WEST COAST BANCORP /NEW/OR/ - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


		For the Quarter ended June 30, 2003 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
Lake Oswego, Oregon		97035
(Address of principal executive offices)		(Zip Code)

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o

The number of shares of Registrant’s Common Stock outstanding on July 31, 2003 was 15,191,150.

TABLE OF CONTENTS


PART I. Financial Information
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. Other Information
	Item 1. Legal Proceedings.
	Item 6. Exhibits and Reports on Form 8-K.
Signatures
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

WEST COAST BANCORP
FORM 10-Q
Table of Contents


PART I. Financial Information
Item 1.	Financial Statements (unaudited)	Page

	Consolidated Balance Sheets - June 30, 2003 and December 31, 2002		3
	Consolidated Statements of Income - Three and six months ended June 30, 2003 and 2002		4
	Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002		5
	Consolidated Statements of Changes in Stockholders’ Equity - Six months ended June 30, 2003 and year ended December 31, 2002		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.	Controls and Procedures		27
PART II. Other Information
Item 1.	Legal Proceedings		27
Item 6.	Exhibits and Reports on Form 8-K		27
Signatures			28

PART I. Financial Information
Item 1. Financial Statements

WEST COAST BANCORP
CONSOLIDATED BALANCE SHEETS
(Unaudited)


				June 30,			December 31,
(Dollars in thousands)				2003			2002

ASSETS:
Cash and cash equivalents:
		Cash and due from banks		$	71,321		$	55,026
		Interest-bearing deposits in other banks			1,995			2,316
		Federal funds sold			3,343			391

			Total cash and cash equivalents		76,659			57,733
Trading assets					859			967
Investment securities available for sale, at fair value (amortized cost: $247,610 and $257,954)					253,130			266,407
Loans held for sale					8,860			10,924
Loans					1,211,778			1,159,915
Allowance for loan losses					(17,843	)		(16,838	)

			Loans, net		1,193,935			1,143,077
Premises and equipment, net					26,630			26,609
Intangible assets, net					1,040			1,218
Bank owned life insurance					14,062			1,757
Other assets					18,369			23,635

			Total assets	$	1,593,544		$	1,532,327

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
		Demand		$	291,014		$	275,724
		Savings and interest-bearing demand			649,145			619,502
		Certificates of deposit			384,403			371,227

			Total deposits		1,324,562			1,266,453
Short-term borrowings					17,572			9,902
Long-term borrowings					83,000			98,000
Mandatorily redeemable trust preferred securities					12,500			12,500
Other liabilities					18,234			12,085

			Total liabilities		1,455,868			1,398,940
Commitments and contingent liabilities (note 8)
STOCKHOLDERS’ EQUITY:
Preferred stock: no par value, none issued; 10,000,000 shares authorized
Common stock: no par value, 55,000,000 shares authorized; 15,178,657and 15,325,937 shares issued and outstanding, respectively					18,973			19,158
Additional paid-in capital					69,247			72,279
Retained earnings					45,415			38,047
Deferred compensation					(1,479	)		(671	)
Accumulated other comprehensive income					5,520			4,574

	Total stockholders’ equity				137,676			133,387

			Total liabilities and stockholders’ equity	$	1,593,544		$	1,532,327

See notes to consolidated financial statements.

WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


(Dollars and shares in thousands			Three months ended June 30,				Six months ended June 30,
except per shares data)			2003		2002		2003		2002

INTEREST INCOME:
Interest and fees on loans			$	19,693	$	20,567	$	39,187	$	41,036
Interest on taxable investment securities				1,984		2,372		4,195		4,636
Interest on nontaxable investment securities				818		887		1,649		1,791
Interest on deposits in other banks				8		19		12		34
Interest on federal funds sold				20		14		28		20

		Total interest income		22,523		23,859		45,071		47,517
INTEREST EXPENSE:
Savings and interest-bearing demand				1,204		1,829		2,492		3,729
Certificates of deposit				2,802		3,638		5,701		7,606
Short-term borrowings				107		79		246		200
Long-term borrowings				912		1,349		2,174		2,848
Manditorily redeemable trust preferred securities				264		118		526		229

	Total interest expense			5,289		7,013		11,139		14,612

NET INTEREST INCOME				17,234		16,846		33,932		32,905
Provision for loan losses				850		1,442		1,700		2,319

Net interest income after provision for loan losses				16,384		15,404		32,232		30,586
NONINTEREST INCOME:
Service charges on deposit accounts				1,777		1,556		3,449		3,112
Other service charges, commissions and fees				1,712		1,392		3,104		2,541
Trust revenue				445		446		860		907
Gain on sales of loans				1,572		980		2,714		2,072
Bank owned life insurance				196		—		305		—
Other				138		136		199		1,092
Gain on sales of securities				—		—		192		—

		Total noninterest income		5,840		4,510		10,823		9,724
NONINTEREST EXPENSE:
Salaries and employee benefits				8,063		7,170		15,893		14,715
Equipment				1,245		1,165		2,461		2,497
Occupancy				1,174		1,157		2,355		2,310
Check and other transaction processing				717		645		1,392		1,263
Professional fees				640		424		1,141		785
Courier and postage				519		486		1,028		962
Marketing				678		497		967		889
Other loan expense				440		313		887		693
Communications				310		299		597		594
Other taxes and insurance				181		188		363		382
Printing and office supplies				196		190		336		361
Other noninterest expense				664		553		1,090		1,600

	Total noninterest expense			14,827		13,087		28,510		27,051

INCOME BEFORE INCOME TAXES				7,397		6,827		14,545		13,259
PROVISION FOR INCOME TAXES				2,398		2,303		4,826		4,492

NET INCOME			$	4,999	$	4,524	$	9,719	$	8,767

	Basic earnings per share		$	0.33	$	0.29	$	0.64	$	0.56
	Diluted earnings per share		$	0.32	$	0.28	$	0.62	$	0.54
	Weighted average common shares			15,076		15,640		15,111		15,749
	Weighted average diluted shares			15,586		16,133		15,604		16,222

See notes to consolidated financial statements.

WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


				Six months ended June 30,
(Dollars in thousands)				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income				$	9,719		$	8,767
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation of premises and equipment					1,380			1,685
Deferred income tax expense benefit					(155	)		(33	)
Write-down of premises and equipment					—			613
Amortization of intangibles					178			180
Provision for loan losses					1,700			2,319
Decrease (increase) in interest receivable					123			(24	)
Decrease in other assets					4,993			33
Gain on sale of securities					(192	)		—
Gains on sales of loans					2,714			2,072
Origination of loans held for sale					(53,513	)		(45,836	)
Proceeds from sales of loans held for sale					52,863			49,441
Decrease in interest payable					(276	)		(198	)
Increase (decrease) in other liabilities					6,425			(4,951	)
Stock based compensation expense					332			255
Tax benefit associated with stock options					54			133
Decrease in trading assets					108			37

			Net cash provided by operating activities		26,453			14,493
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available for sale securities					60,207			31,238
Proceeds from sales of securities					4,188			—
Purchase of available for sale securities					(49,980	)		(35,397	)
Purchase of bank owned life insurance					(12,000	)		—
Loans made to customers greater than principal collected on loans					(52,558	)		(52,346	)
Net capital expenditures					(1,401	)		(812	)

			Net cash used in investing activities		(51,544	)		(57,317	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, savings and interest bearing transaction accounts					44,933			29,783
Net increase in certificates of deposit					13,176			22,863
Proceeds from issuance of trust preferred securities					—			7,500
Proceeds from issuance of long-term borrowings					—			35,000
Repayment of long-term borrowings					(15,000	)		(20,000	)
Net (decrease) increase in short-term borrowings					7,670			(5,315	)
Redemption and repurchase of common stock					(5,520	)		(6,520	)
Net proceeds from issuance of common stock					1,109			564
Dividends paid and cash paid for fractional shares					(2,351	)		(2,298	)

			Net cash provided by financing activities		44,017			61,577

NET INCREASE IN CASH AND CASH EQUIVALENTS					18,926			18,753
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					57,733			52,961

CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	76,659		$	71,714

Supplemental cash flow information:
	Cash paid in the period for:
		Interest		$	11,415		$	14,810
		Income taxes		$	6,075		$	1,273

See notes to consolidated financial statements.

WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)


																		Accumulated
									Additional									Other
(Shares and Dollars in thousands)			Common Stock						Paid-In			Retained			Deferred			Comprehensive
			Shares			Amount			Capital			Earnings			Compensation			Income		Total

BALANCE, January 1, 2002				16,025		$	20,032		$	82,679		$	24,543		$	(878	)	$	2,414	$	128,790
Comprehensive income:
	Net income			—			—			—			18,203			—			—		18,203
	Other comprehensive income, net of tax:
		Net unrealized investment gains		—			—			—			—			—			2,160		2,160

	Other comprehensive income, net of tax																				2,160

Comprehensive income																				$	20,363

Cash dividends, $.30 per common share				—			—			—			(4,699	)		—			—		(4,699	)
Issuance of common stock- option plans				164			205			1,272			—			—			—		1,477
Redemption of common stock				(35	)		(44	)		(464	)					18			—		(490	)
Activity in Deferred Compensation Plan				13			16			144											160
Issuance of common stock- restricted stock plans				25			31			346						(377	)		—		—
Amortization of deferred compensation restricted stock																566			—		566
Common stock repurchased and retired				(866	)		(1,082	)		(11,999	)								—		(13,081	)
Tax benefit associated with stock options										301									—		301

BALANCE, December 31, 2002				15,326			19,158			72,279			38,047			(671	)		4,574		133,387
Comprehensive income:
	Net income			—			—			—			9,719			—			—		9,719
	Other comprehensive income, net of tax:
		Net unrealized investment gains and unrealized derivative losses		—			—			—			—			—			946		946

	Other comprehensive income, net of tax																				946

Comprehensive income																				$	10,665

Cash dividends, $.155 per common share				—			—			—			(2,351	)		—			—		(2,351	)
Issuance of common stock- option plans				146			182			1,255			—			—			—		1,437
Redemption of common stock				(20	)		(26	)		(305	)		—			21			—		(310	)
Activity in Deferred Compensation Plan				(1	)		(1	)		(17	)		—			—			—		(18	)
Issuance of common stock- restricted stock plans				72			90			1,071			—			(1,161	)		—		—
Amortization of deferred compensation restricted stock				—			—			—			—			332			—		332
Common stock repurchased and retired				(344	)		(430	)		(5,090	)								—		(5,520	)
Tax benefit associated with stock options				—			—			54			—			—			—		54

BALANCE, June 30, 2003				15,179		$	18,973		$	69,247		$	45,415		$	(1,479	)	$	5,520	$	137,676

See notes to consolidated financial statements.

WEST COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying interim consolidated financial statements include the accounts of West Coast Bancorp (“Bancorp” or the “Company”) and its wholly-owned subsidiaries, West Coast Bank (the “Bank”), which includes its wholly owned subsidiary Eld inc., West Coast Trust, West Coast Statutory Trust I, West Coast Statutory Trust II, Centennial Funding Corporation and Totten, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

The interim unaudited financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information. In addition, this report has been prepared in accordance with the instructions for Form 10-Q, and therefore, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial information contained in this report reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods. All such adjustments are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2003, and cash flows for the six months ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003, or other future periods.

Certain reclassifications of prior year amounts have been made to conform to current classifications. The accompanying interim consolidated financial statements should be read in conjunction with the financial statements and related notes contained in Bancorp’s 2002 Annual Report to Stockholders.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

Loans Held for Sale includes mortgage loans and is reported at the lower of cost or market value. Gains or losses on the sale of loans that are held for sale and certain SBA loans, are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained servicing rights.

Loans are reported net of unearned income. Interest income on loans is accrued daily on the principal balance outstanding. Loan and commitment fees and the direct cost of originating a loan are deferred and recognized over the life of the loan and/or commitment period as yield adjustments. Generally, no interest is accrued on loans when factors indicate collection of interest is doubtful or when the principal or interest payment becomes 90 days past due. 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.

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 value of the collateral if the loan is collateral dependent. Loans that are currently measured at fair value or 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.

The allowance for loan loss is based on management’s estimates of probable loan losses incurred as of the balance sheet date. Management determines the adequacy of the allowance for loan loss based on evaluations of the loan portfolio, recent loss experience, and other factors, including economic conditions. The Company determines the amount of the allowance for loan loss required for certain sectors based on relative risk characteristics of the loan portfolio and other financial instruments with credit exposure. Actual losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known. The allowance for loan loss is increased by provisions for loan losses in operating earnings. Losses are charged to the allowance while recoveries are credited to the allowance.

2. NEW ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred and be measured at fair value and adjusted for changes in estimated cash flows. Prior generally accepted accounting principles provided for the recognition of such costs at the date of management’s commitment to an exit plan. Under SFAS No. 146, management’s commitment to an exit plan would not be sufficient, by itself, to recognize a liability. The Statement is effective for exit or disposal activities initiated after December 31, 2002 and has not had a material impact on the results of operations or financial condition of Bancorp.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. This statement is effective for fiscal years ending after December 15, 2002. Management does not expect that the provisions of SFAS No. 148 will impact our results of operations or financial condition.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, for certain decisions made by the FASB and to incorporate clarifications of the definition of a derivative. Management does not expect that the provisions of SFAS No. 149 will impact our results of operations or financial condition.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability or an asset in some circumstances. Management does not expect that the provisions of SFAS No. 150 will impact our results of operations or financial condition.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation requires a variable interest entity to be consolidated by the primary beneficiary of that entity. The consolidation requirements of this interpretation apply immediately to variable interest entities created after January 31, 2003, and apply to existing entities for the first fiscal year or interim period beginning after June 15, 2003. Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is currently evaluating the impact of the interpretation on its financial statements and, except for the possible effects related to the issuance of its trust preferred securities, and any related regulatory effects, (see discussion under the heading “Capital Resources” in Item 2 of this report), does not currently believe the interpretation will have a material impact on the results of operations or financial condition of Bancorp.

3. ACCOUNTING FOR STOCK BASED COMPENSATION

At June 30, 2003, Bancorp has multiple stock option plans. Bancorp accounts for its stock option plans using the intrinsic value method under Accounting Principles Board (APB) Opinion 25, under which no compensation cost has been recognized in the periods presented. All options granted under our stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method established in SFAS No. 123, Accounting for Stock-Based Compensation, had been applied to all outstanding and unvested awards in each period.


