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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, 2000 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 January 31, 2001, was $168,816,000. The
number of shares of Registrant's Common Stock outstanding on January 31, 2001,
was 16,370,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the West Coast Bancorp Definitive Proxy Statement for the
2001 annual meeting of shareholders are incorporated by reference into Part III
of Form 10-K.
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INDEX
PART I PAGE
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Item 1. BUSINESS..........................................................................2
General.......................................................................2
Recent Developments...........................................................2
Subsidiaries..................................................................3
Employees.....................................................................4
Competition...................................................................4
Governmental Policies.........................................................5
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
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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.......................26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................................53
PART III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................53
Item 11. EXECUTIVE COMPENSATION...........................................................53
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................................53
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................53
PART IV
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Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.........................................................................54
SIGNATURES..................................................................................55
EXHIBIT INDEX...............................................................................56
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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 merged with 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 is 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, 2000, the
Bank had facilities in 32 cities and towns in western Oregon and western
Washington, operating a total of 37 full-service and three limited-service
branches. Bancorp also owns 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, 2000 totaled $252.1 million.
Bancorp's primary business is conducted through the Bank and West Coast
Trust. 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 2000 was $11.6 million, or $.69 per diluted
share, and its combined equity at December 31, 2000, was $121.3 million, with
16.4 million common shares outstanding and a book value of $7.39 per share. Net
loans of $986.0 million at December 31, 2000, represented approximately 72.8% of
total assets. Bancorp had deposits totaling $1.077 billion at year-end 2000. For
more information regarding Bancorp's results, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Financial
Statements and Supplementary Data," contained in this report.
CONSOLIDATION OF BANKING SUBSIDIARIES
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."
CHANGES IN MANAGEMENT TEAM
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. Donald A. Kalkofen
resigned as Chief Financial Officer, effective March 31, 2000. On April 3, 2000,
Anders Giltvedt was named Executive Vice President and Chief Financial Officer.
Ronald T. Delude former Executive Vice President and Chief Operating Officer
resigned as of May 31, 2000. On May 1, 2000, Brian Cooper was appointed
Executive Vice President of Retail and Business Banking. Gregory B. Schumacher
was appointed Vice President/Audit manager on May 26, 2000. Shauna L. Vernal
resigned as General Counsel as of September 5, 2000. Richard R. Rasmussen was
appointed Executive Vice President and General Counsel on October 11, 2000.
Xandra T. McKeown was appointed Senior Vice President of Business Banking on
November 9, 2000.
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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 includes expansion
of business banking market penetration, as well as greater distribution
capability in the Pacific Northwest. Bancorp will continue to seek acquisition
opportunities with community banks that share its business philosophies. Bancorp
also intends to grow its distribution and reach through development of new
branch locations in key growth markets. Consistent with that strategy we
announced our intention to open a new branch in Canby, Oregon, approximately
mid-year 2001.
SUBSIDIARIES
WEST COAST 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 40 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-two branches, Olympia-two branches, Centralia, Chehalis,
Hoodsport, Lacey, and Shelton. At December 31, 2000, the Bank had deposits
totaling $1.077 billion and net loans totaling $986.0 million.
The primary business strategy of the Bank is to provide comprehensive
banking and related financial services tailored to individuals, professionals,
and small to medium-sized businesses. The Bank emphasizes comprehensive product
lines and convenient access typically associated with larger financial
organizations, combined with the high quality service, decision making
authority, market knowledge, and community orientation of a local financial
institution. The Bank has significant focus on four targeted segments: 1) High
value consumers (including the mature market), 2) smaller businesses with credit
needs under $250,000, 3) medium-sized commercial businesses with credit needs
over $250,000 up to $15 million, and 4) commercial real estate and
construction-related businesses.
For consumer banking customers, the Bank offers a variety of flexible
checking and savings plans, as well as competitive borrowing solutions,
including lines of credit, home equity loans, mortgages, credit cards, and other
types of consumer loans. Customers have access to our products and services
through a variety of convenient channels such as 24 hour a day, 7 days a week
phone and Internet channels, as well as through ATMs (both shared and
proprietary networks) and our 40 branch locations.
For business banking customers, the Bank offers tailored deposit plans,
packaged checking with sophisticated, Internet-based cash management and a full
array of investment services all with online and/or CD-ROM information
reporting. Customized financing packages for commercial, commercial real estate
and construction purposes are developed from a suite of loan offerings,
including: Short-to-intermediate term loans, inventory financing, equipment
leasing, revolving lines-of-credit, SBA loans, business VISA credit cards, and
other types of credit. The Bank's portfolio has some concentration in real
estate-secured loans, construction loans, and agricultural and light
manufacturing-related businesses.
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 MAIN OFFICE
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. Annuity products and services are available and offered
through a third party broker-dealer with offices at certain 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 can make 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, 2000, Bancorp and its subsidiaries had approximately 563
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, restricted stock plan,
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, as well as leveraging technology and third party
arrangements to better compete in targeted customer segments. 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. Additionally, the rapid adoption of financial
services through the internet has reduced the barrier to entry by financial
services providers physically located outside our market area. 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.
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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-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
We are 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 and summaries are qualified in their entirety by reference to
the particular statute or regulation. 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 federal or state laws and regulations.
CHANGES IN BANKING LAWS AND REGULATIONS
The laws and regulations that affect banks and bank holding companies
have recently undergone significant changes brought about by the Financial
Services Modernization Act of 1999. Generally, the act (i) repeals the
historical restrictions on preventing banks from affiliating with securities
firms, (ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (iii) broadens the activities that may
be conducted by national banks and banking subsidiaries of bank holding
companies, (iv) provides an enhanced framework for protecting the privacy of
consumer information and (v) 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 and elect to become financial
holding companies are 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 institutions 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.
