10-Q 1 e10-q.txt FORM 10-Q FOR PERIOD ENDED JUNE 30, 2000 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 June 30, 2000 [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-10997 WEST COAST BANCORP (Exact name of registrant specified in its charter) Oregon 93-0810577 (State or other jurisdiction (IRS Employer incorporation or organization) Identification No.) 5335 Meadows Road, Suite 201, Lake Oswego, Oregon 97035 (Address of principal executive offices) (Zip code) (503) 684-0884 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No. [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, no par value, outstanding on July 31, 2000: 15,424,635 2 TABLE OF CONTENTS
Page ---- PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2000 and December 31, 1999..........................................3 Consolidated Statements of Income - Three months and six months ended June 30, 2000 and 1999.....................4 Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and 1999......................................5 Consolidated Statements of Changes in Stockholders' Equity...................6 Notes to Consolidated Financial Statements...................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................12 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................23 PART II. Other Information Item 1. Legal Proceedings...........................................................24 Item 4. Submissions of Matters to a Vote of Security Holders........................25 Item 6. Exhibits and Reports on Form 8-K............................................26 Signatures..........................................................................26
2 3 PART I. FINANCIAL INFORMATION Item 1. WEST COAST BANCORP CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 --------------- --------------- (Unaudited) ASSETS: Cash and cash equivalents: Cash and due from banks $ 54,884,855 $ 47,148,168 Interest-bearing deposits in other banks 1,560,961 17,024,548 Federal funds sold 2,200,000 2,800,000 --------------- --------------- Total cash and cash equivalents 58,645,816 66,972,716 Trading assets 907,569 1,000,943 Investment securities: Investments available for sale 239,962,845 255,609,218 Loans held for sale 4,957,452 8,309,188 Loans 1,009,572,539 976,297,233 Allowance for loan loss (14,083,531) (13,479,752) --------------- --------------- Loans, net 995,489,008 962,817,481 Premises and equipment, net 29,874,653 30,654,447 Intangible assets 2,142,895 2,337,049 Other assets 27,918,806 26,986,340 --------------- --------------- Total assets $ 1,359,899,044 $ 1,354,687,382 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Demand $ 197,117,779 $ 194,338,293 Savings and interest-bearing demand 496,190,399 542,532,667 Certificates of deposits 370,319,401 343,926,889 --------------- --------------- Total deposits 1,063,627,579 1,080,797,849 Short-term borrowings 123,700,000 79,512,500 Other liabilities 9,557,554 11,895,821 Long-term borrowings 45,093,319 65,688,557 --------------- --------------- Total liabilities 1,241,978,452 1,237,894,727 Commitments and contingent liabilities STOCKHOLDERS' EQUITY: Preferred stock: no par value, none issued; 10,000,000 shares authorized Common stock: no par value, 50,000,000 shares authorized; shares issued and outstanding 15,431,117 and 15,344,857, respectively 19,288,896 19,181,071 Additional paid-in capital 76,467,611 78,005,788 Retained earnings 25,766,113 23,007,819 Accumulated other comprehensive loss (3,602,028) (3,402,023) --------------- --------------- Total stockholders' equity 117,920,592 116,792,655 --------------- --------------- Total liabilities and stockholders' equity $ 1,359,899,044 $ 1,354,687,382 =============== ===============
The accompanying notes are an integral part of these consolidated statements. 3 4 WEST COAST BANCORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended Six months ended June 30, June 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ INTEREST INCOME: Interest and fees on loans $ 23,041,832 $ 20,370,422 $ 45,680,205 $ 40,448,396 Interest on taxable investment securities 2,721,729 2,228,953 5,568,838 4,752,860 Interest on nontaxable investment securities 1,059,554 1,124,995 2,127,599 2,255,323 Interest from other banks 24,174 77,869 74,744 149,996 Interest on federal funds sold 809 17,668 3,529 26,283 ------------ ------------ ------------ ------------ Total interest income 26,848,098 23,819,907 53,454,915 47,632,858 INTEREST EXPENSE: Savings and interest-bearing demand 4,080,971 4,048,979 8,258,625 7,995,986 Certificates of deposit 4,916,014 4,489,939 9,487,708 8,983,875 Short-term borrowings 1,906,648 104,633 3,471,757 215,551 Long-term borrowings 901,283 241,393 1,793,111 497,665 ------------ ------------ ------------ ------------ Total interest expense 11,804,916 8,884,944 23,011,201 17,693,077 ------------ ------------ ------------ ------------ NET INTEREST INCOME 15,043,182 14,934,963 30,443,714 29,939,781 PROVISION FOR LOAN LOSS 693,000 450,000 1,368,000 960,000 ------------ ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 14,350,182 14,484,963 29,075,714 28,979,781 NONINTEREST INCOME: Service charges on deposit accounts 1,353,360 1,144,297 2,566,889 2,302,338 Other service charges, commissions and fees 1,250,319 1,081,827 2,348,411 2,112,952 Trust revenue 515,785 587,832 1,069,453 1,115,860 Gains on sales of loans 86,248 1,009,900 504,927 2,245,666 Loan servicing fees 131,593 84,152 260,100 240,117 Other 111,374 73,002 250,694 557,232 Net gains (losses) on sales of securities (221,575) 101,459 (221,575) 204,364 ------------ ------------ ------------ ------------ Total noninterest income 3,227,104 4,082,469 6,778,899 8,778,529 NONINTEREST EXPENSE: Salaries and employee benefits 6,351,720 6,474,984 12,496,658 13,437,913 Equipment 1,334,096 1,208,981 2,647,308 2,476,573 Occupancy 994,187 867,005 1,934,090 1,742,322 Professional fees 603,046 355,054 822,263 682,658 Marketing 391,743 551,861 745,068 911,259 Communications 329,077 392,608 699,787 818,396 Printing and office supplies 194,285 252,264 434,634 540,806 Litigation settlement charges -- -- 4,946,055 -- Restructuring charges -- 303,290 -- 707,863 Other noninterest expense 2,193,146 1,678,949 4,265,103 3,513,198 ------------ ------------ ------------ ------------ Total noninterest expense 12,391,300 12,084,996 28,990,966 24,830,988 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 5,185,986 6,482,436 6,863,647 12,927,322 PROVISION FOR INCOME TAXES 1,674,246 1,987,018 2,100,282 4,051,828 ------------ ------------ ------------ ------------ NET INCOME $ 3,511,740 $ 4,495,418 $ 4,763,365 $ 8,875,494 ============ ============ ============ ============ Basic earnings per share $ 0.23 $ 0.29 $ 0.31 $ 0.57 Diluted earnings per share $ 0.23 $ 0.28 $ 0.31 $ 0.56
The accompanying notes are an integral part of these consolidated statements. 4 5 WEST COAST BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, ------------------------------- 2000 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,763,365 $ 8,875,494 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 1,970,154 1,744,825 Amortization of intangibles 194,154 196,046 Net (gain) loss on sales of available for sale investments 221,575 (204,364) Provision for loan losses 1,368,000 960,000 (Increase ) decrease in interest receivable (141,759) 421,338 Increase in other assets (790,707) (2,364,815) Net cash provided by loans held for sale 3,351,736 11,638,968 (Decrease) increase in interest payable (638,739) 954,494 Decrease in other liabilities (1,699,528) (3,690,086) Tax benefit associated with stock options 122,944 416,492 Decrease in trading assets 93,374 -- ------------ ------------ Net cash provided by operating activities 8,814,569 18,948,392 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of available for sale securities 6,867,199 37,685,303 Proceeds from sales of available for sale securities 8,930,891 11,732,703 Purchase of available for sale securities (573,297) (32,278,385) Loans made to customers greater than principal collected on loans (34,039,527) (40,041,112) Net capital expenditures (1,190,360) (2,400,515) ------------ ------------ Net cash used in investing activities (20,005,094) (25,302,006) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in demand, savings and interest bearing transaction accounts (43,562,782) (34,071,701) Net increase in certificates of deposit 26,392,512 14,416,720 Net decrease in long-term borrowings (20,595,238) (785,714) Net increase in short-term borrowings 44,187,500 14,300,000 Redemption of common stock for stock repurchase plan (2,574,320) (5,778,001) Net proceeds from issuance of common stock 1,021,024 720,302 Dividends paid and cash paid for fractional shares (2,005,071) (1,553,619) ------------ ------------ Net cash (used in) provided by financing activities 2,863,625 (12,752,013) ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (8,326,900) (19,105,627) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 66,972,716 81,491,894 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 58,645,816 $ 62,386,267 ============ ============
