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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999 Commission file number 0-10997
WEST COAST BANCORP
(Exact name of registrant as specified in its charter)
Oregon 93-0810577
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5335 Meadows Road - Suite 201 97035
Lake Oswego, Oregon (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (503) 684-0884
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of Registrant's Common Stock held
by non-affiliates of the Registrant on February 29, 2000, was $160,449,790.
The number of shares of Registrant's Common Stock outstanding on
February 29, 2000, was 15,372,435.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the West Coast Bancorp Definitive Proxy Statement dated
March 24, 2000 are incorporated by reference into Part III of Form 10-K.
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INDEX
PART I PAGE
- ------ ----
Item 1. BUSINESS........................................................................2
General....................................................................2
Recent Developments........................................................2
Subsidiaries...............................................................3
Employees..................................................................4
Competition................................................................4
Governmental Policies......................................................4
Supervision and Regulation.................................................5
Item 2. PROPERTIES......................................................................9
Item 3. LEGAL PROCEEDINGS..............................................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................................11
Item 6. SELECTED FINANCIAL DATA........................................................12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................13
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................54
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................54
Item 11. EXECUTIVE COMPENSATION.........................................................54
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................................54
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................54
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................................................55
SIGNATURES.................................................................................56
EXHIBIT INDEX..............................................................................57
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PART I
ITEM 1. BUSINESS
GENERAL
West Coast Bancorp ("Bancorp," "Company," or the "registrant,") an
Oregon corporation and a bank holding company, was organized in August of 1981
under the name "Commercial Bancorp." Commercial Bancorp acquired West Coast
Bancorp, a one-bank holding company based in Newport, Oregon, on February 28,
1995. The combined corporation retained the name "West Coast Bancorp," and moved
its headquarters to Lake Oswego, Oregon. References in this report to "we,"
"us," or "our" refer to Bancorp.
Bancorp remains headquartered in Lake Oswego, and its principal business
activities are conducted through its full-service, commercial bank subsidiary
West Coast Bank ("Bank"), an Oregon State-chartered bank with deposits insured
by the Federal Deposit Insurance Corporation ("FDIC"). At December 31, 1999, the
Bank had facilities in 33 cities and towns in western Oregon and western
Washington, operating a total of 38 full-service and three limited-service
branches. Bancorp also operates West Coast Trust Company, Inc. ("WCT" or "West
Coast Trust") an Oregon trust company that provides agency, fiduciary, and other
related trust services. The market value of assets managed for others at
December 31, 1999 totaled $257.9 million.
Bancorp's primary business is conducted through the Bank and WCT.
Bancorp's four former commercial bank subsidiaries were merged together under
the name West Coast Bank, effective December 31, 1998 (the "Consolidation"). For
more information regarding the Consolidation, see below under "Recent
Developments."
RECENT DEVELOPMENTS
RESULTS
Bancorp's net income for 1999 was $17.3 million, or $1.10 per diluted
share, and its combined equity at December 31, 1999, was $116.8 million, with
15.3 million common shares outstanding and a book value of $7.61 per share. Net
loans of $962.8 million at December 31, 1999, represented approximately 71.07%
of total assets. Bancorp had deposits totaling $1.081 billion at year-end 1999.
For more information regarding Bancorp's results, see "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and "Financial
Statements and Supplementary Data," contained in this report.
THE CONSOLIDATION
During 1998, Bancorp was the parent bank holding company of four wholly
owned, full-service commercial Bank subsidiaries: (1) The Bank of Newport,
Newport, Oregon, (2) The Commercial Bank, Salem, Oregon, (3) Bank of Vancouver,
Vancouver, Washington, and (4) Centennial Bank, Olympia, Washington. On December
31, 1998, The Commercial Bank, Bank of Vancouver, and Centennial Bank were
merged into The Bank of Newport, which changed its name to "West Coast Bank."
MANAGEMENT DEVELOPMENTS
Robert D. Sznewajs was appointed President and Chief Executive Officer
("CEO") of the Bank and Bancorp on January 1, 2000. Mr. Sznewajs was also
appointed a director of the Bank and Bancorp in January 2000. Victor L. Bartruff
former President and CEO of Bancorp and the Bank, resigned as of July 16, 1999.
Ronald T. DeLude served as acting President and CEO of the Company from July 16,
1999 through December 31, 1999. Mr. DeLude currently remains the company's Chief
Operating Officer. Donald A. Kalkofen resigned as Chief Financial Officer,
effective March 31, 2000. Mr. Kalkofen has agreed to provide up to 250 hours of
certain financial an accounting services to the Company through June 30, 2000,
at the Company's request.
Andrew J. Gerlicher resigned as President and CEO of West Coast Trust,
effective May 30, 1999, and was replaced by WCT's current President and CEO
William R. Trout. Prior to Mr. Gerlicher's resignation, Mr. Trout served as a
Vice President and Trust Officer for WCT.
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FUTURE EXPANSION STRATEGY
Bancorp remains committed to community banking and intends West Coast
Bank to remain community-focused. Bancorp's strategic vision continues to
include expansion throughout the west. Bancorp will continue to seek acquisition
opportunities with community banks that share its business philosophies. Bancorp
also intends to grow through development of new branch locations. Consistent
with this strategy, Bancorp opened a new branch in McMinnville, Oregon on
January 25, 1999, and a new branch in Vancouver, Washington on June 1, 1999.
SUBSIDIARIES
THE BANK
West Coast Bank was originally organized in 1925 under the name "The
Bank of Newport," and its head office is currently located in Lake Oswego,
Oregon. The Bank conducts business through 41 branches located in western Oregon
and southwestern Washington. The Oregon branches are located in the following
cities and towns: Salem-four branches, Keizer-three branches, Newport-two
branches, Clackamas, Dallas, Depoe Bay, Forest Grove, Hillsboro, King City, Lake
Oswego, Lincoln City, McMinnville, Molalla, Monmouth, Newberg, North Plains,
Portland, Silverton, Stayton, Sublimity, Tigard, Toledo, Waldport, Wilsonville,
and Woodburn. The Bank's Washington branches are located in the following cities
and towns: Vancouver-three branches, Olympia-two branches, Centralia, Chehalis,
Hoodsport, Lacey, and Shelton. At December 31, 1999, the Bank had deposits
totaling $1.081 billion and net loans totaling $962.8 million.
The primary business strategy of the Bank is to provide community
banking and related services to individuals, professionals, and small to
medium-sized businesses. The Bank emphasizes customer relationships, high
quality service, and individual attention to customer needs. Small to
medium-sized business, the mature market consumer, real estate construction, and
commercial customers are a significant focus. The Bank offers deposit accounts,
safe-deposit boxes, consumer loans, commercial and residential real estate
loans, commercial loans, including operating lines secured by accounts
receivable and inventory, and other traditional bank products. The Bank's
portfolio has some concentration in real estate-secured loans, construction
loans, and agricultural and light manufacturing-related businesses.
Deposit products include regular and interest or package checking
accounts, savings accounts, certificates of deposit, and money market accounts.
Consumer credit products include residential first and second mortgages,
automobile loans, credit cards, lines of credit, and other products. Lending
services include short to intermediate-term loans, inventory financing,
equipment leasing, revolving lines of credit, and other types of credit. The
Bank also offers a VISA credit card program as part of its retail banking
services.
The Bank emphasizes the importance of establishing high quality,
long-term relationships with customers and seeks to implement new products and
services to meet their banking needs and to exceed their banking expectations.
For example, the Bank offers (1) trust services through its affiliate West Coast
Trust, (2) courier services to our small business customers, (3) a Progressive
Banking Program (which uses designated customer deposits exclusively for loans
to and short-term investments in small businesses, affordable housing, and
community development), (4) 24-hour telephone banking, and (5) ExecuBanc
(24-hour access to electronic banking for business customers). Automated teller
machines are available in 42 branch and other locations offering 24-hour
transaction services, including cash withdrawals, deposits, account transfers,
and balance inquiries. The Bank offers electronic banking services through
telephone and personal computers. The Bank also offers securities and insurance
products through an arrangement with a third party broker/dealer. These products
include tax-deferred annuities, single premium whole life insurance, and other
insurance investment products and securities products.
The Bank also operates a commercial real estate loan brokerage division,
which originates and brokers commercial real estate loans to other banks,
insurance companies pension funds, and other sophisticated investors.
