U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT UNDER 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
(Name of Small Business Issuer 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 Offices) (Zip Code)
(714) 442-9330
Issuer's Telephone Number, Including Area Code
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, No Par Value
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
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB.[X]
Total revenues for the most recent fiscal year: $11,030,000.
As of February 28, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $6,693,000 based upon the
last sale price on such date.
Number of shares of Common Stock of the registrant outstanding as of
February 28, 1997: 9,168,942
Transitional Small Business Disclosure Format: YES NO X
Documents Incorporated by Reference
Part III of this Form 10-KSB is incorporated by reference from registrant's
definitive proxy statement which will be filed within 120 days of the fiscal
year ended December 31, 1996.
This document contains a total of 65 pages.
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
TABLE OF CONTENTS
Page
PART I
Item 1 Business 3
Item 2 Properties 20
Item 3 Legal Proceedings 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 4(A) Executive officers of the registrant 20
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 21
Item 6 Management's Discussion and Analysis 22
Item 7 Financial Statements 29
Item 8 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 29
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons 30
Item 10 Executive Compensation 30
Item 11 Security Ownership of Certain Beneficial Owners and
Management 30
Item 12 Certain Relationships and Related Transactions 30
PART IV
Item 13 Exhibits, List and Reports on Form 8-K 30
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
PART I
ITEM 1. BUSINESS
Certain matters discussed in this Annual Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market and
statements regarding the Company's mission and vision. The Company's actual
results, performance, or achievements may differ significantly from the results,
performance, or achievements expressed or implied in such forward-looking
statements. For discussion of the factors that might cause such a difference,
see "ITEM 1. BUSINESS - Summary of Business Considerations and Other Factors
That May Affect Future Results of Operations and/or Stock Price."
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 primary
subsidiary is Sunwest Bank ("Sunwest"). On February 29, 1996, West Coast and
Sunwest entered into an agreement with Western Acquisitions, L.L.C. and Western
Acquisition Partners, L.P., (collectively, "Western"), affiliates of Hovde
Financial, Inc., for West Coast to sell 35 outstanding shares of Sunwest common
stock owned by West Coast for $2,520,000 and for Sunwest to issue and sell 15
new shares of common stock for $1,051,000. On September 13, 1996 the sale
closed. As a result of these transactions West Coast and Western own
approximately 56.5% and 43.5% of Sunwest, respectively.
West Coast's sale of the 35 outstanding shares of Sunwest's common shares
included a purchase price adjustment based on Sunwest's financial performance
through December 31, 1996. Based on Sunwest's performance, an additional
$493,000 was paid from Western to West Coast in February 1997. West Coast
recorded a loss on the sale of the 35 shares of Sunwest stock of $246,000 during
1996. This occurred because the selling price of Sunwest stock was less than the
book value of outstanding shares at September 13, 1996.
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, shares of B&PB common stock
equivalent to 14.5% of B&PB's then outstanding common stock and the right to
receive a contingent cash payment. The stock was included in Net Assets Held for
Sale in the accompanying balance sheet. The B&PB stock was sold during 1995 and
1996. The first contractual due date for the contingent cash payment is in 1998.
Sacramento First's operating results were not included in the consolidated
financial statements for any of the periods presented in the accompanying
financial statements. The only other remaining subsidiary with activity during
the periods was WCV Inc. Its activity was limited to the restoration of one
remaining property.
West Coast also currently has six other direct and indirect wholly-owned
subsidiaries which are either in the process of liquidation 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 Company had net income of $874,000 or $.10 per share in 1996, as
compared with a net loss of $339,000 or $.04 per share in 1995.
West Coast is subject to a regulatory agreement with the regulatory
authorities. See "ITEM 1. - BUSINESS Supervision And Regulation - "West Coast's
Regulatory Agreement" and "Termination of Sunwest's Regulatory Orders" and "Note
16 of the Notes to the Consolidated Financial Statements."
SUBSIDIARIES
Sunwest Bank
Sunwest commenced operations as a California state-chartered bank in 1970
and is the oldest commercial bank founded in Orange County, California. West
Coast acquired Sunwest in June 1985. At December 31, 1996, Sunwest had total
consolidated assets of $108,413,000 total consolidated loans and leases of
$82,657,000 and total consolidated deposits of $96,003,000. For the year
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
ended December 31, 1996, Sunwest had net income of $1,683,000. Minority
shareholders interest reduced the net income to the Company by $510,000.
Sunwest presently has three banking offices within Orange County,
California. The main office is located in Tustin at 535 East First Street.
Sunwest's two branch offices are located at 4770 Campus Drive, Newport Beach and
501 South Main Street, Orange.
Through its network of banking offices, Sunwest emphasizes personalized
service combined with services primarily directed to small and medium-sized
businesses and professionals. Although Sunwest focuses its marketing of services
to businesses and professionals, a wide range of consumer banking services are
made available to its customers.
Sunwest 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.
Sunwest 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. Sunwest originates loans ("SBA Loans") that are
guaranteed under the Small Business Investments Act and in the past has sold SBA
Loans in the secondary market. Sunwest currently retains SBA Loans in its
portfolio.
Sunwest 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 facilities,
merchant windows, ACH origination's, on-line banking for business customers,
traveler's checks, safe deposit, Mastercard and Visa merchant deposit services,
and computer accounting services, which include payroll and escrow accounting
services. Sunwest currently does not operate a trust department.
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.
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 1992, the Company 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. 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
has no assets, revenues and earnings for the periods presented.
Centennial Beneficial Loan Company
Centennial Loan was organized in March 1981 and engaged in limited loan
servicing activities. Centennial Loan is inactive and has no assets, revenues
and earnings for the periods presented.
COMPETITION
The banking and financial services business in California generally, and in
Sunwest's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. Sunwest competes for loans,
deposits and customers for financial services with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, credit
unions, and other nonbank financial service providers. Many of these competitors
are much larger in total assets and capitalization, have greater access to
capital markets and offer a broader array of financial services than Sunwest. In
order to compete with the other financial services providers, Sunwest
principally relies upon local promotional activities, personal relationships
established by officers, directors and employees with its customers, and
specialized services tailored to meet its customers' needs. In those instances
where Sunwest is unable to accommodate a customer's needs, Sunwest may arrange
for those services to be provided by its correspondents. Neither the deposits
nor loans of the Bank exceed 1% of
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
all financial services companies located in the market area in which Sunwest
operates.
EFFECT OF GOVERNMENTAL POLICIES
AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Company on its deposits and its
other borrowings and the interest rate received by the Company on loans extended
to its customers and securities held in its portfolio comprises the major
portion of the Company's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Company. Accordingly, the earnings
and growth of the Company are subject to the influence of domestic and foreign
economic conditions, including inflation, recession and unemployment.
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 institutions 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 services providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial services provider are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major legislative changes and the impact such changes
might have on the Company is impossible to predict. See "ITEM 1. BUSINESS -
Supervision And Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of the Company and the Bank. The description does
not purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
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 "BHCA"). West Coast
is required to file with the Federal Reserve Board semi-annually and annual
reports and such additional information as the Federal Reserve Board may require
pursuant to the BHCA. 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
of 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. Further, West Coast is required
by the Federal Reserve Board to maintain certain levels of capital. See "ITEM 1.