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BANK HOLDING COMPANY REGULATION
General. Bancorp is a bank holding company as defined in the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and is therefore 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.
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 tying
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 a bank holding company makes to its subsidiary banks are
subordinate to deposits and to certain other indebtedness of those subsidiary
banks.
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,
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. As a result, the Bank is subject
to supervision and regulation by 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 factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility.
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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 such 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.
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 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.
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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, 2000, the Bank could
have declared dividends of approximately $44.9 million in the aggregate, without
obtaining prior regulatory approval.
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 quarterly average 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 such purposes 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 Bancorp 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 22 buildings mainly
housing 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 downtown
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 $9,000; and
(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. We sublease approximately
2,575 square feet of this building for $3,541 per month.
The Bank leases office space in Lake Oswego, Oregon, for its
headquarters office. 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 $126,000.
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.
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ITEM 3. LEGAL PROCEEDINGS
West Coast Bank v. B.A.S.S. Construction Co., et. al., Lincoln County
Circuit Court Case No. 992167. This case arose out of an earlier dispute with
Edward and Marianne Fischer that has now been settled. The Fischers loaned $4.6
million to B.A.S.S. Construction Company. The loan was secured by an approximate
425 acre tract of land in Lincoln County, Oregon ("Lincoln County Property").
B.A.S.S. defaulted on the $4.6 million loan. The Fischers then filed suit
against the Bank alleging that the Bank failed to provide promised take-out
funding to B.A.S.S. In March 2000, the Bank settled the Fischer case. Under the
Agreement, the Bank paid $5.4 million and obtained the Fischers' rights to
collect the $4.6 million loan to B.A.S.S. and to foreclose on the Lincoln County
Property. Based on an appraisal of the property and related carrying,
disposition, and other cost estimates, the Bank currently estimates the net book
value of the Lincoln County Property at approximately $587,000. Accordingly, in
connection with this settlement and its valuation of its interest in the Lincoln
County Property, the Company expensed in its 2000 results the net effect of
approximately $4.9 million, for this non-recurring item.
The Bank has foreclosed on the Lincoln County Property pursuant to a
sheriff's sale at which the Bank purchased the property. The Bank now has a
deficiency claim against B.A.S.S. for approximately $2.7 million plus interest
and costs. B.A.S.S. filed counterclaims against the Bank seeking damages in
excess of $5 million. The Bank denies any liability to B.A.S.S. and will defend
itself accordingly. Very little discovery has been taken regarding the B.A.S.S.
counterclaims. Due to the uncertainties inherent in litigation, and the nascent
stage of discovery, there are no assurances that this matter will not ultimately
result in a loss that could materially affect the Company.
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, facts and events currently unknown to
management that may surface in connection with the B.A.S.S. counterclaims or the
Lincoln County Property, and other risks inherent in litigation. Readers are
cautioned not to place undue reliance on these forward looking statements, which
reflect management's analysis only as of the date of the statement. 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; Ragen McKenzie Inc.;
Sandler O'Neill & Partners, LP; Sherwood Securities Corp.; D.A. Davidson & Co.;
Redibook ECN, LLC; Wells Fargo Investments, LLC and Spear, Leeds & Kellogg. The
high and low daily closing 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, 2000, there were
approximately 1,900 shareholders of common stock of record.
2000 1999
----------------------------------- ----------------------------------
Market Price Market Price
------------------- Cash dividend ------------------- Cash dividend
High Low declared High Low declared
--------- --------- ------------- ---------- -------- -------------
1st Quarter..... $12.39 $8.81 $0.059 $18.08 $13.74 $0.045
2nd Quarter..... $10.23 $8.18 $0.059 $16.06 $13.79 $0.045
3rd Quarter..... $10.85 $8.07 $0.065 $14.77 $11.88 $0.059
4th Quarter..... $11.06 $7.94 $0.065 $14.32 $11.59 $0.059
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) 2000 1999 1998 1997 1996
- --------------------------------------------- --------------------------------------------------------------------------------
Interest income $ 107,913 $ 97,363 $ 97,053 $ 89,065 $ 75,586
Interest expense 48,082 36,890 36,431 32,262 26,596
------------- ------------- ------------ ------------ ------------
Net interest income 59,831 60,473 60,622 56,803 48,990
Provision for loan loss 2,068 2,190 2,900 3,936 2,571
------------- ------------- ------------ ------------ ------------
Net interest income after provision for loan
loss 57,763 58,283 57,722 52,867 46,419
Noninterest income 13,873 16,234 19,159 14,150 9,875
Noninterest expense 54,573 49,271 56,098 45,394 38,814
------------- ------------- ------------ ------------ ------------
Income before income taxes 17,063 25,246 20,783 21,623 17,480
Provision for income taxes 5,443 7,914 6,724 7,184 5,804
------------- ------------- ------------ ------------ ------------