(Dollars in thousands, except per share data)		Three months ended						Six months ended
		June 30,						June 30,
		2003			2002			2003			2002

Net income, as reported		$	4,999		$	4,524		$	9,719		$	8,767
Deduct: Total stock-based compensation expense determined under fair value based method for all options, net of related tax effects			(230	)		(214	)		(424	)		(367	)

Pro forma net income		$	4,769		$	4,310		$	9,295		$	8,400

Earnings per share:
	Basic-as reported	$	0.33		$	0.29		$	0.64		$	0.56
	Basic-proforma	$	0.32		$	0.28		$	0.62		$	0.53
	Diluted-as reported	$	0.32		$	0.28		$	0.62		$	0.54
	Diluted-proforma	$	0.31		$	0.27		$	0.60		$	0.52

4. COMPREHENSIVE INCOME

The components of comprehensive income are as follows:


		Three months ended						Six months ended
		June 30,						June 30,
(Dollars in thousands)		2003			2002			2003			2002

Net income as reported		$	4,999		$	4,524		$	9,719		$	8,767
Unrealized gains on securities:
Unrealized holding gains arising during the period			1,117			1,639			1,915			1,177
Tax provision			(439	)		(643	)		(752	)		(462	)

Net unrealized gain on securities, net of tax			678			996			1,163			715
Less: Reclassification adjustment for gains on sales of securities			—			—			192			—
Tax provision			—			—			(75	)		—

Net realized gains on sale of securities, net of tax			—			—			117			—
Unrealized losses on derivatives:
Unrealized holding losses on derivatives arising during the period			(111	)		(171	)		(165	)		(171	)
Tax benefit			28			67			65			67

Net unrealized holding losses from derivatives, net of tax			(83	)		(104	)		(100	)		(104	)

	Total comprehensive income	$	5,594		$	5,416		$	10,665		$	9,378

Bancorp currently uses two single interest-rate swaps to convert its variable rate Trust Preferred Securities to fixed rates. These swaps were entered into concurrently with the issuance of the Trust Preferred Securities. The swaps are accounted for as cash flow hedges under SFAS No. 133. The fair value of Bancorp’s swaps was an unrealized loss of $1.2 million at June 30, 2003 and $1.0 million at December 31, 2002. This unrealized loss is reflected in other liabilities on the consolidated balance sheet, as well as in accumulated other comprehensive income in the consolidated statement of changes in stockholders’ equity.

5. EARNINGS PER SHARE

The following tables reconcile the numerator and denominator of the basic and diluted earnings per share computations:


				Weighted Average		Per Share
(Dollars and shares in thousands, except per share data)		Net Income		Shares		Amount
		Three months ended June 30, 2003

Basic earnings		$	4,999		15,076	$	0.33
Common stock equivalents from:
	Stock options				480
	Restricted stock				30

Diluted earnings		$	4,999		15,586	$	0.32


		Three months ended June 30, 2002

Basic earnings		$	4,524	15,640	$	0.29
Common stock equivalents from:
	Stock options			452
	Restricted stock			41

Diluted earnings		$	4,524	16,133	$	0.28


				Weighted Average		Per Share
(Dollars and shares in thousands, except per share data)		Net Income		Shares		Amount

		Six months ended June 30, 2003

Basic earnings		$	9,719		15,111	$	0.64
Common stock equivalents from:
	Stock options				458
	Restricted stock				35

Diluted earnings		$	9,719		15,604	$	0.62


		Six months ended June 30, 2002

Basic earnings		$	8,767	15,749	$	0.56
Common stock equivalents from:
	Stock options			429
	Restricted stock			44

Diluted earnings		$	8,767	16,222	$	0.54

For the periods reported, Bancorp had no reconciling items between net income and income available to common stockholders.

6. PREMISES AND EQUIPMENT

The following table presents the amounts of premises and equipment:


(Dollars in thousands)	June 30, 2003			December 31, 2002

Land	$	4,796		$	4,796
Buildings and improvements		22,919			22,881
Furniture and equipment		22,664			22,432
Construction in progress		612			37

		50,991			50,146
Accumulated depreciation		(24,361	)		(23,537	)

Total	$	26,630		$	26,609

Depreciation included in the net occupancy and equipment expense amounted to $1.4 million and $1.7 million in the first six months of 2003 and 2002, respectively. The Company periodically reviews the recorded value of its long-lived assets, specifically premises and equipment, to determine whether impairment exists. During the first two quarters of 2003, there were no impairment write-downs. In 2002, under the guidance of SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the Company recognized a total of $613,000 of expenses in other noninterest expense related to fixed asset write-offs and impairment charges. The fair value of the properties was based on pending sale prices and independent appraisals.

7. ALLOWANCE FOR LOAN LOSSES

The following tables represent activity in the allowance for loan losses for the six months ended June 30, 2003, and 2002:


	Six months ending
(Dollars in thousands)	June 30, 2003			June 30, 2002

Balance at beginning of period	$	16,838		$	15,252
Provision for loan losses		1,700			2,319
Loans charged off		(1,054	)		(1,630	)
Recoveries		359			126

Balance at end of period	$	17,843		$	16,067

8. CONTINGENCIES AND LITIGATION

In April, 2002, a lawsuit was filed against Bancorp in the Circuit Court of the State of Oregon for the County of Lincoln by Walter L. West d.b.a. Walter West Construction Co. The suit is known as Walter L. West, dba Walter West Construction Co. v. Jeffrey Teeny, Stephen L. Stoelk, Shauna L. Stoelk, B.A.S.S. Construction Co., Inc. and West Coast Bancorp. Plaintiffs have asserted various claims against Bancorp alleging breach of contract and other theories.

Plaintiff’s allegations relate to Bancorp’s alleged failure to provide take out financing to a third party in connection with a real estate transaction in 1998. Plaintiff alleges that it was a third party beneficiary of an agreement to provide financing and that Bancorp’s actions in connection with the transaction constituted a breach of contract and were tortious under Oregon law. Plaintiff seeks damages from Bancorp in the amount of $3.5 million, plus such additional damages as may be proven at trial.

In addition, Bancorp is periodically party to litigation arising in the ordinary course of its business. Based on information currently known to management, although there are uncertainties inherent in litigation, we do not believe there is any legal action to which Bancorp or any of its subsidiaries is a party that, individually or in the aggregate, will have a materially adverse effect on Bancorp’s financial condition and results of operations.

9. SEGMENT AND RELATED INFORMATION

Bancorp accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the service provided. Intercompany items relate primarily to the use of accounting, human resources, data processing and marketing services provided. All other accounting policies are the same as those described in the summary of significant accounting policies in Bancorp’s 2002 annual report.

Summarized financial information concerning Bancorp’s reportable segments and the reconciliation to Bancorp’s consolidated results is shown in the following table. The “Other” column includes Bancorp’s trust operations and corporate-related items. Investment in subsidiaries is netted out of the presentations below. The “Intersegment” column identifies the intersegment activities of revenues, expenses and other assets, between the “Banking” and “Other” segments.


(Dollars in thousands)			Three months ended June 30, 2003

			Banking		Other			Intersegment			Consolidation

Interest income			$	22,504	$	174		$	(155	)	$	22,523
Interest expense				5,138		306			(155	)		5,289

	Net interest income			17,366		(132	)		—			17,234

Provision for loan loss				850		—			—			850
Noninterest income				5,429		471			(60	)		5,840
Noninterest expense				14,379		508			(60	)		14,827

		Income (loss) before income taxes		7,566		(169	)		—			7,397
Provision (benefit) for income taxes				2,463		(65	)		—			2,398

		Net income (loss)	$	5,103	$	(104	)	$	—		$	4,999

Depreciation and amortization			$	776	$	1		$	—		$	777
Assets			$	1,592,005	$	15,755		$	(14,216	)	$	1,593,544
Loans, net			$	1,193,945	$	12,887		$	(12,897	)	$	1,193,935
Deposits			$	1,333,316	$	—		$	(8,754	)	$	1,324,562
Equity			$	140,557	$	3,106			N/A		$	137,676


(Dollars in thousands)			Three months ended June 30, 2002

			Banking		Other			Intersegment			Consolidation

Interest income			$	23,835	$	110		$	(86	)	$	23,859
Interest expense				6,946		153			(86	)		7,013

	Net interest income			16,889		(43	)		—			16,846

Provision for loan loss				1,442		—			—			1,442
Noninterest income				4,102		448			(40	)		4,510
Noninterest expense				12,703		424			(40	)		13,087

