Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
General
West Coast Bancorp ("Bancorp" or the "registrant"), an Oregon corporation, was organized in August 1981 as a bank holding company under the name Commercial Bancorp. Pursuant to an Agreement and Plan of Reorganization dated November 30, 1981, Bancorp acquired all of the common stock of The Commercial Bank, an Oregon state-chartered bank, in a transaction effective July 12, 1982.
As discussed in more detail under "Recent Developments," pursuant to an Agreement and Plan of Merger dated as of October 24, 1994, between former West Coast Bancorp ("WCB") and the registrant, as amended as of December 12, 1994 (the "Merger Agreement"), WCB and the registrant were merged on February 28, 1995 (the "Merger"), with the registrant as the surviving corporation. WCB was a one bank holding company headquartered in Newport, Oregon. The combined company commenced operations on March 1, 1995, under the name West Coast Bancorp and, with approximately $445 million in total assets, is the third largest bank holding company based in Oregon.
The registrant is presently headquartered in Salem, Oregon, but will be moving its principal executive offices to Lake Oswego, Oregon, in the near future. Bancorp's principal business activities are conducted through its three bank subsidiaries, The Commercial Bank, Valley Commercial Bank, and The Bank of Newport (collectively, the "Banks"), each of which is an Oregon state- chartered, full-service commercial bank with deposits insured by the Federal Deposit Insurance Corporation ("FDIC"). At March 1, 1995, the Banks had facilities in a total of 18 cities and towns in Oregon, operating a total of 22 full-service branches and 2 limited service branches.
Recent Developments
Merger with Former West Coast Bancorp
The merger of equals which was consummated between the registrant and former West Coast Bancorp on February 28, 1995, is expected to further both companies' objectives of preserving the benefits of a community banking business strategy under the umbrella of a "super community" banking organization with greater size, flexibility, breadth of services, efficiency, and capital strength than either institution would possess on a stand-alone basis. The combined corporations' complementary market areas, product mixes, and areas of expertise are anticipated to provide significant opportunities to achieve growth, revenue enhancement, increased quality of customer services, an ability to compete more effectively with larger institutions, and greater stability through diversification.
In the Merger, WCB shareholders received .60 shares of Common Stock of the registrant (the "Common Stock") for each share of WCB stock owned. Shareholders of the registrant continue to have one share of Common Stock for each share owned prior to the Merger.
For the year ended December 31, 1994, the operations of the registrant and WCB on a combined basis earned net income of $6.8 million, or $1.67 per share, before $922,000 of non-recurring Merger related and reorganization costs. Net income was $5.9 million or $1.44 per share after the Merger related costs. The pro forma combined equity of the corporations at December 31, 1994, was $43.3 million, with 4.3 million shares outstanding and a book value of $10.18 per share. Net loans of the combined corporations of $276 million at December 31, 1994, represented approximately 63 percent of combined total assets. Combined deposits totaled in excess of $371 million at year-end 1994.
Rodney B. Tibbatts, formerly president and chief executive officer of the registrant, and Victor L. Bartruff, formerly president and chief executive officer of WCB, have assumed the roles of Co-Presidents and Co-Chief Executive Officers of Bancorp. Mr. Tibbatts is primarily responsible for holding company administration and non-bank operating units, while Mr. Bartruff is primarily responsible for all banking operations. Each subsidiary bank is continuing to operate in its respective local communities with substantial autonomy and local decision making authority under the guidance of community boards of directors and local management.
The Bank of Newport
WCB's only operating subsidiary was The Bank of Newport, which was established in 1925. It currently conducts business through eight branches located in the cities of Newport (two), Lincoln City, Waldport, Depoe Bay, and Toledo along the central Oregon coast, downtown Portland, Oregon, and Lake Oswego, a suburb of Portland. The Bank of Newport has received regulatory approval to open a new branch in east Portland, which is expected to open by April 1995. In addition, a commercial real estate loan brokerage office located in Lake Oswego originates and brokers commercial real estate loans to other banks, insurance companies, pension funds, and other sophisticated investors.
The Bank of Newport's principal business consists of attracting deposits from the general public through its branch system and using those funds, together with advances from the Federal Home Loan Bank Board, to originate loans and purchase investment securities. The Bank of Newport also generates noninterest income through the origination and sale of mortgage and Small Business Administration ("SBA") loans, service charges on deposit accounts, loan servicing fees, ATM service charges, merchant credit card processing fees, and from the sale of annuities and mutual funds. To augment The Bank of Newport's commitment to small-and medium-sized businesses, it has adopted a number of lending programs targeted at serving this segment. It has expanded its use of the resources available through the SBA and has added employees experienced in both processing SBA guaranteed loans and selling the guaranteed portions of these loans. Also, The Bank of Newport has initiated its Business Manager product, an accounts receivable lending program designed specifically for small-to medium-sized businesses. Its loan portfolio emphasizes the tourism and real estate industries.
Pending Merger with Great Western Bank
In October 1994, Bancorp and The Commercial Bank entered into a merger agreement with Great Western Bank of Dallas, Oregon. Under the agreement, subject to satisfaction of certain conditions (including, without limitation, approval by the shareholders of Great Western Bank and receipt of applicable regulatory approvals), Great Western Bank will be merged into The Commercial Bank and the shareholders of Great Western Bank will receive shares of Bancorp Common Stock in exchange for their shares. At December 31, 1994, Great Western Bank had total assets of approximately $9,300,000 and shareholders' equity of approximately $860,000. The number of shares of Bancorp Common Stock issuable to the shareholders of Great Western Bank will be determined by a formula based upon the adjusted book value of Great Western Bank (as defined) and the market price of Common Stock. Upon consummation of the merger, scheduled for March 30, 1995, the single branch of Great Western Bank will become the Dallas, Oregon, branch of The Commercial Bank.
The Commercial Bank and Valley Commercial Bank
The Commercial Bank and Valley Commercial Bank were organized in 1954 and 1981, respectively. The Commercial Bank's main office is located at 301 Church Street N.E., Salem, Oregon (telephone (503) 399-2900); it has three additional branches in Salem, three branches in Keizer, and branches in Molalla, Monmouth, Newberg, Silverton, Tigard, and Wilsonville. At December 31, 1994, it had deposits totaling $232 million and loans totaling $167 million. The main office of Valley Commercial Bank is located at 4110 Pacific Avenue, Forest Grove, Oregon 97116 (telephone (503) 359-4495), with additional branches in North Plains and Hillsboro. At December 31, 1994, it had deposits and loans totaling $15 million and $10 million, respectively.
The primary business strategy of The Commercial Bank and Valley Commercial Bank is to provide community banking services to individuals, professionals, and small- and medium-sized businesses, emphasizing customer relationships, a high level of service, and attention to customer needs. Business and commercial customers are a significant focus of activity. The two banks offer deposit accounts, safe-deposit, consumer lending, commercial and residential real estate lending, commercial loans, including operating lines secured by accounts receivable and inventory, and other traditional bank products. Their loan portfolios have some concentration in agricultural and light manufacturing related businesses. Deposit products include regular and special checking accounts, savings accounts, certificates of deposit, and money market accounts. Consumer credit products include residential first and second mortgages, automobile loans, credit cards, lines of credit, and other products. Lending services include short- and intermediate-term loans, inventory financing, equipment leasing, revolving lines of credit, and other types of credit. The Commercial Bank and Valley Commercial Bank also offer Master Card and VISA credit card programs through third party vendors as part of their retail banking services.
In order to provide convenient banking services to their customers, The Commercial Bank and Valley Commercial Bank offer extended banking hours in selected branches. The Commercial Bank has also installed automatic teller machines in ten of its branches offering 24-hour transaction services, including cash withdrawals, deposits, account transfers, and balance inquiries.
The Commercial Bank's Trust Department provides trust services to individuals, partnerships, corporations, and institutions. The Trust Department acts as fiduciary of estates and conservatorships, and as a trustee under various wills, trust, and pension and profit-sharing plans. The Commercial Bank also offers tax-deferred annuities, single-premium whole life insurance, other insurance investment products, and securities products.
Coban, Inc.
In December 1967, The Commercial Bank incorporated Coban, Inc. (Coban), an Oregon corporation. Coban was established to hold selected fixed assets of The Commercial Bank and to provide additional flexibility for real property transactions. In addition, Coban serves as an intermediary to purchase Common Stock for the voluntary employee stock purchase plan and the shareholder dividend reinvestment plan.
Employees
At March 1, 1995, Bancorp and its subsidiaries had approximately 335 full- time equivalent employees. None of these employees are represented by labor unions. A number of benefit programs are available to eligible employees including group medical plans, paid sick leave, paid vacation, group life insurance, pension plan, and an optional employee stock purchase plan.
Competition
At December 31, 1994, The Commercial Bank, The Bank of Newport, and Valley Commercial Bank were the 13th, 15th, and 47th largest, respectively, of the 51 commercial and savings banks in Oregon. The Banks compete with other commercial banks, as well as with savings and loan associations, savings banks, credit unions, mortgage companies, investment banks, insurance companies, securities brokerages, and other financial institutions. Banking in Oregon is dominated by United States National Bank of Oregon and First Interstate Bank of Oregon, N.A., which together account for approximately 44 percent of the total commercial and savings bank deposits in the state. Other significant competitors include subsidiaries of BankAmerica Corporation, Key Corp., and West One Bancorp. These competitors offer a greater number of branch locations (with statewide branch networks in the case of the two largest competitors), the ability to offer higher lending limits, and a variety of services not offered by the Banks. Bancorp has attempted to offset some of the advantages of the larger competitors by arranging participations with other banks for loans above its subsidiaries' legal lending limits. Emphasis is placed on local banking featuring quality service, local responsive decisionmaking, and money reinvested into the community, and by participating in nationwide services such as The Exchange, Instant Teller, and Cirrus networks.
Governmental Policies
The earnings and growth of Bancorp and its banking subsidiaries, as well as their existing and future business activities, are affected not only by general economic conditions, but also by the fiscal and monetary policies of the Federal government and its agencies, particularly the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Federal Reserve Board implements national monetary policies (intended to curb inflation and combat recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by varying the discount rates applicable to borrowings by banks from the Federal Reserve Banks. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans and deposits. As banking is a business which depends largely on interest rate differentials (in general, the difference between the interest rates paid by the Banks on their deposits and their other borrowings and the interest rates received by the Banks on loans extended to their customers and on securities held in the Banks' investment portfolios), the influence of economic conditions and monetary policies on interest rates will directly affect earnings. The nature and impact of any future changes in monetary policies cannot be predicted.
