FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
FOR QUARTER ENDED SEPTEMBER 30, 1994 COMMISSION FILE NUMBER: 0-10897
WEST COAST BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3586860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4770 CAMPUS DRIVE, SUITE 100
Newport Beach, California 92660-1833
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (714) 757-6868
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
Number of shares of common stock of the registrant outstanding as of October
31, 1994:
9,192,942
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except shares) September 30, December 31,
ASSETS 1994 1993
---------------------
Cash and due from banks $ 9,012 $ 18,995
Interest-bearing deposits with banks 2,241 4,377
Investment securities held to maturity -
approximate market value of $5,844 and
$16,392 in 1994 and 1993, respectively 5,876 16,317
Investment securities held for sale 4,000 -
Federal funds sold 12,200 36,800
Loans and direct lease financing held for sale - 2,977
Loans and direct lease financing 97,065 220,366
Less allowance for possible credit losses (4,622) (5,557)
----------------------
Net loans and direct lease financing 92,443 214,809
Real estate owned 4,857 7,738
Premises and equipment, net 2,842 5,550
Net assets held for sale 6,825 -
Other assets 1,323 4,700
----------------------
$141,619 $312,263
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 33,840 $ 96,053
Savings, money market & interest
bearing demand 41,540 104,731
Time certificates under $100,000 45,394 68,833
Time certificates $100,000 or more 6,785 23,333
----------------------
Total deposits 127,559 292,950
Notes payable to affiliates 598 406
Other borrowed funds 716 441
10% convertible subordinated debentures 3,035 3,035
Other liabilities 2,352 4,020
----------------------
Total liabilities 134,260 300,852
Shareholders' equity:
Common stock, no par value - 30,000,000 shares
authorized, 9,192,942 shares issued and
outstanding in 1994 and 1993 30,200 30,200
Accumulated deficit (22,841) (18,789)
----------------------
Total shareholders' equity 7,359 11,411
----------------------
$141,619 $312,263
======================
See accompanying notes to consolidated financial statements.
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
Nine Months Ended Three Months Ended
(in thousands, September 30, September 30,
except per share data) 1994 1993 1994 1993
----------------------------------------
Interest income:
Loans, including fees $ 12,181 $ 18,054 $ 2,620 $ 5,616
Investment securities 516 614 70 202
Deposits with banks 110 43 31 14
Federal funds sold 631 508 192 182
----------------------------------------
Total interest income 13,438 19,219 2,913 6,014
Interest expense:
Interest on deposits 3,463 5,367 773 1,670
Other borrowed funds 382 423 119 137
----------------------------------------
Total interest expense 3,845 5,790 892 1,807
----------------------------------------
Net interest income 9,593 13,429 2,021 4,207
Provision for possible
credit losses 3,039 6,534 895 1,487
----------------------------------------
Net interest income
after provision for
possible credit losses 6,554 6,895 1,126 2,720
Other operating income 2,279 2,407 433 993
Other operating expenses 10,972 17,920 2,189 6,072
Loss on liquidation of WCV, Inc. 100 400 - 100
Loss on proposed sale
of Sacramento First 1,800 - - -
----------------------------------------
Loss before income taxes (4,039) (9,018) (630) (2,459)
Income tax expense 13 7 - -
----------------------------------------
Net loss $ (4,052) $ (9,025) $ (630) $ (2,459)
Accumulated deficit at
beginning of period (18,789) (6,682) (22,211) (13,248)
----------------------------------------
Accumulated deficit at
end of period (22,841) (15,707) (22,841) (15,707)
========================================
Net loss per common share
and common share equivalent $ (.44) $ (.98) $ (.07) $ (.27)
========================================
Weighted average number of common
and common equivalent shares 9,193 9,183 9,193 9,193
========================================
See accompanying notes to consolidated financial statements.
-3- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
(in thousands) 1994 1993
--------------------
Cash flows from operating activities:
Net loss $ (4,052) $ (9,025)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 670 810
Provision for possible credit losses 3,039 6,534
Net change in receivables, payables
and other assets 2,217 (90)
Net write-downs of real estate owned 194 2,300
Proceeds from sales of loans
originated for sale 5,072 8,616
Loans originated for sale (4,139) (5,518)
Gain from sales of loans, net (1,045) (681)
Gain from sales of real estate owned, net (260) (219)
Loss on discontinued business 1,900 400
----------------------
Net cash provided by operating activities 3,596 3,127
Cash flows from investing activities:
Proceeds from maturity of investment securities 3,446 9,040
Purchase of investment securities (12,647) (9,123)
Net decrease in loans 35,506 24,277
Proceeds from sales of loans and leases 4,490 2,313
Proceeds from sales of real estate owned 4,626 8,145
Purchase of premises and equipment (92) (360)
Proceeds from sales of premises and equipment 68 -
Capital expenditures for real estate owned (489) (360)
Decrease in cash and cash equivalents
from proposed sale of Sacramento First (15,475) -
----------------------
Net cash provided by investing activities 19,433 33,932
Cash flows from financing activities:
Net decrease in deposits (59,322) (28,265)
Payments for notes payable to affiliates,
subordinated debt and other borrowed funds (576) (1,419)
Loan proceeds from affiliate 150 -
Shares issued to employee - 24
----------------------
Net cash used in financing activities (59,748) (29,660)
----------------------
(Decrease) increase in cash and cash equivalents (36,719) 7,399
Beginning cash and cash equivalents 60,172 48,084
----------------------
Ending cash and cash equivalents $ 23,453 $ 55,483
======================
(Continued)
See accompanying notes to consolidated financial statements.