Net income $ 11,620 $ 17,332 $ 14,059 $ 14,439 $ 11,676
============= ============= ============ ============ ============
Per share data:
Basic earnings per share $ 0.70 $ 1.02 $ 0.83 $ 0.87 $ 0.72
Diluted earnings per share $ 0.69 $ 1.00 $ 0.79 $ 0.84 $ 0.70
Cash dividends $ 0.25 $ 0.21 $ 0.16 $ 0.14 $ 0.12
Period end book value $ 7.39 $ 6.92 $ 6.80 $ 6.03 $ 5.20
Weighted average common shares
outstanding 16,834,299 17,369,550 17,758,134 17,270,612 16,650,934
Total assets $ 1,354,961 $ 1,354,687 $ 1,255,423 $ 1,117,826 $ 940,297
Total deposits $ 1,076,608 $ 1,080,798 $ 1,108,457 $ 958,482 $ 806,300
Total long-term borrowings $ 45,022 $ 65,689 $ 20,260 $ 22,446 $ 28,583
Net loans $ 985,968 $ 962,817 $ 849,599 $ 766,491 $ 711,374
Stockholders' equity $ 121,269 $ 116,793 $ 117,225 $ 101,140 $ 85,381
Financial ratios:
Return on average assets 0.86% 1.37% 1.21% 1.43% 1.39%
Return on average equity 9.86% 14.86% 12.97% 15.75% 14.93%
Average equity to average assets 8.72% 9.24% 9.30% 9.10% 9.29%
Dividend payout ratio 35.80% 20.49% 21.14% 15.97% 16.36%
Efficiency ratio(1) 71.63% 62.37% 68.84% 62.77% 64.47%
Net loans to assets 72.77% 71.07% 67.67% 68.57% 75.65%
Average yields earned(1) 8.76% 8.54% 9.16% 9.70% 9.99%
Average rates paid 4.65% 3.91% 4.16% 4.25% 4.22%
Net interest spread(1) 4.11% 4.63% 5.00% 5.45% 5.77%
Net interest margin(1) 4.94% 5.38% 5.79% 6.23% 6.54%
Nonperforming assets to total assets 0.47% 0.34% 0.46% 0.43% 0.28%
Allowance for loan loss to total loans 1.42% 1.38% 1.44% 1.35% 1.18%
Allowance for loan loss to
nonperforming assets 221.94% 289.95% 217.41% 218.50% 320.40%
(1) Interest earned on nontaxable securities has been computed on a 35% tax
equivalent basis in 2000 and 1999 and 34% in 1998, 1997 and 1996.
12
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our audited
consolidated financial statements and the notes to those statements as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000, 1999 and 1998 included in this report.
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; 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, 2000, 1999 and 1998.
OVERVIEW. In the first quarter of 2000, we settled a lawsuit further
described in the previous section, "Legal Proceedings". The 2000 results were
also impacted by non-recurring equipment write-offs and severance costs
associated with department restructurings. During 1998 and 1999 we restructured
by merging our four bank subsidiaries into one bank called "West Coast Bank".
The results for 1998 and 1999, reflect the impact of the settlement charges and
costs of restructuring. In addition, during 1998, we completed an acquisition
transaction that extended our market further into Southwest Washington. The 1998
results reflect costs associated with this acquisition. Our assets were $1.355
billion as of December 31, 2000.
Our net income for 2000 was $11.6 million, compared with $17.3 million
in 1999 and $14.1 million in 1998. Diluted earnings per share for the three
years ended 2000, were $.69, $1.00, and $0.79. These results were impacted by
several non-recurring events:
- 2000 income was reduced by $3.1 million ($4.9 million pretax) for
litigation settlement charges.
- Equipment write-offs and donations, and severance charges reduced
2000 income by $904,000 ($1.5 million pretax.)
- Nonrecurring restructuring charges of $558,000 ($888,000 pretax)
were incurred in 1999, and $2.4 million ($3.8 million pretax) were
incurred in 1998.
- 1998 income was reduced by $1.1 million for charges associated with
our acquisition of CHL. 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.
After adjusting for these nonrecurring items, our operating income was
$15.6 million, $17.9 million and $17.6 million for the years ended December 31,
2000, 1999 and 1998, respectively. After adjusting for nonrecurring items
diluted earnings per share for the three years ended 2000, were $.93, $1.03, and
$0.99.
Net interest income on a tax equivalent basis totaled $62.1 million for
the year ended December 31, 2000, a decrease of $756,000 from $62.9 million for
the same period in 1999, which was up slightly over 1998. Noninterest income was
down in 2000 from the previous year due mainly to decreased sales activity in
the secondary residential real estate programs, due to the higher interest rate
environment in 2000 as well as Bancorp's new business strategy for residential
real estate. Other noninterest income decreased in 2000 primarily due to the
sales of certain real estate assets in 1999. Excluding litigation settlement
charges, fixed asset write-offs and severance expenses, noninterest expenses
decreased slightly in 2000 compared to 1999. In 1999 and continuing into 2000,
we saw benefits from our restructuring efforts.
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 utilized 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)
- ---------------------- ---------------------------------------------------------------------------------
2000 1999 1998 00-99 99-98
---------------------------------------------------------------------------------
Interest and fee income(1) $ 110,177 $ 99,741 $ 99,108 $ 10,436 $ 633
Interest expense $ 48,082 $ 36,890 $ 36,431 $ 11,192 $ 459
------------- ------------- ------------- -------- --------
Net interest income(1) $ 62,095 $ 62,851 $ 62,677 $ (756) $ 174
Average interest earning assets $ 1,257,711 $ 1,167,597 $ 1,082,035 $ 90,114 $ 85,562
Average interest bearing liabilities $ 1,034,403 $ 942,904 $ 875,368 $ 91,499 $ 67,536
Average interest earning assets/
Average interest bearing liabilities 121.59% 123.83% 123.61% -2.24% 0.22%
Average yields earned(1) 8.76% 8.54% 9.16% 0.22% -0.62%
Average rates paid 4.65% 3.91% 4.16% 0.74% -0.25%
Net interest spread(1) 4.11% 4.63% 5.00% -0.52% -0.37%
Net interest margin(1) 4.94% 5.38% 5.79% -0.44% -0.41%
Change
-------------------
(Dollars in thousands) 00-99 99-98
- ---------------------- -------------------
Interest and fee income(1) 10.46% 0.64%
Interest expense 30.34% 1.26%
Net interest income(1) -1.20% 0.28%
Average interest earning assets 7.72% 7.91%
Average interest bearing liabilities 9.70% 7.72%
Average interest earning assets/
Average interest bearing liabilities
Average yields earned(1)
Average rates paid
Net interest spread(1)
Net interest margin(1)
(1) Interest earned on nontaxable securities has been computed on a 35% tax
equivalent basis in 2000 and 1999 and 34% in 1998.