Supervision and Regulation
General
As a bank holding company, Bancorp is subject to supervision by the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956, as amended (the "BHCA"). Its bank subsidiaries are subject to extensive supervision, examination, and regulation by applicable federal and state banking agencies, including the FDIC, in the case of The Commercial Bank and The Bank of Newport (which are not members of the Federal Reserve System), and the Federal Reserve Board, in the case of Valley Commercial Bank (which is a member bank). Each of the Banks is insured (to applicable limits) by, and therefore is also subject to the regulations of, the FDIC. In addition, the Banks are subject to supervision of the Oregon Department of Consumer and Business Services and regulation under Oregon law.
Depository institutions, such as the Banks, are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. Also, relevant Oregon law applies to certain areas of all bank operations, such as the opening of branches, and limits the maximum interest rates that may be charged by state banks.
As a corporation chartered under the laws of the state of Oregon, Bancorp is also subject to certain limitations and restrictions as provided under applicable Oregon law. These include, for example, limitations and restrictions which relate to indemnification of directors, distributions to shareholders, transactions involving directors, officers, or interested shareholders, the maintenance of books, records, and minutes, and procedural matters relating to shareholder meetings and major corporate transactions.
The following references to certain statutes and regulations are brief summaries thereof. The references are not intended to be complete and are qualified in their entirety by reference to the statutes and regulations. In addition, there are other statutes and regulations that apply to and regulate the operation of banking institutions. A change in applicable law or regulation may have a material effect on the business of Bancorp and its subsidiaries.
Dividend Restrictions
Dividends paid by the Banks are the source of substantially all of Bancorp's cash flow. Various federal and state statutory provisions limit the amount of dividends the Banks are permitted to pay to Bancorp without regulatory approval. The Federal Reserve Board has issued a policy statement that a bank holding company should not declare or pay a cash dividend to its shareholders if the dividend would place undue pressure on the capital of its subsidiary banks or if the dividend could be funded only through additional borrowings or other arrangements that might adversely affect the financial position of the bank holding company. Specifically, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality, and overall financial condition.
If, in the opinion of the applicable federal banking agency, a depositary institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the institution, could include the payment of dividends), the agency may require, after notice and hearing, that such institution cease and desist from such practice. In addition, the Federal Reserve Board and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Under Oregon law, the following limitations on the payment of dividends by Oregon state-chartered banks are imposed: (i) no dividends may be paid that would impair capital; (ii) until the surplus fund of a bank is equal to 50 percent of its paid-in capital, no dividends may be declared unless there has been carried to the surplus account at least 20 percent of the bank's net profits for the dividend period; (iii) dividends cannot be greater than net undivided profits then on hand minus losses, certain bad debts, certain charged-off assets or depreciation and accrued expenses, interest, and taxes; and (iv) if the surplus fund does not exceed 50 percent of paid-in capital at the time of a reduction in the surplus due to losses, dividends cannot be declared or paid in excess of 50 percent of net earnings until the surplus fund is restored to at least the amount from which the surplus was originally reduced.
Under these restrictions, as of December 31, 1994, the Banks could have declared dividends of approximately $7.6 million in the aggregate, without obtaining prior regulatory approval. The payment of dividends by any bank subsidiary may also be affected by other factors, such as the requirement that each such subsidiary maintain adequate capital.
Holding Company Structure
APPROVAL BY FEDERAL RESERVE BOARD. A bank holding company is required to file with the Federal Reserve Board annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval before acquiring, directly or indirectly, ownership or control of any voting shares of any bank if, after such acquisition, it would directly or indirectly own or control more than 5 percent of the voting stock of that bank, unless it already owns a majority of the voting stock of that bank.
The BHCA further provides that the Federal Reserve Board shall not approve any acquisition that would result in or further the creation of a monopoly, or the effect of which may be substantially to lessen competition, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the probable effect in meeting the convenience and needs of the community to be served.
LIMITS ON CONTROL OF NONBANKS. Under the BHCA, a bank holding company is, with limited exceptions, prohibited from (i) acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company which is not a bank or (ii) engaging in any activity other than managing or controlling banks. With the prior approval of the Federal Reserve Board, however, a bank holding company may own shares of a company engaged in activities which the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The Federal Reserve Board has by regulation determined that certain activities are so closely related to banking as to be a proper incident thereto within the meaning of the BHCA. These activities include, but are not limited to, operating an industrial loan company, industrial bank, savings association, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing investment and financial advice; operating a trust company in certain instances; selling traveler's checks, United States savings bonds, and certain money orders; providing certain courier services; providing management consulting advice to nonaffiliated depository institutions in some instances; acting as insurance agent for certain types of credit-related insurance; leasing property or acting as agent, broker, or adviser for leasing property on a "full pay-out basis"; acting as a consumer financial counselor, including tax planning and return preparation; performing futures and options advisory services, check guarantee services, and discount brokerage activities; operating a collection or credit bureau; or performing personal property appraisals.
The Federal Reserve Board has also determined that certain activities are not so closely related to banking to be a proper incident thereto within the meaning of the BHCA. Such activities include real estate brokerage and syndication; land development; property management; underwriting of life insurance not related to credit transactions; and, with certain exceptions, securities underwriting and equity funding. In the future, the Federal Reserve Board may add to or delete from the list of activities permissible for subsidiaries of bank holding companies.
TRANSACTIONS INVOLVING BANK SUBSIDIARIES. Transactions involving the Banks will be subject to restrictions under federal law that limit the transfer of funds from such subsidiaries to Bancorp and (with certain exceptions) its nonbank subsidiaries in "covered transactions" such as loans, extensions of credit, investments, or asset purchases. Each such transfer by a bank subsidiary to either Bancorp or any nonbank subsidiary is limited to 10 percent of that bank subsidiary's capital and surplus and, with respect to all such transfers to Bancorp and all Bancorp's nonbank subsidiaries in the aggregate, to 20 percent of that bank subsidiary's capital and surplus. Furthermore, loans and extensions of credit are required to be secured in specified amounts. "Covered transactions" also include the acceptance of securities issued by the bank subsidiary as collateral for a loan and the issuance of a guarantee, acceptance, or letter of credit for the benefit of Bancorp or its nonbank subsidiaries.
TIE-IN ARRANGEMENTS. A bank holding company and its subsidiaries are prohibited from certain tie-in arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services. For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company, or other subsidiaries, or on a promise by its customer not to obtain other services from a competitor.
BANK HOLDING COMPANY SUPPORT OF BANK SUBSIDIARIES. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. This support may be required by the Federal Reserve Board at times when Bancorp may not have the resources to provide it or, for other reasons, would not otherwise be inclined to provide it. Any capital loans by Bancorp to any of the Banks are subordinate in right of payment to deposits and to certain other indebtedness of such bank subsidiary. In addition, the Crime Control Act of 1990 provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
RECOVERY OF LOSSES BY FDIC. A depository institution, the deposits of which are insured by the FDIC, may be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default (the so-called cross guaranty provision). "Default" is defined under the FDIC's regulations generally as the appointment of a conservator or receiver, and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance.
Capital Requirements
The minimum ratio of total capital to risk-adjusted assets (including certain off-balance sheet items, such as stand-by letters of credit) required by the Federal Reserve Board for bank holding companies is 8 percent. At least one-half of the total capital must be comprised of common equity, retained earnings, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets ("Tier 1 capital"). The remainder may consist of hybrid capital instruments, perpetual debt, mandatorily convertible debt securities, a limited amount of subordinated debt, other preferred stock, and a limited amount of loan and lease loss reserves ("Tier 2 capital"). The Federal Reserve Board has stated that banking organizations generally, and particularly those that actively make acquisitions, are expected to operate well above the minimum risk-based capital ratios.
In addition, Bancorp is subject to minimum leverage ratio (Tier 1 capital to average total assets) guidelines. These guidelines provide for a minimum leverage ratio of 3 percent for bank holding companies that meet certain specified criteria, including that they have the highest supervisory rating. All other bank holding companies are required to maintain a leverage ratio which is at least 100 to 200 basis points higher (i.e., a leverage ratio of at least 4 percent to 5 percent). Neither Bancorp nor any of its bank subsidiaries has been advised by its appropriate federal regulatory agency of any specific leverage ratio applicable to it. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 capital less all intangibles to total assets less all intangibles. The Banks will also be subject to capital requirements adopted by applicable federal regulatory agencies which are substantially similar to those imposed by the Federal Reserve Board on bank holding companies. As of December 31, 1994, Bancorp and each of the Banks had capital in excess of all minimum regulatory requirements.
Each of the federal banking agencies has proposed regulations that would add an additional capital requirement based upon the amount of an institution's exposure to interest rate risk. The federal banking agencies have yet to adopt final rules on the interest rate risk component of risk-based capital.
The Federal Deposit Insurance Act (the "FDIA") generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the institution would thereafter be undercapitalized.
Undercapitalized depository institutions are also subject to restrictions on borrowing from the Federal Reserve System, are subject to increased monitoring by the appropriate federal banking agency and limitations on growth, and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company with respect to such a guarantee is limited to the lesser of: (a) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized or (b) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it were significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized and requirements to reduce total assets, and are prohibited from receiving deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator.
Under Oregon law, the Oregon Department of Consumer and Business Services has the authority to require the shareholders of an Oregon state- chartered bank to contribute additional capital to the bank if its capital becomes impaired. The capital of a bank is deemed to be impaired under Oregon law if the value of the bank's assets is insufficient to pay its liabilities (excluding any liability on outstanding capital debentures) plus the amount of its paid-in capital.
Recent Legislation
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which, among other things, amended the FDIA, increased the FDIC's borrowing authority to resolve bank failures, mandated least-cost resolutions and prompt regulatory action with regard to undercapitalized institutions, expanded consumer protection, and mandated increased supervision of domestic depository institutions and the U.S. operations of foreign depository institutions. FDICIA requires federal banking agencies to promulgate regulations and specify standards in numerous areas of bank operations, including interest rate exposure, asset growth, internal controls, credit underwriting, executive officer and director compensation, real estate construction financing, additional review of capital standards, interbank liabilities, and other operational and managerial standards as the agencies determine appropriate. These regulations have increased and may continue to increase the cost of and the regulatory burden associated with the banking business.
FDICIA contains numerous amendments to consumer-related laws. The Equal Credit Opportunity Act ("ECOA") has been amended to require the banking agencies to report any case where there is a reason to believe a pattern or practice of violating the ECOA has occurred directly to the United States Attorney General. The Expedited Funds Availability Act has been amended to extend the time period in which notice must be given to depositors regarding the use of an exception to the institution's funds availability schedule. The Truth in Savings Act, which requires comprehensive disclosures of interest rates and terms of deposit accounts, has been adopted pursuant to FDICIA.
