WEST COAST BANCORP AND SUBSIDIARIES
U.S. Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from N/A to N/A
COMMISSION FILE NUMBER: 0-10897
WEST COAST BANCORP
(Exact name of small business issuer as
specified in its charter)
CALIFORNIA 95-3586860
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4770 CAMPUS DRIVE, SUITE 250
Newport Beach, California 92660-1833
(Address of principal executive offices)
(714) 442-9330
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
Number of shares outstanding of each of the issuer's
classes of common equity as of October 30, 1996:
9,168,942
Transitional Small Business Disclosure Format Yes No X
-- --
This document contains a total of 20 pages.
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in thousands, except share data) 1996 1995
------------------------
ASSETS
Cash and due from bank $ 6,274 $ 6,507
Interest-bearing deposits with
financial institutions 2,756 3,933
Investment securities held to maturity -
approximate fair value of $2,781 and
$5,616 in 1996 and 1995, respectively 2,767 5,574
Investment securities available-for-sale
at fair value 1,948 -
Federal funds sold 11,100 15,400
Loans 77,871 79,000
Less allowance for credit losses (3,124) (3,820)
-----------------------
Net loans 74,747 75,180
-----------------------
Real estate owned, net 3,305 2,637
Premises and equipment, net 1,329 1,790
Net assets held for sale - 1,452
Other assets 1,185 1,181
-----------------------
$105,411 $113,654
=======================
LIABILITIES
Deposits:
Demand, non-interest bearing $ 33,691 $ 35,983
Savings, money market & interest bearing demand 33,991 36,699
Time certificates under $100,000 15,737 22,372
Time certificates of $100,000 or more 6,667 7,608
-----------------------
Total deposits 90,086 102,662
Notes payable to affiliates 360 948
Other borrowed funds 844 599
10% convertible subordinated debentures 3,035 3,035
Other liabilities 1,075 1,124
Minority interest 4,507 -
-----------------------
Total liabilities 99,907 108,368
SHAREHOLDERS' EQUITY
Common stock, no par value - 30,000,000
shares authorized, 9,168,942 shares
issued and outstanding in 1996 and 1995 30,019 30,176
Securities valuation allowance (42) -
Accumulated deficit (24,473) (24,890)
-----------------------
Total shareholders' equity 5,504 5,286
-----------------------
$105,411 $113,654
=======================
(See accompanying notes to consolidated financial statements)
-2-
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
(in thousands, September 30, September 30,
except share data) 1996 1995 1996 1995
--------------------------------------
INTEREST INCOME
Loans, including fees $6,135 $6,549 $2,096 $2,180
Investment securities 292 490 79 149
Deposits with banks 154 251 45 89
Federal funds sold 528 663 152 255
--------------------------------------
Total interest income 7,109 7,953 2,372 2,673
INTEREST EXPENSE
Interest on deposits 1,546 2,200 467 721
Other 453 487 144 278
--------------------------------------
Total interest expense 1,999 2,687 611 999
--------------------------------------
Net interest income 5,110 5,266 1,761 1,674
Provision for credit losses (236) 214 (180) 152
--------------------------------------
Net interest income after
provision for credit losses 5,346 5,052 1,941 1,522
Other operating income 1,303 717 645 234
Other operating expenses 5,781 6,428 1,846 2,098
Gain (loss) on liquidation of WCV, Inc.149 - (3) -
Loss (gain) on sale of Sunwest shares 394 - (65) -
Minority interest expense 199 - 199 -
--------------------------------------
Income (loss) before income taxes 424 (659) 603 (342)
Income taxes 7 7 - -
--------------------------------------
Net income (loss) $ 417 $ (666) $ 603 $ (342)
======================================
Net income (loss) per common share $ .05 $ (.07) $ .07 $ (.04)
======================================
Weighted average number of common
and shares outstanding 9,169 9,185 9,169 9,169
======================================
(See accompanying notes to consolidated financial statements)
-3-
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Securities Share-
------------- Valuation Accum. holders'
(in thousands) Shares Amount Allowance Deficit Equity
--------------------------------------------
Balance at December 31, 1995 9,169 $30,176 $ - $(24,890) $5,286
Net income - - - 417 417
Change in securities
valuation allowance - - (42) - (42)
Decrease from Sunwest issuing
common stock - (157) - - (157)
--------------------------------------------
Balance at September 30, 1996 9,169 $30,019 $ (42) $(24,473) $5,504
============================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(in thousands) 1996 1995