-4- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Nine Months Ended
September 30,
(in thousands) 1994 1993
---------------------
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 4,016 $ 5,898
Income taxes (98) 7
Supplemental schedule of non-cash investing
and financing activities:
Transfer of loans to real estate owned $ 2,568 $ 4,636
Senior debt recorded in acquisition of
real estate owned 987 1,070
Loans made to purchasers of real estate owned 309 1,370
Loans assumed by purchasers of real estate owned 94 -
See accompanying notes to consolidated financial statements.
-5- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1994
(1) BASIS OF PRESENTATION
West Coast Bancorp entered into a definitive agreement on June 22, 1994
to sell Sacramento First National Bank ("Sacramento First"). All assets
and liabilities of Sacramento First are included in "Net assets held for
sale" at September 30, 1994. Sacramento First's operating results were
included in the consolidated statements of operations for all periods
through June 30, 1994. See "Management's discussion and analysis -
general" and Note 5 for additional details. The unaudited consolidated
financial statements reflect all adjustments, consisting primarily of
normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results of operations for the
interim periods. Results for the nine and three month periods ended
September 30, 1994 and 1993 are not necessarily indicative of results
which may be expected for any other interim period, or for the year as a
whole. All significant intercompany balances have been eliminated.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 1993 financial
statements to conform to the presentation in 1994.
(3) NET LOSS PER SHARE
The stock options, common stock warrants and 10% convertible
subordinated debentures were not included in the net loss per share
computations as the effect would have been anti-dilutive. Fully diluted
loss per share approximates primary loss per share.
(4) LOANS AND DIRECT LEASE FINANCING
A summary of loans and direct lease financing follows:
(in thousands) September 30, December 31,
1994 1993
----------------------
Commercial $ 36,549 $ 78,462
Real estate - Construction 775 27,558
Real estate - Mortgage 54,678 98,220
Installment 5,370 16,874
Direct lease financing 85 -
Less unearned income and discounts (392) (748)
----------------------
Loans and direct lease financing $ 97,065 $220,366
======================
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1994
(5) NET ASSETS HELD FOR SALE
Net assets held for sale represents cost incurred by West Coast as a
result of the sale and all assets and liabilities of Sacramento First at
September 30, 1994 are as follows:
(in thousands) Amount
-----------
Cash and due from banks $ 8,402
Interest-bearing deposits with banks 1,377
Investment securities 15,612
Federal funds 9,850
Loans and direct financing leases 72,594
Real estate owned 1,796
Premises and equipment 1,962
Other assets 1,760
Deposits (102,240)
Other borrowed funds (739)
Other liabilities (1,172)
Minority interest (488)
Accrued loss on proposed sale
of Sacramento First (1,800)
Earnings subsequent to the signing
of the proposed sale agreement (164)
Costs capitalized on proposed sale 75
-----------
$ 6,825
===========
(6) OTHER OPERATING INCOME
A summary of other operating income follows:
Nine Months Ended Three Months Ended
September 30, September 30,
(in thousands) 1994 1993 1994 1993
----------------------------------------
Gain from sales of loans
and leases, net $1,045 $ 681 $ 186 $460
Depositor charges 868 1,222 206 384
Service charges, commissions
and fees 307 416 25 116
Other income 59 88 16 33
----------------------------------------
$2,279 $2,407 $ 433 $993
========================================
-7- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1994
(7) OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
(in thousands) 1994 1993 1994 1993
-----------------------------------------
Salaries and employee
benefits $ 5,248 $ 7,639 $ 1,029 $2,355
Occupancy 1,311 1,798 259 622
Depreciation and
amortization 670 810 156 262
Professional services 569 632 88 191
Regulatory fees
and assessments 555 708 112 229
Data processing 496 618 113 196
Collection 489 573 126 231
Customer service 278 330 91 110
Insurance 196 235 51 76
Advertising and promotion 168 317 15 113
Printing and postage 150 184 28 53
Delivery and courier 146 208 15 70
Telephone and telefax 125 167 26 72
Stationery and supplies 123 216 29 69
Director fees 74 240 15 85
Net cost of operation of
real estate owned 72 2,438 (41) 1,096
Miscellaneous 302 807 77 242
-----------------------------------------
$10,972 $17,920 $ 2,189 $6,072
=========================================
-8-
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
The following presents management's discussion and analysis of the consolidated
financial condition and operating results of West Coast Bancorp (as a separate
entity "West Coast" and together with its subsidiaries the "Company") for the
nine and three month periods ended September 30, 1994 and 1993. The discussion
should be read in conjunction with the Company's consolidated financial
statements and the accompanying notes appearing elsewhere in this report.