PROMPT CORRECTIVE ACTION. Effective in December 1992, the FDIC, the Federal Reserve Board, and other federal bank regulatory authorities adopted new regulations to implement the prompt corrective action provisions of the FDIA. The capital-based prompt corrective action provisions of the FDIA and their implementing regulations apply to FDIC-insured depository institutions and are not applicable to holding companies which control such institutions. However, the Federal Reserve Board has indicated that in regulating bank holding companies, it will take appropriate action at the holding company level based on its assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to such provisions and regulations. Although the capital categories defined under the prompt corrective action regulations are not directly applicable to Bancorp under existing law and regulations, if Bancorp were placed in a capital category, it would have qualified as well-capitalized as of December 31, 1994. As of December 31, 1994, no bank subsidiary of Bancorp was subject to any regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure.
BROKERED DEPOSITS. The FDIC has also adopted final regulations governing the receipt of brokered deposits. Under these regulations, an FDIC-insured bank or savings association cannot accept brokered deposits unless: (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC.
A bank or savings association that cannot receive brokered deposits also cannot offer "pass through" insurance on certain employee benefit accounts, unless it provides certain notice to affected depositors. In addition, a bank or savings association that is not well capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates.
At December 31, 1994, none of Bancorp's bank subsidiaries had brokered deposits.
FDIC INSURANCE. The FDIC has adopted a risk-related insurance assessment system. Under the risk-related insurance assessment system, a bank or savings association is required to pay an assessment ranging from $.23 to $.31 per $100 of deposits based on the institution's risk classification. The Banks pay assessments to the FDIC's Bank Insurance Fund.
The risk classification is based on an assignment of the institution by the FDIC to one of three capital groups and to one of three supervisory subgroups. The capital groups are "well capitalized," "adequately capitalized," and "undercapitalized." The three supervisory subgroups are Group "A" (for financially sound institutions with only a few minor weaknesses), Group "B" (for those institutions with weaknesses which, if uncorrected, could cause substantial deterioration of the institution and increase risk to the deposit insurance fund), and Group "C" (for those institutions with a substantial probability of loss to the fund absent effective corrective action). For the most recent assessment period, insurance assessments on all deposits of the Banks were paid at the $.23 rate per $100 of deposits. In February 1995, the FDIC published proposed rules which, if adopted, would result in a significant reduction in assessment rates for members of the Bank Insurance Fund.
INTERSTATE BRANCHING. The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") will, over the next three years, permit nationwide interstate banking and branching by bank holding companies meeting specified capital and management adequacy standards. The Interstate Act currently allows states to permit interstate mergers within their own borders. After September 1995, bank holding companies may buy banks in any state. From that time, states may not prohibit such purchases. As of July 1, 1997, banks will be permitted to merge with banks in any other state as long as the state has not passed legislation prohibiting such mergers. Also, if a state permits it, a bank may establish de novo branches in the state. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. At this time, the impact of the Interstate Act on Bancorp and its bank subsidiaries is unclear.
Control Acquisitions
The Change in Bank Control Act of 1978, as amended, prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been given 60 days' prior written notice of proposed acquisition and within that time period the Federal Reserve Board has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. An acquisition may be made prior to the expiration of the disapproval period if the Federal Reserve Board issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10 percent or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, such as Bancorp, would, under the circumstances set forth in the presumption, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25 percent (5 percent in the case of an acquiror that is a bank holding company) or more of the outstanding shares of the Common Stock, or otherwise obtaining control over Bancorp.
ITEM 2.



ITEM 2. PROPERTIES
The principal properties of the registrant are comprised of banking facilities owned by the registrant's three banking subsidiaries.
The main offices of The Commercial Bank are located in downtown Salem, Oregon, in recently remodeled two-story buildings totaling approximately 40,000 square feet of space. The main offices, which are owned by The Commercial Bank, include administrative offices of Bancorp and The Commercial Bank, the main branch of The Commercial Bank, and drive-up teller facilities. The Commercial Bank also operates 12 other branches, of which 6 are owned and 6 are leased at an aggregate monthly rental of approximately $11,000. In addition, The Commercial Bank owns an approximately 8,000-square-foot service center in Salem, Oregon, that houses data processing facilities.
The main office of Valley Commercial Bank is located in Forest Grove, Oregon, in a building owned by a subsidiary of The Commercial Bank. Valley Commercial Bank operates a branch in North Plains, Oregon, in a facility owned by it, and a branch in Hillsboro, Oregon, which is leased for approximately $2,800 per month.
The Bank of Newport owns the land and building housing its main offices located in Newport, Oregon, consisting of approximately 15,640 square feet of space. At December 31, 1994, The Bank of Newport also owned the land and buildings housing four other branches and offices and leased the space housing five branches and offices at a monthly aggregate rental of approximately $10,000.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Beginning in 1987, The Commercial Bank's Trust Department offered interests in a common trust fund (the "IRA Fund") as an investment vehicle for individual retirement accounts. In the fall of 1994, The Commercial Bank and the manager of The Commercial Bank's Trust Department consented to the entry of an order by the Securities and Exchange Commission (the "SEC") finding that The Commercial Bank willfully violated, and that the manager of The Commercial Bank's Trust Department willfully aided and abetted and caused violations by The Commercial Bank of, various provisions of the Securities Act of 1933, as amended ("Securities Act"), and the Investment Company Act of 1940, as amended ("Investment Company Act"), by offering interests in the IRA Fund without registration under such laws, by failing to disclose that interests in the IRA Fund were not insured by the FDIC, and otherwise. Pursuant to offers of settlement, in which The Commercial Bank and the manager of the Trust Department neither admitted nor denied the violations, the SEC ordered that The Commercial Bank and the manager of the Trust Department each cease and desist from committing or causing violations of the specified provisions of the Securities Act and Investment Company Act. The Commercial Bank was ordered to pay a civil penalty in the amount of $75,000 and to retain an independent consultant to conduct a review of compliance procedures, to recommend policies and procedures to prevent and detect violations of federal securities laws, and to report to the Board of Directors of The Commercial Bank. The manager of the Trust Department was suspended from association with any broker/dealer, municipal securities dealer, investment adviser, or investment company for a period of six months. Together with the independent consultant, The Commercial Bank is evaluating the most effective method of ensuring that the IRA Fund is operated in full compliance with all applicable securities laws and is actively reviewing alternatives, principally various means of offering registered funds sponsored by third parties. The Commercial Bank also plans to offer recision (at a price equal to original deposit plus 9 percent per annum interest) of prior purchases of interests in the IRA Fund. The Commercial Bank estimates that its maximum aggregate liability in the event of acceptance of the recision offer by all persons whose interests in the IRA Fund have a current market value of less than the amount offered in the recision offer is approximately $90,000, based on market prices as of December 31, 1994.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of Bancorp's common shareholders was held on February 27, 1995, to consider and vote upon approval of a plan of merger contained in the Merger Agreement. The table below shows the votes cast for or against approval of the Merger, as well as abstentions and broker non- votes.
No. of Shares
For 1,844,344.8400 Against 33,366.8630 Abstentions 11,609.6826 Broker Non-Votes 8,480.0000
Pursuant to the Merger Agreement, the following individuals were designated as directors of Bancorp beginning the effective date of the Merger, with terms ending as of the annual meeting of shareholders occurring in the years specified below.
Name Term Ending
Lloyd D. Ankeny 1998 Iral D. Barrett 1998 Victor L. Bartruff 1997 Phillip G. Bateman 1998 Chester C. Clark 1997 Lester D. Green 1996 Stanley M. Green 1998 William B. Loch 1997 Jack E. Long 1996 C. Douglas McGregor 1998 Robert D. Morrison 1997 J. F. Ouderkirk 1996 Gary D. Putnam 1996 Rodney B. Tibbatts 1997
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Bancorp's executive officers appears in Item 10 of this report.
PART II
Item 5.

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bancorp's common stock is traded over the counter in the NASDAQ National Market System. At December 31, 1994, there were approximately 1,100 shareholders of record of Bancorp common stock. The following table presents the high and low sales prices, as reported by NASDAQ, of Bancorp's common stock and cash dividends paid for each quarter in the last two years:
Cash High Low Dividend 1994 1st Quarter $15.91 $12.85 $.0750 1994 2nd Quarter 16.00 14.75 .0750 1994 3rd Quarter 16.50 15.25 .0750 1994 4th Quarter 17.00 14.00 .0750
1993 1st Quarter $15.68 $13.18 $.0682 1993 2nd Quarter 15.23 14.09 .0682 1993 3rd Quarter 14.55 12.95 .0682 1993 4th Quarter 15.68 13.64 .0682
The market prices and cash dividends have been adjusted retroactively for the 2-for-1 stock split effective January 25, 1993, and the 10 percent stock dividend paid in 1994. See Item 1. Business, "Supervision and Regulation-- Dividend Restrictions" for a discussion of legal restrictions on the ability of Bancorp's banking subsidiaries to pay dividends to Bancorp.
Item 6.

Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with Bancorp's consolidated financial statements and the accompanying notes presented in Item 8 of this report. The data was not restated to reflect the February 28, 1995, merger with former West Coast Bancorp.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements and accompanying notes presented in Item 8


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the pages indicated:
Page
Consolidated Balance Sheets 28 Consolidated Statements of Income 29 Consolidated Statements of Shareholders' Equity 30 Consolidated Statements of Cash Flows 31 Notes to Consolidated Financial Statements 32 Report of Independent Public Accountants 47
COMMERCIAL BANCORP CONSOLIDATED BALANCE SHEETS (dollars in thousands) ASSETS
December 31, --------------------- 1994 1993 -------- -------- CASH AND CASH EQUIVALENTS Cash and due from banks (Note 2) $ 23,313 $ 21,194 Federal Funds sold 2,474 300 ------- ------- Total cash and cash equivalents 25,787 21,494
INVESTMENT SECURITIES (Note 3) Investments available for sale 27,497 50,738 Investments held to maturity 41,810 39,392 ------- ------- Total investments 69,307 90,130
LOANS (Note 4) 176,893 156,326 Less reserve for possible loan losses (2,905) (2,497) ------- ------- Net loans 173,988 153,829
PREMISES AND EQUIPMENT, at cost less accumulated depreciation (Note 6) 9,109 6,029 ACCRUED INTEREST AND OTHER ASSETS 4,388 5,818 ------- ------- Total assets $282,579 $277,300 ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES Deposits- Demand $ 51,419 $ 49,922 Interest-bearing demand 76,571 75,636 Savings 71,564 73,448 Time (Note 7) 47,100 46,583 ------- ------- Total deposits 246,654 245,589
Federal Funds purchased 6,000 4,000 Other liabilities 2,918 3,197 ------- ------- Total liabilities 255,572 252,786
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8) SHAREHOLDERS' EQUITY Common stock, no par value, 10,000,000 shares authorized, 2,627,422 and 2,388,565 shares issued, and 2,621,481 and 2,384,992 outstanding, respectively 3,277 2,981 Paid in capital 13,783 10,291 Retained earnings 10,407 10,987 Net unrealized (loss) gain on investments available for sale (Note 3) (460) 255 ------- ------- Total shareholders' equity 27,007 24,514 ------- ------- Total liabilities and shareholders' equity $282,579 $277,300 ======== ========
The accompanying notes are an integral part of these consolidated statements.
