nine months ended September 30, 1998 and 1997............4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997.............................5 Consolidated Statements of Changes in Stockholders' Equity................6 Notes to Consolidated Financial Statements................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk...............23 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K.........................................24 Signatures ..............................................................25
2 3 PART I. FINANCIAL INFORMATION Item 1. WEST COAST BANCORP CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1998 1997 --------------- --------------- (Unaudited) ASSETS Cash and cash equivalents: Cash and due from banks ....................... $ 84,293,751 $ 97,769,331 Interest-bearing deposits in other banks ...... 1,244,644 1,048,327 Federal funds sold ............................ -- -- --------------- --------------- Total cash and cash equivalents .......... 85,538,395 98,817,658 Investment securities: Investment available for sale ................. 243,558,504 191,189,957 Investment held to maturity ................... 2,878,746 2,987,256 --------------- --------------- Total investment securities .............. 246,437,250 194,177,213 Loans held for sale ................................. 13,306,975 10,457,247 Loans ............................................... 827,213,047 776,941,389 Allowance for loan loss ............................. (12,096,258) (10,450,584) --------------- --------------- Loans, net .................................... 815,116,789 766,490,805 Premises and equipment, net ......................... 31,074,024 27,850,076 Intangible assets ................................... 2,828,319 3,157,300 Other assets ........................................ 17,604,050 17,436,250 --------------- --------------- Total assets ............................. $ 1,211,905,802 $ 1,118,386,549 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand ........................................ $ 189,878,888 $ 162,567,731 Savings and interest-bearing demand ........... 526,089,289 495,890,935 Certificates of deposits ...................... 332,834,321 300,022,929 --------------- --------------- Total deposits ........................... 1,048,802,498 958,481,595 Short-term borrowings ............................... 9,700,000 29,249,000 Other liabilities ................................... 8,720,454 7,069,962 Long-term borrowings ................................ 31,088,531 22,445,674 --------------- --------------- Total liabilities ........................ 1,098,311,483 1,017,246,231 Commitments and contingent liabilities STOCKHOLDERS' EQUITY Preferred stock: no par value, none issued; 10,000,000 shares authorized Common stock: no par value, 50,000,000 shares authorized; shares issued and outstanding 14,207,899 and 12,606,009 respectively ........ 17,759,874 15,757,511 Additional paid-in capital .......................... 66,654,104 43,213,086 Retained earnings ................................... 26,658,801 40,599,130 Accumulated other comprehensive income .............. 2,521,540 1,570,591 --------------- --------------- Total stockholders' equity .................... 113,594,319 101,140,318 --------------- --------------- Total liabilities and stockholders' equity $ 1,211,905,802 $ 1,118,386,549 =============== ===============
The accompanying notes are an integral part of these consolidated statements. 3 4 WEST COAST BANCORP CONSOLIDATED STATEMENTS OF INCOME
Three Months ended Nine months ended September 30, September 30, ----------------------------------- ---------------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ INTEREST INCOME (Unaudited) Interest and fees on loans ................. $ 20,932,081 $ 19,695,260 $ 61,580,301 $ 57,731,845 Interest on taxable investment securities .. 2,247,770 1,667,606 6,358,165 4,616,872 Interest on nontaxable investment securities 1,024,178 585,119 2,888,270 1,720,232 Interest from other banks .................. 292,116 672,223 1,237,205 1,028,251 Interest on federal funds sold ............. 321,426 15,948 356,572 44,833 ------------ ------------ ------------ ------------ Total interest income ................ 24,817,571 22,636,156 72,420,513 65,142,033 INTEREST EXPENSE Savings and interest-bearing demand ........ 4,257,626 4,923,340 12,264,022 11,961,564 Certificates of deposit .................... 4,552,781 3,091,129 13,214,674 10,177,701 Short-term borrowings ...................... 3,617 17,312 403,883 447,581 Long-term borrowings ....................... 459,583 244,606 1,378,486 964,990 ------------ ------------ ------------ ------------ Total interest expense ............... 9,273,607 8,276,387 27,261,065 23,551,836 ------------ ------------ ------------ ------------ NET INTEREST INCOME ........................ 15,543,964 14,359,769 45,159,448 41,590,197 PROVISION FOR LOAN LOSS .................... 485,000 632,500 2,465,415 2,942,500 ------------ ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS .............. 15,058,964 13,727,269 42,694,033 38,647,697 NONINTEREST INCOME Gains on sales of loans .................... 1,221,244 591,171 4,196,425 1,446,480 Service charges on deposit accounts ........ 1,176,609 1,000,198 3,383,962 2,951,158 Other service charges, commissions and fees 1,257,285 876,022 2,913,359 2,336,569 Gains on sale of servicing rights .......... -- 214,103 -- 1,659,420 Trust revenue .............................. 576,540 413,847 1,881,084 1,215,226 Loans servicing fees ....................... 128,960 178,187 441,441 657,754 Other ...................................... 242,120 69,137 643,631 278,364 Net gains (losses) on sales of securities .. (497) (10,369) 250,484 (56,755) ------------ ------------ ------------ ------------ Total noninterest income ............. 4,602,261 3,332,296 13,710,386 10,488,216 NONINTEREST EXPENSE Salaries and employee benefits ............. 7,532,563 6,712,131 22,271,507 18,761,522 Equipment .................................. 1,384,183 1,185,672 3,961,079 3,415,997 Occupancy .................................. 853,299 768,186 2,472,430 2,349,209 Restructuring charges ...................... 1,918,350 -- 1,918,350 -- Communications ............................. 440,977 315,629 1,189,457 866,719 Professional fees .......................... 398,642 237,706 1,179,341 1,246,305 Marketing .................................. 359,168 252,531 1,109,102 924,847 Printing and office supplies ............... 288,804 359,903 1,048,460 933,766 FDIC insurance ............................. 29,506 26,027 87,175 74,828 Other noninterest expense .................. 1,647,681 1,470,675 5,653,489 4,377,437 ------------ ------------ ------------ ------------ Total noninterest expense ............ 14,853,173 11,328,460 40,890,390 32,950,630 INCOME BEFORE INCOME TAXES ................. 4,808,052 5,731,105 15,514,029 16,185,283 PROVISION FOR INCOME TAXES ................. 1,504,743 1,598,009 5,108,253 5,389,700 ------------ ------------ ------------ ------------ NET INCOME ................................. $ 3,303,309 $ 4,133,096 $ 10,405,776 $ 10,795,583 ============ ============ ============ ============ AVERAGE NUMBER OF COMMON EQUIVALENT SHARES OUTSTANDING ................................ 14,664,000 14,353,000 14,688,000 14,225,000 Basic ................................ $ .23 $ .30 $ .74 $ .79 Diluted .............................. $ .23 $ .29 $ .71 $ .76
The accompanying notes are an integral part of these consolidated statements. 4 5 WEST COAST BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, -------------------------------- 1998 1997 ------------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income ...................................................... $ 10,405,776 $ 10,795,583 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment ... 2,313,150 2,127,134 Amortization of intangibles ............................... 328,981 266,351 Net (gain) loss on sales of available for sale investments (250,484) 56,755 Provision for loan losses ................................. 2,465,415 2,942,500 Increase in interest receivables .......................... (1,507,100) (1,327,486) (Increase) decrease in other assets ....................... 1,339,300 (1,529,169) Net cash used by loans held for sale ...................... (2,849,728) (1,870,292) Decrease in interest payable .............................. (229,424) (69,242) Increase (decrease) in other liabilities .................. 1,879,916 (1,678,238) Tax benefit associated with stock options ................. 1,454,687 -- ------------- ------------- Net cash provided by operating activities ............ 15,350,489 9,713,896 CASH FLOWS FOR INVESTING ACTIVITIES Proceeds from maturities of investment securities: Available for sale ........................................ 37,930,970 18,136,305 Held to maturity .......................................... 108,510 77,011 Proceeds from sales of available for sale investment securities . 4,906,135 23,830,401 Purchase of investment securities: Available for sale ........................................ (94,004,219) (89,261,945) Held to maturity .......................................... -- (100,000) Acquisition of intangible ....................................... -- (781,403) Loans made to customers greater than principal collected on loans (51,091,399) (46,341,159) Capital expenditures ............................................ (5,537,098) (2,551,236) ------------- ------------- Net cash used in investing activities ..................... (107,687,101) (96,992,026) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand, savings and interest bearing transaction accounts .............................. 57,509,511 106,306,060 Net increase in proceeds from sales of certificates of deposits greater than payments for maturing time deposits .......... 32,811,392 33,346,711 Proceeds from long-term borrowings .............................. 11,000,000 10,500,000 Payments on long-term borrowings ................................ (2,357,143) (20,351,382) Net decrease in short-term borrowings ........................... (19,549,000) (9,572,431) Sales of common stock, net ...................................... 1,708,238 1,513,966 Dividends paid and cash paid for fractional shares .............. (2,065,649) (1,669,759) ------------- ------------- Net cash provided by financing activities ................. 79,057,349 120,073,165 ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............ (13,279,263) 32,795,035 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 98,817,658 59,174,506 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 85,538,395 $ 91,969,541 ============= =============