BANK LOCATION
The principal office of the Bank is at 5335 Meadows Road, Suite 201,
Lake Oswego, OR 97035 (503) 684-0884.
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WEST COAST TRUST
West Coast Trust provides trust services to individuals, partnerships,
corporations, and institutions. WCT acts as fiduciary of estates and
conservatorships, and as a trustee under various wills, trust, and pension and
profit-sharing plans. These trust and annuity services are available and offered
through a third party broker-dealer with offices at bank branches. The main
office of WCT is located at 301 Church Street, Salem, OR 97301 (503) 399-2993.
TOTTEN, INC.
Totten, Inc. ("Totten"), a Washington corporation, is a subsidiary of
Bancorp that serves as trustee under deeds of trust and holds certain real
estate licenses.
CENTENNIAL FUNDING CORPORATION
In September of 1995, Centennial Holdings, Ltd. ("CHL") acquired all of
the outstanding stock of Centennial Funding Corporation, a Washington
corporation and an FHA-approved mortgage lender that makes home loans and
residential development loans. Following Bancorp's acquisition of CHL,
Centennial Funding Corporation became a wholly owned subsidiary of Bancorp.
ELD, INC.
ELD, Inc, a Washington corporation, is a wholly owned subsidiary of West
Coast Bank. ELD, Inc. was incorporated by Centennial Bank in October, 1990 to
conduct real estate reconveyances and to hold certain other property classified
as other real estate owned. Following the Consolidation, ELD became West Coast
Bank's subsidiary.
EMPLOYEES
At December 31, 1999, Bancorp and its subsidiaries had approximately 594
full-time equivalent employees. None of these employees are represented by labor
unions. A number of benefit programs are available to eligible employees,
including group medical plans, paid sick leave, paid vacation, group life
insurance, 401(k) plans, deferred compensation plans, stock option plans, and an
optional employee stock purchase plan.
COMPETITION
The Bank competes with other banks, as well as with savings and loan
associations, savings banks, credit unions, mortgage companies, investment
banks, insurance companies, securities brokerages, and other financial
institutions. Banking in Oregon and Washington is dominated by several
significant banking institutions, including U.S. Bank, Wells Fargo Bank, Bank of
America, and Washington Mutual Bank, which together account for a majority of
the total commercial and savings bank deposits in Oregon and Washington. These
competitors offer a greater number of branch locations (with statewide branch
networks), the ability to offer higher lending limits, and a variety of services
not offered by the Bank. Bancorp has attempted to offset some of the advantages
of the larger competitors by arranging participations with other banks for loans
above its legal lending limits. Emphasis is placed on local banking featuring
quality service, local responsive decision making, money reinvested into the
community, and participation in nationwide services such as VISA, The Exchange,
Interlink, Plus, and Accel.
Bancorp anticipates that the level of consolidation among financial
institutions in its market area will continue. Other financial institutions,
many with substantially greater resources than Bancorp, compete in the
acquisition market against Bancorp. Some of these institutions, among other
items, have greater access to capital markets, larger cash reserves and a more
liquid currency than Bancorp. Although Bancorp has been able to compete
effectively in the financial services business in its markets to date, there can
be no assurance that it will be able to continue to do so in the future.
GOVERNMENTAL POLICIES
The earnings and growth of Bancorp, the Bank and Bancorp's other
subsidiaries, as well as their existing and future business activities, are
affected not only by general economic conditions, but also by the fiscal and
monetary policies of the Federal government and its agencies, particularly the
Board of Governors of the Federal Reserve System ("FRB"). The FRB implements
national monetary policies (intended to curb inflation and combat recession) by
its open-
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market operations in United States Government securities, by adjusting the
required level of reserves for financial institutions subject to its reserve
requirements, and by varying the discount rates applicable to borrowings by the
bank from the Federal Reserve Bank. The actions of the FRB in these areas
influence the growth of bank loans, investments and deposits, and also affect
interest rates charged on loans and deposits. As banking is a business which
depends largely on interest rate differentials (in general, the difference
between the interest rates paid by the Bank on their deposits and their other
borrowings and the interest rates received by the Bank on loans extended to
their customers and on securities held in the Bank investment portfolio), the
influence of economic conditions and monetary policies on interest rates will
directly affect earnings. The nature and impact of any future changes in
monetary policies cannot be predicted.
SUPERVISION AND REGULATION
GENERAL
INTRODUCTION
The Company is extensively regulated under federal and state law. These
laws and regulations are primarily intended to protect depositors, not
shareholders. The discussion below describes and summarizes certain statutes and
regulations. These descriptions are qualified by reference to the particular
statute or regulation described. Changes in applicable laws or regulations may
have a material effect on our business and prospects. Our operations may also be
affected by changes in the policies of banking and other government regulators.
We cannot accurately predict the nature or extent of the possible future effects
on our business and earnings of changes in fiscal or monetary policies or new
laws and regulations.
CHANGES IN BANKING LAWS AND REGULATIONS
On November 12, 1999, the President signed into law the Financial
Services Modernization Act of 1999. Generally, the act (1) repeals the
historical restrictions that prevented banks from affiliating with securities
firms, (2) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (3) broadens the activities that may
be conducted by national banks and banking subsidiaries of bank holding
companies, (4) provides an enhanced framework for protecting the privacy of
consumer information and (5) addresses a variety of other legal and regulatory
issues affecting both day-to-day operations and long-term activities of
financial institutions.
Bank holding companies, which qualify as and notify the FRB of their
intent to become financial holding companies, will be permitted to engage in a
wider variety of financial activities than permitted under previous law,
particularly with respect to insurance and securities activities. In addition,
in a change from previous law, bank holding companies will be in a position to
be owned, controlled or acquired by any company engaged in financially related
activities, so long as such company meets certain regulatory requirements. The
act also permits national banks (and, in states with wildcard statutes, certain
state banks), either directly or through operating subsidiaries, to engage in
certain non-banking financial activities.
We do not believe that the act will negatively affect our operations in
the short term. However, to the extent the legislation permits banks, securities
firms and insurance companies to affiliate, the financial services industry may
experience further consolidation. This consolidation could result in a growing
number of larger financial companies that offer a wider variety of financial
services than we currently offer, and these companies may be able to
aggressively compete in the markets we currently serve.
BANK HOLDING COMPANY REGULATION
General. Bancorp is a bank holding company as defined in the Bank
Holding Company Act of 1956 ("BHCA"). Accordingly, we are subject to regulation,
supervision and examination by the FRB. In general, the BHCA limits the business
of bank holding companies to owning or controlling banks and engaging in other
activities closely related to banking. Bancorp must file reports with the FRB
and must provide it with such additional information as it may require.
Holding Company Bank Ownership. The BHCA requires every bank holding
company to obtain the prior approval of the FRB before (1) acquiring, directly
or indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares, (2) acquiring all or substantially all of the assets of another
bank or bank holding company, or (3) merging or consolidating with another bank
holding company.
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Holding Company Control of Nonbanks. With some exceptions, the BHCA also
prohibits a bank holding company from acquiring or retaining direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank or bank holding company, or from engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by FRB
regulation or order, have been identified as activities closely related to the
business of banking or of managing or controlling banks.
Transactions with Affiliates. Subsidiary banks of a bank holding company
are subject to restrictions imposed by the Federal Reserve Act on extensions of
credit to the holding company or its subsidiaries, on investments in their
securities and on the use of their securities as collateral for loans to any
borrower. These regulations and restrictions may limit Bancorp's ability to
obtain funds from the Bank for its cash needs, including, funds for payment of
dividends, interest, and operational expenses.
Tying Arrangements. We are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither Bancorp nor its subsidiaries may condition an extension of credit to a
customer on either (1) a requirement that the customer obtain additional
services provided by us or (2) an agreement by the customer to refrain from
obtaining other services from a competitor.
Support of Subsidiary Banks. Under FRB policy, Bancorp is expected to
act as a source of financial and managerial strength to the Bank. This means
that Bancorp is required to commit, as necessary, resources to support the Bank.
Any capital loans made by Bancorp to the Bank would be subordinate in priority
to deposits and to certain other indebtedness of the Bank.
State Law Restrictions. As an Oregon corporation, Bancorp is subject to
certain limitations and restrictions under applicable Oregon corporate law. For
example, state law restrictions in Oregon include limitations and restrictions
relating to: indemnification of directors, distributions to shareholders,
dividend declarations, transactions involving directors, officers or interested
shareholders, maintenance of books, records, and minutes, and observance of
certain corporate formalities.