GENERAL
The Company posted losses of $4,052,000 or $.44 per share and $630,000 or $.07
per share during the nine and three months ended September 30, 1994,
respectively, and $9,025,000 or $.98 per share and $2,459,000 or $.27 per share
during the same respective periods in 1993.
On June 22, 1994, West Coast announced the signing of a definitive agreement
among Business & Professional Bank ("B&PB"), Sacramento First National Bank
("Sacramento First"), and West Coast providing for the acquisition of its
majority owned subsidiary, Sacramento First by B&PB.
Completion of the transaction is subject to, among other things, the receipt of
necessary regulatory approvals from the state and federal banking agencies as
well as the approval of the shareholders of both B&PB and Sacramento First.
West Coast, which owns 94% of Sacramento First's common shares, has agreed to
vote its shares in favor of the transaction. The sale is expected to close
during the fourth quarter of 1994 and to provide West Coast with approximately
$3.6 million of cash and approximately $2.3 million in B&PB's common stock
based upon B&PB's book value per common share as of the end of the month
immediately preceding the consummation of the transaction. A contingent
payment of up to $940,000 may be received by West Coast from three to five
years after the sale date based on the performance of Sacramento First's loan
portfolio and real estate owned. All assets and liabilities of Sacramento
First are included in "Net assets held for sale" at September 30, 1994.
Sacramento First's operating results were included in the consolidated
statements of operations for all periods through June 30, 1994.
Exclusive of Sacramento First's earnings and loss on sale, the Company's loss
would have been $2,464,000 and $630,000 for the nine and three months ended
September 30, 1994 as compared with $8,774,000 and $2,503,000 for the same
periods in 1993.
The Company had total assets, loans and deposits as follows (in thousands):
September 30, December 31, September 30, December 31,
1994 1993 1993 1992
-----------------------------------------------------
Total assets $ 141,619 $ 312,263 $ 324,429 $ 361,741
Loans 97,065 223,343 240,539 279,014
Deposits 127,559 292,950 302,578 330,843
Total assets, loans and deposits of Sacramento First that have been netted into
"Net Assets Held for Sale" at September 30, 1994 were $113,353, $73,490 and
$102,240, respectively.
-9- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
Remaining reductions in assets resulted from a decrease in loans due to lower
loan demand and more stringent underwriting standard at Sunwest Bank
("Sunwest"). The decrease in assets also resulted from Sunwest's capital
position and its regulatory orders. Sunwest is operating under an Order to
Cease and Desist (the "C&D Order") from the FDIC and an order from the State
Banking Department (the "State Order"). Both orders require, among other
things, maintenance of certain capital levels. Further, Sunwest is signifi-
cantly undercapitalized under the prompt corrective action provisions of the
FDIC Improvement Act. Sunwest's capital position and the presence of its
regulatory orders have made it difficult for Sunwest to compete with other
financial institutions for loans and deposits. Loan and deposit growth are not
anticipated until Sunwest's capital is increased.
The federal banking agencies have broad powers to impose restrictions and
sanctions on an institution classified as significantly undercapitalized. In
the event Sunwest continues to incur losses, and West Coast is unable to raise
the funds necessary to increase the Company's and Sunwest's capital levels, the
FDIC would take additional actions at Sunwest. Those actions may include the
appointment of a conservator or receiver or the termination of insurance of
deposits.
Further, West Coast's liquidity is very limited and a cash shortfall is
presently anticipated. Although West Coast has certain options available to
raise or conserve cash, its liquidity needs ultimately must be met by raising
capital or selling assets. In the event that West Coast does not raise capital
or sell assets, it is probable that West Coast would not be able to meet its
current obligations and could be forced into bankruptcy.
If these events were to occur, West Coast's shareholders could suffer the
elimination of the value of their investments in the Company.
On October 28, 1994 Sunwest submitted a revised capital restoration plan to the
FDIC for approval. The FDIC has requested that West Coast enter into a
security agreement pledging all of its assets in support of its guaranty of
Sunwest's capital plan. Under such security agreement, West Coast may be
required to seek the approval of the FDIC prior to selling assets or disbursing
funds.
RESULTS OF OPERATIONS
GENERAL
The 1994 losses were significantly affected by recording an estimate of the
loss on the proposed sale of Sacramento First. The 1993 losses resulted from
lower net interest income, loan losses and costs and expenses associated with
high levels of nonperforming assets.