----------------------
Cash flows from operating activities:
Net income (loss) $ 417 $(666)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 390 486
Provision for credit losses (236) 214
Net change in receivables, payables and other assets 432 202
Proceeds from sales of loans originated for sale - 1,996
Loans originated for sale - (1,863)
Gain from sales of loan, net - (126)
Write-downs of real estate owned 291 347
Gain from sales of real estate owned, net (60) (110)
Gain on discontinued businesses (149) -
Gain on sale of B&PB shares (436) -
Loss on sale of Sunwest shares 394 -
Minority interest expense 199 -
---------------------
Net cash provided by (used in) operating activities 1,242
480
(Continued)
(See accompanying notes to consolidated financial statements)
-4-
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
(in thousands) September 30,
1996 1995
Cash flows from investing activities: --------------------
Proceeds from maturity of interest bearing cash
with an original maturity greater than 90 days $ 2,760 $ 1,779
Purchases of interest bearing cash (1,583) (3,166)
Proceeds from maturity of investment securities
held to maturity 2,807 2,209
Purchase of investment securities available-for-sale (1,988) -
Net (increase) decrease in loans (1,341) 5,374
Proceeds from sales of real estate owned 1,324 3,418
Capital expenditures for real estate owned - (34)
Purchase of premises and equipment (62) (278)
Proceeds from sales of premises & equipment - 181
--------------------
Net cash provided by investing activities 1,917 9,483
Cash flows from financing activities:
Net decrease in deposits (12,576) (10,145)
Proceeds from sale of Sacramento First - 3,512
Proceeds from sale of B&PB stock 1,884 387
Proceeds from sales of Sunwest stock 3,571 -
Payments for notes payable to affiliates,
subordinated debt and other borrowed funds (608) (334)
Loan proceeds from affiliate 37 297
--------------------
Net cash used in financing activities (7,692) (6,283)
--------------------
Increase (decrease) in cash and cash equivalents (4,533) 3,680
Beginning cash and cash equivalents 21,907 23,637
--------------------
Ending cash and cash equivalents $17,374 $ 27,317
====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,033 $ 2,695
Income taxes 7 7
Supplemental schedule of non-cash investing
and financing activities:
Transfer of loans to real estate owned $ 2,010 $ 2,236
Transfer from notes payable to affiliates
to other borrowed funds 475 -
Assumption of real estate owned senior debt 213 -
Capital adjustment from Sunwest issuing new shares 157 -
Reclassification of fixed assets to other assets 133 -
Increase in premises & equipment & other
borrowed funds to establish a capital lease - 378
Reclassification of other liabilities to
other borrowed funds - 372
(See accompanying notes to consolidated financial statements)
-5-
WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements reflect all
adjustments, consisting primarily of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair
statement of the results of operations for the interim periods.
Results for the nine and three month periods ended September 30, 1996
and 1995 are not necessarily indicative of results which may be
expected for any other interim period, or for the year as a whole.
All significant intercompany balances have been eliminated.
On February 29, 1996, West Coast Bancorp ("West Coast") and Sunwest
Bank ("Sunwest") entered into an agreement with Western Acquisitions,
L.L.C. ("Western"), an affiliate of Hovde Financial, Inc., for West
Coast to sell 35 existing shares of Sunwest for $2,520,000 and for
Sunwest to issue and sell 15 new shares for $1,051,000. On September
13, 1996 the sale closed. West Coast and Western own approximately
56.5% and 43.5% of Sunwest, respectively. West Coast recorded a loss
on the sale of the 35 shares of Sunwest stock of $394,000 for the nine
months ended September 30, 1996 and a gain of $65,000 for the quarter
ended September 30, 1996. The gain on sale of the Sunwest shares
during the quarter occurred because Sunwest recorded year to date net
income in excess of $500,000 which triggered a purchase price
adjustment. West Coast will record another purchase price adjustment
in the fourth quarter of 1996 in the amount of 43.5% of Sunwest's
fourth quarter earnings or losses. The issuance of 15 new shares of
Sunwest stock resulted in a $157,000 charge to paid-in-capital at West
Coast with an offsetting amount for minority interest. This occurred
because the selling price of Sunwest stock is $72,000 per share versus
a book value of outstanding shares at September 13, 1996 of $88,572
per share.
