FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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 250
Newport Beach, California 92660-1833
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (714)724-8733
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.[X]
As of February 28, 1995, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $2,292,000 based upon
the last sale price on such date.
Number of shares of Common Stock of the registrant outstanding as of February
28, 1995:
9,192,942
Documents Incorporated by Reference
Part III of this Form 10-K is incorporated by reference from registrant's
definitive proxy statement for the 1995 annual meeting of shareholders which
will be filed within 120 days of the fiscal year ended December 31, 1994.
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
TABLE OF CONTENTS
Page
PART I
Item 1 Business 3
General 3
The Banks 4
Non-Bank Subsidiaries 5
Competition and Local Market Effects 6
Effect of Governmental Policies and
Recent Legislation 6
Supervision and Regulation 15
Potential and Existing Enforcement Actions 17
Employees 20
Selected Statistical Information 21
Item 2 Properties 31
Item 3 Legal Proceedings 31
Item 4 Submission of Matters to a Vote of Security Holders 32
Item 4(A) Executive Officers of the Registrant 32
PART II
Item 5 Market for Registrant's Common Stock
and Related Shareholder Matters 33
Item 6 Selected Consolidated Financial Information 34
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 35
Item 8 Financial Statements and Supplementary Data 48
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 49
PART III
Item 10 Directors and Executive Officers of the Registrant 50
Item 11 Executive Compensation 50
Item 12 Security Ownership of Certain
Beneficial Owners and Management 50
Item 13 Certain Relationships and Related Transactions 50
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 50
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
PART I
ITEM 1. BUSINESS
GENERAL
West Coast Bancorp (separately, "West Coast" and, with its subsidiaries
on a consolidated basis, the "Company") is a California corporation organized
in February 1981 and is a registered bank holding company subject to the Bank
Holding Company Act of 1956, as amended ("BHC Act"). West Coast's principal
operating subsidiary is its wholly-owned subsidiary, Sunwest Bank
("Sunwest"). West Coast entered into an agreement on June 22, 1994 to sell
its 93% ownership of Sacramento First National Bank ("Sacramento First") to
Business & Professional Bank ("B&PB"). On January 20, 1995 the sale closed
and West Coast received $3.6 million of cash and 243,500 shares or 14.5% of
B&PB common shares outstanding. Cash proceeds of $3.4 million were used to
increase capital at Sunwest. See "NOTE 1 of the notes to the consolidated
financial statements" for accounting treatment of the expected of Sacramento
First. Sunwest and Sacramento First are sometimes collectively referred to
herein as "the Banks." West Coast also currently has six other direct and
indirect wholly-owned subsidiaries which are either in the process of liqui-
dation or inactive - West Coast Realty Finance ("West Coast Realty"), North
Orange County Bancorp ("North Orange"), which acts as a holding company for
WCV, Inc. and Chancellor Financial Services, Inc. ("Chancellor"), Sunwest
Leasing Corp. ("Sunwest Leasing"), a wholly-owned subsidiary of Sunwest, and
Centennial Beneficial Loan Company ("Centennial Loan").
The assets of Sunwest, Sacramento First and WCV, Inc. carried on the
books of the Company at December 31, 1994 and the net loss reported in the
financial statements of the Company of each for the year ended December 31,
1994 are as follows:
Net
(dollars in thousands) Assets Loss
-----------------------
Sunwest and its subsidiary $125,220 $ (1,723)
Sacramento First (1) 5,351 (2,713)
Loss on liquidation of WCV, Inc. - (133)
-----------------------
(1) Assets of Sacramento First are included in net assets held for sale and
its loss includes operating income through June 30, 1994 offset by the
loss on sale of $2,788,000.
The Company commenced business in 1981 through the activities of West
Coast Realty. During 1982, WCV, Inc. and Chancellor commenced business. In
late 1984, West Coast acquired its majority interest in the common stock of
Sacramento First. West Coast acquired Sunwest and Sacramento First acquired
Sacramento Valley Bank in 1985. The Company had total assets, total loans
and total deposits at December 31, as follows:
(dollars in millions) 1994 1993
-----------------------
Total assets $ 130.9 $ 312.3
Total loans 86.6 223.3
Total deposits 119.3 293.0
-----------------------
The Company had net losses of $5,205,000 or $.57 per share in 1994,
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
$12,107,000 or $1.32 per share in 1993 and $6,997,000 or $.76 per share in
1992.
As a result of the Company's and Sunwest's substantial losses and
resulting declines in capital levels, West Coast and Sunwest are subject to
regulatory agreements and orders with the bank regulatory authorities. In
addition, during much of 1994, Sunwest was considered "significantly
undercapitalized" under the prompt corrective action provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991.
On January 20, 1995, as a result of selling Sacramento First, West
Coast significantly reduced its regulatory assets and consequently increased
its capital ratios to the "adequately capitalized" levels as defined under
the prompt action provisions of the FDIC Improvement Act. On January 20,
1995, Sunwest received $3.4 million from West Coast and on March 30, 1995
Sunwest received an additional $200,000 from West Coast increasing Sunwest's
leverage ratio to over 6.5%. These capital infusions increased Sunwest's
capital ratios to amounts necessary for a depository institution to be
claimed to be "well capitalized." However, because Sunwest is still subject
to regulatory agreements it can only be deemed "adequately capitalized."
Sunwest is now in compliance with the 6.5% leverage ratio as required
by their regulatory agreements and orders and as set forth in the capital
plan Sunwest submitted to the FDIC, pursuant to the prompt corrective action
provision of the FDIC Improvement Act, which is guaranteed by West Coast.
See "ITEM 1. BUSINESS - Effect of Government Policy and Recent Legislation -
Prompt Correction Action."
West Coast's liquidity is limited. In the event West Coast is unable
to raise funds to increase its liquidity, West Coast may not be able to meet
its current obligations and may be forced into bankruptcy. If this event
were to occur, West Coast shareholders could suffer the elimination of the
value of their investments in the Company. See "ITEM 1. BUSINESS -
Supervision and Regulation -- and Potential and Existing Enforcement Actions"
and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
THE BANKS
Sunwest Bank
Sunwest commenced operations as a California state-chartered bank in
1970 and is the oldest commercial bank headquartered in Orange County,
California. West Coast acquired Sunwest in June 1985. At December 31, 1994,
Sunwest had total consolidated assets of $125,220,000, total consolidated
loans and leases of $86,628,000 and total consolidated deposits of
$119,277,000. For the year ended December 31, 1994, Sunwest had a net loss
of $1,723,000.
Sunwest presently has four banking offices within Orange County,
California. The main office is located in Tustin at 535 East First Street.
Sunwest's three branch offices are located at 4770 Campus Drive, Newport
Beach, 501 South Main Street, Orange and 600 Santa Ana Boulevard, Santa Ana.
Sunwest closed an office at 720 North Harbor Boulevard, Fullerton during
1994.
Sacramento First National Bank
Sacramento First commenced operations as a national banking association
in November 1984. In December 1985, Sacramento First acquired Sacramento
Valley Bank.
West Coast entered into an agreement on June 22, 1994 to sell its 93%
ownership of Sacramento First to B&PB. On January 20, 1995 the sale closed
and West Coast received $3.6 million of cash and 243,500 shares or 14.5% of
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
B&PB common shares outstanding. See "NOTE 1 of the notes to the consolidated
financial statements" for accounting treatment of the sale of Sacramento
First.
All assets and liabilities of Sacramento First are included in the "Net
Assets Held for Sale" balance of $5,351,000 at December 31, 1994.
Sacramento First had net income from operations of $75,000 through June
30, 1994. Subsequently, West Coast excluded all operating income from the
consolidated financial statements and recorded a $2,788,000 loss on the sale
of Sacramento First.
Banking Services
Through its network of banking offices, the Company emphasizes person-
alized service combined with services primarily directed to small and medium-
sized businesses and professionals. Although the Company focuses its
marketing of services to businesses and professionals, a full range of
consumer banking services are made available to its customers.
The Company offers a wide range of deposit instruments. These include
personal and business checking and savings accounts, including interest-
bearing negotiable order of withdrawal ("NOW") accounts, Super NOW accounts
and money market accounts, time deposits and individual retirement accounts.
The Company also engages in the full complement of lending activities,
including commercial, consumer installment and real estate loans. Commercial
loans are loans to local community businesses and may be unsecured or secured
by assets of the business and/or its principals. Consumer installment loans
include loans for automobiles, home improvements, debt consolidation and
other personal needs. Real estate loans include secured short-term mini-
permanent real estate loans and construction loans. The Company originates
loans that are guaranteed under the Small Business Investments Act and
periodically sell the guaranteed and unguaranteed portion of such loans in
the secondary market.
The Company also offers a wide range of specialized services designed
to attract and service the needs of commercial customers and account holders.
These services include extended weekday banking, drive-up and walk-up facili-
ties, merchant windows, traveler's checks, safe deposit, Mastercard and Visa
merchant deposit services, and computer accounting services, which include
payroll and escrow accounting services. The Company currently does not
operate a trust department.
NON-BANK SUBSIDIARIES
West Coast Realty Finance
West Coast Realty, a California corporation organized in March 1981, is
licensed as a real estate broker and until 1990 operated as a mortgage
banker. West Coast Realty restructured its operations during 1989,
eliminating its loan servicing functions. During 1990, West Coast Realty
discontinued originating loans. West Coast Realty is now inactive.
North Orange County Bancorp
North Orange, a wholly-owned subsidiary of West Coast, acts solely as a
holding company for WCV, Inc. and Chancellor. North Orange does not have
assets, revenues or earnings that are material to the Company other than its
investment in WCV, Inc.
WCV, Inc.
WCV, Inc., formerly Heritage Thrift and Loan Association, was organized
in June 1981 and commenced business in March 1982 as a licensed California
thrift and loan company. During the fourth quarter of 1992, the Company
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
began liquidating the assets of WCV, Inc.
As of March 9, 1993, WCV, Inc. had no remaining deposits and, it
surrendered its license to act as a California thrift and loan company during
March 1993. WCV, Inc.'s assets are now substantially liquidated and its
operations are limited to the restoration and sale of its one remaining
property and resolving a certain lease obligation. See "ITEM 3 - LEGAL
PROCEEDINGS."
Chancellor Financial Services, Inc.
Chancellor was organized in June 1981 and commenced business in March
1982 as a licensed California personal property broker. Chancellor is
inactive and its assets, revenues or earnings are not material to the
Company.
Centennial Beneficial Loan Company
Centennial Loan was organized in March 1981 and engaged in limited loan
servicing activities. Centennial Loan is inactive and its assets, revenues
and earnings are not material to the Company.
Centennial Mortgage Income Fund
CMIF is a limited partnership engaged in real estate lending. The
partnership, which was organized in December 1983, commenced business in
December 1984 to invest in commercial, industrial and residential income-
producing real property by making first mortgage loans, equity participation
loans, construction loans and wrap-around and other junior loans. West Coast
was a general partner of CMIF until 1992, when West Coast resigned as a
general partner.
COMPETITION AND LOCAL MARKET EFFECTS
Sunwest has four banking offices located in Orange County, California.
Sunwest has had no significant direct impact from the Orange County
bankruptcy filing that occurred in December 1994. No assurances can be made
as to whether any impact will occur in the future. Sunwest faces substantial
competition for deposits and loans throughout its respective market areas.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services,
convenience of office locations and office hours. Competition for deposits
comes primarily from other commercial banks, savings institutions, credit
unions, money market funds and other investment alternatives. The primary
factors in competing for loans are interest rates, loan origination fees, the
quality and range of lending services and personalized services. Competition
for loans comes primarily from other commercial banks, savings institutions,
credit unions and other financial intermediaries. Sunwest faces competition
for deposits and loans throughout its market area not only from local
institutions but also from out-of-state financial intermediaries which have
opened loan production offices or which solicit deposits in their market
areas. Many of the financial intermediaries operating in Sunwest's market
area offer certain services, such as trust, investment, ATM cards and
international banking services, which Sunwest does not offer directly.
Additionally, banks with larger capitalization and financial intermediaries
not subject to bank regulatory restrictions have larger lending limits and
are thereby able to serve the needs of larger customers. Neither the
deposits nor loans of Sunwest exceed 1% of the aggregate loans or deposits of
all financial intermediaries located in its market area.
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Banks on their deposits
and other borrowings and the interest rate received by them on loans extended
to their customers and securities held in the Banks' portfolios comprise the
major portion of the Company's earnings. These rates are highly sensitive to
many factors that are beyond the control of the Banks. Accordingly, the
earnings and growth of the Company are subject to the influence of local,
domestic and foreign economic conditions, including recession, unemployment
and inflation.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Federal Reserve Board. The Federal Reserve Board implements
national monetary policies (with objectives such as curbing inflation and
combating recession) by its open-market operations in United States
Government securities, by adjusting the required level of reserves for
financial intermediaries subject to its reserve requirements and by varying
the discount rates applicable to borrowings by depository institutions. 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 paid on deposits. The nature and impact of any future changes
in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial intermediaries are frequently made in Congress, in the
California legislature and by various bank regulatory and other professional
agencies. For example, legislation was recently introduced in Congress that
would repeal the current statutory restrictions on affiliations between
commercial banks and securities firms. Under the proposed legislation, bank
holding companies would be allowed to control both a commercial bank and a
securities affiliate, which could engage in the full range of investment
banking activities, including corporate underwriting. The likelihood of any
major legislative changes and the impact such changes might have on the
Company are impossible to predict. See "Item 1. Business - Supervision and
Regulation."
Prompt Corrective Action
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC
Improvement Act"). Under the regulations, an insured depository institution
will be deemed to be:
- "well capitalized" if it (i) has total risk-based capital of 10% or
greater, Tier 1 risk-based capital of 6% or greater and a leverage
ratio of 5% or greater and (ii) is not subject to an order, written
agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure;
- "adequately capitalized" if it has total risk-based capital of 8% or
greater, Tier 1 risk-based capital of 4% or greater and a leverage
ratio of 4% or greater (or a leverage ratio of 3% or greater if the
institution is rated composite 1 under the applicable regulatory rating
system in its most recent report of examination);
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
- "undercapitalized" if it has total risk-based capital that is less than
8%, Tier 1 risk-based capital that is less than 4% or a leverage ratio
that is less than 4% (or a leverage ratio that is less than 3% if the
institution is rated composite 1 under the applicable regulatory rating
system in its most recent report of examination);
- "significantly undercapitalized" if it has total risk-based capital
that is less than 6%, Tier 1 risk-based capital that is less than 3% or
a leverage ratio that is less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized or undercapitalized may be
reclassified to the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, (i) determines that
the institution is in an unsafe or unsound condition or (ii) deems the
institution to be engaging in an unsafe or unsound practice and not to have
corrected the deficiency. At each successive lower capital level, an
institution is subject to more restrictions and federal banking agencies are
given less flexibility in deciding how to deal with it.
The law prohibits insured depository institutions from making capital
distributions or paying management fees to any controlling persons if after
such transaction the institution would be undercapitalized. If an
institution is undercapitalized, it will be closely monitored by the
appropriate federal banking agency, subject to asset growth restrictions and
required to obtain prior regulatory approval for acquisitions, branching and
engaging in new lines of business. Any undercapitalized depository
institution must submit an acceptable capital restoration plan to the
appropriate federal banking agency 45 days after becoming undercapitalized.
The appropriate federal banking agency cannot accept a capital restoration
plan unless, among other things, it determines that the plan (i) specifies
the steps the institution will take to become adequately capitalized, (ii) is
based on realistic assumptions and (iii) is likely to succeed in restoring
the institution's capital. In addition, each company controlling an
undercapitalized institution must guaranty that the institution will comply
with the capital plan until the institution has been adequately capitalized
on an average basis during each of four consecutive calendar quarters and
must otherwise provide adequate assurances of performance. The aggregate
liability of such guaranty is limited to the lesser of (a) an amount equal to
5% of the depository institution's total assets at the time the institution
became undercapitalized or (b) the amount which is necessary to bring the
institution into compliance with all capital standards applicable to such
institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose
any of the additional restrictions or sanctions that it may impose on
significantly undercapitalized institutions if it determines that such action
will further the purpose of the prompt corrective action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a
material respect to implement, an acceptable capital restoration plan, is
subject to additional restrictions and sanctions. These include, among other
things: (i) a forced sale of voting shares to raise capital or, if grounds
exist for appointment of a receiver or conservator, a forced merger; (ii)
restrictions on transactions with affiliates; (iii) further limitations on
interest rates paid on deposits; (iv) further restrictions on growth or
required shrinkage; (v) modification or termination of specified activities;
(vi) replacement of directors or senior executive officers, subject to
certain grandfather provisions for those elected prior to enactment of the
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
FDIC Improvement Act; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by
the holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by
the appropriate federal banking agency. Although the appropriate federal
banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a
sale of voting shares or merger, impose restrictions on affiliate
transactions and impose restrictions on rates paid on deposits unless it
determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior executive
officers or provide compensation to any of them at a rate that exceeds such
officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on
institutions that are critically undercapitalized. For example, a critically
undercapitalized institution generally would be prohibited from engaging in
any material transaction other than in the ordinary course of business
without prior regulatory approval and could not, with certain exceptions,
make any payment of principal or interest on its subordinated debt beginning
60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution
becomes critically undercapitalized, is required to appoint a conservator or
receiver for the institution. The board of directors of an insured
depository institution would not be liable to the institution's shareholders
or creditors for consenting in good faith to the appointment of a receiver or
conservator or to an acquisition or merger as required by the appropriate
federal banking agency.
As of December 31, 1994, Sunwest had a total risk-based capital ratio
of 6.24%, a Tier 1 risk-based capital ratio of 4.95% and a leverage capital
ratio of 3.59%. Because Sunwest's total risk-based capital was below 8% and
its leverage ratio was below 4% at December 31, 1994, Sunwest was deemed to
be "undercapitalized" under the prompt corrective action provisions of the
FDIC Improvement Act. On January 20, 1995, Sunwest received $3.4 million
from West Coast increasing Sunwest's capital to the "well capitalized"
levels. However, because Sunwest remains subject to agreements it may only
be considered "adequately capitalized" as defined by the prompt corrective
action provisions of the FDIC Improvement Act.
Capital Standards
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such
as letters of credit and recourse arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet
items, against both total qualifying capital (the sum of Tier 1 capital and
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital
consists primarily of common stock, retained earnings, noncumulative
perpetual preferred stock (cumulative perpetual preferred stock for bank
holding companies) and minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses, cumulative preferred stock,
long term preferred stock, eligible term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements
of Tier 2 capital is subject to certain other requirements and limitations of
the federal banking agencies. The federal banking agencies require a minimum
ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum
ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets is 3%. For all banking organizations not rated in the
highest category, the minimum leverage ratio must be at least 100 to 200
basis points above the 3% minimum, or 4% to 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum
capital requirements for specific institutions at rates significantly above
the minimum guidelines and ratios. Sunwest has been required by the FDIC to
maintain a leverage ratio of 6.5%.
The federal banking regulators have issued a proposed rule to take
account of interest rate risk in calculating risk-based capital. The
proposed rule includes a supervisory model for taking account of interest
rate risk. Under that model, institutions would report their assets,
liabilities and off balance sheet positions in time bands based upon their
remaining maturities. The federal banking agencies would then calculate a
net risk weighted interest rate exposure. If that interest rate risk
exposure was in excess of a certain threshold (1% of assets), the institution
could be required to hold additional capital proportionate to that excess
risk. Alternatively, the agencies have proposed making interest rate risk
exposure a subjective factor in considering capital adequacy. Exposures
would be measured in terms of the change in the present value of an
institution's assets minus the change in the present value of its liabilities
and off-balance sheet positions for an assumed 100 basis point parallel shift
in market interest rates. However, the federal banking agencies have
proposed to let banks use their own internal measurement of interest rate
risk if it is declared adequate by examiners.
Effective January 17, 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the
concentration of credit and nontraditional activities. Institutions which
have significant amounts of their assets concentrated in high risk loans or
nontraditional banking activities and who fail to adequately manage these
risks, will be required to set aside capital in excess of the regulatory
minimums. The federal banking agencies have not imposed any quantitative
assessment for determining when these risks are significant, but have
identified these issues as important factors they will review in assessing an
individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among
other things, establishes certain benchmark ratios of loan loss reserves to
classified assets. The benchmark set forth by such policy statement is the
sum of (a) assets classified loss; (b) 50 percent of assets classified
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
doubtful; (c) 15 percent of assets classified substandard; and (d) estimated
credit losses on other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. See
"Item 1. Business - Supervision and Regulation - Accounting Changes." The
federal banking agencies recently issued final rules governing banks and bank
holding companies, which become effective April 1, 1995, which limit the
amount of deferred tax assets that are allowable in computing an institutions
regulatory capital. The standard has been in effect on an interim basis
since March 1993. Deferred tax assets that can be realized for taxes paid in
prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year
of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of
any deferred tax in excess of this limit would be excluded from Tier 1
Capital and total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The
standards, which were issued in the form of guidelines rather than
regulations, relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, compensation and interest rate
exposure. In general, the standards are designed to assist the federal
banking agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to
meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan
may result in enforcement proceedings. Additional standards on earnings and
classified assets are expected to be issued in the near future.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations,
which became effective on March 19, 1993, require insured depository
institutions to adopt written policies establishing standards, consistent
with such guidelines, for extensions of credit secured by real estate. The
policies must address loan portfolio management, underwriting standards and
loan to value limits that do not exceed the supervisory limits prescribed by
the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions
include the sale, lease, purchase investment in, or exchange of, real
property or interests in real property, the financing or refinancing of real
property, and the use of real property or interests in real property as
security for a loan or investment, including mortgage-backed securities.
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
Premiums for Deposit Insurance
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by
the FDIC. The FDIC is authorized to borrow up to $30 billion from the United
States Treasury; up to 90% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of the BIF. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums assessed to
member institutions. Such premiums must be sufficient to repay any borrowed
funds within 15 years and provide insurance fund reserves of $1.25 for each
$100 of insured deposits. The result of these provisions is that the
assessment rate on deposits of BIF members could increase in the future. The
FDIC also has authority to impose special assessments against insured
deposits.
The FDIC has adopted final regulations implementing a risk-based
premium system required by federal law. Under the regulations, which cover
the assessment periods commencing on and after January 1, 1994, insured
depository institutions are required to pay insurance premiums currently
within a range of 23 cents per $100 of deposits to 31 cents per $100 of
deposits depending on their risk classification. On January 31, 1995, the
FDIC issued proposed regulations that would establish a new assessment rate
schedule of 4 cents per $100 of deposits to 31 cents per $100 of deposits
applicable to members of BIF. There can be no assurance that the final
regulations will be adopted as proposed. To determine the risk-based
assessment for each institution, the FDIC will categorize an institution as
well capitalized, adequately capitalized or undercapitalized based on its
capital ratios. A well-capitalized institution is one that has at least a
10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and
a 5% Tier 1 leverage capital ratio. An adequately capitalized institution
will have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-
based capital ratio and a 4% Tier 1 leverage capital ratio. An
undercapitalized institution will be one that does not meet either of the
above definitions. The FDIC will also assign each institution to one of
three subgroups based upon reviews by the institution's primary federal or
state regulator, statistical analyses of financial statements and other
information relevant to evaluating the risk posed by the institution.
Interstate Banking and Branching
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed
may obtain approval under the BHCA to acquire an existing bank located in
another state without regard to state law. A bank holding company would not
be permitted to make such an acquisition if, upon consummation, it would
control (a) more than 10% of the total amount of deposits of insured
depository institutions in the United States or (b) 30% or more of the
deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank
or bank holding company if application of such limitation does not
discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum
length of time that may be prescribed by state law except that a state may
not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of
the acquired bank into branches of the resulting bank. Each state may permit
-12-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
such combinations earlier than June 1, 1997, and may adopt legislation to
prohibit interstate mergers after that date in that state or in other states
by that state's banks. The same concentration limits discussed in the
preceding paragraph apply. The Interstate Act also permits a national or
state bank to establish branches in a state other than its home state if
permitted by the laws of that state, subject to the same requirements and
conditions as for a merger transaction.
The Interstate Act is likely to increase competition in the Company's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the
other state's laws permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two states. The first stage allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage,
which became effective January 1, 1991, allows interstate acquisitions on a
national "reciprocal" basis. California has also adopted similar legislation
applicable to savings associations and their holding companies.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate
income neighborhoods. In addition to substantial penalties and corrective
measures that may be required for a violation of certain fair lending laws,
the federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities. On December 21,
1993, the federal banking agencies issued a proposal to change the manner in
which they measure a bank's compliance with its CRA obligations, but no final
regulation has yet been approved.
