UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2004

Commission file number 0-10997

WEST COAST BANCORP

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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [   ]

     The number of shares of Registrant’s Common Stock outstanding on April 30, 2004 was 15,038,178.

WEST COAST BANCORP
FORM 10-Q
Table of Contents

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PART I. Financial Information

Item 1. Financial Statements

WEST COAST BANCORP

See notes to consolidated financial statements.

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WEST COAST BANCORP

See notes to consolidated financial statements.

4

WEST COAST BANCORP

See notes to consolidated financial statements.

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WEST COAST BANCORP

See notes to consolidated financial statements.

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WEST COAST BANCORP

1. BASIS OF PRESENTATION

     The accompanying interim consolidated financial statements include the accounts of West Coast Bancorp (“Bancorp” or the “Company”), which operates its wholly-owned subsidiaries, West Coast Bank (the “Bank”), West Coast Trust, and Totten, Inc., after elimination of intercompany transactions and balances. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, West Coast Statutory Trust I, II, III, and IV are considered related parties to West Coast Bancorp and their financial results are not consolidated in West Coast Bancorp’s financial statements. Certain reclassifications of prior year amounts have been made to conform to current classifications. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying interim consolidated financial statements should be read in conjunction with the financial statements and related notes contained in Bancorp’s 2003 Annual Report on Form 10-K.

     The interim unaudited consolidated 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 and cash flows for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004, or other future periods.

     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.

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     At March 31, 2004, Bancorp had multiple stock option plans. Bancorp accounts for its stock option plans using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 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 Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, had been applied to all outstanding and unvested awards in each period.

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2. INVESTMENT SECURITIES

     The composition and carrying value of Bancorp’s investment portfolio is as follows:

     The following tables provide information on unrealized losses in the investment securities portfolio at March 31, 2004:

     The Company has one investment security with a 12 month or greater continuous unrealized loss in the investment portfolio at March 31, 2004. At March 31, 2004 there were approximately 21 securities with an unrealized loss of $.5 million, or an average loss of $24,000 per security. The impairment on these fixed income securities is due to an increase in interest rates subsequent to their purchase. The fair value of these securities will fluctuate as market interest rates change.

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3. COMPREHENSIVE INCOME

     The components of comprehensive income are as follows:

     Bancorp currently uses two single interest-rate swaps to convert two variable rate Junior Subordinated Debt issuances to fixed rates. The two swaps entered into concurrently with the issuance of the junior subordinated debt are accounted for as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The fair value of Bancorp’s swaps was an unrealized loss of $.88 million at March 31, 2004 and $.75 million at December 31, 2003. 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.

4. EARNINGS PER SHARE

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

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

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5. PREMISES AND EQUIPMENT

     The following table presents the amounts of premises and equipment:

     Depreciation included in the net occupancy and equipment expense amounted to $1.0 million and $.7 million in the first three months of 2004 and 2003, 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 three months of 2004, there were no impairment write-downs.

6. ALLOWANCE FOR LOAN LOSSES

     The following table represents activity in the allowance for loan losses for the three months ended March 31, 2004, and 2003:

7. COMMITMENTS AND CONTINGENT LIABILITIES

     On March 4, 2004, the Company was served with a lawsuit filed in Multnomah County Circuit Court entitled Walter L. West, dba Walter West Construction Co. v. West Coast Bancorp. The lawsuit is related to a case filed by the plaintiff in Lincoln County Circuit Court in April 2002 that was voluntarily dismissed by the plaintiff. The plaintiff has re-asserted claims against Bancorp alleging breach of contract/third party beneficiary, promissory estoppel, and equitable estoppel.

     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 seeks damages from Bancorp in the amount of $3.5 million, plus such additional damages as may be proven at trial.

     Bancorp is periodically party to other litigation arising in the ordinary course of 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.

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8. 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 2003 Annual Report on Form 10-K.

     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.