COMMERCIAL BANCORP CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands except per share amounts)
Years Ended December 31, ------------------------ 1994 1993 1992 ------ ------ ------
INTEREST INCOME Loans and loan fees $17,197 $14,964 $15,689 Taxable investments 1,783 1,946 1,986 Nontaxable investments 2,396 2,305 1,919 Federal Funds sold 257 325 235 ------ ------ ------ Total interest income 21,633 19,540 19,829
INTEREST ON DEPOSITS Interest-bearing demand 1,752 1,728 1,883 Savings 2,283 1,946 1,439 Time 1,503 1,956 3,310 ------ ------ ------ Total interest expense 5,538 5,630 6,632 ------ ------ ------
NET INTEREST INCOME 16,095 13,910 13,197 PROVISION FOR POSSIBLE LOAN LOSSES 300 325 832 ------ ------ ------ Net interest income after provision for possible loan losses 15,795 13,585 12,365
NONINTEREST INCOME Service charges on deposit accounts 1,410 1,536 1,498 Trust department 1,206 1,078 776 Other fees and income 1,282 1,601 1,238 Investment securities gains (losses), net (48) 77 45 ------ ------ ------ Total noninterest income 3,850 4,292 3,557 ------ ------ ------
NONINTEREST EXPENSE Salaries and employee benefits 7,781 7,385 6,819 Occupancy 1,088 936 888 Furniture and equipment 853 712 880 Communications 422 455 418 Data processing 428 637 703 Examination fees and deposit insurance 667 618 650 Loan origination and collection 178 213 306 Supplies 232 246 278 Other 2,519 1,380 1,260 ------ ------ ------ Total noninterest expense 14,168 12,582 12,202 ------ ------ ------ INCOME BEFORE PROVISION FOR INCOME TAXES 5,477 5,295 3,720 PROVISION FOR INCOME TAXES (Note 12) 1,464 1,344 854 ------ ------ ------ NET INCOME $ 4,013 $ 3,951 $ 2,866 ======= ======= =======
NET INCOME PER SHARE (Note 13) $1.53 $1.51 $1.09 ======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
COMMERCIAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Years Ended December 31, ------------------------ 1994 1993 1992 ------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES Net income $4,013 $3,951 $2,866 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 665 546 630 Provision for possible loan losses 300 325 832 Net losses (gains) on sales of investment securities 48 (77) (45) (Credit) provision for deferred income taxes (19) (419) (267) Decrease (increase) in accrued interest and other assets 1,896 (941) 767 (Decrease) increase in other liabilities (279) 1,064 (1,869) ------ ------ ------ Net cash provided by operating activities 6,624 4,449 2,914
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Available for sale (12,711) -- -- Held to maturity (10,346) (46,046) (35,984) Proceeds from maturities of investment securities Available for sale 24,413 -- -- Held to maturity 7,497 21,872 23,202 Proceeds from sales of investment securities Available for sale 10,329 -- -- Held to maturity 431 5,826 2,299 Loan originations and loan principal collections, net (20,459) (17,848) 4,567 Purchase of premises and equipment, net (3,745) (1,322) (1,342) ------- ------- ------ Net cash used in investing activities (4,591) (37,518) (7,258)
CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits and savings accounts 130 39,429 25,471 Proceeds from issuances of and (payments) for maturing time deposits, net 935 (11,730) (15,158) Net increase in borrowed funds 2,000 4,000 -- Sales (purchases) of stock, net (34) 38 (38) Cash dividends paid (771) (716) (583) Exercise of stock option -- 6 -- ------- ------- ------ Net cash provided by financing activities 2,260 31,027 9,692 ------- ------- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,293 (2,042) 5,348
CASH AND CASH EQUIVALENTS, beginning of year 21,494 23,536 18,188 ------- ------- ------
CASH AND CASH EQUIVALENTS, end of year $25,787 $21,494 $23,536 ======= ======= ======
The accompanying notes are an integral part of these consolidated statements.
COMMERCIAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of Commercial Bancorp (Bancorp), a bank holding company and its wholly owned subsidiaries, The Commercial Bank (CB) and Valley Commercial Bank (VCB) (collectively, the Banks). Significant intercompany accounts and transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS. The Banks' activities include the usual lending and deposit functions of a commercial bank. CB also has a Trust Department which provides agency, trust, and related services.
STATEMENTS OF CASH FLOWS. 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 sold for one day periods. The Banks paid approximately $5,484,000, $5,258,000, and $$6,870,000 for the years ended December 31, 1994, 1993, and 1992, respectively, in interest on deposits and other borrowings. Bancorp made income tax payments of approximately $1,172,000, $1,644,000, and $1,242,000 in 1994, 1993, and 1992, respectively.
INVESTMENT SECURITIES. Effective December 31, 1993, the Banks adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, a bank's investment portfolio is segregated between investment securities that are available for sale, and those that are held to maturity. The investment securities that are available for sale are stated at market value and unrealized gains and losses are reported net of related income taxes as a separate component of shareholders' equity.
Investment securities that are held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Gains or losses on the sale of investment securities are determined on the basis of specific identification.
During 1994, Bancorp sold three securities from its held to maturity portfolio due to the deterioration in credit quality of the investments as evidenced by the downgrading of each security below an A rating coupled with the location of the investments being out of Bancorp's operating territory. The following represents a list of amortized costs and realized gain or loss for each security.
1994 Sales from Held to Maturity Amortized Cost Realized Gain (Loss) ----------------------------------------
$ 53,000 $ (335) 135,589 557 142,636 2,552
INCOME RECOGNITION. Interest on loans is accrued on a simple interest basis. The accrual of interest on loans is discontinued when, in management's judgment, the future collectability of interest and principal is in serious doubt or 90 days past due.
Loan origination and commitment fees, net of certain direct loan origination costs, are generally recognized over the life of the related loan as an adjustment of yield.
RESERVE FOR POSSIBLE LOAN LOSSES. The reserve for possible loan losses is based on management's estimates. 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. Losses are charged, and recoveries are credited, to the reserve.
ACCOUNTING CHANGES. In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and in October 1994 issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition Disclosures, an amendment to SFAS No. 114." These statements require that impaired loans be measured based on the 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. These statements exclude 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. These statements apply to financial statements for fiscal years beginning after December 31, 1994. Management believes that implementation of the statements will not have a material effect on Bancorp's reported financial position or net income.
PREMISES AND EQUIPMENT. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is principally provided on the straight-line method over the estimated useful lives of the assets.
INCOME TAXES. Deferred income taxes result from timing differences in reporting transactions for financial reporting and income tax purposes.
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." Bancorp adopted the new standard in 1993. When Bancorp adopted the new accounting rules in 1993, the entire catch-up effect was recorded. Implementation of the standard did not have a material effect on Bancorp's reported financial position or net income.
TRUST DEPARTMENT ASSETS. Assets (other than cash deposits) held by CB in fiduciary or agency capacities for its trust customers are not included in the accompanying consolidated balance sheets, since such items are not assets of CB.
REPURCHASE OF SHARES. A wholly owned subsidiary of CB held 5,941 shares of Bancorp common stock at December 31, 1994, and 3,573 shares at December 31, 1993. For accounting purposes, Bancorp treats these shares as if they were not outstanding even though they are issued shares.
RECLASSIFICATIONS. Certain reclassifications of prior year amounts have been made to conform to current year classifications.
2. Cash and Due from Banks
The Banks are required to maintain average reserve balances with the Federal Reserve Bank or maintain such balances in the form of cash. The amount of these reserve balances at December 31, 1994 and 1993 was approximately $3,892,000 and $3,554,000, respectively, and were met by holding cash and maintaining reserve balances with the Federal Reserve Bank.
3. Investment Securities
The carrying value of securities and their approximate market value at December 31 were as follows (dollars in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- ---- Held to maturity U.S. Treasury $ 3,174 $ -- $(208) $ 2,966 U.S. Government agencies 1,973 -- (42) 1,931 Obligations of state and political subdivisions 34,692 773 (614) 34,851 Other 1,971 28 -- 1,999 ------ --- ---- ------ Total $41,810 $801 $(864) $41,747 ======= ==== ===== =======
Available for sale U.S. Treasury $10,209 $ -- $(235) $ 9,974 U.S. Government agencies 7,994 10 (56) 7,948 Obligations of state and political subdivisions 7,670 2 (457) 7,215 Corporate bonds 1,498 2 (20) 1,480 Other 873 7 -- 880 ------ --- ---- ------ Total $28,244 $21 $(768) $27,497 ======= ==== ===== =======
---- Held to maturity U.S. Treasury $ 4,119 $ 12 $(22) $ 4,109 U.S. Government agencies 2,000 71 -- 2,071 Obligations of state and political subdivisions 29,553 2,772 (18) 32,307 Certificates of deposit - other institutions 2,967 -- -- 2,967 Other 753 11 -- 764 ------ --- ---- ------ Total $39,392 $2,866 $(40) $42,218 ======= ====== ===== =======
Available for Sale U.S. Treasury $21,515 $ 70 $ (65) $21,520 U.S. Government agencies 13,043 307 (38) 13,312 Obligations of state and political subdivisions 8,322 235 (13) 8,544 Corporate bonds 6,602 57 -- 6,659 Other 841 -- (138) 703 ------ --- ---- ------ Total $50,323 $669 $(254) $50,738 ======= ==== ===== =======
The amortized cost and estimated market value of investment securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Cost Market Value -------------- ------------ (dollars in thousands) Held to Maturity Due in one year or less $ 2,435 $ 2,476 Due in one year through five years 12,633 12,570 Due after five years through ten years 13,173 13,479 Due after ten years 13,569 13,222 ------ ------ $41,810 $41,747 ======= =======
Available for Sale Due in one year or less $ 9,079 $ 9,030 Due in one year through five years 12,317 12,037 Due after five years through ten years 4,502 4,221 Due after ten years 2,346 2,209 ------ ------ $28,244 $27,497 ======= =======
Securities of approximately $4,000,000 (at carrying value) were pledged at December 31, 1994 and 1993, to secure public monies as required or permitted by law. Secured deposits were approximately $4,869,000 and $2,409,000 at December 31, 1994 and 1993, respectively.