On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
Current Accounting Pronouncements
In February 1992, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 109, "Accounting for Income Taxes," which superseded SFAS No.
96 of the same title. SFAS No. 109, which became effective for fiscal years
beginning after December 31, 1992, employs an asset and liability approach in
accounting for income taxes payable or refundable at the date of the
financial statements as a result of all events that have been recognized in
the financial statements and as measured by the provisions of enacted tax
laws. Adoption by the Company of SFAS No. 109 did not have a material impact
on the Company's results of operations.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," which is effective for fiscal years ending
after December 15, 1992 (December 15, 1995 in the case of entities with less
than $150 million in total assets). SFAS No. 107 requires financial
intermediaries to disclose, either in the body of their financial statements
-13-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
or in the accompanying notes, the "fair value" of financial instruments for
which it is "practicable to estimate that value." SFAS No. 107 defines "fair
value" as the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forces or
liquidation sale. Quoted market prices, if available, are deemed the best
evidence of the fair value of such instruments. Most deposit and loan
instruments issued by financial intermediaries are subject to SFAS No. 107,
and its effect will be to require financial statement disclosure of the fair
value of most of the assets and liabilities of financial intermediaries such
as the Company and the Bank. The disclosure required by SFAS No. 107 at
December 31, 1994 is presented in NOTE 18 to the Company's Consolidated
Financial Statements. See "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA." Management is unable to predict what effect, if any, such disclosure
requirements could have on the market price of the common stock of the
Company or its ability to raise funds in the financial markets.
In December 1990, FASB issued SFAS No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions" effective for fiscal years
beginning after December 15, 1992. In November 1992, FASB issued Statement
of Financial Standards No. 112, "Employers' Accounting for Post-Employment
Benefits," effective for fiscal years beginning after December 15, 1993.
SFAS No. 106 and SFAS No. 112 focus primarily on post-retirement health care
benefits. The Company does not provide post-retirement benefits, and SFAS
No. 106 and SFAS No. 112 will have no impact on net income in 1995.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114") and in October 1994 the FASB issued
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118").
Under the provisions of SFAS 114, a loan is considered impaired when, based
on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. SFAS 114 requires creditors to measure impairment of a loan
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the
loan, a creditor shall recognize an impairment by creating a valuation
allowance with a corresponding charge to expense. This statement also
applies to restructured loans and narrows the definition of in-substance
foreclosures such that loans probable of foreclosure are accounted for as
loans as opposed to real estate. SFAS 118 amends SFAS 114 to allow a
creditor to use existing methods for recognizing interest income on impaired
loans. In addition SFAS 118 amends certain disclosure requirements of SFAS
114. SFAS 114 and 118 apply to financial statements for fiscal years
beginning after December 15, 1994 and initial adoption is required to be
reflected prospectively. The Company does not expect these statements to
have a material impact on its financial position or results of operations.
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). SFAS 115 requires that investments be classified
as "held-to-maturity", "available-for-sale" or "trading securities." The
statement defines investments in securities as "held-to-maturity" based upon
a positive intent and ability to hold those securities to maturity.
Investments held-to-maturity would be reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as "trading securities" and
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
would be reported at fair value, with unrealized gains and losses included in
operations. Debt and equity securities not classified as "held-to-maturity"
or "trading securities" are classified as "available-for-sale" and would be
recorded at fair value, with unrealized gains and losses excluded from
operations and reported as a separate component of stockholders' equity, net
of tax effect. SFAS 115 is effective for fiscal years beginning after
December 15, 1993. The adoption of SFAS 115 did not have a material effect
on the Company's financial statements. The initial adoption of SFAS 115 was
accounted for prospectively as of January 1, 1994.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law.
West Coast
West Coast, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the
"Act"). West Coast is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the Act. The Federal Reserve Board may
conduct examinations of West Coast and its subsidiaries.
The Federal Reserve Board may require that West Coast terminate an
activity or terminate control of or liquidate or divest certain subsidiaries
or affiliates when the Federal Reserve Board believes the activity or the
control or the subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any of its banking subsidiaries.
The Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
West Coast must file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities.
Under the Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels
of capital. See "ITEM 1. BUSINESS - Effect of Governmental Policies and
Recent Legislation - Capital Standards."
West Coast is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares
of any class of voting securities or substantially all of the assets of any
bank or bank holding company. Prior approval of the Federal Reserve Board is
also required for the merger or consolidation of West Coast and another bank
holding company.
The Company is prohibited by the Act, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company may, subject
to the prior approval of the Federal Reserve Board, engage in any, or acquire
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In making any such determination,
the Federal Reserve Board is required to consider whether the performance of
such activities by West Coast or an affiliate can reasonably be expected to
-15-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
produce benefits to the public, such as greater convenience, increased
competition or gains in efficiency, that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal Reserve
Board is also empowered to differentiate between activities commenced de novo
and activities commenced by acquisition, in whole or in part, of a going
concern.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in
serving as a source of strength to its subsidiary banks, a bank holding
company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks.
A bank holding company's failure to meet its obligations to serve as a source
of strength to its subsidiary banks will generally be considered by the
Federal Reserve Board to be an unsafe and unsound banking practice or a
violation of the Federal Reserve Board regulations or both. This doctrine
has become known as the "source of strength" doctrine. Although the United
States Court of Appeals for the Fifth Circuit found the Federal Reserve
Board's source of strength doctrine invalid in 1990, stating that the Federal
Reserve Board had no authority to assert the doctrine under the Act, the
decision, which is not binding on federal courts outside the Fifth Circuit,
was recently reversed by the United States Supreme Court on procedural
grounds. The validity of the source of strength doctrine is likely to
continue to be the subject of litigation until definitively resolved by the
courts or by Congress.
West Coast is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, West Coast and its
subsidiaries are subject to examination by, and may be required to file
reports with, the California State Banking Department.
Finally, West Coast is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities
and Exchange Commission.
Sunwest Bank
Sunwest, as a California state-chartered bank, is subject to primary
supervision, examination and regulation by the California Superintendent of
Banks (the "Superintendent") and the FDIC. While Sunwest is not a member of
the Federal Reserve System, it is nevertheless subject to certain regulations
of the Federal Reserve Board.
Sunwest is insured by the FDIC, which currently insures deposits of
each member bank to a maximum of $100,000 per depositor. For this
protection, each bank pays a semi-annual statutory assessment and is subject
to the rules and regulations of the FDIC. See "ITEM 1. BUSINESS - Effect of
Governmental Policies and Recent Legislation - Premium of Deposit Insurance."
Various requirements and restrictions under the laws of the United
States and the State of California affect the operations of Sunwest. These
statutes and regulations relate to many aspects of Sunwest's operations,
including reserves against deposits, interest rates payable on deposits,
loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices, capital requirements and disclosure obligations
to depositors and borrowers.
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WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
Restrictions on Transfers of Funds to West Coast by Sunwest
West Coast is a legal entity separate and distinct from Sunwest.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to West Coast by Sunwest. California law
restricts the amount available for cash dividends by state-chartered banks,
such as Sunwest, to the lesser of retained earnings or the bank's net income
for its last three fiscal years (less any distributions to shareholders made
during such period). In the event a bank is precluded from paying cash
dividends, cash dividends may be paid with the prior approval of the
Superintendent in an amount not exceeding the greater of the retained
earnings of the bank, the net income of the bank for its last fiscal year or
the net income of the bank for its current fiscal year.
The FDIC, the Comptroller of the Currency and the Federal Reserve Board
have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their
jurisdiction. Compliance with the standards set forth in such guidelines
limit the amount of dividends which the Bank may pay. Further, Sunwest is
subject to regulatory orders and the prompt corrective action provisions of
the FDIC Improvement Act which require it to maintain specified levels of
capital and prohibit it from paying any cash dividends to West Coast. See
"ITEM 1. BUSINESS - Effect of Government Policy and Recent Legislation -
Prompt Corrective Action and - Capital Standards and - Potential and Existing
Enforcement Action - Sunwest's Regulatory Orders" for a discussion of these
additional restrictions on capital distributions.
At present, substantially all of West Coast's revenues, including funds
available for the payment of other operating expenses, are currently, and
will for the foreseeable future continue to be, proceeds from the liquidation
of the non-bank subsidiaries and B&PB stock. At December 31, 1994, Sunwest
is unable to pay a dividend without regulatory approval. West Coast is also
restricted from charging and collecting management fees from Sunwest. See
"ITEM 1. BUSINESS - Effect of Government Policy and Recent Legislation -
Prompt Corrective Regulatory Action."
Sunwest is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guaranty or letter of
credit on behalf of, West Coast or other affiliates, the purchase of or
investments in stock or other securities thereof, the taking of such
securities as collateral for loans and the purchase of assets of West Coast
or other affiliates. Such restrictions prevent West Coast and such other
affiliates from borrowing from Sunwest unless the loans are secured by
marketable obligations of designated amounts. Further, such secured loans
and investments by Sunwest to or in West Coast or to or in any other
affiliate is limited to 10% of Sunwest's capital and surplus (as defined by
federal regulations) and such secured loans and investments are limited, in
the aggregate, to 20% of Sunwest's capital and surplus (as defined by federal
regulations). California law also imposes certain restrictions with respect
to transactions involving state chartered banks and certain persons
controlling the Company and other controlling persons of Sunwest. Additional
restrictions on transactions with affiliates may be imposed on Sunwest under
the prompt corrective action provisions of the FDIC Improvement Act. See
"ITEM 1. BUSINESS - Effect of Government Policies and Recent Legislation -
Prompt Corrective Action."
POTENTIAL AND EXISTING ENFORCEMENT ACTIONS
Commercial banking organizations, such as Sunwest, and its institution-
affiliated parties, which include West Coast, may be subject to potential
enforcement actions by Federal and state banking agencies for unsafe or
-17-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
unsound practices in conducting their businesses or for violations of any
law, rule, regulation or any condition imposed in writing by the agency or
any written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease and desist
order that can be judicially enforced, the termination of insurance of
deposits, the imposition of civil monetary penalties, the issuance of a
directive to increase capital, the issuance of an order of removal or
prohibition against institution-affiliated parties and the imposition of
restrictions or sanctions under the prompt corrective action provisions of
the FDIC Improvement Act. Additionally, a holding company's inability to
serve as a source of strength to its subsidiary banking organizations could
serve as an additional basis for regulatory action against the holding
company.
West Coast's Regulatory Agreement
Based upon its examination of West Coast as of September 30, 1993, the
FRB and West Coast entered into a Written Agreement that is dated April 11,
1994 (the "Agreement"). The Agreement requires West Coast to: (a) refrain
from paying any dividends without the prior written approval of the FRB; (b)
refrain from incurring any debt, without the prior written approval of the
FRB; (c) within 90 days of the Agreement, submit to the FRB a written plan to
service its current debt without incurring additional debt or without
reliance on fees or payments from the Banks; (d) refrain from making any cash
expenditure in excess of $25,000, individually or in the aggregate, to any
individual or entities, without the prior written consent of the FRB; (e)
within 30 days of the Agreement, submit to the FRB a written policy
addressing intercorporate management fees, service fees and other payments
assessed or paid by the Banks; (f) refrain from assessing or collecting any
management or service fee from the Banks without the prior written approval
of the FRB; (g) within 10 days of the Agreement, identify an outside director
who shall submit a report to the FRB, within 60 days of the Agreement, that
fully documents all management and service fees that have been paid by the
Banks since January 1, 1992 including a justification of such services
provided by West Coast to, or on behalf of the Banks, and explain how they
are consistent with all applicable policies of West Coast; (h) refrain from,
directly or indirectly, entering into or engaging in any financial
transaction with the Banks or any of its other affiliates in any one month in
excess of $25,000, without the prior written approval of the FRB; (i) refrain
from entering into, or participating in any manner, in any financial
transaction with any of West Coast's or the Banks' institution affiliated
parties or their related interests ("insiders") in excess of $25,000 without
the prior written consent of the FRB; (j) within 90 days of the Agreement,
submit to the FRB a written statement concerning the steps that the Board of
Directors proposes to take to improve the condition of the Company and the
Banks; (k) refrain from, directly or indirectly, increasing the salaries or
fees of, or pay any bonus to, or make any other payment to, any insiders of
the Company or the Banks; (l) notify the FRB at least 30 days before adding
or replacing any director or senior executive officer of West Coast; and (m)
within 45 days of the end of each calendar quarter following the date of the
Agreement, provide various progress reports to the FRB.
Based upon its examination of West Coast as of September 30, 1994, the
FRB concluded that West Coast was in substantial compliance with the
agreement.
Sunwest's Regulatory Orders
Based upon an examination of Sunwest as of August 23, 1991, the FDIC
issued an Order to Cease and Desist against Sunwest (the "C&D Order") which
-18-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
became effective on April 27, 1992. The C&D Order requires Sunwest to: (a)
have management with qualifications and experience commensurate with his or
her duties at the Bank which should include (i) a chief executive officer
with proven ability in managing a financial institution and experience in
upgrading low quality assets and (ii) a senior lending officer with an
appropriate level of lending, collection and loan supervision experience for
the type and quality of Sunwest's loans; (b) increase its Tier 1 capital to
not less than $17.3 million on or before July 26, 1992 and to not less than
$18.3 million on or before December 31, 1992; (c) achieve a Tier 1 capital
ratio of at least 6.5% on or before July 26, 1992 and thereafter maintain
that ratio; (d) develop and adopt a plan to meet the FDIC's minimum risk-
based capital requirements; (e) eliminate from its books certain criticized
assets and reduce other criticized assets to specified levels at various
dates until April 26, 1993; (f) not extend, directly or indirectly, any
additional credit to any borrower who has a loan or other extension of credit
that has been charged off or classified, in whole or in part, "loss" or
"doubtful" and is uncollected; (g) develop or revise, adopt and implement
several policies including (i) written lending and collection policies, (ii)
a written liquidity and funds management policy, (iii) a comprehensive policy
for determining the adequacy of the reserve for loan losses and (iv) a policy
regarding internal routine and control procedures; (h) establish and
thereafter maintain adequate reserves for loan losses; (i) develop and adopt
a plan to control overhead and other expenses; (j) eliminate and/or correct
all violations of law identified by the FDIC in its examination as of August
23, 1991 and take all necessary steps to ensure future compliance with all
applicable laws and regulations; (k) refrain from paying cash dividends
without prior written consent of the FDIC and the Superintendent; (l) refrain
from increasing the amount of broker deposits above the amount outstanding at
April 27, 1992 and submit to the FDIC and Superintendent a written plan for
eliminating Sunwest's reliance on brokered deposits; (m) file Consolidated
Reports of Condition and Income, and all necessary amendments thereto, that
accurately reflect the financial condition of Sunwest as of the end of each
fiscal quarter on and after March 31, 1991; and (n) furnish quarterly written
progress reports to the FDIC and the Superintendent detailing the form and
manner of actions taken to secure compliance with the C&D Order.
As a result of an examination of Sunwest conducted by the California
State Banking Department as of March 16, 1992, the Superintendent issued on
February 8, 1993 an Order under Financial Code Section 1913 (the "State
Order") against Sunwest that was effective immediately and superseded a
temporary Order under Financial Section Code 1912 dated November 12, 1992.
The State Order contains provisions that are substantially similar to the C&D
Order. However, it also requires Sunwest to: (a) formulate, adopt and
implement a comprehensive business plan by December 31, 1992 for restoring
Sunwest to a sound condition; and (b) develop and adopt by December 31, 1992,
and thereafter implement, a month-by-month budget for 1993 and a profit plan
which shall include, among other things, a plan to improve earnings.
Due to the losses incurred by Sunwest and the resulting reduction in
Sunwest's capital ratios, at December 31, 1994, Sunwest was undercapitalized
as defined under the prompt corrective action provisions of the FDIC
Improvement Act.
In addition, Sunwest Bank received three orders during 1994 from the
California State Banking Department that its contributed capital was impaired
under the provisions of California Financial Code and that the Bank must
correct such impairment of its contributed capital within 60 days of the
respective order. Pursuant to California law, at December 31, 1994, a paid
in capital infusion of approximately $4,968,000 was required to correct such
impairment. The impairment could also be cured by an increase in retained
-19-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
earnings of approximately $2 million. Failure to correct the capital
impairment could lead to a reduction or possibly elimination of West Coast
ownership interest in Sunwest.
Response to Administrative Actions
Management of West Coast and Sunwest have taken actions and implemented
programs to comply with the requirements of the agreements or orders
applicable to their respective institutions.
Based upon its examination of West Coast as of September 30, 1994, the
FRB concluded that West Coast was in substantial compliance with the
Agreement.
In its most recent examination of Sunwest as of July 26, 1994, the FDIC
noted that Sunwest was not in full compliance with the provisions of the C&D
Order relating to maintaining specified ratios of Tier 1 and risk-based
capital and maintaining an adequate reserve for loan losses. The FDIC also
noted that, although Sunwest has attempted to reduce overhead expenses,
Sunwest is still experiencing large operating losses due primarily to its
high level of classified assets and the weak local economy.
Since the examination, management of Sunwest has continued its efforts
to reduce the level of classified assets and to correct the criticism of its
reserve for loan losses. In accordance with the prompt corrective action
provisions of the FDIC Improvement Act, Sunwest submitted to the FDIC a
revised capital restoration plan and West Coast submitted to the FDIC through
a commitment and guaranty and security agreement, a guaranty of the capital
restoration plan. The capital restoration plan provides that the anticipated
primary source of additional capital for Sunwest will be provided by West
Coast with the proceeds from the sale of Sacramento First. On June 22, 1994,
West Coast, Sacramento First and B&PB entered into an agreement providing for
the acquisition of Sacramento First by B&PB. On January 20, 1995, the
acquisition was completed. West Coast received $3,514,000 in cash net of
legal costs, 243,546 shares of B&PB common stock and a right to receive a
contingent cash payment of up to $940,000 three to five years after the sale
date based upon the performance of Sacramento First's loan portfolio and real
estate owned.
Sunwest received $3.4 million of the $3,514,000 proceeds in the form of
repayment of management fees charged to Sunwest by West Coast from 1989
through 1993. Management believes this resulted in eliminating the capital
impairment under the provisions of the California Financial Code. The shares
of B&PB common stock are held by Sunwest as security for West Coast's
guaranty of its capital plan.
On March 30, 1995, West Coast sold 50,000 shares of the B&PB common
stock for $7.75 per share totaling $387,500. Proceeds of $200,000 were
infused as capital into Sunwest increasing the leverage ratio to over 6.5%.
West Coast has requested approval from the FDIC to receive the remaining
cash. The cash is currently held by Sunwest as collateral for West Coast's
guaranty of Sunwest's capital plan.
Management believes that the actions taken have brought West Coast and
Sunwest into compliance with the Agreement, the C&D Order, the State Order
and the prompt corrective action provisions of the FDIC Improvement Act.
Compliance will be determined by the regulatory authorities.
EMPLOYEES
At December 31, 1994, West Coast and its subsidiaries employed 91 per-
sons. West Coast and its subsidiaries believe that their employee relations
are satisfactory.
-20-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
SELECTED STATISTICAL INFORMATION
The following tables and data set forth, for the respective periods
shown, selected statistical information relating to the Company. The tables
and data should be read in conjunction with the other financial information
appearing elsewhere in this report.
For the tables of "Average Balance Sheet and Analysis of Net Interest
Earnings" and "Rate and Volume Variance Analysis" see "ITEM 7. - MANAGEMENT'S
DISCUSSION AND ANALYSIS - Results of Operation - Net Interest Income."
Loans by Type
The following table sets forth loans by type as of December 31. The
Company had no foreign loans during the periods reported.
(dollars in thousands) 1994 1993 1992 1991 1990
-----------------------------------------------
Commercial $33,010 $ 78,462 $104,704 $138,973 $175,505
Real estate:
Construction - 27,558 39,227 40,045 34,318
Mortgage 49,236 98,220 108,241 126,681 95,584
Installment loans 4,694 16,874 22,937 39,439 61,088
Direct lease financing - - 3,486 14,361 26,573
Unearned income, discounts
and fees (371) (748) (2,084) (5,432) (9,811)
-----------------------------------------------
Total $86,569 $220,366 $276,511 $354,067 $383,257
===============================================
Commercial loans are loans to local community businesses and may be
unsecured or secured by assets of the business and/or its principals.
Construction loans are secured by the underlying property and may be secured
by additional collateral or guarantees by the principal borrowers. Mortgage
loans are secured by deeds of trust on the underlying properties and may be
guaranteed by the principal borrowers. Installment loans to individuals may
be unsecured or secured by various types of assets including automobiles,
trust deeds, recreational vehicles or other personal property.
The Company primarily funds loans based on the creditworthiness of the
borrower and supported by a minimum of two identified sources of repayment.
Advance rates on collateral provided in support of the sources of repayment
generally does not exceed 60% to 80% of collateral value.
Total loans decreased significantly from 1990 through 1994 primarily
from: the exclusion of Sacramento First in 1994; a general decrease in the
demand for loans during 1993 at Sacramento First; the liquidation of WCV,
Inc.; the liquidation of WCRF; and a decrease of $155 million of loans at
Sunwest of which $51 million and $40 million occurred during 1994 and 1993,
respectively.
Sunwest's overall decreases in loans from 1992 through 1994 as well as
the decreases in its commercial loans in 1991 resulted from lower loan
demand, more stringent underwriting standards and planned disengagement from
problem and potential problem credits. The decrease in loans during the past
three years, and particularly in 1994 also resulted from Sunwest's capital
position and its regulatory orders. See "ITEM 1. BUSINESS - Potential and
Existing Enforcement Action - Sunwest's Regulatory Orders." Sunwest's
capital position and the presence of its regulatory orders made it difficult
for Sunwest to compete with other financial institutions for deposits. The
capital position has improved significantly since December 31, 1994. This
will reduce some of the adverse competitive pressures, although until the
-21-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
regulatory orders are removed, significant loan growth is unlikely and
further declines may occur.
Declines in commercial loans occurred primarily from declines at
Sunwest. The significant portion of construction lending was at Sacramento
First for all periods. Real Estate Mortgage loans increased at Sunwest from
1990 through 1992 as the Bank focused its lending efforts away from
commercial loans and into this segment. In 1993 and 1994 decreases resulted
from capital constraints and competitive pressures mentioned above. The
Installment and Direct Lease Financing portfolios have decreased as Sunwest
has not been emphasizing these products and sold its remaining lease
portfolios in 1992 and 1993; WCV, Inc. had a sizable portfolio in 1990 that
was substantially liquidated in 1992 with the remainder included in "Net
Assets held for sale" at December 31, 1992; and Sacramento First has had
steady decreases in its portfolio through 1993 and its 1994 balance was
included in "Net Assets Held for Sale."
The Company's real estate mortgage secured loans are further segregated
at December 31, 1994 as follows (The Company had no real estate construction
loans at December 31, 1994):
(dollars in thousands) Total
---------
Residential:
Revolving, open ended lines of credit $ -
1 to 4 family properties:
First liens 1,221
Junior liens 5,364
Multifamily (5 or more) properties 243
Mortgage warehouse lines of credit 1,298
Farm land -
Commercial and other property 41,110
---------
Total $ 49,236
=========
Real estate mortgage and construction lending contains potential risks
which are not inherent in other types of commercial loans. These potential
risks include declines in market values of underlying real property
collateral and, with respect to construction lending, delays or cost
overruns, which could expose the Company to loss. In addition, risks in
commercial real estate lending include declines in commercial real estate
values, general economic conditions surrounding the commercial real estate
properties, and vacancy rates. A decline in the general economic conditions
or real estate values within the Company's market area could have a negative
impact on the performance of the loan portfolio or value of the collateral.
Because the Company lends primarily within its market areas, the real
property collateral for its loans is similarly concentrated, rather than
diversified over a broader geographic area. The Company could therefore be
adversely affected by a decline in real estate values in Orange and Los
Angeles Counties even if real estate values elsewhere in California generally
remained stable or increased.
The risks in the Company's loan portfolio stem from the individual
credits that are contained therein and the diversification among the credits.
The risks of a particular credit arise from the interplay of various factors,
including the underwriting criteria applied to originate the credit, the
creditworthiness of the borrower, the controls placed on the disbursement of
funds, the procedures employed to monitor the credit, the interest rate
-22-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
charged, market interest rate increases for variable rate loans and the
external economic conditions that may affect the creditor's ability to repay
or the value of the underlying collateral. Further, with respect to secured
credits, certain additional factors include the nature of the appraisals
obtained with respect to the underlying collateral and the loan to value
ratio. Assuming all other things are equal, certain credits have
characteristics that present a higher degree of risk than others: a secured
credit is less risky than an unsecured credit; a credit with liquid
collateral is less risky than a credit secured by collateral for which there
is only a limited market; a credit with a lower interest rate is less risky
than one with a higher rate; a credit with a lower loan to value ratio is
less risky than a credit with a higher ratio; and a credit that is
underwritten pursuant to rigorous underwriting criteria and a careful review
of the borrower's creditworthiness is less risky than a credit originated
pursuant to less rigorous standards. The Company considers these
characteristics, among others, during the underwriting process in an attempt
to originate loans with an acceptable level of risk. At December 31, 1994,
the Company had no significant loan concentrations other than those listed
above.