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
NET INTEREST INCOME
Net interest income decreased $3,836,000 or 29% from the first nine months of
1993 to the first nine months of 1994 and by $2,186,000 or 52% from the third
quarter of 1993 to the third quarter of 1994 because of the proposed sale of
Sacramento First and reduced loan volumes at Sunwest. The proposed sale of
Sacramento First resulted in a $1,637,000 decrease in net interest income for
the nine and three months ended September 30, 1994 versus 1993. Average loans
at Sunwest decreased by $49 million or 30% from the first nine months of 1993
to the first nine months of 1994.
Average earning assets and average interest-bearing liabilities decreased in
the third quarter primarily as a result of the proposed sale of Sacramento
First. Excluding Sacramento First from all periods, average earning assets
would have decreased by $42 million and $51 million and average interest-
bearing liabilities would have decreased by $27 million and $28 million for the
nine and three month periods ended September 30, 1994 versus 1993,
respectively.
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
The following table sets forth the Company's average balance sheets, yields on
earning assets, rates paid on interest-bearing liabilities, net interest
margins and net yields on interest-earning assets for the nine and three month
periods ended September 30, 1994 and 1993 (dollars in millions):
Nine Months Ended September 30,
1994 1993
Average Yields/ Average Yields/
ASSETS Balance Rates Balance Rates
------------------------------------
Loans, net of unearned income
and discounts $170.4 9.53% $255.2 9.43%
Investment securities 13.9 4.98 16.5 4.97
Federal funds sold 23.5 3.59 24.9 2.72
Interest-bearing deposits
in other banks 3.8 3.79 1.4 4.18
------------------------------------
Total interest-earning assets 211.6 8.47 298.0 8.60
Allowance for possible credit losses (5.5) (6.7)
Cash and due from banks 15.5 26.2
Other assets 16.0 23.9
------------------------------------
$237.6 $341.4
====================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 70.3 3.93% $108.1 3.97%
Savings deposits 10.3 2.18 12.0 2.45
Interest-bearing demand deposits 73.4 2.22 96.1 2.67
Other 5.0 10.16 5.3 10.66
------------------------------------
Total interest-bearing liabilities 159.0 3.22 221.5 3.48
Demand deposits 66.3 96.0
Other liabilities 2.7 2.5
Shareholders' equity 9.6 21.4
------------------------------------
$237.6 $341.4
====================================
Net interest margin 5.24% 5.11%
Net yield on interest-earning assets 6.04 6.01
(Continued)
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
(Continued) Three Months Ended September 30,
1994 1993
Average Yields/ Average Yields/
ASSETS Balance Rates Balance Rates
------------------------------------
Loans, net of unearned income
and discounts $103.6 10.12% $248.4 9.05%
Investment securities 5.7 4.94 16.4 4.92
Federal funds sold 17.2 4.46 26.2 2.77
Interest-bearing deposits
in other banks 2.8 4.36 1.4 4.05
------------------------------------
Total interest-earning assets 129.3 9.01 292.4 8.23
Allowance for possible credit losses (4.7) (6.7)
Cash and due from banks 7.7 25.6
Other assets 16.1 21.4
------------------------------------
$148.4 $332.7
====================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 52.9 4.21% $ 98.8 3.94%
Savings deposits 6.6 1.93 11.7 2.36
Interest-bearing demand deposits 36.1 2.05 97.6 2.57
Other 4.8 9.98 4.9 11.15
------------------------------------
Total interest-bearing liabilities 100.4 3.55 213.0 3.39
Demand deposits 38.1 98.6
Other liabilities 2.0 2.7
Shareholders' equity 7.9 18.4
------------------------------------
$148.4 $332.7
====================================
Net interest margin 5.46% 4.83%
Net yield on interest-earning assets 6.25 5.75
-13-
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
The increases (decreases) in interest income and expense and net interest
income resulting from changes in average assets, liabilities and interest rates
for the 1994 versus 1993 periods are summarized as follows (in thousands):
Nine Months Ended September 30, Three Months Ended September 30,
----------------------------- ------------------------------
Asset/ Interest Asset/ Interest
Liability Rate Liability Rate
Changes in Changes Changes Total Changes Changes Total
----------------------------- ------------------------------
Interest
income $(6,115) $ 334 $(5,781) $(3,790) $ 689 $(3,101)
Interest
expense (1,571) (374) (1,945) (844) (71) (915)
--------------------------------------------------------------
Net interest
income $(4,544) $ 708 $(3,836) $(2,946) $ 760 $(2,186)
==============================================================
The declines in net interest income resulted primarily from the proposed sale
of Sacramento First and volume declines in average earning assets.