West Coast entered into an agreement with Western on February 29,
1996, which was amended in April 1996, whereby Western would acquire
all of the remaining 213,384 shares of Business & Professional Bank
("B&PB") common stock at $8.81 per share. The sale was completed in
three phases. Phase one occurred on March 8, 1996 and resulted in
proceeds of approximately $407,000. Phase two occurred on May 28,
1996 and resulted in proceeds of $820,000. Phase three occurred on
September 17, 1996 and resulted in proceeds of $654,000.
West Coast used the $2.5 million from the sale of Sunwest stock and
$.6 million from the sale of B&PB stock to redeem the $3.1 million of
outstanding convertible subordinated debentures on October 15, 1996.
-6-
WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the prior periods
financial statements to conform to the presentation in the current
periods.
(3) NET INCOME (LOSS) PER SHARE
The stock options and 10% convertible subordinated debentures were not
included in the net income (loss) per share computations as the effect
would have been anti-dilutive because conversion prices exceeded the
market price during all periods. Fully diluted earnings (loss) per
share equals primary earnings (loss) per share.
(4) LOANS
A summary of loans follows:
September 30, December
31,
(in thousands) 1996 1995
-------------------------
Real estate mortgage loans $52,194 $ 56,959
Commercial loans not secured by real estate 23,413 20,391
Personal loans not secured by real estate 2,558 2,023
Less unearned income, discounts and fees (294) (373)
-------------------------
$77,871 $ 79,000
=========================
(5) OTHER OPERATING INCOME
A summary of other operating income follows:
Nine Months Ended Three Months Ended
September 30, September 30,
(in thousands) 1996 1995 1996 1995
------------------------------------
Depositor charges $ 442 $ 519 $ 138 $ 168
Gain on sale of B&PB stock 436 12 149 -
Interest recoveries on
charged off loans 320 - 320 -
Service charges, commissions
& fees 42 52 14 15
Net gain from sales of loans - 126 - 49
Other income 63 8 24 2
------------------------------------
$1,303 $ 717 $ 645 $ 234
====================================
-7-
WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
(6) OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
Nine Three
Months Ended Months Ended
September 30, September 30,
(in thousands) 1996 1995 1996 1995
-----------------------------------
Salaries and employee benefits $2,627 $3,048 $ 838 $ 960
Occupancy 689 717 229 142
Depreciation and amortization 390 486 109 187
Professional services 330 273 89 85
Data processing 312 294 110 94
Customer service 275 256 88 88
Net cost of operation of REO 206 187 53 20
Regulatory fees and assessments 157 279 64 87
Advertising and promotion 150 77 50 30
Stationary and supplies 91 88 29 32
Printing & postage 90 84 27 26
Insurance 75 108 25 36
Telephone and telefax 52 53 15 13
Collection 46 28 14 28
Loss from facility lease adjustment - 155 - 155
Miscellaneous 291 295 106 115
-----------------------------------
$5,781 $6,428 $1,846 $2,098
===================================
(7) CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". SFAS 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application
of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial
and servicing assets it controls and liabilities it has incurred and
derecognizes financial assets it no longer controls and liabilities that
have been extinguished. The financial-components approach focuses on the
assets and liabilities that exist after the transfer. Many of these assets
and liabilities are components of financial assets that existed prior to
the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and should
be applied prospectively. Management does not believe SFAS 125 will have a
material impact on the Company's financial condition or operations.