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

Forward Looking Statement Disclosure

     Statements in this Quarterly Report regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and are made pursuant to the safe harbors of the PSLRA. Actual results of West Coast Bancorp (“Bancorp” or the “Company”) could be quite different from those expressed or implied by the forward-looking statements. Any statements that expressly or implicitly predict future results, performance, or events should be considered forward-looking. Factors that could cause results to differ from forward-looking statements include, among others, risks discussed in the text of this Quarterly Report as well as the following specific items: general economic conditions, whether national or regional, that could affect the demand for loans or lead to increased loan losses; evolving banking industry standards; legal developments; competitive factors, including increased competition with community, regional, and national financial institutions that may lead to pricing pressures on Bancorp’s loan yield and rates paid on deposits; loss of customers of greatest value to Bancorp; changing customer investment, deposit and lending behaviors; credit policies of regulatory authorities; increasing or decreasing interest rate environments, including the shape and the level of the yield curve, that could lead to decreased net interest margin, net interest income and fee income, including lower gains on sales of loans; changing business conditions in the banking industry; changes in the regulatory environment or new legislation affecting the financial services industry; changes in government funding of Small Business Administration (“SBA”) loans; and changes in technology or required investments in technology.

     Furthermore, the forward-looking statements are subject to risks and uncertainties related to the Company’s ability to: attract and retain lending officers and other key personnel; close loans in the pipeline; generate loan and deposit balances at projected spreads; sustain fee generation, including lower gains on sales of loans; maintain asset quality; control the level of net charge-offs; increase productivity; generate retail investments; control expense growth; monitor and manage the Company’s internal operating and disclosure control environments; and other matters.

     Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as of the date of the statements. Bancorp undertakes no obligation to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.

     This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission (“SEC”).

Critical Accounting Policies

     We have identified our most critical accounting policy to be 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.

Income Statement Overview

Three months ended March 31, 2004 and 2003

     Bancorp reported net income of $5.2 million, or $.33 per diluted share, for the three months ended March 31, 2004, compared to $4.7 million, or $.30 per diluted share, for the three months ended March 31, 2003. This represents a 10% net income and earnings per diluted share growth for the first quarter of 2004 compared to the same period in 2003. Our return on equity for the quarters ended March 31, 2004 and 3002 was 14.79% and 14.35%, respectively.

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     Net Interest Income. Bancorp’s profitability, like that of many financial institutions, is dependent to a large extent upon net interest income. At March 31, 2004, we estimate our balance sheet was slightly asset sensitive over a 12 month horizon, meaning that interest-earning assets mature or reprice slightly more quickly than interest-bearing liabilities in a given period. Therefore, a significant decrease in market rates of interest could adversely affect net interest income, while an increase in market rates may increase net interest income. We attempt to limit our interest rate risk through managing the repricing characteristics of our assets and liabilities. Competition, the economy, and a change in the yield curve may also impact Bancorp’s net interest income materially in any period beyond what declining or rising interest rates may do.

     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:

	(1)		Interest earned on nontaxable securities has been computed on a 35% tax equivalent basis.
			Ratios for the three months ended March 31, 2004 and 2003 have been annualized where appropriate.

     Analysis of Net Interest Income. Net interest income, including a $.42 million adjustment to a tax equivalent basis for the three months ended March 31, 2004, increased slightly less than 9% to $18.7 million from $17.1 million for the same period in 2003. Higher loan and investment balances and an improved deposit mix contributed to the increase in net interest income. Average yields on earning assets decreased 60 basis points to 5.86% in the first quarter of 2004 from 6.46% in 2003. Average interest earning assets increased $124.4 million, or 8.6%, to $1.6 billion in the first quarter of 2004 from $1.4 billion for the same period in 2003. Average rates paid on interest bearing liabilities decreased 70 basis points to 1.40% in the first quarter of 2004, from 2.10% for the same period in 2003. The net interest spread increased from 4.36% in the first quarter of 2003 to 4.46% in the first quarter of 2004. Bancorp’s net interest margin for the three months ended March 31, 2004, was 4.78%, a decrease of 4 basis points from 4.82% for the comparable period of 2003.