BANK REGULATION
General. The Bank is an Oregon commercial bank operating in Oregon and
Washington, with deposits insured by the FDIC. Accordingly, the Bank is subject
to the supervision and regulation of the Oregon Department of Consumer and
Business Services, the Washington Department of Financial Institutions, and the
FDIC. These agencies have the authority to prohibit banks from engaging in what
they believe constitute unsafe or unsound banking practices.
CRA. The Community Reinvestment Act ("CRA") requires that, in connection
with examinations of financial institutions within their jurisdiction, the FRB
or the FDIC evaluate the record of the financial institution in meeting the
credit needs of its local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of the institution.
These evaluations are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders or any related interests
of those persons. Extensions of credit (1) must be made on substantially the
same terms, including interest rates and collateral as, and follow credit
underwriting procedures that are not less stringent than, those prevailing at
the time for comparable transactions with persons not covered above and who are
not employees, and (2) must not involve more than the normal risk of repayment
or present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to insiders. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties, the imposition of a cease and desist order, and other regulatory
sanctions.
Regulation of Management. Federal law (1) sets forth circumstances under
which officers or directors of a bank may be removed by the institution's
federal supervisory agency; (2) places restraints on lending by a bank to its
executive officers, directors, principal shareholders, and their related
interests; and (3) prohibits management personnel of a bank from serving as a
director or in other management positions of another financial institution whose
assets exceed a specified amount or which has an office within a specified
geographic area.
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FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
("FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit these purchases. Additionally, banks are permitted to merge with banks
in other states, as long as the home state of neither merging bank has opted out
under the legislation. The Interstate Act requires regulators to consult with
community organizations before permitting an interstate institution to close a
branch in a low-income area.
Under recent FDIC regulations, banks are prohibited from using their
interstate branches primarily for deposit production. The FDIC has accordingly
implemented a loan-to-deposit ratio screen to ensure compliance with this
prohibition.
Oregon and Washington each enacted "opting in" legislation in accordance
with the Interstate Act provisions allowing banks to engage in interstate merger
transactions, subject to certain "aging" requirements. Both states restrict an
out-of-state bank from opening de novo branches. However, once an out-of-state
bank has acquired a bank within the state, either through merger or acquisition
of all or substantially all of the bank's assets, the out-of-state bank may open
additional branches within the state.
DEPOSIT INSURANCE
The deposits of The Bank are currently insured to a maximum of $100,000
per depositor through the Bank Insurance Fund ("BIF") administered by the FDIC.
The Bank is required to pay semiannual deposit insurance premium assessments to
the FDIC.
FDICIA included provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
FDICIA also permits the FDIC to make special assessments on insured depository
institutions in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources or for any other purpose the FDIC deems necessary. The FDIC has
implemented a risk-based insurance premium system under which banks are assessed
insurance premiums based on how much risk they present to the BIF. Banks with
higher levels of capital and a low degree of supervisory concern are assessed
lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern.
DIVIDENDS
The principal source of Bancorp's cash reserves are dividends received
from the Bank. The payment of dividends is subject to government regulation, in
that regulatory authorities may prohibit banks and bank holding companies from
paying dividends in a manner that would constitute an unsafe or unsound banking
practice. In addition, a bank may not pay cash dividends if doing so would
reduce the amount of its capital below that necessary to meet minimum applicable
regulatory capital requirements. Oregon Law also limits a bank's ability to pay
dividends. Under these restrictions, as of December 31, 1999, the Bank could
have declared dividends of approximately $24 million in the aggregate, without
obtaining prior regulatory approval.
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CAPITAL ADEQUACY
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities.
The FDIC and FRB use risk-based capital guidelines for banks and bank
holding companies. These are designed to make such capital requirements more
sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the FRB has noted
that bank holding companies contemplating significant expansion programs should
not allow expansion to diminish their capital ratios and should maintain ratios
well in excess of the minimum. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier I capital. Tier I
capital for bank holding companies includes common shareholders' equity, certain
qualifying perpetual preferred stock and minority interests in equity accounts
of consolidated subsidiaries, less intangibles.
The FRB also employs a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The FRB requires a minimum leverage ratio of 3%. However,
for all but the most highly rated bank holding companies and for bank holding
companies seeking to expand, the FRB expects an additional cushion of at least
1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed to
the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized," depending on the category to which they are
assigned, are subject to certain mandatory supervisory corrective actions.
EFFECTS OF GOVERNMENT MONETARY POLICY
Our earnings and growth are affected not only by general economic
conditions, but also by the fiscal and monetary policies of the federal
government, particularly the FRB. The FRB can and does implement national
monetary policy for purposes such as curbing inflation and combating recession,
but its open market operations in U.S. government securities, control of the
discount rate applicable to borrowings from the FRB, and establishment of
reserve requirements against certain deposits, influence the growth of bank
loans, investments and deposits, and also affect interest rates charged on loans
or paid on deposits. The nature and impact of future changes in monetary
policies and their impact on the Company cannot be predicted with certainty.
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ITEM 2. PROPERTIES
The principal properties of the registrant are comprised of the banking
facilities owned by the Bank. The Bank owns a total of 23 buildings hosting its
branch offices and owns the land under 20 of those buildings. Some significant
properties owned by the Bank are as follows:
(1) Land, administrative offices and drive-up teller facilities in Salem,
Oregon with approximately 40,000 square feet of space;
(2) Land and the building housing a branch and administrative offices in
Newport, Oregon, consisting of approximately 15,640 square feet of
space;
(3) A building in Vancouver, Washington that is leased to another party
under a ground lease at a monthly rental of $6,771;
(4) A building and the land under it in Lacey, Washington that is home to
the Bank's Lacey branch and contains some administrative offices in
approximately 12,000 square feet of space; and
(6) A building and land in Shelton, Washington with approximately 7,500
square feet that contains data processing and communications equipment.
The Bank leases office space in Lake Oswego, Oregon, for its headquarter
offices. The Bank leases a building and land in Salem, Oregon, where the Bank's
data center is located. The Bank also leases office space in Wilsonville, Oregon
for loan servicing and operations activity. In addition, the Bank leases space
at approximately 26 other locations for branch and other offices. The aggregate
monthly rental on all properties leased by Bancorp and the Bank is approximately
$133,000.
West Coast Trust's main office is in Salem where it leases space from
the Bank. West Coast Trust also has offices in Portland, Oregon, Newport,
Oregon, and Vancouver, Washington, where it leases space from the Bank.
ELD, Inc. holds a one-third partnership interest in a building and land
in Sequim, Washington. This interest was acquired before Bancorp purchased ELD's
former parent Centennial Bank. Bancorp is currently seeking to divest of its
interest in this property.
9
11
ITEM 3. 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 this 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. The accompanying
financial statements do not reflect any loss accrual in connection with this
matter. Management believes it is probable the Company may experience a loss;
however, the Company is not currently able to reasonably estimate the amount of
any loss. The magnitude of any loss the Company may incur may depend upon the
market value of the Lincoln County Property. The market value of the Lincoln
County Property may depend upon the feasibility of a development project
currently planned and the ability of the Bank to obtain or maintain required
permits in connection with that project. In addition, the Bank may incur
significant additional expenses collecting the loan, foreclosing on the
collateral, and pursuing development of the Lincoln County Property. These
expenses and the market value of the Lincoln County Property could adversely
impact the Company's future financial statements. The Company expects shortly to
receive the results of an appraisal of the Lincoln County Property. These
results may enable the Company to in the near future estimate the amount or
range of any potential loss.
This section contains certain "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This
statement is included for the express purpose of availing 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, (4)
factors affecting the real estate market and property values in Lincoln County,
Oregon, (5) factors that may delay the Company's receipt of appraisal results,
(6) actual market or sale values of property can differ from appraised values,
and (6) other risks inherent in property development. Readers are cautioned not
to place undue reliance on these forward looking statements, which reflect
management's analysis only as of the date of the statement. Bancorp undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this report.