-8-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
The following presents management's discussion and analysis of the
consolidated financial condition and operating results of West Coast
Bancorp (as a separate entity "West Coast" and together with its
subsidiaries the "Company") for the nine and three month periods ended
September 30, 1996 and 1995. The discussion should be read in conjunction
with the Company's consolidated financial statements and the accompanying
notes appearing elsewhere in this report.
GENERAL
The Company recorded income of $417,000 or $.05 per share and $603,000 or
$.07 per share during the nine and three months ended September 30, 1996 as
compared with losses of $666,000 or $.07 per share and $342,000 or $.04 per
share during the same respective periods in 1995. The income in 1996
versus losses in 1995 occurred primarily because Sunwest had higher
earnings of $954,000.
On February 29, 1996, West Coast Bancorp ("West Coast") and Sunwest Bank
("Sunwest") entered into an agreement with Western Acquisitions, L.L.C.
("Western"), an affiliate of Hovde Financial, Inc., for West Coast to sell
35 existing shares of Sunwest for $2,520,000 and for Sunwest to issue and
sell 15 new shares for $1,051,000. On September 13, 1996 the sale closed.
West Coast and Western own approximately 56.5% and 43.5% of Sunwest,
respectively. See note 1 of the "Notes to the Consolidated Financial
Statements" for additional information on this transaction.
West Coast entered into an agreement with Western on February 29, 1996,
which was amended in April 1996, whereby Western acquired all of the
remaining 213,384 shares of B&PB common stock at $8.81 per share. See Note
1 of the "Notes to the consolidated financial statements" for additional
information on the above transactions.
West Coast used the $2.5 million from the sale of Sunwest stock and $.6
million from sale of B&PB stock to pay the $3.1 million of outstanding
convertible subordinated debentures on October 15, 1996.
The Company had total assets, loans and deposits as follows:
September 30, December 31, September 30, December 31,
1996 1995 1995 1994
(in thousands) -----------------------------------------------------
Total assets $ 105,411 $ 113,654 $ 120,570 $ 130,910
Loans 77,871 79,000 77,758 86,628
Deposits 90,086 102,662 109,124 119,269
-9-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
The $25 million reduction in total assets since December 31, 1994 resulted
from a $7 million decrease in loans, $7 million decrease in investment
securities, $5 million decrease in net assets held for sale and $4 million
decrease in cash. The decrease in total liabilities resulted primarily
from a $22 million decrease in time certificates of deposits.
RESULTS OF OPERATIONS
GENERAL
Net income increased from the first nine months of 1995 to the first nine
months of 1996 primarily because Sunwest had higher earnings of $954,000 in
1996 (this excludes the $3.4 million management fee repayment in 1995).
Additional items that resulted in a change in net income included: the
parent company recorded a $436,000 gain on sale of its B&PB stock and a
gain on discontinued business of $149,000 offset by a $394,000 loss on the
sale of Sunwest shares by West Coast and $199,000 of minority interest
expense. The year to date loss on sale of Sunwest shares was partially
offset by a purchase price adjustment (gain) because Sunwest recorded year
to date net income in excess of $500,000. West Coast will record another
purchase price adjustment in the fourth quarter of 1996 in the amount of
43.5% of Sunwest's fourth quarter earnings or losses.
NET INTEREST INCOME
Net interest income decreased $156,000 or 3% from the first nine months of
1995 to the same period in 1996 because of reduced loan and investment
securities volumes at Sunwest. For the first nine months of 1995 to the
first nine months of 1996 average loans at Sunwest decreased by $5 million
or 6% and average investment securities decreased by $4 million or 40%.
These decreases in net interest income were offset by average time deposits
decreasing by $13 million or 34% during the same period. Quarterly average
loans have been relatively stable staying in the $75-80 million range since
the third quarter of 1995.