BUSINESS - Supervision and Regulation - 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 the Company and another bank holding company.
West Coast is prohibited by the BHCA, 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, West Coast, subject to the prior approval
of the Federal Reserve Board, may
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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 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. In 1996, the Economic Growth and Regulatory Paperwork Reduction Act of
1996 (the "Budget Act") eliminated the requirement that bank holding companies
seek Federal Reserve Board approval before engaging de novo in permissible
nonbanking activities listed in Regulation Y, which governs bank holding
companies, if the holding company and its lead depository institution are
well-managed and well-capitalized and certain other criteria specified in the
statute are met. For purposes of determining the capital levels at which a bank
holding company shall be considered "well-capitalized" under this section of the
Budget Act and Regulation Y, the FRB adopted risk-based capital ratios (on a
consolidated basis) that are the same as the levels set for determining that a
state member bank is well capitalized under the provisions established under the
prompt corrective action provisions of federal law. See "ITEM 1. BUSINESS
Supervision and Regulation - Prompt Corrective Action and Other Enforcement
Mechanisms."
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's
regulations or both.
This doctrine has become known as the "source of strength" doctrine.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company 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 Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the California
Superintendent of Banks ("Superintendent") and the FDIC. If, as a result of an
examination of a bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, Management, liquidity or
other aspects of Sunwest's operations are unsatisfactory or that Sunwest or its
Management is violating or has violated any law or regulation, various remedies
are available to the FDIC. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in capital, to restrict the
growth of the bank, to assess civil monetary penalties, to remove officers and
directors and ultimately to terminate a bank's deposit insurance, which for a
California state-chartered bank would result in a revocation of the bank's
charter. The Superintendent has many of the same remedial powers. Sunwest is not
currently subject to any such actions by the FDIC or the Superintendent. See -
"ITEM 1. - BUSINESS - Termination of Sunwest's Regulatory Orders."
The deposits of Sunwest are insured by the FDIC in the manner and to the
extent provided by law. For this protection, Sunwest pays a quarterly statutory
assessment. See "ITEM 1. - BUSINESS - Supervision and Regulation Premiums for
Deposit Insurance." Although Sunwest is not a member of the Federal Reserve
System, it is nevertheless subject to certain regulations of the Federal Reserve
Board.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of Sunwest. State and
federal statutes and regulations relate to many aspects of Sunwest operations,
including reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital requirements. Further, Sunwest is required to
maintain certain levels of capital. See "ITEM
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
1. BUSINESS - Supervision and Regulation - Capital Standards."
Restrictions on Transfers of Funds to West Coast by Sunwest
West Coast is a legal entity separate and distinct from the Bank. West
Coast's ability to pay cash dividends is limited by state law.
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 to the lesser of retained
earnings or the bank's net income for its last three fiscal years (less any
distributions made to shareholders by the bank or by any majority-owned
subsidiary of the bank during such period). Notwithstanding this restriction, a
bank may, with the prior approval of the Superintendent, make a distribution to
its shareholders in an amount not exceeding the greatest of the retained
earnings of the bank, net income for such bank's last fiscal year or the net
income of the bank for its current year.
The FDIC and the Superintendent also have authority to prohibit Sunwest
from engaging in activities that, in the FDIC's and the Superintendent's
opinion, constitute unsafe or unsound practices in conducting its business. It
is possible, depending upon the financial condition of Sunwest and other
factors, that the FDIC and the Superintendent could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice. Further, the FDIC 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 and the restrictions that are or
may be imposed under the prompt corrective action provisions of federal law
could limit the amount of dividends which Sunwest or West Coast may pay. See
"ITEM 1. BUSINESS - Supervision and Regulation - Prompt Corrective Regulatory
Action and Other Enforcement Mechanisms" and - "Capital Standards" for a
discussion of these additional restrictions on capital distributions.
West Coast has not received any and does not currently plan on receiving
any dividends from Sunwest in 1997. At December 31, 1996, Sunwest had an
accumulated deficit, which prohibits it from payment of cash dividends without
prior regulatory approval. West Coast is also restricted from charging and
collecting management fees from Sunwest pursuant to its regulatory agreement
with the Federal Reserve Board.
Sunwest is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee 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 are limited to 10% of Sunwest capital
stock and surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of Sunwest capital stock and
surplus (as defined by federal regulations). California law also imposes certain
restrictions with respect to transactions involving West Coast and other
controlling persons of Sunwest. Additional restrictions on transactions with
affiliates may be imposed on Sunwest under the prompt corrective action
provisions of federal law. See "ITEM 1. - BUSINESS - Supervision and Regulation
- - Prompt Corrective Regulatory Action and Other Enforcement Mechanisms."
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 commercial 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 limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists of, among other things, (i)
common stockholders' equity capital (includes common stock and related surplus,
and undivided profits); (ii) noncumulative perpetual preferred stock (cumulative
perpetual preferred stock for bank holding companies), including any related
surplus; and (iii) minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital may consist of: (i) a limited amount of the
allowance for possible loan and lease losses; (ii) cumulative perpetual
preferred stock; (iii) perpetual
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
preferred stock (and any related surplus); (iv) 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 must
be 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.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank with
material weaknesses in its risk management process or high levels of exposure
relative to its capital will be directed by the agencies to take corrective
action. Such actions will include recommendations or directions to raise
additional capital, strengthen Management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses (ALLL) 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 doubtful; (c) 15
percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months. This amount is neither a "floor" nor a
"safe harbor" level for an institution's ALLL.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies issued final rules governing banks and bank holding companies,
which became effective April 1, 1995, which limit the amount of deferred tax
assets that are allowable in computing an institution's regulatory capital.
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, based on projected taxable income for that year 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.
The following table presents the amounts of regulatory capital and the
capital ratios for Sunwest, compared to its minimum regulatory capital
requirements as of December 31, 1996:
Minimum
(Dollars in Actual Capital
thousands) Amount Ratio Requirement
- ------------------- ------------ ---------- ---------------
Leverage ratio $11,066 10.27% 4.0%
Tier 1 risk-based
ratio 11,066 12.55 4.0
Total risk-based
ratio 12,190 13.82 8.0
- ------------------- ------------ ---------- ---------------
Prompt Corrective Action And Other Enforcement Mechanisms
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. In accordance with federal law, each federal banking agency has
promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. An insured depository institution will be classified in the
following categories based, in part, on the capital measures indicated below:
"Well capitalized" Total risk-based capital of 10%; Tier 1 risk-based
capital of 6% and; Leverage ratio of 5%.
"Adequately capitalized" Total risk-based capital of 8%; Tier 1 risk-based
capital of 4%; and Leverage ratio of 4%.
"Undercapitalized"
Total risk-based capital less than 8%; Tier 1 risk-based capital less
than 4%; or Leverage ratio less than 4%.