Rate Sensitivity
Financial institutions are susceptible to fluctuations in interest
rates. To the degree that the average yield on assets responds differently
to a change in interest rates than does the average cost of funds sources,
earnings will be sensitive to interest rate changes.
The following table sets forth the maturities for commercial loans and
for real estate construction loans. These loans comprised 38% of the gross
loan portfolio at December 31, 1994 and are classified according to changes
in interest rates.
(dollars in thousands) Maturing
---------------------------------------
Within After One After
One Year But Within Five
Or Less Five Years Years Total
---------------------------------------
Commercial $ 22,604 $ 6,774 $ 3,632 $ 33,010
========================================
Loans included above with:
Fixed rates $ 777 $ 1,698 $ - $ 2,475
Variable rates 21,827 5,076 3,632 30,535
----------------------------------------
Total $ 22,604 $ 6,774 $ 3,362 $ 33,010
========================================
-23-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
Allowance for Possible Credit Losses
The following table discloses the activity in the allowance for possible
credit losses for the years ended December 31:
(dollars in thousands) 1994 1993 1992 1991 1990
--------------------------------------------
Allowance for possible credit
losses at beginning
of period $ 5,557 $ 6,512 $ 6,935 $ 7,193 $ 5,531
Charge-offs:
Commercial (3,317) (8,396) (3,492) (5,563) (2,618)
Real estate - construction (51) - (1,603) (93) (1,070)
Real estate - mortgage (432) (973) (1,306) (1,995) (2,212)
Installment loans to
individuals (181) (909) (1,345) (1,265) (1,664)
Direct lease financing (29) (56) (532) (1,313) (626)
Recoveries:
Commercial 452 518 1,774 280 391
Real estate - construction 1 - - - -
Real estate - mortgage 5 3 - - 20
Installment loans to
individuals 142 320 312 336 250
Direct lease financing 48 68 146 220 100
--------------------------------------------
Net charge-offs (3,362) (9,425) (6,046) (9,393) (7,429)
Additions charged to operations 3,297 8,470 5,623 9,135 9,091
Transfer to assets held for sale (843) - - - -
--------------------------------------------
Balance at end of period $ 4,649 $ 5,557 $ 6,512 $ 6,935 $ 7,193
============================================
Allowance for possible credit
losses as a percentage of:
Average loans 3.08% 2.23% 2.03% 1.91% 1.94%
Loans at end of period 5.37 2.49 2.33 1.96 1.88
Net charge-offs as a percentage
of average loans 2.23 3.78 1.89 2.58 2.00
============================================
The allowance for possible credit losses is established by a provision
for possible credit losses charged against current period income. Loan and
lease losses are charged against the allowance when, in management's
judgment, the loan or lease is considered uncollectible or of such little
value that its continuance as an asset is unwarranted. The allowance is the
amount that management believes is adequate to absorb losses inherent in
existing loans and commitments to extend credit. Management's evaluation
takes into consideration several factors, including economic conditions and
their effects on particular industries and specific borrowers, borrowers'
financial data, regulatory examinations and requirements, and continuous
monitoring and review of the loan portfolio for changes in overall quality
and specific loan problems. During 1991, the Company fully implemented the
following methodology for determining the allowance for possible credit
losses. Each subsidiary's allowance consists of specific reserves, general
reserves and supplemental reserves. Specific reserves are established by
analyzing individual credits, generally all loans classified as "doubtful"
and certain loans classified as "substandard" (see "ITEM 1. BUSINESS -
Selected Statistical Information - Classified Loans"). The general reserves
are determined based upon quantitative historical loss experience of loans
-24-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
classified as "substandard" and "other assets especially mentioned" as well
as certain categories of loans. The supplemental reserves are additional
reserves that are based on economic conditions, trends in delinquency,
renegotiated and nonperforming loans, and are otherwise deemed necessary and
prudent by management. Management believes that the allowance for possible
credit losses of $4,649,000, constituting approximately 5.37% of loans
outstanding at December 31, 1994, was adequate to absorb known and inherent
risks in the loan portfolio. For additional information on the allowance for
possible credit losses and net charge-offs, see "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Results of Operations."
The Company established an allowance for possible credit losses at
December 31, 1991 through 1994 for each category as set forth below. The
allowance includes reserves for specific loans as well as general and
supplemental reserves for each category. In 1990, the Company did not
normally allocate the allowance for possible credit losses to specific loan
categories, however, an allocation to the major categories was made for the
purposes of this report. The allocations during this year was estimated
based upon historical loss experience and management's evaluation of the same
factors considered in determining the amount of additional provisions to the
allowance for possible credit losses.
(dollars in
thousands) 1994 1993 1992
------------------------------------------------------------
Percent Percent Percent
Of Loan Of Loan Of Loan
Allowance Category Allowance Category Allowance Category
------------------------------------------------------------
Commercial $2,214 38.1% $ 2,881 36.3% $3,579 37.2%
Real Estate:
Construction - .- 339 12.3 602 14.0
Mortgage 2,247 56.5 1,692 43.8 1,300 38.5
Installment
loans 188 5.4 645 7.6 831 8.2
Direct lease
financing - .- - .- 200 2.1
------------------------------------------------------------
Total $4,649 100.0% $ 5,557 100.0% $6,512 100.0%
============================================================
(Continued)
-25-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
(Continued)
(dollars in
thousands) 1991 1990
----------------------------------------
Percent Percent
Of Loan Of Loan
Allowance Category Allowance Category
----------------------------------------
Commercial $2,355 42.9% $ 3,120 47.7%
Real Estate:
Construction 1,110 11.1 597 8.7
Mortgage 1,727 28.6 1,324 21.3
Installment
loans 1,190 13.4 1,425 15.5
Direct lease
financing 553 4.0 727 6.8
----------------------------------------
Total $6,935 100.0% $ 7,193 100.0%
========================================
-26-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
Nonperforming Loans
Loans for which the accrual of interest has been discontinued are
designated nonaccrual loans. Accrual of interest on such loans is discon-
tinued when there exists reasonable doubt as to the full and timely
collection of either principal or interest or generally when a loan becomes
contractually past due 90 days with respect to principal or interest. Under
certain circumstances, interest accruals are continued on loans past due 90
days which, in management's judgment, are considered to be fully collectible.
Renegotiated loans are those on which the terms have been modified in favor
of the borrower as a result of the borrower's inability to meet the original
terms.
The following table summarizes loans which were on nonaccrual, loans
90 days or more past due and still accruing interest and renegotiated loans
as of December 31:
(dollars in thousands) 1994 1993 1992 1991 1990
----------------------------------------
Nonaccrual loans $ 5,414 $10,744 $ 8,796 $10,078 $ 12,692
90 days past due loans and
still accruing 76 353 158 123 1,616
Renegotiated loans 5,850 5,591 - 123 89
Loans on nonaccrual and 90 days
past due/total loans 6.34% 4.97% 3.21% 2.88% 3.73%
Loans on nonaccrual and 90 days
past due/total assets 4.19 3.55 2.48 2.23 3.04
========================================
The decrease in nonaccrual loans and loans 90 days past due and still
accruing from 1990 to 1992 and in 1994 resulted primarily from charge-offs
and foreclosures on real estate collateral. The changes in the levels of
nonperforming loans during 1993 and 1994 is discussed under "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Results of Operations - Nonperforming Assets."
The five largest nonaccrual loans at December 31, 1994 totaled $3.7
million or 69% of total nonaccrual loans. At December 31, 1994, three loans
totaling $2.2 million were primarily secured by real estate with one of these
loans totaling $491,000 being restructured and in compliance with its
modified terms. The remaining two loans with a balance of $1.5 million at
December 31, 1994 were secured by receivables, equipment or inventory.
As of December 31, 1994, the Company had reversed all of the previously
accrued interest on loans on nonaccrual status. If loans on nonaccrual at
December 31, 1994, 1993 and 1992 had performed in accordance with original
terms, interest income of the Company would have increased by $354,000,
$872,000 and $989,000, respectively.
All renegotiated loans shown in the chart above were in compliance with
their modified terms.
Classified Loans
The policy of the Company is to review the loans in the portfolio to
identify problem credits. During 1991 the Company fully implemented a loan
grading system. The loan grading system includes three classifications for
problem loans: "substandard," "doubtful" and "loss." A substandard loan is
inadequately protected by the current sound net worth and paying capacity of
the borrower or by the pledged collateral, if any. A substandard loan has
one or more well defined weaknesses that jeopardize the liquidation of the
debt. A doubtful loan has critical weaknesses which make collection or
liquidation in full improbable. A loan classified as loss is considered
-27-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
uncollectible or of such little value that its continuance as an asset is
unwarranted. Another category designated as "special mention" is maintained
for loans which are marginally acceptable but currently protected by the
current sound net worth and paying capacity of the borrower or by the pledged
collateral, if any. A special mention loan is potentially weak, as the
borrower is exhibiting deteriorating trends which, if not corrected, could
jeopardize the repayment of the debt and result in a substandard
classification.
The following presents loans classified as substandard, doubtful and
special mention at December 31:
(dollars in thousands) 1994 1993 1992
-------------------------------------
Substandard $ 21,658 $ 22,543 $ 30,596
Doubtful 369 1,405 1,883
-------------------------------------
Total $ 22,027 $ 23,948 $ 32,479
=====================================
Special mention $ 10,708 $ 28,740 $ 31,007
=====================================
Except for the loans classified as substandard or doubtful, management
is not aware of any loans at December 31, 1994 where the known credit
problems of the borrower would cause the Company to have serious doubts as to
the ability of such borrowers to comply with their present loan repayment
terms and which would result in such loans becoming nonperforming loans at
some future date. Management cannot, however, predict the extent to which
the current economic environment may persist or worsen, or the full impact
such environment may have on the Company's loan portfolio. Furthermore,
Sunwest's loan portfolio is subject to review by federal and state regulators
as part of their routine, periodic examination and such regulators'
assessment of specific credits may affect the level of the Company's
nonperforming loans and allowance for possible credit losses. Accordingly,
there can be no assurance that other loans will not become nonperforming in
the future.
Real Estate Owned
Gross real estate owned, the valuation allowance and net real estate
owned at December 31 were as follows:
(dollars in thousands) 1994 1993 1992
-------------------------------------
Gross real estate owned $ 5,129 $ 10,944 $ 17,475
Valuation allowance 777 3,206 1,927
-------------------------------------
Net real estate owned $ 4,352 $ 7,738 $ 15,548
=====================================
Percent of assets 3.3% 2.5% 4.3%
=====================================
Real estate owned consists of real estate acquired in settlement of
loans and loans accounted for as in-substance foreclosures. Real estate
owned is carried at the lower of cost or fair value less estimated selling
costs.
When there is indication that a borrower no longer has equity in
property collateralizing a loan and it is doubtful that equity will be
rebuilt in the foreseeable future, the property is considered repossessed in-
-28-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
substance ("in-substance foreclosure"). Both in-substance foreclosure and
real estate acquired in settlement of loans are recorded at the lower of the
unpaid balance of the loan at the settlement date or fair value less selling
costs of the collateral. Subsequently, valuation allowances for estimated
losses are provided against income if the carrying value of real estate
exceeds estimated fair value less selling costs.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards #114 ("SFAS 114") "Accounting by Creditors for
Impairment of a Loan." and this will adjust the Company's in-substance
foreclosure policy. See "NOTE 1 to the Notes to the Consolidated Financial
Statements" for a discussion of this accounting pronouncement.
While management strives to sell real estate owned for at least the
carrying value, the amounts actually realized reflect general economic
conditions nationally and in the geographic areas where such properties are
located, prevailing interest rates and the quality and location of such
properties, which conditions management cannot predict. In addition, the
regulatory agencies periodically review the allowance for real estate losses
and such agencies may require the Company to recognize additions to the
allowance based on information and factors available to them at the time of
their examinations. Accordingly, no assurance can be given that the Company
will not recognize additional losses with respect to its real estate owned.
The net cost of operation of other real estate owned includes write-downs of
real estate owned, gains and losses on disposition and real estate owned
operating expenses, net of related income. The net cost of operation of other
real estate owned totaled $88,000 during 1994, representing .5% of the
Company's total income for that year, as compared with $3,493,000 or 12.4% of
total income for 1993.
Investment Securities
Investment securities are stated at cost, adjusted for amortization of
premiums and accretion of discounts. See "NOTE 1 of the notes to the
consolidated financial statements" regarding the implementation during 1994
of Statement of Financial Accounting Standards #115 ("SFAS 115") "Accounting
for certain investments in debt and equity securities." The gross unrealized
gains and losses on such securities are set forth in "NOTE 3 of the Notes to
the Consolidated Financial Statements." The following tables show the book
value of the Company's portfolio of "Held-to-maturity" and "Available-for-
sale" investment securities as of December 31:
(dollars in thousands) 1994 1993(1) 1992(1)
Held-to-maturity -------------------------------------
U.S. government agencies and
corporations $ 5,868 $ 11,051 $ 11,678
Obligations of states and
political subdivisions - 4,023 3,438
Other securities - 1,243 993
-------------------------------------
Total $ 5,868 $ 16,317 $ 16,109
=====================================
Available-for-sale
U.S. government agencies
and corporations $ 1,947 $ - $ -
Other securities 4,000 - -
-------------------------------------
Total $ 5,947 $ - $ -
=====================================
-29-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
(1) The Company did not classify securities as "available-for-sale" during
1993 and 1992.
The following table discloses the maturity dates and average yields of
the investment securities "Held-to-maturity" and "available-for-sale" at
December 31, 1994 (no securities were due after 10 years):
Due After Due After
One Year Five Years
Due Within But Within But Within
(dollars in thousands) One Year Five Years Ten Years
----------------------------------------------------
Amount Yield Amount Yield Amount Yield Total
Held-to-maturity ----------------------------------------------------
U.S. government
agencies and
corporations $ - .--% $5,868 6.33% $ - .--% $ 5,868
====================================================
Available-for-sale
U.S. government
agencies and
corporations $1,947 6.20% $ - .-- $ - .--% $ 1,947
Other securities 4,000 5.52 - .-- - .-- 4,000
----------------------------------------------------
Total $5,947 5.74% $ - .--% $ - .--% $ 5,947
====================================================
The $4 million of other securities were invested in a "Government Cash
Fund" issued by Forum Financial Services, Inc. through their group of Monarch
Funds. Fair value of this fund equaled book value at December 31, 1994. For
additional information on investment securities, see "NOTE 3 of the Notes to
the Consolidated Financial Statements."
Deposits
The following table discloses the average outstanding balance of
deposits and the average rates paid thereon for each of the years ended
December 31:
(dollars in thousands) 1994 1993 1992
------------------------------------------------------
Average Interest Average Interest Average Interest
Balance Rate Balance Rate Balance Rate
------------------------------------------------------
Non-interest bearing
demand deposits $ 58,238 .--% $ 96,776 .--% $ 94,269 .--%
Interest-bearing
demand deposits 63,680 2.18 96,415 2.61 98,079 3.16
Savings deposits 9,334 2.15 11,956 2.42 16,780 3.47
Time deposits 65,039 4.08 102,158 3.97 161,055 5.11
------------------------------------------------------
Total $196,291 2.16 $307,305 2.23% $370,183 3.22%
======================================================
-30-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
The maturities of the time certificates of deposit of $100,000 or more
and the ratio of such deposits to total deposits at December 31, 1994 were as
follows (dollars in thousands):
Percentage
Maturity Amount of Total
------------------------
0-3 Months $ 3,354 2.81%
3-6 Months 951 .80
6-12 Months 688 .58
Over 12 Months 300 .25
------------------------
Total $ 5,293 4.44%
========================
Generally, the holders of these deposits are highly sensitive to changes
in interest rates thereby increasing the competition for such deposits as
well as the interest rates paid thereon.
Selected Financial Ratios
The following table sets forth the ratios of net loss to average total
assets and to average shareholders' equity for the years ended December 31,
as indicated. In addition, the ratios of average shareholders' equity to
average total assets are presented. West Coast has not declared or paid any
cash dividends during the periods presented.
1994 1993 1992
-------------------------------------
Ratio of net loss to:
Average total assets (2.45)% (3.62)% (1.70)%
Average shareholders' equity (57.44) (62.38) (22.04)
Ratio of average shareholders'
equity to average total assets 4.26 5.80 7.72
=====================================
ITEM 2. PROPERTIES
West Coast rents office space located at 4770 Campus Drive, Suite 250,
Newport Beach, California, from Sunwest. The Company occupies its offices
under long-term leases expiring at various dates through 2006.
The Company's total occupancy expense for the year ended December 31,
1994 was approximately $1,546,000. For additional information concerning
properties, see Notes 7, 15 and 20 of the Notes to the Consolidated Financial
Statements appearing elsewhere in this report.
ITEM 3. LEGAL PROCEEDINGS
In April 1992, the San Bernardino County Environmental Health Services
Department ("SBEHS") named WCV, Inc. as a "responsible party" and a
"generator" under state and federal environmental laws with respect to the
contamination of certain real property located in San Bernardino, California
(the "Property"). In addition, WCV, Inc. was named as a party that must
reimburse SBEHS and the appropriate Regional Water Quality Control Board for
all expenses and oversight and supervision requirements associated with the
clean-up of the Property.
In February 1993, the Regional Water Quality Control Board of La Hontan
(the "La Hontan RWQCB") issued an interim order that clarified an interim
order issued in October 1992 and required WCV, Inc., among other things, to
-31-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
file a work plan for remediation of the Property and install test wells.
WCV, Inc. acquired an interest in the Property in 1983 when it extended
a loan that was secured by a deed of trust on the Property. Both before and
after 1983, the Property was operated as a gas station with eight underground
storage tanks. In October 1988, WCV, Inc. foreclosed on its deed of trust
and took title to the Property.
WCV, Inc. has taken various actions to address the contamination on the
Property, including retaining environmental consultants, filing a work plan,
ordering various tests and analysis of the Property, removing the underground
storage tanks, installing test wells and removing contaminants.
WCV, Inc. has also taken steps to bring actions against other
potentially responsible parties, including the prior owners and responsible
oil company for, among other things, indemnity in the event that it is
ultimately held responsible to pay for the remediation of the Property. WCV,
Inc. has filed a claim under the California Underground Tank Cleanup Fund
law, and its claim has been acknowledged and tentatively classified as a
Class C claim. A commitment letter has not been issued. WCV, Inc. may be
eligible for reimbursement of certain costs incurred to remediate the
property. Such amounts, if any, are unable to be determined at this time.
The cost to remediate the Property has been tentatively estimated at
$840,000, of which $660,000 has been incurred through December 31, 1994.
WCV, Inc. has accrued $180,000 with respect to its remaining liability in
connection with this matter.
In addition, West Coast and its subsidiaries are parties to various
other legal proceedings, none of which individually or in the aggregate are
considered by West Coast or its subsidiaries, based in part upon opinions of
counsel, to be material to the financial condition or results of operations
of West Coast or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
1994.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 4, 1995, the executive officers of the Company are as
follows (Includes Name, Age, Position, and Principal Occupation and
Affiliation During Last Five Years):
John B. Joseph, Age 56
Chairman of the Board, President and Chief Executive Officer, West
Coast; Chairman of the Board and President, North Orange, WCV, Inc., West
Coast Realty and Centennial Loan; Co-Chairman of the Board, Sunwest; Chairman
of the Board, Sunwest Leasing, WCV, Inc.; Chairman of the Board and CEO,
Chancellor.
John B. Joseph is currently the Chairman of the Board, President and
Chief Executive Officer of West Coast. He has been Chairman of the Board of
Directors of West Coast since its inception in 1981, President since April
1993 and Chief Executive Officer since April 1991. Mr. Joseph also serves,
or has served, in the following capacities during the past five years:
President of West Coast from April 1987 to April 1991; Vice Chairman of the
Board of Directors of The Centennial Group, Inc., a Delaware corporation
("CGI"), since February 1987; Senior Executive Vice President and Secretary
of CGI from July 1987 to July 1993; General Partner of various limited
partnerships engaged in real estate development and lending activities. Mr.
Joseph presently holds and has held, over the past five years, various
-32-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
positions in the subsidiaries of West Coast. Mr. Joseph has held, over the
past five years up until July 1993 various positions in the subsidiaries of
CGI.
Ronald R. White, Age 48
Vice Chairman of the Board of Directors and Executive Vice President,
West Coast, West Coast Realty, Centennial Loan; Director, WCV, Inc., North
Orange, Sunwest Leasing and Chancellor; Co-Chairman of the Board, Sunwest.
Ronald R. White is currently Executive Vice President and Vice Chairman
of the Board of Directors of West Coast. Mr. White has served in these
capacities since April 1987. Mr. White also serves, or has served, in the
following capacities during the past five years: Chairman of the Board of
Directors, President and Chief Executive Officer of CGI since February 1987;
General Partner of various limited partnerships engaged in real estate
development and lending activities. Mr. White presently holds and has held,
over the past five years, various positions in the subsidiaries of West Coast
and CGI.
Frank E. Smith, Age 44
Senior Vice President, Chief Financial Officer and Secretary, West
Coast, West Coast Realty; Senior Vice President, Chief Financial Officer,
Secretary and Treasurer, Sunwest; Vice President, Secretary and Chief
Financial Officer, Sunwest Leasing and North Orange; Senior Vice President,
Treasurer and Secretary, Centennial Loan; Treasurer and Secretary,
Chancellor; Treasurer, WCV, Inc.
Frank E. Smith has served as Senior Vice President, Chief Financial
Officer and Secretary of West Coast since September 1987 and as Senior Vice
President and Chief Financial Officer of Sunwest since February 1993.
James G. LeSieur, Age 53
Director, President and Chief Executive Officer, Sunwest and Sunwest
Leasing.
James G. LeSieur has served as President and Chief Executive Officer of
Sunwest since April 1991 and Executive Vice President and Chief Financial
Officer of Sunwest from November 1985 to April 1991. Mr. LeSieur joined
Sunwest in 1975 as Vice President and Cashier and was later promoted to
Senior Vice President and Controller.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Holders of Record
As of February 28, 1995, there were approximately 3,100 holders of
record of West Coast's common stock.
Dividends
No dividends have been paid by West Coast since inception. At the
present time, West Coast plans to retain any earnings to increase its
liquidity and capital levels. Further, pursuant to the terms of the
Memorandum and Agreement, West Coast may not pay any cash dividends without
the prior written approval of the FRB. For additional information on
dividends, see "ITEM 1. BUSINESS - Supervision and Regulation - West Coast
Bancorp and - Restrictions on Transfers of Funds to West Coast by the Banks"
and "ITEM 1. BUSINESS - Potential and Existing Enforcement Actions - West
Coast's Regulatory Agreement."
-33-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
Securities Market Information
West Coast's common stock currently trades over the counter under the
symbol WCBC. West Coast's common stock was traded on the Nasdaq Stock Market
until December 1994. The stock was delisted because the Company's total
market value fell below $3 million. The following table sets forth, for the
calendar quarters indicated, the range of high and low sales prices for the
common stock as reported by Nasdaq or retrieved through over the counter
trades:
1994 1993
High Low High Low
-----------------------------------
First Quarter $ .69 $ .34 $ 1.25 $ .56
Second Quarter .75 .38 1.50 .56
Third Quarter .47 .31 .75 .38
Fourth Quarter .38 .31 .63 .31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial data
for the years ended December 31 as indicated with respect to the Company and
is qualified in its entirety by, and should be read in conjunction with, the
1992 through 1994 consolidated financial statements, the related notes and
the independent auditors' report. The data was derived from the consolidated
financial statements of the Company, which were audited by KPMG Peat Marwick
LLP, whose report for December 31, 1994 and 1993 and for each of the years in
the three-year period ended December 31, 1994 is included elsewhere in this
report. The report of KPMG Peat Marwick LLP contains an explanatory
paragraph regarding uncertainties surrounding Sunwest Bank's (a wholly owned
subsidiary of West Coast Bancorp) ability to maintain minimum regulatory
capital requirements and substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
-34-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
(in thousands,
except per share data) 1994 1993 1992 1991 1990
--------------------------------------------------
Results of operations
Interest income $ 16,134 $ 25,078 $ 36,113 $ 47,501 $ 51,574
Interest expense 4,735 7,407 12,575 20,411 23,943
Net interest income 11,399 17,671 23,538 27,090 27,631
Provision for possible
credit losses 3,297 8,470 5,623 9,135 9,091
Other operating income 2,683 3,110 4,045 3,490 3,177
Other operating expenses 13,064 23,883 28,006 24,750 23,572
Loss on disposition
of businesses 2,913 550 1,546 - -
Income tax expense
(benefit) 13 (15) (595) (1,600) (617)
Net earnings (loss) $ (5,205)$ (12,107)$ (6,997)$ (1,705)$ (1,238)
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) $ (.57)$ (1.32)$ (.76)$ (.19)$ (.14)
FINANCIAL POSITION
Total assets $ 130,910 $ 312,263 $ 361,741 $ 458,124 $ 470,252
Net loans and direct
lease financing 81,920 217,786 272,502 347,132 376,064
Total deposits 119,269 292,950 330,843 415,710 424,087
Shareholders' equity (1) 6,203 11,411 23,494 30,491 32,196
Long-term obligations 3,755 3,441 3,558 3,630 3,849
==================================================
(1) No cash dividends have been declared or paid by West Coast Bancorp.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 years ended December 31, 1994, 1993 and 1992. This
discussion should be read in conjunction with the Company's consolidated
financial statements and the notes thereto appearing elsewhere in this
report.