The Company's ability to increase earning assets is limited by the capital
levels that it and Sunwest Bank are required to maintain. Sunwest is currently
below certain regulatory capital requirements. See "Capital Resources and
Dividends." Consequently, Sunwest will not be able to significantly increase
and may further decrease its assets until such time as it increases its capital
to a level that will permit growth.
Loans on which the accrual of interest had been discontinued at September 30,
1994 and 1993 amounted to $5,931,000 and $14,601,000, respectively. If these
loans had been current throughout their terms, it is estimated that net
interest income would have increased by approximately $166,000 and $268,000 in
the third quarters of 1994 and 1993, respectively. This would have raised the
net yield on interest-earning assets and the net interest margin by
approximately 51 basis points during the third quarter of 1994 and by
approximately 36 basis points during the third quarter of 1993.
For the nine months ended September 30, 1993 versus 1994 the yield on earning
assets decreased from 8.60% to 8.47%. This decrease was primarily a result of
average loans decreasing from 86% to 81% of average earning assets. If the mix
of average earning assets did not change from 1993 to 1994 the yield on earning
assets would have increased by 15 basis points. The yield on interest-earning
assets increased by 21 basis points from the second quarter to the third
quarter of 1994 because of the 50 basis point prime rate increase in August.
The yield is expected to increase during the remainder of 1994 as a full
quarter of interest is earned at the higher rates and as a portion of the $27
million of real estate loans that only reprice annually gradually reprice. The
rate on interest-bearing liabilities increased by 43 basis points from the
second quarter to the third quarter of 1994 as time deposits have matured and
repriced at a higher rate. This trend is expected to continue until market
rates stabilize.
-14- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
NONPERFORMING ASSETS AND PROVISION FOR POSSIBLE CREDIT LOSSES
The following table summarizes the activity in the allowance for possible
credit losses during the periods indicated (in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
1994 1993 1994 1993
----------------------------------------
Allowance for possible credit losses
balance at beginning of period $ 5,557 $ 6,512 $ 4,446 $ 6,358
Charge-offs (3,562) (6,680) (797) (1,231)
Recoveries 431 478 78 230
----------------------------------------
Net charge-offs (3,131) (6,202) (719) (1,001)
Provision for possible
credit losses 3,039 6,534 895 1,487
Transfer to assets held for sale (843) - - -
----------------------------------------
Allowance for possible credit losses
balance at end of period $ 4,622 $ 6,844 $ 4,622 $ 6,844
========================================
A summary of net (charge-offs) recoveries follows (in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
1994 1993 1994 1993
----------------------------------------
West Coast Bancorp $ 67 $ 60 $ - $ 29
Sacramento First National Bank (746) (1,482) - (907)
Sunwest Bank (2,452) (4,780) (719) (123)
----------------------------------------
$(3,131) $(6,202) $ (719) $(1,001)
========================================
The provision for possible credit losses was lower during the nine and three
months ended September 30, 1994 than in the same respective periods in 1993,
reflecting the reduced charge-offs, lower levels of nonperforming loans and the
proposed sale of Sacramento First. Sunwest's total charge-offs and provision
decreased by $2,342,000 and $2,644,000 respectively during the nine months
ended September 30, 1994 versus 1993. Recoveries were relatively unchanged
from 1993 to 1994 at Sunwest. Sacramento First had total charge-offs,
recoveries and a provision for possible credit losses of $836,000, $90,000 and
$551,000, respectively, included in the 1994 year-to-date allowance activity.
Management believes that the allowance for possible credit losses at September
30, 1994 of $4,622,000 or 4.76% of loans was adequate to absorb known and
inherent risks in the Company's credit portfolio.
-15- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
A summary of nonperforming assets follows (dollars in thousands):
September 30, December 31, September 30, December 31,
1994 1993 1993 1992
------------------------------------------------------
Nonaccrual loans $ 5,931 $10,744 $ 14,601 $ 8,796
Loans 90 days past due
and still accruing 48 353 546 158
------------------------------------------------------
Nonperforming loans 5,979 11,097 15,147 8,954
Real estate owned 4,857 7,738 10,354 15,548
------------------------------------------------------
Nonperforming assets $ 10,836 $18,835 $ 25,501 $24,502
======================================================
Nonperforming loans/
Total loans 6.16% 5.04% 6.30% 3.21%
Nonperforming assets/
Total assets 7.65 6.03 7.86 6.77
======================================================
Nonperforming assets have decreased from $24.5 million at December 31, 1992 to
$10.8 million at September 30, 1994. The proposed sale of Sacramento First
accounted for $1,211,000 of the nonperforming loan decrease and $3,173,000 of
the nonperforming asset decrease from December 31, 1993 to September 30, 1994.
The high levels of nonperforming assets as a percentage of assets are
reflective of the current economic environment and depressed real estate values
in southern California. While significant progress in reducing nonperforming
assets has been made, until such time as the current economic environment and
real estate values improve, the Company may continue to experience high levels
of nonperforming assets, charge-offs and provisions for possible credit losses.