"Significantly undercapitalized" Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 3%; or Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository 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
receiving notice, or is deemed to have notice, that the institution is
undercapitalized. The appropriate federal banking agency cannot accept a capital
plan unless, among other things, it determines that the plan: (i) specifies: (a)
the steps the institution will take to become adequately capitalized; (b) the
levels of capital to be attained during each year in which the plan will be in
effect; (c) how the institution will comply with the restrictions or
requirements then in effect under Section 38 of the FDIA; and (d) the types and
levels of activities in which the institution will engage; (ii) is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital; and (iii) would not appreciably increase the risk
(including credit risk, interest-rate risk, and other types of risk) to which
the institution is exposed. In addition, each company controlling an
undercapitalized depository institution must guarantee that the institution will
comply with the capital plan until the depository institution has been
adequately capitalized on average during each of four consecutive calendar
quarters and must otherwise provide appropriate assurances of performance. The
aggregate liability of such guarantee 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 correction 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; (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
Page - 9
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
restrictions or sanctions it will seek to impose, it is required to: (i) force a
sale of shares or obligations of the bank, or require the bank to be acquired by
or combine with another institution; (ii) impose restrictions on affiliate
transactions and (iii) 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 insured
depository 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 regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or 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. See "ITEM 1. - BUSINESS - Supervision and Regulation - Potential
Enforcement Actions."
Safety And Soundness Standards
Effective July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. These
standards are designed to identify potential safety and soundness concerns and
ensure that action is taken to address those concerns before they pose a risk to
the deposit insurance funds. The standards relate to (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fee
and benefits. If a federal banking agency determines that an institution fails
to meet any of these standards, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard. In the
event the institution fails to submit an acceptable plan within the time allowed
by the agency or fails in any material respect to implement an accepted plan,
the agency must, by order, require the institution to correct the deficiency.
Effective October 1, 1996, the federal banking agencies promulgated safety
and soundness regulations and accompanying interagency compliance guidelines on
asset quality and earnings standards. These new guidelines provide six standards
for establishing and maintaining a system to identify problem assets and prevent
those assets from deteriorating. The institution should: (i) conduct periodic
asset quality reviews to identify problem assets; (ii) estimate the inherent
losses in those assets and establish reserves that are sufficient to absorb
estimated losses; (iii) compare problem asset totals to capital; (iv) take
appropriate corrective action to resolve problem assets; (v) consider the size
and potential risks of material asset concentrations; and (vi) provide periodic
asset reports with adequate information for Management and the board of
directors to assess the level of asset risk. These new guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
Premiums for Deposit Insurance
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law. On November 14, 1995, the FDIC issued
regulations that establish a new assessment rate schedule ranging from 0 cents
per $100 of deposits to 27 cents per $100 of deposits applicable to members of
The Bank Insurance Fund ("BIF"). To determine the risk-based assessment for each
institution, the FDIC will categorize an institution as well capitalized,
adequately capitalized or under capitalized based on its capital ratios using
the same standards used by the FDIC for its prompt corrective action
regulations. A well-capitalized institution is generally one that has at least
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
generally have at
Page - 10
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
least an 8% total risked-based capital ratio, a 4% Tier 1 risk-based capital
ratio and a 4% Tier 1 leverage capital ratio. An undercapitalized institution
will generally be one that does not meet either of the above definitions. The
FDIC will also assign each institution to one of the three subgroups based upon
reviews by the institution's primary federal or state regulator, statistical
analysis of financial statements and other information relevant to evaluating
the risk posed by the institution. The three supervisory categories are:
financially sound with only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration (Group B), and poses a
substantial probability of loss (Group C).
BIF assessment rates are set forth below for institutions based on their
risk-based assessment categorization.
Assessment Rates Effective January 1, 1996*
Group A Group B Group C
- ---------------------- ----------- ----------- ------------
Well Capitalized 0 3 17
Adequately
Capitalized 3 10 24
Undercapitalized 10 24 27
- ---------------------- ----------- ----------- ------------
* Assessment figures are expressed in terms of cents per $100 of deposits.
On September 30, 1996, Congress passed the Budget Act which capitalized the
Savings Association Insurance Fund (SAIF) through a special assessment on
SAIF-insured deposits and required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to help
fund the federal government costs associated with the savings and loan crisis of
the late 1980's. The special thrift SAIF assessment has been set at 65.7 cents
per $100 insured by the thrift funds as of March 31, 1995. Effective January 1,
1997, for the FICO payments, SAIF-insured institutions will pay 3.2 cents per
$100 in domestic deposits and BIF-insured institutions, like the Bank, will pay
0.64 cents per $100 in domestic deposits. Full pro rata sharing of the FICO
interest payments takes effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The Budget Act also prohibits the FDIC from setting premiums
under the risk-based schedule above the amount needed to meet the designated
reserve ratio (currently 1.25%).
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 is not 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 or bank holding companies. 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 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.
Under the Interstate Act, the extent of a commercial bank's ability to
branch into a new state will depend on the law of the state. In October 1995,
California adopted an early "opt in" statute under the Interstate Act that
permits out-of-state banks to acquire California banks that satisfy a five-year
minimum age requirement (subject to exceptions for supervisory transactions) by
means of merger or purchases of assets, although entry through acquisition of
individual branches of California institutions and de novo branching into
California are not permitted. The Interstate Act and the California branching
statute will likely increase competition from out-of-state banks in the markets
in which the Company
Page - 11
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
operates, although it is difficult to assess the impact that such increased
competition may have on the Company's operations.
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 its 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.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance, rather than the extent to which the institution conducts
needs assessments, documents community outreach activities or complies with
other procedural requirements.
In March 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.
In connection with its assessment of CRA performance, the FDIC assigns a
rating of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." Based on an examination conducted during the third quarter of
1996, the Bank was rated satisfactory.
Potential Enforcement Actions
Commercial banking organizations, such as the bank, and their
institution-affiliated parties, which include the Company, may be subject to
potential enforcement actions by the Federal Reserve Board, the FDIC and the
Superintendent for unsafe or 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 (in the case of the Bank), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against institution affiliated parties and the imposition of restrictions and
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 a 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 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
Page - 12
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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, 1996, the FRB
concluded that West Coast was in substantial compliance with the Agreement.
Termination of Sunwest's Regulatory Orders
A concurrent examination of Sunwest was completed by the FDIC and State
Banking Department during the third quarter of 1996. The FDIC and State Banking
Department subsequently notified Sunwest that their Orders were terminated due
to continued improvements of the Bank's financial condition. As evidence of its
commitment to continued improvement, however, the Bank's Board of Director
passed a resolution to retain satisfactory management; maintain a Tier 1 capital
to total asset ratio of at least 7.0 percent; reduce assets adversely classified
during the July 29, 1996 exam to $9.1 million or less at December 31, 1996, to
$7.5 million or less by June 30, 1997 and $6.0 million or less by December 31,
1997; and furnish a quarterly written progress report to the FDIC Regional
Director. At December 31, 1996, Sunwest had $7.7 million of adversely classified
loans from the July 29, 1996 exam.
Current Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" in 1996. During 1996 Management elected to
abandon a facility lease when the lease cancellation clause becomes available
April 1, 1997. A valuation allowance for long-lived leasehold improvements of
$276,000 was established as required under SFAS 121.
The Company adopted Statement of Financial Accounting Standards No. 122
(SFAS 122), "Accounting for Mortgage Servicing Rights" during 1996. SFAS 122 had
no material impact on the Company's operations.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which permits either adoption of the new standard's principles
for recording the estimated value of stock-based compensation over the
applicable vesting period, or permits continued application of existing
accounting standards, with disclosure of any unrecorded cost under the new
standard and the related effect on earnings per share. The Company adopted SFAS
123 in 1996, and elected to adopt the disclosure provisions of the new standard
only. As the Company issued no stock-based compensation in 1996 and 1995
adoption of this standard had no effect on the Company's financial position or
disclosures for the years ended December 31, 1996 and 1995.