Securities of approximately $2,000,000 and $1,000,000 (at carrying value) were pledged at December 31, 1994 and 1993, respectively, with the State of Oregon to ensure performance of fiduciary responsibilities by the CB Trust Department and to secure any deposits maintained at CB for the Trust Department in excess of $100,000.
4. Loans
The composition of loan balances at December 31, 1994 and 1993 was as follows (dollars in thousands):
1994 1993 ---------- ----------
Commercial $ 69,386 $ 66,340 Real estate - construction 14,990 1,226 Real estate - mortgage 69,149 59,562 Installment 23,004 29,198 Other 364 -- ------- ------- $176,893 $156,326 ======== ========
The Banks grant commercial and residential loans to customers throughout the Willamette Valley, Washington County, and Columbia County. Although the Banks have diversified loan portfolios, a substantial portion of their debtors' ability to honor their contracts is dependent upon the economy of these areas.
Loans on nonaccrual status were approximately $302,000 and $983,000 at December 31, 1994 and 1993, respectively. Bancorp estimates that interest forgone on nonaccrual loans was approximately $67,000, $137,000, and $181,000 in 1994, 1993, and 1992, respectively. Loans past due 90 days and still accruing interest were $20,000 and $68,000 at year-end 1994 and 1993, respectively.
Transactions in the reserve for possible loan losses for the years ended December 31 were as follows (dollars in thousands):
1994 1993 1992 ---------- ---------- ----------
Balance at beginning of year $2,497 $2,229 $1,953 Provision for possible loan losses 300 325 832 Recoveries of loans previously charged off 261 228 96 Loans charged off (153) (285) (652) ----- ----- ----- Balance at end of year $2,905 $2,497 $2,229 ====== ====== ======
The Banks have had, and expect to have in the future, transactions in the ordinary course of business with directors and executive officers of the Banks (and the companies with which they are associated). All loans and loan commitments included in such transactions were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers of the Banks.
An analysis of activity with respect to such loans for the year ended December 31, 1994, was as follows (dollars in thousands):
Balance at beginning of period $1,386 Additions 1,346 Amounts collected (1,539) ----- Balance at end of period $1,193 ======
In addition, as of December 31, 1994, there were commitments to extend credit of approximately $1,491,000 to various directors and executive officers of the Banks.
5. Financial Instruments with Off-Balance Sheet Risk
The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers and to reduce their exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Banks have in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. For interest rate caps and floors, the contract or notional amounts do not represent exposure to credit loss. Management does not anticipate any material loss as a result of these transactions.
Contract or Notional Amount December 31, 1994 ----------------- (dollars in thousands) Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $16,683 Standby letters of credit 2,216
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based upon management's credit evaluations of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks hold marketable securities as collateral supporting those commitments for which collateral is deemed necessary.
6. Premises and Equipment
The composition of premises and equipment at December 31 was as follows (dollars in thousands):
1994 1993 ---------- ----------
Land $ 1,541 $ 1,202 Buildings and improvements 8,160 5,522 Furniture and equipment 3,978 3,514 ------ ------ $13,679 $10,238 Less accumulated depreciation (4,570) (4,209) ------ ------ $ 9,109 $6,029 ====== =====
7. Time Deposits
Time certificates of deposit in excess of $100,000 aggregated approximately $8,207,000 and $7,253,000 at December 31, 1994 and 1993, respectively. Interest expense on deposits in excess of $100,000 totaled $208,000, $285,000, and $247,000 in 1994, 1993, and 1992, respectively.
8. Commitments and Contingencies
The Banks lease some branch premises and equipment. Total rental expense was approximately $248,000, $275,000, and $320,000 in 1994, 1993, and 1992, respectively.
As of December 31, 1994, the aggregate minimum rental commitments under existing operating leases is summarized as follows (dollars in thousands):
1995 $ 152 1996 141 1997 124 1998 125 1999 126 Thereafter 506 ----- $1,174 ======
The Company is involved in certain litigation matters arising in the ordinary course of business. In the opinion of the Company's management, these actions will not have a material effect, if any, on the Company's financial position or results of operations.
9. Retirement Plan
Effective December 31, 1992, CB terminated its defined benefit pension plan. The plan participants became fully vested as of the termination date. In conjunction with the termination, the plan was amended to provide that all excess funding be allocated to plan participants at settlement.
CB's method of accounting for pension costs complies with SFAS No. 87 and No. 88. No pension expense was recognized in 1994 or 1993, as compared to $369,000 in 1992. The following table illustrates the components of pension expense under this method, the funded status of the plan and amounts recognized in Bancorp's consolidated financial statements, and the major assumptions used to determine these amounts at December 31 (dollars in thousands):
---------- PLAN ASSETS AT FAIR VALUE (PRIMARILY COMMON TRUST FUNDS CONSISTING OF LISTED STOCKS, BONDS, AND CASH EQUIVALENTS) $3,517 ======
ACTUARIAL PRESENT VALUE OF PROJECTED BENEFIT OBLIGATIONS: Accumulated benefit obligations - Vested $3,517 Nonvested -- Provision for future salary increases -- Projected benefit obligations $3,517 ======
EXCESS (DEFICIT) OF PLAN ASSETS OVER PROJECTED BENEFIT OBLIGATIONS $ -- UNRECOGNIZED NET TRANSITION ASSET -- UNRECOGNIZED NET (GAIN) LOSS -- ----- Accrued pension cost $ -- ======
COMPONENTS OF PENSION EXPENSE: Service cost $ 136 Interest cost 227 Actual return on plan assets (229) Net amortization and deferral (115) Curtailment loss due to plan termination and amendment 350 ----- $ 369 ======
10. 401(k) Plan
The 401(k) Plan (the Plan) was established effective January 1, 1988, by CB to encourage employee savings and to supplement other benefits. The Plan was adopted and amended by Bancorp effective January 1, 1993, to cover employees of CB and VCB and was renamed the Commercial Bancorp 401(k) Plus Savings Plan. Participants may elect to contribute up to 17 percent of qualified earnings, and Bancorp will match 25 percent of the first 6 percent of qualified contributions up to a maximum of $2,310 per employee. Bancorp may also elect to make discretionary contributions. Expense under the Plan totaled $461,000 and $378,000 in 1994 and 1993, respectively, of which $377,000 and $313,000 was discretionary, respectively.
11. Stock Option Plan
Bancorp has a combined Incentive Stock Option Plan and Non-Qualified Stock Option Plan (jointly termed "the Stock Option Plan") which covers a maximum number of shares not to exceed 2 percent of the shares of Bancorp stock outstanding on January 1 of each year.
The price per share under each option granted under the Non-Qualified Stock Option Plan shall be determined by the Board of Directors and may be less than, equal to, or greater than the fair market value of the shares covered by the option on the date such option is granted.
In general, the exercise price per share under each option granted under the Incentive Stock Option Plan shall be determined by the Board of Directors, but shall not be less than the fair market value of the shares covered by the option on the date such option is granted.
The following table presents share data related to the Plan.
Option Price Per Common Share Common Shares ---------------- -------------
December 31, 1991 7.52 13,975 Granted 13.30 17,050 Options exercised -- -- Terminated -- -- ----- ------ December 31, 1992 7.52 to 13.30 31,025 Granted 14.21 25,575 Options exercised 7.62 (808) Terminated -- (770) ----- ------ December 31, 1993 7.52 to 14.21 55,022 Granted 15.375 30,000 Options exercised -- -- Terminated -- -- ----- ------ December 31, 1994 7.52 to 15.375 85,022 ============== ======
The above amounts have been adjusted for a 10 percent stock dividend paid in April 1994, a two-for-one stock split effective January 25, 1993, and a 5 percent stock dividend in 1992.
12. Income Taxes
The provision for income taxes for the years ended December 31 was as follows (dollars in thousands):
1994 1993 1992 ------ ------ ------ Current: Federal $1,116 $1,335 $825 State 367 428 296 ----- ----- --- Total current 1,483 1,763 1,121
Deferred: Federal (17) (371) (221) State (2) (48) (46) ----- ----- --- Total deferred (19) (419) (267) ----- ----- --- Provision for income taxes $1,464 $1,344 $854 ====== ====== ====
The provision for income taxes results in effective tax rates being less than the federal income tax statutory rate. The nature of the differences for the years ended December 31 was as follows (dollars in thousands):
1994 1993 1992 ------ ------ ------ Computed expected federal tax expense at 34 percent $1,862 $1,800 $1,265 State income taxes, net of federal effect 274 251 165 Effect of nontaxable interest income (769) (725) (573) Other, net 97 18 (3) ----- ----- --- Provision for income taxes $1,464 $1,344 $854 ====== ====== ====
The Company has the following deferred tax assets and deferred tax liabilities resulting from the tax effects of temporary differences at December 31 (dollars in thousands):
1994 1993 ------ ------ DEFERRED TAX ASSETS Allowance for loan losses $ 634 $ 519 Deferred income 188 235 Vacation accrual 65 65 Net operating loss 66 103 Unrealized loss on investments available for sale 147 -- Other 39 11 ----- ----- 1,139 933
DEFERRED TAX LIABILITIES Accumulated depreciation 246 210 Unrealized gain on investments available for sale -- 161 Other 24 20 ----- ----- 270 391 ----- ----- $869 $542 ====== ======
No valuation adjustment is required for the deferred tax asset.
An analysis of the components of the deferred tax provision for the year ended December 31, 1992, was as follows (dollars in thousands):
------
Loan loss provision $(104) Depreciation 33 Pension expense (48) Deferred loan fees (182) Other, net 34 ---- $(267) =====
13. Net Income per Share
Net income per share and other per share information included in the accompanying consolidated financial statements is based on the average number of shares of common stock outstanding during each year, adjusted retroactively for a 5 percent stock dividend in 1992, a two-for-one stock split effective January 25, 1993, and a 10 percent stock dividend in April 1994. Average shares outstanding as adjusted were approximately 2,624,197, 2,622,629, and 2,621,126 for 1994, 1993, and 1992, respectively.