Readers should carefully review the risk factors described in this and other
documents Bancorp files from time to time with the Securities and Exchange
Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
10
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK PRICE AND DIVIDENDS
West Coast Bancorp common stock trades on The Nasdaq Stock Market under
the symbol "WCBO" and its primary market makers are: Dain Rauscher, Inc.;
Herzog, Heine, Geduld, Inc.; Hoefer & Arnett, Inc.; Keefe, Bruyette & Woods,
Inc.; Knight Securities, LP; Pacific Crest Securities; Piper Jaffray Companies,
Inc.; Ragen McKenzie Inc.; Sandler O'Neill & Partners, LP; Sherwood Securities
Corp.; and Spear, Leeds & Kellogg. The high and low sale prices of our common
stock for the periods indicated are shown below in the table. The prices below
do not include retail mark-ups, mark-downs or commissions, and may not represent
actual transactions. All the per share information have been adjusted
retroactively for all stock dividends and splits previously issued. As of
December 31, 1999, there were approximately 5,400 shareholders of common stock
of record.
1999 1998
-------------------------------- ---------------------------------
Market Price Market Price
---------------- Cash dividend ---------------- Cash dividend
High Low declared High Low declared
------ ------ ------------- ------ ------ -------------
1st Quarter........... $19.89 $15.11 $0.050 $22.52 $19.84 $0.041
2nd Quarter........... $17.67 $15.17 $0.050 $22.52 $18.03 $0.041
3rd Quarter........... $16.25 $13.07 $0.065 $20.45 $13.12 $0.050
4th Quarter........... $15.75 $12.75 $0.065 $20.80 $13.43 $0.050
11
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with West
Coast Bancorp's (Bancorp or the Company) consolidated financial statements and
the accompanying notes presented in this report. The per share information has
been adjusted retroactively for all stock dividends and splits previously
issued.
(Dollars in thousands, except per share data) Year ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Interest income ......................................... $ 97,363 $ 97,053 $ 89,065 $ 75,586 $ 62,968
Interest expense ........................................ 36,890 36,431 32,262 26,596 22,959
----------- ----------- ----------- ----------- -----------
Net interest income .................................. 60,473 60,622 56,803 48,990 40,009
Provision for loan loss ................................. 2,190 2,900 3,936 2,571 1,200
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan loss ....... 58,283 57,722 52,867 46,419 38,809
Noninterest income ...................................... 16,234 19,159 14,150 9,875 9,606
Noninterest expense ..................................... 49,271 56,098 45,394 38,814 33,653
----------- ----------- ----------- ----------- -----------
Income before income taxes .............................. 25,246 20,783 21,623 17,480 14,762
Provision for income taxes .............................. 7,914 6,724 7,184 5,804 4,154
----------- ----------- ----------- ----------- -----------
Net income .............................................. $ 17,332 $ 14,059 $ 14,439 $ 11,676 $ 10,608
=========== =========== =========== =========== ===========
Per share data:
Basic earnings per share ............................. $ 1.12 $ 0.91 $ 0.96 $ 0.79 $ 0.74
Diluted earnings per share ........................... $ 1.10 $ 0.87 $ 0.92 $ 0.77 $ 0.72
Cash dividends ....................................... $ 0.23 $ 0.18 $ 0.15 $ 0.13 $ 0.13
Period end book value ................................ $ 7.61 $ 7.48 $ 6.63 $ 5.72 $ 5.02
Weighted average common shares
outstanding ....................................... 15,790,500 16,143,758 15,700,556 15,137,213 14,732,037
Total assets ............................................ $ 1,354,687 $ 1,255,423 $ 1,117,826 $ 940,297 $ 766,658
Total deposits .......................................... $ 1,080,798 $ 1,108,457 $ 958,482 $ 806,300 $ 664,385
Total long-term borrowings .............................. $ 65,689 $ 20,260 $ 22,446 $ 28,583 $ 10,188
Net loans ............................................... $ 962,817 $ 849,599 $ 766,491 $ 711,374 $ 512,599
Stockholders' equity .................................... $ 116,793 $ 117,225 $ 101,140 $ 85,381 $ 72,660
Financial ratios:
Return on average assets ............................. 1.37% 1.21% 1.43% 1.39% 1.51%
Return on average equity ............................. 14.86% 12.97% 15.75% 14.93% 16.33%
Average equity to average assets ..................... 9.24% 9.30% 9.10% 9.29% 9.22%
Dividend payout ratio ................................ 20.49% 21.14% 15.97% 16.36% 16.83%
Efficiency ratio (1)(2) .............................. 62.37% 68.84% 62.77% 64.47% 65.86%
Net loans to assets .................................. 71.07% 67.67% 68.57% 75.65% 66.86%
Average yields earned (1)(2) ......................... 8.54% 9.16% 9.70% 9.99% 10.07%
Average rates paid ................................... 3.91% 4.16% 4.25% 4.22% 4.40%
Net interest spread (1)(2) ........................... 4.63% 5.00% 5.45% 5.77% 5.67%
Net interest margin (1)(2) ........................... 5.38% 5.79% 6.23% 6.54% 6.48%
Nonperforming assets to total assets ................. 0.34% 0.46% 0.43% 0.28% 0.22%
Allowance for loan loss to total loans ............... 1.38% 1.44% 1.35% 1.18% 1.26%
Allowance for loan loss to
nonperforming assets .............................. 289.95% 217.41% 218.50% 320.40% 397.32%
(1) Interest earned on nontaxable securities has been computed on a 34% tax
basis for 1998 through 1995.
(2) Interest earned on nontaxable securities has been computed on a 35% tax
equivalent basis in 1999.
12
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD LOOKING STATEMENT DISCLOSURE
In addition to historical information, this 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; year 2000 issues; 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
Years Ended December 31, 1999, 1998 and 1997.
OVERVIEW. During 1998 and 1999, we restructured by merging our four bank
subsidiaries into one bank called "West Coast Bank". The results for these years
reflect the impact of the costs of this restructuring. In addition, during 1998,
we completed an acquisition transaction that extended our market further into
Washington. The 1997 and 1998 results reflect costs associated with this
acquisition. Our assets were $1.355 billion as of December 31, 1999, an increase
of $838 million, or 162%, from $517 million (before pooling transactions) at
December 31, 1995. This rapid growth is attributable to both our acquisitions
and the Company's strong internal asset generation.
Our net income for 1999 was $17.3 million, compared with $14.1 million
in 1998 and $14.4 million in 1997. Diluted earnings per share for the three
years ended 1999, were $1.10, $0.87, and $0.92. These results were impacted by
several non-recurring events:
- 1998 income was reduced by $1.1 million for charges associated with
our acquisition of CHL, WA. These charges were for conversion costs of
$569,000 (pretax), and an increase in the provision for loan losses of
$1.0 million (pretax) to bring the CHL's allowance for loan loss
methodology in line with Bancorp practices.
- Nonrecurring restructuring charges of $2.4 million ($3.8 million
pretax) were incurred in 1998, and $558,000 ($888,999 pretax) were
incurred in 1999.
- The 1997 results were favorably impacted by a $1.095 million after tax
gain on sale of servicing rights offset by merger expenditures of
$905,000, after tax.
After adjusting for these nonrecurring items, our operating income was
$17.9 million, $17.6 million and $14.2 million for the years ended December 31,
1999, 1998 and 1997, respectively.
Net interest income on a tax equivalent basis totaled $62.9 million for
the year ended December 31, 1999, a less than one percent increase over $62.7
million for the same period in 1998, which was up 7.92% over 1997. Noninterest
income was down in 1999 from the previous year due mainly to slower revenue
produced in our secondary real estate loan sales divisions and smaller profits
generated on our trust assets. Noninterest income in 1997 reflected a one-time
gain on the sales of servicing rights on a loan portfolio. Noninterest expenses
decreased in 1999, primarily due to our restructuring efforts and the related
charges, as well as the acquisitions' costs recorded in the 1998 and 1997
results.