In 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" which
superseded SFAS 122. SFAS 125 is effective for all transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. Management does not expect adoption of SFAS 125 to have a material impact
on the Company's operations.
EMPLOYEES
At December 31, 1996, West Coast and its subsidiaries employed 73 persons
of which 71 were full time. West Coast and its subsidiaries believe that their
employee relations are satisfactory.
Page - 13
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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 6. - MANAGEMENT'S
DISCUSSION AND ANALYSIS - Results Of Operation - Net Interest Income."
Investment Securities
Investment securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Investment securities
available for sale are stated at market value. The following tables show the
book value of the Company's investment securities as of December 31:
Held to maturity Available for sale
(dollars in thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
U.S. government agencies
and corporations $2,607 $5,574 $2,680 $ --
- --------------------------------------------------------------------------------
Total $2,607 $5,574 $2,680 $ --
================================================================================
The following table discloses the maturity dates and average yields of the
investment securities at December 31, 1996:
Due After One Due After Five
Due Within Year But Within Years But Within Due After
One Year Five Years Ten Years Ten Years
- --------------------------------------------------------------------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------
Held to maturity
U.S. government agencies
and corporations $-- . -% $2,607 7.02% $-- . -% $-- . -%
- --------------------------------------------------------------------------------
$-- . -% $2,607 7.02% $-- . -% $-- . -%
================================================================================
Available for sale
U.S. government agencies
and corporations $-- . -% $1,966 5.29% $-- . -% $714 8.38%
- -------------------------------------------------------------------------------
$-- . -% $1,966 5.29% $-- . -% $714 8.38%
================================================================================
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, 1996 all interest bearing deposits with
financial institutions mature in one year or less.
Page - 14
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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) 1996 1995
- ----------------------------- ------------- ---------------
Commercial $ 25,300 $ 28,479
Real Estate - Mortgage 54,938 47,379
Installment loans 2,728 3,515
Unearned income, discounts
and fees (309) (373)
- ----------------------------- ------------- ---------------
Total $ 82,657 $ 79,000
- ----------------------------- ------------- ---------------
The Company had no Real Estate - Construction loans at December 31, 1996 or
1995. Commercial loans are loans to local community businesses and may be
unsecured or secured by assets of the business and/or its principals. 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 do not exceed 60% to 80% of collateral value.
Sunwest was the only subsidiary that had loans for all the periods
presented. Commercial loans decreased because of low loan demand, stringent
underwriting standards and planned disengagement from problem and potential
problem credits. Real Estate - Mortgage loans have increased because of an
emphasis on originating this type of loan during 1996. Installment loans
decreased in 1996 because Sunwest has not been emphasizing this product.
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 County and the surrounding 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 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, 1996, 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.
Page - 15
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
The following table sets forth the maturities for commercial loans at
December 31, 1996. These loans comprised 31% of the gross loan portfolio and are
classified according to changes in interest rates. The Company did not have any
real estate construction loans.
Maturing
Within After One
One Year But After
Year or Within Five
(in thousands) Less Five Years Years Total
- --------------------------------------------------------------------------------
Commercial $ 12,266 $ 10,578 $ 2,456 $ 25,300
- --------------------------------------------------------------------------------
Loans included above with:
Fixed rates $ 887 $ 1,262 $ 23 $ 2,172
Variable rates 11,379 9,316 2,433 23,128
- --------------------------------------------------------------------------------
Total $ 12,266 $ 10,578 $ 2,456 $ 25,300
================================================================================
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) 1996 1995
- -------------------------------------- ---------- ---------
Allowance for possible credit losses
at beginning of period $ 3,820 $ 4,649
Charge-offs:
Commercial (512) (985)
Real estate-mortgage (513) (1,049)
Installment loans to individuals (47) (119)
Direct lease financing - (3)
- -------------------------------------- ---------- ---------
Total Charge-offs (1,072) (2,156)
- -------------------------------------- ---------- ---------
Recoveries:
Commercial 745 773
Real estate - construction - 2
Real estate - mortgage 30 75
Installment loans to individuals 94 60
Direct lease financing 7 28
- -------------------------------------- ---------- ---------
Total Recoveries 876 938
- -------------------------------------- ---------- ---------
Net charge-offs (196) (1,218)
Additions (reductions) charged to
operations (668) 389
Other adjustment (1) (108) -
- -------------------------------------- ---------- ---------
Balance at end of period $ 2,848 $ 3,820
- -------------------------------------- ---------- ---------
Allowance for possible credit losses as a percentage of:
Average loans 3.69% 4.77%
Loans at end of period 3.45 4.84
Loans on nonaccrual and 90 days
past due 295.48 91.43
Net charge-offs as a percentage of:
Average loans .25 1.52
- -------------------------------------- ---------- ---------
(1) Reclassification of previous recoveries.
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. The
allowance is available for all possible credit losses. The amount of the
allowance is determined by establishing specific allocations, general
allocations and supplemental allocations. Specific allocations 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 allocations
are determined based upon quantitative historical loss experience of loans
classified as "substandard" and "special mention" as well as certain categories
of loans. The supplemental allocations are additional reserves that are based on
economic conditions, trends in delinquency, restructured and nonperforming
loans, and are otherwise deemed necessary and prudent by Management. Management
believes that the allowance for possible credit losses of $2,848,000,
constituting approximately 3.45% of loans outstanding at December 31, 1996, 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 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS - Results Of Operations."
The Company established an allowance for possible credit losses at December
31, 1996 and 1995 for each category as set forth below. The allowance includes
allocations for specific loans as well as general and supplemental allocations
for each category.
Page - 16
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
(dollars in thousands) 1996
- -------------------------- --------------------------------
Percent of Loan
Category to
Allowance Total Loans
- -------------------------- -------------- -----------------
Commercial $ 427 30.5%
Real estate mortgage 2,237 66.2
Installment loans 184 3.3
- -------------------------- -------------- -----------------
Total $ 2,848 100.0%
- -------------------------- -------------- -----------------
(dollars in thousands) 1995
- -------------------------- --------------------------------
Percent of Loan
Category to
Allowance Total Loans
- -------------------------- -------------- -----------------
Commercial $ 974 35.9%
Real estate mortgage 2,691 59.7
Installment loans 155 4.4
- -------------------------- -------------- -----------------
Total $ 3,820 100.0%
- -------------------------- -------------- -----------------
Nonperforming Loans
Loans for which the accrual of interest has been discontinued are
designated nonaccrual loans. Accrual of interest on such loans is discontinued
when reasonable doubt exists as to the full and timely collection of either
principal or interest or generally when a loan becomes contractually 90 days
past due 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. Restructured 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 restructured loans as of
December 31:
(dollars in thousands) 1996 1995
- ------------------------------------- ---------- ----------
Nonaccrual loans $ 931 $ 4,153
90 days past due loans and still
accruing 43 25
Restructured loans 3,116 2,536
Loans on nonaccrual and 90 days
past due/total loans 1.18% 5.29%
Loans on nonaccrual and 90 days
past due/total assets 0.89 3.68
- ------------------------------------- ---------- ----------
The changes in the levels of nonperforming loans during 1996 and 1995 are
discussed under "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of
Operations - Nonperforming Assets."