GENERAL
The Company posted a net loss of $5,205,000 or $.57 per share in 1994,
$12,107,000 or $1.32 per share in 1993 and $6,997,000 or $.76 per share in
1992. The net loss narrowed in 1994 as losses from the high levels of
nonperforming assets were reduced despite the continued weak economy and
depressed real estate values.
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. The
transaction was completed on January 20, 1995 and provided West Coast with
approximately $3.6 million of cash, approximately 243,500 shares of B&BP's
common stock and a contingent cash payment of up to $940,000 that may be
received by West Coast from three to five years after the sale date based on
-35-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
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 December 31, 1994 and a $2.8 million expected loss was
recorded in 1994. This loss adjusted the net book value of Sacramento First
to the sum of the current market value of B&PB stock and cash, both received
upon closing in January 1995. Sacramento First's operating results were
included in the consolidated statements of operations for all periods through
June 30, 1994. Subsequent to June 30, 1994, no amounts relating to
Sacramento First were included in any category of the Company's ending
balance sheet, average balance sheet and income statement except as noted
above.
Exclusive of Sacramento First's earnings and loss on sale, the Company's
loss would have been $2,539,000 or $.28 per share in 1994, $11,541,000 or
$1.26 per share in 1993 and $8,117,000 or $.89 per share in 1992.
The Company had total assets, loans and deposits as of December 31 as
follows:
(dollars in millions) 1994 1993 1992
-------------------------------------
Total assets $ 131 $ 312 $ 362
Total loans and leases 87 223 279
Total deposits 119 293 331
=====================================
The 1994 reductions resulted primarily from the accounting treatment for
the expected sale of Sacramento First. Reductions occurred during 1994 and
1993 from a decrease in loans due to lower loan demand, more stringent
underwriting standards, and Sunwest's capital position and 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.
During 1993 Sunwest became "undercapitalized" and during part of 1994
Sunwest was "significantly undercapitalized" under the prompt corrective
action provisions of the FDIC Improvement Act. This made it difficult for
Sunwest to compete with other financial institutions for deposits and loans.
In January 1995 as a result of the sale of Sacramento First, West Coast
repaid $3.4 million of management fees to Sunwest. This increased Sunwest's
capital ratios to amounts necessary for a depository institution to be
claimed to be "well capitalized" as defined under the prompt action
provisions of the FDIC Improvement Act. However, because Sunwest is still
subject to regulatory agreements it can only be deemed "adequately
capitalized." See Capital Resources and Dividends. Despite Sunwest's
current capital level, significant asset growth is not anticipated and
further declines may occur.
Further, West Coast's liquidity is limited. In the event West Coast is
unable to raise funds to increase its liquidity, West Coast may not be able
to meet its current obligations and may be forces into bankruptcy. If this
event were to occur, West Coast shareholders could suffer the elimination of
the value of their investments in the Company. See "ITEM 1. BUSINESS -
Supervision and Regulation -- and Potential and Existing Enforcement Actions"
and "Capital Resources and Dividends."
-36-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
RESULTS OF OPERATIONS
GENERAL
The 1994 loss resulted primarily from an accrued loss on the sale of
Sacramento First which was completed on January 20, 1995. Other factors
affecting the 1994 loss and the primary factors contributing to the 1993 and
1992 losses were loan losses, costs and expenses associated with high levels
of nonperforming assets and lower net interest income. The 1992 loss also
resulted from the write-off of goodwill of $3.2 million arising from the
acquisition of Sunwest, as well as a $1.5 million loss on the liquidation of
WCV, Inc. begun in 1992. The loss in 1992 was partially offset by a $2.8
million litigation recovery from Lloyds of London (the "Lloyds Settlement").
The high levels of provision for possible credit losses stemmed from
higher charge-offs, foreclosures, nonperforming loans and classified assets
which, in turn, resulted primarily from a weaker economy and softening real
estate values.
All 1994 income and expense categories (excluding loss on sale of
Sacramento First) were lower in 1994 versus 1993 primarily from the exclusion
of Sacramento First in 1994 as described above and asset declines at Sunwest.
Other operating income was higher in 1992 due principally to the Lloyds
Settlement.
Other operating expenses decreased from 1994 to 1993 due primarily to
the exclusion of Sacramento First, reduced net cost of operation of real
estate owned and cost control efforts at Sunwest. The 1993 decrease as
compared with 1992 resulted from a write-off of goodwill in 1992, and the
liquidation of WCV, Inc. in 1992 partially offset by a significant increase
in the net cost of real estate owned in 1993.
NET INTEREST INCOME
The decline in net interest income in 1994 and 1993 resulted primarily
from lower interest-earning asset volumes in 1994 and 1993 and, to a lesser
extent, lower market rates of interest in 1993.
The net yield on interest-earning assets (net interest income divided by
average earning assets) and net interest margin (yield on earning assets less
rate paid on interest-bearing liabilities) both increased slightly in 1994 as
the yield on interest-earning assets remained unchanged and the rates on
interest-bearing liabilities declined slightly.
The yield on interest-earning assets during 1994 compared to 1993
remained stable despite a 250 basis point increase in the prime rate during
1994 because Sunwest's yield on interest-earning assets declined from 8.80%
in 1993 to 8.67% in 1994. Sunwest's decline was caused by its average loans
(the highest yielding asset) declining from 85% of average interest earning
assets in 1993 to 80% in 1994, and the yield on loans increasing by only 19
basis points during 1994. The increase in yield on loans was lower than the
prime rate increases because of a combination of factors including the fact
that a full year of the prime rate increases were not earned, Sunwest is
trying to attract and retain higher quality (lower rate) loans, approximately
50% of Sunwest's loans are either fixed or reprice only once a year and the
sale of $3.6 million of the unguaranteed portion of SBA loans that were
yielding 13.54%. The net yield on interest-earning assets declined in 1993
from 1992 because net interest income declined at a greater rate than average
interest-earning assets. The net interest margin declined in 1993 because
the decline in rates on average loans exceeded the decline in rates paid on
average deposits.
Loans on which the accrual of interest had been discontinued at December
31, 1994, 1993 and 1992 amounted to $5,414,000, $10,744,000 and $8,796,000,
respectively. If these loans had been current throughout their terms, net
-37-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
interest income would have increased approximately $354,000, $872,000 and
$989,000 in 1994, 1993 and 1992, respectively. This would have raised both
the net yield on interest-earning assets and the net interest margin by .19%,
.30% and .27% in 1994, 1993 and 1992, respectively.
<TABLE>
Average Balance Sheets and Analyses of Net Interest Earnings
Information concerning average interest-earning assets and interest-
bearing liabilities, along with the interest earned or paid thereon and the
average interest rates earned and paid thereon, is set forth in the following
table for the years ended December 31. Averages for Sunwest, Sacramento
First and WCV, Inc., the assets of which constitute 99% of the Company's
earning assets, were computed based on daily balances. Averages for the
remaining entities are based on monthly balances. Income and yields earned
on tax exempt securities are not presented in the following tables on a
taxable equivalent basis since the tax effect was not material.
-38-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
<CAPTION>
(dollars in thousands) 1994 1993 1992
------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Rates Balances Interest Rates Balances Interest Rates
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans, net of unearned
loan fees and discounts (1) $150,837 $ 14,480 9.60% $ 249,258 $ 23,490 9.42% $320,395 $ 34,227 10.68%
Investment securities 12,817 671 5.24 16,400 814 4.96 13,590 794 5.84
Federal funds sold 21,283 820 3.85 26,109 718 2.75 29,704 945 3.18
Interest-bearing deposits
with banks 3,815 163 4.27 1,379 56 4.06 3,151 147 4.67
------------------------------------------------------------------------------------------------
Total interest-earning assets 188,752 16,134 8.55 293,146 25,078 8.55 366,840 36,113 9.84
Allowance for possible
credit losses (5,305) (6,781) (7,235)
Cash and due from banks 13,500 25,791 24,630
Other assets 15,740 22,288 27,168
------------------------------------------------------------------------------------------------
Total assets $212,687 $ 334,444 $411,403
================================================================================================
Liabilities and
shareholders' equity
Time deposits $ 65,039 $ 2,654 4.08% $ 102,158 $ 4,054 3.97% $161,055 $ 8,232 5.11%
Interest-bearing
demand deposits 63,680 1,390 2.18 96,415 2,518 2.61 98,079 3,100 3.16
Savings deposits 9,334 201 2.15 11,956 289 2.42 16,780 582 3.47
Capital leases 691 64 9.26 1,190 110 9.24 1,318 125 9.48
Other long-term debt 1,105 74 6.70 917 84 9.16 2,176 185 8.50
Convertible
subordinated debentures 3,035 352 11.60 3,035 352 11.60 3,035 351 11.57
------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 142,884 4,735 3.31 215,671 7,407 3.43 282,443 12,575 4.45
Demand deposits 58,238 96,776 94,269
Other liabilities 2,504 2,587 2,948
Shareholders' equity 9,061 19,410 31,743
------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $212,687 $ 334,444 $411,403
================================================================================================
Net interest income $11,399 $ 17,671 $ 23,538
================================================================================================
Net interest margin 5.24% 5.12% 5.39%
Net yield on
interest-earning assets 6.04 6.03 6.42
================================================================================================
(1) Interest income includes loan fees of $224,000, $1,542,000 and $2,049,000 for the years ended December 31, 1994, 1993 and
1992, respectively. Loans, net of unearned loan fees and discounts, includes loans placed on nonaccrual.
-39-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
Rate and Volume Variance Analyses
The following schedule analyzes the rate and volume changes in net interest income for the years ended December 31. The
variances attributable to simultaneous volume and rate changes have been allocated based upon the absolute values of the rate
and volume variance.
(dollars in thousands) 1994 vs. 1993 1993 vs. 1992 1992 vs. 1991
------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------------------------------------------------------------------------------------------------
Interest Income:
Loans and leases $(9,440) $ 430 $ (9,010) $ (7,014) $ (3,723) $(10,737) $ (4,993) $ (5,428) $(10,421)
Investment securities (186) 43 (143) 150 (130) 20 230 (124) 106
Federal funds sold (150) 252 102 (107) (120) (227) (390) (694) (1,084)
Interest-bearing deposits
with banks 104 3 107 (74) (17) (91) 65 (54) 11
------------------------------------------------------------------------------------------------
Total (9,672) 728 (8,944) (7,045) (3,990) (11,035) (5,088) (6,300) (11,388)
------------------------------------------------------------------------------------------------
Interest Expense:
Time deposits (1,512) 112 (1,400) (2,593) (1,585) (4,178) (2,393) (3,598) (5,991)
Interest-bearing
demand deposits (760) (368) (1,128) (52) (530) (582) 280 (1,732) (1,452)
Savings deposits (59) (29) (88) (143) (150) (293) (103) (299) (402)
Capital leases (46) - (46) (12) (3) (15) (14) 5 (9)
Other long-term debt 17 (27) (10) (136) 35 (101) 73 (9) 64
Convertible subordinated
debentures - - - - 1 1 (47) 1 (46)
------------------------------------------------------------------------------------------------
Total (2,360) (312) (2,672) (2,936) (2,232) (5,168) (2,204) (5,632) (7,836)
------------------------------------------------------------------------------------------------
Net change in net
interest income $(7,312) $ 1,040 $ (6,272) $ (4,109) $ (1,758) $ (5,867) $ (2,884) $ (668) $ (3,552)
================================================================================================
</TABLE>
INTEREST INCOME AND YIELD ON EARNING ASSETS
Interest income declined in 1994 and 1993 as a result of lower earning
asset volumes and to a lesser extent lower rates in 1993.
Average interest-earning assets decreased by $104 million from 1993 to
1994 and by $74 million from 1992 to 1993. The decrease in average loans as
a percentage of average interest-earning assets from 87.3% in 1992 to 79.9%
in 1994 also exerted downward pressure on interest income.
The average interest rates on interest-earning assets remained unchanged
from 1993 to 1994 and decreased by 129 basis points from 1992 to 1993
primarily because of changes in market rates of interest. The changes in the
rates on interest-earning assets tends to lag behind the changes in market
rates, as interest-earning assets reprice. The prime rate declined 350 basis
points during 1991 to 6.5% at December 31, 1991, remained at 6% from July
1992 through March 1994 and then steadily increased to 8.5% by December 31,
1994.
Interest income is expected to be lower in 1995 due to the decrease in
assets during 1994. Total assets at December 31, 1994 were $131 million
versus average assets in 1994 being $213 million.
-40-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
INTEREST EXPENSE AND COST OF FUNDS
Interest expense declined in 1994 and 1993 primarily from lower volumes
and in 1993 from lower rates of interest. Average interest-bearing
liabilities decreased by $73 million from 1993 to 1994 and by $67 million
from 1992 to 1993.
The average rates paid on interest-bearing liabilities decreased by 12
basis points from 1993 to 1994 and 102 basis points from 1992 to 1993. The
decreases occurred largely as a result of the market rate changes, and, like
interest-earning assets, the Bank's changes tend to lag behind the market
changes. The interest rates on time deposits, the highest cost deposit, fell
more than other interest-bearing deposits from 1992 to 1993 and rose from
1993 to 1994. This occurred because time deposits are much more rate
sensitive than other deposits. Average time deposits declined from
approximately 57% of average interest-bearing liabilities in 1992 to 46% in
1994, further reducing the cost of funds.
Interest expense is expected to be lower in 1995 due to the decrease in
interest-bearing liabilities during 1994. Total interest-bearing liabilities
at December 31, 1994 were $87 million versus a 1994 average of $143 million.
This decrease from lower volumes is expected to be partially offset by higher
rates, particularly on time deposits.
PROVISION FOR POSSIBLE CREDIT LOSSES
The Company's allowance for possible credit losses, net charge-offs and
provision for possible credit losses are summarized for the years ended
December 31 as follows:
(dollars in thousands) 1994 1993 1992
---------------------------------
Allowance for possible credit losses
at beginning of period $ 5,557 $ 6,512 $ 6,935
Charge-offs:
Commercial (3,317) (8,396) (3,492)
Real estate - construction (51) - (1,603)
Real estate - mortgage (432) (973) (1,306)
Installment loans to individuals (181) (909) (1,345)
Direct lease financing (29) (56) (532)
---------------------------------
Total charge-offs (4,010) (10,334) (8,278)
Recoveries 648 909 2,232
---------------------------------
Net charge-offs (3,362) (9,425) (6,046)
Provision for possible credit losses 3,297 8,470 5,623
Transfer to assets held for sale (843) - -
---------------------------------
Allowance for possible credit losses
at end of period $ 4,649 $ 5,557 $ 6,512
=================================
Allowance/Total loans 5.4% 2.5% 2.3%
Allowance/Loans on nonaccrual and
90 days past due 84.7% 50.1% 72.7%
=================================
The Company has had high provisions for possible credit losses and
charge-offs during the three year period as a result of the economic
recession and depressed real estate values, particularly in southern
California. The lower provision for possible credit losses during 1994 as
compared with 1993 and 1992 is attributable to lower net charge-offs.
-41-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
Recoveries were higher in 1992 because Sunwest received a litigation
settlement of $2.8 million in 1992 in connection with the Lloyds Settlement
and recorded $1.2 million as a loan loss recovery, which matched the amount
of the original loan charge-off which was the subject of the litigation. The
1992 provision also includes the reversal of approximately $600,000 of
allowance for possible credit losses associated with certain loans sold by
WCV, Inc.
Management has significantly increased the Company's allowance for
possible credit losses as a percentage of total loans. The level of reserves
reflects management's assessment of the current economic environment and its
impact on the portfolio as well as the result of implementation of a more
comprehensive risk assessment system established to identify and quantify
risk in the portfolio. Management believes that the allowance for possible
credit losses at December 31, 1994 is adequate to absorb known and inherent
risks in the Company's credit portfolio. See "ITEM 1 - SELECTED STATISTICAL
INFORMATION - Classified loans" for a summary of classified loans.
The ultimate collectibility of a substantial portion of the Company's
loans, as well as its financial condition, is affected by general economic
conditions and the real estate market in California. California has
experienced, and may continue to experience, adverse economic conditions.
These conditions have adversely affected certain borrowers' ability to repay
loans. The continuation of these conditions or further economic decline in
the Company's market area could result in a further deterioration in the
quality of the loan portfolio and high levels of nonperforming assets,
classified assets and charge-offs, which would require increased provisions
for possible credit losses and would adversely affect the financial condition
and results of operations of the Company. Sunwest has had no significant
direct impact from the Orange County bankruptcy filing that occurred in
December 1994. No assurance can be made as to whether any impact will occur
in the future.
CHARGE-OFFS
A summary of net charge-offs (recoveries) by company for the years
ended December 31 follows:
(dollars in thousands) 1994 1993 1992
---------------------------------
West Coast $ (67) $ (65) $ -
West Coast Realty - - 1,426
WCV, Inc. - - 847
Sacramento First 746 2,295 533
Sunwest 2,683 7,195 3,240
---------------------------------
$ 3,362 $ 9,425 $ 6,046
=================================
West Coast Realty and WCV, Inc. had no charge-offs after 1992 because
both companies were substantially liquidated in 1992. Currently, both
companies are inactive.
Charge-offs increased at Sacramento First during 1993 as a result of the
economic environment. Approximately 88% of Sacramento First's gross charge-
offs in 1993 were commercial loans. Sacramento First's charge-offs were
significantly lower than Sunwest's primarily because the recession and
declines in real estate values have been much less severe in northern
California than in southern California.
Gross charge-offs of commercial loans at Sunwest represented 79% of
charge-offs in 1994, 79% in 1993 and 60% in 1992. The level of charge-offs
-42-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
relates primarily to the weak economy, high business failures and falling
real estate values in southern California. The 1993 charge-offs were
significantly higher partially because of two loans, with each loan having a
charge-off of approximately $1.2 million. The net charge-offs at Sunwest
included a recovery of $1.2 million related to the Lloyds Settlement in 1992.
The Company's and Sunwest's charge-offs as a percentage of average loans
were 2.23% and 2.43%, respectively during 1994.
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and real estate owned.
Nonperforming loans include loans for which the accrual of interest has been
discontinued and loans that are contractually past due 90 days or more with
respect to principal and are still accruing interest. Real estate owned
consists of real estate collateral for which the Company has legally taken
ownership and real estate collateral that is still legally owned by the
borrower, but has been accounted for as an "in-substance" foreclosure. See
"NOTE 1 of the Notes to Consolidated Financial Statements" for a discussion
of Statement of Financial Accounting Standards No 114, ("SFAS 114")
"Accounting by Creditors for Impairment of a Loan." This pronouncement was
implemented during the first quarter of 1995.
A summary of nonperforming loans at December 31 follows:
(dollars in thousands) 1994(a) 1993 1992(b)
---------------------------------
West Coast $ - $ 46 $ -
West Coast Realty - - 132
Sacramento First - 1,372 2,955
Sunwest 5,490 9,679 5,867
---------------------------------
$ 5,490 $11,097 $ 8,954
=================================
Nonperforming loans/Total loans 6.3% 5.0% 3.2%
=================================
(a) Excludes $1,031,000 of Sacramento First loans classified as Net Assets
Held for Sale.
(b) Excludes $63,000 of WCV, Inc. loans classified in other assets as assets
held for sale.
A summary of real estate owned at December 31 follows:
(dollars in thousands) 1994(c) 1993 1992(d)
---------------------------------
West Coast $ 53 $ 433 $ -
West Coast Realty - - 325
Sacramento First - 3,229 2,831
Sunwest 4,299 4,076 12,392
---------------------------------
$ 4,352 $ 7,738 $15,548
=================================
Real estate owned/Total assets 3.3% 2.5% 4.3%
=================================
(c) Excludes $1,399,000 of Sacramento First real estate owned classified as
Net Assets Held for Sale.
(d) Excludes $606,000 of WCV, Inc. real estate owned classified in other
-43-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
assets as assets held for sale.
A summary of nonperforming assets (nonperforming loans and real estate
owned combined) at December 31 follows:
(dollars in thousands) 1994(e) 1993 1992(f)
---------------------------------
West Coast $ 53 $ 479 $ -
West Coast Realty - - 457
Sacramento First - 4,601 5,786
Sunwest 9,789 13,755 18,259
---------------------------------
$ 9,842 $18,835 $24,502
=================================
Nonperforming assets/Total assets 7.5% 6.0% 6.8%
=================================
(e) Excludes $2,430,000 of Sacramento First nonperforming assets classified
as Net Assets Held for Sale.
(f) Excludes $669,000 of WCV, Inc. nonperforming assets classified in other
assets as assets held for sale.
Total nonperforming loans decreased significantly while the percentage
of nonperforming loans to total loans increased from 1993 to 1994. This
resulted from the decrease in total loans from $220 million at December 31,
1993 to $87 million at December 31, 1994. Real estate owned totaled $15.5
million at year-end 1992 as a result of foreclosures which totaled $12.3
million in 1992. Real estate owned decreased to $7.7 million at year-end
1993 as foreclosures were $7.9 million, and $15.9 million in real estate
owned was sold or written down. The 1994 decline in real estate owned was
primarily a result of including Sacramento First in Net Assets Held for Sale.
Nonperforming assets as a percentage of total assets at Sunwest were 7.8%,
7.3% and 8.1% in 1994, 1993 and 1992, respectively.
Restructured loans which were performing in compliance with their
modified terms totaled $5,850,000 and $5,591,000 at December 31, 1994 and
1993, respectively. The Company had no restructured loans at December 31,
1992. Restructured loans totaling $605,000 were on nonaccrual status at
December 31, 1994. No such loans existed at year-end 1993 or 1992.
In general, the changes in the Company's nonperforming assets is
reflective of the current economic environment and real estate values.
OTHER OPERATING INCOME
A summary of other operating income by category is presented in NOTE 14
of the Notes to the Consolidated Financial Statements. Other operating
income decreased to $2.7 million in 1994, from $3.1 million in 1993 and $4.0
million in 1992.
From 1993 to 1994 depositor charges decreased by $254,000 as a result of
the exclusion of Sacramento First and by $268,000 from lower deposit balances
at Sunwest. Depositor charges are expected to decrease in 1995 because 1994
includes $206,000 relating to Sacramento First and average deposits are
expected to be lower at Sunwest during 1995.
The decrease in service charges, commissions and fees from 1993 to 1994
resulted from the exclusion of Sacramento First. Liquidating WCV, Inc. in
1992 caused service charges, commissions and fees to decrease from 1992 to
1993. Fee income is expected to decrease significantly in 1995 because 1994
includes $194,000 related to Sacramento First.
Gain on sale of loans were higher in 1994 versus 1993 because Sunwest
-44-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
sold its unguaranteed portion of SBA loans for a gain of $536,000. As a
result of the exclusion of Sacramento First, Sacramento First's gain on sale
decreased $481,000 from 1993 to 1994. Gain on sales of loans were
significantly lower in 1992 because a $838,000 net loss on sale of WCV,
Inc.'s loans was incurred prior to entering into a plan of liquidation. Loan
sales at WCV, Inc. were made in connection with WCV, Inc.'s planned asset
reduction. Gain on sale of loans may decrease in 1995 because 1994 included
$222,000 of gains from Sacramento First and West Coast.
The net gain on sale of premises and equipment relates to Sunwest's
conversion of a capital lease to an operating lease in December 1994.
Nonrecurring income in 1992 consisted of the $1.6 million Lloyds
Settlement.
OTHER OPERATING EXPENSES
Other operating expenses decreased significantly from 1992 to 1994. A
summary of the operating expenses is presented in NOTE 15 of the Notes to the
Consolidated Financial Statements.