14. Statement of Fair Values
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
CASH AND CASH EQUIVALENTS. The carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES. For securities and derivative instruments held for investment purposes, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
LOANS. For variable rate loans, fair value is estimated at carrying value as these loans reprice to market frequently. The fair value of other types of loans is estimated by discounting the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES. The fair value of demand deposits, savings accounts, and other deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL GUARANTEES. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations at the reporting date. The fees currently charged are considered negligible.
The estimated fair values of financial instruments at December 31, 1994, are as follows (dollars in thousands):
Carrying Value Fair Value -------- ----------
Financial assets: Cash and cash equivalents $ 25,787 $ 25,787 Investment securities and money market investments 69,307 69,244 Loans 176,893 Less--reserve for possible loan losses (2,905) ------- ------- Net loans 173,988 175,493
Financial liabilities: Deposits 246,654 246,597
Unrecognized financial instruments: Commitments to extend credit 16,683 (59) Standby letters of credit 2,216 (27)
The estimated fair values of financial instruments at December 31, 1993 are as follows (dollars in thousands):
Carrying Value Fair Value -------- ----------
Financial assets: Cash and cash equivalents $ 21,494 $ 21,494 Investment securities and money market investments 90,130 92,956 Loans 156,326 Less--reserve for possible loan losses (2,497) ------- ------- Net loans 153,829 157,300
Financial liabilities: Deposits 245,589 246,555
Unrecognized financial instruments: Commitments to extend credit 4,550 (16) Standby letters of credit 396 (5)
15. Parent Company Financial Information
Condensed financial information for Bancorp (unconsolidated parent company only) is as follows (dollars in thousands):
CONDENSED BALANCE SHEETS
December 31, 1994 1993 ------- ------- ASSETS: Cash $ 347 $ 229 Investments 848 701 Investment in subsidiaries 25,863 23,331 Other assets 322 432 ------ ------ $27,380 $24,693 ======= =======
LIABILITIES: Other liabilities $ 373 $ 179
SHAREHOLDERS' EQUITY: Common stock 3,284 2,981 Other shareholders' equity 23,723 21,533 ------ ------ 27,007 24,514 ------ ------ $27,380 $24,693 ======= =======
CONDENSED STATEMENTS OF INCOME
Year Ended December 31, ------------------------ 1994 1993 1992 ------ ------ ------
INCOME: Cash dividends from subsidiaries $1,295 $1,825 $ 855 Investment dividends 16 4 -- ----- ----- ------ 1,311 1,829 855
EXPENSE: Salaries and employee benefits 161 139 105 Other 679 194 176 ----- ----- ----- 840 333 281 ----- ----- ----- INCOME BEFORE BENEFIT FOR INCOME TAXES 471 1,496 574 INCOME TAX BENEFIT 172 133 92 ----- ----- ----- INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY 643 1,629 666 EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY 3,370 2,322 2,200 ----- ----- ----- NET INCOME $4,013 $3,951 $2,866 ====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------ 1994 1993 1992 ------ ------ ------
OPERATING ACTIVITIES: Net income $4,013 $3,951 $2,866 Adjustments to reconcile net income to net cash provided by operating activities - Tax benefit provided from losses (172) (133) (92) Undistributed earnings in subsidiaries (3,370) (2,322) (2,200) Changes in assets and liabilities - Increase in other liabilities 194 122 24 (Increase) decrease in other assets 224 (80) 27 ----- ----- ----- Net cash provided by operating activities 889 1,538 625 ----- ----- -----
INVESTING ACTIVITIES: Purchase of investment securities -- (841) -- ----- ----- ----- Net cash used in investing activities -- (841) -- ----- ----- -----
FINANCING ACTIVITIES: Cash dividends paid (771) (716) (583) Exercise of stock options -- 6 -- ----- ----- ----- Net cash used in financing activities (771) (710) (583)
(DECREASE) INCREASE IN CASH 118 (13) 42 CASH AT BEGINNING OF YEAR 229 242 200 ----- ----- ----- CASH AT END OF YEAR $ 347 $ 229 $ 242 ====== ====== ======
16. Quarterly Financial Information (Unaudited)
17. Merger with West Coast Bancorp
On October 24, 1994, as amended December 12, 1994, Bancorp entered into an Agreement and Plan of Merger (the "Merger") with West Coast Bancorp of Newport, Oregon. The Merger provides that shareholders of West Coast will receive, for each share of West Coast Common Stock, .60 shares of Bancorp Common Stock in the combined company.
Completion of the Merger is subject to shareholder and regulatory approvals and is expected to close in the spring of 1995. The Merger will be accounted for as a pooling of interests under generally accepted accounting principles.
West Coast Bancorp reported net interest income of $8,390,000, net income of $1,864,000, and earnings per share of $0.74 for the year ended December 31, 1994. West Coast Bancorp had total assets of $160,654,000, total deposits of $124,697,000, and shareholders' equity of $17,131,000 as of December 31, 1994.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Commercial Bancorp:
We have audited the accompanying consolidated balance sheets of Commercial Bancorp (an Oregon corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Commercial Bancorp and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 30, 1995
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the registrant at March 1, 1995, are set forth below. The executive officers include certain persons who are not titled officers of the registrant, but serve as officers of its bank subsidiaries.
Name Age Position(s) Held ---- --- ----------------
Lloyd D. Ankeny 57 Director of Bancorp*
Iral D. Barrett 60 Director of Bancorp
Victor L. Bartruff 47 Co-President and Co-Chief Executive Officer and Director of Bancorp*; President and Chief Executive Officer of The Bank of Newport
Phillip G. Bateman 54 Director of Bancorp*
Chester C. Clark 73 Director of Bancorp*
Lester D. Green 69 Chairman of the Board of Bancorp
Stanley M. Green 72 Director of Bancorp*
Cora A. Hallauer 55 Secretary of Bancorp; Senior Vice President and Secretary of The Commercial Bank
Donald A. Kalkofen 31 Chief Financial Officer of Bancorp* and Senior Vice President and Chief Financial Officer of The Bank of Newport
William B. Loch 61 Director of Bancorp
Jack E. Long 56 Director of Bancorp and Chairman of the Board of The Commercial Bank
C. Douglas McGregor 56 Director of Bancorp
Edgar B. Martin 55 President and Chief Executive Officer of The Commercial Bank
Robert D. Morrison 63 Director of Bancorp
J. F. Ouderkirk 44 Director of Bancorp* and Chairman of the Board of The Bank of Newport
Gary D. Putnam 50 Vice Chairman of the Board of Bancorp*
Rodney B. Tibbatts 55 Co-President and Co-Chief Executive Officer and Director of Bancorp* and Chairman of the Board of Valley Commercial Bank
--------------- *Since February 28, 1995, pursuant to the Merger Agreement.
Bancorp's Board of Directors is divided into three classes with staggered terms of three years; directors serve until their successors have been elected and qualified. The terms of Bancorp's present directors expire as follows: the terms of Messrs. Lester D. Green, Long, Ouderkirk, and Putnam expire in 1996; the terms of Messrs. Bartruff, Clark, Loch, Morrison, and Tibbatts expire in 1997; and the terms of Messrs. Ankeny, Barrett, Bateman, Stanley M. Green, and McGregor expire in 1998. The officers of Bancorp and its bank subsidiaries are elected by their respective board of directors to serve until the next annual board meeting or until their successors are elected and qualified, subject to prior death, resignation, or removal. There are no family relationships among the directors and executive officers.
Lloyd D. Ankeny was a director of WCB since 1993 and has served as a director of The Bank of Newport since 1986. Mr. Ankeny graduated from the University of California in 1959 with a B.S. degree and, in 1961, earned an M.B.A. in Management. During the period 1961 through 1980, Mr. Ankeny served in various executive capacities with IBM and Xerox corporations. Since 1981, Mr. Ankeny has been a self-employed real estate investor and owner of Landmark Development Corporation.
Iral D. Barrett has been a director of Bancorp since 1982. He is the retired Chairman of the Board and Chief Executive Officer of Supra Products, Inc., a key lock company, a position which Mr. Barrett held from 1964 until 1994. Mr. Barrett joined the board of The Commercial Bank in 1976, of which Mr. Barrett continues to be a director, and served as Chairman of the Board of The Commercial Bank from May 1991 to April 1994. Mr. Barrett has been actively involved in the community and with Young Life for many years.
Victor L. Bartruff was President and Chief Executive Officer of WCB from 1993 until February 28, 1995, when he became Co-President and Co-Chief Executive Officer of Bancorp, and was a director of WCB since 1992. Mr. Bartruff has served as President and Chief Executive Officer and director of The Bank of Newport since 1991. Mr. Bartruff has been in the banking industry for over 29 years. Mr. Bartruff was with United States National Bank of Oregon from 1965 to 1991 and was a Vice President and District Manager prior to joining WCB and The Bank of Newport. Mr. Bartruff has an extensive background in lending, personnel, marketing, and management. He is a graduate of Oregon State University and Pacific Coast Banking School. Mr. Bartruff is an active leader in many civic and church-related organizations. He serves as a director of the Greater Newport Chamber of Commerce and is a member of the Newport Rotary Club, Treasurer of the Yaquina Bay Economic Foundation, Chairman of the City of Newport Retirement Board, a member of the Oregon State University Newport Marine Science Development Council, and a Deacon at the First Baptist Church of Newport.
Phillip G. Bateman was a director of WCB since 1993 and has served as a director of The Bank of Newport since 1979. Mr. Bateman is a graduate of San Francisco College of Mortuary Science and has been a partner in Bateman Funeral Homes, Central Coast Crematorium, and Chelan Abbey Mausoleum and Columbariam since 1975.
Chester C. Clark was a director of WCB since 1993 and has served as a director of The Bank of Newport since 1986. Mr. Clark was employed by what is now First Interstate Bank of Oregon, N.A., from 1942 to 1965. In 1965, Mr. Clark entered the veneer business and, in 1968, joined Alsea Veneer Company, Inc. Mr. Clark served as owner/operator of that company until his retirement in 1987. Mr. Clark remains Chairman of the Board of Alsea Veneer Company, Inc., and a partner in Alsea Land and Timber Company.
Lester D. Green has been Chairman of Bancorp's Board of Directors since 1991 and has served as a director of Bancorp since 1982 and of The Commercial Bank since 1972. He has been property manager of Mission Properties, a real estate holding company, since 1994. Mr. Green was formerly Chairman of the Board of Capitol Auto Group, composed of Capitol Chevrolet Cadillac, Capitol Toyota, and Willamette Pontiac, since 1955. A University of Oregon graduate, Mr. Green has been actively involved in numerous automobile dealer associations during his career. Mr. Green received the TIME Quality Dealer Award in 1971. During his involvement in the community, Mr. Green has chaired or been president of the Salem Downtown Development Commission, the Salem Economic Development Corporation, the East Salem Rotary Club, and the Salem Hospital Board. Mr. Green was also honored as Salem's First Citizen in 1977.