Restructured loans totaled $5,883,000 at September 30, 1994 and were all
performing substantially in accordance with their current terms.
OTHER OPERATING INCOME
Other operating income decreased by $128,000 and $560,000 for the nine and
three months ended September 30, 1994 as compared with the same periods in
1993. See notes (1) and (6) of the notes to consolidated financial statements.
Gain on sale of loans increased by $364,000 for the nine months ended September
30, 1994 versus 1993 primarily because Sunwest sold a significant amount of its
non-guaranteed loans for a $536,000 gain during the second quarter of 1994.
Historically Sunwest has only sold its guaranteed portion of the SBA loans.
Gain on sale of loans decreased by $274,000 for the quarter ended September 30,
1994 versus 1993 primarily because of the proposed sale of Sacramento First.
Depositor charges decreased $354,000 and $178,000 during the first nine months
and third quarter of 1994 versus 1993 from declines at Sunwest and the proposed
sale of Sacramento First. Sunwest depositor charges decreased by $204,000 and
$65,000 for the nine and three months ended September 30, 1993 versus 1994
primarily from lower deposit levels. Service charges, commission and fees have
historically totaled, and are expected to continue to total, approximately
$25,000 per quarter at Sunwest.
-16- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
OTHER OPERATING EXPENSES
Other operating expenses have decreased $6,948,000 and $3,883,000 from the nine
and three months ended September 30, 1993 to the same periods in 1994. See
notes (1) and (7) of the notes to consolidated financial statements. Total
other operating expenses expressed in dollars and as a percentage of total
revenues and average assets follows (dollars in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
1994 1993 1994 1993
-----------------------------------------
Other operating expenses $ 10,972 $ 17,920 $ 2,189 $ 6,072
Other operating expenses
(annualized)/average assets 6.16% 7.00% 5.90% 7.30%
Other operating expenses/interest
and other operating income 69.8% 82.9% 65.4% 86.7%
=========================================
Salaries decreased $2,391,000 and $1,326,000 for the nine and three months
ended September 30, 1994 versus the same periods in 1993. Salaries decreased
at Sunwest by $1,046,000 and $526,000 for the same respective periods as a
result of the 28% staff reduction during the second quarter of 1994. As a
result of the proposed sale, Sacramento First's salaries were not recorded
during the third quarter of 1994. Salaries totaling $754,000 were recorded for
Sacramento First during the same period in 1993. For the nine months ended
September 30, 1994 versus 1993 salaries decreased $989,000 at Sacramento First
primarily because of the aforementioned accounting treatment for the proposed
sale. West Coast reduced salaries by $356,000 for the nine months ended
September 30, 1994 versus 1993 as a result of the 1993 restructuring and other
salary adjustments. The net cost of operation of real estate owned decreased
by $2,366,000 and $1,137,000 for the first nine months and third quarter of
1993 versus 1994 due primarily to lower losses incurred on the sale of real
estate owned and lower levels of real estate owned. All other noninterest
expenses decreased $2,191,000 and $1,420,000 for the nine and three months
ended September 30, 1994 versus 1993 as a result of lower asset levels,
management's cost control efforts and the proposed sale of Sacramento First.
The proposed sale of Sacramento First decreased all other noninterest expenses
by $739,000 and $765,000 for the nine and three months ended September 30, 1994
versus 1993.
INCOME TAXES
The Company did not record any significant income tax expense or benefit during
the nine months ended September 30, 1994 or 1993. No significant income tax
expense is expected during 1994.
-17- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
LIQUIDITY
The Company
Liquidity, as it relates to banking, represents the ability to obtain funds to
meet loan commitments and to satisfy demand for deposit withdrawals. The
principal sources of funds that provide liquidity to West Coast's subsidiaries
are maturities of investment securities and loans, collections on loans,
increased deposits and temporary borrowings. The Company's liquid asset ratio
(the sum of cash, investments and Federal funds sold divided by total assets)
was 24% at September 30, 1994 and December 31, 1993. The Company believes it
has sufficient liquid resources, as well as available credit facilities, to
enable it to meet its operating needs.
THE PARENT COMPANY
West Coast's liquidity is limited. West Coast has relied on sales of assets,
and management service fees and dividends from its subsidiaries as sources of
liquidity. West Coast does not expect to receive management service fees
during 1994. Sunwest is prohibited from paying cash dividends and terms of the
proposed sale agreement prevent Sacramento First from paying dividends.
West Coast anticipates that it will receive from the proposed sale of
Sacramento First during the fourth quarter of 1994 approximately $3.7 million
in cash and $2.3 million of B&PB common stock based upon B&PB's book value per
common share as of the end of the month immediately preceding the consummation
of the transaction. There is a planned capital infusion with the cash proceeds
from such sale in the amount of $3.4 million to Sunwest. This capital infusion
will leave West Coast with limited liquidity.