A summary of other operating expenses, net of amortization of goodwill
in 1992, follows:
(dollars in thousands) 1994 1993 1992
---------------------------------
Other operating expenses $ 13,064 $23,883 $24,475
Other operating expenses/Interest
and other operating income 69.4% 84.7% 60.9%
Other operating expenses/Average assets 6.1% 7.1% 5.9%
=================================
Other operating expenses decreased by $10.8 million or 45% from 1993 to
1994. Sunwest decreased its other operating expenses by $6.7 million or 41%,
expenses for Sacramento First decreased $3.5 million or 53% and West Coast
decreased its expenses by $951,000 or 67%. Decreases occurred in every
category and typically varied from 20% to 50%. A significant exception
included the net cost of operation of real estate owned which decreased $3.4
million or 97% for the period. Sunwest accounted for $3.0 million of this
decrease primarily because it incurred net gains on the sales of real estate
owned in 1994 and had lower levels of real estate owned in 1994.
Salaries decreased by $3.7 million or 37% from 1993 to 1994. Sacramento
First's salaries decreased $1.7 million as a result of the sale, Sunwest's
salaries decreased $1.6 million from reducing staff by 37% in 1994 and West
Coast's salaries decreased by $423,000 from a reorganization in 1993. All
other expenses decreased $3.7 million or 35% from 1993 to 1994 as a result of
lower asset levels, management's cost control efforts and the exclusion of
Sacramento First.
Included in depreciation and amortization in 1992 was a $3.2 million
charge relating to goodwill arising from the 1985 acquisition of Sunwest.
The charge was recorded as a result of a determination, based in part on
continued uncertainties in the banking industry and increased regulatory
scrutiny, that the net unamortized goodwill arising from the aforementioned
acquisition had no further continuing value.
Excluding the amortization of goodwill, the decrease in other operating
expenses in 1993 resulted from salaries and employee benefits, occupancy,
depreciation and amortization, and other expenses. Offsetting increases
occurred in the net cost of operation of real estate owned and professional
services.
The increases in the net cost of operation of real estate owned
-45-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
consisted primarily from losses on sales and write-downs of real estate
owned. The increased write-downs generally reflected the economic factors
influencing real estate values. The increase in collection expenses resulted
from the high levels of nonperforming loans. Salaries and employee benefits
decreased in 1993 from the reduction in employees. Total employees have
decreased to 91 at year-end 1994 from 216 at year-end 1993 and 251 at year-
end 1992. Depreciation and amortization and occupancy decreased in 1993
because of the liquidation of WCV, Inc.
Other operating expenses are expected to decrease in 1995 because 1994
amounts included $3.1 million from Sacramento First. In addition, Sunwest is
expected to continue to reduce operating expenses.
LOSS ON LIQUIDATION OF WCV, INC.
The Company recorded a loss on the liquidation of WCV, Inc., formerly
Heritage Thrift & Loan Association, of $125,000, $550,000 and $1.5 million in
1994, 1993 and 1992, respectively, which included estimated losses on loans
and real estate owned and estimated salaries, occupancy and other operating
expenses associated with its final operations.
WCV, Inc. was substantially liquidated in 1993. Remaining activity
consists of the environmental clean-up and disposition of the sole remaining
real estate owned property and resolving a certain lease obligation.
A claim was filed with the UTS fund for reimbursement of certain direct
clean-up costs related to the contaminated property. At December 31, 1994
WCV, Inc. had paid approximately $460,000 of qualifying expenses and expects
to pay an additional $270,000 of expenses. The $730,000 of expenses have
been recorded as a loss on discontinued business because of the uncertainty
of the amount and timing of any refund. If a refund is received from the UTS
fund, this will allow WCV, Inc. to reverse the previous expenses.
LOSS ON SALE OF SACRAMENTO FIRST
West Coast entered into a definitive agreement on June 22, 1994 to sell
Sacramento First to Business & Professional Bank ("B&PB"). The sale closed
on January 20, 1995 and provided West Coast with net cash proceeds of $3.5
million and 243,000 shares of B&PB stock valued at $1.8 million. No value
was assigned to the right to receive a contingent cash payment. The sale
resulted in a loss of $2.8 million as the net cash proceeds and value of B&PB
stock was less than the book value of Sacramento First.
INCOME TAXES
A summary indicating the differences between the effective income tax
rate and the Federal statutory rate is presented in NOTE 11 of the Notes to
the Consolidated Financial Statements. The 1994, 1993 and 1992 tax benefits
were less than expected principally because of the change in the valuation
allowance for deferred taxes and the nondeductible charge-off of goodwill in
1992. The valuation allowance was increased to offset the Company's deferred
tax asset. The Company may not record a deferred tax asset for deductible
temporary differences, operating loss or tax credit carryforwards until it is
more likely than not that the tax benefits will be realized. The net state
franchise tax affected income tax benefit in 1993 and 1992.
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
subsidiary, Sunwest, are maturities of investment securities, collections on
-46-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
loans, increased deposits and temporary borrowings. The Company had loan
commitments of $13,075,000 and standby and commercial letters of credit
totaling $438,000 at December 31, 1994. The majority of outstanding loan
commitments are not expected to be drawn upon.
All the outstanding loan commitments were at Sunwest. Sunwest manages
its liquidity as well as interest rate risk through an asset and liability
management committee. The asset and liability management committee obtains
estimates from the bank's loan officers of how much of the commitments will
ultimately be funded and when. The committee reviews and evaluates these
estimates in conjunction with projections of loan and time deposit run-off,
other expected deposit fluctuations and investment maturities. The committee
uses the projections to assess liquidity and manage asset levels.
The Company's liquid asset ratio (the sum of cash, investments
available-for-sale and Federal funds sold divided by total assets) was 23% at
December 31, 1994 and 18% at December 31, 1993. The Company believes that it
has sufficient liquid resources, as well as available credit facilities, to
enable it to meet its operating needs.
The Company's cash and cash equivalents decreased by $32.2 million
during 1994. The operating activities increased cash by $3.4 million. The
$5.2 million net loss was offset by non-cash expenses, primarily the
provision for possible credit losses of $3.3 million, the net decrease in
receivables, payables and other assets of $1.9 million and a loss on
discontinued business of $2.9 million. Investing activities provided $32.8
million in cash and cash equivalent consisted primarily of loan decreases of
$45.5 million, proceeds from sales of real estate owned of $5.3 million and
proceeds from sales of loans of $4.5 million. These were offset by a $14.0
million decrease in cash and cash equivalents from the exclusion of
Sacramento First. Net cash of $68.4 million was used in financing activities
and consisted almost entirely of decreases in deposits.
THE PARENT COMPANY
West Coast's liquidity is limited. West Coast has relied on sales of
assets, borrowings from officers/directors, and management service fees and
dividends from its subsidiaries as sources of liquidity. Dividends from
subsidiaries ordinarily provide a source of liquidity to a bank holding
company. Sunwest is prohibited from paying cash dividends by an Order to
Cease and Desist ("the C&D") issued by the FDIC and an Order issued by the
California Superintendent of Banks (the "state order") without their prior
consent.
During 1994, West Coast did not receive any management fees or dividends
from its subsidiaries. West Coast does not expect to receive management fees
or dividends from its subsidiaries during 1995.
West Coast received $3.5 million of cash, net of selling expenses, from
the sale of Sacramento First. West Coast immediately transferred $3.4
million into Sunwest as a repayment of previously paid management fees.
Sales of other property are forecasted to provide $233,000 during 1995. WCV,
Inc. may be eligible for reimbursement of certain costs incurred to remediate
a property. Such amounts, if any, are unable to be determined. At December
31, 1994, West Coast had cash totaling $8,000.
West Coast anticipates cash expenditures during 1995 to consist of debt
service payments, advances to WCV, Inc. and other operating expenses. West
Coast's projected debt service for 1995 includes quarterly interest payments
on the 10% subordinated debentures of $76,000 each and an annual principal
payment on the notes payable to affiliates of $113,000. A portion of the
notes payable to affiliates are currently secured by, and scheduled to be
repaid by sales proceeds totaling $233,000 from the other property sales
mentioned above. Advances to WCV, Inc. are forecasted at $173,000 during
-47-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
1995 primarily for restoration of the real estate owned. West Coast
anticipates that other operating expenses, will be approximately $451,000
during 1995, of which $221,000 relates to salaries and directors' fees that
are currently being deferred.
A cash shortfall is anticipated unless additional cash can be raised. A
former officer of the Company has a judgment against West Coast in the amount
of $311,000 and is actively pursuing collection of the judgment. In
addition, West Coast agreed in connection with the sale of Sacramento First
to indemnify B&PB for losses in excess of $250,000 arising from breach of
certain representations and warranties made in the definitive acquisition
agreement. Management believes that all losses were adequately accrued at
Sacramento First at December 31, 1994.
West Coast may elect to raise additional cash by limiting repayments of
the affiliate debt or interest payments on the subordinated debt, and/or
incurring additional debt. West Coast may not incur debt without the
approval of the Federal Reserve Board. On March 23, 1995, West Coast sold
50,000 shares of B&PB stock. Of the total proceeds of $387,500, $200,000 was
infused as capital in Sunwest to achieve compliance with the various
regulatory orders. West Coast has requested approval from the FDIC to
receive the remaining cash. The cash is currently held by Sunwest as
collateral for West Coast's guaranty of Sunwest's capital plan. West Coast
is considering selling additional shares of B&PB stock, however pursuant to
agreement with B&PB, West Coast can sell no additional shares of B&PB during
1995 without B&PB's consent. Even if B&PB was to consent to sale of some
additional shares, proceeds of such sale would become security for West
Coast's guarantee of Sunwest's capital plan as all shares of B&PB stock and
proceeds thereof are pledged to Sunwest to secure such obligation. No
assurances can be given that the FDIC would permit Sunwest to release the
collateral to West Coast.
In the event West Coast is unable to raise funds to increase its
liquidity, West Coast may not be able to meet its current obligations and may
be forced into bankruptcy. If this event were to occur, West Coast
shareholders could suffer the elimination of the value of their investments
in the Company. See "Capital Resources and Dividends."
CAPITAL RESOURCES AND DIVIDENDS
The following table set forth the Tier 1 and total risk-based capital
and leverage ratios as of December 31, 1994 for the Company and Sunwest:
Tier 1 Total
Risk-based Risk-based
Capital Capital Leverage
Ratio Ratio Ratio
--------------------------------------
The Company 5.31% 6.92% 3.88%
Sunwest 4.95 6.24 3.59
Regulatory minimum 4.00 8.00 4.00 (a)
======================================
(a) Sunwest is subject to regulatory orders that require it to maintain a
minimum leverage ratio of 6.5%.
On January 20, 1995, Sunwest received $3.4 million from West Coast and
on March 30, 1995 Sunwest received an additional $200,000 from West Coast
increasing Sunwest's leverage ratio to above 6.5%. These capital infusions
increase Sunwest's capital ratios to amounts necessary for a depository
-48-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
institution to be deemed to be "well capitalized." However, because Sunwest
is still subject to regulatory agreements it can only be deemed "adequately
capitalized."
Management believes Sunwest is now in compliance with the 6.5% leverage
ratio as required by their regulatory agreements and orders as set forth in
the capital plan Sunwest submitted to the FDIC, pursuant to the prompt
corrective action provisions of the FDIC Improvement Act, which is guaranteed
by West Coast. 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. See "ITEM 1. BUSINESS - Effect of Governmental Policy and Recent
Legislation - Prompt Corrective Action."
The Company had no material commitments for capital expenditures as of
December 31, 1994.
ASSET AND LIABILITY MANAGEMENT
Management of assets and liabilities in terms of rate, maturity and
quality has an important effect on liquidity and net interest margin, and
rate sensitivity is of particular importance. Rate sensitivity is determined
by calculating the ratio of rate sensitive assets to rate sensitive liabil-
ities. Rate sensitivity ratios that are close to one-to-one tend to
stabilize earnings and provide a company with flexibility in managing
liquidity. Rate sensitivity ratios in which rate sensitive assets exceed
rate sensitive liabilities tend to produce an expanded net yield on interest
earning assets in rising interest rate environments and a reduced net yield
on interest earning assets in declining interest rate environments. Con-
versely, when rate sensitive liabilities exceed rate sensitive assets, the
net yield on interest earning assets generally declines in rising interest
rate environments and increases in declining interest rate environments.
However, because interest rates for different asset and liability products
offered by depository institutions respond differently to changes in the
interest rate environment, the interest sensitivity table set forth below is
only a general indicator of interest rate sensitivity.
The Company had a net asset sensitivity of $25.5 million at December 31,
1994. Market rates of interest increased dramatically during 1994, held
steady during 1993 and declined slightly during 1992. The Company's net
yield on interest-earning assets changed from 6.42% in 1992 to 6.03% in 1993
and 6.04% in 1994.
-49-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
<TABLE>
The following table sets forth the interest-earning assets and interest-
bearing liabilities of the Company on the basis of when they reprice or
mature and sets forth the rate sensitivity positions of the Company at Decem-
ber 31, 1994:
<CAPTION> Over
Two 91 181 One Year Over
Through Through Through Through Five
(dollars in thousands) Immediate 90 Days 180 Days 365 Days Five Years Years Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans $ 43,068 $ 850 $ 8,393 $ 18,755 $ 13,292 $ 2,270 $ 86,628
Investments 14,200 1,560 2,936 1,479 5,868 - 26,043
------------------------------------------------------------------------------
Total interest-earning assets $ 57,268 $ 2,410 $ 11,329 $ 20,234 $ 19,160 $ 2,270 $ 112,671
==============================================================================
INTEREST-BEARING LIABILITIES
Time certificates of deposit of
$100,000 or more $ - $ 3,354 $ 951 $ 688 $ 300 $ - $ 5,293
Time certificates of deposit
under $100,000 - 17,809 11,001 7,967 2,357 - 39,134
Other interest-bearing deposits 38,815 - - - - - 38,815
Other interest-bearing liabilities 644 - - - 3,111 171 3,926
------------------------------------------------------------------------------
Total interest-bearing liabilities $ 39,459 $ 21,163 $ 11,952 $ 8,655 $ 5,768 $ 171 $ 87,168
==============================================================================
Rate sensitivity gap $ 17,809 $ (18,753) $ (623) $ 11,579 $ 13,392 $ 2,099 $ 25,503
==============================================================================
Cumulative rate sensitivity gap $ 17,809 $ (944) $ (1,567) $ 10,012 $ 23,404 $ 25,503 $ 25,503
==============================================================================
Cumulative assets divided by liabilities 145.13% 98.44% 97.84% 112.33% 126.90% 129.26% 129.26%
==============================================================================
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K" below for consolidated financial statements filed as a part of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
SCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as hereinafter noted, the information concerning directors and
executive officers of the Company is incorporated by reference from the
sections entitled "DIRECTORS AND EXECUTIVE OFFICERS - Election of Directors
and - Compliance with Section 16(a) of the Securities Exchange Act of 1934"
of the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year. For
-50-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
information concerning executive officers of the Company, see "ITEM 4(A).
EXECUTIVE OFFICERS OF THE REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management remuneration and transactions is
incorporated by reference from the section entitled "DIRECTORS AND EXECUTIVE
OFFICERS - Compensation of Executive Officers and Directors" of the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated by reference from the section entitled
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
with management is incorporated by reference from the section entitled
"DIRECTORS AND EXECUTIVE OFFICERS - Compensation of Executive Officers and
Directors - Certain Transactions" of the Company's definitive Proxy Statement
to be filed pursuant to Regulation 14A within 120 days after the end of the
last fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
1. Consolidated Financial Statements. Reference is made to the Index
to Consolidated Financial Statements at page F-1 for a list of
financial statements filed as part of this report.
2. Financial Statement Schedules. No financial statement schedules are
included in this report on the basis that they are either
inapplicable or the information required to be set forth therein is
contained in the financial statements filed herewith.
3. Exhibits. Reference is made to the Index of Exhibits at page F-35
for a list of the exhibits filed as part of this report.
Executive Compensation Plans and Arrangements. The following
compensation plan and arrangement is filed as exhibits to this
report: None.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the
fourth quarter of 1994.
(c) Exhibits required by Item 601 of Regulation S-K. See Item 14(a) 3.
(d) Additional financial statements. Inapplicable.
-51-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
UNDERTAKING FOR REGISTRATION STATEMENT ON S-8
For the purpose of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's Registration Statement on Form
S-8 No. 33-25859 (filed December 1, 1988):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
-52-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
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, on the 29th day
of March, 1995.
WEST COAST BANCORP
(Registrant)
By /s/ John B. Joseph
----------------------
John B. Joseph
Chairman of the Board, President and
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 in the capacities and on the dates indicated.
/s/ John B. Joseph Chairman of the Board, March 29, 1995
------------------- President and
John B. Joseph Chief Executive Officer
(Principal Executive Officer)
/s/ Ronald R. White Executive Vice President March 29, 1995
------------------- and Director
Ronald R. White
/s/ Frank E. Smith Chief Financial Officer March 29, 1995
------------------- (Principal Financial
Frank E. Smith and Accounting Officer)
/s/ J. David Cheshier Director March 29, 1995
-------------------
J. David Cheshier
/s/ Dr. L. Wayne Gertmenian Director March 29, 1995
-------------------
Dr. L. Wayne Gertmenian
/s/ Thomas A. Jones Director March 29, 1995
-------------------
Thomas A. Jones
/s/ Lacy G. Marlette, Jr. Director March 29, 1995
-------------------
Lacy G. Marlette, Jr.
-53-<PAGE>
WEST COAST BANCORP
Form 10-K for the year ended December 31, 1994
ITEMS 8, 14(a)(1) and 14(a)(2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
West Coast Bancorp and Subsidiaries:
Consolidated Balance Sheets -
December 31, 1994 and 1993 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1993 and 1992 F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1994, 1993 and 1992 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992 F-5
Notes to Consolidated Financial Statements F-7
Independent Auditors' Report F-32
Responsibility for Financial Reporting F-34
All schedules are omitted because they are not applicable, not material or
because the information is included in the consolidated financial statements
or the notes thereto.
F-1<PAGE>
CONSOLIDATED BALANCE SHEETS West Coast Bancorp and Subsidiaries
(in thousands, except share data)
At December 31,
1994 1993
ASSETS -------------------------
Cash and due from banks $ 9,437 $ 18,995
Interest-bearing deposits with
financial institutions 4,028 4,377
Federal funds sold 10,200 36,800
Investment securities held-to-maturity -
approximate fair value of $5,708
and $16,612 in 1994 and 1993, respectively 5,868 16,317
Investment securities available-for-sale -
approximate fair value of $5,947 in 1994 5,947 -
Loans and direct lease financing held for sale 59 2,977
Loans 86,569 220,366
Less allowance for possible credit losses (4,649) (5,557)
-------------------------
Net loans and direct lease financing 81,920 214,809
-------------------------
Real estate owned, net 4,352 7,738
Premises and equipment, net 2,347 5,550
Net assets held for sale 5,351 -
Other assets 1,401 4,700
-------------------------
$ 130,910 $ 312,263
=========================
LIABILITIES
Deposits:
Demand, non-interest bearing $ 36,027 $ 96,053
Savings, money market and interest bearing demand 38,815 104,731
Time certificates under $100,000 39,134 68,833
Time certificates of $100,000 or more 5,293 23,333
-------------------------
Total deposits 119,269 292,950
Notes payable to affiliates 720 406
Other borrowed funds 171 441
Other liabilities 1,512 4,020
10% Convertible subordinated debentures 3,035 3,035
-------------------------
Total liabilities 124,707 300,852
-------------------------
Commitments and contingencies
Subsequent events
-------------------------
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
Securities valuation allowance (3) -
Accumulated deficit (23,994) (18,789)
-------------------------
Total shareholders' equity 6,203 11,411
-------------------------
$ 130,910 $ 312,263
=========================
(See accompanying notes to consolidated financial statements.)
F-2<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS West Coast Bancorp and Subsidiaries
(in thousands, except loss per share)
Years ended December 31,
1994 1993 1992
INTEREST INCOME -------------------------------
Loans, including fees $ 14,480 $ 23,490 $ 34,227
Federal funds sold 820 718 945
Investment securities 671 814 794
Interest-bearing deposits with banks 163 56 147
-------------------------------
Total interest income 16,134 25,078 36,113
-------------------------------
INTEREST EXPENSE
Savings, money market and interest
bearing demand deposits 1,591 2,807 3,682
Time certificate deposits under $100,000 2,162 2,944 5,864
Time certificate deposits of $100,000 or more 492 1,110 2,368
-------------------------------
Total interest on deposits 4,245 6,861 11,914
Other 490 546 661
-------------------------------
Total interest expense 4,735 7,407 12,575
-------------------------------
Net interest income 11,399 17,671 23,538
Provision for possible credit losses 3,297 8,470 5,623
-------------------------------
Net interest income after provision
for possible credit losses 8,102 9,201 17,915
Other operating income 2,683 3,110 4,045
Other operating expenses 13,064 23,883 28,006
Loss on liquidation of WCV, Inc. 125 550 1,546
Loss on sale of Sacramento First 2,788 - -
-------------------------------
Loss before income taxes (5,192) (12,122) (7,592)
Income taxes (benefit) 13 (15) (595)
-------------------------------
Net loss (5,205) (12,107) (6,997)
===============================
Net loss per common share $ (.57) $ (1.32) $ (.76)
===============================
Weighted average number of common
shares outstanding 9,193 9,185 9,169
===============================
(See accompanying notes to consolidated financial statements.)
F-3<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES West Coast Bancorp and Subsidiaries
IN SHAREHOLDERS' EQUITY
(in thousands) Retained
Common Stock Securities Earnings Share-
------------- Valuation (Accum. holders'
Shares Amount Allowance Deficit) Equity
----------------------------------------------
Balance at December 31, 1991 9,169 $30,176 $ - $ 315 $ 30,491
Net loss - - - (6,997) (6,997)
----------------------------------------------
Balance at December 31, 1992 9,169 30,176 - (6,682) 23,494
Shares issued to employee 24 24 - - 24
Net loss - - - (12,107) (12,107)
----------------------------------------------
Balance at December 31, 1993 9,193 30,200 - (18,789) 11,411
Net loss - - - (5,205) (5,205)
Change in securities
valuation allowance - - (3) - (3)
----------------------------------------------
Balance at December 31, 1994 9,193 $30,200 $ (3) $(23,994) $ 6,203
==============================================
(See accompanying notes to consolidated financial statements.)
F-4<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS West Coast Bancorp and Subsidiaries
(in thousands)
Years ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1994 1993 1992
--------------------------------
Net loss $ (5,205)$ (12,107)$ (6,997)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization,
including the write-off of
goodwill of $3,223 in 1992 821 1,081 4,699
Provision for possible credit losses 3,297 8,470 5,623
Deferred income tax benefit - - (629)
Net change in receivables, payables
and other assets 1,880 128 651
Gain on sales of loans (1,054) (825) (29)
Proceeds from sales of loans
originated for sale 5,359 10,084 15,357
Loans originated for sale (4,417) (10,423) (14,490)
Write-down of real estate owned 286 3,469 2,136
(Gain) loss on sales of real estate owned (309) (453) 42
Gain on sale of premises & equipment (144) - (6)
Loss on sale and liquidation of subsidiaries 2,913 550 1,546
--------------------------------
Net cash provided by (used in)
operating activities 3,427 (26) 7,903
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of
interest bearing balances 4,874 1,476 7,944
Purchases of interest bearing balances (5,902) (4,583) (1,459)
Proceeds from maturity of
investment securities 3,447 11,706 9,840
Purchase of investment securities (10,587) (11,914) (15,063)
Net decrease in loans 45,468 38,610 34,591
Proceeds from sales of loans 4,490 2,313 5,403
Proceeds from sales of real estate owned 5,278 11,913 3,332
Transfer cash equivalents to net
assets held for sale (14,023) - (3,349)
Proceeds from sales of premises and equipment 372 - 74
Purchases of premises and equipment (106) (614) (816)
Capital expenditures for real estate owned (491) (448) (102)
--------------------------------
Net cash provided by
investing activities 32,820 48,459 40,395
--------------------------------
(See accompanying notes to consolidated financial statements.)