13
15
ANALYSIS OF NET INTEREST INCOME. The following table displays
information on the yields on average interest earning assets, expense on
interest bearing liabilities, and net yields on interest earning assets for the
periods indicated on a tax equivalent basis. This information can be used to
follow the changes in our yields and rates and the changes in our earning assets
and liabilities over the past three years:
(Dollars in thousands) Year Ended December 31, Increase (Decrease) Change
------------------------ ------------------------------- --------------
1999 1998 1997 99-98 98-97 99-98 98-97
---------- ---------- -------- ------- -------- ----- ------
Interest and fee income (1)(2) ............... $ 99,741 $ 99,108 $ 90,340 $ 633 $ 8,768 0.64% 9.71%
Interest expense ............................. $ 36,890 $ 36,431 $ 32,262 $ 459 $ 4,169 1.26% 12.92%
Net interest income (1)(2) ................... $ 62,851 $ 62,677 $ 58,078 $ 174 $ 4,599 0.28% 7.92%
Average interest earning assets .............. $1,167,597 $1,082,035 $931,578 $85,562 $150,457 7.91% 16.15%
Average interest bearing liabilities ......... $ 942,904 $ 875,368 $758,614 $67,536 $116,754 7.72% 15.39%
Average interest earning assets/
Average interest bearing liabilities ..... 123.83% 123.61% 122.80% 0.22 0.81
Average yields earned (1)(2) ................. 8.54% 9.16% 9.70% (0.62) (0.54)
Average rates paid ........................... 3.91% 4.16% 4.25% (0.25) (0.09)
Net interest spread (1)(2) ................... 4.63% 5.00% 5.45% (0.37) (0.45)
Net interest margin (1)(2) ................... 5.38% 5.79% 6.23% (0.41) (0.44)
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis for 1998 and 1997.
(2) Interest earned on nontaxable securities has been computed on a 35% tax
equivalent basis for 1999.
NET INTEREST INCOME. As the above chart displays, for years ended
December 31, 1999, 1998 and 1997, our average interest earning assets grew to
$1.168 billion, from $1.082 billion and $931.6 million, respectively. During the
same periods, average interest bearing liabilities were $942.9 million, $875.4
million and $758.6 million, respectively. The percentage of our average interest
earning assets to average interest bearing liabilities increased to 123.83% in
1999, from 123.61% in 1998 and 122.80% in 1997. During the same periods the net
interest margins were 5.38%, 5.79% and 6.23%, respectively. The decreases in the
net interest margins and related yields or spreads were due mainly to a changing
interest rate environment, increased pricing competition, a shift in some of the
asset mix, and an increased reliance on borrowed funds. We expect that these
factors will continue to pressure our net interest margins and spreads. Net
interest income on a tax-equivalent basis only increased $174,000, or 0.28%, to
$62.9 million in 1999 from $62.7 million in 1998, which was up from $58.1
million in 1997. The increases in our net interest income were due mainly to
earning assets growth. Average interest earning assets increased 7.91% in 1999
from 1998 and 16.15%, in 1998 over 1997.
We experienced a decrease in the net interest spread of 37 basis points
in 1999 to 4.63%, from 5.00% in 1998, which was down 45 basis points from 5.45%
in 1997. The average yield earned on interest earning assets was 8.54% in 1999,
9.16% in 1998 and 9.70% in 1997. Average interest bearing liabilities increased
$67.5 million, or 7.72%, to $942.9 million for the year ended December 31, 1999,
from $875.4 million in 1998 and $758.6 million in 1997, while the average rates
paid declined over the period to 3.91%, from 4.16%, and 4.25%, respectively. Our
loan portfolio experienced growth in 1999, ending the year at $976.3 million, up
$114.2 million, or 13.25% from $862.1 million at December 31, 1998. The deposit
base decreased to $1.081 billion at December 31, 1999, a reduction of $27
million or 2.44% from $1.108 billion at the end of 1998. During our restructure,
we experienced deposit run-off of approximately $60 million in our South Puget
Sound Region. This run-off was mainly attributable to staff turnover and the
short period of time from the close of the acquisition of this unit to the
actual name change and restructuring events. We also experienced pricing
pressure from our customers and the competition, mainly from late 1998 through
the first half of 1999, causing certain of our loans to be re-priced downward,
reducing the yields on these earning assets.
14
16
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID. The following
table sets forth, for the periods indicated, information with regard to (1)
average balances of assets and liabilities, (2) the total dollar amounts of
interest income on interest earning assets and interest expense on interest
bearing liabilities, (3) resulting yields or costs, (4) net interest income, and
(5) net interest spread. Nonaccrual loans have been included in the tables as
loans carrying a zero yield. Loan fees are recognized as income using the
interest method over the life of the loan.
(Dollars in thousands) 1999 1998 1997
------------------------------ ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1) Balance Paid Rate(1)
------------ -------- ------- ----------- -------- ------- ----------- -------- ------
ASSETS:
Interest earning balances
due from banks ................. $ 5,068 $ 257 5.08% $ 31,178 $ 1,575 5.05% $ 29,195 $ 1,624 5.56%
Federal funds sold ............... 862 44 5.06 7,667 422 5.50 1,026 53 5.15
Taxable securities ............... 160,798 10,205 6.35 138,387 8,896 6.43 104,375 6,833 6.55
Nontaxable securities(2)(3) ...... 89,689 6,794 7.57 77,536 6,044 7.80 43,231 3,751 8.68
Loans, including fees(4) ......... 911,180 82,441 9.05 827,267 82,171 9.93 753,721 78,079 10.36
---------- ------- ---- ---------- ------- ---- ---------- ------- -----
Total interest earning
assets ..................... 1,167,597 99,741 8.54% 1,082,035 99,108 9.16% 931,548 90,340 9.70%
Allowance for loan loss......... (13,022) (11,971) (9,474)
Premises and equipment.......... 30,096 29,273 26,327
Other assets.................... 77,116 66,625 58,461
---------- ---------- ----------
Total assets.................. $1,261,787 $1,165,962 $1,006,862
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS'
Savings and interest bearing
demand deposits............ $545,682 $16,315 2.99% $ 514,287 $16,460 3.20% $ 455,882 $16,382 3.59%
Certificates of deposit...... 347,130 17,911 5.16 322,671 17,798 5.52 272,242 14,075 5.17
Short-term borrowings........ 30,583 1,675 5.48 7,081 359 5.08 7,943 527 6.63
Long-term borrowings......... 19,509 989 5.07 31,329 1,814 5.79 22,547 1,278 5.67
---------- ------- ---- ---------- ------- ---- ---------- ------- -----
Total interest bearing
liabilities.............. 942,904 36,890 3.91% 875,368 36,431 4.16% 758,614 32,262 4.25%
Demand deposits.............. 193,888 175,688 147,770
Other liabilities............ 8,355 6,474 8,822
---------- ---------- ----------
Total liabilities.......... 1,145,147 1,057,530 915,206
Shareholders' equity......... 116,640 108,432 91,656
---------- ---------- ----------
Total liabilities and
shareholders' equity..... $1,261,787 $1,165,962 $1,006,862
========== ========== ==========
Net interest income.......... $62,851 $62,677 $58,078
======= ======= =======
Net interest spread.......... 4.63% 5.00% 5.45%
==== ==== ====
(1) Yield/rate calculations have been based on more detailed information than
presented and therefore may not recompute exactly due to rounding.
(2) Interest earned on nontaxable securities has been computed on a 34 percent
tax equivalent basis in 1998 and 1997.
(3) Interest earned on nontaxable securities has been computed on a 35 percent
tax equivalent basis in 1999.
(4) Includes balances for loans held for sale.
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17
ANALYSIS OF CHANGE IN INTEREST DIFFERENTIAL. The following table sets
forth the amounts of the changes in consolidated net interest income
attributable to changes in volume and to changes in interest rates. Changes not
due solely to volume or rate are allocated to rate and changes due to new
product lines are allocated to volume.
Year Ended December 31,
------------------------------------------------------------------------
1999 versus 1998 1998 versus 1997
----------------------------------- ---------------------------------
Total Total
Increase (Decrease) Increase Increase (Decrease) Increase
Due to (Decrease) Due to (Decrease)
--------------------- ---------- --------------------- ---------
(Dollars in thousands) Volume Rate Volume Rate
-------- -------- -------- --------
Interest income:
Interest earning balances due
from banks ......................................... $(1,319) $ 1 $(1,318) $ 110 $ (159) $ (49)
Federal funds sold ................................... (375) (3) (378) 343 26 369
Investment security income:
Interest on taxable securities ..................... 1,441 (132) 1,309 2,227 (164) 2,063
Interest on nontaxable securities (TEA)(1)(2) ...... 947 (197) 750 2,977 (684) 2,293
Loans, including fees on loans ....................... 8,335 (8,065) 270 7,615 (3,523) 4,092
------- ------- ------- ------- ------- ------
Total interest income TEA (1)(2) ................... 9,029 (8,396) 633 13,272 (4,504) 8,768
Interest expense:
Savings and interest bearing demand .................. 1,005 (1,150) (145) 2,099 (2,021) 78
Certificates of deposit .............................. 1,349 (1,236) 113 2,607 1,116 3,723
Short-term borrowings ................................ 1,192 124 1,316 (57) (111) (168)
Long-term borrowings ................................. (684) (141) (825) 498 38 536
------- ------- ------- ------- ------- ------
Total interest expense ............................. 2,862 (2,403) 459 5,147 (978) 4,169
------- ------- ------- ------- ------- ------
Net interest spread (1)(2) ......................... $ 6,167 $(5,993) $ 174 $ 8,125 $(3,526) $4,599
======= ======= ======= ======= ======= ======
(1) Tax-exempt income has been adjusted to a tax-equivalent basis at a 34
percent tax equivalent basis in 1998 and 1997.