The accompanying notes are an integral part of these consolidated statements. 5 6 WEST COAST BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Shares Amount Capital Earnings Income Total ------------- ------------- ------------- ------------- ------------- ------------- BALANCE, December 31, 1996 ........ 8,992,541 $ 11,240,676 $ 44,819,357 $ 28,477,489 $ 843,142 $ 85,380,664 Net income ........................ -- -- -- 14,438,513 -- 14,438,513 Net unrealized gains on investments available for sale .............. -- -- -- -- 727,449 727,449 Cash dividends, $.16 per common Shares .......................... -- -- -- (2,305,154) -- (2,305,154) Sale of common stock pursuant to stock option plans .............. 262,516 328,145 2,055,883 -- -- 2,384,028 Redemption of stock pursuant to stock option plans .............. (19,507) (24,384) (526,964) -- -- (551,348) Stock Split in the form of a 50 percent dividend ................ 3,370,835 4,213,544 (4,213,544) -- -- -- Cash paid for fractional shares ... (376) (470) -- (11,718) -- (12,188) Tax benefit associated with stock Options ......................... -- -- 1,078,354 -- -- 1,078,354 ------------- ------------- ------------- ------------- ------------- ------------- BALANCE, December 31, 1997 ........ 12,606,009 15,757,511 43,213,086 40,599,130 1,570,591 101,140,318 Net income ........................ -- -- -- 10,405,776 -- 10,405,776 Net unrealized gains on investments Available for sale .............. -- -- -- -- 950,949 950,949 Cash dividends, $.15 per common Share ........................... -- -- -- (2,064,074) -- (2,064,074) Sale of common stock pursuant to Stock options plans ............. 323,114 403,892 1,546,820 -- -- 1,950,712 Redemption of stock pursuant to Stock option plans .............. (12,763) (15,953) (226,521) -- -- (242,474) 10 percent stock dividend ......... 1,291,627 1,614,534 20,666,032 (22,280,566) -- -- Cash paid for fractional shares ... (88) (110) -- (1,465) -- (1,575) Tax benefit associated with stock options ......................... -- -- 1,454,687 -- -- 1,454,687 ------------- ------------- ------------- ------------- ------------- ------------- BALANCE, September 30, 1998 ....... 14,207,899 $ 17,759,874 $ 66,654,104 $ 26,658,801 $ 2,521,540 $ 113,594,319 ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated statements. 6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENT 1. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of West Coast Bancorp ("Bancorp or the Company") which operates its wholly-owned subsidiaries, The Commercial Bank, The Bank of Newport, including its branches operated under the trade name Valley Commercial Bank, The Bank of Vancouver, Centennial Bank, (collectively, the "Banks"), Centennial Funding corporation, Totten Inc., and West Coast Trust, after elimination of intercompany transactions and balances. The interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals necessary for fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the three and nine months ended September 30, 1998 are not necessarily indicative of results to be anticipated for the year ending December 31, 1998, or other future periods. 2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. BUSINESS COMBINATIONS Effective February 28, 1998, Bancorp completed its acquisition of Centennial Holdings, Ltd. in Olympia, Washington. Its principal business activities were conducted through Centennial Bank, which has continued as a wholly-owned commercial bank subsidiary of Bancorp. The merger was accounted for as a pooling-of-interests. The historical consolidated financial statements have been restated and include the accounts and results of operations of Centennial Holdings, Ltd. 4. RESTRUCTURING CHARGES In September 1998, Bancorp announced its plan to combine its four separate banking affiliates into a single banking entity to be operated under the name West Coast Bank. Bancorp anticipates one-time costs of approximately $5 million to cover costs of the consolidation, including the severance program, signage, data conversions and other marketing/branching, regulatory and administrative costs. Of the one-time expenses, $1,918,350 has been recognized in the third quarter of 1998 with the remaining costs to be expensed as incurred in the next several quarters. The following table summarizes the restructuring charges incurred in the third quarter.
September 30, 1998 ------------------ Balance, accrued restructuring charges, beginning of period - Provision for restructure charges $1,918,350 Utilization: Cash 48,000 Noncash - ---------- Total Utilization 48,000 ---------- Balance, accrued restructuring charges, end of period $1,870,350 ==========
Total restructuring charges of $1,918,350 were recorded to cover anticipated costs of $1,730,000 for the severance program and personnel related expenditures, with the remaining $188,350 in costs reserved for marketing and professional fees incurred but not yet paid. As a result of the consolidation, Bancorp expects to reduce employment by approximately 100 administrative and back office positions. The consolidation is expected to be completed by the year ended 1998 following regulatory approval. 7 8 5. ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). Statement 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). The implementation of this statement is not anticipated to have a material effect on Bancorp's financial position or net income. 6. STOCKHOLDERS' EQUITY The Board of Directors declared a quarterly cash dividend of $.055 per share during the third quarter of 1998. In addition, dividends of $.045 per share were declared in the first and second quarters of 1998. A 10% stock dividend was also declared in the third quarter of 1998. A stock split in the form of a 50 percent dividend was declared during the third quarter of 1997. All per share amounts have been restated to retroactively reflect stock dividends and stock splits previously reported. 7. SUPPLEMENTAL CASH FLOW INFORMATION For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Bancorp paid $27,490,489 and $23,621,078 for interest in the nine months ended September 30, 1998 and 1997, respectively. Income taxes paid were $3,370,934 and $6,238,016 in the nine months ended September 30, 1998 and 1997 respectively. 8. COMPREHENSIVE INCOME Bancorp has adopted SFAS No. 130 "Reporting Comprehensive Income" as of the quarter ended March 31, 1998. This statement established standards for the reporting and display of comprehensive income and its components in the financial statements. For Bancorp, comprehensive income includes net income reported on the income statement and changes in the fair value of its available-for-sale investments reported as a component of shareholders' equity. The following table presents net income adjusted by the change in unrealized gains or losses on the available-for-sale investments as a component of comprehensive income:
Three Months ended Nine months ended September 30, September 30, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net income $ 3,303,309 $ 4,133,096 $10,405,776 $10,795,583 Net change in unrealized gains (losses) on available for sale investments 913,169 428,997 950,949 334,167 ----------- ----------- ----------- ----------- Comprehensive income $ 4,216,478 $ 4,562,093 $11,356,725 $11,129,750 =========== =========== =========== ===========
8 9 9. EARNINGS PER SHARE Bancorp adopted SFAS No. 128, "Earnings Per Share", effective December 15, 1997. As a result, Bancorp's earnings per share for all periods have been restated. Bancorp for the periods reported had no reconciling items between net income and income available to common shareholders. The following table reconciles the numerator and denominator of the basic and diluted earnings per share computations:
Weighted Average Per-Share Net Income Shares Amount ----------- ----------- --------- Three Months ended September 30, 1998 ----------- ----------- ----- Basic earnings per share................ $ 3,303,309 14,177,998 $0.23 Stock options........................... 485,588 Diluted earnings per share.............. $ 3,303,309 14,663,586 $0.23
Three Months ended September 30, 1997 ----------- ----------- ----- Basic earnings per share................ $ 4,133,096 13,626,952 $0.30 Stock options........................... 726,519 Diluted earnings per share.............. $ 4,133,096 14,353,471 $0.29
Nine months ended September 30, 1998 ----------- ----------- ----- Basic earnings per share................ $10,405,776 14,077,611 $0.74 Stock options........................... 610,776 Diluted earnings per share.............. $10,405,776 14,688,387 $0.71 Nine months ended September 30, 1997 ----------- ----------- ----- Basic earnings per share................ $10,795,583 13,597,145 $0.79 Stock options........................... 627,437 Diluted earnings per share.............. $10,795,583 14,224,582 $0.76
10. RECLASSIFICATION Certain reclassifications of prior year amounts have been made to conform to current classifications. 9 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of Bancorp's consolidated financial condition and results of operations should be read in conjunction with the selected consolidated financial and other data, the consolidated financial statements, and related notes included elsewhere in this report. In addition to historical information, this quarterly report contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the express purpose of availing Bancorp of the protections of the safe harbor provisions of the PSLRA. The forward looking statements contained in this report are subject to factors, risks, and uncertainties that may cause actual results to differ materially from those projected. Important factors that might cause such a material difference include, but are not limited to, those discussed in this section of the report. In addition, the following items are among the factors that could cause actual results to differ materially from the forward looking statements in this report: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; new legislation; rapidly changing technology and evolving banking industry standards; competitive standards; competitive factors, including increased competition with community, regional, and national financial institutions; fluctuating interest rate environments; and similar matters. Readers are cautioned not to place undue reliance on these forward looking statements, which reflect Management's analysis only as of the date of the statement. Bancorp undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in this and other documents Bancorp files from time to time with the Securities and Exchange Commission. RESULTS OF OPERATIONS Three months ended September 30, 1998 and 1997 Net Income. Bancorp reported net income of $3,303,309 or $.23 per diluted share, for the three months ended September 30, 1998, compared to $4,133,096 or $.29 per diluted share for the three months ended September 30, 1997. A one-time $1.9 million restructuring charge ($1.2 million after income taxes) impacted the third quarter 1998 results due to the company's recently announced consolidation of its subsidiary banks. In addition, the 1997 third quarter results were favorably impacted by a non-recurring gain on sale of servicing rights of $214,103 ($141,000 after income taxes). After adjusting for the third quarter non-recurring events, adjusted operating net income was $4,550,000 or $.31 per diluted share, up 14% compared to adjusted operating net income of $3,992,000 or $.28 per diluted share, in the like quarter of 1997. Net interest income increased in the third quarter of 1998 over the comparable period in 1997 due to higher average interest earning assets. Noninterest income increased mainly due to gains on sales of loans, an increased customer base, higher transaction volumes, and increases in fee assessments. Expenses increased mainly due to restructuring charges, an increased customer base, higher transaction volumes, product expansion costs, and other costs related to growth and expansion. Net Interest Income. Net interest income is the difference between interest income (principally from loan and investment securities) and interest expense (principally on customer deposits and borrowings). Changes in net interest income result from changes in volume, net interest spread, and net interest margin. Volume refers to the average dollar level of interest earning assets and interest bearing liabilities. Net interest spread refers to the differences between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin refers to net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities. Bancorp's profitability, like that of many financial institutions, is dependent to a large extent upon net interest income. Since Bancorp tends to be liability sensitive, as interest bearing liabilities mature or reprice more quickly than interest earning assets in a given period, a significant increase in the market rates of interest or flattening of the interest rate yield curve could adversely affect net interest income. In contrast, a declining interest rate environment or steepening of the interest rate yield curve could favorably impact Bancorp's margin. Competition, the economy, and the status of the interest rate environment also impact Bancorp's net interest income in any period. 