F-5<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS West Coast Bancorp and Subsidiaries
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES Years ended December 31,
1994 1993 1992
--------------------------------
Net decrease in deposits (67,612) (37,893) (64,654)
Repayments of notes payable to affiliates,
subordinated debt and other borrowed funds (793) (1,559) (2,403)
--------------------------------
Net cash used in financing activities (68,405) (39,452) (67,057)
--------------------------------
(Decrease) increase in cash and
cash equivalents (32,158) 8,981 (18,759)
Cash and cash equivalents at
beginning of year 55,795 46,814 65,573
--------------------------------
Cash and cash equivalents at end of year $ 23,637 $ 55,795 $ 46,814
================================
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfer of loans to real estate owned $ 2,812 $ 6,353 $ 10,999
Assumption of notes payable upon
possession of real estate owned 931 1,523 1,255
Loans made to purchaser of real estate owned 309 1,057 433
Land transferred to prepaid rent for future
operating lease payment concessions 218 - -
Assumption of senior mortgage debt by
purchasers of real estate owned 94 - 757
Increase in other receivables from
sales of loans and real estate owned - 1,675 -
Removal of senior debt from write-off
of real estate owned - - 171
================================
(See accompanying notes to consolidated financial statements.)
F-6<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
West Coast Bancorp, through its remaining active subsidiary Sunwest
Bank, currently provides banking services in Orange County and is subject to
competition from other financial institutions. West Coast Bancorp and
Sunwest Bank are regulated by certain Federal and state agencies and undergo
periodic examinations by those regulatory authorities.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of West Coast
Bancorp, a bank holding company ("West Coast"), and its subsidiaries (the
"Company"). West Coast's significant remaining subsidiary is its wholly
owned subsidiary, Sunwest Bank ("Sunwest"). West Coast entered into an
agreement to sell its majority-owned subsidiary, Sacramento First National
Bank ("Sacramento First") on June 22, 1994. On January 20, 1995 the sale
closed and West Coast received from Business & Professional Bank ("B&PB") as
part of the sales proceeds 14.5% of its common stock. Other formerly active
subsidiaries during the periods presented were West Coast Realty Finance
("West Coast Realty") and WCV, Inc. (formerly "Heritage Thrift & Loan"). All
intercompany balances and transactions have been eliminated in consolidation.
All assets and liabilities of Sacramento First are included in "Net
assets held for sale" at December 31, 1994. Sacramento First's operating
results were included in the consolidated statements of operations for all
periods through the measurement date of June 30, 1994.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and prevailing practices within
the banking industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
West Coast's liquidity is limited. In the event West Coast is unable to
raise funds to increase its liquidity, West Coast may not be able to meet its
current obligations and may be forced into bankruptcy. If this event were to
occur, West Coast shareholders could suffer the elimination of the value of
their investments in the Company.
INTEREST BEARING DEPOSITS WITH FINANCIAL INSTITUTIONS
Interest bearing deposits with financial institutions generally
represent certificates of deposit of $100,000 or less held at other financial
institutions with FDIC insurance. At December 31, 1994 all interest-bearing
deposits with financial institutions matured in less than 1 year.
INVESTMENT SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting For Certain Investments in Debt and Equity Securities" ("SFAS
115") effective January 1, 1994 and classified a portion of its securities
portfolio as being available-for-sale.
The Company's securities portfolios include U.S. Treasury, U.S. federal
agency, and mutual fund securities. Securities are classified as available-
for-sale when the Company intends to hold the securities for an indefinite
period of time but not necessarily to maturity. Any decision to sell a
security classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities, liquidity demands, regulatory
F-7<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
capital considerations, and other similar factors. Securities available-for-
sale are carried at the lower of cost or market value. Cost is generally
adjusted for amortization of premiums and accretion of discounts to maturity
or, in the case of mortgage-backed securities, over the estimated life of the
security. Unrealized gains and losses on investment securities available-
for-sale are excluded from operations and reported as a separate component of
stockholders' equity.
Securities are classified as held-to-maturity when the Company has the
ability to hold the securities to maturity and the intent to hold them on a
long-term basis. Securities held-to-maturity are carried at cost, adjusted
for amortization of premiums and accretion of discounts to maturity or, in
the case of mortgage-backed securities, over the estimated life of the
security. The cost of securities sold is based on the specific
identification method.
The Company has no investments classified as trading securities.
LOANS AND DIRECT LEASE FINANCING HELD FOR SALE
Loans and direct financing leases held for sale are carried at the lower
of amortized cost or estimated market value in the aggregate. Net unrealized
losses are recognized in a valuation allowance by charges to income.
LOANS
Loans are reported at the principal amount outstanding, net of unearned
income. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is discontinued
when reasonable doubt exists as to the full, timely collection of interest or
principal and, generally, when a loan becomes contractually past-due by
ninety days or more with respect to principal or interest. The accrual of
interest may be continued on a loan contractually past due 90 days or more
with respect to principal or interest if the loan is in process of collection
or collection of the principal and interest is deemed probable.
When a loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed against current period income. Income
on such loans is then recognized only to the extent that cash is received and
where the future collection of principal is probable. Accruals are resumed
on loans only when, in the judgment of management, the loan is estimated to
be fully collectible. Renegotiated loans are returned to the accrual status
when the remaining loan balances, net of any charge-offs related to the
renegotiations, are estimated to be fully collectible by management.
A loan is classified as a restructured loan when certain modifications,
such as the reduction of interest rates to below market or forgiveness or
deferral of principal payments, are made to contractual terms due to a bor-
rower's financial condition. Certain restructured loan agreements call for
additional interest or principal to be paid on a deferred or contingent
basis.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and direct costs associated with lending are
netted, deferred and amortized to interest income as an adjustment to yield
over the respective lives of the loans using the interest method. The
amortization of deferred fees and costs is discontinued on loans that are
contractually 90 days delinquent. Net deferred loan fees of approximately
$371,000 and $748,000 are included as an offset to loans at December 31, 1994
and 1993, respectively.
SALES OF LOANS
The Company has realized gains from the sale of the guaranteed and
F-8<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
unguaranteed portions of "Small Business Administration" loans. When only a
portion of a loan is sold the gain or loss is recognized upon completion of
the sale (net of related commissions paid that are directly attributable to
the sale) and is based on the difference between the net sales proceeds and
the relative fair value of the portion of the loan sold versus the portion of
the loan retained.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The allowance for possible credit losses is established through a
provision for possible credit losses charged to expense. Loans and leases
are charged against the allowance for possible credit losses when management
believes that the collectibility of the principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb losses in-
herent in existing loans, leases and commitments to extend credit, based on
evaluations of the collectibility and prior loss experience. The evaluations
take into consideration such factors as changes in the nature and volume of
the portfolio; overall portfolio quality; loan concentrations; specific
problem loans, leases and commitments; and current and anticipated economic
conditions that may affect the borrowers' ability to pay.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. Material estimates relating to the determination of the
allowance for possible credit losses are particularly susceptible to
significant change in the near term. In addition, both Federal and state
regulatory agencies, as an integral part of their examination process, peri-
odically review the Company's allowance for possible credit losses. These
agencies may require the Company to recognize additions to the allowance
based on their judgment about information available to them at the time of
their examinations.
REAL ESTATE OWNED
Real estate owned consists of real estate acquired in settlement of
loans and loans accounted for as in-substance foreclosures. Real estate
owned is carried at the lower of cost or fair value, determined by current
appraisals, less selling costs. The recognition of gains and losses on sales
of real estate is dependent upon various factors relating to the nature of
the property sold, the terms of the sale and the future involvement of the
Company.
When there is indication that a borrower no longer has equity in
property collateralizing a loan and it is doubtful that equity will be
rebuilt in the foreseeable future, the property is considered repossessed in-
substance ("in-substance foreclosure"). Both in-substance foreclosure and
real estate acquired in settlement of loans are recorded at the lower of the
unpaid balance of the loan at the settlement date or estimated fair value of
the collateral less selling costs. Subsequently, valuation allowances for
estimated losses are provided against income if the carrying value of real
estate exceeds estimated fair value less selling costs. Legal fees and
direct costs, including foreclosure, appraisal and other related costs, are
expensed as incurred. While management uses currently available information
to provide for losses on real estate, future additions to the allowance may
be necessary based on future economic conditions. In addition, the regula-
tory agencies periodically review the allowance for real estate losses and
such agencies may require the Company to recognize additions to the allowance
based on information and factors available to them at the time of their
examinations.
F-9<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization which is charged to expense on a straight-line basis over
the estimated useful lives of 3 to 10 years. Premises under leasehold
improvements are amortized on a straight-line basis over the term of the
lease or the estimated useful lives of the improvements, whichever is
shorter. Expenditures for major renewals and betterments of premises and
equipment are capitalized and those for maintenance and repairs are charged
to expense as incurred.
GOODWILL
The excess of purchase price over the fair value of net assets acquired
(goodwill) in the acquisitions of Sacramento Valley Bank by Sacramento First
and of Sunwest by West Coast was amortized using accelerated and straight-
line methods over estimated useful lives of 7 and 18 years, respectively.
Goodwill arising from the acquisition of Sacramento Valley Bank was
fully amortized at December 31, 1992.
Included in the 1992 consolidated statement of operations is a charge of
approximately $3,223,000 as a result of the determination, based in part on
the continued uncertainties in the banking industry and increased regulatory
scrutiny, that the net unamortized goodwill arising from the Sunwest ac-
quisition had no further continuing value.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, investment securities with an original maturity of
less than 90 days and Federal funds sold. Generally, Federal funds are pur-
chased and sold for one-day periods. Net cash provided by operating
activities includes interest paid of $5,463,000, $7,480,000 and $13,050,000
in 1994, 1993 and 1992, respectively, and income tax refunds, net of pay-
ments, of $98,000 in 1994, $84,000 in 1993 and $325,000 in 1992.
NET LOSS PER SHARE
The employee stock options, the convertible debentures and common stock
warrants were not included in the net loss per share computations as the
effects would have been antidilutive. Primary shares approximate fully
diluted shares.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1992 consolidated financial statements
have been reclassified to conform to the 1994 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
F-10<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
for Impairment of a Loan" ("SFAS 114") and in October 1994 the FASB issued
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118").
Under the provisions of SFAS 114, a loan is considered impaired when, based
on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. SFAS 114 requires creditors to measure impairment of a loan
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the
loan, a creditor shall recognize an impairment by creating a valuation
allowance with a corresponding charge to expense. This statement also
applies to restructured loans and narrows the definition of in-substance
foreclosures such that loans probable of foreclosure are accounted for as
loans as opposed to real estate. SFAS 118 amends SFAS 114 to allow a
creditor to use existing methods for recognizing interest income on impaired
loans. In addition SFAS 118 amends certain disclosure requirements of SFAS
114. SFAS 114 and 118 apply to financial statements for fiscal years
beginning after December 15, 1994 and initial adoption is required to be
reflected prospectively. The adoption of SFAS 114 by the Company did not
have a material impact on its financial position or results of operations.
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). SFAS 115 requires that investments be classified as "held-to-
maturity", "available-for-sale" or "trading securities." The statement
defines investments in securities as "held-to-maturity" based upon a positive
intent and ability to hold those securities to maturity. Investments held-
to-maturity would be reported at amortized cost. Debt and equity securities
that are bought and held principally for the purpose of selling them in the
near term are classified as "trading securities" and would be reported at
fair value, with unrealized gains and losses included in operations. Debt
and equity securities not classified as "held-to-maturity" or "trading
securities" are classified as "available-for-sale" and would be recorded at
fair value, with unrealized gains and losses excluded from operations and
reported as a separate component of stockholders' equity, net of tax effect.
SFAS 115 is effective for fiscal years beginning after December 15, 1993.
The adoption of SFAS 115 did not have a material effect on the Company's
financial statements. The initial adoption of SFAS 115 was accounted for
prospectively as of January 1, 1994.
NOTE 2
RESTRICTED CASH BALANCES
Noninterest earning cash reserves of $1,132,000 were maintained by
Sunwest to satisfy Federal regulatory requirements at December 31, 1994.
F-11<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
NOTE 3
INVESTMENT SECURITIES
A summary of investment securities held-to-maturity at December 31, 1994
follows:
(in thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
U.S. Treasury securities and
obligations of other U.S.
Government agencies
and corporations $5,868 $ - $ (160) $ 5,708
===========================================
A summary of investment securities held-to-maturity at December 31, 1993
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
U.S. Treasury securities and
obligations of other U.S.
Government agencies
and corporations $11,051 $ 73 $ (9) $11,115
Obligations of state and
political subdivisions 4,023 229 - 4,252
Other securities 1,243 2 - 1,245
------------------------------------------
$16,317 $ 304 $ (9) $16,612
==========================================
At December 31, 1994, investment securities held-to-maturity with a book
value of $898,000 were pledged as collateral to secure court ordered and
public deposits and treasury, tax and loan accounts. Additionally,
investment securities held-to-maturity with a book value of $3,484,000 were
pledged at Sunwest as collateral for a Federal Funds line of credit with a
correspondent bank. There were no sales of investment securities held-to-
maturity during 1994, 1993 or 1992.
F-12<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
Maturities of investment securities held-to-maturity are as follows at
December 31, 1994:
Due After Due After
One Year Five Years
Due In Through Through Due After
(in thousands) One Year Five Years Ten Years Ten Years Total
---------------------------------------------------
Amortized cost $ - $ 5,868 $ - $ - $ 5,868
Estimated fair value - 5,708 - - 5,708
===================================================
At December 31, 1994 available-for-sale securities consisted of
$1,947,000 of U.S. Treasury securities and $4 million of other securities.
The unamortized cost of available-for-sale U.S. Treasury securities were
adjusted to the estimated fair value through a $3,000 charge to retained
earnings. All available-for-sale securities mature within one year and none
were pledged. There was no gain or loss recognized from sales of available-
for-sale securities during 1994.
Refer to NOTE 1 of the Notes to Consolidated Financial Statements for
information on the Company's accounting policy to classify a portion of the
securities as being available-for-sale.
NOTE 4
LOANS AND DIRECT LEASE FINANCING
A summary of loans and direct lease financing follows:
(in thousands) 1994 1993
-----------------------
Commercial $ 33,010 $ 78,462
Real estate:
Construction - 27,558
Mortgage 49,236 98,220
Installment 4,694 16,874
Unearned income, discounts and fees (371) (748)
-----------------------
$ 86,569 $ 220,366
=======================
Included in real estate mortgage loans at December 31, 1994 and 1993
were $1,298,000 and $10,385,000, respectively, of outstanding warehouse lines
of credit granted to various mortgage companies, representing approximately
2% and 5%, respectively of outstanding loan balances during each period.
Total unfunded amounts committed under warehouse lines of credit at December
31, 1994 and 1993 were $1,852,000 and $11,173,000, respectively, representing
approximately 2% and 4%, respectively, of the total amount of commitments to
extend credit and outstanding loan balances. Warehouse lines of credit are
collateralized by the assignment of mortgage notes secured by residential
properties.
Loans on which the accrual of interest had been discontinued or reduced
at December 31, 1994, 1993 and 1992 amounted to $5,414,000, $10,744,000 and
$8,796,000, respectively. If these loans had been current throughout their
terms, interest income would have increased approximately $354,000, $872,000
and $989,000 in 1994, 1993 and 1992, respectively.
Restructured loans performing in accordance with their current terms
totaled $5,850,000 and $5,591,000 at December 31, 1994 and 1993. Under the
F-13<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
original terms of the restructured loans, interest earned would have totaled
$540,000 and $648,000 for the years ended December 31, 1994 and 1993. Under
the restructured terms of the loans, interest income recorded amounted to
$439,000 and $581,000 in 1994 and 1993. The Company did not incur any
charge-offs in 1994 and charged off $605,000 in 1993 in connection with
restructured loans. Restructured loans totaling $491,000 were on non-accrual
status at December 31, 1994. No such loans existed at December 31, 1993.
The Company serviced loans for others totaling $3,340,000 and
$36,273,000 at December 31, 1994 and 1993, respectively.
Loans totaling $8,201,000 at December 31, 1994 were pledged as
collateral with the Federal Reserve Bank to secure purchases of Federal
funds. There were no purchases of Federal funds from the Federal Reserve
Bank during 1994 and 1993.
NOTE 5
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
A summary of activity in the allowance for possible credit losses
follows:
(in thousands) 1994 1993 1992
---------------------------------
Balance at beginning of year $ 5,557 $ 6,512 $ 6,935
Credits charged off (4,010) (10,334) (8,278)
Recoveries on credits previously charged off 648 909 2,232
---------------------------------
Net charge-offs (3,362) (9,425) (6,046)
Provision for possible credit losses 3,297 8,470 5,623
Transfer to net assets held for sale (843) - -
---------------------------------
Balance at end of year $ 4,649 $ 5,557 $ 6,512
=================================
NOTE 6
VALUATION ALLOWANCE FOR REAL ESTATE OWNED
A summary of activity in the valuation allowance for real estate owned
follows:
(in thousands) 1994 1993 1992
---------------------------------
Balance at beginning of year $ 3,206 $ 1,927 $ 424
Losses charged off (2,715) (2,190) (633)
Provision for estimated losses 286 3,469 2,136
---------------------------------
Balance at end of year $ 777 $ 3,206 $ 1,927
=================================
F-14<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
NOTE 7
PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
(in thousands) 1994 1993
----------------------
Premises $ 571 $ 790
Furniture, fixtures and equipment 3,469 4,904
Leasehold improvements 2,225 3,078
Property under capital leases - 3,268
----------------------
6,265 12,040
Accumulated depreciation
and amortization (3,918) (6,490)
----------------------
$ 2,347 $ 5,550
======================
NOTE 8
NET ASSETS HELD FOR SALE
Net assets held for sale primarily represents all assets and liabilities
of Sacramento First at December 31, 1994 as follows:
(in thousands) Amount
-----------
Cash and due from banks $ 7,696
Interest-bearing deposits with bank 1,278
Investment securities 15,597
Federal funds 12,200
Loans and direct financing leases, less allowance for
possible credit losses of $1,185 74,133
Real estate owned 1,399
Premises and equipment 1,905
Other assets 1,817
Deposits (105,229)
Other borrowed funds (729)
Other liabilities (986)
Minority interest (466)
Accrued loss on proposed sale of Sacramento First (2,788)
Earnings subsequent to the signing of the sale agreement (63)
Adjusted consolidated deferred tax payable as a result of the sale (413)
-----------
$ 5,351
===========
NOTE 9
OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1994 and 1993 consisted of
encumbrances by senior lien holders against real estate owned. The weighted
average rate of interest on the notes outstanding at December 31, 1994 and
1993 were 6.3% and 6.8%, respectively.
F-15<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
NOTE 10
10% CONVERTIBLE SUBORDINATED DEBENTURES
The 10% convertible subordinated debentures (the "10% debentures")
mature December 15, 1996 and have conversion prices ranging from $7.25 per
share through February 4, 1995 to $7.75 until December 15, 1996. The 10%
debentures are redeemable at the option of the Company at the principal
amount for their remaining term. Offering costs of $375,000 have been
deferred and are being amortized to expense over the life of the debentures.
Also see "Note 24 - Condensed Financial Information of Parent Company Only."
NOTE 11
INCOME TAXES
The components of income tax expense (benefit) are as follows:
(in thousands) Federal State Total
----------------------------
1994:
Current $ - $ 13 $ 13
Deferred - - -
----------------------------
$ - $ 13 $ 13
============================
1993:
Current $ - $ (15) $ (15)
Deferred - - -
----------------------------
$ - $ (15) $ (15)
============================
1992:
Current $ - $ 34 $ 34
Deferred (458) (171) (629)
----------------------------
$ (458) $ (137) $ (595)
============================
The actual income tax benefit differed from the expected Federal
statutory rate as follows:
(in thousands) 1994 1993 1992
----------------------------
Expected tax benefit at 34% $ (1,765) $(4,121) $(2,581)
Change in beginning-of-the-year balance of the
valuation allowance for deferred tax assets 1,346 5,361 1,185
Adjustment to the valuation allowance for
deferred tax assets from the sale
of Sacramento First 606 - -
Net state franchise tax (201) (1,025) (414)
Goodwill amortization - - 1,201
Other 27 (230) 14
----------------------------
$ 13 $ (15) $ (595)
============================
F-16<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are as follows:
(in thousands) 1994 1993
------------------
Deferred tax assets
Net operating loss carryforwards $ 5,090 $ 3,607
Capital loss from sale of Sacramento First 1,297 -
Loans, due to allowance for possible credit losses,
deferred loan origination fees and costs, and market
value adjustment of loans held for sale 851 995
Alternative minimum tax credit carryforwards 508 580
Real estate owned 353 1,587
Loss and expense accruals and other 335 289
General business tax credit carryforwards 130 130
------------------
Total gross deferred tax assets 8,564 7,188
Less valuation allowance (8,018) (6,672)
------------------
Net deferred tax assets 546 516
------------------
Deferred tax liabilities
Premises and equipment 530 491
Direct financing leases 16 25
------------------
Total gross deferred tax liabilities 546 516
------------------
Net deferred tax asset $ - $ -
==================
The net increases in the total valuation allowance for the years ended
December 31, 1994 and 1993 were $1,346,000 and $5,361,000, respectively.
A current income tax refund receivable of $114,000 was included in
other assets at December 31, 1993.
The Company had net operating loss carryforwards of $13.7 million for
Federal income tax purposes at December 31, 1994 which expire from 2005 to
2009 and $3.8 million for state franchise tax purposes which expire from 2008
to 2009. The Company had general business tax credit carryforwards of
$130,000 available for tax purposes at December 31, 1994 which expire from
1997 to 2000. The Company had alternative minimum tax credit carryforwards
of $194,000 available for Federal income tax purposes and $314,000 available
for state franchise tax purposes at December 31, 1994.
F-17<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
NOTE 12
STOCK OPTION PLANS
During 1984, the Company adopted a Key Employees' Incentive Stock
Option Plan (the "1983 Plan"). The 1983 Plan expired in 1993. As a result,
no new options can be issued under this Plan.
A summary of stock option transactions for the 1983 Plan follows:
Number Price
of per
Shares Share
-----------------------
Options outstanding at December 31, 1991 20,000 $ 4.25
-----------------------
Options outstanding at December 31, 1992 20,000 4.25
-----------------------
Options outstanding at December 31, 1993 20,000 4.25
Cancelled (20,000) 4.25
-----------------------
Options outstanding and exercisable at
December 31, 1994 - $ -
=======================
During 1988, the Company adopted the West Coast Bancorp 1988 Stock
Option Plan (the "1988 Plan"). The 1988 Plan provides for the grant of both
options that are incentive options, as well as options that do not qualify as
incentive options ("non-qualified options"), to purchase 1,250,000 of
authorized but unissued shares of the Company's common stock. All employees,
employee directors and non-employee directors of the Company are eligible to
receive options. Non-employee directors of the Company are only eligible to
receive non-qualified options. The 1988 Plan is administered by the Board of
Directors or a committee thereof, and such board or committee determines the
persons to whom options will be granted, the vesting schedule and the
purchase price of the common stock subject to each option, provided that such
purchase price may not be less than 100% of the fair market value of the
common stock at the time the option is granted. No options may extend more
than ten years from the date of grant. Incentive options to persons owning
more than 10% of the total combined voting power of all classes of stock of
West Coast or its affiliates shall expire not later than 5 years from the
date of grant. The 1988 Plan expires in September 1998.
F-18<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
A summary of stock option transactions for the 1988 Plan follows:
Number Price
of per
Shares Share
-----------------------
Options outstanding at December 31, 1991 552,000 .88-2.75
Granted 150,000 1.00-1.06
Canceled (37,500) 1.13-2.75
-----------------------
Options outstanding at December 31, 1992 664,500 .88-2.75
Canceled (67,500) 1.06-2.75
-----------------------
Options outstanding at December 31, 1993 597,000 .88-2.75
Canceled (182,000) 1.00-2.75
-----------------------
Options outstanding at December 31, 1994 415,000 .88-2.75
=======================
Options exercisable at December 31, 1994 280,000 $ .88-2.75
=======================
NOTE 13
RELATED PARTY TRANSACTIONS
Related party receivables and payables are summarized as follows:
Loans Notes 10%
(in thousands) Receivable Payable Debentures
----------------------------------
Balance at December 31, 1991 2,568 595 2,174
Additions 3,242 - -
Collections/payments (3,607) (72) -
Sales by holders - - (957)
----------------------------------
Balance at December 31, 1992 2,203 523 1,217
Additions 333 - -
Collections/payments (1,909) (117) -
----------------------------------
Balance at December 31, 1993 627 406 1,217
Additions - 314 -
Purchase by holders - - 600
Transfer to assets held for sale (627) - -
----------------------------------
Balance at December 31, 1994 $ - $ 720 $ 1,817
==================================
Loans receivable represents extensions of credit by Sunwest and
Sacramento First to certain of their or the Company's directors, officers
and/or companies in which they have an interest.
The notes payable are to Mr. Joseph or affiliates of Mr. Joseph and Mr.
White. Approximately $436,000 are payable to the Centennial Group, Inc.
("CGI") and its subsidiaries. These include annual principal installments
with interest due on maturity at June 30, 1996 and bear interest at prime
plus 2%. Various other notes payable are due to Mr. Joseph or affiliates of
Mr. Joseph and are due on demand or in 1996 and bear interest at prime plus
2% or 10% fixed. On December 31, 1994, prime was 8.5%.