The accompanying notes are an integral part of these consolidated statements. 5 6 WEST COAST BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Additional Common Stock Paid-In Retained Shares Amount Capital Earnings ------------- ------------- ------------- ------------- BALANCE, December 31, 1998 14,235,931 $ 17,794,914 $ 66,474,468 $ 29,392,264 Comprehensive income: Net income -- -- -- 17,332,036 Other comprehensive income (loss), net of tax: Net unrealized investment losses -- -- -- -- Cumulative effect of change in accounting principal -- -- -- -- Reclassification adjustments for realized gains included in net income -- -- -- -- Other comprehensive loss, net of tax -- -- -- -- Comprehensive income -- -- -- -- Cash dividends, $.23 per common share -- -- -- (3,553,257) Issuance of common stock pursuant to option plans 277,875 347,344 1,914,874 -- Redemption of stock pursuant to options (36,866) (46,083) (620,233) -- Common stock repurchased and retired (533,206) (666,508) (8,919,681) -- 10% stock dividend 1,401,926 1,752,408 18,400,279 (20,152,687) Cash paid for fractional shares (803) (1,004) -- (10,537) Tax benefit associated with stock options -- -- 756,081 -- ------------- ------------- ------------- ------------- BALANCE, December 31, 1999 15,344,857 19,181,071 78,005,788 23,007,819 Comprehensive income: Net income -- -- -- 4,763,365 Other comprehensive loss, net of tax: Net unrealized investment losses -- -- -- -- Comprehensive income -- -- -- -- Cash dividends, $.13 per common share -- -- -- (2,005,071) Issuance of common stock pursuant to option plans 211,331 264,164 853,179 -- Redemption of stock pursuant to options (14,270) (17,838) (159,370) -- Issuance of common stock pursuant to deferred compensation and restricted stock plans, net 115,899 144,874 (63,985) -- Common stock repurchased and retired (226,700) (283,375) (2,290,945) -- Tax benefit associated with stock options -- -- 122,944 -- ------------- ------------- ------------- ------------- BALANCE, June 30, 2000 15,431,117 $ 19,288,896 $ 76,467,611 $ 25,766,113 ============= ============= ============= =============
Accumulated Other Comprehensive Income (Loss) Total -------------- ------------- BALANCE, December 31, 1998 $ 3,563,522 $ 117,225,168 Comprehensive income: Net income -- 17,332,036 Other comprehensive income (loss), net of tax: Net unrealized investment losses -- (7,046,537) Cumulative effect of change in accounting principal -- 131,369 Reclassification adjustments for realized gains included in net income -- (50,377) ------------- Other comprehensive loss, net of tax (6,965,545) (6,965,545) ------------- Comprehensive income -- 10,366,491 ============= Cash dividends, $.23 per common share -- (3,553,257) Issuance of common stock pursuant to option plans -- 2,262,218 Redemption of stock pursuant to options -- (666,316) Common stock repurchased and retired -- (9,586,189) 10% stock dividend -- -- Cash paid for fractional shares -- (11,541) Tax benefit associated with stock options -- 756,081 ------------- ------------- BALANCE, December 31, 1999 (3,402,023) 116,792,655 Comprehensive income: Net income -- 4,763,365 Other comprehensive loss, net of tax: Net unrealized investment losses (200,005) (200,005) ------------- Comprehensive income -- 4,563,360 ============= Cash dividends, $.13 per common share -- (2,005,071) Issuance of common stock pursuant to option plans -- 1,117,343 Redemption of stock pursuant to options -- (177,208) Issuance of common stock pursuant to deferred compensation and restricted stock plans, net -- 80,889 Common stock repurchased and retired -- (2,574,320) Tax benefit associated with stock options -- 122,944 ------------- ------------- BALANCE, June 30, 2000 $ (3,602,028) $ 117,920,592 ============= =============
The accompanying notes are an integral part of these consolidated statements. 6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of West Coast Bancorp (Bancorp or Company) which operates its wholly-owned subsidiaries, West Coast Bank (Bank), West Coast Trust, Centennial Funding Corporation and Totten, Inc., after elimination of intercompany transactions and balances. The interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals necessary for fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the three and six month periods ended June 30, 2000 are not necessarily indicative of results to be anticipated for the year ending December 31, 2000, or other future periods. 2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. STOCKHOLDERS' EQUITY The Board of Directors declared a quarterly cash dividend of $.065 per share during the first and second quarters of 2000. A dividend of $.05 was declared in the first and second quarters of 1999. A 10 percent stock dividend was also declared in the third quarter of 1999. All per share amounts have been restated to retroactively reflect stock dividends and stock splits previously reported. 4. SUPPLEMENTAL CASH FLOW INFORMATION For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Bancorp paid $23,650,000 and $16,739,000 for interest in the six months ended June 30, 2000 and 1999, respectively. Income taxes paid were $2,260,000 and $3,985,000 in the six months ended June 30, 2000 and 1999, respectively. 7 8 5. CONTINGENCIES AND LITIGATION Edward and Marianne Fischer v. West Coast Bank, Multnomah County Circuit Court, Case No. 9905-04969. On May 11, 1999, a husband and wife who loaned $4.6 million to a construction company filed suit in the Circuit Court of the State of Oregon for the County of Multnomah against the Bank and Bancorp alleging that they suffered damages as the result of the Bank and Bancorp's failure to provide take-out funding to the construction company. The construction company defaulted on the $4.6 million loan. The loan is secured by an approximate 500 acre tract of land in Lincoln County, Oregon ("Lincoln County Property"). Plaintiffs asserted claims against the Bank for breach of contract, promissory estoppel, fraud, promissory fraud and conversion, and for compensatory damages in excess of $4.6 million. Plaintiffs subsequently amended their complaint to remove Bancorp as a defendant and to include a claim for punitive damages against the Bank in excess of $5 million. On March 16, 2000, the Bank entered into a Settlement and Loan Purchase Agreement with Plaintiffs. Under the Agreement, the Bank paid to Plaintiffs $5.4 million, in exchange for Plaintiffs' transfer of all their rights, title and interest in the loan and the Lincoln County Property and a release of all Plaintiffs' claims against the Bank and its affiliates. Based on an appraisal of the property and related carrying, disposition, and other cost estimates, the Bank currently estimates the net book value of the Lincoln County Property at approximately $539,000. Accordingly, in connection with this settlement and its valuation of its interest in the Lincoln County Property, the Company expensed in its first quarter results, the net effect of approximately $5 million, for this non-recurring item. The Company is in the process of foreclosing its interest in the Lincoln County Property and pursuing its rights against the construction company under the loan agreement. The construction company has recently filed a counterclaim against the Bank seeking damages in excess of $5 million. This counterclaim has been filed in Lincoln County Circuit Court, Case No. 992167. The Bank denies any liability to the construction company and will defend itself accordingly. Due to the nature and uncertainties inherent in litigation, there are no assurances that this matter will not ultimately result in a loss that could materially affect the Company. However Company management does not expect a material loss at this time. This section may contain "forward looking statements." Please see item 1 of Part II other information of this report entitled "Legal Proceedings" for risk factors and uncertainties that may affect these statements. Readers are cautioned not to place undue reliance on these statements which reflect management's analysis only as of the date of the statement. 6. COMPREHENSIVE INCOME The components of other comprehensive income are as follows:
Three months ended Six months ended June 30, June 30, ------------------- ------------------- (Dollars in thousands) 2000 1999 2000 1999 Unrealized gains (losses) on securities: ------- ------- ------- ------- Unrealized holding gains (losses) arising during the period $ 729 $(5,382) $ (193) $(8,074) Tax (provision) benefit (285) 2,064 129 3,080 ------- ------- ------- ------- Unrealized holding gains (losses) arising during the period, after tax 444 (3,318) (64) (4,994) Less: Unrealized gains from change in accounting principle -- -- -- 213 Tax provision -- -- -- (82) ------- ------- ------- ------- Unrealized gains from change in accounting principle, net of tax -- -- -- 131 Plus: Reclassification adjustment for realized gains (losses) on sale of securities (221) 101 (221) 204 Tax benefit (provision) 85 (38) 85 (78) ------- ------- ------- ------- Net realized (losses) gains (136) 63 (136) 126 ------- ------- ------- ------- Other comprehensive income (loss), net of tax $ 308 $(3,255) $ (200) $(4,737) ======= ======= ======= =======
8 9 7. EARNINGS PER SHARE 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 June 30, 2000 --------------------------------------------- Basic earnings per share...... $ 3,511,740 15,328,078 $ 0.23 Stock options................. 101,084 Diluted earnings per share.... $ 3,511,740 15,429,162 $ 0.23
Three months ended June 30, 1999 --------------------------------------------- Basic earnings per share...... $ 4,495,418 15,514,104 $ 0.29 Stock options................. 365,168 Diluted earnings per share.... $ 4,495,418 15,879,272 $ 0.28
Weighted Average Per Share Net Income Shares Amount --------------------------------------------- Three months ended June 30, 2000 --------------------------------------------- Basic earnings per share...... $ 4,763,365 15,342,339 $ 0.31 Stock options................. 143,022 Diluted earnings per share.... $ 4,763,365 15,485,361 $ 0.31
Three months ended June 30, 1999 --------------------------------------------- Basic earnings per share...... $ 8,875,494 15,553,852 $ 0.57 Stock options................. 407,191 Diluted earnings per share.... $ 8,875,494 15,961,043 $ 0.56
For the periods reported, Bancorp had no reconciling items between net income and income available to common shareholders. 8. RECLASSIFICATIONS Certain reclassifications of prior year amounts have been made to conform to current classifications. 9 10 9. SEGMENT AND RELATED INFORMATION Bancorp accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the service provided. Intercompany items relate primarily to the use of accounting, human resources, data processing and marketing services provided. All other accounting policies are the same as those described in the summary of significant accounting policies in Bancorp's 1999 annual report. Summarized financial information concerning Bancorp's reportable segments and the reconciliation to Bancorp's consolidated results is shown in the following table. The "Other" column includes Bancorp's trust operations and corporate-related items. Investment in subsidiaries is netted out of the presentations below. The "Intersegment" column identifies the intersegment activities of revenues, expenses and other assets, between the "Banking" and "Other" segments.
(Dollars in thousands) Three months ended June 30, 2000 ------------------------------------------------------------ Banking Other Intersegment Consolidated ---------- ---------- ------------ ------------ Interest income .................. $ 26,826 $ 41 $ (19) $ 26,848 Interest expense ................. 11,822 2 (19) 11,805 ---------- ---------- ---------- ---------- Net interest income ......... 15,004 39 -- 15,043 ---------- ---------- ---------- ---------- Provision for loan loss .......... 693 -- -- 693 Noninterest income ............... 2,744 518 (35) 3,227 Noninterest expense .............. 11,942 484 (35) 12,391 ---------- ---------- ---------- ---------- Income before income taxes ... 5,113 73 -- 5,186 Provision for income taxes ....... 1,647 27 -- 1,674 ---------- ---------- ---------- ---------- Net income ....................... $ 3,466 $ 46 $ -- $ 3,512 ========== ========== ========== ========== Depreciation and amortization .... $ 1,089 $ 2 $ -- $ 1,091 Assets ........................... $1,358,638 $ 4,446 $ (3,185) $1,359,899 Loans, net ....................... $ 995,489 $ -- $ -- $ 995,489 Deposits ......................... $1,066,254 $ -- $ (2,626) $1,063,628 Equity ........................... $ 113,820 $ 4,101 $ N/A $ 117,921
(Dollars in thousands) Three months ended June 30, 2000 ------------------------------------------------------------ Banking Other Intersegment Consolidated ---------- ---------- ------------ ------------ Interest income .................. $ 23,783 $ 65 $ (28) $ 23,820 Interest expense ................. 8,913 -- (28) 8,885 ---------- ---------- ---------- ---------- Net interest income ......... 14,870 65 -- 14,935 ---------- ---------- ---------- ---------- Provision for loan loss .......... 450 -- -- 450 Noninterest income ............... 3,551 596 (65) 4,082 Restructuring charges ............ 303 -- -- 303 Noninterest expense .............. 11,241 606 (65) 11,782 ---------- ---------- ---------- ---------- Income before income taxes .. 6,427 55 -- 6,482 Provision for income taxes ....... 1,968 19 -- 1,987 ---------- ---------- ---------- ---------- Net income ....................... $ 4,459 $ 36 $ -- $ 4,495 ========== ========== ========== ========== Depreciation and amortization .... $ 972 $ 8 $ -- $ 980 Assets ........................... $1,242,641 $ 6,928 $ (5,078) $1,244,491 Loans, net ....................... $ 888,681 $ -- $ -- $ 888,681 Deposits ......................... $1,094,204 $ -- $ (5,402) $1,088,802 Equity ........................... $ 107,263 $ 7,906 $ N/A $ 115,169
10 11
(Dollars in thousands) Six months ended June 30, 2000 ------------------------------------------------------------ Banking Other Intersegment Consolidated ---------- ---------- ------------ ------------ Interest income .................. $ 53,411 $ 85 $ (41) $ 53,455 Interest expense ................. 23,049 3 (41) 23,011 ---------- ---------- ---------- ---------- Net interest income ......... 30,362 82 -- 30,444 ---------- ---------- ---------- ---------- Provision for loan loss .......... 1,368 -- -- 1,368 Noninterest income ............... 5,769 1,078 (68) 6,779 Noninterest expense .............. 28,031 1,028 (68) 28,991 ---------- ---------- ---------- ---------- Income before income taxes .. 6,732 132 -- 6,864 Provision for income taxes ....... 2,050 50 -- 2,100 ---------- ---------- ---------- ---------- Net income ....................... $ 4,682 $ 82 $ -- $ 4,764 ========== ========== ========== ========== Depreciation and amortization .... $ 2,161 $ 3 $ -- $ 2,164 Assets ........................... $1,358,638 $ 4,446 $ (3,185) $1,359,899 Loans, net ....................... $ 995,489 $ -- $ -- $ 995,489 Deposits ......................... $1,066,254 $ -- $ (2,626) $1,063,628 Equity ........................... $ 113,820 $ 4,101 $ N/A $ 117,921
(Dollars in thousands) Six months ended June 30, 2000 ------------------------------------------------------------ Banking Other Intersegment Consolidated ---------- ---------- ------------ ------------ Interest income .................. $ 47,580 $ 105 $ (52) $ 47,633 Interest expense ................. 17,745 -- (52) 17,693 ---------- ---------- ---------- ---------- Net interest income ......... 29,835 105 -- 29,940 ---------- ---------- ---------- ---------- Provision for loan loss .......... 960 -- -- 960 Noninterest income ............... 7,757 1,152 (131) 8,778 Restructuring charges ............ 708 -- -- 708 Noninterest expense .............. 22,987 1,267 (131) 24,123 ---------- ---------- ---------- ---------- Income before income taxes .. 12,937 (10) -- 12,927 Provision for income taxes ....... 4,055 (3) -- 4,052 ---------- ---------- ---------- ---------- Net income ....................... $ 8,882 $ (7) $ -- $ 8,875 ========== ========== ========== ========== Depreciation and amortization .... $ 1,922 $ 19 $ -- $ 1,941 Assets ........................... $1,242,641 $ 6,928 $ (5,078) $1,244,491 Loans, net ....................... $ 888,681 $ -- $ -- $ 888,681 Deposits ......................... $1,094,204 $ -- $ (5,402) $1,088,802 Equity ........................... $ 107,263 $ 7,906 $ N/A $ 115,169