-10-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
The following table sets forth the Company's average balance sheets, yields
on earning assets, rates paid on interest-bearing liabilities, net interest
margins and net yields on interest-earning assets for the nine and three
month periods ended September 30, 1996 and 1995 (dollars in millions):
Nine Months Ended September 30,
1996 1995
Average Yields/ Average Yields/
Balance Rates Balance Rates
----------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 76.7 10.67% $ 81.4 10.73%
Investment securities 6.3 6.13 10.7 6.13
Federal funds sold 13.0 5.44 15.1 5.83
Interest-bearing deposits
with financial institutions 3.5 5.84 5.1 6.59
----------------------------------
Total interest-earning assets 99.5 9.53 112.3 9.44
Allowance for credit losses (3.6) (4.3)
Cash and due from banks 5.8 6.6
Other assets 7.2 8.8
----------------------------------
$ 108.9 $ 123.4
==================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 25.6 5.23% $ 38.7 5.58%
Savings deposits 5.2 1.99 5.6 1.97
Interest-bearing demand deposits 32.0 1.93 33.6 1.97
Other 4.6 13.15 4.1 15.80
----------------------------------
Total interest-bearing liabilities 67.4 3.96 82.0 4.37
Minority interest .3 .-
Demand deposits 34.5 33.8
Other liabilities 1.3 1.6
Shareholders' equity 5.4 6.0
----------------------------------
$ 108.9 $ 123.4
==================================
Net interest margin 5.57% 5.08%
Net yield on interest-earning assets 6.85 6.25
(Continued)
-11-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
(Continued)
Three Months Ended September 30,
1996 1995
Average Yields/ Average Yields/
Balance Rates Balance Rates
----------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 77.5 10.82% $ 77.6 11.23%
Investment securities 5.0 6.29 9.7 6.12
Federal funds sold 11.1 5.47 17.6 5.81
Interest-bearing deposits
with financial institutions 3.3 5.50 5.3 6.74
----------------------------------
Total interest-earning assets 96.9 9.79 110.2 9.70
Allowance for credit losses (3.2) (3.5)
Cash and due from banks 5.7 6.6
Other assets 6.9 8.7
----------------------------------
$ 106.3 $ 122.0
==================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 23.1 5.07% $ 35.8 5.77%
Savings deposits 5.2 1.93 5.1 2.03
Interest-bearing demand deposits 30.8 1.94 35.9 1.99
Other 4.2 13.58 4.4 25.65
----------------------------------
Total interest-bearing liabilities 63.3 3.86 81.2 4.92
Minority interest .9 .-
Demand deposits 35.2 33.5
Other liabilities 1.5 1.5
Shareholders' equity 5.4 5.8
----------------------------------
$ 106.3 $ 122.0
==================================
Net interest margin 5.93% 4.78%
Net yield on interest-earning assets 7.27 6.08
-12-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
The increases (decreases) in interest income and expense and net interest
income resulting from changes in average assets, liabilities and interest
rates for the 1996 versus 1995 periods are summarized as follows (in
thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------------------------------
Asset/ Interest Asset/ Interest
Liability Rate Liability Rate
Changes Changes Total Changes Changes Total
------------------------------------------------------
Changes in:
Interest income $(736) $(108) $ (844) $(196) $ (105) $(301)
Interest expense (394) (294) (688) (217) (171) (388)
------------------------------------------------------
Net interest income $(342) $ 186 $ (156) $ 21 $ 66 $ 87
======================================================
The year to date decline in net interest income resulted primarily from
volume declines in average earning assets. The $5 million decline in loans
(the highest yielding assets) for the nine months ended September 30, 1996
as compared to the same period in 1995 caused the greatest decrease in net
interest income. The decline in loans resulted from the payoff or paydown
of substandard loans. The decrease in interest expense was caused by a $13
million decrease in average time deposits for the three and nine months
ended September 30, 1996 versus 1995. The decline in average time deposits
was the result of allowing out of market area deposits to run off.
For the quarter ended September 30, 1996 versus 1995 net interest income
increased despite a $16 million decrease in average assets. This resulted
because the decreases in earning assets were in the lower yielding earning
assets of fed funds, investment securities and interest-bearing cash. The
decrease in interest-bearing liabilities was primarily in time deposits,
the highest rate deposit. The net interest margin was also increased by
interest bearing liabilities decreasing $5 million greater than interest
earning assets because non-interest earning assets decreased by $3 million
and non-interest bearing liabilities (demand deposits) increased by $2
million.