NET INTEREST INCOME. As the above chart displays, for years ended
December 31, 2000, 1999 and 1998, our average interest earning assets grew to
$1.258 billion, from $1.168 billion and $1.082 billion, respectively. During the
same periods, average interest bearing liabilities were $1.034 billion, $942.9
million and $875.4 million, respectively. The percentage of our average interest
earning assets to average interest bearing liabilities decreased to 121.59% in
2000, from 123.83% in 1999 and 123.61% in 1998. During the same periods the net
interest margins were 4.94%, 5.38% and 5.79%, respectively. The decreases in the
net interest margins and related yields or spreads were due mainly to a higher
short term interest rates, increased pricing competition, a greater reliance on
borrowings and certificates of deposit, as well as the repricing characteristics
of the loan portfolio. We expect that these factors will continue to pressure
our net interest margins and spreads. Net interest income on a tax-equivalent
basis decreased $756,000 or 1.2% in 2000 from 1999, as costs of deposits and
borrowings more than offset earning asset volume growth. In 1999 net interest
income increased $174,000, or 0.28%, to $62.9 million in 1999 from $62.7 million
in 1998. The changes in our net interest income were due mainly to earning
assets growth offset by higher short term interest rates. Average interest
earning assets increased 7.72% in 2000 from 1999 and 7.91% in 1999 over 1998.
We experienced a decrease in the net interest spread of 52 basis points
in 2000 to 4.11%, from 4.63% in 1999, which was down 37 basis points from 5.00%
in 1998. The average yield earned on interest earning assets was 8.76% in 2000,
8.54% in 1999 and 9.16% in 1998. Average interest bearing liabilities increased
$91.5 million, or 9.70%, to $1.034 billion for the year ended December 31, 2000,
from $942.9 million in 1999 and $875.4 million in 1998, while the average rates
paid increased over the period to 4.65% from 3.91% in 1999. Average rates paid
in 1999 of 3.91% decreased from rates paid in 1998 of 4.16%. Our loan portfolio
experienced growth in 2000, ending the year at $1.00 billion, up $23.9 million,
or 2.45% from $976.3 million at December 31, 1999. The deposit base decreased to
$1.077 billion at December 31, 2000, a reduction of $4.2 million or .39%, from
$1.081 billion at the end of 1999.
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) Year Ended December 31,
- ---------------------- ----------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------- ------------------------------- ---------------------------------
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 $ 2,684 $ 150 5.59% $ 5,068 $ 257 5.08% $ 31,178 $ 1,575 5.05%
Federal funds sold 780 50 6.43 862 44 5.06 7,667 422 5.50
Taxable securities 164,066 11,085 6.76 160,798 10,205 6.35 138,387 8,896 6.43
Nontaxable securities(2) 83,383 6,466 7.76 89,689 6,794 7.57 77,536 6,044 7.80
Loans, including fees(3) 1,006,798 92,425 9.18 911,180 82,441 9.05 827,267 82,171 9.93
----------- --------- ---------- -------- ----------- -----------
Total interest earning assets 1,257,711 110,176 8.76% 1,167,597 99,741 8.54% 1,082,035 99,108 9.16%
Allowance for loan loss (14,080) (13,022) (11,971)
Premises and equipment 29,814 30,096 29,273
Other assets 78,365 77,116 66,625
----------- ---------- -----------
Total assets $ 1,351,810 $1,261,787 $ 1,165,962
=========== ========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Savings and interest bearing
demand deposits $ 509,091 $ 16,848 3.31% $ 545,682 $ 16,315 2.99% $ 514,287 $ 16,460 3.20%
Certificates of deposit 365,495 20,958 5.73 347,130 17,911 5.16 322,671 17,798 5.52
Short-term borrowings 106,481 6,940 6.52 30,583 1,675 5.48 7,081 359 5.08
Long-term borrowings 53,336 3,336 6.25 19,509 989 5.07 31,329 1,814 5.79
----------- ---------- -----------
Total interest bearing
liabilities 1,034,403 48,082 4.65% 942,904 36,890 3.91% 875,368 36,431 4.16%
Demand deposits 188,939 193,888 175,688
Other liabilities 10,646 8,355 6,474
----------- ---------- -----------
Total liabilities 1,233,988 1,145,147 1,057,530
Shareholders' equity 117,822 116,640 108,432
----------- ---------- -----------
Total liabilities and
shareholders' equity $ 1,351,810 $1,261,787 $ 1,165,962
=========== ========== ===========
Net interest income $ 62,094 $ 62,851 $ 62,677
========= ======== ===========
Net interest spread 4.11% 4.63% 5.00%
==== ==== ====
(1) Yield/rate calculations have been based on more detailed information and
therefore may not recompute exactly due to rounding.