11 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENT DISCLOSURE In addition to historical information, this annual report contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). This statement is included for the express purpose of availing Bancorp of the protections of the safe harbor provisions of the PSLRA. The forward looking statements contained in this report are subject to factors, risks, and uncertainties that may cause actual results to differ materially from those projected. Important factors that might cause such a material difference include, but are not limited to, those discussed in this section of the report. In addition, the following items are among the factors that could cause actual results to differ materially from the forward looking statements in this report: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; new legislation; vendor quality and efficiency; employee retention factors; rapidly changing technology and evolving banking industry standards; competitive standards; competitive factors, including increased competition with community, regional, and national financial institutions; fluctuating interest rate environments; and similar matters. Readers are cautioned not to place undue reliance on these forward looking statements, which reflect management's analysis only as of the date of the statement. Bancorp undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission. RESULTS OF OPERATIONS Three months ended June 30, 2000 and 1999 Net Income. Bancorp reported net income of $3,512,000, or $.23 per diluted share, for the three months ended June 30, 2000, compared to $4,496,000, or $.28 per diluted share, for the three months ended June 30, 1999. The second quarter 2000 results include severance expenses and losses on sales of securities of $586,000, after tax. The second quarter 1999 results include non-recurring and restructuring charges of $304,000 after taxes, resulting from expenses associated with Bancorp's consolidation of its subsidiary banks, and $66,000 after tax gain on sale of securities. After adjusting for second quarter non-core, non-recurring events, adjusted operating net income in the second quarter of 2000 was $4,098,000 or $.27 per diluted share, compared to adjusted 1999 results of $4,734,000 or $.30 per diluted share. Net interest income increased slightly in the second quarter of 2000 over the comparable period in 1999, due mainly to higher loan volumes, partly offset by increased volumes and average rates paid on interest bearing liabilities, as well as changes in the mix of interest bearing liabilities. Noninterest income decreased mainly due to lower revenues generated from sales of loans and sales of securities, partly offset by higher service charges on deposit accounts and sales of investment products. Total noninterest expenses increased due to non-recurring severance charges, increased check processing fees and professional fees, offset in part by lower marketing and communication costs. Net Interest Income. Net interest income is the difference between interest income (principally from loan and investment securities) and interest expense (principally on customer deposits and borrowings). Changes in net interest income result from changes in volume, net interest spread, and net interest margin. Volume is the average dollar level of interest earning assets and interest bearing liabilities. Net interest spread is the differences between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin is net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities. Bancorp's profitability, like that of many financial institutions, is dependent to a large extent upon net interest income. Bancorp is liability sensitive, meaning that interest bearing liabilities mature or reprice more quickly than interest earning assets in a given period. Therefore, a significant increase in the market rates of interest could adversely affect net interest income. In contrast, a decreasing interest rate environment, a less inverse or steepening interest rate yield curve may slightly improve Bancorp's margin. Competition, the economy, and the status of the interest rate environment also impact Bancorp's net interest income in any period. 12 13 Net interest income on a tax equivalent basis for the three months ended June 30, 2000, increased $100,000, or 0.06%, to $15,614,000 from $15,514,000 for the same period in 1999. The increase was due mainly to increases in volumes of interest earning assets partly offset by increases in both volume and rates, as well as change in mix of interest bearing liabilities. Average yields on earning assets increased to 8.76% in the second quarter of 2000 from 8.49% in 1999. Average interest earning assets increased $106.5 million, or 9.24%, to $1.26 billion in the second quarter of 2000, from $1.15 billion for the same period in 1999, while average interest bearing liabilities increased $109.2 million or 11.73%. Average rates paid on interest bearing liabilities increased 73 basis points in the second quarter of 2000, to 4.56% from 3.83% for the like period in 1999. The average net interest spread decreased from 4.66% to 4.20% in the second quarter of 2000 compared to 1999, mainly due to increases in average volumes and rates paid on interest bearing liabilities. Bancorp's net interest margin for the three months ended June 30, 2000, was 4.99%, a decrease of 41 basis points from 5.40% for the comparable period of 1999. The decreases in Bancorp's net interest margin and related yields or spreads are due mainly to a changing interest rate environment, increased pricing competition, a shift in asset mix, and an increased dependence on borrowed funds during the period. Given these factors, and the interest rate environment, continued strong competition in the markets it serves, and other economic factors, Bancorp could see further decreases in net interest margin. Analysis of Net Interest Income The following table presents information regarding yields on interest-earning assets, expense on interest-bearing liabilities, and net yields on interest-earning assets for the periods indicated on a tax equivalent basis:
Three months ended (Dollars in thousands) June 30, --------------------------------- Increase 2000 1999 (Decrease) Change ------------- ------------- ------------- ----------- Interest and fee income (1) ........ $ 27,419 $ 24,399 $ 3,020 12.38% Interest expense ................... 11,805 8,885 2,920 32.86% ------------- ------------- ------------- Net interest income ................ $ 15,614 $ 15,514 $ 100 0.06% ============= ============= ============= Average interest earning assets .... $ 1,259,041 $ 1,152,563 $ 106,478 9.24% Average interest bearing liabilities $ 1,040,123 $ 930,914 $ 109,209 11.73% Average interest earning assets/ interest bearing liabilities .. 121.05% 123.81% (2.76) Average yields earned (2) .......... 8.76% 8.49% 0.27 Average rates paid (2) ............. 4.56% 3.83% 0.73 Net interest spread (2) ............ 4.20% 4.66% (0.46) Net interest margin (2) ............ 4.99% 5.40% (0.41)
(1) Interest earned on nontaxable securities has been computed on a 35% tax equivalent basis in 2000 and 34% in 1999. (2) These ratios for the three months ended June 30, 2000 and 1999 have been annualized. Provision for Loan Loss. Bancorp recorded provisions for loan losses for the second quarter of 2000 and 1999 of $693,000 and $450,000, respectively. Net charge-offs for the second quarter of 2000 were $674,000, compared to net charge-offs of $113,000 for the same period in 1999. At June 30, 2000, the percentage of non-performing assets was 0.32% of total assets, compared to 0.36% one year earlier. Bancorp's allowance for loan losses, as a percentage of total loans was 1.40% at June 30, 2000, compared to 1.45% at June 30, 1999. Noninterest Income. Noninterest income for the second quarter of 2000 was $3,227,000, down $855,000, or 20.95%, from $4,082,000 in the like period in 1999. Gains on sales of loans decreased $924,000, to $86,000 in 2000, from $1,010,000 in 1999. The decrease in gains on sales of loans was due mainly to decreased sales activity in the secondary residential real estate programs, predominantly caused by the higher interest rate environment in 2000. Service charges on deposit accounts increased to $1,353,000, an 18.27% increase over the same period in 1999, caused mainly by fluctuations in customer activity and deposit volume, as well as increased fees and fee collection efforts. Other service charges, commissions, and fees increased $168,000, to $1,250,000, from $1,082,000 or 15.57%, in 2000 over 1999. The increase in other service charges, commissions, and fees was due to increased sales activity, resulting in higher net revenues for brokerage commissions and merchant bankcard activities. Trust revenue decreased slightly during the second quarter of 2000, as compared to the same period in 1999, due in part to fee adjustments and changes in the market value of assets managed. Loan servicing fees and other noninterest income increased in the second quarter of 2000, compared to 1999. A loss of $221,000 was incurred on securities sold in the second quarter of 2000, while net gains on the sales of securities were $101,000 in the second quarter of 1999. 