F-19<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
The 10% debentures represent West Coast's 10% Convertible Subordinated
Debentures owned by certain officer/directors.
In the opinion of management, all transactions with related parties are
either on terms similar to transactions with nonaffiliated parties or on term
beneficial to the company as compared with similar transactions with
nonaffiliated parties.
NOTE 14
OTHER OPERATING INCOME
A summary of other operating income is as follows:
(in thousands) 1994 1993 1992
----------------------------
Depositor charges $ 1,063 $ 1,585 $ 1,444
Net gain on sales of loans 1,054 825 29
Service charges, commissions and fees 335 507 721
Net gain on sales of premises and equipment 144 - 6
Nonrecurring income - 100 1,555
Other income 87 93 290
----------------------------
$ 2,683 $ 3,110 $ 4,045
============================
F-20<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
NOTE 15
OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
(in thousands) 1994 1993 1992
----------------------------
Salaries and employee benefits $ 6,247 $ 9,969 $ 11,294
Occupancy 1,546 2,303 2,524
Depreciation and amortization, including the
write-off of goodwill of $3,223,000 in 1992 821 1,081 4,699
Regulatory fees and assessments 666 936 955
Professional services 633 925 639
Data processing 599 819 891
Collection 597 813 890
Customer service expense 353 426 508
Insurance 232 291 333
Printing and postage 179 243 330
Advertising and promotion 178 414 392
Directors fees 89 304 319
Net cost of operation of real estate owned 88 3,493 2,113
Miscellaneous 836 1,866 2,119
----------------------------
$ 13,064 $ 23,883 $ 28,006
============================
NOTE 16
LITIGATION SETTLEMENT
In 1992, Sunwest received $2,765,000 as a final settlement in an action
brought against Lloyds of London. Sunwest recorded $1,200,000 of the
settlement as a recovery of credits previously charged off, $1,555,000 as
nonrecurring income and $10,000 as a reduction of professional services.
NOTE 17
LOSS ON LIQUIDATION OF WCV, INC.
During November 1992, the Board of Directors of WCV, Inc., formerly
Heritage Thrift & Loan Association, resolved to liquidate WCV, Inc. by
selling WCV, Inc.'s loans and other assets and redeeming WCV, Inc.'s thrift
certificates as the sales of its assets took place. The liquidation of WCV,
Inc. was substantially completed in 1993. The net liability related to WCV,
Inc. of $492,000 at December 31, 1994 is included in other liabilities.
During 1992, the Company recorded a loss on liquidation of WCV, Inc. of
$1,546,000 which included $1,256,000 in operating losses incurred by WCV,
Inc. during November and December 1992 and $290,000 in estimated future oper-
ating losses. The loss consisted of estimated losses on loans and real
estate owned and estimated salaries, occupancy and other operating expenses
associated with the final operations and liquidation of WCV, Inc. In
addition to the loss accrual as of December 31, 1992, losses of $550,000 were
recorded in 1993 and $125,000 in 1994. These losses relate primarily to
expenses associated with disposition of loans and real estate owned including
one contaminated property. Approximately $660,000 of clean-up costs have
been incurred for this property through December 31, 1994 with net remaining
costs estimated at $180,000.
A claim was filed with the UTS fund for reimbursement of certain direct
cleanup costs related to the contaminated property. At December 31, 1994
F-21<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
WCV, Inc. had paid approximately $460,000 of qualifying expenses and expects
to pay an additional $270,000 of expenses. The $730,000 of expenses have
been recorded as a loss on liquidation of WCV, Inc. because of the
uncertainty of the amount and timing of any refund. If a refund is received
from the UTS fund, this will allow WCV, Inc. to reverse the previous
expenses.
WCV, Inc.'s net assets (liability) held for sale included in other
liabilities at December 31 are as follows:
(in thousands) 1994 1993
------------------
Cash and Federal funds sold $ - $ 1
Other assets 3 7
Other liabilities (479) (540)
Accrued loss on liquidation of WCV, Inc. (16) (6)
------------------
$ (492) $ (538)
==================
NOTE 18
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About
the Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values of its financial instruments. Fair value estimates,
methods and assumptions are set forth below.
CASH, INTEREST BEARING BALANCES AND FED FUNDS
The carrying values approximate fair value because of the short
maturity of these instruments.
INVESTMENT SECURITIES
For investment securities, fair value is based on quoted market prices.
LOANS AND DIRECT LEASE FINANCING
For loans and direct lease financing, fair value is estimated using
quoted market prices for similar loans. For loans and direct lease financing
for which no quoted market price is readily available and for all other loans
and direct lease financing, fair value is estimated by a method that approxi-
mates discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same maturities.
DEPOSIT LIABILITIES
The fair value of demand, savings and money market deposits is the
amount payable on demand at the reporting date. The fair value of time
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
OTHER INTEREST BEARING LIABILITIES
Other interest bearing liabilities include notes payable to affiliates,
other borrowed funds and the 10% convertible subordinated debentures. The
fair value of other interest bearing liabilities is estimated using market
rates for instruments with similar characteristics.
F-22<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
The estimated fair values of the Company's financial instruments at
December 31, 1994 are as follows:
Estimated
Carrying Fair
(in thousands) Amount Value
------------------
Financial assets
Cash, interest bearing deposits and Fed Funds $ 23,665 $ 23,665
Investment securities 11,815 11,655
Net loans and direct lease financing 81,979 81,687
Financial liabilities
Deposits 119,269 119,107
Other interest bearing liabilities 3,926 3,926
==================
The estimated fair values of the Company's financial instruments at
December 31, 1993 are as follows:
Estimated
Carrying Fair
(in thousands) Amount Value
------------------
Financial assets
Cash, interest bearing balances and Fed Funds $ 60,172 $ 60,172
Investment securities 16,317 16,612
Net loans and direct lease financing 217,786 219,364
Financial liabilities
Deposits 292,950 293,248
Other interest bearing liabilities 3,882 3,882
==================
NOTE 19
401(k) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "Plan") that covers
all employees eighteen years of age or older who have completed 500 hours of
service. Each employee eligible to participate in the Plan may contribute up
to 15% of his or her compensation, subject to certain statutory limitations.
Once an employee has completed 1,000 hours of service, the Company will match
50% of the participant's contribution until the participant's contribution
equals 6% of his or her compensation. The Company may also make an addi-
tional profit sharing contribution on behalf of the eligible employees. The
Company's contributions of approximately $86,000, $133,000, and $140,000 were
included in salaries and employee benefits in 1994, 1993, and 1992, respec-
tively.
NOTE 20
COMMITMENTS
LEASES
The Company leases certain facilities for corporate offices and branch
operations and equipment under non-concealable long-term operating leases.
Facility lease expense, net of rental income, for the years ended December
F-23<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
31, 1994, 1993 and 1992 was approximately $1,034,000, $1,530,000 and
$1,460,000, respectively.
Future minimum lease commitments under all noncancellable leases at
December 31, 1994 are as follows:
Operating
(in thousands) Leases
---------
Year ending December 31:
1995 $ 876
1996 929
1997 972
1998 947
1999 582
Thereafter 1,487
---------
Total minimum lease payments $ 5,793
=========
There were no capital leases at December 31, 1994.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company makes various commitments
and incurs certain contingent liabilities which are not reflected in the
accompanying consolidated financial statements. These commitments and
contingencies include various guarantees, commitments to extend credit and
standby and commercial letters of credit. At December 31, 1994 and 1993, the
Company had standby and commercial letters of credit of $438,000 and $952,000
outstanding and commitments to extend credit, including mortgage warehouse
lines of credit, totaling $13,075,000 and $67,594,000, respectively.
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.
Standby and commercial letters of credit and financial guarantees written are
conditional commitments issued by the Company to guaranty the performance of
a customer to a third party. 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 credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company evaluates each customer's creditworthiness on a case
by case basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation
of the counter-party. Collateral held varies but may include deposits,
accounts receivable, inventory, property, plant and equipment, motor vehicles
and real estate.
NOTE 21
CONTINGENCIES
The Company is party to various lawsuits which have arisen in the
course of business. While it is not possible to predict with certainty the
outcome of such litigation, it is the opinion of Company management, based in
part upon opinions of counsel, that the liability, if any, arising from such
lawsuits would not have a material adverse effect on the Company's
consolidated financial statements.
In addition, West Coast has an indemnification clause to B&PB included
F-24<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
in the Sacramento First sale contract that requires West Coast to indemnify
B&PB for losses in excess of $250,000 arising from breach of certain
representations and warranties made in the definitive acquisition agreement.
Management believes that all losses were adequately accrued at Sacramento
First at December 31, 1994.
NOTE 22
REGULATORY MATTERS
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted on December 19, 1991. FDICIA makes several changes to
the deposit insurance system and expands the authority of the federal
regulatory agencies to ensure that financial institutions have sound
management and adequate capital. FDICIA contains a number of measures
intended to promote early identification of management problems at depository
institutions and to ensure that regulators intervene promptly to require
corrective action by institutions with insufficient capital or inadequate
operations and managerial standards.
WEST COAST
Based upon its examination of West Coast as of September 30, 1993, the
FRB and West Coast entered into a Written Agreement that is dated April 11,
1994 (the "Agreement"). The Agreement requires West Coast to, among other
things, submit plans to improve the condition of the Company and the Banks
and to service its current debt; identify an outside director who shall
submit a report that fully documents all management and service fees paid by
the Banks since January 1, 1992 including a justification of such services
and explain how they are consistent with all applicable policies of West
Coast, and refrain from paying dividends, incurring debt, assessing or
collecting management or service fees from the Banks or engaging in financial
transactions with its affiliates in any one month in excess of $25,000
without the prior approval of the FRB.
Based upon its examination of West Coast as of September 30, 1994, the
FRB concluded that West Coast was in substantial compliance with the
Agreement.
SUNWEST
As a result of its examination as of August 23, 1991, the FDIC issued
an Order to Cease and Desist (the "C&D") against Sunwest, effective April 27,
1992 (the "Effective Date"). The C&D requires Sunwest to, among other
things, have and retain qualified management; increase its Tier 1 capital to
not less than $17,300,000 within 90 days of the Effective Date and not less
than $18,300,000 on or before December 31, 1992; achieve and thereafter
maintain a ratio of Tier 1 capital to total assets of at least 6.5% within 90
days of the Effective Date; develop and adopt plans to meet the FDIC's mini-
mum risk-based capital requirements and control overhead and other expenses;
eliminate from its books certain criticized assets to specified levels;
refrain from paying cash dividends without the prior written consent of the
FDIC and the California Superintendent of Banks ("Superintendent") and ref-
rain from increasing the amount of brokered deposits above the amount
outstanding on the Effective Date and submit to the FDIC and Superintendent a
written plan for eliminating Sunwest's reliance on brokered deposits.
In its most recent examination of Sunwest as of July 26, 1994, the FDIC
noted that Sunwest was not in full compliance with the provisions of the C&D
relating to maintaining specified levels of Tier 1 and risk-based capital and
maintaining an adequate reserve for loan losses. The FDIC also noted that,
although Sunwest has attempted to reduce overhead expenses, Sunwest is still
F-25<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
experiencing large operating losses due primarily to its high level of
classified assets and the weak local economy.
Since the examination, management of Sunwest has continued its efforts
to reduce the level of classified assets and to correct the criticism of its
reserve for loan losses. 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 capital restoration plan was accepted by
the FDIC on March 14, 1995.
To be considered "adequately capitalized," an institution must
generally have a leverage ratio of at least 4%, a Tier 1 risk-based capital
ratio of at least 4%, and a total risk-based capital ratio of at least 8%.
An institution is deemed to be "critically undercapitalized" if it has a
tangible equity ratio of 2% or less.
As a result of an examination conducted by the California State Banking
Department as of March 16, 1992, the Superintendent issued an Order effective
November 12, 1992 against Sunwest (the "State Order"). The State Order con-
tains provisions that are substantially similar to the C&D. However, it also
requires Sunwest to formulate, adopt and implement by December 31, 1992 a
comprehensive business plan for restoring Sunwest to a sound condition and
develop and implement by December 31, 1992 a month-by-month budget for 1993
and a profit plan which should include, among other things, a plan to improve
earnings.
In addition, Sunwest Bank received three orders during 1994 from the
California State Banking Department that its contributed capital was impaired
under the provisions of California Financial Code and that the Bank must
correct such impairment of its contributed capital within 60 days of the
respective order. Pursuant to California law, at December 31, 1994 a paid in
capital infusion of approximately $4,968,000 (unaudited) was required to
correct such impairment. The impairment could also be cured by an increase
in retained earnings of approximately $2 million (unaudited). Failure to
correct the capital impairment could lead to a reduction or possibly
elimination of West Coast's ownership interest in Sunwest through regulatory
action.
On January 20, 1995, Sunwest received $3.4 million from West Coast
increasing Sunwest's capital to the "well capitalized" levels. However,
because Sunwest remains subject to regulatory agreements it may only be
considered "adequately capitalized." On March 30, 1995, Sunwest received
$200,000 (unaudited) from West Coast increasing Sunwest's leverage ratio to
over 6.5%. Management believes that West Coast and Sunwest are now in
compliance with the various regulatory orders and that the capital impairment
has been cured as of March 31, 1995 (unaudited).
Although management of Sunwest has already taken certain action and is
attempting to undertake other actions to address the identified areas of
noncompliance and otherwise facilitate compliance with the C&D, the State
Order and the prompt corrective action provisions of the FDIC Improvement
Act, no assurance can be given that they will be able to comply. In any
event, compliance will be determined by the regulatory authorities. If the
FDIC determines that Sunwest is not in compliance with the C&D, and the
prompt corrective action provisions of the FDIC Improvement Act, it would
have various remedies available to it, including the power to assess civil
monetary penalties, to remove officers and directors and, ultimately, to
place Sunwest and West Coast in receivership or conservatorship. 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.
At this time, the financial impact, if any, of regulatory actions that
may result from the failure of Sunwest to maintain the minimum capital
F-26<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
requirements cannot be determined. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
NOTE 23
DIVIDEND AND ADVANCE RESTRICTIONS
The Federal Reserve Act restricts Sunwest from making loans or advances
to West Coast in excess of 10% of its capital stock and surplus. Such loans
or extensions of credit to West Coast must be secured at the time of trans-
action by collateral having a market value of 100% to 130%, depending on the
collateral, of the amount funded. No loans were permitted from Sunwest at
December 31, 1994.
Various laws and regulations limit the amount of dividends which a bank
can pay without obtaining prior approval from bank regulators. At Decem-
ber 31, 1994, Sunwest's capital levels were not high enough to permit a
dividend payment. In addition, the C&D and State Order preclude Sunwest from
paying any cash dividend without prior regulatory approval.
NOTE 24
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
Following are condensed balance sheets for West Coast Bancorp as of
December 31, 1994 and 1993 and condensed statements of operations and cash
flows for each of the years in the three-year period ended December 31, 1994:
CONDENSED BALANCE SHEETS
(in thousands) 1994 1993
----------------------
Assets
Cash and short-term investments $ 8 $ 33
Investment in:
Sunwest 5,332 7,033
Sacramento First (1) 5,351 8,477
Other assets 339 846
----------------------
$ 11,030 $ 16,389
======================
Liabilities and Shareholders' Equity
Notes payable $ 720 $ 498
10% Convertible subordinated debentures 3,035 3,035
Other liabilities 1,072 1,445
----------------------
Total liabilities 4,827 4,978
----------------------
Shareholders' equity:
Common stock 30,200 30,200
Accumulated deficit (23,997) (18,789)
----------------------
Total shareholders' equity 6,203 11,411
----------------------
$ 11,030 $ 16,389
======================
(1) 1994 balances were reported as "Net Assets Held for Sale" in the
F-27<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
Consolidated Balance Sheet.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands) 1994 1993 1992
---------------------------------
Income
Income from subsidiaries:
Management fees $ - $ 517 $ 1,504
Interest 1 4 166
Other interest income - 6 -
Other operating income 97 2 2
---------------------------------
98 529 1,672
---------------------------------
Expenses
Interest expense 392 390 393
Salaries and employee benefits 308 731 1,523
Professional services 155 266 (91)
Provision for possible credit losses (88) (44) -
Other expenses 4 422 410
---------------------------------
771 1,765 2,235
---------------------------------
Equity in undistributed net loss
of subsidiaries (1,781) (11,145) (6,108)
Loss on sale of Sacramento First (2,788) - -
Dividends from:
Bank subsidiary - 70 244
Non-bank subsidiary - 11 -
---------------------------------
Loss before income taxes (5,242) (12,300) (6,427)
Income taxes (benefit) (37) (193) 570
---------------------------------
Net loss $ (5,205) $ (12,107) $ (6,997)
=================================
F-28<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands) 1994 1993 1992
---------------------------------
Cash flows from operating activities
Net loss $ (5,205) $ (12,107) $ (6,997)
Equity in loss of subsidiaries 1,781 11,064 5,864
Loss on sale of Sacramento First 2,788 - -
---------------------------------
Net cash used in operating activities (636) (1,043) (1,133)
---------------------------------
Cash flows from investing activities
(Increase) decrease in advances
to subsidiaries (33) (85) 564
Decrease in other assets 507 39 381
---------------------------------
Net cash provided by (used in)
investing activities 474 (46) 945
---------------------------------
Cash flows from financing activities
Increases (decreases) in notes payable
and subordinated debt 222 (25) (72)
(Decrease) increase in other liabilities (85) 748 (23)
Stock granted to employee - 24 -
---------------------------------
Net cash provided by (used in)
financing activities 137 747 (95)
---------------------------------
Decrease in cash (25) (342) (283)
Cash at beginning of year 33 375 658
---------------------------------
Cash at end of year $ 8 $ 33 $ 375
=================================
(in thousands) 1994 1993 1992
---------------------------------
Supplemental schedule of non-cash
financing activities
Reclassify deferred tax payable to
net assets held for sale $ 413 $ - $ -
Transfer of real estate owned from
discontinued business - 336 -
Purchase of subsidiary common stock with
proceeds from redemption of capital
notes in 1992 - - 2,000
=================================
Supplemental disclosure of cash
flow information
Cash paid during the year for interest $ 392 $ 390 $ 393
=================================
West Coast's liquidity is limited. West Coast has relied on sales of
assets, borrowings from officers/directors, and management service fees and
dividends from its subsidiaries as sources of liquidity. Dividends from
subsidiaries ordinarily provide a source of liquidity to a bank holding
company. Sunwest is prohibited from paying cash dividends by the Order to
F-29<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
Cease and Desist ("the C&D") issued by the FDIC and an Order issued by the
California Superintendent of Banks (the "state order") without their prior
consent.
During 1994, West Coast did not receive any management fees or dividends
from its subsidiaries. West Coast does not expect to receive management fees
or dividends from its subsidiaries during 1995.
West Coast received $3.5 million of cash, net of selling expenses, from
the sale of Sacramento First. West Coast immediately transferred $3.4
million into Sunwest as a repayment of previously paid management fees.
Sales of other property are forecasted to provide $233,000 during 1995. WCV,
Inc. may be eligible for reimbursement of certain costs incurred to remediate
property. Such amounts, if any, are unable to be determined at this time.
At December 31, 1994, West Coast had cash totaling $8,000.
West Coast anticipates cash expenditures during 1995 to consist of debt
service payments, advances to WCV, Inc. and other operating expenses. West
Coast's projected debt service for 1995 includes quarterly interest payments
on the 10% subordinated debentures of $76,000 each and an annual principal
payment on the notes payable to affiliates of $113,000. A portion of the
notes payable to affiliates are currently secured by, and scheduled to be
repaid by sales proceeds totaling $233,000 from the other property sales
mentioned above. Advances to WCV, Inc. are forecasted at $173,000 during
1995 primarily for restoration of the real estate owned. West Coast
anticipates that other operating expenses, will be approximately $451,000
during 1995, of which $221,000 relates to salaries and directors' fees that
are currently being deferred.
A cash shortfall is anticipated unless additional cash can be raised. A
former officer of the Company has a judgment against West Coast in the amount
of $311,000 and is actively pursuing collection of the judgment. In
addition, West Coast agreed in connection with the sale of Sacramento First
to indemnify B&PB for losses in excess of $250,000 arising from breach of
certain representations and warranties made in the definitive acquisition
agreement. Management believes that all losses were adequately accrued at
Sacramento First at December 31, 1994. West Coast may elect to raise
additional cash by limiting repayments of the affiliate debt or interest
payments on the subordinated debt, and/or incurring additional debt. West
Coast may not incur debt without the approval of the Federal Reserve Board.
On March 23, 1995, West Coast sold 50,000 shares of B&PB stock. Of the total
proceeds of $387,500, $200,000 was infused in Sunwest as capital to achieve
compliance with the various regulatory orders. West Coast has requested
permission from the FDIC to receive the remaining cash. The cash is
currently held at Sunwest as collateral for West Coast's guaranty of
Sunwest's capital plan. West Coast is considering selling additional shares
of B&PB stock, however pursuant to agreement with B&PB, West Coast can sell
no additional shares of B&PB during 1995 without B&PB's consent. Even if
B&PB was to consent to the sale of some additional shares, proceeds of such
sale would become security for West Coast's guaranty of Sunwest's capital
plan as all shares of B&PB stock and proceeds thereof are pledged to Sunwest
to secure such obligation. No assurances can be given that the FDIC would
permit Sunwest to release the collateral to West Coast.
In the event West Coast is unable to raise funds to increase its
liquidity, West Coast may not be able to meet its current obligations and may
be forced into bankruptcy. If this event were to occur, West Coast
shareholders could suffer the elimination of the value of their investments
in the Company.
F-30<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1994, 1993, and 1992
NOTE 25
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows for the three months ended
(in thousands, except per share data):
March 31 June 30 September 30 December 31
1994 -----------------------------------------------------
Total interest income $ 5,254 $ 5,271 $ 2,913 $ 2,696
Total interest expense 1,553 1,400 892 890
Net interest income 3,701 3,871 2,021 1,806
Provision for possible
credit losses 1,272 872 895 258
Loss before income taxes (1,384) (2,025) (630) (1,153)
Net loss (1,384) (2,038) (630) (1,153)
Net loss per common share (.15) (.22) (.07) (.13)
=====================================================
1993
Total interest income $ 6,824 $ 6,381 $ 6,014 $ 5,859
Total interest expense 2,061 1,922 1,807 1,617
Net interest income 4,763 4,459 4,207 4,242
Provision for possible
credit losses 798 4,249 1,487 1,936
Loss before income taxes (1,440) (5,119) (2,459) (3,104)
Net loss (1,440) (5,126) (2,459) (3,082)
Net loss per common share (.16) (.56) (.27) (.34)
=====================================================
During the second quarter of 1994, West Coast recorded a $1.8 million loss on
the sale of Sacramento First. An additional charge of $988,000 was added
during the fourth quarter of 1994 primarily to reflect a lower valuation
basis for the B&PB stock to be received upon closing the transaction.
F-31<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
West Coast Bancorp:
We have audited the accompanying consolidated balance sheets of West Coast
Bancorp and subsidiaries (the "Company") as of December 31, 1994 and 1993,
and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform our audit to
obtain reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of West
Coast Bancorp and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in note 22 to the consolidated financial statements, the prompt
corrective action ("PCA") provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") place restrictions on any
insured depository institution that does not meet certain requirements,
including minimum capital ratios. These restrictions are based on an
institution's FDICIA defined capital category and become increasingly more
severe as an institution's capital category declines. Further, Sunwest Bank
(the "Bank"), a wholly owned subsidiary of West Coast Bancorp, is under a
Cease and Desist Order (the "Order") entered into in April 1992, which
requires, among other things, the Bank to maintain a ratio of Tier 1 capital
to total assets of at least 6.5%. The Bank has filed a capital plan with the
FDIC outlining its plans for attaining the required levels of regulatory
capital and that plan was accepted by the FDIC on March 14, 1995. In
accordance with the capital plan, West Coast Bancorp made capital
contributions of $3.4 million and $200,000 on January 20, 1995 and March 30,
1995, respectively. As a result of the $200,000 capital contribution, the
Bank believes that it is in compliance with the Order as of March 31, 1995.