At December 31, 1996 the Company had only four loans on nonaccrual status.
Two loans totaling $622,000 were primarily secured by real estate with one of
these loans totaling $476,000 being previously restructured. The remaining two
loans with a balance of $309,000 at December 31, 1996, were secured by
receivables, equipment or inventory with one of these loans totaling $101,000
being previously restructured.
As of December 31, 1996, the Company had no accrued interest on loans on
nonaccrual status. If loans on nonaccrual at December 31, 1996 and 1995 had
performed in accordance with original terms, interest income of the Company
would have increased by $66,000 and $326,000, respectively. Under the original
terms of the restructured loans, interest earned would have totaled $394,000 and
$305,000 for the years ended December 31, 1996 and 1995. Under the restructured
terms of the loans, interest income recorded amounted to $304,000 and $249,000
in 1996 and 1995, respectively.
All restructured 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 and classify them based on 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 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.
Page - 17
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
The following presents loans classified as substandard, doubtful and
special mention at December 31:
(in thousands) 1996 1995
- ------------------------------- ------------ --------------
Substandard $ 6,513 $ 14,355
Doubtful 14 226
- ------------------------------- ------------ --------------
Total $ 6,527 $ 14,581
- ------------------------------- ------------ --------------
Special mention $ 6,479 $ 7,465
- ------------------------------- ------------ --------------
There were no loans classified as loss for any of the periods presented.
Except for the loans classified as substandard or doubtful, Management is not
aware of any loans at December 31, 1996 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) 1996 1995
- -------------------------------- ------------ -------------
Gross real estate owned $ 1,692 $ 3,229
Valuation allowance 449 592
- -------------------------------- ------------ -------------
Net real estate owned $ 1,243 $ 2,637
- -------------------------------- ------------ -------------
Percent of assets 1.1% 2.3%
- -------------------------------- ------------ -------------
Real estate owned consists of real estate acquired in settlement of loans.
Real estate owned is initially recorded at fair value at the time of
foreclosure, 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.
Once real estate is acquired and periodically thereafter, Management
obtains a valuation of the real estate and a valuation allowance for estimated
losses is 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 valuation allowance may be necessary based on
future economic conditions. In addition, the regulatory agencies periodically
review the valuation allowance and such agencies may require the Company to
recognize additions to the valuation 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 $272,000 during 1996, representing
2.4% of the Company's total income for that year, as compared with $296,000 or
2.5% of total income for 1995.
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) 1996
- --------------------------- -------------------------------
Average Interest
Balance Rate
- --------------------------- --------------- ---------------
Noninterest bearing
demand deposits $ 34,558 . -%
Interest bearing demand
deposits 31,499 1.92
Savings deposits 5,108 1.98
Time deposits 25,628 5.24
- --------------------------- --------------- ---------------
Total $ 96,793 2.12%
- --------------------------- --------------- ---------------
(dollars in thousands) 1995
- --------------------------- -------------------------------
Average Interest
Balance Rate
- --------------------------- ---------------- --------------
Noninterest bearing
demand deposits $ 34,042 . -%
Interest bearing demand
deposits 33,376 1.98
Savings deposits 5,486 1.95
Time deposits 36,976 5.62
- --------------------------- ---------------- --------------
Total $ 109,880 2.59%
- --------------------------- ---------------- --------------
Page - 18
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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, 1996 were as
follows (dollars in thousands):
Percentage
Maturity Amount of Total
- ------------------------- ---------------- ----------------
0-3 Months $ 4,347 4.55%
3-6 Months 2,075 2.17
6-12 Months 1,762 1.84
Over 12 Months 788 0.83
- ------------------------- ---------------- ----------------
Total $ 8,972 9.39%
- ------------------------- ---------------- ----------------
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 income (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.
1996 1995
- ------------------------------------ ----------- ----------
Ratio of net income (loss) to:
Average total assets 0.80% (0.28)%
Average shareholders' equity 15.96 (5.71)
Ratio of average shareholders'
equity to average total assets 5.04 4.88
- ------------------------------------ ----------- ----------
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE
Discussions of certain matters contained in this Annual Report on Form
10-KSB may constitute forward-looking statements within the meaning of the
Reform Act and as such, may involve risks and uncertainties. These
forward-looking statements relate to, among other things, expectations of the
business environment in which the Company operates, projections of future
performance, perceived opportunities in the market and statements regarding the
Company's mission and vision. The Company's actual results, performance and
achievements may differ materially from the results, performance or achievements
expressed or implied in such forward-looking statements. The following is a
summary of some of the important factors that could affect the Company's future
results of operations and/or its stock price, and should be considered carefully
in evaluating the Company.
Economic Conditions and Geographic Concentration.
The Company's operations are located in Southern California and
concentrated primarily in the area known as Orange County. As a result of the
geographic concentration, the Company's results depend largely upon economic
conditions in this area, which has been relatively volatile over the last
several years. While the Southern California and Orange County economies
recently have exhibited positive economic and employment trends, there is no
assurance that such trends will continue. A deterioration in economic conditions
could have material adverse impact on the quality of the Company's loan
portfolio and the demand for its products and services.
Interest Rates
The Company anticipates that interest rate levels will remain generally
constant in 1997, but if interest rates vary substantially from present levels,
the Company's results may differ materially from the results currently
anticipated. Changes in interest rates will influence the growth of loans,
investments and deposits and affect the rates received on loans and investment
securities and paid on deposits.
Government Regulation and Monetary Policy
The banking industry is subject to extensive federal and state supervision
and regulation. Significant new laws or changes in, or repeals of, existing laws
may cause the Company's results to differ materially. Further, federal monetary
policy, particularly as implemented through the Federal Reserve System,
significantly affects credit conditions for the Company, primarily through open
market operations in United States government securities, the discount rate for
bank borrowings and bank reserve requirements, and a material change in these
conditions would be likely to have a material impact on the Company's results.
Competition
The banking and financial services business in the Company's market areas
are highly competitive. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product delivery
systems, and the accelerating pace of consolidation among financial services
providers. The results of the Company may differ if circumstances affecting the
nature or level of competition change.
Page - 19
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
Credit Quality
A significant source of risk arises from the possibility that losses will
be sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. The Company has adopted
underwriting and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for credit losses, that Management
believes are appropriate to minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying the Company's credit
portfolio. Such policies and procedures, however, may not prevent unexpected
losses that could materially adversely affect the Company's results.
Other Risks
From time to time, the Company details other risks with respect to its
business and/or financial results in its filings with the Securities and
Exchange Commission.
ITEM 2. PROPERTIES
Sunwest occupies its offices under long-term leases expiring at various
dates through 2003. The Company's total occupancy expense for the year ended
December 31, 1996 and 1995 were approximately $984,000 and $982,000,
respectively. For additional information concerning properties, see "Notes 6, 12
and 15 of the Notes to the Consolidated Financial Statements appearing elsewhere
in this report.