Stanley M. Green was a director of WCB since 1981. He worked as an Animation Artist for Walt Disney from 1950 to 1991 and is currently an animation director of Tolco Productions, Inc. Mr. Green is a member of the faculty at Portland State University, where he teaches animation and drawing. Mr. Green attended the Arts Students League in New York City and the Chounaird Art Institute in Los Angeles.
Cora A. Hallauer has been Senior Vice President and Operations Administrator and Secretary of The Commercial Bank and Secretary of Bancorp since July 1990. She was also Treasurer of Bancorp from July 1990 until February 28, 1995. Ms. Hallauer previously served as Vice President and Systems Operations Officer of The Commercial Bank since 1985. Ms. Hallauer is a graduate of Pacific Coast Banking School and has taught at Chemeketa Community College and for the American Institute of Banking since 1978. Ms. Hallauer is a member of the Oregon Bankers Association Operations Committee, and serves on the Board of Directors for the YWCA of Salem.
Donald A. Kalkofen was the Senior Vice President and Treasurer of WCB, as well as Senior Vice President and Chief Financial Officer of The Bank of Newport, from January 1993 until February 28, 1995, when he became Chief Financial Officer of Bancorp. Mr. Kalkofen is a Certified Public Accountant and has nine years experience in the accounting and financial services related industries. Prior to joining WCB and The Bank of Newport, Mr. Kalkofen held various positions with United States National Bank of Oregon, including Senior Accounting Officer and Controller of a subsidiary from May 1988 to April 1992. Mr. Kalkofen is a gradate of Washington State University and the Bank Administration Institute and is a member of the Oregon Society of Certified Public Accountants, the American Society of Certified Public Accountants, the Oregon Bankers Association Investment Committee, and the Oregon Society of Certified Public Accountants Financial Services Committee.
William B. Loch has been a director of Bancorp since 1982 and of The Commercial Bank since 1977. He has been President of Capital City Companies, Inc., a petroleum distribution and transportation company, since 1980. Mr. Loch is a graduate of the University of Oregon and has owned and managed petroleum, transportation, and warehouse businesses since 1957. He is actively involved in several industry associations and is a Trustee of the University of Oregon Foundation.
Jack E. Long has been a Bancorp director since 1990, a director of The Commercial Bank since 1990, and Chairman of the Board of The Commercial Bank since April 1994. He is President of J & L Nursery Co., Inc. Mr. Long has been in the nursery business since his graduation from Oregon State University's agricultural program in 1960. Mr. Long is a member of numerous professional organizations including President [Elect] of the American Association of Nurserymen and the Oregon Department of Agriculture Nursery Advisory Council. Mr. Long has received numerous awards related to his nursery business. Among them, Mr. Long was named "STAR PRODUCER" in the "AG STARS 88" promotion sponsored by the Salem Economic Development Commission and received the Northwest Horticulture Congress Distinguished Service Award.
C. Douglas McGregor has been a director of Bancorp and of The Commercial Bank since 1994. He has been Chairman of the Board of ACCESS Long Distance since 1993. Formerly, Mr. McGregor was an Executive Vice President with First Interstate Bank of Oregon, N.A., since 1985. Mr. McGregor is a graduate of Oregon State University and past Trustee and Chairman of Pacific Coast Banking School and is currently a member of the Executive Committee of Willamette University.
Edgar B. Martin has been President and Chief Executive Officer of The Commercial Bank since 1991. He was previously Executive Vice President from March 1990, and Chief Operating Officer from June 1990, of The Commercial Bank. Mr. Martin served as Senior Vice President and Loan Administrator of The Commercial Bank from 1985 to 1990 and, prior to that, served as Vice President and Branch Administrator for 12 years. He is a graduate of Lewis and Clark College and Pacific Coast Banking School. Mr. Martin is active in the Salem Kiwanis, Salem Area Chamber of Commerce, and numerous Oregon Bankers Association committees.
Robert D. Morrison has been a director of Bancorp since 1978 and of The Commercial Bank since 1982. He has been First Vice President, Financial Consultant with Smith Barney, Inc. (or its predecessor, Shearson Lehman Brothers, Inc.) since 1974. Mr. Morrison is a graduate of the University of Washington, is a member and past trustee of the First Methodist Church in Salem, and is a founding director of Illahe Hills Country Club.
J. F. Ouderkirk was a director of WCB since 1992 and has served as a director of The Bank of Newport since 1986 and as Chairman of the Board of The Bank of Newport since 1988. During 1992 and 1993, Mr. Ouderkirk also served as Executive Vice President of WCB and was Chairman of the Board of WCB from April 1993 to February 1994. Mr. Ouderkirk is a partner in the law firm of Richardson, Ouderkirk and Hollen, which Mr. Ouderkirk co-founded in 1975. Mr. Ouderkirk is a graduate of Brown University and the University of Oregon School of Law. Mr. Ouderkirk is a member of the Oregon State Bar and is admitted to practice before the United States District Court, District of Oregon, the Ninth Circuit Court of Appeals, and the Unites States Tax Court.
Gary D. Putnam served as President and Chief Operating Officer and director of WCB from 1990 to 1992. Mr. Putnam rejoined the board of directors of WCB in October 1993 and was appointed Chairman of the Board of WCB in 1994. Mr. Putnam has 20 years of banking experience and, prior to joining WCB, served as Senior Vice President of Far West Federal Bank, S.B. ("Far West") from 1985 to 1988 and Executive Vice President of Far West from 1988 to 1990. In 1991, Far West was placed in receivership by the Office of Thrift Supervision. In May 1994, the Resolution Trust Corporation ("RTC"), as successor to Far West, filed a lawsuit against certain former officers and directors of Far West alleging negligence in their management of Far West and seeking damages for the resulting losses. Mr. Putnam was named as a defendant in an amended complaint filed in June 1994. Mr. Putnam never served as a director or a loan officer of Far West and believes that there is no basis for any claim by the RTC against him. During 1971 to 1989, while not employed in bank management, Mr. Putnam was engaged in the practice of law, emphasizing banking and financial law. Mr. Putnam is a graduate of Lewis & Clark College and the Willamette University College of Law and a member of the Oregon State Bar and the American Bar Association. Since 1992, Mr. Putnam has been an owner and is President of Pacific Drilling Supply, Inc., in Wilsonville, Oregon.
Rodney B. Tibbatts was President and Chief Executive Officer of Bancorp from 1990 until February 28, 1995, when he became Co-President and Co-Chief Executive Officer of Bancorp. Mr. Tibbatts has been a director of Bancorp and of The Commercial Bank since 1990 and of Valley Commercial Bank since 1991 and Chairman of the Board of Valley Commercial Bank since April 1993. Mr. Tibbatts was formerly Senior Vice President and Regional Manager of Key Bank of Oregon from 1986 until 1991. He has been in the banking industry for 33 years. Mr. Tibbatts attended the University of Washington and graduated from the Pacific Coast Banking School. He is a member of the American Bankers Association Government Relations Council and several Oregon Bankers Association committees. Mr. Tibbatts is President-Elect of the Salem Downtown Rotary Club, serves on the board of the Salem Area Chamber of Commerce and the Salem Family YMCA, and was named Associated Oregon Industries "1986 Oregon Business Leader of the Year" and Albany's 1986 "First Citizen."
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the three years ended December 31, 1994, the compensation awarded or paid to, or earned by, Bancorp's chief executive officer and each other executive officer whose salary and bonus for 1994 exceeded $100,000.
FISCAL YEAR-END OPTION VALUES (1) ---------------------------------
Number of Value of Securities Underlying Unexercised In-the-Money Unexercised Options at FY-End Options at FY-End Name Exercisable Unexercisable (#) Exercisable Unexercisable ------------------ ------------------------------- ---------------------------
Rodney B. Tibbatts 18,920 8,500 $42,465 --
Edgar G. Martin 11,110 6,500 21,720 --
---------------------
(1) No options were exercised by the indicated persons during 1994.
(2) On December 31, 1994, the closing price of Bancorp's Common Stock was $14.50. For purposes of the foregoing table, stock options with an exercise price less than that amount are considered to be "in-the-money" and are considered to have a value equal to the difference between this amount and the exercise price of the stock option multiplied by the number of shares covered by the stock option.
COMPENSATION OF DIRECTORS. Bancorp directors receive a fee of $1,000 per month ($1,250 per month for the Chairman and Vice Chairman of the Board), plus $100 for each committee meeting attended, other than meetings held in conjunction with Board of Directors meetings. In addition, each non-employee director of The Commercial Bank receives a fee of $750 per month and the Chairman of the Board receives a fee of $1,000 per month. Each member of a committee of The Commercial Bank receives $100 for each committee meeting attended (other than special Loan and Investment Committee meetings held immediately prior to the regular Board of Directors meetings). Directors of Valley Commercial Bank receive $125 per month. Non-employee directors of The Bank of Newport receive $600 per month, except the Chairman of the Board, who receives an additional $250 per month, and members of board committees receive $100 for each meeting attended. Directors of Bancorp during 1994 otherwise received fees only as directors of one of Bancorp's bank subsidiaries.
During 1994, Lester D. Green received $325 per month for his services as Chairman of the Board of Bancorp, and Iral D. Barrett and Jack E. Long received $1,300 and $2,375, respectively, for services as Chairman of the Board of The Commercial Bank.
Lester D. Green and Jack E. Long each received $5,000 from Bancorp in 1994, and $2,000 from Bancorp during 1995, as compensation for services to Bancorp in connection with the Merger. J. F. Ouderkirk and Gary D. Putnam each received $2,000 per month from August 31, 1994, through February 28, 1995, from WCB as compensation for services to WCB in connection with the Merger.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 1994, Iral D. Barrett, Michael J. Bragg, Anna M. Peterson, and Forrest A. Weil served on an ad hoc compensation committee appointed by Bancorp's Board of Directors. Each member of the ad hoc committee was a nonemployee director of Bancorp. Various directors, including one or more members of the ad hoc committee, members of their immediate families, and firms in which they had an interest were customers of and had transactions with Bancorp's subsidiary banks during 1994 in the ordinary course of business. Similar transactions may be expected to take place in the ordinary course of business in the future. All outstanding loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not, in the opinion of management, involve more than normal risks of collectibility or present other unfavorable features.