		Income (loss) before income taxes		6,846		(19	)		—			6,827
Provision (benefit) for income taxes				2,311		(8	)		—			2,303

		Net income (loss)	$	4,535	$	(11	)	$	—		$	4,524

Depreciation and amortization			$	869	$	2		$	—		$	871
Assets			$	1,500,497	$	27,024		$	(25,626	)	$	1,501,895
Loans, net			$	1,119,825	$	12,500		$	(12,500	)	$	1,119,825
Deposits			$	1,236,801	$	—		$	(12,722	)	$	1,224,079
Equity			$	128,532	$	1,770			N/A		$	130,302

9. SEGMENT AND RELATED INFORMATION (Continued)


(Dollars in thousands)			Six months ended June 30, 2003

			Banking		Other			Intersegment			Consolidation

Interest income			$	45,032	$	354		$	(315	)	$	45,071
Interest expense				10,840		614			(315	)		11,139

	Net interest income			34,192		(260	)		—			33,932

Provision for loan loss				1,700		—			—			1,700
Noninterest income				10,030		913			(120	)		10,823
Noninterest expense				27,654		976			(120	)		28,510

		Income (loss) before income taxes		14,868		(323	)		—			14,545
Provision (benefit) for income taxes				4,952		(126	)		—			4,826

		Net income (loss)	$	9,916	$	(197	)	$	—		$	9,719

Depreciation and amortization			$	1,555	$	1		$	—		$	1,556
Assets			$	1,592,005	$	15,755		$	(14,216	)	$	1,593,544
Loans, net			$	1,193,945	$	12,887		$	(12,897	)	$	1,193,935
Deposits			$	1,333,316	$	—		$	(8,754	)	$	1,324,562
Equity			$	140,557	$	(2,881	)		N/A		$	137,676


(Dollars in thousands)			Six months ended June 30, 2002

			Banking		Other			Intersegment			Consolidation

Interest income			$	47,469	$	240		$	(192	)	$	47,517
Interest expense				14,506		298			(192	)		14,612

	Net interest income			32,963		(58	)		—			32,905

Provision for loan loss				2,319		—			—			2,319
Noninterest income				8,894		910			(80	)		9,724
Noninterest expense				26,305		826			(80	)		27,051

		Income before income taxes		13,233		26			—			13,259
Provision for income taxes				4,482		51			(41	)		4,492

		Net income (loss)	$	8,751	$	(25	)	$	—		$	8,767

Depreciation and amortization			$	1,861	$	4		$	—		$	1,865
Assets			$	1,500,497	$	27,024		$	(25,626	)	$	1,501,895
Loans, net			$	1,119,825	$	12,500		$	(12,500	)	$	1,119,825
Deposits			$	1,236,801	$	—		$	(12,722	)	$	1,224,079
Equity			$	128,532	$	1,770			N/A		$	130,302

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statement Disclosure

This Quarterly Report may contain statements regarding future events or performance that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) and are made pursuant to the safe harbors of the PSLRA. Forward-looking statements include, without limitation, statements regarding the outlook for future operations, the effect of changes in interest rates and the yield curve and their effect on Company net interest income and fee income, the adequacy of loan loss reserves, forecasts of future expenses and productivity, evaluation of market conditions, the outcome of legal proceedings, or plans for distribution, product or service development or expansion. Forward-looking statements are subject to risks and uncertainties that may cause actual results to be quite different from those expressed or implied by the forward-looking statements. Factors that could cause actual results to differ include, among others, risks discussed in this Quarterly Report and in Bancorp’s other reports filed with the Securities and Exchange Commission, as well as the following: changes in general economic conditions, whether national or regional, that could affect the demand for loans or lead to increased loan losses; competitive factors, including increased competition with community, regional, and national financial institutions, that may lead to pricing pressures on rates Bancorp charges on loans and pays on deposits reducing demand for our products and services or negatively impact the Company’s ability to attract lending personnel; changes in interest rates that could result in lower net interest income, net interest margin, and fee income, including lower gains on sales of loans arising from mortgage activity; loss of customers of greatest value to Bancorp; changing business conditions in the banking industry; changes in the bank regulatory environment or new legislation; changes in vendor quality; changes in technology or required investments in technology; and weaknesses or limitations in the Company’s monitoring and management of its disclosure controls and internal control environment. Readers are cautioned not to place undue reliance on forward-looking statements. Bancorp disclaims any obligation to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.

Results of Operations

Three months ended June 30, 2003 and 2002

Net Income. Bancorp reported net income of $5.00 million, or $.32 per diluted share, for the three months ended June 30, 2003, compared to $4.52 million, or $.28 per diluted share, for the three months ended June 30, 2002. Net interest income increased to $17.2 million in the second quarter of 2003 compared to $16.8 million for the same period in 2002, an increase of $.4 million or 2%. The increase in net interest income continues to be driven by higher loan balances and improved deposit mix.

Total non-interest income increased $1.3 million or 30% to $5.8 million for the three months ended June 30, 2003, compared to the same period a year ago. This was largely due to a $.6 million or 60% increase in gains on sales of loans stemming from very strong residential mortgage production and an increase in total deposit and other service charges of $.5 million, or 18%. During the first quarter 2003, the Company invested in bank-owned life insurance, contributing $.2 million to non-interest income in the second quarter, with a partially offsetting impact on net interest income and margin.

Non-interest expense increased $1.7 million or 13% to $14.8 million from the second quarter of 2002. More than half of the period-over-period increase was related to the addition of commercial lending personnel, new branches, higher commission expense, and expenses associated with foreclosure of certain properties. The remaining increase in non-interest expense was incurred in the areas of additional new branch personnel, professional expenses, and marketing related expenses.

Net Interest Income. Net interest income is the difference between interest income (principally from loans and investment securities) and interest expense (principally on customer deposits and borrowings). Changes in net interest income result from changes in volume and net interest spread. Volume is the average dollar level of interest earning assets and interest bearing liabilities. Net interest spread is the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin is net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities. Bancorp’s profitability, like that of many financial institutions, is dependent to a large extent upon net interest income. Our balance sheet is currently slightly liability sensitive, meaning that interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period. Therefore, a significant increase in market rates of interest, or a flattening or inverted interest rate yield curve, could adversely affect our net interest income. Further, the effects of a flattening yield curve could more adversely affect net interest income than any benefits received from a sustained, steep interest rate yield curve. Competition, the economy, and the interest rate environment also impact Bancorp’s net interest income in any period.

Analysis of Net Interest Income. Net interest income, including a $.4 million adjustment to a tax equivalent basis for the three months ended June 30, 2003, increased 2% to $17.7 million from $17.3 million for the same period in 2002. The increase was mainly due to increased average loan balances and decreases in rates paid on interest bearing liabilities, offset in part by a decrease in yields on average earning assets. Average yields on earning assets decreased 88 basis points to 6.22% in the second quarter of 2003 from 7.10% in 2002. Average interest earning assets increased $106.4 million, or 7.7%, to $1.48 billion in the second quarter of 2003, from $1.38 billion for the same period in 2002. Average rates paid on interest bearing liabilities decreased 69 basis points to 1.85% in the second quarter of 2003, from 2.54% for the same period in 2002. The net interest spread decreased from 4.56% in the second quarter of 2002 to 4.37% in the second quarter of 2003. Bancorp’s net interest margin for the three months ended June 30, 2003, was 4.78%, a decrease of 27 basis points from 5.05% for the comparable period of 2002. The decrease in Bancorp’s second quarter net interest margin and spread was caused by lower yields on earning assets, lower investment value of non-interest bearing deposits, and the purchase of bank owned life insurance in the first quarter of 2003.