ITEM 3. LEGAL PROCEEDINGS
In 1992, WCV, Inc. was named a "responsible party" under state and federal
environmental laws with respect to the contamination of certain real property
located in San Bernardino, California (the "Property"). In 1996 and 1995, WCV,
Inc. filed claims with the California Underground Storage Tank Cleanup Fund
("USTF") and was reimbursed for "eligible" cleanup costs associated with the
contaminated property. WCV, Inc. expects that future cleanup costs will total
$50,000 and that these costs will qualify as "eligible" costs and be reimbursed
by USTF. The cost to remediate the Property has been tentatively estimated at
$910,000 of which $860,000 has been incurred through December 31, 1996. The USTF
limits the reimbursement per site to $1 million. WCV, Inc. has been reimbursed
$690,000 through December 31, 1996.
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
1996.
ITEM 4(A) EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 4, 1997, 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 58
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, North Orange; 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 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.
Page - 20
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
Ronald R. White, Age 50
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 46
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 55
Director, President and Chief Executive Officer, Sunwest and Sunwest
Leasing.
James G. LeSieur has serves as President and Chief Executive Officer of
Sunwest. Mr. LeSieur joined Sunwest in 1975 as Vice President and Cashier, was
promoted to Senior Vice President and Controller, and later promoted to
Executive Vice President and Chief Financial Officer.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Securities Market Information
West Coast's common stock currently trades over the counter under the
symbol WCBC. The following table sets forth, for the calendar quarters
indicated, the range of high and low bid or sale prices for the common stock as
received from over the counter market quotations. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions:
1996 1995
High Low High Low
- ------------------- --------- --------- --------- ---------
First Quarter $ .53 $ .12 $ .28 $.25
Second Quarter .50 .28 .31 .18
Third Quarter .50 .33 .31 .21
Fourth Quarter .66 .50 .50 .12
Holders of Record
As of February 28, 1997, there were approximately 3,400 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 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 and - Restrictions on Transfers of Funds to West Coast
by Sunwest" and "ITEM 1. BUSINESS - POTENTIAL AND EXISTING ENFORCEMENT ACTIONS -
West Coast's Regulatory Agreement."
Page - 21
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following presents Management's discussion and analysis of West Coast
Bancorp (as a separate entity "West Coast" and together with its subsidiaries
the "Company") for the years ended December 31, 1996 and 1995. West Coast`s
primary subsidiary is its majority owned subsidiary Sunwest Bank ("Sunwest"),
This discussion should be read in conjunction with the Company's consolidated
financial statements and the notes thereto appearing elsewhere in this report.
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
such forward-looking statements. Factors that might cause such a difference
include but are not limited to economic conditions, competition in the
geographic and business areas in which the Company conducts its operations,
fluctuations in interest rates, credit quality and government regulation. For
additional information concerning these factors, see "ITEM 1. BUSINESS - Summary
of Business Considerations and Certain Factors That May Affect Future Results of
Operations and/or Stock Price."
GENERAL
The Company posted net income of $874,000 or $.10 per share in 1996 versus
a net loss of $339,000 or $.04 per share in 1995. The net income resulted from
improved asset quality reflecting reductions in the provision for possible
credit losses, reduced noninterest expenses, an increase in noninterest income
from recoveries of nonaccrual interest from prior years and a gain on sale of
B&PB stock and a recognition of a deferred tax benefit.
On February 29, 1996, West Coast and Sunwest entered into an agreement with
Western Acquisitions, L.L.C. and Western Acquisition Partners, L.P.,
(collectively, "Western"), affiliates of Hovde Financial, Inc., for West Coast
to sell 35 outstanding shares of Sunwest common stock owned by West Coast for
$2,520,000 and for Sunwest to issue and sell 15 new shares of common stock for
$1,051,000. On September 13, 1996 the sale closed. As a result of these
transactions West Coast and Western own approximately 56.5% and 43.5% of
Sunwest, respectively.
West Coast's sale of the 35 outstanding shares of Sunwest's common shares
included a purchase price adjustment based on Sunwest's financial performance
through December 31, 1996. Based on Sunwest's performance, an additional
$493,000 was paid from Western to West Coast in February 1997. West Coast
recorded a loss on the sale of the 35 shares of Sunwest stock of $246,000 during
1996. This occurred because the selling price of Sunwest stock was less than the
book value of outstanding shares at September 13, 1996.
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, shares of B&PB common stock
equivalent to 14.5% of B&PB's then outstanding common stock and the right to
receive a contingent cash payment. The stock was included in Net Assets Held for
Sale in the accompanying balance sheet. The B&PB stock was sold during 1995 and
1996. The first contractual due date for the contingent cash payment is in 1998.
Sacramento First's operating results were not included in the consolidated
financial statements for any of the periods presented in the accompanying
financial statements. The only other remaining subsidiary with activity during
the periods was WCV Inc. Its activity was limited to the restoration of one
remaining property.
The Company had total assets, loans and deposits as of December 31 as
follows:
(in millions) 1996 1995
- ----------------------------- ------------ ----------------
Total assets $ 109 $ 114
Total loans and leases 83 79
Total deposits 96 103
- ----------------------------- ------------ ----------------
The 1996 deposit reductions resulted primarily from the intentional runoff
of higher cost time certificates of deposit at Sunwest. Loans increased in 1996
due to improved loan demand during 1996.
RESULTS OF OPERATIONS
General
The Company had net income in 1996 versus a loss in 1995 because of a
$668,000 negative provision for credit losses in 1996 (due to a significant
improvement in asset quality), a $846,000 decrease in noninterest expenses
(primarily from a $514,000 decrease in salaries and benefits), a $578,000
increase in noninterest income (resulting from interest recoveries on
charged-off loans and a gain on sales of B&PB stock) and a $870,000 deferred tax
benefit recorded in 1996. These items were offset partially by decreases in
income from a $814,000 expected loss on abandonment of a facility lease,
$510,000 of minority interest expense and a decrease in the gain on liquidation
of WCV, Inc. of $480,000.
Page - 22
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
The 1995 loss resulted primarily from the high percentage of nonperforming
assets, high debt service at West Coast and high operating costs.
Net Interest Income
The decline in net interest income in 1996 and 1995 resulted primarily from
lower interest earning asset volumes. Average interest earning assets decreased
by $11 million from 1995 to 1996 and by $78 million from 1994 to 1995.
In 1996, the net interest margin (yield on earning assets less the rate
paid on interest bearing liabilities) and the net yield on interest earning
assets (net interest income divided by average earning assets) both increased.
This occurred because the Company was able to increase its yield on earning
assets slightly while reducing its rate on interest bearing liabilities.
The yield on earning assets increased from 1995 to 1996 because the ratio
of loans (the highest yielding earning asset) increased as a percentage of total
earning assets from 72% in 1995 to 78% in 1996. Market rates for loans decreased
slightly in 1996 with the "prime" rate decreasing in February from 8.50% to
8.25%. In 1995 prime was slightly higher, remaining in the 8.50% to 9.00% range
for the entire year. The yield on loans decreased by only 13 basis points
because average nonaccrual loans decreased from $4.6 million in 1995 to $2.6
million in 1996. The yield on investment securities remained relatively
unchanged while the yield on Federal funds sold and interest bearing deposits
decreased from general market rate declines. The decrease in average investments
was caused primarily by Management's decision to reduce the amount of nationally
gathered time deposits from its Money Desk operation.