NON-QUALIFIED RETIREMENT PLAN. In December 1994, a Non-Qualified Deferred Compensation Plan was approved with respect to Edgar B. Martin that will result in a $250,000 benefit to Mr. Martin at normal retirement (age 65). The benefit is intended to compensate Mr. Martin for the shortfall that would otherwise occur due to termination of The Commercial Bank Defined Benefit Plan at December 31, 1992. The benefit will be funded by an insurance contract with an annual premium expected not to exceed $30,000.
EXECUTIVE EMPLOYMENT AGREEMENT. Bancorp has entered into an executive employment agreement with Rodney B. Tibbatts pursuant to which Bancorp has agreed to employ Mr. Tibbatts as Co-President and Co-Chief Executive Officer through December 31, 1996. The agreement provides that Mr. Tibbatts will receive a base salary of $125,000 per year, is eligible to receive bonuses, and is entitled to be provided with other benefits made available by Bancorp. Also, if Mr. Tibbatt's employment were terminated prior to December 31, 1996, without cause (as defined), or terminated by him for good reason (as defined), he would be entitled to continuing compensation through December 31, 1996. He will also be entitled to receive a salary continuation payment if his employment is terminated without cause or terminated by him for good reason following a change in control which occurs prior to December 31, 1996, or which results from a definitive agreement in effect at or prior to December 31, 1996. The salary continuation payment would be paid in a lump sum following termination at a rate equal to his annual salary level at the date of termination plus his most recent bonus for a period of 24 months following the change in control, less any period of continued employment by Bancorp following such change in control during the salary continuation period. For purposes of the agreement, "change in control" means (i) the acquisition or ownership by a person or group of persons acting in concert of more than 50 percent of the outstanding Common Stock or (ii) the merger of Bancorp with or into any corporation where more than 50 percent of the stock of the surviving corporation is owned by persons other than the owners of the Common Stock prior to such merger.
SALARY CONTINUATION AGREEMENT. The Commercial Bank has entered into a salary continuation agreement with Edgar B. Martin pursuant to which he will be entitled to receive a salary continuation payment in the event his employment is terminated without cause or he elects to terminate his employment for good reason prior to December 31, 1996. In the event of a change in control of Bancorp occurring on or before June 30, 1996, or pursuant to a definitive agreement executed by that date, Mr. Martin will be entitled to receive a payment in the event of termination without cause or termination by him for good reason occurring prior to December 31, 1996. In either such event, the salary continuation payment would be based on Mr. Martin's current salary as of the date of termination plus a prorated amount reflecting his most recent bonus or incentive compensation and would be payable in a lump sum calculated for the period beginning with the date of termination through December 31, 1996, but not to exceed 18 months. See "Executive Employment Agreement" for a summary of the definition of change in control.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the shares of Bancorp Common Stock beneficially owned as of March 1, 1995, by each director, by certain executive officers, and by all executive officers and directors of Bancorp as a group.
Such shares include shares held in the Bancorp dividend reinvestment program/stock purchase plan, but exclude fractional shares.
Shares Percent Name of Beneficial Owner Beneficially Owned (1)(2) of Class ------------------------ ------------------------- -------
Lloyd D. Ankeny 32,231 *
Iral D. Barrett 10,181 *
Victor L. Bartruff 29,387 *
Phillip G. Bateman 15,618 *
Chester C. Clark 41,907 (3) *
Lester D. Green 32,334 (3) *
Stanley M. Green 116,159 (3) 2.7%
William B. Loch 11,424 *
Jack E. Long 5,198 *
C. Douglas McGregor 634 *
Edgar B. Martin 14,461 *
Robert D. Morrison 13,217 *
J. F. Ouderkirk 13,258 *
Gary D. Putnam 2,880 *
Rodney B. Tibbatts 21,734 (3) *
All directors and executive officers as a group (17 persons) 369,001 8.8%
__________________________
* Represents less than one percent.
(1) Shares held directly with sole voting and sole investment power, unless otherwise indicated.
(2) Share amounts include stock options which are currently exercisable as follows: Lloyd D. Ankeny, 1,580 shares; Victor L. Bartruff, 19,418 shares; Phillip G. Bateman, 2,451 shares: Chester C. Clark, 2,451 shares; Stanley M. Green, 1,580 shares; Edgar B. Martin, 11,110 shares; J.F. Ouderkirk, 3,355 shares; Gary D. Putnam, 1,560 shares; Rodney B. Tibbatts, 18,920 shares; and all directors and executive officers as a group, 70,803 shares.
(3) Share amounts include shares owned by the spouses of Lester D. Green (5,914), Stanley M. Green (37,596), William B. Loch (783), and Rodney B. Tibbatts (2,814), each of whom disclaims any beneficial ownership in the shares.
ITEM 13.

ITEM 13. CERTAIN TRANSACTIONS.
Various of the directors and officers of Bancorp, members of their immediate families, and firms in which they had an interest were customers of and had transactions with Bancorp's subsidiary banks during 1994 in the ordinary course of business. Similar transactions may be expected to take place in the ordinary course of business in the future. All outstanding loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not, in the opinion of management, involve more than normal risks of collectibility or present other unfavorable features.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. The financial statements and related documents listed in the index set forth in Item 8 of this report are filed as part of this report.
All schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or related notes.
(a) 3. Exhibits are listed in the Exhibit Index beginning on page 61 of this report. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report is listed under Item 10, "Executive Compensation Plans and Arrangements and Other Management Contracts," in the Exhibit Index.
Upon written request to Cora Hallauer, Secretary, West Coast Bancorp, P.O. Box 428, Salem, Oregon 97308, a shareholder will be furnished a copy of any exhibit, upon payment of $.10 per page, which represents the registrant's reasonable expenses in furnishing the exhibit requested.
(b) Reports on Form 8-K: During the quarter ended December 31, 1994, the registrant filed a Current Report on Form 8-K dated October 24, 1994, reporting the execution of an Agreement and Plan of Merger dated as of October 24, 1994, between the registrant and former West Coast Bancorp, together with related documents.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
West Coast Bancorp (Registrant)
Date: March 28, 1995 By: Victor L. Bartruff Co-President and Co-Chief Executive Officer
Date: March 28, 1995 By: Rodney B. Tibbatts Co-President and Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 28th day of March, 1995.
Signature Title
Principal Executive Officers and Directors:
Victor L. Bartruff Co-President and Co-Chief Executive Officer and Director
Rodney B. Tibbatts Co-President and Co-Chief Executive Officer and Director
Principal Financial Officer:
Donald A. Kalkofen Chief Financial Officer
Principal Accounting Officer:
Donald R. Judson Controller
Other Directors:
Iral D. Barrett Director Lester D. Green Chairman of the Board William B. Loch Director Jack E. Long Director C. Douglas McGregor Director Robert D. Morrison Director
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger dated as of October 24, 1994, between West Coast Bancorp and the Registrant, as amended as of December 12, 1994 ("Merger Agreement"), incorporated by reference to Appendix 1 to the Prospectus/Proxy Statement included in the Registrant's Registration Statement on Form S-4 (No. 33-88656) (the "Form S-4"). Annex 4 to Appendix 1 to the Prospectus/Proxy Statement specifying the form of letter to be executed by certain affiliates and the Schedules of Exceptions and related Disclosure Letters are omitted and will be furnished supplementally to the Commission upon its request.
2.2 Merger Agreement dated September 28, 1994, among The Commercial Bank, the Registrant, and Great Western Bank, incorporated by reference to Exhibit (2)(B) to the Form S-4. The schedules thereto are omitted and will be furnished supplementally to the Commission upon its request.
3.1 Restated Articles of Incorporation of the Registrant.
3.2 Restated Bylaws of the Registrant.
4 The Registrant has incurred long-term indebtedness as to which the amount involved is less than ten percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish instruments relating to such indebtedness to the Commission upon its request.
10 Executive Compensation Plans and Arrangements and Other Management Contracts.
10.1 Executive Employment Agreement between the Registrant and Rodney B. Tibbatts effective February 28, 1995, incorporated by reference to Exhibit (10)(G) to the Form S-4.
10.2 Executive Employment Agreement between the Registrant and Victor L. Bartruff effective February 28, 1995, incorporated by reference to Exhibit (10)(I) to the Form S-4.
10.3 Executive Employment Agreement between the Registrant and Donald A. Kalkofen effective February 28, 1995, incorporated by reference to Exhibit (10)(J) to the Form S-4.
10.4 Executive Employment Agreement between the Registrant and Cora A. Hallauer effective February 28, 1995, incorporated by reference to Exhibit (10)(H) to the Form S-4.
10.5 Salary Continuation Agreement between The Commercial Bank and Edgar B. Martin effective February 28, 1995, incorporated by reference to Exhibit (10)(N) to the Form S-4.
10.6 Form of Salary Continuation Agreement with other officers and key employees of the Registrant's subsidiaries effective February 28, 1995.
10.7 1991 Combined Incentive Stock Option Plan and 1991 Non-Qualified Stock Option Plan of the Registrant, incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-K for the year ended December 31, 1991.
10.8 Form of Option Grant under 1991 Combined Incentive Stock Option Plan and 1991 Non-Qualified Stock Option Plan of the Registrant, incorporated by reference to Exhibit (10)(W) to the Form S-4.
10.9 Non-Qualified Stock Option Plan of former West Coast Bancorp and related Form of Non-Qualified Stock Option Agreement, incorporated by reference to Exhibits 10.2 and 10.3, respectively, to its Registration Statement on Form SB-2 (No. 33-79086) ("Form SB-2").
10.10 Incentive Stock Option Plan of former West Coast Bancorp and related Form of Incentive Stock Option Agreement, incorporated by reference to Exhibits 10.4 and 10.5, respectively, to the Form SB- 2.
10.11 The Commercial Bank Incentive Compensation Plan, as amended, incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 1993.
10.12 1994 and 1995 Amendments to The Commercial Bank Incentive Compensation Plan, incorporated by reference to Exhibit (10)(BB) to the Form S-4.
10.13 Valley Commercial Bank Incentive Compensation Plan, as amended, incorporated by reference to Exhibit (10)(CC) to the Form S-4.
10.14 Non-Qualified Deferred Compensation Plan for Edgar B. Martin, incorporated by reference to Exhibit (10)(FF) to the Form S-4.
10.15 Indemnification of Directors and Officers of the Registrant, incorporated by reference to Exhibit 25 to the Registrant's Form 10-K for the year ended December 31, 1989.
11 Statement of Calculation of Average Common Shares Outstanding of the Registrant.
21 Schedule of Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP with respect to its report on the Registrant's financial statements.
27 Financial Data Schedule.
Other exhibits listed in Item 601 of Regulation S-K are not applicable.