Sources of cash for West Coast included $150,000 received during the second
quarter of 1994 from the sale of its remaining loans and the sale of loans
previously charged off. West Coast has received $150,000 of loans from a
director and $410,000 from sales of real estate owned through September 1994.
An additional $100,000 loan from a director is anticipated during the fourth
quarter of 1994. Subject to any required regulatory approval, West Coast
intends to sell a portion of the B&PB common stock it will receive if such sale
is consummated to raise additional cash. West Coast had cash totaling $23,000
at September 30, 1994.
West Coast anticipates expenditures during the remainder of 1994 will consist
of debt service payments, advances to WCV, Inc. and other operating expenses,
primarily salaries and employee benefits. West Coast's projected debt service
for 1994 includes a quarterly interest payment on the 10% subordinated deben-
tures of $76,000. Advances to WCV, Inc. are not expected to exceed $86,000
during the remainder of 1994 and are primarily for restoration of the real
estate owned. West Coast anticipates that other operating expenses will be ap-
proximately $130,000 during the remainder of 1994.
-18- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
In October, West Coast entered into a settlement agreement with its former
president William J. Mylymok. The settlement ends a lawsuit over an employment
agreement and calls for a payment of $311,000 upon the earlier of (i) the sale
of an asset or assets by West Coast; or (ii) the receipt by West Coast of
approval from the Federal Reserve Bank to pay such amount to Mr. Mylymok. A
stipulation for the entry of judgement may be filed by Mr. Mylymok upon the
earlier of (i) December 31, 1994; or (ii) the failure by West Coast to make
payment to Mr. Mylymok of the amount set forth above within seven days of the
occurrence of either of the events described in the preceding sentence.
A cash shortfall is anticipated unless additional funds can be raised.
Although the proposed sale of Sacramento First would provide a substantial
inflow of cash, West Coast will use $3.4 million as a capital infusion for
Sunwest. In addition to the sale of assets West Coast is exploring various
alternatives for raising funds, including a possible rights/public offering or
the possible private placement of securities. See "Capital Resources and
Dividends." West Coast may not incur debt without the approval of the Federal
Reserve Board. In the event that West Coast does not complete the sale of
Sacramento First and is not able to raise additional funds, it is possible that
West Coast would not be able to meet its current obligations and could be
forced into bankruptcy. See "Capital Resources and Dividends."
CAPITAL RESOURCES AND DIVIDENDS
The following table sets forth the tier 1 and total risk-based capital and
leverage ratios as of September 30, 1994 for the Company, Sunwest and
Sacramento First:
Tier 1 Total
Capital Capital Leverage
Ratio Ratio Ratio
---------------------------
The Company 5.28% 7.12% 3.89%
Sunwest 4.27 5.56 3.23
Sacramento First (b) 11.39 12.50 7.95
Regulatory minimum 4.00 8.00 4.00 (a)
(a) Sunwest is subject to the C&D Order from the FDIC that requires Sunwest
to achieve a leverage ratio of 6.5% and is subject to a substantially
similar State Order.
(b) Sacramento First is currently included in "Net assets held for sale."
-19-
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
Sunwest is not in full compliance with the provisions of the C&D Order and the
State Order relating to maintaining specified levels of tier 1 and total risk-
based capital. Subsequent to December 31, 1993, the FDIC notified Sunwest that
it was deemed to be significantly undercapitalized under the prompt corrective
action provisions of the FDIC Improvement Act. As a result of becoming
significantly undercapitalized, Sunwest is not only subject to asset growth
restrictions, and prohibitions on payment of dividends and management fees and
the elimination of "pass through" deposit insurance for certain employee
benefit accounts placed at Sunwest, but is also subject to other additional
restrictions and sanctions being imposed by the FDIC which could include, among
other things, a forced sale of Sunwest to another institution, further
restrictions on growth or required shrinkage, and limitations on interest rates
paid on deposits to prevailing rates in Sunwest's market area for deposits of
comparable size and maturity.
In accordance with the prompt corrective action provisions of the FDIC
Improvement Act, Sunwest submitted to the FDIC a capital restoration plan and
West Coast submitted to the FDIC a guaranty of the capital restoration plan.