The following table presents information regarding yields on interest-earning assets, expense on interest-bearing liabilities, and net yields on interest-earning assets for the periods indicated on a tax equivalent basis:


	Three months ended						Increase			Percentage
(Dollars in thousands)	June 30,						(Decrease)			Change

	2003			2002			2003-2002			2003-2002
Interest and fee income (1)	$	22,964		$	24,337			($1,373	)		-5.6	%
Interest expense		5,289			7,013			(1,724	)		-24.6	%

Net interest income (1)	$	17,675		$	17,324		$	351			2.0	%
Average interest earning assets	$	1,481,671		$	1,375,300		$	106,371			7.7	%
Average interest bearing liabilities	$	1,148,485		$	1,107,303		$	41,182			3.7	%
Average interest earning assets/ Average interest bearing liabilities		129.0	%		124.2	%		4.8	%
Average yields earned (1)		6.22	%		7.10	%		-0.88	%
Average rates paid		1.85	%		2.54	%		-0.69	%
Net interest spread (1)		4.37	%		4.56	%		-0.19	%
Net interest margin (1)		4.78	%		5.05	%		-0.27	%

(1) Interest earned on nontaxable securities has been computed on a 35% tax equivalent basis.
Ratios for the three months ended June 30, 2003 and 2002 have been annualized where appropriate.

Provision for Loan Loss. Bancorp recorded provisions for loan losses for the second quarter of 2003 and 2002 of $.85 million and $1.44 million, respectively. The decrease in the provision in the second quarter of 2003 compared to the second quarter of 2002 is primarily due to lower net loan charge-offs in the second quarter of 2003. Net charge-offs for the second quarter of 2003 were $.25 million, compared to net charge-offs of $1.01 million for the same period in 2002. Net charge-offs were concentrated in commercial real estate and consumer credit portfolios. Annualized net charge-offs for the second quarter 2003 were 0.08% of average loans, compared to 0.36% in the same period last year. At June 30, 2003, non-performing assets were $6.3 million or 0.40% of total assets, compared to 0.36% one year earlier. Bancorp’s allowance for loan losses as a percentage of total loans was 1.47% at June 30, 2003, up from 1.41% at June 30, 2002. The provision for loan loss is recorded to bring the allowance for loan losses to an amount considered appropriate by management based on factors which are described in the “Lending and Credit Management” and “Allowance for Loan Losses” sections of this report.

Noninterest Income. Total non-interest income was $5.84 million for the three months ended June 30, 2003, compared to $4.51 million for the period ended June 30, 2002, an increase of $1.33 million or 30%. The growth in non-interest income was in large part due to a $.6 million or 60% increase in gains on sales of loans driven by strong residential mortgage production. Combined service charges on deposit accounts and other service charges, commissions and fees were $3.49 million in the quarter ended June 30, 2003, an increase of $.5 million or 18% over the same period last year. The increase reflects growth in deposit volumes, increased income in Bankcard related programs and higher income from overdraft fees. During the first quarter of 2003, the Company purchased $12 million of bank owned life insurance which produced $.2 million in revenue in the second quarter of 2003. Trust income and other noninterest income were relatively flat in the second quarter of 2003 compared to the like period in 2002.

Noninterest Expense. Noninterest expense for the second quarter ended June 30, 2003 was $14.8 million, an increase of $1.7 million compared to $13.1 million in noninterest expense for the same period in 2002. Bancorp’s compensation and employee benefits increased $.9 million, or 12.5%, to $8.1 million in the second quarter of 2003, from $7.2 million for the like period in 2002. The increase in compensation expense was primarily related to the addition of commercial lending personnel, personnel in new branches, and higher commission related expenses. During the quarter ending June 30, 2003, Bancorp employed 582 full time equivalent employees compared to 547 at June 30, 2002. Bancorp has continued to invest in personnel with expertise consistent with the strategy of the Company, with additions of new personnel centered in branches and commercial lending teams.

Equipment expense increased $.1 million in the second quarter of 2003 over 2002. This increase in the second quarter is due to multiple factors, including increased maintenance and repair cost, increased leased equipment expense and new investments in software. Occupancy expenses increased over 1% in the second quarter of 2003 compared to the same period in 2002. The increase in occupancy expense is due to the addition of three new branches and certain periodic lease expense increases on leased properties. Check and other transaction processing fees increased 11% in the second quarter of 2003 compared to 2002 due to an increase in the volume of transactions processed. Professional fees increased $.2 million in the second quarter of 2003 compared to the same period in 2002 due to increased legal expenses, higher costs associated with restricted stock granted to directors, and higher deferred compensation costs. Courier and postage expense increased slightly in the second quarter compared to the prior year second quarter as more customers took advantage of courier services. Marketing expenses increased 36% in the second quarter of 2003 compared to the same period in 2002, due to an increase in promotions, direct mail campaigns and public relation related expenses.

Communication expense and printing and office supply expense increased slightly in the second quarter of 2003 compared to 2002. Other loan expense increased $.1 million, or 40%, in the second quarter of 2003 compared to the same period in 2002 due to expenses associated with foreclosures on certain properties. Other noninterest expense increased in the second quarter of 2003 compared to 2002 due to increased check printing expenses and certain minor fixed asset disposals.

Six months ended June 30, 2003 and 2002

Net Income. Bancorp reported net income of $9.72 million, or $.62 per diluted share, for the six months ended June 30, 2003, compared to $8.77 million, or $.54 per diluted share, for the six months ended June 30, 2002. Net interest income increased to $33.9 million in the first two quarters of 2003 compared to $32.9 million for the same period in 2002, an increase of $1.0 million or 3%. The increase in net interest income was driven by higher loan balances, higher loan fees, and improved deposit mix.

Analysis of Net Interest Income. Net interest income, including a $.9 million adjustment to a tax equivalent basis for the six months ended June 30, 2003, increased 2.8% to $34.8 million from $33.9 million for the same period in 2002. The increase was mainly due to increased average loan balances and decreases in rates paid on interest bearing liabilities, offset in part by a decrease in yields on average earning assets. Average yields on earning assets decreased to 6.33% in the first two quarters of 2003 from 7.16% in 2002. Average interest earning assets increased $98.1 million, or 7.2%, to $1.46 billion in the first two quarters of 2003, from $1.36 billion for the same period in 2002. Average rates paid on interest bearing liabilities decreased 70 basis points in the first two quarters of 2003, to 1.97% from 2.67% for the like period in 2002. The net interest spread decreased from 4.49% in the first two quarters of 2002 to 4.36% in the first two quarters of 2003. Bancorp’s net interest margin for the six months ended June 30, 2003, was 4.80%, a decrease of 20 basis points from 5.00% for the comparable period of 2002. The decrease in Bancorp’s net interest margin and related spreads is predominantly due to a combination of lower investment value of non-interest bearing deposits, a $.2 million pre-payment expense on longer-term debt, lower yields on earning assets, and the purchase of bank owned life insurance.


	Six months ended						Increase			Percentage
(Dollars in thousands)	June 30,						(Decrease)			Change

	2003			2002			2003-2002			2003-2002

Interest and fee income (1)	$	45,959		$	48,482			($2,523	)		-5.2	%
Interest expense		11,139			14,612			(3,473	)		-23.8	%

Net interest income (1)	$	34,820		$	33,870		$	950			2.8	%
Average interest earning assets	$	1,462,931		$	1,364,841		$	98,090			7.2	%
Average interest bearing liabilities	$	1,140,182		$	1,101,670		$	38,512			3.5	%
Average interest earning assets/ Average interest bearing liabilities		128.3	%		123.9	%		4.4	%
Average yields earned (1)		6.33	%		7.16	%		-0.83	%
Average rates paid		1.97	%		2.67	%		-0.70	%
Net interest spread (1)		4.36	%		4.49	%		-0.13	%
Net interest margin (1)		4.80	%		5.00	%		-0.20	%

(1) Interest earned on nontaxable securities has been computed on a 35% tax equivalent basis.
Ratios for the six months ended June 30, 2003 and 2002 have been annualized where appropriate.