10 11 Net interest income on a tax equivalent basis for the three months ended September 30, 1998 increased $1,410,377 or 9.62%, to $16,071,571 from $14,661,194 for the same period in 1997. Average interest earning assets increased by $141.4 million, or 14.79%, to $1.1 billion from $956.2 million for the same period in 1997, while average interest bearing liabilities increased $111.8 million or 14.54%. The average net interest spread decreased from 5.25% to 4.98%, mainly due to decreased average earning asset yields which declined 36 basis points from 9.52% to 9.16%. The low/flat interest rate yield curve has caused variable rate repricing on assets over the period, which along with increased competitive pricing have lead to the decreasing asset yields. In addition, certain fixed rate loan customers have refinanced their loans at the lower rates over the period. Average rates paid decreased only 9 basis points to 4.18% in the third quarter of 1998 from 4.27% for the same period in 1997. Bancorp's net interest margin for the three months ended September 30, 1998 was 5.81%, a decrease of 27 basis points from 6.08% for the comparable period of 1997. Bancorp expects to see further declines in its interest margin. Continued anticipated refinance activity caused by the low interest rate environment, continued strong competition in the markets it serves, and other economic factors, could further impact the company's net interest margin. The following table presents information regarding yields on interest-earning assets, expense on interest-bearing liabilities, and net yields on interest-earning assets for the periods indicated on a tax equivalent basis:
Analysis of Net Interest Income Three Months Ended September 30, Increase ------------------------------------------- 1998 1997 (Decrease) Change ---------------- ---------------- ---------------- --------- Interest and fee income (1).................... $ 25,345,178 $ 22,937,581 $ 2,407,597 10.50% Interest expense............................... 9,273,607 8,276,387 997,220 12.05% ---------------- ---------------- ---------------- Net interest income............................ $ 16,071,571 $ 14,661,194 $ 1,410,377 9.62% ================ ================ ================ Average interest earning assets................ $ 1,097,639,437 $ 956,244,512 $ 141,394,925 14.79% Average interest bearing liabilities........... $ 880,656,497 $ 768,850,376 $ 111,806,121 14.54% Average yields earned (2)...................... 9.16% 9.52% (0.36) Average rates paid (2)......................... 4.18% 4.27% (0.09) Net interest spread (2)........................ 4.98% 5.25% (0.27) Net interest margin (2)........................ 5.81% 6.08% (0.27)
(1) Interest earned on nontaxable securities has been computed on a 34% tax equivalent basis. (2) These ratios for the three months ended September 30, 1998 and 1997 have been annualized. Provision for Loan Loss. Bancorp recorded provisions for loan losses for the third quarter of 1998 and 1997 of $485,000 and $632,500 respectively. Bancorp previously reported its provision for loan losses of $495,000 for the second quarter of 1998 and $447,000 for the first quarter, net of the one time merger-related increase in the provision for loan losses of $1,038,000. Net charge-offs for the third quarter of 1998 were $392,000, compared to net charge-offs of $442,000 for the same period in 1997. At September 30, 1998, the percentage of non-performing assets was 0.36% of total assets compared to 0.45% one year earlier. Bancorp's loan loss reserve, as a percentage of total loans was 1.46% at September 30, 1998 compared to 1.30% as of September 30, 1997. Noninterest Income. Noninterest income for the third quarter of 1998 was $4,602,261, up $1,269,965 or 38.11% from $3,332,296 in the like period in 1997. Gains on sales of loans increased $630,073 to $1,221,244 in 1998 over 1997. The gains represented 27% of non-interest income during the third quarter of 1998, compared to 18% in the third quarter of 1997. The increase in sales of loans was due mainly to increased activity in the commercial brokerage and residential real estate programs. Service charges on deposit accounts increased to $1,176,609, a 17.64% increase over the same period in 1997 caused mainly by increases in volumes of customers serviced and increases in fee assessments. Other service charges, commissions, and fees increased $381,263 or 43.52% in 1998 over 1997. The increases in other service charges, commissions, and fees were due to strong growth in the merchant bankcard program and sales of investment products. Trust revenue increased in 1998 over 1997, due mainly to an increased customer base, assets managed, and transaction volumes. Loan servicing fees decreased, due mainly to prior period sales of servicing rights on loans, while other noninterest income increased during the period. 11 12 Noninterest Expense. Noninterest expenses for the third quarter ended September 30, 1998, were $14,853,173, an increase of $3,524,713 or 31.11% over the same period in 1997. A one time $1.9 million restructuring charge impacted the third quarter 1998 noninterest expenses, due to the company's recently announced consolidation of its subsidiary banks. Bancorp's salaries and employee benefits, equipment, occupancy, communications, and other expenses are higher in the third quarter of 1998 over the same period in 1997, due mainly to growth and expansion including additions of new branches, products and services over the period. Salaries and employee benefits increased $820,432 or 12.22% in the third quarter of 1998, due to increases in personnel over the same period in 1997. Equipment expense increased $198,511 or 16.74% in the third quarter of 1998 over 1997. Bancorp continues to invest in technological improvements and expansion. Communication and other expenses increased in line with the continued growth of Bancorp. Printing and office supplies decreased in the third quarter of 1998 over the like period in 1997. Professional fees incurred for services from outside consultants, accountants, and attorneys are up $160,936 in the third quarter of 1998 compared to the third quarter of 1997. Nine months Ended September 30, 1998 and 1997 Net Income. For the nine months ended September 30, 1998, Bancorp's net income was $10,405,776, a decrease of $389,807 from $10,795,583 for the same period in 1997, a 3.61% decrease. A one-time $1.9 million restructuring charge ($1.2 million after income taxes) impacted the third quarter of 1998 results due to the company's recently announced consolidation of its subsidiary banks. In addition, net income in 1998 includes first quarter pretax merger related costs of $569,000 in transition expenses and a merger related increase in the provision for loan losses of $1,038,000. Net income through September 30, 1997 includes a non-recurring pretax gain on sale of servicing rights of $1,659,420 and a one-time increase to the provision for loan losses of $675,000 related to a previous bank acquisition made by Centennial Bank. After adjusting for these non-recurring items and the non-recurring third quarter 1998 restructuring charges, the nine months' 1998 operating net income was $12,713,000, or $.87 per diluted share, an increase of 25 percent over 1997 adjusted operating net income of $10,146,000, or $.71 per diluted share. Net interest income increased mainly due to higher average interest earning assets. Noninterest income increased mainly due to gains on sales of loans, an increased customer base, and higher transaction volumes. Expenses increased mainly due to an increased customer base, higher transaction volumes, branch expansion costs, acquisition related costs, and other costs related to growth. Net Interest Income. Net interest income on a tax equivalent basis for the nine months ended September 30, 1998 increased $4,170,968 or 9.82%, to $46,647,345 from $42,476,377 for the same period in 1997. Average interest earning assets increased by $154.4 million, or 17.00%, to $1.06 billion from $908.1 million for the same period in 1997. Average interest bearing liabilities increased $125.0 million or 16.91% over the same period. The average net interest spread decreased from 5.46% to 5.08%, due to decreased average earning asset yields which declined 42 basis points from 9.72% to 9.30%. The low/flat interest rate yield curve has caused variable rate repricing on assets over the period, which along with increased competitive pricing have lead to the decreasing asset yields. In addition, certain fixed rate loan customers have refinanced their loans at the lower rates over the period. Bancorp expects to see further declines in its interest margin. Continued anticipated refinance activity caused by the low interest rate environment, continued strong competition in the markets it serves, and other economic factors could further impact the company's net interest margin. Average rates paid decreased only 4 basis points to 4.22% through September 1998 from 4.26% for the same period in 1997. Bancorp's net interest margin for the nine months ended September 30, 1998 was 5.87%, a decrease of 38 basis points from 6.25% for the comparable period of 1997. The following table presents information regarding yields on interest-earning assets, expense on interest-bearing liabilities, and net yields on interest-earning assets for the periods indicated on a tax equivalent basis:
Analysis of Net Interest Income Nine months Ended September 30, Increase ------------------------------------------- 1998 1997 (Decrease) Change ---------------- ---------------- ---------------- --------- Interest and fee income (1).................... $ 73,908,410 $ 66,028,213 $ 7,880,197 11.93% Interest expense............................... 27,261,065 23,551,836 3,709,229 15.75% ---------------- ---------------- ---------------- Net interest income............................ $ 46,647,345 $ 42,476,377 $ 4,170,968 9.82% ================ ================ ================ Average interest earning assets................ $ 1,062,528,117 $ 908,136,828 $ 154,391,289 17.00% Average interest bearing liabilities........... $ 864,149,832 $ 739,137,812 $ 125,012,020 16.91% Average yields earned (2)...................... 9.30% 9.72% (0.42) Average rates paid (2)......................... 4.22% 4.26% (0.04) Net interest spread (2)........................ 5.08% 5.46% (0.38) Net interest margin (2)........................ 5.87% 6.25% (0.38)