Total interest income declined in 1995 as a result of lower earning asset
volumes partially offset by more favorable rates. The decrease in average loans
as a percentage of average interest earning assets from 80% in 1994 to 72% in
1995 also exerted downward pressure on interest income for that period.
The average rates earned on interest earning assets increased by 94 basis
points from 1994 to 1995, primarily because of changes in market rates of
interest. The prime rate was at 6% in early March 1994 and then increased to 9%
by February 1995 until falling back to 8.5% in December 1995.
Interest expense declined in 1996 and 1995 primarily from lower interest
bearing deposit volumes. In 1996 lower rates also contributed to the decline.
Average interest bearing liabilities decreased by $14 million from 1995 to 1996
and by $63 million from 1994 to 1995. The volume declines from 1995 to 1996 was
primarily from the intentional reduction in the highest cost time deposits that
are gathered through national market sources. From 1994 to 1995 average interest
bearing deposits declines were primarily a result of customers leaving Sunwest
due to its financial condition. Interest bearing deposits are expected to
increase due to an improvement in Sunwest's financial condition.
The average rates paid on interest bearing liabilities decreased by 45
basis points from 1995 to 1996 and increased by 104 basis points from 1994 to
1995.
Rates on interest bearing liabilities were lower in 1996 because average
time deposits as a percentage of average interest bearing liabilities decreased
from 46% in 1995 to 39% in 1996. The 38 basis points decrease in time deposit
rates was partially due to Management's intentional reduction in the highest
cost time deposits and partially from the general market rate declines. Rates on
interest bearing liabilities were higher in 1995 partially because of a lawsuit
settlement with a former director which included recognition of past interest.
During the quarter ended December 31, 1996 the average rate on interest bearing
liabilities decreased to 3.72% primarily from payment of the convertible
subordinated debentures in October 1996.
Loans on which the accrual of interest had been discontinued at December
31, 1996 and 1995 amounted to $931,000 and $4,153,000, respectively. If these
loans had been current throughout their terms, net interest income would have
increased approximately $66,000 and $326,000 in 1996 and 1995, respectively.
This would have raised both the net yield on interest earning assets and the net
interest margin by .07% in 1996 and .39% in 1995, respectively.
Page - 23
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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, 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 daily averages for
1996 and monthly averages for 1995. The Company had no income or yield earned on
tax exempt securities during any of the periods presented.
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rates Balance Interest Rates
- --------------------------------------------------------------------------------
Assets
Loans, net of unearned loan fees &
discounts (1) $ 77,244 $ 8,226 10.65% $ 80,153 $ 8,648 10.79%
Investment securities 5,957 367 6.16 10,196 623 6.11
Federal funds sold 13,123 714 5.44 15,272 893 5.85
Interest bearing deposits
with banks 3,224 187 5.80 4,994 330 6.61
- --------------------------------------------------------------------------------
Interest earning assets 99,548 9,494 9.54 110,615 10,494 9.49
Allowance for possible credit
losses (3,510) (4,175)
Cash and due from banks 5,886 6,470
Other assets 6,782 8,638
- --------------------------------------------------------------------------------
Total assets $108,706 $121,548
================================================================================
Liabilities and Shareholders' Equity
Time deposits $ 25,628 $ 1,342 5.24% $ 36,976 $ 2,077 5.62%
Interest bearing demand
deposits 31,499 606 1.92 33,376 661 1.98
Savings deposits 5,108 101 1.98 5,486 107 1.95
Notes Payable to affiliates 584 45 7.71 815 68 8.34
Other debt (2) 817 197 24.11 391 222 56.78
Convertible subordinated
debentures 2,391 284 11.88 3,035 352 11.60
- --------------------------------------------------------------------------------
Total interest bearing
liabilities 66,027 2,575 3.90 80,079 3,487 4.35
Demand deposits 34,558 34,042
Other liabilities 1,289 1,491
Minority Interest 1,356 --
Shareholders' equity 5,476 5,936
- --------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $108,706 $121,548
================================================================================
Net interest income $ 6,919 $ 7,007
Net interest margin 5.64% 5.13%
Net yield on interest earning assets 6.95 6.33
- --------------------------------------------------------------------------------
(1) Interest income includes loan fees of $107,000 and $197,000 for the years
ended December 31, 1996 and 1995 respectively. Loans, net of unearned loan fees
and discounts, includes loans placed on nonaccrual.
(2) Other debt includes a capital lease, senior debt on real estate owned, notes
payable to an unaffiliated party and short-term debt owed to a former officer of
West Coast.
Page - 24
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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.
1996 vs. 1995 1995 vs. 1994
------------- -------------
(dollars in thousands) Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------
Interest Income:
Loans and leases $(311) $(111) $ (422) $(7,451) $ 1,619 $(5,832)
Investment securities (261) 5 (256) (150) 102 (48)
Federal funds sold (120) (59) (179) (274) 347 73
Interest bearing deposits
with banks (106) (37) (143) 60 107 167
- --------------------------------------------------------------------------------
Total (798) (202) (1,000) (7,815) 2,175 (5,640)
Interest Expense:
Time deposits (602) (133) (735) (1,375) 798 (577)
Interest bearing demand
deposits (36) (19) (55) (610) (119) (729)
Savings deposits (7) 1 (6) (77) (17) (94)
Notes payable to affiliates (18) (5) (23) 23 7 30
Other debt 66 (159) (93) (114) 236 122
- --------------------------------------------------------------------------------
Total (597) (315) (912) (2,153) 905 (1,248)
- --------------------------------------------------------------------------------
Net change in net interest
income $(201) $ 113 $ (88) $(5,662) $ 1,270 $(4,392)
- --------------------------------------------------------------------------------
Provision for Possible Credit Losses
For the tables showing the Company's "Allowance for possible credit losses,
net charge-offs and provision for possible credit losses": See "ITEM 1 -
BUSINESS - SELECTED STATISTICAL INFORMATION - Allowance for possible credit
losses."
The Company had a credit provision for possible credit losses in 1996 due
to improvements in the Company's loan portfolio and recoveries of loan losses
from prior years. Total loans classified substandard and doubtful decreased from
$14.6 million at December 31, 1995 to $6.5 million at December 31, 1996.
Management has maintained the Company's allowance for possible credit
losses as a percentage of loans at a level substantially higher than industry
averages, which reflects the result of a comprehensive risk assessment system to
identify and quantify risk in the portfolio. Management believes that the
allowance for possible credit losses at December 31, 1996 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, volatile economic conditions. These conditions
have adversely affected certain borrowers' ability to repay loans. While
Southern California and Orange County economies have recently exhibited positive
trends, there is no assurance that such trends will continue. A deterioration in
economic conditions could result in a 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. Future reversals of the allowance for possible credit losses are
not anticipated unless recoveries remain at high levels or the underlying
conditions of various classified loans improve. The high provisions for possible
credit losses experienced prior to 1996 are not anticipated unless current
economic conditions deteriorate.
Charge-offs
All charge-offs and recoveries were located at Sunwest. The decrease is a
result of Management's ongoing efforts to reduce the classified assets in its
portfolio. Gross charge-offs of commercial loans at Sunwest represented 48% of
charge-offs in 1996 and 46% in 1995. The level of charge-offs relates primarily
to the economy and real estate values stabilizing in southern California. The
Company's net charge-offs as a percentage of average loans were .25% in 1996 and
1.52% in 1995.