Provision for Loan Loss. Bancorp recorded year to date 2003 and 2002 provisions for loan losses of $1.7 million and $2.3 million, respectively. The decrease in the provision in the first half of 2003 compared to the first half of 2002 is primarily due to lower net loan charge-offs in the first two quarters of 2003 compared to 2002. Net charge-offs for the first two quarters of 2003 were $.7 million, compared to net charge-offs of $1.5 million for the same period in 2002. The Company experienced loan recoveries of $.36 million during the year to date ended June 30, 2003, as compared to $.13 million in first two quarters of 2002. Annualized net charge-offs for the year to date June 30, 2003 were 0.12% of average loans, compared to 0.27% in the same period last year. At June 30, 2003, non-performing assets were 0.40% of total assets, compared to 0.36% one year earlier. Bancorp’s allowance for loan losses as a percentage of total loans was 1.47% at June 30, 2003, up from 1.41% at June 30, 2002. The provision for loan loss is recorded to bring the allowance for loan losses to an amount considered appropriate by management based on factors which are described in the “Lending and Credit Management” and “Allowance for Loan Losses” sections of this report.

Noninterest Income. Excluding the $.6 million gain on sale of property in the first quarter of 2002, total non-interest income increased slightly less than 19% year to date through June 30, 2003 from the same period a year ago (see “Reconciliation to GAAP Financial Measures” section). This was largely due to a 31% increase in gains on sales of loans and a 16% increase in total deposit and other service charges, commission and fees. During the first quarter 2003, the Company invested $12 million in bank owned life insurance, contributing $.3 million to non-interest income in the first two quarters, with a partially offsetting impact on net interest income and margin. In addition, the Company recognized a $.2 million gain on the sales of securities during the first quarter, which substantially offset an expense associated with a pre-payment of long-term debt. On a GAAP basis, total non-interest income increased over 11% year to date June 30, 2003, from the same period in 2002 to $10.8 million.

Noninterest Expense. Excluding the first quarter 2002 write-off of certain fixed assets, non-interest expense for the year to date ended June 30, 2003 increased just under 8% from same period in 2002 (see “Reconciliation to GAAP Financial Measures” section). The period-over-period increase was primarily related to the addition of commercial lending personnel, new branches, and higher commission related expenses. Professional fees increased 45% to $1.14 million in the first two quarters of 2003 from $.8 million in the first two quarters of 2002 due to increased legal expenses, higher costs associated with restricted stock, and higher deferred compensation costs. Other loan expense increased 28% from $.7 million in the first half of 2002 to $.9 million in the same period in 2003. On a GAAP basis noninterest expense increased 5% in the year to date June 30, 2003, compared to the year to date 2002.

Reconciliation to GAAP Financial Measures. The above sections include information relating to non-interest income and non-interest expense that is calculated on a non-GAAP basis. Management uses this non-GAAP information internally, and has disclosed it to investors, based on its belief that the information provides a more useful picture of its operating results for purposes of comparisons to results for prior periods. The tables below include a reconciliation of these measures to comparable measures calculated in accordance with GAAP.


	Six months ended				Change
	June 30,
(Unaudited) (dollars in thousands):	2003		2002		$		%

Non-interest income excluding gain on sale of property	$	10,823	$	9,111	$	1,712		19	%
add: Gain on sale of property		—		613		-613		—

GAAP non-interest income	$	10,823	$	9,724	$	1,099		11	%


	Six months ended
	June 30,				Change
	2003		2002		$		%

Non-interest expense excluding write-off of fixed assets	$	28,510	$	26,438	$	2,072		8	%
add: Write off of fixed assets		—		613		-613		—

GAAP non-interest expense	$	28,510	$	27,051	$	1,459		5	%

Income Taxes

During the first six months of 2003, due to an increase in net income before taxes offset in part by increased non-taxable income from bank owned life insurance and the effect of investments in tax credits. The provision for income taxes increased $.3 million in the first six months ended June 30, 2003 from the like period in 2002. Bancorp’s effective tax rate in the second quarter of 2003, decreased to 32.4% compared to 33.7% for the same period in 2002 due to an increase in non-taxable income from bank owned life insurance.

Investment Portfolio

The investment portfolio at June 30, 2003 decreased $13.3 million compared to December 31, 2002. The composition and carrying value of the Bank’s investment portfolio is as follows:


		June 30,		December 31,
(Dollars in thousands)		2003		2002

Investments available for sale (At fair value)
U.S. Treasury securities		$	5,552	$	5,583
U.S. Government agency securities			75,921		66,483
Corporate securities			20,950		22,497
Mortgage-backed securities			50,542		69,234
Obligations of state and political subdivisions			88,207		87,592
Equity and other securities			11,958		15,018

	Total Investment Portfolio	$	253,130	$	266,407

Liquidity and Sources of Funds

Bancorp’s primary sources of funds are customer deposits, maturities of investment securities, sales of available for sale securities, loan sales, loan repayments, net income, advances from the Federal Home Loan Bank of Seattle (“FHLB”), the issuance of trust preferred securities 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. General interest rate levels, interest rates available on other investments, competition, economic conditions, and other factors, influence unscheduled loan prepayments.

Deposits are Bancorp’s primary source of funds. Total deposits were $1.325 billion at June 30, 2003, compared to $1.266 billion at December 31, 2002. At June 30, 2003, Bancorp used no brokered deposits, but we may accept such deposits in the future. We are focused on attracting deposits in the market area we serve through competitive pricing and delivery of a quality product. The composition of Bancorp’s deposits is as follows:


	June 30,					December 31,
	2003					2002

(Dollars in thousands)	Amount		Percent			Amount		Percent

Demand	$	291,014		22	%	$	275,724		22	%
Savings and interest bearing demand		649,145		49	%		619,502		49	%
Certificates of deposit		384,403		29	%		371,227		29	%

Total deposits	$	1,324,562		100	%	$	1,266,453		100	%

Management anticipates that Bancorp will continue relying on customer deposits, maturity of investment securities, sales of available for sale securities, loan sales, loan repayments, net income, Trust Preferred Securities, Federal Funds markets, FHLB, and other borrowings to provide liquidity. Deposit balances might be influenced by changes in the banking industry, interest rates available on other investments, general economic conditions, competition, and other factors. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a long-term basis to support lending activities and to better match maturities or repricing intervals of assets. The sources of such funds might include repurchase agreements, borrowings from the FHLB and the issuance of Trust Preferred Securities.

As of June 30, 2003 other borrowings had the following time periods remaining to contractual maturity.


		Payments due within listed time periods at June 30, 2003

(Dollars in thousands)								Due after
		0-12 months		1-3 Years		4-5 Years		five years		Total

Reverse repurchase agreements		$	5,036	$	—	$	—	$	—	$	5,036
Trust preferred securities			—		—		12,500		—		12,500
Short term borrowings		$	12,536		—		—		—		12,536
Long-term borrowings			15,000		42,500		25,500		—		83,000

	Total borrowings	$	32,572	$	42,500	$	38,000	$	—	$	113,072

Capital Resources

As of June 30, 2003, Bancorp and the Bank are considered “Well Capitalized” under the regulatory risk based capital guidelines. The Federal Reserve Bank (FRB) and the Federal Deposit Insurance Corporation (FDIC) have otherwise 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%.