(1) Interest earned on nontaxable securities has been computed on a 34% tax equivalent basis. (2) These ratios for the nine months ended September 30, 1998 and 1997 have been annualized. 12 13 Provision for Loan Loss. Management's policy is to maintain an adequate allowance for loan loss based on historical trends, current economic forecasts, and statistical analysis of the loan portfolio, as well as detailed review of individual loans, and current loan performance. Bancorp recorded provisions for loan losses through September 1998 and 1997 of $2,465,415 and $2,942,500, respectively. The provision for loan loss through September 30, 1998 includes an increase at Centennial Bank of $1,038,000 to bring the allowance for loan loss methodology in line with Bancorp practices. Included in the September 30, 1997 provision for loan loss is a one-time increase of $675,000 related to a previous bank acquisition made by Centennial Bank. Net charge-offs through September 30, 1998 were $820,000, compared to net charge-offs of $1,456,000 for the same period in 1997. At September 30, 1998, the percentage of non-performing assets was 0.36% of total assets compared to 0.45% one year earlier. Bancorp's loan loss reserve, as a percentage of total loans was 1.46% at September 30, 1998 compared to 1.30% as of September 30, 1997. Management has in place a comprehensive loan approval process and an asset quality monitoring system. Management continues its efforts to collect amounts previously charged off and to originate new loans of high quality. Management believes that the allowance for loan losses at September 30, 1998 was adequate to absorb potential loss exposure in the portfolio. Further additions to the allowance for loan losses could become necessary, depending upon the performance of Bancorp's loan portfolio or changes in economic conditions, as well as growth within the loan portfolio. See "Loan Loss Allowance and Provision". Noninterest Income. Noninterest income for the nine months ended September 30, 1998 was $13,710,386 up $3,222,170 from $10,488,216 or 30.72% over the like period in 1997. Gains on sales of loans increased $2,749,945 to $4,196,425 in 1998 over 1997. The gains represent 31% of noninterest income in 1998 compared to 14% in the same period of 1997. The increase in sales of loans was due to increased activity in the commercial brokerage and residential real estate programs. Service charges on deposit accounts increased to $3,383,962 for the nine months ended September 30, 1998, a 14.67% increase over the same period in 1997, caused mainly by increases in volumes of customers serviced and increases in fee assessments. Other service charges, commissions, and fees increased $576,790 or 24.69% in 1998 over 1997. The increases in other service charges, commissions, and fees were due to strong growth in the merchant bankcard program and sales of investment products. Included in the September 30, 1997 noninterest income is a non-recurring gain on sale of servicing rights of $1,659,420. Trust revenue increased in 1998 over 1997, due mainly to an increased customer base, assets managed, and transaction volumes. Loan servicing fees decreased, due mainly to the previously mentioned sale of servicing rights, while other noninterest income increased in 1998 over 1997. Noninterest Expense. Noninterest expenses for the nine months ended September 30, 1998, were $40,890,390, an increase of $7,939,760 or 24.10% over the same period in 1997. A one-time $1.9 million restructuring charge impacted the 1998 non-interest expenses, due to the company's recently announced consolidation of its subsidiary banks. In addition, non-interest expenses through September 30, 1998 include $569,000 of expenditures in relation to the transition of the acquisition of Centennial Bank into Bancorp. The majority of these expenses are related to employment, computer hardware and software expenditures, and conversion costs. Bancorp's salaries and employee benefits, equipment, occupancy, communications, marketing, printing and office supplies, and other expenses are higher in the first nine months of 1998 over the same period in 1997, due mainly to growth and expansion including additions of new products, branch locations, and services over the period. Salaries and employee benefits increased $3,509,985 or 18.71% through the third quarter of 1998, due to increases in salaries and personnel over the same period in 1997. Equipment expense increased $545,082 or 15.96% in 1998 over 1997. Bancorp continues to invest in technological improvements and expansion. Occupancy, marketing and printing and office supplies expense increased through the third quarter of 1998 over the like period in 1997 due to growth and increased efforts to promote products and services in new and current markets. Professional fees incurred for services from outside consultants, accountants, and attorneys are down $66,964 in the first three quarters of 1998 compared to the same period in 1997. Communication and other expenses increased in line with the continued growth of Bancorp. Other noninterest expenses are up due to merger related transition expenses of $569,000 and continued growth. 13 14 RESTRUCTURING CHARGES For the three months ended September 30, 1998 Bancorp recognized $1,918,350 in restructuring charges related to its plan to consolidate its four separate banking affiliates into one entity. As a result of the consolidation, Bancorp expects to reduce employment by approximately 100 administrative and back office positions. Bancorp anticipates one-time costs of approximately $5 million to cover costs of the consolidation, including the severance program, signage, data conversions and other marketing/branching, regulatory and administrative costs. In the third quarter of 1998, approximately $1.7 million was recorded to cover the cost of the severance program, with the residual charges relating marketing, professional fees and administrative costs. Bancorp expects to record the remaining one-time costs in the following several quarters. Bancorp expects that the consolidation will save approximately $6 million annually or 12% of its current ongoing overhead expenses. The cost savings will come from the reductions in staff and related overhead, a simplified corporate structure, a reduced regulatory burden and synergies created by unified marketing efforts and name branding. The plan calls for two-thirds of the cost savings to be substantially achieved by third quarter 1999, with the remaining savings to be achieved early in the year 2000. Bancorp's liquidity has not been materially affected by cash outlays related to one-time restructuring charges. Bancorp does not anticipate that future restructuring charges will have a material effect on Bancorp's liquidity. INCOME TAXES During the first nine months of 1998, due to a decrease in net income before taxes and changes in the mix of taxable and nontaxable income items, the provision for income taxes decreased from that of 1997. It is anticipated that Bancorp's tax expense will increase in future periods, both due to an increase in income before taxes and a smaller percentage of Bancorp's income being generated from tax exempt items. Any future merger related capitalized costs may also increase Bancorp tax provisions. LIQUIDITY AND SOURCES OF FUNDS Bancorp's primary sources of funds are customer deposits, maturities of investment securities, sales of "Available for Sale" securities, loan sales, loan repayments, net income, advances from the Federal Home Loan Bank of Seattle ("FHLB"), and the use of Federal Funds markets. Scheduled loan repayments are relatively stable sources of funds, while deposit inflows and unscheduled loan prepayments are not. Deposit inflows and unscheduled loan prepayments are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions, and other factors. Deposits are Bancorp's primary source of new funds. Total deposits were $1.049 billion at September 30, 1998, up from $958.5 million at December 31, 1997. Bancorp does not generally accept brokered deposits. A concerted effort has been made to attract deposits in the market area it serves through competitive pricing and delivery of a quality product. Increases over the period are due to marketing efforts, expansion, and new business development programs initiated by Bancorp. Management anticipates that Bancorp will continue relying on customer deposits, maturity of investment securities, sales of "Available for Sale" securities, loan sales, loan repayments, net income, Federal Funds markets, FHLB, and other borrowings to provide liquidity. Although deposit balances have shown historical growth, such balances may be influenced by changes in the banking industry, interest rates available on other investments, general economic conditions, competition, customer management of cash resources prior to year 2000 and other factors. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a long-term basis to support expanded lending activities and to match maturities or repricing intervals of assets. The sources of such funds will include Federal Funds purchased and borrowings from the FHLB. 14 15 CAPITAL RESOURCES The Board of Governors of the Federal Reserve System ("FRB") and the Federal Deposit Insurance Corporation ("FDIC") have established minimum requirements for capital adequacy for bank holding companies and member banks. The requirements address both risk-based capital and leveraged capital. The regulatory agencies may establish higher minimum requirements if, for example, a corporation has previously received special attention or has a high susceptibility to interest rate risk. The FRB and FDIC risk-based capital guidelines require banks and bank holding companies to have a ratio of tier one capital to total risk-weighted assets of at least 4%, and a ratio of total capital to total risk-weighted assets of 8% or greater. In addition, the leverage ratio of tier one capital to total assets less intangibles is required to be at least 3%. Shareholders' equity increased to $113,594,319 at September 30, 1998, from $101,140,318 at December 31, 1997, an increase of $12,454,001, or 12.31%, over that period of time. At September 30, 1998, Bancorp's shareholders' equity, as a percentage of total assets, was 9.37%, compared to 9.04% at December 31, 1997. The increase was primarily the result of Bancorp's equity base growing faster than assets. Equity grew at 12.31% over the period from December 31, 1997, to September 30, 1998, while assets grew by 8.36% over the same period. As the following table indicates, Bancorp currently exceeds the regulatory capital minimum requirements.
September 30, 1998 ------------------------------- (Dollars in thousands) Amount Ratio ------------- ----------- Tier 1 capital.......................................... $ 108,897 11.56% Tier 1 capital minimum requirement...................... 37,676 4.00% ------------- ----- Excess over minimum Tier 1 capital.................... $ 71,221 7.56% ============= ====== Total capital........................................... $ 120,674 12.81% Total capital minimum requirement....................... 75,352 8.00% ------------- ----- Excess over minimum total capital..................... $ 45,322 4.81% ============= ===== Risk-adjusted assets.................................... $ 941,897 ============= Leverage ratio.......................................... 9.23% Minimum leverage requirement............................ 3.00% ----- Excess over minimum leverage ratio.................... 6.23% ===== Risk-adjusted total assets.............................. $ 1,179,506 =============
15 16 LOAN PORTFOLIO Interest earned on the loan portfolio is the primary source of income for Bancorp. Net loans represented 67.26% and 68.54% of total assets as of September 30, 1998 and December 31, 1997, respectively. Although the Banks strive to serve the credit needs of the service areas, the primary focus is on real estate related and commercial credits. The Banks make substantially all of their loans to customers located within the Banks' service areas. The Banks have no loans defined as highly leveraged transactions by the FRB. The following table presents the composition of the Banks' loan portfolios, at the dates indicated. December 31, 1997 loan classification balances have been adjusted to retroactively reflect current loan classification.