(2) Interest earned on nontaxable securities has been computed on a 35% tax
equivalent basis in 2000 and 1999 and 34% in 1998.
(3) Includes balances for loans held for sale.
15
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.
(Dollars in thousands) Year Ended December 31,
- ---------------------- --------------------------------------------------------------------------
2000 versus 1999 1999 versus 1998
--------------------------------------------------------------------------
Total Total
Increase (Decrease) Increase Increase (Decrease) Increase
due to: (Decrease) due to: (Decrease)
--------------------------------------------------------------------------
Volume Rate Volume Rate
Interest income:
Interest earning balances due
from banks $ (121) $ 14 $ (107) $ (1,319) $ 1 $ (1,318)
Federal funds sold (4) 10 6 (375) (3) (378)
Investment security income:
Interest on taxable securities 207 673 880 1,441 (132) 1,309
Interest on nontaxable securities(1) (478) 150 (328) 947 (197) 750
Loans, including fees on loans 8,651 1,333 9,984 8,335 (8,065) 270
-------- -------- -------- -------- -------- --------
Total interest income(1) 8,255 2,180 10,435 9,029 (8,396) 633
Interest expense:
Savings and interest bearing demand (1,094) 1,627 533 1,005 (1,150) (145)
Certificates of deposit 948 2,099 3,047 1,349 (1,236) 113
Short-term borrowings 4,157 1,108 5,265 1,192 124 1,316
Long-term borrowings 1,715 632 2,347 (684) (141) (825)
-------- -------- -------- -------- -------- --------
Total interest expense 5,726 5,466 11,192 2,862 (2,403) 459
-------- -------- -------- -------- -------- --------
Net interest spread(1) $ 2,529 $ (3,286) $ (757) $ 6,167 $ (5,993) $ 174
======== ======== ======== ======== ======== ========
(1) Tax-exempt income has been adjusted to a tax-equivalent basis using a 35%
tax equivalent basis in 2000 and 1999 and 34% in 1998.
PROVISION FOR LOAN LOSSES. Provisions for loan losses of $2,068,000,
$2,190,000, and $2,900,000 were recorded for the years ended December 31, 2000,
1999 and 1998, 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. Net charge-offs
of $1,303,000, $1,163,000, and $898,000, were recorded in 2000, 1999 and 1998,
respectively. The allowance for loan loss as a percentage of loan totals at
December 31, 2000 and 1999, was 1.42% and 1.38%, respectively, and the allowance
for loan losses represented 221.94% of our non-performing assets as of December
31, 2000, compared to 289.95% at December 31, 1999.
NONINTEREST INCOME. Noninterest income for the year ended December 31,
2000, was $13.9 million compared to $16.2 million in 1999 and $19.2 million in
1998. The service charges on deposit accounts we collected were $5.3 million,
$4.5 million and $4.6 million for 2000, 1999 and 1998, respectively. Deposit
service charges increased in 2000 over 1999 due to increased fees and fee
collection efforts. Deposit service charges decreased slightly in 1999 compared
to 1998. During the restructuring, certain fees charged on some deposit accounts
were waived as some customers may have experienced conversion-related issues. In
addition, over the last two years 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, including increased sales activity, mainly in our investment sales
operations. Gains on sales of loans were $1.2 million in 2000, $3.6 million
during 1999 and $6.4 million during 1998.
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 and 2000, the activity slowed dramatically as the Federal Reserve Board
began raising interest rates. We experienced a slowdown in both refinance
activity as well as new loan sales generation during the period. Furthermore in
2000, gains on sales of loans decreased as a result of our new business strategy
related to residential mortgage originations.
Trust revenues of $2.0 million, $2.1 million and $2.5 million were
earned during 2000, 1999 and 1998, 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 the Trust area are mainly
generated from the market values of these managed assets.
Other noninterest income fluctuated over the three-year period, with
some non-recurring activity related to changes in the Company. In 1999, we sold
some real estate related assets for a gain. A loss on securities sold of
$221,000 was incurred in 2000, while gains of $82,000 and $348,000 were realized
in 1999 and 1998, respectively.
NONINTEREST EXPENSE. Noninterest expenses during the last three years
were $54.6 million in 2000, $49.3 million in 1999 and $56.1 million in 1998. The
increased expenses in 2000 over 1999 were caused mainly by a non-recurring
litigation settlement
16
18
charge of $4.9 million pretax in the first quarter of 2000. In 2000 we also
incurred $1.5 million pretax, in severance expenses and equipment write-off
charges.
During 1999, operating expenses declined from $56.1 million to $49.3
million. The $6.8 million 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 directly related to the
restructure were $3.77 million in 1998 and $888,000 in 1999. The 1999 costs
include $180,000 recorded in marketing expenses in the financial statements.
Salaries and employee benefits expense decreased in 2000, as we reduced
the full-time equivalent employees from 594 in 1999 to 563 in 2000 and
significantly lowered variable compensation costs, offset in part by severance
costs and changes in salary and compensation structure. The decrease in salary
and employee benefits expense in 1999 versus 1998 were primarily due to
decreases in staffing associated with our restructuring efforts, including
outsourcing certain processing services. Equipment expense increased in 2000
compared to 1999 as we continue to invest in new technology. Equipment, printing
and office supplies, and other noninterest expenses were reduced as a result of
the restructure in 1999 compared to 1998.