13 14 Noninterest Expense. Noninterest expense for the second quarter ending June 30, 2000 was $12,391,000, an increase of $306,000, or 2.53%, over the same period in 1999. A restructuring charge of $483,000 ($303,000 after income taxes), impacted second quarter 1999 noninterest expense, due to the Company's consolidation of its subsidiary banks. Bancorp's salaries and employee benefits decreased $123,000, or 1.90%, to $6,352,000 in the second quarter of 2000, from $6,475,000 for the like period in 1999. Salary and employee benefit expense has declined primarily as a result of decreases in the level of staffing in the period, offset by severance costs and changes in salary structure. At June 30, 2000, Bancorp employed 591 staffing positions compared to 649 at June 30, 1999. Bancorp's staffing reductions have been primarily administrative in nature, and Bancorp has continued to expand its products, services, and branch network over the previous year. Equipment and occupancy expenses increased in the second quarter of 2000 compared to the same period in 1999, due in part to the opening of two new branches and improvements to certain branch locations. Equipment expense increased $125,000 or 10.35% in the second quarter of 2000 over 1999, as Bancorp has continued to invest in technological improvements and expansion. Bancorp introduced internet-based banking during the second quarter of 2000. Occupancy expenses were higher in the second quarter of 2000 over the same period in 1999, due mainly to growth and expansion, including additions of new branches, a new loan servicing center, and other products and services. Professional fees incurred for services from directors, outside consultants, accountants, and attorneys, increased to $603,000 in the second quarter of 2000, compared to $355,000 in the second quarter of 1999, due in part to increased utilization of outside consultants to enhance information systems, streamline product offerings and improve operational processes. Marketing expenses and printing and office supplies expenses decreased in the second quarter of 2000 over the same period in 1999. In 2000, Bancorp has adjusted its marketing strategy associated with marketing its new bank name and company expansion. Communication expense decreased $64,000 in the second quarter of 2000 compared to 1999, due to improved utilization of communication technology and data lines. Other noninterest expenses were higher in the quarter ended June 30, 2000, due to changes in check processing, other loan expenses and other enhancements to services provided. Six months ended June 30, 2000 and 1999 Net Income. Bancorp reported net income of $4,763,000, or $.31 per diluted share, for the six months ended June 30, 2000, compared to $8,875,000, or $.56 per diluted share, for the six months ended June 30, 1999. The 2000 year to date results include a nonrecurring charge of $4,946,000 ($3,051,000 after income taxes) related to litigation settlement charges in the first quarter of 2000. The 2000 year-to-date results also include after tax non-recurring charges of $586,000 relating to severance expenses and losses on the sale of investments. The 1999 year-to-date results include $888,000 in non-recurring and restructuring charges ($558,000 after tax) resulting from marketing costs to promote the West Coast Bank name and restructuring expenses associated with Bancorp's consolidation of its subsidiary banks. The 1999 year to date results also include after tax gains on sales of securities of $128,000. After adjusting for first and second quarter non-recurring events, adjusted operating net income for the first six months of 2000 was $8,400,000 or $.54 per diluted share, compared to adjusted 1999 results of $9,305,000 or $.58 per diluted share. Net interest income increased in the first six months of 2000 over the comparable period in 1999, due mainly to higher loan volumes partly offset by increased volumes and average rates paid on interest bearing liabilities, as well as changes in the mix of interest bearing liabilities. Noninterest income decreased mainly due to lower revenues generated from sales of loans and sales of securities, partially offset by higher service charges. Total noninterest expenses increased due to the litigation settlement charges and higher check processing fees, offset partially by decreased salaries and employee benefits. Net Interest Income. Net interest income on a tax equivalent basis for the six months ended June 30, 2000, increased $488,000, or 1.57%, to $31,590,000 from $31,102,000 for the same period in 1999. The increase in net interest income was due mainly to increases in volumes of interest earning assets partly offset by increases in both volume and rates, as well as change in mix of interest bearing liabilities. Average yields on earning assets increased to 8.72% in the first six months of 2000, compared to 8.58% one year earlier. Average interest earning assets increased $111.9 million, or 9.76%, to $1.26 billion in first six months of 2000, from $1.15 billion for the same period in 1999, while average interest bearing liabilities increased $113.2 million or 12.22%. Average rates paid on interest bearing liabilities increased 60 basis points in the first six months of 2000 to 4.45% from 3.85% for the like period in 1999. The average net interest spread decreased from 4.73% to 4.27% in the first six months of 2000 compared to 1999, mainly due to increases in average volumes and rates paid on interest bearing liabilities. Bancorp's net interest margin for the six months ended June 30, 2000, was 5.05%, a decrease of 42 basis points from 5.47% for the comparable period of 1999. The decrease in Bancorp's net interest margin and related yields or spreads are due mainly to a changing interest rate environment, increased pricing competition, a shift in its asset mix, and an increased dependence on borrowed funds during the period. Given these factors, and the interest rate environment, continued strong competition in the markets it serves, and other economic factors, Bancorp could see further decreases in net interest margin. 14 15 Analysis of Net Interest Income The following table presents information regarding yields on interest-earning assets, expense on interest-bearing liabilities, and net yields on interest-earning assets for the periods indicated on a tax equivalent basis:
Six months ended (Dollars in thousands) June 30, --------------------------------- Increase 2000 1999 (Decrease) Change ------------- ------------- ------------- ----------- Interest and fee income (1) ........ $ 54,601 $ 48,795 $ 5,806 11.90% Interest expense ................... 23,011 17,693 5,318 30.06% ------------- ------------- ------------- Net interest income ................ $ 31,590 $ 31,102 $ 488 1.57% ============= ============= ============= Average interest earning assets .... $ 1,259,123 $ 1,147,178 $ 111,945 9.76% Average interest bearing liabilities $ 1,039,606 $ 926,441 $ 113,165 12.22% Average interest earning assets/ interest bearing liabilities .. 121.12% 123.83% (2.71) Average yields earned (2) .......... 8.72% 8.58% 0.14 Average rates paid (2) ............. 4.45% 3.85% 0.60 Net interest spread (2) ............ 4.27% 4.73% (0.46) Net interest margin (2) ............ 5.05% 5.47% (0.42)
(1) Interest earned on nontaxable securities has been computed on a 35% tax equivalent basis in 2000 and 34% in 1999. (2) These ratios for the six months ended June 30, 2000 and 1999 have been annualized. Provision for Loan Loss. Bancorp recorded provisions for loan losses for the six months ended June 30, 2000 and 1999 of $1,368,000 and $960,000, respectively. Net charge-offs through June 30, 2000 were $764,000, compared to net charge-offs of $355,000 for the same period in 1999 Noninterest Income. Noninterest income for the first six months of 2000 was $6,779,000, down $2,000,000, or 22.78%, from $8,779,000 in the like period in 1999. Gains on sales of loans decreased $1,741,000, to $505,000 in 2000, from $2,246,000 in 1999. The decrease in gains on sales of loans was due mainly to decreased sales activity in the secondary residential real estate programs, predominantly caused by the higher interest rate environment in 2000. Service charges on deposit accounts increased to $2,567,000, an 11.49% increase over the same period in 1999, caused mainly by fluctuations in customer activity and deposit volume, as well as increased fees and fee collection efforts. Other service charges, commissions, and fees increased $235,000, to $2,348,000, from $2,113,000 or 11.14%, in 2000 over 1999. The increase in other service charges, commissions, and fees was due to increased sales activity, resulting in higher net revenues for brokerage commissions and merchant bankcard activities. Trust revenue decreased slightly during the first six months of 2000, as compared to the same period in 1999, due in part to fee adjustments and changes in the market value of assets managed. Loan servicing fees increased slightly the first six months in 2000, compared to 1999. Other noninterest income decreased in 2000, compared to 1999, due to gains of sales of certain real estate assets in the six months ended 1999. A loss on securities sold of $221,000 was incurred during the first six months of 2000, while net gains on the sales of securities were $204,000 in 1999. 