Loans on which the accrual of interest had been discontinued at September
30, 1996 and 1995 amounted to $1,973,000 and $2,965,000, respectively. If
these loans had been current throughout their terms, it is estimated that
net interest income would have increased by approximately $60,000 and
$126,000 in the third quarters of 1996 and 1995, respectively. This would
have raised the net yield on interest-earning assets and the net interest
margin by approximately 25 and 46 basis points during the third quarters of
1996 and 1995, respectively.
Impaired loans have not changed significantly from the amounts reported at
December 31, 1995 except for the changes in nonaccrual loans described
above.
For the nine months ended September 30, 1996 versus 1995 the yield on
earning assets remained relatively flat, only changing from 9.44% to 9.53%.
-13-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
The rates on interest-bearing liabilities decreased for the nine months
ended September 30, 1996 versus 1995 primarily caused by a decrease in
rates on time deposits from 4.37% to 3.96%.
NONPERFORMING ASSETS AND PROVISION FOR CREDIT LOSSES
The following table summarizes the activity in the allowance for credit
losses during the periods indicated (in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
----------------------------------------
Allowance for credit losses
balance at beginning of period $3,820 $4,649 $3,093 $3,395
Charge-offs (1,002) (2,074) (11) (94)
Recoveries 657 821 337 157
----------------------------------------
Net charge-offs(recovery) (345) (1,253) 326 63
Provision for credit losses (236) 214 (180) 152
Other adjustments (1) (115) - (115) -
----------------------------------------
Allowance for credit losses
balance at end of period $3,124 $3,610 $3,124 $3,610
========================================
(1) Interest collected on charged-off loans had in prior years been
recorded as a recovery of principal on charged-off loans. These
amounts should have been recorded to other non-interest income. Prior
periods were not restated because the recoveries occurred over several
years and are not material to any individual year's total loans, charge-
offs or recoveries. An offsetting amount is included in other
operating income during the current quarter (see note 5).
All the above charge-offs and recoveries were at Sunwest. The provision
for credit losses was $450,000 lower during the nine months ended September
30, 1996 than in the same respective period in 1995, reflecting the
decreases in net charge-offs and nonperforming loans. Recoveries increased
during the quarter ended September 30, 1996 from one individual recovery
that totaled $180,000. The negative provision for credit losses in 1996
resulted primarily from reducing the allowance for credit losses in
recognition of this recovery.
Management believes that the allowance for credit losses at September 30,
1996 of $3,124,000 or 4.01% of loans was adequate to absorb known and
inherent risks in the Company's credit portfolio. No assurance can be
given that economic condition which may adversely effect the Company's
service area or other circumstances will not be reflected in increased
provisions for credit losses in the future.
-14-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
A summary of nonperforming assets follows (dollars in thousands):
September 30, December 31, September 30,
December 31,
1996 1995 1995 1994
-------------------------------------------------
Nonaccrual loans $ 1,973 $ 4,153 $2,965 $ 5,414
Loans 90 days past due
and still accruing 58 25 54 76
-------------------------------------------------
Nonperforming loans 2,031 4,178 3,019 5,490
Real estate owned 3,305 2,637 2,967 4,352
-------------------------------------------------
Nonperforming assets $ 5,336 $ 6,815 $5,986 $ 9,842
=================================================
Nonperforming loans/
Total loans 2.61% 5.29% 3.88% 6.34%
Nonperforming assets/
Total assets 5.06 6.00 4.96 7.52
=================================================
Nonperforming assets have decreased from $9.8 million at December 31, 1994
to $5.3 million at September 30, 1996. While the levels of nonperforming
assets as a percentage of assets have improved since December 31, 1994,
they remain high. This was primarily caused by the current economic
environment and depressed real estate values in southern California. While
significant progress in reducing nonperforming assets has been made, until
such time as the current economic environment and real estate values
improve, the Company may continue to experience moderately high levels of
nonperforming assets and charge-offs.