In June 2002, West Coast Bancorp issued $7.5 million of pooled Trust Preferred Securities through one issuance by a wholly-owned subsidiary grantor trust, West Coast Statutory Trust II (Trust II). The sole asset of Trust II is $7.5 million principal amount 4.69% Debentures that mature in June 2032, and are redeemable prior to maturity at the option of the Company on or after June 2007. These Trust Preferred Securities are considered Tier 1 capital (with certain limitations applicable) under current regulatory guidelines. At June 30, 2003, Bancorp’s total outstanding Trust Preferred Securities was $12.5 million.

The Trust Preferred Securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. Trust II used the net proceeds from the offering to purchase a like amount of Junior Subordinated Debentures (the Junior Debentures) of the Company. The Junior Debentures are the sole assets of Trust II and are eliminated, along with the related income statement effects, in the consolidated financial statements. The Company’s obligations under the Junior Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the statutory Trust. The Trust Preferred Securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation requires a variable interest entity to be consolidated by the primary beneficiary of that entity. This interpretation may affect the way Trust Preferred Securities are accounted for and viewed by Regulatory Agencies. On July 2, 2003, the Federal Reserve Bank issued Supervisory Letter SR 03-13 clarifying that Bank Holding Companies should continue to report Trust Preferred Securities in accordance with current Federal Reserve Bank instructions which allows Trust Preferred Securities to be counted in Tier 1 capital subject to certain limitations. The Federal Reserve has indicated it will review the implications of any accounting treatment changes and, if necessary or warranted, will provide appropriate guidance.

The following table summarizes the consolidated Risk Based Capital ratios of Bancorp and the Bank at June 30, 2003 and December 31, 2002.


	June 30, 2003										December 31, 2002

						Amount		Percent								Amount		Percent
						Required For		required for								Required For		required for
						Minimum		Minimum								Minimum		Minimum
						Capital		Capital								Capital		Capital
(Dollars in thousands)	Actual					Adequacy		Adequacy			Actual					Adequacy		Adequacy

	Amount		Ratio			Amount					Amount		Ratio			Amount

Tier 1 Capital
West Coast Bancorp	$	143,616		10.05	%	$	57,186		4	%	$	140,095		10.10	%	$	55,474		4	%
West Coast Bank		134,051		9.38	%		57,142		4	%		133,958		9.66	%		55,467		4	%
Total Capital
West Coast Bancorp	$	161,458		11.29	%	$	114,372		8	%	$	156,933		11.32	%	$	110,947		8	%
West Coast Bank		151,894		10.63	%		114,283		8	%		150,796		10.87	%		110,933		8	%
Risk weighted assets West Coast Bancorp	$	1,429,653									$	1,386,843
West Coast Bank	$	1,428,543									$	1,386,667
Leverage Ratio
West Coast Bancorp	$	143,616		9.37	%	$	46,002		3	%	$	140,095		9.19	%	$	45,725		3	%
West Coast Bank		134,051		8.65	%		46,509		3	%		133,958		8.78	%		45,748		3	%
Adjusted total assets
West Coast Bancorp		1,533,407										1,524,169
West Coast Bank		1,550,303										1,524,927

Stockholders’ equity increased to $137.7 million at June 30, 2003, from $133.4 million at December 31, 2002, an increase of $4.3 million. The increase is due to net income and an increase in the unrealized gain on securities available for sale, offset in part by payments of cash dividends to stockholders and Bancorp’s activity in its corporate stock repurchase program.

In July 2000, Bancorp announced a corporate stock repurchase program that was expanded in September 2000, June 2001, and again in September 2002. Under this plan, the Company can buy up to 2.88 million shares of the Company’s common stock, including completed purchases. The Company intends to use existing funds and/or long-term borrowings to finance the repurchases. During the first six months of 2003, and consistent with its capital plan, the Company repurchased approximately 344,000 shares, or approximately 2.3% of its common shares pursuant to its corporate stock repurchase program. Total shares available for repurchase under this plan are 564,000 at June 30, 2003. The following table presents information with respect to Bancorp’s July 2000 stock repurchase program.


						Average
(Shares and dollars in thousands)		Shares repurchased in period		Cost of shares repurchased		Cost per share

Year ended 2000			573	$	5,264	$	9.19
Year ended 2001			534		6,597	$	12.35
Year ended 2002			866		13,081	$	15.11
Year to date June 30, 2003			344		5,520	$	16.05

	Plan to date total		2,317	$	30,462	$	13.15

Critical Accounting Policies

We have identified our most critical accounting policy to be that related to the allowance for loan loss. Bancorp’s allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Qualitative factors include the general economic environment in our markets and, in particular, the state of certain industries. Size and complexity of individual loans in relation to lending officer’s background and experience levels, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in our methodology. As we add new products, increase complexity of the portfolio, and expand our geographic coverage, we intend to enhance and adapt our methodology to keep pace with the size and complexity of the loan portfolio. Changes in any of the above factors could affect the calculation of the allowance for loan loss in any given period. Management believes that our systematic methodology continues to be appropriate given our size and level of complexity.

This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2002.

Lending and Credit Management

Interest earned on the loan portfolio is the primary source of Bancorp’s income. Net loans represented 74.9% of total assets as of June 30, 2003 compared to 74.6% at December 31, 2002. A certain degree of credit risk is inherent in our lending activities. Bancorp has a comprehensive risk management process to control, underwrite, monitor and manage credit risk in our loan portfolio. This risk is managed through our credit administration and credit review functions, which are designed to help ensure compliance with our credit standards. Credit files are examined on a sample test basis, periodically, by the internal credit review department, internal and external auditors, as well as bank regulatory examiners.

Through the credit review function, Bancorp 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 advanced 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. The credit review function independently reviews loans to ensure risk ratings are appropriate. The findings of these reviews are communicated with senior management, the Audit Compliance and Governance Committee and the Loan, Investment, and ALCO Committee, which is made up of certain directors.

Bancorp strives to serve the credit needs of its service areas; the primary focus is on real estate related and commercial credits. We make substantially all our loans to customers located within our service areas.

A risk of nonpayment exists with respect to all loans, and 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 Bancorp’s loans. The expected source of repayment of these loans is generally the cash flow of the project, operations of the borrower’s business, personal income or net worth. Risks associated with real estate loans include fluctuating land values, local and national economic conditions, changes in tax policies, and a concentration of loans within any one area. Due to the concentration of Bancorp’s real estate collateral, adverse developments with respect to the above risks could have a significant adverse impact on the value of Bancorp’s collateral and a negative impact on earnings.

The composition of Bancorp’s loan portfolio is as follows:


(Dollars in thousands)	June 30, 2003						December 31, 2002

	Amount			Percent			Amount			Percent

Commercial	$	239,296			19.7	%	$	205,725			17.7	%
Real estate construction		126,422			10.4	%		121,711			10.5	%
Real estate mortgage		162,681			13.4	%		148,350			12.8	%
Real estate commercial		642,467			53.0	%		637,978			55.0	%
Installment and other consumer		40,912			3.4	%		46,151			4.0	%

Total loans		1,211,778			100	%		1,159,915			100	%
Allowance for loan losses		(17,843	)		1.47	%		(16,838	)		1.45	%

Total loans, net	$	1,193,935					$	1,143,077

The change in the composition of Bancorp’s loan portfolio, with higher a percentage mix in commercial and real estate mortgage (home equity) categories, reflects the strategic focus of the Company.