September 30, 1998 December 31,1997 ------------------------- ------------------------------ (Dollars in thousands) Amount Percent Amount Percent ------- ------- ------ ------- Commercial........................................... $161,567 19.82% $150,197 19.60% Real estate construction............................. 115,723 14.20 112,378 14.66 Real estate mortgage................................. 112,423 13.79 116,228 15.16 Real estate commercial............................... 368,950 45.26 323,320 42.18 Installment and other consumer....................... 68,550 8.41 74,819 9.76 -------- ------- -------- ------ Total loans.......................................... 827,213 101.48% 776,942 101.36% Allowance for loan losses............................ (12,096) (1.48) (10,451) (1.36) -------- ------- -------- ------- Total loans, net..................................... $815,117 100.00% $766,491 100.00% ======== ======= ======== =======
LENDING AND CREDIT MANAGEMENT Although a risk of nonpayment exists with respect to all loans, certain specific types of risks are associated with different types of loans. Because of the nature of the Banks' customer base and the growth experienced in the market areas served, real estate is frequently a material component of collateral for the Banks' loans. The expected source of repayment of these loans is generally the operations of the borrower's business or personal income, but real estate provides an additional measure of security. Risks associated with real estate loans include fluctuating land values, local economic conditions, changes in tax policies, and a concentration of loans within any one area. The Banks mitigate risk on construction loans by generally lending funds to customers who have been pre-qualified for long term financing or are using experienced contractors approved by the Banks. The commercial real estate risk is further mitigated by making the majority of commercial real estate loans to owner-occupied users of the property. Generally, no interest is accrued on loans when factors indicate collection of interest is doubtful or when the principal or interest payment becomes ninety days past due. Loans greater than ninety days past due and on accruing status are both adequately collateralized and in the process of collection. 16 17 The Banks manage the general risks inherent in the loan portfolio by following loan policies and underwriting practices designed to result in prudent lending activities. The following table presents information with respect to non-performing assets.
(Dollars in thousands) September 30, 1998 December 31, 1997 -------------------- ------------------ ----------------- Loans on nonaccrual status.............................................. $3,475 $4,245 Loans past due greater than 90 days but not on nonaccrual status........ 132 44 Other real estate owned................................................. 784 494 ---- ---- Total nonperforming assets.............................................. $4,391 $4,783 ====== ====== Percentage of nonperforming assets to total assets...................... .36% .43% === ===
See "Loan Loss Allowance and Provisions" LOAN LOSS ALLOWANCE AND PROVISION The provision for loan losses charged to operating expense is based on the Banks' loan loss experience and such other factors that, in management's judgment, deserve recognition in estimating loan losses. Management monitors the loan portfolio to ensure that the allowance for loan losses is adequate to cover outstanding loans. In determining the allowance for loan losses, management considers the level of nonperforming loans, impaired loans, loan mix, recent loan growth, historical loss experience for each loan category, potential economic influences and other relevant factors related to the loan portfolio. In addition, management utilizes internal loan grading as part of its analysis. The following table summarizes the Banks' allowance for loan losses and charge-off and recovery activity:
Nine months ended Year ended (Dollars in thousands) September 30, 1998 December 31, 1997 -------------------- ------------------ ----------------- Loans outstanding at end of period................................ $ 827,213 $ 776,942 Average loans outstanding during the period....................... $ 807,391 $ 751,284 Allowance for loan losses, beginning of period.................... $ 10,451 $ 8,491 Recoveries........................................................ 297 242 Loans charged off................................................. (1,117) (2,218) ----------- ----------- Net loans charged off............................................. (820) (1,976) Provision for loan losses......................................... 2,465 3,936 ----------- ----------- Allowance for loan losses, end of period.......................... $ 12,096 $ 10,451 =========== =========== Ratio of net loans charged off to average loans outstanding (1)................................ .14% .26% Ratio of allowance for loan losses to loans at end of period....................................... 1.46% 1.35%
(1) The ratios for the nine months ended September 30, 1998 have been annualized. Forecasted loan growth will lead to expected future increase in the provision for loan losses. Historical activity in loans charged off or recoveries are not necessarily indicative of activity to be anticipated for the year ending December 31, 1998 or any future periods. 17 18 INVESTMENT PORTFOLIO The following table shows the carrying value of the Banks' portfolio of investments:
September 30, December 31, (Dollars in thousands) 1998 1997 -------------------- ---------------- ------------- Investments available for sale (At Fair Value) U.S. Treasury securities.............................................. $ 6,676 $ 9,571 U.S. Government agency securities..................................... 90,797 76,512 Corporate securities.................................................. 35,422 24,802 Mortgage-backed securities............................................ 8,564 8,444 Obligations of state and political subdivisions....................... 92,818 63,822 Other securities...................................................... 9,281 8,039 ------------ ------------ Total.......................................................... $ 243,558 $ 191,190 Investments held to maturity (At Historical Cost) U.S. Treasury securities.............................................. $ --- $ --- U.S. Government agency securities..................................... --- --- Corporate securities.................................................. --- --- Mortgage-backed securities............................................ --- --- Obligations of state and political subdivisions....................... 2,879 2,987 Other securities...................................................... --- --- ------------ ------------ Total.......................................................... $ 2,879 $ 2,987 Total Investment Portfolio..................................... $ 246,437 $ 194,177 ============ ============
YEAR 2000 ISSUES Introduction The year 2000 creates challenges with respect to the automated systems used by financial institutions and other companies. Many software programs are not able to recognize the year 2000, since most programs and systems were designed to store calendar years in the 1900s by assuming the "19" and storing only the last two digits of the year. For example, these automated systems would recognize a year stored as "00" as the year "1900," rather than as the year 2000. If these automated systems are not appropriately re-coded, updated, or replaced before the year 2000, they will likely confuse data, crash, or fail in some manner. In addition, many software programs and automated systems will fail to recognize the year 2000 as a leap year. The problem is not limited to computer systems. Year 2000 issues will potentially affect every system that has an embedded microchip, such as automated teller machines, elevators, and vaults. The year 2000 challenge is especially problematic for financial institutions, since many transactions, such as interest accruals and payments, are date sensitive. It also may affect the operations of third parties with whom Bancorp does business, including the Company's vendors, suppliers, utility companies, and customers. The Company's State of Readiness The Company is committed to addressing these year 2000 challenges in a prompt and responsible manner and has dedicated resources to do so. Management has completed an assessment of its automated systems and has implemented a plan to resolve these issues, including purchasing appropriate computer technology. The Company's year 2000 compliance plan ("Y2K Plan") has five phases. These phases are (1) project management, (2) awareness, (3) assessment, (4) testing, and (5) renovation and implementation. The Company has substantially completed phases one through four, although appropriate follow-up activities are continuing to occur, and the Company is currently focusing on the fifth phase of the Y2K Plan. Project Management. The Company has assigned primary responsibility for year 2000 project management to its Chief Information Officer. The Company has also formed a year 2000 compliance committee, consisting of appropriate representatives from its critical operational areas, to assist the Chief Information Officer in implementing the Y2K Plan. In addition, Bancorp provides quarterly reports to its board of directors and to the boards of directors of each of its subsidiaries, in order to assist them in overseeing the Company's year 2000 readiness. 18 19 Awareness. The Company has completed several projects designed to promote awareness of year 2000 issues throughout our organization and our customer base. These projects include mailing information brochures to deposit and loan customers, providing training for lending officers, and other staff, assigning a compliance officer to answer customer questions, responding to vendor, customer, and shareholder inquiries, and providing year 2000 information and progress updates on Bancorp's web site. Assessment. Assessment is the process of identifying all mission-critical applications, including information technology and non-information technology systems, that could potentially be negatively affected by dates in the year 2000 and beyond. The Company's assessment phase is substantially complete. Systems examined during this phase included telecommunications systems, account-processing applications, and other software and hardware used in connection with customer accounts. The Company's operations, like those of many other companies, are intertwined with the operations of certain of its business partners. Accordingly, the Company's operations could be materially affected, if the operations of those companies who provide the Company with mission critical applications, systems, and services are materially affected. For example, the Company depends upon vendors who provide equipment, technology, and software to it in connection with its business operations. Failure of these software vendors to achieve year 2000 readiness could substantially affect the operations of the Company. In addition, lawsuits and other financial challenges materially affecting the financial viability of these vendors could materially affect the Company. In response to this concern, the Company has identified and contacted those vendors who provide our mission-critical applications. The Company is assessing their year 2000 compliance efforts and will continue to monitor their progress as the year 2000 approaches. The Company's lending personnel have examined its current loan portfolios and identified our key business customers. The Company has contacted these customers and requested information regarding their preparation for the year 2000. The Company is currently assessing the responses received from these customers and following up as appropriate to identify the risk of loan defaults due to the effects of the year 2000 on the businesses of key business customers. This assessment process is expected to be complete by the end of October, 1998; however, certain follow-up activities may continue throughout 1998 and 1999 as issues arise. For example, the Company is monitoring on a quarterly basis those business borrowers who appear to have higher risk than others with respect to year 2000 issues. In addition, the Company will continue to assess new loan applicants for year 2000 risks. For more information see below, under "The Risks of the Company's Year 2000 Issues." Testing. Updating and testing of the Company's mission-critical automated systems is currently underway. All mission-critical systems will be tested to verify that dates in the year 2000 are being appropriately recognized and processed. Testing of the Company's current mission-critical automated systems was substantially completed by September 30, 1998. Testing of renovations and new systems will continue throughout 1998 and 1999. Renovation and Implementation. This phase involves obtaining and implementing renovated software applications provided by our vendors. As these applications are received and implemented, the Company will test them for year 2000 compliance. This phase also involves upgrading and replacing automated systems where appropriate and will continue throughout 1998 and 1999. Although this phase will be substantially complete before the end of 1999, additional follow-up activities may take place in the year 2000 and beyond. 19 20 Estimated Costs to Address the Company's Year 2000 Issues The total financial effect of these year 2000 challenges on the Company cannot be predicted with certainty at this time. In fact, in spite of all efforts being made to rectify these problems, the success of these efforts cannot be predicted until the year 2000 actually arrives. The Company will upgrade or replace certain automated systems before the year 2000; however some of these systems would have been replaced before the year 2000, without regard to year 2000 compliance issues, due to technology updates and Company expansion. The Company's estimated budget under its Y2K Plan is set forth in the table below(1). The costs below represent approximately 9% of the Company's information technology budget for 1998 and approximately 10% of the 1999 information technology budget. The Company currently plans to use normal operating funds for payment of its year 2000 expenses. Year-to-date, the Company has spent approximately $105,000 of the 1998 costs estimated below. Bancorp's estimated budget for year 2000 costs and expenses is as follows:
Item 1998 1999 Total ---- -------- -------- -------- Anticipated Personnel Costs $100,000 $105,000 $205,000 Telephone Banking Equipment (2) -- 75,000 75,000 Personal Computers (2) 59,500 87,500 147,000 ATM Upgrades -- 25,000 25,000 Third Party Consulting (3) 30,000 35,000 65,000 -------- -------- -------- Totals $189,500 327,500 $517,000
(1) The Company may incur additional costs complying with requirements of its regulatory agencies related to year 2000 issues. Management cannot predict these costs at this time, so they have not been included in the table above, other than with respect to anticipated personnel costs. (2) This represents the replacement cost of certain equipment the Company has identified to date as requiring replacement. The majority of this equipment was scheduled for replacement regardless of year 2000 issues, due to age, operability, and changing Company requirements. (3) Bancorp has engaged a consulting firm to write a comprehensive testing plan for the Company. Expenses for 1999 relate to consulting Bancorp may seek to review and audit the Company's year 2000 compliance progress. Based on the estimates set forth above and the information the Company has received to date from its critical system providers and vendors, Management does not believe that expenses related to meeting the Company's year 2000 challenges will have a material effect on the operations or financial performance of the Company. However, factors beyond the control of management, such as the effects on vendors of our mission-critical software and systems, the effects of year 2000 issues on the economy, and the development of the risks identified below under "The Risks of the Company's Year 2000 Issues," among other things, could have a material effect on the operations or financial performance of the Company. 20 21 The Risks of the Company's Year 2000 Issues The year 2000 presents certain risks to the Company and its operations. Some of these risks are present because the Company purchases technology applications from other parties who face year 2000 challenges. Other of these risks are inherent in the business of banking or are risks faced by many companies with stock traded on a national stock exchange. Although it is impossible to identify every possible risk that the Company may face moving into the millennium, Management has to date identified the following potential risks: 1. Commercial banks, such as the Banks, may experience a contraction in their deposit base, if a significant amount of deposited funds are withdrawn by customers prior to the year 2000, and interest rates may increase in the latter part of 1999. This potential deposit contraction could make it necessary for the Banks to change their sources of funding and could materially impact future earnings. The Company has incorporated a contingency plan for addressing this situation, should it occur, into its asset and liability management policies. This plan includes maintaining the ability to borrow funds in an amount at least equal to 50% of the Company's allowed borrowing from the Federal Home Loan Bank of Seattle. Significant demand for funds by other banks could reduce the amount of funds available for the Company to borrow. If insufficient funds are available from a Federal Home Loan Bank or other correspondents, the Company may also sell investment securities or other liquid assets to meet liquidity needs. Despite these efforts, a significant deposit contraction could materially impact the Company's earnings or future operations, particularly if funds availability at the Federal Home Loan Bank is impaired or higher interest rates for the Banks' funding sources lead to a decrease in the Company's net interest margin. 2. The Banks lend significant amounts to businesses in their market areas. If these businesses are adversely affected by year 2000 issues, their ability to repay loans could be impaired. This increased credit risk could affect the Company's financial performance. During the assessment phase of the Company's Y2K Plan, each of the Banks identified their significant borrowers. Management is currently monitoring the year 2000 compliance efforts of these credit customers as described above under the "Assessment" segment of the "Introduction." Based on the risks the Company has identified to date, Management currently believes the Company's loan loss reserves are adequate to absorb potential losses from loan defaults due to year 2000 risks. However, as the Company continues to assess risk in this area, it may increase loan loss reserves in the future. 3. The Company's operations, like those of many other companies, can be affected by the year-2000-triggered failures of other companies upon whom the Company depends for the functioning of its automated systems. Accordingly, the Company's operations could be materially affected, if the operations of those companies who provide the Company with mission critical applications, systems, and services are materially affected. As described above, the Company has identified its mission-critical vendors and is monitoring their year 2000 compliance progress. For more information, see "The Company's Year 2000 Readiness," above. 4. All companies with stock traded on a national stock exchange, including Bancorp, could experience a drop in stock price as investors change their investment portfolios or sell stock prior to the millennium. At this time, it is impossible to predict whether or not this will in fact be the case with respect to the stock of Bancorp or any other company. 5. Bancorp's subsidiary West Coast Trust provides investment advisory services to certain customers, including an open-end mutual fund administered by an investment company registered under the Investment Advisors Act of 1940. Management is currently assessing the material risks of the activities of West Coast Trust and is monitoring the year 2000 compliance activities of the investment company administering the open-end mutual fund. 6. The Company's ability to operate effectively in the year 2000 could be affected by communications abilities and access to utilities, such as electricity, water, telephone, and others, to the extent access is interrupted due to the effects of year 2000 issues on these and other utilities. 21 22 The Company's Contingency Plans In addition to the contingency plans described above under "The Risks of the Company's Year 2000 Issues," the Company is developing a Business Interruption Contingency Plan ("BIC Plan"). This BIC Plan is currently in incomplete draft form, and the Company expects to complete it by the end of the first quarter of 1999. The BIC Plan will contain information pertinent to maintaining the successful operation of each major business line of the Company. Based on the Company's current assessment, it is anticipated that the BIC Plan will address such matters as (1) Company policies and procedures relating to staffing and employee resources during the critical time periods before and after the year 2000, (2) maintenance of external and internal communications, (3) plans for maintaining critical business operations, (4) steps for contingency plan implementation, (4) timelines or timing guidelines for contingency plan implementation, and (5) guidelines or procedures to be followed if it becomes necessary to implement a contingency plan with respect to a major business line. In addition, if the Company identifies a material problem with a mission-critical system, the Company will develop an appropriate contingency plan for operation or recovery, as possible and appropriate, should that system fail in the year 2000. Certain circumstances may occur for which there are no satisfactory contingency plans. For more information see above under "The Risks of the Company's Year 2000 Issues." FORWARD LOOKING STATEMENTS The discussion above, entitled "Year 2000 Issues," including without limitation the section entitled "Risks of the Company's Year 2000 Issues," includes certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the express purpose of availing Bancorp of the protections of the safe harbor provisions of the PSLRA. Management's ability to predict results or effects of issues related to the year 2000 is inherently uncertain, and is subject to factors that may cause actual results to differ materially from those projected. Factors that could affect the actual results include, without limitation, (1) the possibility that protection procedures, contingency plans, and remediation efforts will not operate as intended, (2) the possibility that the Company may fail to timely or completely identify all software or hardware applications requiring remediation or other risks or issues related to the year 2000, (3) unexpected costs or events, (4) failures of communications abilities or utility companies serving the Company, (5) fluctuating interest rates, and (6) the uncertainty associated with the impact of year 2000 issues on the banking industry and on the Company's customers, vendors, and others with whom it does business. Readers are cautioned not to place undue reliance on these forward looking statements. 22 23 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK Interest rate, credit, and operations risks are the most significant market risks impacting Bancorp's performance. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of Bancorp's business activities. Bancorp relies on loan reviews, prudent loan underwriting standards and an adequate allowance for loan loss to mitigate credit risk. Bancorp uses an asset/liability management simulation model to measure interest rate risk. The model quantifies interest rate risk through simulating forecasted net interest income over a 12-month time period under various rate scenarios, as well as monitoring the change in the present value of equity under the same rate scenarios. The present value of equity is defined as the difference between the market value of current assets less current liabilities. By measuring the change in the present value of equity under different rate scenarios, management is able to identify interest rate risk that may not be evident in simulating changes in forecasted net interest income. Bancorp is currently slightly liability sensitive, meaning that interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, therefore, a significant increase in market rates of interest or a flattening interest rate yield curve could adversely affect net interest income. In contrast, a decreasing rate environment or a steepening interest rate yield curve may slightly improve Bancorp's margin. Bancorp's strategy will be to continue to limit its loss exposure through managing the repricing characteristics of its assets and liabilities. Bancorp has also placed increased emphasis on its non-interest revenue products to additionally stabilize earnings strength. It should be noted that the simulation model does not take into account future management actions that could be undertaken, if there were a change in actual market interest rates during the year. Also, certain assumptions are required to perform modeling simulations that may have significant impact on the results. These include assumptions regarding the level of interest rates and balance changes on deposit products that do not have stated maturities. These assumptions have been developed through a combination of industry standards and future expected pricing behavior. The model also includes assumptions about changes in the composition or mix of the balance sheet. The results derived from the simulation model could vary significantly by external factors such as changes in the prepayment assumptions, early withdrawals of deposits and competition. Merger activity will also have an impact on Bancorp's asset/liability position as new assets are acquired and added. The acquisition of Centennial Holdings, Ltd. decreased Bancorp's liability sensitivity slightly. Centennial Bank is currently slightly asset sensitive. Management has assessed these risks and believes that there has been no material change since December 31, 1997. 