15 16 Noninterest Expense. Noninterest expenses for the six months ended June 30, 2000 were $28,991,000, an increase of $4,160,000, or 16.75%, over the same period in 1999. A one-time expense related to litigation settlement charges of $4,946,000 ($3,051,000 after income taxes) impacted the first six months of 2000, while a restructuring charge of $888,000 ($558,000 after income taxes) impacted 1999 due to the Company's consolidation of its subsidiary banks. Bancorp's salaries and employee benefits decreased $941,000, or 7.00%, to $12,497,000 in 2000, from $13,438,000 for the like period in 1999. Salary and employee benefit expense has declined primarily as a result of decreases in the level of staffing in the period, offset in part by severance costs and changes in salary structure. Equipment and occupancy expenses increased in the first six months of 2000 compared to the same period in 1999, due in part to the opening of two new branches and improving certain branch locations. Equipment expense increased $171,000 or 6.89% in the first six months of 2000 over 1999, as Bancorp has continued to invest in technological improvements and expansion. Occupancy expenses were higher in the first six months of 2000 compared with the same period in 1999, due mainly to growth and expansion including additions of new branches, a new loan servicing center, and products and services over the period. Communication expense decreased in the first six months of 2000 compared to 1999. Marketing expenses decreased in the first six months of 2000 over the same period in 1999. In 2000, Bancorp has adjusted its marketing strategy associated with marketing its new bank name and company expansion. Professional fees incurred for services from directors, outside consultants, accountants, and attorneys, increased to $822,000 in the first six months of 2000, compared to $683,000 during the same period in 1999, due in part to increased utilization of outside consultants to enhance information systems and improve operational processes. Other noninterest expenses were higher in the first six months of 2000, due primarily to increased expenses for check processing and enhanced courier services. RESTRUCTURING CHARGES The year to date 1999 results were impacted by one-time costs resulting from the consolidation of our subsidiary banks into one entity, called West Coast Bank. The consolidation was completed on December 31, 1998, and the conversions were completed in 1999. Of the one-time expenses, $708,000 was recognized in the first and second quarters of 1999. There were no restructuring charges incurred in 2000. During 1999, we completed and worked on the system and data conversions, signage changes, name branding, staff reductions, corporate reorganizations, the opening of a new loan servicing center and the consolidation of loan processing, etc. We expended a total of $4.63 million in costs for the consolidation, including costs related to a severance plan, signage, data conversions, marketing, regulatory and administrative costs. Accrued and unpaid restructuring charges were $315,000 at December 31, 1999. All accruals for related restructuring charges were utilized during the first quarter of 2000. These items were recognized as expenses in the results of operations through December 31, 1999. We initially anticipated these costs of the consolidation at $5 million. We were successful in maintaining the restructuring costs below our original forecast. The following table summarizes accrued restructuring charge activity:
(Dollars in thousands) June 30, 2000 ------------- Balance, accrued restructuring charges, December 31, 1999... $315 Provision for restructure charges second quarter 2000....... -- Utilization first quarter 2000: Cash .................................................. 315 Noncash ............................................... -- ---- Total Utilization .......................................... 315 ---- Balance, accrued restructuring charges, June 30, 2000....... $ -- ====
Our original forecast, established in 1998, anticipated that the consolidation would save approximately $6 million annually. The cost savings were identified as coming from reductions in staff and related overhead, a simplified corporate structure, a reduced regulatory burden, and pricing and other synergies created by unified marketing efforts and name branding. The plan called for two-thirds of the cost savings to be substantially achieved by the third quarter of 1999, with the remaining savings to be achieved early in the year 2000. Bancorp's liquidity has not been materially affected by cash outlays related to one-time restructuring charges. 16 17 INCOME TAXES During the first six months of 2000, due to a decrease in net income before taxes and changes in the mix of taxable and nontaxable income items, the provision for income taxes decreased from 1999. We anticipate that Bancorp's tax expense will increase in future periods, both due to an increase in income before taxes and a smaller percentage of Bancorp's income being generated from tax exempt items. LIQUIDITY AND SOURCES OF FUNDS Bancorp's primary sources of funds are customer deposits, maturities of investment securities, sales of Available for Sale securities, loan sales, loan repayments, net income, advances from the Federal Home Loan Bank of Seattle ("FHLB"), and the use of Federal Funds markets. Scheduled loan repayments are relatively stable sources of funds, while deposit inflows and unscheduled loan prepayments are not. Deposit inflows and unscheduled loan prepayments are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions, and other factors. Deposits are Bancorp's primary source of new funds. Total deposits were $1.064 billion at June 30, 2000, compared to $1.081 billion at December 31, 1999. At June 30, 2000, Bancorp used no brokered deposits, but we may accept such deposits in the future. We have focused on attracting deposits in the market area we serve through competitive pricing and delivery of a quality product. Management anticipates that Bancorp will continue relying on customer deposits, maturity of investment securities, sales of Available for Sale securities, loan sales, loan repayments, net income, Federal Funds markets, FHLB, and other borrowings to provide liquidity. Deposit balances will be influenced by changes in the banking industry, interest rates available on other investments, general economic conditions, competition, and other factors. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a long-term basis to support expanded lending activities and to match maturities or repricing intervals of assets. The sources of such funds will include Federal Funds purchased, repurchase agreements, and borrowings from the FHLB. 17 18 CAPITAL RESOURCES The Federal Reserve Bank (FRB) and the Federal Deposit Insurance Corporation (FDIC) have established minimum requirements for capital adequacy for bank holding companies and member banks. The requirements address both risk-based capital and leveraged capital. The regulatory agencies may establish higher minimum requirements if, for example, a corporation has previously received special attention or has a high susceptibility to interest rate risk. The FRB and FDIC risk-based capital guidelines require banks and bank holding companies to have a ratio of tier one capital to total risk-weighted assets of at least 4%, and a ratio of total capital to total risk-weighted assets of 8% or greater. In addition, the leverage ratio of tier one capital to total assets less intangibles is required to be at least 3%. As of June 30, 2000, Bancorp and the Bank are considered "Well Capitalized" under the regulatory risk based capital guidelines. Shareholders' equity increased to $117.9 million at June 30, 2000, from $116.8 million at December 31, 1999, an increase of $1.1 million. The increase is due to net income, offset by cash dividends and Bancorp's activity in its stock repurchase plan. At June 30, 2000, Bancorp's shareholders' equity, as a percentage of total assets, was 8.67%, compared to 8.62% at December 31, 1999. The increase was primarily the result of Bancorp's equity base increasing at a higher rate than total assets. Equity increased .9% over the period from December 31, 1999, to June 30, 2000, while assets increased by .4% over the same period. As the following table indicates, Bancorp currently exceeds the regulatory capital minimum requirements.