     Provision for Loan Loss. Bancorp recorded provisions for loan losses for the first quarter of 2004 and 2003 of $.90 million and $.85 million, respectively. The increase in the provision in the first quarter of 2004 compared to the first quarter of 2003 was primarily due to higher loan growth. Net charge-offs for the first quarter of 2004 were $.35 million, compared to net charge-offs of $.44 million for the same period in 2003. Net charge-offs were concentrated in commercial and consumer credit portfolios. Annualized net charge-offs for the first quarter 2004 were 0.11% of average loans, compared to 0.15% in the same period last year. At March 31, 2004, non-performing assets were $5.2 million or 0.31% of total assets, compared to 0.41% one year earlier. Bancorp’s allowance for loan losses as a percentage of total loans was 1.48% at March 31, 2004, up from 1.47% at March 31, 2003. 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 $5.5 million for the three months ended March 31, 2004, compared to $5.0 million for the period ended March 31, 2003, an increase of $.53 million or 11%. Combined service charges on deposit accounts and other service charges, commissions and fees were $3.6 million in the quarter ended March 31, 2004, an increase of $.50 million or 16% over the same period last year. The increase reflects growth in deposit accounts and volumes, increased income in Bankcard related programs and higher income from investment services sales as well as higher overdraft fees. Trust income increased 21% over the same period last year. Gains on sales of loans decreased $.23 million or 20% in the first quarter of 2004 compared to the like period in 2003. Other noninterest income increased by $.21 million in the first quarter of 2004 compared to 2003 due to the one-time sale of a repossessed property.

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     Noninterest Expense. Noninterest expense for the first quarter ended March 31, 2004 was $15.2 million, an increase of $1.5 million compared to $13.7 million in noninterest expense for the same period in 2003. Salaries and benefits increases represented $1.1 million of the year-over-year quarterly increase. Approximately 40% of the $1.1 million increase in salaries and benefits was associated with new branch personnel and additional commercial and residential lending officers.

     The first quarter 2004 occupancy expense increased $.39 million from the first quarter of 2003, with $.28 million being a charge resulting from decreasing our book value in an affordable housing tax credit to match our equity in the project. Marketing expenses increased $.20 million mainly due to additional direct mail cost associated with a new product launched in the South Puget Sound Region, while other loan expense declined $.26 million, primarily in the area of other real estate owned costs which were lower in the first quarter of 2004. Declining legal costs positively affected professional expense on a year over year first quarter basis. All other expense categories combined remained flat in the first quarter of 2004 compared to the same period in 2003.

     Income taxes. The provision for income taxes increased slightly in the first three months ended March 31, 2004, from the like period in 2003, due to an increase in income before taxes and lower tax exempt municipal security income offset in part by increased non-taxable income from bank owned life insurance and the effect of investments in tax credits. Bancorp’s effective tax rate in the first quarter of 2004 decreased to 32.5% compared to 34.0% for the same period in 2003 primarily due to an increase in non-taxable income from bank owned life insurance and additional tax credits.

Balance Sheet Overview

     Period end total assets increased 5% on an annualized basis to $1.68 billion as of March 31, 2004 from $1.66 billion at December 31, 2003. Our balance sheet has been focused on growth in targeted areas that support our corporate objectives, including small business and middle market commercial lending, home equity lending, and core deposit production.

     Period end total loans at March 31, 2004 increased over 7% or $86.5 million from March 31, 2003. During the first quarter of 2004, our quarter to date average commercial loans were up over 13%, or $29 million over the same period in 2003, while average home equity loans were up $34 million, or 27% over the same period. Total average deposits were up slightly less than 10% for the period ended March 31, 2004 compared to 2003. Lower cost deposits increased at a higher rate as certificates of deposits have declined since March 31, 2003.

Investment Portfolio

     The investment portfolio at March 31, 2004, decreased $5.6 million compared to December 31, 2003. The composition and carrying value of Bancorp’s investment portfolio is as follows:

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Loan Portfolio and Credit Management

     Interest and fees earned on the loan portfolio is our primary source of revenue. Loans represented 75% of total assets, or $1.26 billion as of March 31, 2004, compared to 73% or $1.22 billion at December 31, 2003. A certain degree of credit risk is inherent in our lending activities. 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. In addition, we attempt to manage our risk through our credit administration and credit review functions, which are designed to help ensure compliance with our credit standards. Through the Credit Review function the Bank is able to monitor all credit-related policies and practices on a post approval basis, ensuring uniform application. The findings of these reviews are communicated with senior management and the Loan, Investment, and Asset/Liability Committee, which is made up of certain directors. 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. Credit files are examined periodically on a sample test basis, by internal and external auditors, as well as regulatory examiners.