Occupancy expense increased slightly in 2000 due to lease rate
increases, offset in part by the closing of one branch office in Vancouver,
Washington. In 1999, occupancy expense increased as we expanded. We opened two
new full-service locations in 1999, and closed a small supermarket
limited-service location during 1999. We expect to continue to grow through
strategically placed offices in 2001 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. In 1999, we also moved into a new loan operations center outside of
Portland where we consolidated a number of processing departments in the
restructure.
Check and other transaction processing fees and courier and postage
expenses have increased over the last three years due to outsourcing certain
processing services, changes in processes, and enhancement of services offered.
Marketing expenses were lower in 2000, as we focused precisely on target markets
and new products. Marketing expense was higher in 1999 compared to 1998 due to
marketing expenses associated with branding our new bank name in the communities
we serve.
Professional expense was higher in 2000 compared to 1999 due to costs
associated with our strategic business review. Communications expenses decreased
in 2000 and in 1999 primarily due to increased technology efficiency. Other
noninterest expense is higher in 2000 due mainly to equipment write-offs and
donations in the fourth quarter of 2000.
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. 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.
The following table summarizes the accrued restructuring charges:
(Dollars in thousands) December 31, December 31, December 31,
- ---------------------- 2000 1999 1998
------------ ------------ ------------
Beginning balance, accrued restructuring
charges $ 315 $1,760 $ --
Provision for restructuring charges -- 57 1,918
Utilization:
Cash 315 1,502 158
------ ------ ------
Total Utilization 315 1,502 158
------ ------ ------
End of period balance, accrued
restructuring charges $ -- $ 315 $1,760
====== ====== ======
17
19
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 achieved in 2000.
At year end 1999, we reviewed and determined that we achieved cost
reductions in excess of $6 million, and that the cost reduction efforts and
internal focus in 1999 had affected revenue growth. Accordingly, during the
first half of 2000, we reviewed our business lines to identify sustainable
sources of profitable revenue growth. We focused specifically on certain
consumer and business segments with characteristics consistent with Bancorp's
goals and strategies, including higher return on equity, lower overhead, less
interest rate risk, and better funding dynamics.
Bancorp's liquidity has not been materially affected by cash outlays
related to one-time restructuring charges. Readers are referred to management's
"Forward Looking Statements Disclosure" in connection with this section.
INCOME TAXES
Income tax expense for 2000 was $5.4 million, or 31.9% of income before
income taxes. Income tax expense in 1999 was $7.9 million or 31.3% of income
before income taxes, and 1998 was $6.7 million or 32.3% 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,
specifically the litigation settlement charge previously described. 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. 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 72.8% of total assets as of December 31, 2000. A certain
degree of credit risk is inherent in our lending activities. This risk is
managed through our Credit Administration, Credit Review, and internal audit
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 commercial and real estate related credits. We make
substantially all our loans to customers located within our service areas. In
2000, we centralized and standardized underwriting for all consumer loans. At
the end of 2000, we added telephone and internet access to our distribution
channels as access points for consumer borrowers. A specific set of new small
business products was introduced which improved consistencies in underwriting
and turnaround time to customers. 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, material increases in interest rates, 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 $401,000 during 2000.
At December 31, 2000, we were not aware of any concentration of loans
exceeding 10 percent of the total loans to a multiple number of borrowers
engaged in a similar business. At December 31, 2000 and 1999, the Bank had no
bankers acceptances.
As of December 31, 2000 and 1999, we had $12,439,000 and $11,996,000
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.
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20
(Dollars in thousands) December 31,
- ---------------------- ----------------------
2000 1999
--------- -----------
Balance, beginning of period 11,996 19,873
New loans and advances 3,525 564
Principal payments and payoffs (3,082) (8,441)
------- -------
Balance, end of period 12,439 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. The following table is the composition of the loan portfolio
and allowance for loan loss as of December 31, 2000.
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
- ---------------------- -------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------------
Commercial loans $ 159,861 16.21% $ 157,912 16.40% $ 150,206 17.68% $150,197 19.60% $ 146,632 20.61%
Real estate construction 105,219 10.67% 124,102 12.89% 118,171 13.91% 112,378 14.66% 87,257 12.27%
Real estate-mortgage 97,377 9.88% 101,579 10.55% 113,661 13.38% 116,228 15.16% 124,230 17.46%
Real estate-commercial 583,971 59.23% 531,600 55.21% 414,169 48.75% 323,320 42.18% 274,048 38.52%
Installment and other
consumer 53,784 5.45% 61,104 6.35% 65,845 7.75% 74,819 9.76% 87,698 12.33%
----------- --------- --------- -------- ---------
Total loans 1,000,212 101.44% 976,297 101.40% 862,052 101.47% 776,942 101.36% 719,865 101.19%
Allowance for loan loss (14,244) -1.44% (13,480) -1.40% (12,453) -1.47% (10,451) -1.36% (8,491) -1.19%
-------------------------------------------------------------------------------------------------------
Total loans, net $ 985,968 100.00% 962,817 100.00% $ 849,599 100.00% $766,491 100.00% $ 711,374 100.00%
=======================================================================================================
The maturity distribution of selected categories of Bancorp's loan
portfolio at December 31, 2000, 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 $ 90,954 $ 81,490 $172,444
Due after one through five years 59,191 19,664 78,855
Due after five years 9,716 4,065 13,781
-------- -------- --------
Total $159,861 $105,219 $265,080
======== ======== ========
Interest sensitivity:
Fixed-interest rate loans $ 38,677 $ 5,654 $ 44,331
Floating or adjustable interest rate loans(1) 21,184 99,565 220,749
-------- -------- --------
Total $159,861 $105,219 $265,080
======== ======== ========
(1) Some loans contain provisions which place maximum or minimum limits on
interest rate changes.