(2) Tax-exempt income has been adjusted to a tax-equivalent basis at a 35
percent tax equivalent basis in 1999.
PROVISION FOR LOAN LOSSES. Provisions for loan losses of $2,190,000,
$2,900,415, and $3,936,000 were recorded for the years ended December 31, 1999,
1998 and 1997, respectively. The 1998 provision included $1.0 million related to
the CHL acquisition. The adjustment brought the allowance for loan loss
methodology of the acquired company in-line with our practices. During 1997, the
provision was impacted by subsequent portfolio activity related to an
acquisition previously made by CHL. CHL increased its provision in 1997 by
$675,000, directly related to the loans acquired, and recorded net charge-offs
in 1997, including those related to the acquired loans of $1.3 million. The 1997
CHL net charge-offs were substantially higher than those experienced in 1996 of
$487,000, prior to this acquisition. Net charge-offs of $1,163,000, $898,000,
and $1,976,000, were recorded in 1999, 1998 and 1997, respectively. The
allowance for loan loss as a percentage of loan totals at December 31, 1999 and
1998, was 1.38%, and 1.44% of total loans, respectively, and the allowance for
loan losses represented 289.95% of our non-performing assets as of December 31,
1999, compared to 217.41% at December 31, 1998.
NONINTEREST INCOME. Noninterest income for the year ended December 31,
1999, was $16.2 million compared to $19.2 million in 1998 and $14.1 million in
1997. The service charges on deposit accounts we collected were $4.5 million,
$4.6 million and $4.1 million for 1999, 1998 and 1997, respectively. The deposit
service charges increased in 1998 over 1997, as deposit balances and accounts
increased. During 1999, service charges on deposits decreased, as we completed
our restructuring. During the restructuring, certain fees charged on some
deposit accounts were waived as some customers may have experienced
conversion-related issues. In addition, our South Puget Sound region experienced
deposit balance run-off, affecting the service charge income. Increases in other
service charges, commissions and fees over the last three years were due to an
increased customer base and transaction volume serviced, mainly in our merchant
bankcard and brokerage operations. Gains on sales of loans were $3.6 million in
1999, $6.4 million during 1998 and $2.4 million during 1997. We experienced
significant volatility in this area as the interest rate environment changed
over the past three years. Our loan sales activity increased during 1998 to an
all-time high during the low interest rate environment the U.S. economy
experienced that year. During 1999, the activity slowed dramatically as the
Federal Reserve Board began raising interest rates. We experienced a slow down
in both refinance activity as well as new loan sales generation during 1999.
Early in 2000, the Board of Governors of the Federal Reserve (FRB) again moved
interest rates upward, and as a result, further negative impacts on the gain on
loan sale revenues can be expected in the future. Trust revenues of $2.1
million, $2.5 million and $1.7 million were earned during 1999, 1998 and 1997,
respectively. While the trust operation has seen the book value of its managed
assets increase over the past three years, the market values of these assets
have declined, as the investments have not faired well in the stock and bond
markets. Our fees in
16
18
the Trust area are mainly generated from the market values of these managed
assets. Loan servicing fees have declined in recent years, as the Bank has
chosen not to add any significant activity to this portfolio. Other noninterest
income fluctuated over the three-year period, with some non-recurring activity
and the growth of the Company. During 1997, Bancorp recognized gains on the sale
of servicing rights of $1,659,420. During 1999 and 1998, no such sale of
servicing rights occurred. Net securities gains were $81,861 in 1999, $ 347,797
in 1998, and net losses of $85,446 were recorded in 1997.
NONINTEREST EXPENSE. Noninterest expenses during the last three years
were $49.3 million in 1999, $56.1 million in 1998 and $45.4 million in 1997.
From 1997 to 1998, we experienced an increase in every reported noninterest
expense category except for professional fees. These increased expenses were
caused mainly by the expansion of our branch system and our services, and the
costs associated with entering new markets. The branch system grew to 40 office
locations at the end of 1998, from 34 at the end of 1995. Our operating costs
also increased during these years, as we felt the added burden of operating four
separate banking entities.
During 1999, operating expenses declined from $56.1 million to $49.3
million. This significant decline in operating costs is attributable to our
restructure. During 1998, we initiated a plan to restructure the Company and
consolidate our four banks into one. The costs recorded that directly related to
the restructure were $3.77 million in 1998 and $859,000 in 1999. The 1999 costs
include $151,000 recorded in marketing expenses in the financial statements.
Salaries and employee benefits decreased in 1999, as we reduced the full-time
equivalent employees from 652 in 1998 to 594 in 1999. In addition, equipment,
printing and office supplies, and other noninterest expenses were reduced as a
result of the restructure. Occupancy expense increased as we expanded. We
continued our branch expansion in 1999 by opening two new locations. We also
closed our small supermarket location during 1999. We expect to continue to grow
through strategically placed offices in 2000 and beyond. In general, opening a
new branch results in higher costs, which are not offset until a certain level
of deposits and loans is achieved. Thus, at least initially, new branches tend
to have an adverse effect on results of operations until earnings grow to cover
overhead. We also moved into a new loan operations center outside of Portland
where we consolidated a number of processing departments in the restructure.
Marketing expenses were higher in 1999, as we marketed our new bank name in the
communities we serve. Professional fees and communications expenses were
essentially the same in 1999 as the prior year.
RESTRUCTURING CHARGES
The 1999 and 1998 results have been impacted by one-time costs resulting
from the consolidation of our separate subsidiary banks into one entity, called
West Coast Bank. The consolidation was completed on December 31, 1998, and the
conversions followed. During 1999, we completed the system and data conversions,
signage changes, name branding, staff reductions, corporate reorganizations, the
opening of a new loan servicing center and consolidation of the loan processing,
among other projects. We incurred $4.63 million in costs for the consolidation,
including costs related to a severance plan, signage, data conversions,
marketing, regulatory and administrative costs. We expect to pay approximately
$315,000 in remaining severance payments; these items have been recognized as
expenses in the results of operations through December 31, 1999. All other
payments related to this restructuring have been completed and are reflected in
the results of operations for 1999 and 1998. We initially projected these costs
of the consolidation at $5 million. We were successful in maintaining the
restructuring costs below our original forecast. Approximately 38% of the costs
incurred were employee program and severance related, which were accrued for in
the third quarter of 1998. The accruals are being charged as payments are made.
The following table summarizes the accrued restructuring charges:
(Dollars in thousands) December 31, December 31,
1999 1998
------------ ------------
Beginning balance, accrued restructuring charges ........... $1,760 $ --
Provision for restructuring charges ........................ 57 1,918
Utilization:
Cash ................................................. 1,502 158
------ ------
Total Utilization .......................................... 1,502 158
------ ------
End of period balance, accrued restructuring charges ....... $ 315 $1,760
====== ======
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.
17
19
To date, we have identified and instituted cost reductions in excess of
the $6 million restructuring goal and, in addition, have identified areas for
enhancing revenues. The reduction of non-interest expenses, and improvement in
the noninterest expense to average asset ratios have occurred, even though the
Company is experiencing growth and expansion. The restructure and cost reduction
efforts have had an impact on revenue growth in the past several quarters. The
South Puget Sound region of the Company, which was acquired via the CHL
acquisition of in February 1998, experienced deposit run-off of approximately
$60 million throughout 1999, following the name change and restructuring. This
run-off was mainly attributable to staff turnover and the short period of time
from the close of the acquisition to the actual name change and restructuring
events. This issue is currently receiving attention. The Company was primarily
inwardly focused in 1999, to effectively execute the restructure plan.