The amount of such guaranty is limited to the lesser of (i) 5% of Sunwest's
total assets at September 30, 1993, the date the FDIC deemed Sunwest to have
notice that it was undercapitalized or (ii) the amount which is necessary to
bring Sunwest into compliance with all applicable capital standards at the time
Sunwest fails to comply with the capital restoration plan. On October 28, 1994
Sunwest submitted a revised capital restoration plan. The FDIC has requested
West Coast to secure its guarantee of Sunwest's capital plan by executing a
security agreement pledging all of the assets of West Coast. The capital
restoration plan provides that the anticipated primary source of additional
capital for Sunwest will be provided by West Coast. West Coast's primary means
of providing capital to Sunwest is through the proceeds of the sale of
Sacramento First. West Coast will contribute $3.4 million of the $3.7 million
cash proceeds to be received at the close of the sale of Sacramento First. The
$3.4 million contribution is expected to increase Sunwest's capital to the
"adequately capitalized" level. Approximately $1.2 million of additional
capital would be required to meet the minimum capital requirements under the
C&D Order and to eliminate the capital impairment described below. West Coast
is pursuing various methods for raising capital, including a possible
rights/public offering or the possible private placement of securities and the
sale of assets. In addition to the infusion of capital by West Coast, Sunwest
is attempting to augment its capital levels by selling additional securities,
increasing revenues, reducing overhead expenses, and improving asset quality.
The additional capital received by Sunwest from West Coast's proposed sale of
Sacramento First will not increase Sunwest's leverage ratio above the 6.5%
minimum established by the regulatory orders. In the event additional capital
is not obtained and Sunwest does not resume profitable operations, it is likely
that there will be some form of further regulatory intervention in the
operations of Sunwest. Such intervention could include, among other things, a
forced sale of the voting equity of Sunwest to raise additional capital or a
forced merger or sale of Sunwest under the prompt corrective action provisions
of the FDIC Improvement Act or a closure of Sunwest by the bank's regulatory
authorities. If any of these events were to occur, West Coast's shareholders
could suffer the elimination of the value of their investment in the Company.
-20- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1994
Under the California Financial Code, the contributed capital of a state
chartered bank, such as Sunwest, is deemed impaired when the bank has deficit
retained earnings that exceed 40% of its contributed capital. When the
contributed capital of a state chartered bank is impaired, the Superintendent
is required to order the bank to correct such impairment within 60 days of such
order. Unless the impairment is otherwise corrected within the 60 day period,
the bank's board of directors is required to levy and collect an assessment on
its outstanding common shares in accordance with Section 423 of the California
Corporations Code. The aggregate amount of the assessment shall equal the
minimum amount that is necessary to cure the impairment, which shall equal the
amount that is necessary to increase the contributed capital to the quotient
obtained by dividing the total accumulated deficit retained earnings by 40%.
If an assessment is levied, the shareholders of the bank are required to pay
the assessment on a pro rata basis determined by the number of shares held by
each shareholder. If a shareholder fails to pay the assessment within a
specified time period, the assessed shares may be sold by the bank to satisfy
the assessment. If no bidder offers to pay the assessment due on the shares,
together with a penalty of 5% thereof, the shares shall be forfeited to the
bank.
On February 9, 1994, the Superintendent issued an order to Sunwest advising it
that its contributed capital was impaired under the provisions of the
California Financial Code in the amount of $279,000 and that the Bank must
correct such impairment of its contributed capital within 60 days of the order.
Under the provisions of the California Financial Code, the amount necessary to
correct the impairment as of December 31, 1993 was approximately $700,000.
Since Sunwest did not correct such impairment, during the second quarter of
1994 Sunwest's Board of Directors levied an assessment on Sunwest's outstanding
shares of common stock, all of which are owned by West Coast. In the event
that West Coast cannot pay the assessment due on any of those shares, such
shares, or a portion thereof, could be sold to a bidder who is willing to pay
the assessment and penalty thereon or could be forfeited to Sunwest if no such
bidder is willing to pay such amount. Any such sale of Sunwest's outstanding
common stock would reduce or possibly eliminate West Coast's ownership in
Sunwest, which would, in turn, result in a substantial diminution or the
elimination of value of the West Coast shareholders' interest in the Company.
As of September 30, 1994 Sunwest's contributed capital was now impaired in the
aggregate amount of $1,987,000. The amount necessary to correct the aggregate
impairment as of September 30, 1994 was approximately $4,968,000.
The Company had no material commitments for capital expenditures as of
September 30, 1994.
-21- <PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
September 30, 1994
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- - - -------------------------------
NONE
Item 2. Changes in Securities
- - - -----------------------------------
NONE
Item 3. Defaults Upon Senior Securities
- - - ---------------------------------------------
NONE
Item 4. Submission of Matters to a Vote of Security Holders
- - - -----------------------------------------------------------------
NONE
Item 5. Other Information
- - - -------------------------------
NONE
Item 6. Exhibits and Reports on Form 8-K
- - - ----------------------------------------------
(a) Exhibits
NONE
(b) Reports on Form 8-K
NONE
-22- <PAGE>
SIGNATURES
Pursuant to the requirements 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
/s/John B. Joseph November 10, 1994
----------------------------------------- ----------------------
John B. Joseph Date
Chief Executive Officer
/s/Frank E. Smith November 10, 1994
----------------------------------------- ----------------------
Frank E. Smith Date
Chief Financial Officer<PAGE>