(Dollars in thousands) June 30, 2000 -------------------- --------------------- Amount Ratio ---------- ----- Tier 1 capital ..................... $ 119,876 10.66% Tier 1 capital minimum requirement . 44,997 4.00% ---------- ----- Excess over minimum Tier 1 capital $ 74,879 6.66% ========== ===== Total capital ...................... $ 133,937 11.91% Total capital minimum requirement .. 89,993 8.00% ---------- ----- Excess over minimum total capital $ 43,944 3.91% ========== ===== Risk-adjusted assets ............... $1,124,914 ========== Leverage ratio ..................... 8.83% Minimum leverage requirement ....... 3.00% ----- Excess over minimum leverage ratio 5.83% ===== Risk-adjusted total assets ......... $1,358,103 ==========
18 19 LENDING AND CREDIT MANAGEMENT Interest earned on the loan portfolio is the primary source of Bancorp's income. Net loans represented 73.2% of total assets as of June 30, 2000. A certain degree of credit risk is inherent in our lending activities. This risk is managed through our credit administration and credit review functions, which are designed to help ensure compliance with our credit standards. Through the credit review function, the Bank is able to monitor all credit-related policies and practices on a post approval basis, ensuring uniform application. As part of our ongoing lending process, internal risk ratings are assigned to each commercial and commercial real estate credit before the funds are extended to the customer. Credit risk ratings are based on apparent credit worthiness of the borrower at the time the loan is made. Large balance accounts have the credit risk rating reviewed on at least an annual basis. Although Bancorp strives to serve the credit needs of its service areas, the primary focus is on real estate related and commercial credits. We make substantially all our loans to customers located within our service areas. The Bank has no loans defined as highly leveraged transactions by the FRB. Although a risk of nonpayment exists with respect to all loans, certain specific types of risks are associated with different types of loans. As a result of the nature of our customer base and the growth experienced in the market areas served, real estate is frequently a material component of collateral for the Bank's loans. The expected source of repayment of these loans is generally the cash flow of the project, operations of the borrower's business, or personal income. Risks associated with real estate loans include fluctuating land values, local economic conditions, changes in tax policies, and a concentration of loans within any one area. The composition of the Banks' loan portfolio is as follows:
June 30, 2000 December 31, 1999 (Dollars in thousands) ------------------------- ----------------------------- Amount Percent Amount Percent ----------- ------- ----------- ----------- Commercial ....................... $ 165,027 16.58% $ 157,912 16.40% Real estate construction ......... 124,615 12.52 124,102 12.89 Real estate mortgage ............. 98,089 9.85 101,579 10.55 Real estate commercial ........... 566,363 56.88 531,600 55.21 Installment and other consumer ... 55,479 5.57 61,104 6.35 ----------- ------ ----------- ----------- Total loans ...................... 1,009,573 101.40 976,297 101.40 Allowance for loan losses ........ (14,084) (1.40) (13,480) (1.40) ----------- ------ ----------- ----------- Total loans, net ................. $ 995,489 100.00% $ 962,817 100.00% =========== ====== =========== ===========
Nonperforming assets consist of the following:
(Dollars in thousands) June 30, 2000 December 31, 1999 ------------- ----------------- Loans on nonaccrual status ................................. $4,071 $4,316 Loans past due greater than 90 days but not on nonaccrual status ..................................................... 5 8 Other real estate owned .................................... 211 325 ------ ------ Total nonperforming assets ................................. $4,287 $4,649 ====== ====== Percentage of nonperforming assets to total assets ......... .32% .34%
See "Loan Loss Allowance and Provision" for further discussion on the loan portfolio. Interest income on loans is accrued daily on the principal balance outstanding. Generally, no interest is accrued on loans when factors indicate collection of interest or principal is doubtful or when the principal or interest payment becomes 90 days past due. The nonaccrual loans consist of a number of loans in different categories and are largely secured. For such loans, previously accrued but uncollected interest is charged against current earnings, and income is only recognized to the extent payments are subsequently received. 19 20 At June 30, 2000, we were not aware of any concentration of loans exceeding 10 percent of the total loans to a multiple number of borrowers engaged in a similar business. At June 30, 2000 and December 31, 1999, the Bank had no bankers acceptances. As of June 30, 2000, the Bank had outstanding loans to persons serving as directors, officers, principal shareholders and their related interests. These loans were made substantially on the same terms, including interest rates, maturities and collateral as those made to other customers of the Bank. LOAN LOSS ALLOWANCE AND PROVISION A loan loss allowance has been established to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable estimated losses inherent in the loan portfolio, and to a lesser extent, unused commitments to provide financing. Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include: - The formula allowance, - Specific allowances for identified problem loans and portfolio segments and - The unallocated allowance. Our allowance incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No 118, "Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures." These accounting standards prescribe the measurement, income recognition and guidelines concerning impaired loans. During 1999, modifications to the allowance for loan losses included identifying segments of the loan portfolio where the Bank may have larger credit concentrations or exposure, and then allocating the allowance in these areas based on loss factors deemed appropriate. We continue to look for ways to enhance the allowance methodology, with increased detailed analysis, tracking and review. The changes to the allowance methodology made during 1999 were to enhance the overall identification and allocation of the reserves. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of those loans, pools of loans, or commitments. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and other such pertinent data and may be adjusted for significant factors that, in management's judgement, affect the collectibility of the portfolio as of the evaluation date. While historic charge-off activity is studied and used as a base of information, management believes that the recent strength of the economy has played a favorable role in reducing charge-off activity. Management believes that commercial and commercial real estate loans have in the industry produced significant losses in brief periods at particular points in economic cycles. Therefore management believes it is appropriate to use a reserve higher than recent charge-off experience would suggest in these categories of loans. This decision is supported by what management perceives to be industry practices for minimum reserve levels, and is intended to prevent an understatement of reserves based upon over-reliance on recent, favorable economic conditions. Loss factors are described as follows: - Problem graded loan loss factors are obtained from historical loss experience, and other relevant factors including trends in past dues, non-accruals, and risk rating changes. - Pooled loan loss factors, not individually graded loans, are based on expected net charge-offs and other factors, including trends in past dues, collateral values, and levels of Other Real Estate Owned. Pooled loans are loans and leases that are homogeneous in nature, such as consumer installment and residential mortgage loans. Specific allowances are established where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss may be incurred in an amount different than the amount determined by the application of the formula allowance. The unallocated allowance uses a more subjective method and considers such factors as the following: - Existing general economic and business conditions affecting our key lending areas, - Credit quality trends, including trends in nonperforming loans expected to result from existing conditions, - Collateral values, - Loan growth rates and concentrations, 20 21 - Specific industry conditions within portfolio segments, - Recent loss experience in particular segments of the portfolio, - Interest rate environment, - Duration of the current business cycle, - Bank regulatory examination results and findings of our internal credit examiners. Executive credit management reviews these conditions quarterly in discussion with our senior credit officers and the credit review function. If any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of this condition may be reflected as a specific allowance applicable to this credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the probable loss concerning this condition is reflected in the unallocated allowance. The allowance for credit losses is based upon estimates of probable losses inherent in the loan portfolio. The amount actually observed for these losses can vary significantly from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent information available. At June 30, 2000, the Bank's allowance for loan losses was $14.1 million, consisting of a $13.7 million formula allowance, a $139,000 specific allowance and a $210,000 unallocated allowance. At December 31, 1999, our allowance for loan losses was $13.5 million, consisting of a $12.8 million formula allowance, a $525,000 specific allowance and a $210,000 unallocated allowance. The changes in the allocation of the allowance for loan losses in the second quarter of 2000 were due primarily to additions to the loan portfolio, turnover in our non-performing loans, and charge-off activity. Changes in the allowance for loan losses are as follows:
Six months ended Year ended (Dollars in thousands) June 30, 2000 December 31, 1999 ---------------- ----------------- Loans outstanding at end of period ................ $ 1,009,573 $ 976,297 Average loans outstanding during the period ....... $ 998,320 $ 904,931 Allowance for loan losses, beginning of period .... $ 13,480 $ 12,453 Recoveries: Commercial ...................................... 43 129 Real Estate ..................................... 233 58 Installment and consumer ........................ 15 77 ----------- ----------- Total recoveries ................................ 291 264 Loans charged off: Commercial ...................................... 623 450 Real Estate ..................................... 31 487 Installment and consumer ........................ 401 490 ----------- ----------- Total loans charged off ......................... 1,055 1,427 ----------- ----------- Net loans charged off ............................. (764) (1,163) Provision for loan losses ......................... 1,368 2,190 ----------- ----------- Allowance for loan losses, end of period .......... $ 14,084 $ 13,480 =========== =========== Ratio of net loans charged off to average loans outstanding (1) ................ .15% .13% Ratio of allowance for loan losses to loans outstanding at end of period ........... 1.40% 1.38%