Cash outlays related to one-time restructuring charges have not
materially affected liquidity. Readers are referred to management's "Forward
Looking Statements Disclosure" in connection with this section.
INCOME TAXES
Income tax expense for 1999 was $7.9 million, or 31.3% of income before
income taxes. 1998 was $6.7 million or 32.3% of income before income taxes, and
1997 was $7.2 million or 33.2% of income before income taxes. Income tax expense
has fluctuated over time due to state income taxes and capitalization of certain
merger-related expenditures for income tax purposes, as well as changes in the
income before income taxes of the Company. We anticipate that tax expense will
increase in future years, due to increased income before income taxes, increased
tax rates and a smaller percentage of income being generated from tax exempt
items. Any future merger-related capitalized costs might also increase the tax
provisions. Readers are referred to management's "Forward Looking Statements
Disclosure" in connection with this section.
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is our primary source of income.
Net loans represented 71.07% of total assets as of December 31, 1999. 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 we strive to serve the credit needs of our 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.
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. Increases in nonaccrual loans in
recent years are due primarily to growth in the loan portfolio. The nonaccrual
loans consist of a number of loans in different categories and are largely
secured. For such loans, previously accrued but uncollected interest is charged
against current earnings, and income is only recognized to the extent payments
are subsequently received. Interest income foregone on nonaccrual loans was
approximately $358,000 during 1999.
At December 31, 1999, 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 December 31, 1999 and 1998, the Bank had $0
and $4,628,000 of bankers acceptances, respectively.
18
20
As of December 31, 1999 and 1998, we had $11,996,000 and $19,873,000,
respectively in 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.
(Dollars in thousands) December 31,1999
---------------------- ----------------
Balance, beginning of period $19,873
New loans an advances 564
Principal payments and payoffs (8,441)
-------
Balance, end of period $11,996
=======
The Bank manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities.
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ----------------- ------------------ ------------------ ------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Commercial loans ............ $157,912 16.40% $150,206 17.68% $150,197 19.60% $146,632 20.61% $109,565 21.38%
Real estate construction .... 124,102 12.89 118,171 13.91 112,378 14.66 87,257 12.27 65,163 12.71
Real estate-mortgage ........ 101,579 10.55 113,661 13.38 116,228 15.16 124,230 17.46 87,164 17.00
Real estate-commercial ...... 531,600 55.21 414,169 48.75 323,320 42.18 274,048 38.52 193,035 37.66
Installment and other
consumer .................. 61,104 6.35 65,845 7.75 74,819 9.76 87,698 12.33 64,234 12.53
-------- -------- -------- -------- --------
Total loans ............. 976,297 101.40 862,052 101.47 776,942 101.36 719,865 101.19 519,161 101.28
Allowance for loan loss ..... (13,480) (1.40) (12,453) (1.47) (10,451) (1.36) (8,491) (1.19) (6,562) (1.28)
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans, net ........ $962,817 100.00% $849,599 100.00% $766,491 100.00% $711,374 100.00% $512,599 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
The maturity distribution of selected categories of Bancorp's loan
portfolio at December 31, 1999, and the interest sensitivity are estimated in
the following table.
Commercial Real Estate
(Dollars in thousands) Loans Construction Total
---------- ------------ --------
Maturity distribution:
Due within one year................................ $113,726 $114,177 $227,903
Due after one through five years................... 32,630 8,338 40,968
Due after five years............................... 11,556 1,587 13,143
-------- -------- --------
Total............................................ $157,912 $124,102 $282,014
======== ======== ========
Interest sensitivity:
Fixed-interest rate loans.......................... $ 52,617 $ 5,921 $ 58,538
Floating or adjustable interest rate loans(1)...... 105,295 118,181 223,476
-------- -------- --------
Total............................................ $157,912 $124,102 $282,014
======== ======== ========
(1) Some loans contain provisions which place maximum or minimum limits on
interest rate charges.
The following table presents information with respect to nonperforming
assets.
December 31,
--------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
Loans on nonaccrual status ................... $ 4,316 $ 4,565 $ 4,245 $ 2,228 $ 1,050
Loans past due 90 days or more but not on
nonaccrual status .......................... 8 42 44 97 296
Other real estate owned ...................... 325 1,121 494 324 306
---------- ---------- ---------- -------- --------
Total nonperforming assets ............... $ 4,649 $ 5,728 $ 4,783 $ 2,649 $ 1,652
========== ========== ========== ======== ========
Percentage of nonperforming assets to
total assets ............................... 0.34% 0.46% 0.43% 0.28% 0.22%
Total assets ................................. $1,354,687 $1,255,423 $1,117,826 $940,297 $766,658
19
21
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 and 1998, 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
and 1998 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 history 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,
- 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.
20
22
Executive credit management reviews these conditions quarterly in
discussion with our senior credit officers and Credit Review. 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.
Recently acquired loan portfolios are reviewed and an overall assessment
is made using our methodology as to the adequacy of the loan portfolios, and any
necessary adjustments to the allowance are made as they are identified. A
detailed review of the acquired loan portfolio follows, and our standard loan
grading system is applied to the portfolio. Any further adjustments to the
allowance are recorded in the period they are identified.
At December 31, 1999, our allowance for loan loss was $13.5 million, or
1.38 percent of total loans, and 289.95 percent of total non-performing assets,
compared with an allowance for credit losses at December 31, 1998 of $12.5
million, or 1.44 percent of total loans, and 217.41 percent of total
non-performing assets.
During our 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. Loans are currently measured at
lower of cost or fair value. Leases and certain large groups of smaller balance
homogeneous loans, that are collectively measured for impairment, are excluded.
Impaired loans are charged to the allowance when management believes, after
considering economic and business conditions, collection efforts and collateral
position, that the borrower's financial condition is such that collection of
principal is not probable.
At December 31, 1999, and 1998, the recorded investments in certain
loans that were considered to be impaired were $4,118,000 and $4,423,000,
respectively, all of which was classified as non-performing. Of these impaired
loans, $858,000 and $555,000 had a specific related valuation allowance of
$438,000 and $150,000, respectively, while $3,260,000 and $3,868,000 did not
require a specific valuation allowance. The balance of the allowance for loan
loss in excess of these specific reserves is available to absorb losses from all
loans. The average recorded investment in certain impaired loans for the years
ended December 31, 1999 and 1998, were approximately, $4,252,000 and $3,633,000,
respectively. For the years ended December 31, 1999 and 1998, interest income
recognized on impaired loans totaled $165,000 and $384,000, respectively, all of
which was recognized on a cash basis.
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. At December 31, 1998, the allowance for
loan losses of $12.5 million consisted of a $11.4 million formula allowance, a
$117,000 specific allowance and a $1.0 million unallocated allowance. The
changes in the allocation of the allowance for loan losses from 1998 to 1999,
were due primarily to additions to the loan portfolio, turnover in our
non-performing loans, charge-off activity, enhanced understanding and
measurement of acquired portfolios, and other such relevant factors.
21
23
The following table presents information with respect to certain loan
information.
December 31,
----------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Loans outstanding at end of period ................. $976,297 $862,052 $776,942 $719,865 $519,161
Average loans outstanding during the period ........ $904,931 $816,240 $751,284 $619,205 $483,129
Allowance for loan loss, beginning of period ....... $ 12,453 $ 10,451 $ 8,491 $ 6,562 $ 5,849
Recoveries:
Commercial ....................................... 129 298 218 169 63
Real estate ...................................... 58 47 5 11 --
Installment and consumer ......................... 77 63 52 76 24
-------- -------- -------- -------- --------
Total recoveries ................................. $ 264 $ 408 $ 275 $ 256 $ 87
Loans charged off:
Commercial ....................................... 450 853 1,305 965 301
Real estate ...................................... 487 39 204 62 19
Installment and consumer ......................... 490 414 742 423 254
-------- -------- -------- -------- --------
Total loans charged off .......................... $ 1,427 $ 1,306 $ 2,251 $ 1,450 $ 574
-------- -------- -------- -------- --------
Net loans charged off .............................. (1,163) (898) (1,976) (1,194) (487)
Reserves added through purchase acquisition ........ -- -- -- 552 --
Provision for loan loss ............................ 2,190 2,900 3,936 2,571 1,200
-------- -------- -------- -------- --------
Allowance for loan loss, end of period ............. $ 13,480 $ 12,453 $ 10,451 $ 8,491 $ 6,562
======== ======== ======== ======== ========
Ratio of net loans charged off to average
loans outstanding ................................ .13% .11% .26% .19% .10%
During 1999, net loans charged off were $1,163,000, compared to $898,000
during 1998. The percentage of net loans charged off to average loans
outstanding was 0.13 percent during 1999, compared to 0.11 percent and 0.26
percent for the years ended December 31, 1998 and 1997, respectively. Charge
offs of loans reflect the realization of losses in the portfolio that were
recognized previously through provisions for credit losses.