23 24 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 3.1 Restated Articles of Incorporation 10.1 Agreement and Plan of Merger dated September 30, 1998 27 Financial Data Schedules for Form 10-Q. (b) During the nine months ended September 30, 1998, West Coast Bancorp filed the following current report on Form 8-K: Form 8-K filed September 24, 1998 regarding West Coast Bancorp's plan to combine its four separate banking subsidiaries into a single bank. 24 25 SIGNATURES As required by the Securities Exchange Act of 1934, this report is signed on registrant's behalf by the undersigned authorized officers. WEST COAST BANCORP (Registrant) Dated: November 13, 1998 /s/ Victor L. Bartruff ---------------------- Victor L. Bartruff President and Chief Executive Officer Dated: November 13, 1998 /s/ Donald A. Kalkofen ---------------------- Donald A. Kalkofen Executive Vice President and Chief Financial Officer 25 EX-3.1 2 RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF WEST COAST BANCORP* ARTICLE I NAME The name of the corporation is WEST COAST BANCORP. ARTICLE II CAPITALIZATION The corporation is authorized to issue 60,000,000 shares of stock divided into two classes as follows: A. Common Stock. 50,000,000 shares of common stock which shall have unlimited voting rights, subject only to such voting rights as may be specified in respect of preferred stock, and shall have the right to receive the net assets of the corporation upon dissolution, subject only to prior payment of such amount of the net assets of the corporation as may be specified in respect of shares of preferred stock. B. Preferred Stock. 10,000,000 shares of preferred stock issuable from time to time in one or more series as permitted by law and the provisions of the articles of incorporation as may be determined from time to time by the board of directors (or a committee of the board of directors or an officer duly authorized to take such action) and stated in a resolution or resolutions providing for the issuance of shares of such series prior to the issuance of any such shares: 1. Issuance in Series. The board of directors (or a committee of the board of directors or an officer duly authorized to take such action) shall have the authority to fix and determine, subject to the provisions hereof, the rights and preferences of the shares of any series so established, including, without limitation, the rate of dividend, whether the dividend shall be cumulative, whether shares may be redeemed and, if so, the redemption price and the terms and conditions of the redemption, the amount payable upon shares in the event of voluntary or involuntary liquidation, sinking fund provisions, if any, for the redemption or purchase of shares, the terms and conditions, if any, on which shares may be converted, and voting rights, if any. 2. Dividends. The holders of shares of preferred stock of a series shall be entitled to receive dividends, out of funds legally available therefor, at the rate and at the time or times as may be provided in respect of a particular series of preferred stock. If such dividends shall be cumulative, and if dividends shall not have been paid, then the deficiency shall 1 2 be fully paid or the dividends declared and set apart for payment before any dividends on the common stock shall be paid or declared and set apart for payment. Unless otherwise provided in respect of a particular series of preferred stock, the holders of the preferred stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this section. 3. Redemption. The preferred stock of a series may be redeemed in such amount, and at such time or times, if any, as may be provided in respect of a particular series of preferred stock. In any event, preferred stock may be repurchased by the corporation to the extent legally permissible. 4. Liquidation. In the event of any liquidation, dissolution, or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the common stock, the holders of the preferred stock of a series shall be entitled to be paid the preferential amount or amounts as may be provided in respect of a particular series of preferred stock per share and dividends accrued thereon to the date of such payment. The holders of the preferred stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution, or winding up of the affairs of the corporation other than the distributive amounts referred to in this section, unless otherwise provided in respect of a particular series of preferred stock. 5. Conversion. Shares of a particular series of preferred stock may be convertible or converted into common stock or other securities of the corporation on such terms and conditions as may be provided in respect of that series. 6. Voting Rights. Holders of preferred stock of a series shall have such voting rights not in excess of one vote per share as may be provided in respect of a particular series of preferred stock. C. Preemptive Rights. Shareholders shall have no preemptive right to acquire shares or other securities of the corporation which would otherwise be available to the shareholders pursuant to ORS 60.174. D. Cumulative Rights. Shareholders do not have cumulative voting rights with respect to the election of directors of the corporation. ARTICLE III BOARD OF DIRECTORS A. Number of Directors. The board of directors shall consist of not fewer than eight (8) or more than twenty (20) directors. The exact number within such minimum and maximum limits shall be fixed and determined by resolutions approved by at least a 75 percent vote of the total number of directors then in office. The board of directors may fill vacancies on the board of directors, 2 3 whether caused by resignation, death or otherwise; provided, that at no time shall the total number exceed twenty (20). B. Classes of Board. The board of directors shall be divided into three classes: Class A, Class B, and Class C, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of shareholders following the annual meeting at which such director was elected or when his or her successor has been duly elected and qualified, or until his or her earlier resignation, removal from office, or death. In the event of any increase or decrease in the authorized number of directors (1) each director then serving as such shall nevertheless continue as a director of the class in which he or she is a member until the expiration of his or her current term, or his or her earlier resignation, removal from office or death, and (2) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the board of directors among three classes of directors so as to maintain such classes as nearly equal as possible. C. Removal from Office. No director may be removed from office without cause except by a vote of 66 2/3 percent of the shares then entitled to vote at an election of directors. Except as otherwise provided by law, cause for removal shall exist only if the board of directors has reasonable grounds to believe that the corporation has suffered or will suffer substantial injury as a result of the gross negligence, willful misconduct, or dishonesty of the director whose removal is proposed. ARTICLE IV DIRECTOR LIABILITY Directors of the corporation shall not be liable to the corporation or its shareholders for monetary damages for conduct as directors except to the extent that the Oregon Business Corporation Act, as it now exists or may hereafter be amended, prohibits elimination or limitation of director liability. No repeal or amendment of this Article V or of the Oregon Business Corporation Act shall adversely affect any right or protection of a director for actions or omissions prior to the repeal or amendment. ARTICLE V INDEMNIFICATION The corporation shall indemnify each of its directors to the fullest extent permissible under the Oregon Business Corporation Act, as the same exists or may hereafter be amended, against all expense, liability, and loss (including, without limitation, attorneys' fees) incurred or suffered by such person by reason of or arising from the fact that such person is or was a director of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, and such indemnification shall continue 3 4 as to a person who has ceased to be a director, officer, partner, trustee, employee, or agent and shall inure to the benefit of his or her heirs, executors, and administrators. The corporation may, in its bylaws or as otherwise authorized by its board of directors, provide indemnification to officers, employees, and agents of the corporation to the extent permitted by law. The indemnification provided in this Article VI shall not be exclusive of any other rights to which any person may be entitled under any statute, bylaw, agreement, resolution of shareholders or directors, contract, or otherwise. ARTICLE VI SHAREHOLDER APPROVAL OF CERTAIN TRANSACTIONS A. Except as set forth in Section B of this Article VI: 1. any transaction or series of related transactions to which the corporation or any of its subsidiaries is a party, the consummation of which would result in a Change of Control of the corporation (as hereinafter defined); or 2. any sale, lease, exchange, or other disposition of all or substantially all of the property, with or without goodwill, of the corporation and its subsidiaries to any other corporation, person, trust, partnership, limited liability company, or other entity; shall require the affirmative vote of the holders of shares representing at least 66 1/3 percent of all classes of capital stock of the corporation then entitled to vote at an election of directors, considered for the purposes of this Article VI as one class. For the purposes of this Article VI, a "Change in Control" of the corporation would occur if: (a) any "person" (as such term is used in Sections 13(d) and 14(d) or any successor provisions of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's rules and regulations pursuant thereto, as in effect from time to time (collectively, the "Exchange Act")), other than the corporation, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the corporation representing 30 percent or more of the combined voting power of the corporation's then outstanding securities; or (b) the corporation is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50 percent of the outstanding voting securities of the surviving or resulting corporation would be owned in the aggregate by persons or entities who were shareholders of the corporation immediately prior to such merger or consolidation, other than shareholders who are "affiliates" (as defined in Rule 12b-2 under the Exchange Act) of any party to such merger or consolidation; or 4 5 (c) the transaction is of the type that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act. Also for purposes of this Article VI, the term "substantially all of the property, with or without goodwill, of the corporation and its subsidiaries" shall mean those properties and assets involved in any single transaction or series of related transactions having an aggregate fair market value of more than a majority of the total consolidated assets of the corporation and its subsidiaries. B. The provisions of this Article VI shall not apply to any transaction or series of transactions described in Section A of this Article VI if, prior to the consummation of such transaction or transactions, the board of directors of the corporation shall have approved the transaction or transactions by the affirmative vote of more than 75 percent of the directors. The board of directors of this corporation shall have the power and duty to determine for the purposes of this Article VI, on the basis of information known to the corporation, whether any transaction or series of transactions is subject to the voting requirements of this Article VI. Any such determination made in good faith shall be conclusive and binding for all purposes of this Article VI. C. No amendment to the articles of incorporation of this corporation shall amend, alter, change, or repeal any of the provisions of this Article VI unless the amendment effecting such amendment, alteration, change, or repeal (i) shall be approved by more than 75 percent of the directors, or (ii) shall receive the affirmative vote of 66 2/3 percent of all classes of stock of the corporation entitled to vote at an election of directors, considered for the purposes of this Article VI as one class. D. Nothing contained in this Article VI shall be construed to relieve any beneficial owner of shares of the corporation from any fiduciary obligation imposed by law. ARTICLE VII CONSIDERATION OF NON-MONETARY FACTORS The board of directors of the corporation, when evaluating any offer of another party to (a) make a tender or exchange for any equity security of the corporation, (b) merge or consolidate the corporation with another corporation or association, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the corporation, may, in connection with the exercise of its judgment in determining what is in the best interests of the corporation and its stockholders, give due consideration to all relevant factors, including without limitation the social and economic effects on the employees, customers, suppliers, and other constituents of the corporation and its subsidiaries and on the communities in which the corporation and its subsidiaries operate or are located. * Restated by the corporation's Board of Directors on September 24, 1998, to incorporate the amendment adopted by the corporation's Shareholders on April 24, 1998, and to make certain appropriate clarifying amendments permitted under ORS 60.434. 