The following table presents information with respect to nonperforming
assets.
Year Ended December 31,
------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
- ---------------------- ---------- ---------- ---------- ---------- ----------
Loans on nonaccrual status $ 5,726 $ 4,316 $ 4,565 $ 4,245 $ 2,228
Loans past due 90 days or more but not on
nonaccrual status 270 8 42 44 97
Other real estate owned 422 325 1,121 494 324
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 6,418 $ 4,649 $ 5,728 $ 4,783 $ 2,649
========== ========== ========== ========== ==========
Percentage of nonperforming assets to
total assets 0.47% 0.34% 0.46% 0.43% 0.28%
Total assets $1,354,961 $1,354,687 $1,255,423 $1,117,826 $ 940,297
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, modifications to the allowance for loan losses included
identifying segments of the loan portfolio where the Bank may have larger credit
concentrations or exposure, and then allocating the allowance in these areas
based on loss factors deemed appropriate. We continue to look for ways to
enhance the allowance methodology, with increased detailed analysis, tracking
and review. The changes to the allowance methodology made during 1999 were to
enhance the overall identification and allocation of the reserves.
The formula allowance is calculated by applying loss factors to
outstanding loans and certain unused commitments, in each case based on the
internal risk grade of those loans, pools of loans, or commitments. Changes in
risk grades of both performing and nonperforming loans affect the amount of the
formula allowance. Loss factors are based on our historical loss experience and
other such pertinent data and may be adjusted for significant factors that, in
management's judgement, affect the collectibility of the portfolio as of the
evaluation date. While historic charge-off 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 loss allowance, 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, 2000, our allowance for loan loss was $14.2 million, or
1.42% of total loans, and 221.94% of total non-performing assets, compared with
an allowance for credit losses at December 31, 1999 of $13.5 million, or 1.38%
of total loans, and 289.95% 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. Impaired 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, 2000, and 1999, the recorded investments in certain
loans that were considered to be impaired were $5,472,000 and $4,118,000,
respectively, all of which was classified as non-performing. Of these impaired
loans, $803,000 and $858,000 had a specific related valuation allowance of
$154,000 and $438,000, respectively, while $4,669,000 and $3,260,000 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 impaired loans for the years ended
December 31, 2000, 1999, and 1998 were approximately, $1,701,000, $4,252,000,
and $3,633,000, respectively. For the years ended December 31, 2000, 1999 and
1998, interest income recognized on impaired loans totaled $57,000, $165,000 and
$384,000 respectively, all of which was recognized on a cash basis.
At December 31, 2000, our allowance for loan losses was $14.2 million,
consisting of a $13.7 million formula allowance, a $154,000 specific allowance
and a $301,000 unallocated allowance. At December 31, 1999, the allowance for
loan losses of $13.5 million consisted of a $12.8 million formula allowance, a
$525,000 specific allowance and a $210,000 unallocated allowance. The changes in
the allocation of the allowance for loan losses from 1999 to 2000, 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 the change in
the allowance for loan loss and other loan information.
December 31,
--------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
- ---------------------- ---------- -------- -------- -------- --------
Loans outstanding at end of period $1,000,212 $976,297 $862,052 $776,942 $719,865
Average loans outstanding during the period $1,000,992 $904,931 $816,240 $751,284 $619,205
Allowance for loan loss, beginning of period $ 13,480 $ 12,453 $ 10,451 $ 8,491 $ 6,562
Recoveries:
Commercial 61 129 298 218 169
Real estate 266 58 47 5 11
Installment and consumer 43 77 63 52 76
---------- -------- -------- -------- --------
Total recoveries 370 264 408 275 256
Loans charged off:
Commercial 934 450 853 1,305 965
Real estate 82 487 39 204 62
Installment and consumer 658 490 414 742 423
---------- -------- -------- -------- --------
Total loans charged off 1,674 1,427 1,306 2,251 1,450
Net loans charged off (1,304) (1,163) (898) (1,976) (1,194)
Reserves added through purchase acquisition -- -- -- -- 552
Provision for loan loss 2,068 2,190 2,900 3,936 2,571
---------- -------- -------- -------- --------
Allowance for loan loss, end of period $ 14,244 $ 13,480 $ 12,453 $ 10,451 $ 8,491
========== ======== ======== ======== ========
Ratio of net loans charged off to average
loans outstanding 0.13% 0.13% 0.11% 0.26% 0.19%
During 2000, net loans charged off were $1,303,000, compared to
$1,163,000 during 1999. The percentage of net loans charged off to average loans
outstanding was 0.13% during 2000, compared to 0.13% and 0.11% for the years
ended December 31, 1999 and 1998, respectively. Charge offs of loans generally
reflect the realization of losses in the portfolio that were recognized
previously through provisions for credit losses.
At December 31, 2000, the provision for loan loss exceeded the net loans
charged off during the year, reflecting management's belief, based on the
foregoing analysis, that there are additional losses inherent in the 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, 2000, Bancorp and the Bank are considered
"Well Capitalized" under the regulatory risk based capital guidelines.
Shareholders' equity was $121.3 million at December 31, 2000, compared
to $116.8 million at December 31, 1999, an increase of $4.5 million, or 3.83%,
over that period of time. At December 31, 2000, shareholders' equity, as a
percentage of total assets, was 8.95%, compared to 8.62% at December 31, 1999.
The change was primarily a result of assets staying substantially flat and
shareholders' equity increasing due to 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. Equity increased by 3.83% over the period from December 31, 1999 to
December 31, 2000, while assets grew by .02% over the same period. 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.