     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 decreasing land values, material increases in interest rates, deterioration in local economic conditions, changes in tax policies, and a concentration of loans within any one area.

     As part of our strategic efforts, we have placed an emphasis on increasing the commercial and home equity loan segments of our portfolio. Real estate commercial loans continue to be the largest portion of our loan portfolio at 52%, but is down from 58% at the end of 2000. We believe our focus on commercial business loans is a key contributor to our strategy of core deposit growth.

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

     The change in the composition of Bancorp’s loan portfolio, with increases in the percentage of loans that fall into 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:

(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 March 31, 2004, 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 March 31, 2004 and December 31, 2003, Bancorp had no bankers acceptances.

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     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:

Allowance for Loan Losses

     Please see our Annual Report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Loan Loss Allowance and Provision” for a discussion of Bancorp’s methodologies underlying the calculation of the Company’s allowance for loan losses.

     At March 31, 2004, the Bank’s allowance for loan losses was $18.7 million, consisting of a $17.4 million formula allowance, no required specific allowance and a $1.3 million unallocated allowance. At December 31, 2003, our allowance for loan losses was $18.1 million, consisting of a $17.0 million formula allowance, a $95,000 specific allowance and a $1.0 million unallocated allowance. The changes in the allocation of the allowance for loan losses in the first three months of 2004 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 a decrease in the allocated portion of the allowance for loan loss and a change in the weighting by management on the above mentioned factors describing the methodology of the unallocated allowance.

     At March 31, 2004, Bancorp’s allowance for loan loss was 1.48% of total loans, and 524% of total nonperforming loans, compared with an allowance for loan losses at December 31, 2003 of 1.49% of total loans, and 697% of total nonperforming loans.

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     Changes in the allowance for loan losses are as follows:

(1)

The ratio for the three months ended March 31, 2004, has been annualized.

     During the first three months of 2004, net loans charged off were $.3 million, compared to $.4 million for the same period in 2003. The annualized percentage of net loans charged off year to date to average loans outstanding was 0.11% in the three months ended March 31, 2004, compared to 0.15% 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.

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Deposits and Borrowings

     The following table summarizes the average amount of, and the average rate paid on, each of the deposit and borrowing categories for the periods shown.

(1)

Long-term borrowings include Junior Subordinated Debentures at March 31, 2004, which was designated as Mandatorily Redeemable Trust Preferred Securities at March 31, 2003.

     Average core deposits, consisting of demand and savings, money market and interest bearing demand deposits, increased slightly less than 10% in the first quarter of 2004 compared to the same period in 2003. Our core deposits increase was mainly due to improved sales practices by the branches and commercial teams resulting in both consumer and business core deposit growth, businesses maintaining higher balances to avoid service charges, minimal, if any, yield differences between non-insured investments and similar FDIC insured deposit products.

     Average time deposits declined $41.3 million in 2004 compared to 2003, or 11.1%, as customers likely viewed the rates offered on such deposits unattractive relative to historical rates. Although a significant amount of certificates of deposits or time deposits will mature and reprice in the next twelve months, we expect to retain the majority of these deposits as the rate on the existing time deposit portfolio is already very low by historical standards. A continued decrease in time deposits would unlikely affect our liquidity or short term operations materially. These deposits can generally be retained with increases in rates paid which would increase our cost of funds.

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Capital Resources

     The Federal Reserve Bank (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) have established minimum requirements for capital adequacy for bank holding companies and member banks. The requirements address both risk-based capital and leveraged capital. The regulatory agencies may establish higher minimum requirements if, for example, a corporation has previously received special attention or has a high susceptibility to interest rate risk. The FRB and FDIC risk-based capital guidelines require banks and bank holding companies to have a ratio of tier one capital to total risk-weighted assets of at least 4%, and a ratio of total capital to total risk-weighted assets of 8% or greater. In addition, the leverage ratio of tier one capital to total assets less intangibles is required to be at least 3%. As of March 31, 2004, Bancorp and the Bank are considered “Well Capitalized” under the regulatory risk based capital guidelines.

     The following table summarizes the consolidated risk based capital ratios of Bancorp and the Bank at March 31, 2004, and December 31, 2003.