5 EX-10.1 3 AGREEMENT AND PLAN OF MERGER DATED SEPT. 30, 1998 1 EXHIBIT 10.1 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger ("Agreement") between THE BANK OF NEWPORT ("Newport"), COMMERCIAL BANK ("Commercial"), BANK OF VANCOUVER ("Vancouver") and CENTENNIAL BANK ("Centennial") is dated as of September 30, 1998. RECITALS A. Newport, Commercial, Vancouver and Centennial (collectively, the "Banks") are all wholly owned subsidiaries of West Coast Bancorp ("WCB"), a business corporation duly organized, validly existing and in good standing under federal and Oregon State laws. WCB is also a registered bank holding company under the Bank Holding Company Act of 1956, as amended. B. Newport is an Oregon state-chartered commercial bank duly organized, validly existing, and in good standing under federal and Oregon State laws. The names and locations of Newport's principal office and all other offices and branches are listed in Schedule A. C. Commercial is also an Oregon state-chartered bank duly organized, validly existing and in good standing under federal and Oregon State laws. The names and locations of Commercial's principal office and all other offices and branches are listed in Schedule A. D. Vancouver is a Washington state-chartered commercial bank duly organized, validly existing, and in good standing under federal and Washington State laws. The names and locations of Vancouver's principal office and all other offices and branches are listed in Schedule A. E. Centennial is also a Washington state-chartered commercial bank duly organized, validly existing, and in good standing under federal and Washington State laws. The names and locations of Centennial's principal office and all other offices and branches are listed in Schedule A. F. The Banks each wish to merge Commercial, Vancouver and Centennial with and into Newport on the terms and conditions set forth in this Agreement. The Board of Directors of each of the Banks has approved this Agreement and has authorized its execution and delivery. Therefore, the parties agree as follows: AGREEMENT 1. MERGER TERMS. 1.1 Merger. Subject to the terms of this Agreement, Commercial, Vancouver, and Centennial will merge with and into Newport ("Merger"), and after the Merger, 1 2 Newport will be the surviving Oregon State-chartered commercial bank ("Resulting Bank"). 1.2 Closing. Closing of the Merger ("Closing") will take place at 5:00 p.m. ("Effective Time") on the Closing Date. The Closing Date will be a mutually agreed to date following approval of the Merger in accordance with Sections 3 and 4 and expiration of all applicable waiting periods. 1.3 Transaction. At the Effective Time, under ORS 711.040, RCW 30.49, and 12 USC Section 1828(c) and related rules and regulations: a. Commercial, Vancouver, and Centennial Shares. All shares of Commercial, Vancouver and Centennial capital stock issued and outstanding immediately before the Effective Time will be canceled. b. Newport Shares. All shares of Newport capital stock issued and outstanding immediately before the Effective Time will continue as issued and outstanding shares of the Resulting Bank. c. Capital. The amount of capital and the number and par value of shares applicable to the Resulting Bank at the Effective Time are set forth in Schedule C. 1.4 Resulting Bank. The Resulting Bank's name will be "West Coast Bank," and the Newport branches which currently operate under the assumed business name of "Valley Commercial Bank" will discontinue the use of such name. Newport's charter will become the Resulting Bank's charter. The proposed Articles of Incorporation for the Resulting Bank are attached to this Agreement as Exhibit 1 and will be filed with the Oregon Secretary of State at the Effective Time. The Resulting Bank's principal office will be located at 5335 S.W. Meadows Road, Lake Oswego, Oregon, and all current offices of the Banks, listed in Schedule A, will become offices of the Resulting Bank. The Resulting Bank will be a wholly owned subsidiary of WCB with the same number of issued and outstanding shares as the issued and outstanding shares of Newport immediately before the Effective Time. 1.5 Transfer of Interests. At the Effective Time, as provided in ORS 711.040 and RCW 30.49, all of the Banks' assets, rights, interests, and liabilities will be transferred to the Resulting Bank. 1.6 Resulting Bank Directors. The names of the members of the Resulting Bank's Board of Directors (collectively, the "Resulting Directors"), effective at the Effective Time, are listed in Schedule B. The Resulting Directors will serve on the Resulting Bank's Board of Directors until the next annual meeting of the Resulting Bank's shareholders or until their successors have been elected and 2 3 qualified. Nothing in this Subsection 1.6 or this Agreement restricts in any way any rights of the Resulting Bank's shareholders and directors at any time after the Effective Time to nominate, elect, select or remove the Resulting Bank's directors. 1.7 Resulting Bank Officers. The names of the Resulting Bank's executive officers (collectively, the "Resulting Officers") are listed in Schedule B. Nothing in this Subsection 1.7 or this Agreement restricts in any way any rights of the Resulting Bank's shareholders and directors at any time after the Effective Time to nominate, elect, select or remove the Resulting Bank's executive officers. The parties agree that the official titles of the officers listed in Schedule B may be changed by WCB before Closing without notice to the parties. 2. SHAREHOLDER APPROVAL. The Merger and this Agreement are subject to approval by WCB, as the sole shareholder of each of the Banks. If WCB does not approve the Merger and this Agreement, this Agreement is void, and the parties are relieved of their obligations and responsibilities under this Agreement. 3. DIRECTOR APPROVAL. The Merger and this Agreement are subject to approval by the Director of the Financial Institutions Division of the Oregon Department of Consumer and Business Services and the Director of the Division of Banking of the Washington Department of Financial Institutions (collectively, the "Directors"). If the Directors do not approve the Merger and this Agreement, this Agreement is void, and the parties are relieved of their obligations and responsibilities under this Agreement. 4. OTHER APPROVALS. The Merger and this Agreement are subject to approval by the Federal Deposit Insurance Corporation and all other regulatory agencies having jurisdiction with respect to the Merger. If these agencies do not approve the Merger and this Agreement, this Agreement is void, and the parties are relieved of their obligations and responsibilities under this Agreement. 5. TERMINATION. The parties may terminate this Agreement at any time before the Closing Date by mutual consent. 6. MISCELLANEOUS PROVISIONS. 6.1 Binding Effect. This Agreement is binding and inures to the benefit of the parties and their respective successors and assigns. 3 4 6.2 Assignment. The parties may not assign this Agreement or any rights under this Agreement, unless the other parties consent in writing to the assignment. 6.3 Amendment and Waiver. Except as this Agreement otherwise expressly provides, it contains the parties' entire understanding. No modification or amendment of its terms or conditions is effective unless in writing and signed by the parties, or their respective duly authorized agents. 6.4 Section Headings. The section headings included in this Agreement are for reference and convenience only and are not a substantive part of this Agreement. 6.5 Counterparts. This Agreement may be executed in one or more counterparts. Each of these counterparts are deemed an original, and all counterparts taken together constitute one and the same document. 6.6 Governing Law. The parties intend this Agreement to be governed by Oregon State law, except to the extent Washington State or Federal law may govern certain matters. [SIGNATURES APPEAR ON THE FOLLOWING PAGES] 4 5 This Agreement is executed as of September 30, 1998. THE BANK OF NEWPORT By /s/ Timothy P. Dowling ----------------------------- Timothy P. Dowling Its: President and CEO STATE OF OREGON ) ) ss. COUNTY OF LINCOLN ) On this day 30th day of September, 1998, before me personally appeared TIMOTHY P. DOWLING, to me known to be the President and Chief Executive Officer of The Bank of Newport, the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute the said instrument, and that the seal affixed, if any, is the corporate seal of said corporation. IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ Rebecca L. Rariden --------------------------- Signature) Rebecca L. Rariden --------------------------- (Please print name legibly) NOTARY PUBLIC in and for the State of Oregon, residing at 536 SW 4th, Newport. My commission expires: 9/28/01. 5 6 COMMERCIAL BANK By /s/ Edgar B. Martin ---------------------------- Edgar B. Martin Its: President and CEO STATE OF OREGON ) ) ss. COUNTY OF MARION ) On this day 30th day of September, 1998, before me personally appeared EDGAR B. MARTIN, to me known to be the President and Chief Executive Officer of Commercial Bank, the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute the said instrument, and that the seal affixed, if any, is the corporate seal of said corporation. IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ Kimberly D. Sealey ----------------------------- (Signature) Kimberly D. Sealey ----------------------------- (Please print name legibly) NOTARY PUBLIC in and for the State of Oregon, residing at Salem, Oregon. My commission expires: 7/19/2001. 6 7 BANK OF VANCOUVER By /s/ Ronald T. DeLude --------------------------- Ronald T. DeLude Its: President and CEO STATE OF OREGON ) ) ss. COUNTY OF CLACKAMAS ) On this day 30th day of September, 1998, before me personally appeared RONALD T. DELUDE to me known to be the President and Chief Executive Officer of Bank of Vancouver, the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute the said instrument, and that the seal affixed, if any, is the corporate seal of said corporation. IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ Nina C. Rowe --------------------------------- (Signature) Nina C. Rowe --------------------------------- (Please print name legibly) NOTARY PUBLIC in and for the State of Oregon, residing at Lake Oswego. My commission expires: 9/22/2001. 7 8 CENTENNIAL BANK By /s/ Daniel D. Yerrington ---------------------------- Daniel D. Yerrington Its: President and COO STATE OF WASHINGTON ) ) ss. COUNTY OF THURSTON ) On this day 30th day of September, 1998, before me personally appeared DANIEL D. YERRINGTON, to me known to be the President and Chief Operations Officer of Centennial Bank, the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute the said instrument, and that the seal affixed, if any, is the corporate seal of said corporation. IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ Andrea S. Werner ---------------------------------- (Signature) Andrea S. Werner ---------------------------------- (Please print name legibly) NOTARY PUBLIC in and for the State of Washington, residing at Olympia. My commission expires: 5/15/99. 8 EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 84,294 1,244 0 0 243,559 2,879 2,935 827,213 12,096 1,211,906 1,048,802 9,700 8,720 31,089 0 0 17,760 95,834 1,211,906 61,580 9,246 1,595 72,421 25,479 27,261 45,160 2,465 250 13,460 15,514 15,514 0 0 10,406 .74 .71 5.08 3,475 132 0 0 10,451 1,117 297 12,096 12,096 0 0
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