As the following table indicates, Bancorp currently exceeds the
regulatory minimum capital ratio requirements.
(Dollars in thousands) December 31, 2000
- ---------------------- ------------------------
Amount Ratio
Tier 1 capital $ 119,600 10.90%
Tier 1 capital minimum requirement 43,890 4.00
---------- -----
Excess Tier 1 capital $ 75,710 6.90%
========== =====
Total capital $ 133,328 12.15%
Total capital minimum requirement 87,788 8.00
---------- -----
Excess total capital $ 45,540 4.15%
========== =====
Risk-adjusted assets $1,097,697
==========
Leverage ratio 8.88%
Minimum leverage requirement 3.00%
-----
Excess leverage ratio 5.88%
=====
Adjusted total assets $1,347,571
==========
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 $1.077
billion at December 31, 2000, down from $1.081 billion at December 31, 1999.
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.
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
financial services 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.
INVESTMENT PORTFOLIO
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25
The following table shows the amortized cost and fair value of Bancorp's
investments.
(Dollars in thousands) 2000 1999 1998
- ---------------------- -------------------------------------------------------------------------------
Amortized Amortized Amortized
Available for sale Cost Fair Value Cost Fair Value Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 5,354 $ 5,345 $ 500 $ 501 $ 5,999 $ 6,065
U.S. Agency securities 88,383 88,228 102,574 100,408 87,971 88,856
Obligations of state and political subdivisions 93,801 94,379 98,344 95,946 103,445 107,689
Other securities 59,997 59,864 59,710 58,754 50,103 50,661
-------------------------------------------------------------------------------
Total $247,535 $247,816 $261,128 $255,609 $247,518 $253,271
===============================================================================
(Dollars in thousands) 2000 1999 1998
- ---------------------- ------------------------------------------------------------------------
Amortized Amortized Amortized
Held to maturity Cost Fair Value Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $-- $-- $-- $-- $ -- $ --
U.S. Agency securities -- -- -- -- -- --
Obligations of state and political subdivisions -- -- -- -- 2,696 2,909
Other securities -- -- -- -- -- --
--- --- --- --- ------ ------
Total $-- $-- $-- $-- $2,696 $2,909
=== === === === ====== ======
At December 31, 2000 the net unrealized gain on the investment portfolio
was $281,000 representing .1% 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.
After 5 Due
One 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 $ 5,345 5.74% $ -- $ -- $ -- $ 5,345 5.74%
U.S. Agency securities -- 50,882 6.35% 37,346 7.09% -- 88,228 6.67%
Obligations of state and
political subdivisions(1) 2,654 8.59% 28,676 7.31% 49,033 7.33% 14,016 7.11% 94,379 7.33%
Other Securities(2) 19,212 7.19% 19,742 6.66% 6,475 6.81% 14,435 6.89% 59,864 6.90%
-------- -------- -------- -------- --------
Total(1) $ 27,211 7.04% $ 99,300 6.69% $ 92,854 7.20% $ 28,451 7.00% $247,816 6.95%
======== ======== ======== ======== ========
(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
24
26
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.
2000 1999 1998
-------------------------------------------------------------------------------------
(Dollars in thousands) Average Balance Rate Paid Average Balance Rate Paid Average Balance Rate Paid
- ---------------------- -------------------------------------------------------------------------------------
Demand $ 188,939 -- $ 193,888 -- $ 175,688 --
Savings and interest bearing demand 509,091 3.31% 545,682 2.99% 514,287 3.20%
Certificates of deposit 365,495 5.73% 347,130 5.16% 322,671 5.52%
Short-term borrowings 106,481 6.52% 30,583 5.48% 7,081 5.08%
Long-term borrowings 53,336 6.25% 19,509 5.07% 31,329 5.79%
---------- ---------- ----------
Total deposits and borrowings $1,223,342 4.65% $1,136,792 3.91% $1,051,056 4.16%
========== ========== ==========
As of December 31, 2000 time deposit liabilities are presented below at
the earlier of the next repricing date or maturity.
(1) Time deposits of $100,000 or more represent 10.83% of total deposits as of
December 31, 2000.
Time Deposits
(Dollars in thousands) of $100,000 or More(1) Other Time Deposits(2)
- ---------------------- ---------------------------------------------------
Amount Percent Amount Percent
Reprice/mature in three months or less $ 40,865 35.04% $ 90,146 34.13%
Reprice/mature after three months through six months 25,962 22.26% 31,687 12.00%
Reprice/mature after six months through one year 30,627 26.26% 73,539 27.84%
Reprice/mature after one year through five years 18,804 16.12% 67,263 25.47%
Reprice/mature after five years 361 0.31% 1,477 0.56%
---------------------------------------------------
Total $116,619 100.00% $264,112 100.00%
===================================================
(2) All other time deposits represent 24.53% of total deposits as of December
31, 2000.
As of December 31, 2000 other borrowings had the following items
remaining to contractual maturity.
Due after
Due in three Due after
three months one year
(Dollars in thousands) months through through Due after
---------------------- or less one year five years five years Total
------- -------- ---------- ---------- -----
Short-term borrowings..... $89,270 $12,156 $ -- $ -- $101,426
Long-term borrowings...... 22 -- 45,000 -- 45,022
------- ------- -------- ------ --------
Total borrowings...... $89,292 $12,156 $ 45,000 $ -- $146,448
======= ======= ======== ====== ========
(1) Based on contractual maturities, and may vary based on possible call dates.
25
27
ITEM 7A. QUANTITATIVE AND QUALIT