Restructured loans which were performing substantially in accordance with
their modified terms totaled $2,514,000 at September 30, 1996.
Restructured loans totaling $1,258,000 were on nonaccrual status at
September 30, 1996.
OTHER OPERATING INCOME
Other operating income increased by $586,000 for the nine months ended
September 30, 1996 as compared with the same period in 1995. See notes (1)
and (5) of the notes to consolidated financial statements. The increase
was a result of West Coast recording a $436,000 gain on sale of B&PB stock
in 1996 versus a $12,000 gain in 1995. In 1996, Sunwest recognized
$320,000 of interest recoveries on loans previously charged-off in prior
years. One individual borrower accounted for $206,000 of the recoveries.
Gain on sale of loans decreased $126,000 as Sunwest has elected not to sell
the guaranteed portion of SBA loans in 1996. The remaining decrease was
caused by lower deposit balances.
-15-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
OTHER OPERATING EXPENSES
Other operating expenses have decreased $647,000 from the nine months ended
September 30, 1996 to the same period in 1995. See notes (1) and (6) of the
notes to consolidated financial statements. Total other operating expenses
expressed in dollars and as a percentage of total revenues and average
assets follows (dollars in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
--------------------------------------
Other operating expenses $5,781 $6,428 $1,846 $2,098
Other operating expenses
(annualized)/average assets 7.08% 6.95% 6.95% 6.88%
Other operating expenses/interest
and other operating income 68.7% 74.1% 61.2% 72.2%
======================================
Salaries decreased $421,000 for the nine months ended September 30, 1996
versus the same period in 1995. Salaries decreased at Sunwest by $352,000
for the nine month period as a result of steady reductions in staff,
primarily from not replacing employees who leave voluntarily. The
remaining salary decrease was at West Coast and resulted from a bonus
accrual during 1995 solely for the benefit of John B. Joseph, President and
Chairman of West Coast because West Coast completed the sale of Sacramento
First and Sunwest achieved a 6.5% leverage ratio. Sunwest incurred a
$155,000 loss on facility lease adjustment in 1995 from reclassifying a
lease from an operating lease to capital lease during the third quarter of
1995. Regulatory fees and assessments decreased by $122,000 primarily from
a rate reduction by the Federal Deposit Insurance Corporation.
Depreciation expense decreased $96,000 from assets becoming fully
depreciated combined with a historically low amount of asset purchases
during the current and prior year. Advertising and promotion increased by
$73,000 for the nine months ended September 30, 1996 versus 1995 because of
a return to actively advertising Sunwest in the local market. Professional
services increased by $57,000 because the internal audit function was
outsourced beginning in July 1995.
INCOME TAXES
Due to the sale of Sunwest minority shares, Sunwest is required to file a
tax return on a stand-alone basis versus previously being consolidated with
the Company's return. The Company and Sunwest did not recognize any
significant income tax expense or benefit during the nine or three months
ended September 30, 1996 or 1995. Sunwest has approximately $9.9 million
of net operating loss carryforwards for which a tax benefit may be
recognized in the future. Excluding the Sunwest amounts, the Company has
$3.7 million of net operating loss carryforwards for which a tax benefit
may be recognized in the future.
-16-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
For all the periods presented a valuation allowance has been recorded to
offset the deferred tax assets of Sunwest and the Company. The valuation
allowance was established due to uncertainty of future earnings at both
Sunwest and the Company. Recent earnings trends may allow Sunwest and the
Company to recognize a deferred income tax asset and corresponding tax
benefit in earnings in 1996. No deferred income tax asset or liability was
recognized at September 30, 1996.
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 for Sunwest are
maturities of investment securities and loans, collections on loans,
increased deposits and temporary borrowings. The Company's liquid asset
ratio (the sum of cash, investments available-for-sale (excluding pledged
amounts) and Federal funds sold divided by total assets) was 17% at
September 30, 1996 and 19% at December 31, 1995. The Company believes it
has sufficient liquid resources, as well as available credit facilities, to
enable it to meet its operating needs.