The composition of commercial real estate loan types based on collateral is as follows:


(Dollars in thousands)	June 30, 2003					December 31, 2002

	Amount		Percent			Amount (1)		Percent

Office Buildings	$	142,500		22.2	%	$	138,700		21.7	%
Retail Facilities		71,300		11.1	%		73,000		11.4	%
Hotels/Motels		70,800		11.0	%		72,200		11.3	%
Multi-Family - 5+ Residential		60,600		9.4	%		66,900		10.5	%
Assisted Living		39,100		6.1	%		39,600		6.2	%
Medical Offices		33,200		5.2	%		32,100		5.0	%
Industrial parks and related		23,200		3.6	%		18,600		2.9	%
Mini Storage		18,200		2.8	%		18,000		2.8	%
Manufacturing Plants		15,900		2.5	%		15,900		2.5	%
Commercial/Agricultural		14,500		2.3	%		13,000		2.0	%
Food Establishments		14,500		2.3	%		15,200		2.4	%
Church, Civic, Nonprofit facilities		14,000		2.2	%		14,400		2.3	%
Land Development and Raw Land		11,900		1.9	%		11,200		1.8	%
Health spa and gym		10,900		1.7	%		11,400		1.8	%
RV Parks, Marinas, related		10,700		1.7	%		10,800		1.7	%
Other		91,200		14.2	%		86,900		13.6	%

Total real estate commercial loans	$	642,500		100	%	$	637,900		100	%

(1) Certain amounts have been reclassified at year end to conform to current categories.

Approximately 35% of Bancorp’s commercial real estate loan portfolio is classified as owner occupied. Bancorp’s underwriting of commercial real estate loans is conservative with loan to values generally not exceeding 75% and debt service coverage ratios of 120% or better.

As of June 30, 2003, the Bank had outstanding loans to persons serving as directors, officers, principal stockholders and their related interests. These loans, when made, are substantially on the same terms, including interest rates, maturities and collateral as comparable loans made to other customers of the Bank. At June 30, 2003 and December 31, 2002, Bancorp had no bankers acceptances.

Nonperforming Assets

Nonperforming assets include nonaccrual loans, other real estate owned, and loans past due more than 90 days. Interest income on loans is accrued daily on the principal balance outstanding. Generally, no interest is accrued on loans when factors indicate collection of interest or principal is doubtful or when the principal or interest payment becomes 90 days past due. The current nonaccrual loans consist of a mix of commercial and commercial real estate secured loans. 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.

Nonperforming assets consist of the following:


(Dollars in thousands)	June 30, 2003			December 31, 2002

Loans on nonaccrual status	$	4,621		$	5,080
Loans past due greater than 90 days not on nonaccrual status		—			15
Other real estate owned		1,703			1,672

Total nonperforming assets	$	6,324		$	6,767

Percentage of nonperforming assets to total assets		0.40	%		0.44	%

Allowance for Loan Losses

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. Our methodology for assessing the appropriateness of the allowance consists of several key elements.

— Specific allowances for identified problem loans and portfolio segments,

— The formula allowance, and

— The unallocated allowance.

The evaluation of each element above and the overall allowance is based on a continuing assessment of problem loans, recent and historical loss experience, and other factors, including regulatory guidance and economic factors. The Bank considers historical charge-off levels in addition to existing economic conditions, and other factors, when establishing the allowance for loan losses. Management believes that the current allowance for loan losses is adequate.

Our allowance incorporates the results of measuring impaired loans as provided in: 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.

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 formula allowance is calculated by applying loss factors to outstanding loans, in each case based on the internal risk grade of those loans or pools of loans. 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 data management believes pertinent and may be adjusted for significant factors that, in management’s judgement, affect the collectibility of the portfolio as of the evaluation date. Commercial and Commercial Real Estate loans have produced significant losses in the banking industry 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 loss experience.

Loss factors used in the formula allowance 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, for loans not individually graded, 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.

The unallocated allowance uses a more subjective method and considers factors such 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,

— 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, and

— Bank regulatory examination results and findings of our internal credit examiners.

Executive credit management reviews these conditions quarterly in discussions with our senior credit officers and the credit review function. If any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of this condition may be reflected as a specific allowance applicable to the credit or portfolio segment. If a specifically identifiable problem credit or portfolio segment as of the evaluation date does not evidence any of these conditions, management’s evaluation of the probable loss concerning this condition is reflected in the unallocated allowance.

The allowance for loan 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.

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 June 30, 2003, the Bank’s allowance for loan losses was $17.8 million, consisting of a $16.2 million formula allowance, no required specific allowance and a $1.6 million unallocated allowance. At December 31, 2002, our allowance for loan losses was $16.8 million, consisting of a $15.5 million formula allowance, a $.1 million specific allowance and a $1.2 million unallocated allowance. The changes in the allocation of the allowance for loan losses in the first six months of 2003 were due primarily to changes in the loan portfolio and its mix, changes in the risk grading of our loans, and charge-offs as well as recovery activity. The higher allocation to the unallocated allowance reflects an increased weighting by management on the above mentioned factors describing the methodology of the unallocated allowance.

At June 30, 2003, Bancorp’s allowance for loan loss was 1.47% of total loans, and 386% of total nonperforming loans, compared with an allowance for loan losses at December 31, 2002 of 1.45% of total loans, and 330% of total nonperforming loans.

Changes in the allowance for loan losses are as follows:


		Six months ended			Year ended
(Dollars in thousands)		June 30, 2003			Dec. 31, 2002

Loans outstanding at end of period		$	1,211,778		$	1,159,915
Average loans outstanding during the period		$	1,185,751		$	1,127,761
Allowance for loan losses, beginning of period		$	16,838		$	15,252
Loans charged off:
	Commercial		(348	)		(1,878	)
	Real Estate		(333	)		(526	)
	Installment and consumer		(373	)		(1,276	)

	Total loans charged off		(1,054	)		(3,680	)
Recoveries:
	Commercial		235			160
	Real Estate		62			25
	Installment and consumer		62			102

	Total recoveries		359			287

Net loans charged off			(695	)		(3,393	)
Provision for loan losses			1,700			4,979

Allowance for loan losses, end of period		$	17,843		$	16,838

Ratio of net loans charged off to average loans outstanding (1)			0.12	%		0.30	%
Ratio of allowance for loan losses to loans outstanding at end of period			1.47	%		1.45	%

(1) The ratio for the six months ended June 30, 2003 has been annualized.

During the first six months of 2003, net loans charged off were $.7 million, compared to $1.5 million for the same period in 2002. The annualized percentage of net loans charged off year to date to average loans outstanding was 0.12% in the six months ended June 30, 2003, compared to 0.27% in the same period last year. Charged off loans reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

There has not been any material change in the market risk disclosure contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Item 4. Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Our chief executive officer (“CEO”) and chief financial officer (“CFO”), after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of the end of the period covered by this quarterly report, have concluded, based on such evaluation, that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in its reports filed or submitted under the Exchange Act. No change in the Company’s internal control over financial reporting occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits


Exhibit No.		Exhibit

31.1		Certification of CEO under Section 302 of the Sarbanes-Oxley Act.
31.2		Certification of CFO under Section 302 of the Sarbanes-Oxley Act.
32		Certification of CEO and CFO under Section 906 of the Sarbanes-Oxley Act.

(b) During the three months ended June 30, 2003, West Coast Bancorp filed the following current report on Form 8-K:

Bancorp furnished a report on Form 8-K, reporting its earnings and including as an exhibit a press release dated July 15, 2003, discussing operating results for the second quarter and first six months of 2003.

Signatures

As required by the Securities Exchange Act of 1934, this report is signed on registrant’s behalf by the undersigned authorized officers.


				WEST COAST BANCORP (Registrant)


Dated: August 13, 2003				/s/ Robert D. Sznewajs

				Robert D. Sznewajs Chief Executive Officer and President


Dated: August 13, 2003				/s/ Anders Giltvedt

				Anders Giltvedt Executive Vice President and Chief Financial Officer

	—		Specific allowances for identified problem loans and portfolio segments,
	—		The formula allowance, and
	—		The unallocated allowance.

	—		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, for loans not individually graded, 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.

	—		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,
	—		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, and
	—		Bank regulatory examination results and findings of our internal credit examiners.