However, to fully comply with the PCA provisions of FDICIA, the Bank must
maintain capital compliance for four consecutive quarters. Because the Bank
did not meet the minimum capital thresholds, as of the date of the FDIC's
most recent examination or as of December 31, 1994, to be considered
"adequately capitalized," under FDICIA or the requirements of the Order, and
due to the requirement to maintain capital compliance for four consecutive
quarters, the Bank is subject to certain operating restrictions such as
growth limitations, prohibitions on dividend payments, and increased
supervisory monitoring by the FDIC. Failure to maintain its capital ratios
in accordance with the capital plan and the Order or further declines in its
capital ratios exposes the Bank to further restrictions and regulatory
F-32<PAGE>
actions. At this time, the financial impact, if any, of regulatory actions
that may result from the failure of the Bank to maintain the minimum capital
requirements cannot be determined. Accordingly, the accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
notes 1 and 24 to the consolidated financial statements, due to certain
regulatory restrictions on the Bank's payment of dividends and management
fees to the Parent, the Parent anticipates a cash shortfall in 1995 unless
additional cash can be raised. In the event that the Parent is unable to
raise funds to increase its liquidity, the Parent may not be able to meet its
current obligations and may be forced into bankruptcy. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in note 24. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in notes 1 and 3 to the consolidated financial statements, on
January 1, 1994 the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
/s/ KPMG Peat Marwick LLP
----------------------------------
Orange County, California
March 1, 1995, except as to notes 22 and 24
to the consolidated financial statements,
which are as of March 31, 1995
F-33<PAGE>
RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements included in this report are the
responsibility of management. These statements have been prepared in
conformity with generally accepted accounting principles and include amounts
based on our best estimates and judgments. Financial information appearing
elsewhere in this report is consistent with that in the consolidated
financial statements. To meet management's responsibility for financial
reporting, internal accounting control systems and procedures are designed to
provide reasonable assurance at a reasonable cost as to the reliability of
financial records. In addition, the Company maintains a program for commu-
nicating corporate policy throughout the organization. As a further safe-
guard, an internal audit staff monitors compliance with these policies and
internal accounting control systems and procedures.
West Coast Bancorp's consolidated financial statements have been audited
by KPMG Peat Marwick LLP. In accordance with generally accepted auditing
standards, the independent auditors obtained a sufficient understanding of
the Company's internal control structure to plan their audit and determine
the nature, timing and extent of tests to be performed. The Audit Committee
of the Board of Directors meets with the independent auditors and
representatives of management, including West Coast Bancorp's internal
auditors - both jointly and separately - to discuss financial reporting
matters and audit and control functions.
/s/ Frank E. Smith /s/ John B. Joseph
------------------------------- --------------------------------
Frank E. Smith John B. Joseph
Senior Vice President and Chairman of the Board and
Chief Financial Officer President
March 1, 1995 March 1, 1995
F-34<PAGE>
EXHIBITS
Number Description Page No.
3.1 Amended Articles of Incorporation *
of West Coast, filed as Exhibit
3.1(c)
3.2 Amended Bylaws of West Coast, filed *
as Exhibit 3.2(d)
4.1 Form of 10% Convertible *
Subordinated Debenture Indenture,
including Form of 10% Convertible
Subordinated Debenture Due 1996,
filed as Exhibit 4.4(a)
4.2 Amendment No. 1 to Indenture dated *
as of October 26, 1989 by and
between West Coast and First
Interstate Bank of California,
filed as Exhibit 4.5(c)
10.1 Form of Indemnification Agreement *
entered into and between West Coast
and its directors and certain of
its officers, filed as Exhibit
10.13(a)
10.2 Form of West Coast 1988 Stock *
Option Plan, filed as Exhibit
10.14(b)
10.3 Promissory Note of West Coast dated *
as of June 30, 1991 and payable to
The Centennial Group, Inc. filed as
Exhibit 10.4(d)
10.4 Promissory Note of West Coast dated *
as of June 30, 1991 and payable to
Centennial Capital, Inc. filed as
Exhibit 10.5(d)
10.5 West Coast Bancorp 401(k) Profit *
Sharing Plan Document, Trust and
Summary Plan Description(e)
10.6 Employment Agreement by and between *
Sacramento First and John McGrath
dated as of November 18, 1993,
filed as exhibit 10.2 (f)
F-35<PAGE>
Number Description Page No.
10.7 West Coast's guaranty of Sunwest's *
1993 capital restoration plan (f)
10.8 Agreement between West Coast and *
B&PB to sell Sacramento First to
B&PB dated June 30, 1994 (h)
10.9 Promissory note of West Coast dated F-38
as of March 31, 1994 and payable to
Bedford Pension Limited Partnership
10.10 Promissory note of West Coast dated F-41
as of May 4, 1994 and payable to
Pacific Advisors Inc. Pension Plan
Trust
10.11 West Coast's commitment and F-44
guaranty of Sunwest's 1994 capital
restoration plan
10.12 West Coast's security agreement F-45
pledging B&PB stock to Sunwest Bank
21 Subsidiaries of West Coast, filed *
as Exhibit 22(e)
23 Consent of Independent Auditors F-49
27 Financial Data Schedule F-50
F-36<PAGE>
(a) to West Coast's Registration
Statement on Form S-1 (Registration
No. 33-24069) filed with the
Commission on August 31, 1988, and
which is incorporated herein by
reference
(b) to Amendment No. 1 to West Coast's
Registration Statement on Form S-1
(Registration No. 33-24069) filed
with the Commission on October 21,
1988, and which is incorporated
herein by reference
(c) to West Coast's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1989 filed with the
Commission, and which is
incorporated herein by reference
(d) to West Coast's Annual Report on
form 10-K for the fiscal year ended
December 31, 1991 filed with the
Commission, and which is
incorporated herein by reference
(e) to West Coast's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1992 filed with the
Commission, and which is
incorporated herein by reference
(f) to West Coast's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1993 filed with the
Commission, and which is
incorporated herein by reference
(g) to West Coast's Quarter Report or
Form 10-Q for the six months ended
June 30, 1994 filed with the
commission, and which is
incorporated herein by reference
* Not Applicable
F-37<PAGE>
Exhibit 10.9
PROMISSORY NOTE
Principal Loan Date Maturity
$25,000.00 05/04/1994 03/31/1996
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: West Coast Bancorp, a California
Corporation (TIN: 95-3586860)
4770 Campus Drive, Suite 100
Newport Beach, CA 92660
Lender: Pacific Advisors, Inc. Pension Plan Trust
4770 Campus Drive, Suite 250
Newport Beach, CA 92660
Principal Amount: $25,000.00
Initial Rate: 8.750%
Date of Note: May 4, 1994
PROMISE TO PAY. WEST COAST BANCORP, A CALIFORNIA CORPORATION ("Borrower")
promises to pay to PACIFIC ADVISORS, INC. PENSION PLAN TRUST ("Lender"), or
order, In lawful money of the United States of America, the principal amount
of Twenty Five Thousand & 00/100 Dollars ($25,000.00), together with interest
on the unpaid principal balance from May 4, 1994, until paid in full.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
one principal payment of $25,000.00 plus interest on March 31, 1996. This
payment due March 31, 1996, will be for all principal and accrued interest
not yet paid. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place as
Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to accrued unpaid interest,
then to principal, and any remaining amount to any unpaid collection costs
and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the BANK
OF AMERICA PRIME RATE (the "Index"). The Index is not necessarily the lowest
rate charged by Lender on its loans. If the Index becomes unavailable during
the term of this loan, Lender may designate a substitute index after notice
to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each DAY. The Index currently is 6.750% per annum. The interest rate to be
applied to the unpaid principal balance of this Note will be at a rate of
2.000 percentage points over the Index, resulting in an initial rate of
8.750% per annum. NOTICE: Under no circumstances will the interest rate on
this Note be more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower or Borrower's obligation to continue to
F-38<PAGE>
make payments under the payment schedule. Rather, they will reduce the
principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
6.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to perform promptly at the
time and strictly in the manner provided in this Note or any agreement
related to this Note, or in any other agreement or loan Borrower has with
Lender. (c) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material
respect. (d) Borrower becomes insolvent, a receiver is appointed for any
part of Borrower's property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to
take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with
Lender. (f) Any of the events described in this default section occurs with
respect to any guarantor of this Note. (g) Lender in good faith deems itself
insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately
due, without notice, and then Borrower will pay that amount. Upon Borrower's
failure to pay all amounts declared due pursuant to this section, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, do one or both of the following: (a)
increase the variable interest rate on this Note to 7.000 percentage points
over the Index, and (b) add any unpaid accrued interest to principal and such
sum will bear interest therefrom until paid at the rate provided in this Note
(including any increased rate). Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender
that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of ORANGE
County, the State of California. (Initial Here _______) Lender and Borrower
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the other. This
Note shall be governed by and construed in accordance with the laws of the
State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
COLLATERAL. This Note is secured by DEED OF TRUST DATED MARCH 31, 1994 ON
PROPERTY LOCATED AT 457 ANDRIA DRIVE, STATELINE, NV 89449.
PAST MATURITY CHARGE. An additional 6% will be assessed on the outstanding
matured balance more than 10 days past due.
F-39<PAGE>
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of
specific default provisions or rights of Lender shall not preclude Lender's
right to declare payment of this Note on its demand. Lender may delay or
forgo enforcing any of its rights or remedies under this Note without losing
them. Borrower and any other person who signs, guarantees or endorses this
Note, to the extent allowed by law, waive any applicable statute of
limitations, presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the
party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY
OF THE NOTE.
BORROWER:
WEST COAST BANCORP, A CALIFORNIA CORPORATION
By: /s/ Frank E. Smith
-----------------------------
FRANK E. SMITH, CHIEF FINANCIAL OFFICER
LENDER:
PACIFIC ADVISORS, INC. PENSION PLAN TRUST
By: /s/ John B. Jospeh
-----------------------------
Authorized Officer
F-40<PAGE>
Exhibit 10.10
PROMISSORY NOTE
Principal Loan Date Maturity
$75,000.00 03/31/1994 03/31/1996
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: West Coast Bancorp, a California Corporation (TIN: 95-3586860)
4770 Campus Drive, Suite 100
Newport Beach, CA 92660
Lender: Bedford Pension Limited Partnership
4770 Campus Drive, Suite 250
Newport Beach, CA 92660
Principal Amount: $75,000.00
Initial Rate: 8.250%
Date of Note: March 31, 1994
PROMISE TO PAY. WEST COAST BANCORP, A CALIFORNIA CORPORATION ("Borrower")
promises to pay to BEDFORD PENSION LIMITED PARTNERSHIP ("Lender"), or order,
in lawful money of the United States of America, the principal amount of
Seventy Five Thousand & 00/100 Dollars ($75,000.00), together with interest
on the unpaid principal balance from March 31, 1994, until paid in full.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
one principal payment of $75,000.00 plus interest on March 31, 1996. This
payment due March 31, 1996, will be for all principal and accrued interest
not yet paid. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place as
Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to accrued unpaid interest,
then to principal, and any remaining amount to any unpaid collection costs
and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the BANK
OF AMERICA PRIME RATE (the "Index"). The Index is not necessarily the lowest
rate charged by Lender on its loans. If the Index becomes unavailable during
the term of this loan, Lender may designate a substitute index after notice
to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each DAY. The Index currently is 6.250% per annum. The interest rate to be
applied to the unpaid principal balance of this Note will be at a rate of
2.000 percentage points over the Index, resulting in an initial rate of
8.250% per annum. NOTICE: Under no circumstances will the interest rate on
this Note be more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments under the payment schedule. Rather, they will reduce the
F-41<PAGE>
principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
6.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to perform promptly at the
time and strictly in the manner provided in this Note or any agreement
related to this Note, or in any other agreement or loan Borrower has with
Lender. (c) Borrower defaults under any loan, extension of credit,security
agreement, purchase or sales agreement, or any other agreement, in favor of
any other creditor or person that may materially affect any of Borrower's
property or Borrower's ability to repay this Note or perform Borrower's
obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect. (e)
Borrower becomes insolvent, a receiver is appointed for any part of
Borrower's property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to
take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with
Lender. (g) Any of the events described in this default section occurs with
respect to any guarantor of this Note.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately
due, without notice, and then Borrower will pay that amount. Upon Borrower's
failure to pay all amounts declared due pursuant to this section, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, do one or both of the following: (a)
increase the variable interest rate on this Note to 7.000 percentage points
over the Index, and (b) add any unpaid accrued interest to principal and such
sum will bear interest therefrom until paid at the rate provided in this Note
(including any increased rate). Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender
that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of ORANGE
County, the State of California. (Initial Here /s/ FES) Lender and Borrower
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the other. This
Note shall be governed by and construed in accordance with the laws of the
State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
COLLATERAL. This Note is secured by DEED OF TRUST DATED MARCH 31, 1994 ON
PROPERTY LOCATED AT 457 ANDRIA DRIVE, STATELINE, NV 89449.
F-42<PAGE>
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of
specific default provisions or rights of Lender shall not preclude Lender's
right to declare payment of this Note on its demand. Lender may delay or
forgo enforcing any of its rights or remedies under this Note without losing
them. Borrower and any other person who signs, guarantees or endorses this
Note, to the extent allowed by law, waive any applicable statute of
limitations, presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the
party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY
OF THE NOTE.
BORROWER:
WEST COAST BANCORP, A CALIFORNIA CORPORATION
By: /s/ Frank E. Smith
-----------------------------
FRANK E. SMITH, CHIEF FINANCIAL OFFICER
LENDER:
BEDFORD PENSION LIMITED PARTNERSHIP
By: /s/ John B. Joseph
-----------------------------
Authorized Officer
F-43<PAGE>
Exhibit 10.11
COMMITMENT AND GUARANTY
On or about October 28, 1994, Sunwest Bank, Tustin, California ("Bank"),
submitted to the Federal Deposit Insurance Corporation ("FDIC") a revised
capital restoration plan dated October 28, 1994, which plan shall be amended
by the Bank to address certain additional concerns of the FDIC. The terms of
the plan and the required amendments to be approved by the FDIC are
hereinafter collectively referred to as the "Plan." The terms of the Plan
are incorporated herein by reference and set forth the Bank's proposal, as
required under Section 38 of the Federal Deposit Insurance Act ("Act"), 12
U.S.C. Section 1831o ("Section 38"), for becoming adequately capitalized (as
such term is defined in Section 38 of the Act and Subpart B of Section 325 of
FDIC Rules and Regulations, 12 C.F.R. Section 325 ["Section 325"]).
As a condition to the approval by the FDIC of the Plan, and as required
by Section 38(e)(2)(c) of the Act, the undersigned, West Coast Bancorp,
Newport Beach, California ("West Coast"), a company which controls the Bank,
hereby guarantees and provides assurance by this Commitment and Guaranty
("Commitment"), that the Bank will comply with the Plan until such time as
the Bank has been adequately capitalized on average during each four
consecutive quarters commencing after the date hereof. In the event the Bank
fails to so comply, West Coast hereby agrees that it will pay to the Bank or
its successors or assigns, according to the terms approved by the FDIC, an
amount equal to the lesser of 5 percent of the Bank's total assets at
September 30, 1993, the date that Bank was deemed to have notice that the
Bank was undercapitalized (as such term is defined in Section 38 of the act
and Subpart B of Section 325), or the amount which is necessary to bring the
Bank into compliance with all capital standards applicable to the Bank at the
time the Bank failed to so comply. A copy of a duly certified resolution by
the Board of Directors of West Coast with respect to this Commitment is
attached hereto and incorporated herein by reference.
In consideration, West Coast provides value to the Bank and the Deposit
Insurance Fund (as such term is defined in Section 3 of the Act) by
committing, in support of the Bank's Plan, the financial strength and
resources of West Coast, its successors and assigns, the adequacy and
sufficiency of which is hereby acknowledged by the FDIC. In consideration of
this Commitment, the FDIC agrees to (1) accept the Bank's Plan, (2) forego
the right to treat the Bank as if it were significantly undercapitalized (as
such term is defined in Section 38 of the Act and Subpart B of Section 325)
as provided in Section 38(f) of the Act by its failure to submit and
implement an acceptable capital restoration plan and (3) forego any other
such action against the Bank as would be necessary under Section 38 of the
Act absent this Commitment, thereby enhancing the financial strength of West
Coast and the value to its shareholders by enhancing the financial strength
of its asset, the subsidiary Bank.
The parties specifically agree that this Commitment establishes a
binding and enforceable contractual commitment of West Coast for the benefit
of the Bank and the FDIC as insurer and administrator of the Deposit
Insurance Fund (as such term is defined in Section 3 of the Act), and upon
West Coast's failure to perform any of the obligations contained herein, the
FDIC, after notice to West Coast, may commence legal action to enforce this
Commitment either in its corporate capacity as insurer, or in its
receivership capacity in the event of the failure of the Bank, an intended
beneficiary of this Commitment.
F-44<PAGE>
It is further specifically agreed that this Commitment shall survive the
failure of the Bank, and shall continue as a binding contractual commitment
of West Coast, its successors and assigns.
West Coast waives any right to notice of and information from the FDIC
concerning the Bank's performance under the Plan prior to the Bank's failure
to comply.
This Commitment and the accompanying Security Agreement and the rights
and obligations hereunder shall be governed by and shall be construed in
accordance with the Federal law of the United States, and, in the absence of
controlling Federal law, in accordance with the laws of the State of
California.
Nothing contained herein shall preclude the FDIC from taking any other
appropriate enforcement action against the Bank, including appropriate action
under Section 38 of the Act not related to the absence of this Commitment,
and no enforcement action brought against the Bank by the FDIC shall excuse
West Coast from the obligations contained herein.
This Commitment and the accompanying Security Agreement reflect the
complete and full agreement entered among the parties and may not be
modified, released, renewed for extended in any manner except by a writing
signed by all parties.
Executed and delivered as of the 2nd day of December, 1994.
WEST COAST BANCORP SUNWEST BANK
By: /s/ John B. Joseph By: /s/ James G. LeSieur, III
-------------------- --------------------
John B. Joseph James G. LeSieur, III
Chairman of the Board President and
Chief Executive Officer
FEDERAL DEPOSIT INSURANCE CORPORATION
By: /s/ George J. Masa
------------------------------
F-45<PAGE>
Exhibit 10.12
Security Agreement
West Coast Bancorp, ("the Guarantor"), this 2nd day of December, 1994,
hereby grants unto Sunwest Bank a security interest in the property described
below and all accessions, additions, products and proceeds thereof (hereafter
referred to as "Collateral") as collateral security.
1. Description of Collateral
The following is pledged as Collateral:
All the shares of stock of Business & Professional Bank, Sacramento,
California, as and when acquired in connection with the merger (the
"Merger") of Business & Professional Bank with Sacramento First National
Bank, as well as all proceeds derived from the disposition of such stock
(the "Collateral").
2. Security Interest
Said Collateral shall after consummation of the Merger, be placed in the
possession of the Bank and shall there remain until the obligation of the
Guarantor under this Commitment and Guaranty is paid or released, or
foreclosure of the Commitment and Guaranty, whichever shall occur first.
Upon the sale or disposition of the Collateral by the Bank, all
attorney's fees and legal expenses incurred by the Bank shall be paid out of
the proceeds of the sale or disposition. The Bank shall in all instances be
entitled to recover, and the Guarantor shall be liable for, any deficiency if
the sale or disposition does not produce an amount sufficient to satisfy the
obligation secured hereby. Guarantor warrants that, except for the security
interest hereby granted, Guarantor will be on consummation of the Merger the
owner of the Collateral, free and clear of any liens, security interest,
encumbrances, or other right, title or interest of any other person, firm,
corporation except to the extent herein disclosed. Guarantor further
warrants and covenants that so long as the security interest granted exists,
it will not sell or otherwise transfer possession of the Collateral or any
interest therein without the express written consent of the Bank and the
FDIC. Guarantor further warrants and covenants that it will not voluntarily
create or permit to exist any other security interest in or other encumbrance
upon the Collateral without express written consent of the Bank.
3. Additional Covenants
Guarantor hereby agrees and consents that, with or without expressed
reservation of rights against the Guarantor, the Bank or the FDIC may release
or agree not to sue any person against whom the Guarantor has, to the Bank's
or FDIC's knowledge, a right of recourse or the Bank or FDIC may agree to
suspend the right to enforce against such person this instrument or any
Collateral, or may otherwise discharge such person. The Guarantor also
consents and agrees that any impairment of any Collateral for this instrument
shall in no event be construed to discharge or otherwise affect the
Guarantor's liability hereunder, whether said collateral be given by or on
behalf of the Guarantor or any person, firm, or corporation against whom the
Guarantor has any right of recourse. Guarantor further agrees that the Bank
shall not be bound to exhaust recourse against any endorser, surety or
guarantor; nor shall the Bank be required to realize upon any of its
Collateral before being entitled to payment in full from the Guarantor.
F-46<PAGE>
4. Preservation of Collateral
Guarantor assumes full responsibility for taking all steps necessary to
preserve the Collateral and any right with respect thereto against prior
parties. The Bank shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral if the Bank takes such action for
that purpose as Guarantor shall reasonably request in writing, but no
omissions on the part of the Bank to take any action, whether or not
requested by the Guarantor shall of itself be considered a failure to
exercise reasonable care. If the Bank returns to the Guarantor any of the
Collateral for the purpose of sale or exchange or for presentation,
collection, renewal of registration or transfer, Guarantor shall have twenty-
one (21) days from the date of delivery from the Bank within which to
accomplish such purpose or return the Collateral to the Bank. If the purpose
is accomplished within the twenty-one (21) day period, the Guarantor shall
immediately deliver to the Bank any property or monies received as a result
or in connection therewith.
5. Risk of Loss
The Guarantor shall at all times bear the risk of loss of, damage to, or
destruction of the Collateral and no such event shall release the Guarantor
from any liability hereunder.
6. Agreement of Bank
With respect to the Collateral, Bank agrees to be bound by the terms of
the Shareholder Agreement, dated as of June 22, 1994, by and between West
Coast Bancorp and Business & Professional Bank.
7. Default
The Guarantor shall be in default hereunder upon the occurrence of any
of the following events: (1) the non-payment when due of any amount or
installment under the Commitment and Guaranty; (2) the non-performance, non-
observance or breach of any promise, covenant or warranty contained herein;
(3) if any warranty, covenant, representation or statement made to the Bank
or the FDIC by the Guarantor is false or misleading in any material respect;
(4) if the Guarantor shall become insolvent, become a bankrupt, either
voluntarily or involuntarily, or if a petition for relief under any law
relating to debtors, readjudgment of indebtedness, reorganization or
composition shall be filed by the Guarantor; (5) the dissolution, termination
of existence, insolvency, assignment for the benefit of creditors or the
commencement of any bankruptcy, reorganization, receivership or insolvency
proceedings by or against the Guarantor; (6) if the Guarantor suspends usual
business; or if any governmental authority takes possession of a substantial
part of the property of the Guarantor; (7) if Guarantor does or attempts to
(a) remove or allow removal of the Collateral from the address given for the
location of the Collateral as shown on the face hereof without the express,
written consent of the Bank; (b) encumber or dispose of Collateral or any
interest therein; (c) conceal, misuse, or abuse the Collateral; or (d) use or
allow the Collateral in any manner for any purpose prohibited by law or by a
policy of insurance thereon; or (8) the Collateral or any interest therein is
attached, levied upon or seized in any legal proceedings or otherwise or held
by virtue of any lien.
Executed and delivered in Tustin, California, this 2nd day of December,
1994.
West Coast Bancorp By: /s/ John B. Joseph, Chairman
F-47<PAGE>
----------------------------- --------------------------
Guarantor John B. Joseph, Chairman
Sunwest Bank By: /s/ James G. LeSieur, III, President & CEO
----------------------------- ----------------------------------------------
Bank James G. LeSieur, III, President & CEO
By: /s/ George J. Masa
----------------------------- --------------------------
Federal Deposit
Insurance Corporation
F-48<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
West Coast Bancorp:
We consent to incorporation by reference in the registration statement (No.
33-25859) on Form S-8 of West Coast Bancorp of our report dated March 1 1995,
except as to notes 22 and 24 to the consolidated financial statements, which
are as of March 31, 1995, relating to the consolidated balance sheets of West
Coast Bancorp and subsidiaries (the "Company") as of December 31, 1994 and
1993, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1994, which report appears in the December 31, 1994
Annual Report on Form 10-K of West Coast Bancorp.
Our report dated March 1, 1995, except as to notes 22 and 24 to the
consolidated financial statements, which are as of March 31, 1995, contains
explanatory paragraphs regarding uncertainties surrounding Sunwest Bank's (a
wholly owned subsidiary of West Coast Bancorp) ability to maintain minimum
regulatory capital requirements and substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
/s/ KPMG Peat Marwick LLP
--------------------------------------------
Orange County, California
March 31, 1995
F-49<PAGE>
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<ARTICLE> 9
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 9437
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<SHORT-TERM> 720
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0
0
<OTHER-SE> (23977)
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<LOANS-NON> 5414
<LOANS-PAST> 76
<LOANS-TROUBLED> 5490
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<ALLOWANCE-OPEN> 5557
<CHARGE-OFFS> 4010
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</TABLE>