At December 31, 1999, 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 portfolio.
During the first quarter of 1998, Bancorp recorded a $1.0 million provision
related to the CHL acquisition to bring the allowance for loan loss methodology
in-line with Bancorp practices.
There can be no assurance that the adverse impact of 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.
22
24
CAPITAL RESOURCES
The FRB and Federal Deposit Insurance Corporation (FDIC) have
established minimum requirements for capital adequacy for bank holding companies
and member banks. The requirements address both risk-based capital and leveraged
capital. The regulatory agencies may establish higher minimum requirements if,
for example, a corporation has previously received special attention or has a
high susceptibility to interest rate risk. The FRB and FDIC risk-based capital
guidelines require banks and bank holding companies to have a ratio of tier one
capital to total risk-weighted assets of at least 4% 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 December 31, 1999, Bancorp and the Bank are considered
"Well Capitalized" under the regulatory risk based capital guidelines.
Shareholders' equity was $116.8 million at December 31, 1999, compared
to $117.2 million at December 31, 1998, a decrease of $400,000, or less than 1%,
over that period of time. At December 31, 1999, shareholders' equity, as a
percentage of total assets, was 8.62%, compared to 9.34% at December 31, 1998.
The change was primarily a result of asset growth outpacing the net effect of
income recognition, plus cash from the exercise of stock options, less dividends
and stock repurchased, and the change in net value of the available for sale
investment portfolio. In a rising interest rate environment, the value of the
available for sale portfolio will decline, thus negatively impacting equity. The
opposite would occur in a falling rate environment. Equity decreased less than
1% over the period from December 31, 1998 to December 31, 1999, while assets
grew by 8% over the same period.
As the following table indicates, Bancorp currently exceeds the
regulatory minimum capital ratio requirements.
December 31, 1999
-----------------------------
(Dollars in thousands) Amount Ratio
---------- -----
Tier 1 capital............................. $ 118,397 10.50%
Tier 1 capital minimum requirement......... 45,104 4.00
---------- -----
Excess Tier 1 capital...................... $ 73,293 6.50%
========== =====
Total capital.............................. $ 131,877 11.69%
Total capital minimum requirement.......... 90,249 8.00
---------- -----
Excess total capital....................... $ 41,628 3.69%
========== =====
Risk-adjusted assets....................... $1,128,086
==========
Leverage ratio............................. 9.00%
Minimum leverage requirement............... 3.00
-----
Excess leverage ratio...................... 6.00%
=====
Adjusted total assets...................... $1,315,714
==========
LIQUIDITY AND SOURCES OF FUNDS
The Bank'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 the primary source of new funds. Total deposits were $1.081
billion at December 31, 1999, down from $1.108 billion at December 31, 1998.
Brokered deposits are generally not accepted. We have attempted to attract
deposits in our market areas through competitive pricing and delivery of a
quality product. The deposit decrease in the period is mainly due to the run-off
of balances in the South Puget Sound region following the restructure. Readers
are referred to management's "Restructuring Charges" discussion in connection
with this section.
Management expects to continue relying on customer deposits, maturity of
investment securities, sales of "Available for Sale" securities, loan sales,
loan repayments, net income, Federal Funds markets, advances from FHLB, and
other borrowings to provide liquidity. Although deposit balances at times 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 and
other factors. Borrowings may be used on a short-term and long-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.
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25
INVESTMENT PORTFOLIO
The following table shows the amortized cost and fair value of
Bancorp's investments.
(Dollars in thousands) 1999 1998 1997
--------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Available for sale Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
U.S. Treasury securities ............................. $ 500 $ 501 $ 5,999 $ 6,065 $ 9,540 $ 9,572
U.S. Agency securities ............................... 102,574 100,408 87,971 88,856 76,280 76,513
Obligations of state and political subdivisions ...... 98,344 95,946 103,445 107,689 61,718 63,822
Other Securities ..................................... 59,710 58,754 50,103 50,661 41,097 41,283
-------- -------- -------- -------- -------- --------
Total ............................................ $261,128 $255,609 $247,518 $253,271 $188,635 $191,190
======== ======== ======== ======== ======== ========
(Dollars in thousands) 1999 1998 1997
------------------ ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Held to maturity Cost Value Cost Value Cost Value
--------- ----- --------- ------ --------- -------
U.S. Treasury securities ........................... $-- $-- $ -- $ -- $ -- $ --
U.S. Agency securities .............................
Obligations of state and political subdivisions .... -- -- 2,696 2,909 2,987 3,046
Other Securities ................................... -- -- -- -- -- --
--- --- ------ ------ ------ ------
Total .......................................... $-- $-- $2,696 $2,909 $2,987 $3,046
=== === ====== ====== ====== ======
At December 31, 1999 the net unrealized loss on the investment portfolio
was $5,519,000 representing 2.16% of the total portfolio. Management has no
current plans to sell any of these securities that would result in a material
impact on the results of operation. The following table summarized the
contractual maturities and weighted average yields of investment securities.
One After 5 Due
Year One Thru thru 10 after 10
(Dollars in thousands) Or Less Yield 5 Years Yield Years Yield Years Yield Total Yield
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
U.S. Treasury securities ....... $ 501 5.97% $ -- -- $ -- -- $ -- -- $ 501 5.97%
U.S. Agency securities ......... 548 5.58% 47,481 6.41% 52,379 6.78% 100,408 6.60%
Obligations of state and
political subdivisions(1) .... 2,286 8.63% 23,986 7.48% 47,857 7.28% 21,817 7.24% 95,946 7.35%
Other Securities(2) ............ 18,780 7.19% 23,558 6.54% 12,442 6.88% 3,974 6.72% 58,754 6.83%
------- ------- -------- ------- --------
Total(1) ..................... $22,115 7.27% $95,025 6.72% $112,678 7.01% $25,791 7.16% $255,609 6.94%
======= ======= ======== ======= ========
(1) Yields are stated on a federal tax-equivalent basis at 35 percent.
(2) Does not reflect anticipated maturity from prepayments on mortgage-based and
asset-based securities. Anticipated lives are shorter than contractual
maturities.
DEPOSITS AND BORROWINGS
The following table summarizes the average amount of, and the average
rate paid on, each of the deposit and borrowing categories for the periods
shown.
1999 1998 1997
--------------------------- --------------------------- ---------------------------
(Dollars in thousands) Average Balance Rate Paid Average Balance Rate Paid Average Balance Rate Paid
--------------- --------- --------------- --------- --------------- ---------
Demand ................................. $ 193,888 -- $ 175,688 -- $147,770 --
Savings and interest bearing demand .... 545,682 2.99% 514,287 3.20% 455,882 3.59%
Certificates of deposit ................ 347,130 5.16% 322,671 5.52% 272,242 5.17%
Short-term borrowings .................. 30,583 5.48% 7,081 5.08% 7,943 6.63%
Long-term borrowings ................... 19,509 5.07% 31,329 5.79% 22,547 5.67%
---------- ---- ---------- ---- -------- ----
Total deposits and borrowings .... $1,136,792 3.91% $1,051,056 4.16% $906,384 4.25%
========== ==== ========== ==== ======== ====
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26
As of December 31, 1999 time deposit liabilities are presented below at
the earlier of the next repricing date or maturity.
Time Deposits
of $100,000 or More (1) Other Time Deposits (2)
----------------------- ------------------------
(Dollars in thousands) Amount Percent Amount Percent
------- ------- -------- -------
Reprice/mature in three months or less ..................... $26,304 30.24% $ 64,604 25.14%
Reprice/mature after three months through six months ....... 21,883 25.16 67,518 26.28
Reprice/mature after six months through one year ........... 25,095 28.86 73,585 28.64
Reprice/mature after one year through five years ........... 12,406 14.27 47,473 18.47
Reprice/mature after five years ............................ 1,282 1.47 3,777 1.47