(1) The ratio for the six months ended June 30, 2000 has been annualized. 21 22 At June 30, 2000, Bancorp's allowance for loan loss was $14.1 million, or 1.40% of total loans, and 328.53% of total nonperforming assets, compared with an allowance for loan losses at December 31, 1999 of $13.5 million, or 1.38% of total loans, and 289.95% of total nonperforming assets. During Bancorp's normal loan review procedures, a loan is considered to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is usually not considered to be impaired during a period of minimal delay (less than 90 days). Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair market value of the collateral if the loan is collateral dependent. Impaired loans are currently measured at lower of cost or fair value. Leases and certain large groups of smaller balance homogeneous loans, are collectively measured for impairment, and are excluded in the calculation of total impaired loans. Impaired loans are charged to the allowance when management believes, after considering economic and business conditions, collection efforts and collateral position, that the borrower's financial condition is such that collection of principal is not probable. During the second quarter of 2000, net loans charged off were $674,000, compared to $113,000 for the same period in 1999. The annualized percentage of net loans charged off year to date to average loans outstanding was 0.15% and 0.05% at June 30, 2000, and at June 30, 1999, respectively. Charged off loans reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. At June 30, 2000, the provision for loan loss exceeded the net loans charged off during the year, reflecting management's belief, based on the foregoing analysis, that there are additional losses inherent in the loan portfolio. There can be no assurance that the adverse impact to Bancorp, if any, of these conditions will not be in excess of the range set forth above. Readers are referred to management's "Forward Looking Statement Disclosure" in connection with this section. INVESTMENT PORTFOLIO The carrying value of the Banks' investment portfolio is as follows:
June 30, December 31, (Dollars in thousands) 2000 1999 -------- ----------- Investments available for sale (At Fair Value) U.S. Treasury securities ............................ $ 500 $ 501 U.S. Government agency securities ................... 97,468 100,408 Corporate securities ................................ 23,303 34,340 Mortgage-backed securities .......................... 8,686 9,235 Obligations of state and political subdivisions ..... 94,496 95,946 Equity and other securities ......................... 15,510 15,179 -------- -------- Total Investment Portfolio ................... $239,963 $255,609 ======== ========
22 23 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK Interest rate, credit, and operations risks are the most significant market risks impacting Bancorp's performance. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of Bancorp's business activities. Bancorp relies on loan reviews, prudent loan underwriting standards and an adequate allowance for loan loss to mitigate credit risk. Asset/liability management simulation models are used to measure interest rate risk. The models quantify interest rate risk through simulating forecasted net interest income over a 12-month time horizon under various rate scenarios, as well as monitoring the change in the present value of equity under the same rate scenarios. The present value of equity is defined as the difference between the market value of assets less the market value of liabilities. By measuring the change in the present value of equity under different rate scenarios, management is able to identify interest rate risk that may not be evident in simulating changes in forecasted net interest income. Bancorp is currently liability sensitive, meaning that interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, therefore, a significant increase in market rates of interest could adversely affect net interest income. In contrast, a decreasing rate environment or a steepening interest rate yield curve may slightly improve Bancorp's margin. Bancorp attempts to continue to limit its loss exposure through managing the repricing characteristics of its assets and liabilities. The present reliance on borrowed funds and their re-pricing characteristics has increased our liability sensitivity. Changes in the re-pricing characteristics of newly generated loans during the past year have added to the liability sensitivity. Bancorp has also placed increased emphasis on those non-interest revenue products less impacted by changing interest rates to additionally stabilize earnings strength. It should be noted that the simulation model does not take into account future management actions that could be undertaken, if there were a change in actual market interest rates during the year. Also, certain assumptions are required to perform modeling simulations that may have significant impact on the results. These include assumptions regarding the level of interest rates and balance changes on deposit products that do not have stated maturities. These assumptions have been developed through a combination of industry standards and future expected pricing behavior. The model also includes assumptions about changes in the composition or mix of the balance sheet. The results derived from the simulation model could vary significantly by external factors such as changes in the prepayment assumptions, early withdrawals of deposits and competition. Any merger activity will also have an impact on Bancorp's asset/liability position as new assets are acquired and added. Management has assessed these risks and believes that there has been no material change since December 31, 1999. Readers are referred to management's "Forward Looking Statement Disclosure" in connection with this section. 23 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Edward and Marianne Fischer v. West Coast Bank, Multnomah County Circuit Court, Case No. 9905-04969. On May 11, 1999, a husband and wife who loaned $4.6 million to a construction company filed suit in the Circuit Court of the State of Oregon for the County of Multnomah against the Bank and Bancorp alleging that they suffered damages as the result of the Bank and Bancorp's failure to provide take-out funding to the construction company. The construction company defaulted on the $4.6 million loan. The loan is secured by an approximate 500 acre tract of land in Lincoln County, Oregon ("Lincoln County Property"). Plaintiffs asserted claims against the Bank for breach of contract, promissory estoppel, fraud, promissory fraud and conversion, and for compensatory damages in excess of $4.6 million. Plaintiffs subsequently amended their complaint to remove Bancorp as a defendant and to include a claim for punitive damages against the Bank in excess of $5 million. On March 16, 2000, the Bank entered into a Settlement and Loan Purchase Agreement with Plaintiffs. Under the Agreement, the Bank paid to Plaintiffs $5.4 million, in exchange for Plaintiffs' transfer of all their rights, title and interest in the loan and the Lincoln County Property and a release of all Plaintiffs' claims against the Bank and its affiliates. Based on an appraisal of the property and related carrying, disposition, and other cost estimates, the Bank currently estimates the net book value of the Lincoln County Property at approximately $539,000. Accordingly, in connection with this settlement and its valuation of its interest in the Lincoln County Property, the Company expensed in its first quarter results, the net effect of approximately $5 million, for this non-recurring item. The Company is in the process of foreclosing its interest in the Lincoln County Property and pursuing its rights against the construction company under the loan agreement. The construction company has recently filed a counterclaim against the Company seeking damages in excess of $5 million. This counterclaim has been filed in Lincoln County Circuit Court, Case No. 992167. The Bank denies any liability to the construction company and will defend itself accordingly. Due to the nature and uncertainties inherent in litigation, there are no assurances that this matter will not ultimately result in a loss that could materially affect the Company. However Company management does not expect a material loss at this time. This section contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the express purpose of availing Bancorp of the protections of the safe harbor provisions of the PSLRA. The forward looking statements contained in this section are subject to factors, risks, and uncertainties that may cause actual results to differ materially from those projected. Important factors that might cause such a material difference include, but are not limited to, (1) facts and events currently unknown to management that may surface in connection with the Lincoln County Property, (2) environmental factors and issues that may affect the Lincoln County Property, (3) any defenses raised or other matters occurring that prevent or delay the Bank's ability to foreclose its interest in the Lincoln County Property, if it chooses to foreclose this interest, (4) factors affecting the real estate market and property values in Lincoln County, Oregon, (5) actual market or sale values of property can differ from appraised values, (6) fluctuating interest rates, and (7) other risks inherent in litigation. Readers are cautioned not to place undue reliance on these forward looking statements, which reflect management's analysis only as of the date of the statement. Bancorp undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in this and other documents Bancorp files from time to time with the Securities and Exchange Commission. 24 25 Item 4. Submissions of Matters to a Vote of Security Holders. (a) West Coast Bancorp's Annual Shareholders' Meeting was held on April 27, 2000. (b) Not Applicable (c) A brief description of each matter voted upon at the Annual Shareholders' Meeting held on April 27, 2000 and number of votes cast for, against or withheld, including a separate tabulation with respect to each nominee for office is presented below: (1) Election of (4) Directors for terms expiring in 2003 or when their successors have been elected and qualified. Director: Robert D. Sznewajs- Votes cast for: 12,281,107 Votes cast against: - Votes abstaining: 333,694 Lloyd D. Ankeny - Votes cast for: 11,781,607 Votes cast against: - Votes abstaining: 833,194 C. Douglas McGregor - Votes cast for: 11,773,590 Votes cast against: - Votes abstaining: 841,211 (2)Approve adoption of 2000 Restricted Stock Plan. Votes cast for: 9,808,055 Votes cast against: 2,600,929 Votes abstaining: 205,818 (d) None 25 26 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27 Financial Data Schedule for Form 10-Q. (b) During the three months ended June 30, 2000, West Coast Bancorp filed the following current report on Form 8-K: Form 8-K filed April 3, 2000 related to the settlement of a pending lawsuit. SIGNATURES As required by the Securities Exchange Act of 1934, this report is signed on registrant's behalf by the undersigned authorized officers. WEST COAST BANCORP (Registrant) Dated: August 14, 2000 /s/ Robert D. Sznewajs ----------------------------------------- Robert D. Sznewajs Chief Executive Officer and President Dated: August 14, 2000 /s/ Anders Giltvedt ----------------------------------------- Anders Giltvedt Executive Vice President and Chief Financial Officer 26