THE PARENT COMPANY
West Coast's liquidity is limited. West Coast has relied on sales of
assets and borrowings from officers/directors 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
without the prior consent of the regulatory agencies. During the first
nine months of 1996 West Coast did not receive any dividends from its
subsidiaries. West Coast does not expect to receive dividends from its
subsidiaries throughout 1996.
West Coast's primary sources of cash during 1996 have been from sales of
its B&PB stock and Sunwest stock. During the first nine months of 1996,
West Coast received $1.8 million of cash from the sale of its B&PB stock.
West Coast sold 35 shares of Sunwest stock for $2.5 million on September
13, 1996. Advances from WCV, Inc. provided approximately $120,000 of cash
during the first nine months of 1996 because of refunds received from the
California Underground Storage Tank Fund exceeded payments for the
restoration of the real estate owned. Additional refunds will be used to
pay for current and future amounts due for restoration of the property. At
September 30, 1996, West Coast had cash totaling $3,904,000.
-17-
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
West Coast anticipates cash expenditures during 1996 to consist of debt
service payments and other operating expenses. West Coast repaid other
borrowed funds totaling $185,000 in April 1996, made payments on notes
payable to affiliates totaling $150,000 during June 1996 and $365,000
during October 1996. A payment for the subordinated debenture redemption
plus interest totaling $3,060,000 was made in October 1996. Payments of
deferred directors fees and salaries may occur based on cash availability.
West Coast anticipates that other operating expenses will be approximately
$70,000 during 1996, of which $50,000 relates to salaries and directors'
fees that are currently being deferred.
CAPITAL RESOURCES AND DIVIDENDS
Sunwest had a 12.23%, 13.51% and 9.79% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at September 30, 1996, respectively.
These are above the regulatory minimums of 4.00%, 8.00% and 4.00%,
respectively and above the regulatory orders that require Sunwest to
maintain a minimum leverage ratio of 6.5%. Sunwest's capital ratios are
above amounts necessary for a depository institution to be deemed to be
"Well Capitalized." However, because Sunwest is still subject to a written
regulatory agreement it can only be deemed "Adequately Capitalized."
A concurrent examination of Sunwest was completed by the FDIC and State
Banking Department during the third quarter of 1996. The State Banking
Department subsequently notified Sunwest that its Order has been terminated
due to continued improvement of the bank. The FDIC has notified Sunwest
that its Cease and Desist order will be terminated pending approval of an
informal administrative action.
The Company had no material commitments for capital expenditures as of
September 30, 1996.
-18-
WEST COAST BANCORP AND SUBSIDIARIES
SEPTEMBER 30, 1996
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------------
NONE
Item 2. Changes in Securities
- -----------------------------------
NONE
Item 3. Defaults Upon Senior Securities
- ---------------------------------------------
NONE
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------------
NONE
Item 5. Other Information
- -------------------------------
NONE
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule for September 30, 1996
(b) Reports on Form 8-K
A report for the partial sale of Sunwest shares was filed on September
30, 1996 reported under Item 2 - Acquisition and Disposition of
Assets. West Coast sold 35 existing shares of Sunwest stock and
Sunwest issued and sold 15 shares of stock, both on September 13, 1996
and to Western Acquisitions, L.L.C.
A report was filed on October 29, 1996 under Item 4 - Changes in
Registrant's Certifying Accountant. This announced that KPMG Peat
Marwick LLP was terminated as the Company's independent accountants
and that Arthur Andersen LLP was approved by the Company's board of
directors as the new independent accountants on October 22, 1996.
An amendment to the report filed on October 29, 1996 under Item 4 -
Changes in Registrant's Certifying Accountant was filed November 8,
1996. The amendment outlined a disagreement in the application of an
accounting principle at the Registrant's Subsidiary in 1995.
-19-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
WEST COAST BANCORP
/s/John B. Joseph November 13, 1996
----------------------------------------- ----------------------
John B. Joseph Date
Chief Executive Officer
/s/Frank E. Smith November 13, 1996
----------------------------------------- ----------------------
Frank E. Smith Date
Chief Financial Officer
-20-
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