Page - 25
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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.
Nonperforming loans totaled $974,000 and $4,178,000 at December 31, 1996
and 1995, respectively. This amounted to 1.2% and 5.3% of total loans for the
same respective periods.
In 1996, nonperforming loans decreased by $3.2 million primarily because
$2.0 million were transferred to real estate owned and $1.1 million were charged
off. All loans transferred to nonaccrual status during 1996 were either
collected in full, transferred to REO with the REO sold in 1996, or the loan was
charged-off.
Real estate owned totaled $53,000, $1,190,000 and $1,243,000 at December
31, 1996 at West Coast, Sunwest and the Company, respectively. At December 31,
1995, real estate owned totaled $53,000, $2,584,000 and $2,637,000 at West
Coast, Sunwest and the Company, respectively. This represented 1.1%, and 2.3% of
the Company's assets at December 31, 1996, and 1995, respectively. Real estate
owned at the Company decreased by $1.4 million in 1996 because of $3.2 million
of sales and $.4 million of write-downs offset by $2.2 million of transfers from
loans and assumptions of senior debt during 1996.
Nonperforming assets (nonperforming loans and real estate owned combined)
totaled $53,000, $2,121,000 and $2,173,000 at December 31, 1996 at West Coast,
Sunwest and the Company, respectively. At December 31, 1995, nonperforming
assets totaled $53,000, $6,762,000 and $6,815,000 at West Coast, Sunwest and the
Company, respectively. This represented 2.0% and 6.0% of the Company's assets at
December 31, 1996 and 1995, respectively.
Restructured loans which were performing in compliance with their modified
terms totaled $3,116,000 and $2,536,000 at December 31, 1996 and 1995.
Restructured loans totaling $577,000 and $2,309,000 were on nonaccrual status at
December 31, 1996 and 1995. The decrease in the Company's total restructured
loans in 1996 resulted from transferring a loan to real estate owned.
Other Operating Income
A summary of other operating income by category is presented in NOTE 11 of
the Notes to the Consolidated Financial Statements. Other operating income
increased to $1,536,000 in 1996 from $958,000 in 1995. Gain on sale of B&PB
stock was $424,000 higher in 1996 as West Coast sold all of its remaining B&PB
shares. Interest recoveries on charged off loans increased primarily from
recoveries on three loans totaling $334,000. Gain on sale of loans were lower in
1996 versus 1995 because Sunwest retained its SBA loans to supplement loan
volume. Management currently expects to retain all SBA loans in 1997.
Other Operating Expenses
Other operating expenses decreased from 1995 to 1996. A summary of the
operating expenses is presented in NOTE 12 of the Notes to the Consolidated
Financial Statements.
A summary of other operating expenses follows:
(dollars in thousands) 1996 1995
- -------------------------------- ------------ -------------
Other operating expenses $ 7,691 $ 8,537
Other operating expenses
/Interest and other
operating income 69.7% 74.5%
Other operating expenses
/Average assets 7.1% 7.0%
- -------------------------------- ------------ -------------
Other operating expenses decreased by $846,000 or 10% from 1995 to 1996.
Sunwest decreased its other operating expenses by $356,000 or 9% and West Coast
decreased its expenses (excluding the management fee repayment to Sunwest in
1995) by $90,000 or 23%. The most significant changes from 1995 to 1996 at
Sunwest were salaries decreasing $438,000 because total employees decreased from
89 at the beginning of 1995 to 72 at the end of 1996. Regulatory fees and
assessments decreased $162,000 primarily from a reduced Federal deposit
insurance assessment rate. The assessment rate will be further reduced in 1997.
The loss on facility lease adjustment in 1995 caused $155,000 of the decrease in
other operating expenses. Other decreases were primarily offset by a $103,000
increase in advertising.
Other operating expenses are expected to decrease in 1997 primarily because
of decreases in salaries and employee benefits, occupancy, professional
services, net cost of real estate owned and regulatory fees. Salaries are
expected to decrease because the Company has gradually reduced its full time
equivalent employees from 82 at the beginning of 1996, to 72 at year-end 1996
and to 69 by February 28, 1997. Occupancy is expected to decrease from
abandoning the Santa Ana facility lease.
Professional services are expected to decline due to lower accounting and
tax fees due a competitive bid process during 1996 which caused a change in
accounting firms. The net cost of real estate owned is expected to decline due
to fewer properties owned.
Page - 26
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
Minority Interest Expense
The Company recorded the minority shareholder's 43.5% interest in Sunwest
earnings subsequent to the sale date of September 13, 1996. Minority interest
expense will continue to represent approximately 43.5% of Sunwest's earnings
based on current ownership of Sunwest.
Loss on Abandonment of Santa Ana Facility Lease
In December 1996, Sunwest's Board of Directors approved the exercise of a
buyout clause of a facility lease for premises located in Santa Ana, California.
This lease requires three years of rent be paid ($483,000) to exercise the
buyout clause. A valuation allowance for the remaining leasehold improvements of
$276,000 was established. Moving and related costs were recorded in the expected
loss. This lease would have expired in the year 2006. The employees at this
location will be moved to available space at the remaining locations. While
Management has reviewed various other alternatives including subleasing the
building, none of the alternatives have proven more beneficial to the Company.
As a result of this move, the Company is expected to have an annual savings
of $200,000 in occupancy related payments (rent, utilities & repairs), $40,000
in amortization of leasehold improvements and salary reductions from
efficiencies obtained by relocating the employees.
Loss on Sale of Sunwest Shares
West Coast recorded a $246,000 loss on sale of its Sunwest shares because
the adjusted selling price of its shares was less than the book value of the
shares on September 13, 1996.
Gain on Liquidation of WCV, Inc.
The Company recorded a gain on the liquidation of WCV, Inc. of $149,000 in
1996 and $629,000 in 1995.
WCV, Inc. was substantially liquidated in 1993. Remaining activity in 1997
consists of the environmental cleanup and disposition of the sole remaining real
estate owned property. The gain in 1996 and 1995 relates to refunds received
from the California Underground Storage Tank Cleanup Fund ("USTF") and in 1995
to the reversal of future estimated costs because reimbursement is expected from
the USTF. Future costs totaling $50,000 are expected to be reimbursed by the
USTF.
Income Taxes
A summary indicating the differences between the effective income tax rate
and the Federal statutory rate is presented in NOTE 8 of the Notes to the
Consolidated Financial Statements. A tax benefit was recognized in 1996 because
of a recognition of a deferred tax asset by reversing part of the valuation
allowance for deferred taxes. The valuation allowance was decreased because it
was deemed more likely than not that some of the deferred tax asset will be
realized as a benefit.
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 loans,
increased deposits and temporary borrowings. The Company had loan commitments of
$10,498,000 and standby and commercial letters of credit totaling $63,000 at
December 31, 1996. 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 18% at December 31,
1996 and 19% at December 31, 1995. 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 $4.6 million during
1996. Cash from operating activities increased cash by $1.6 million primarily
from $874,000 of net income. Investing activities used $554,000 in cash and cash
equivalents which consisted primarily of net loan increases of $6.0 million
offset by proceeds from sales of real estate owned of $3.3 million and decreases
in investments of $2.2 million. Net cash of $5.6 million was used in financing
activities and consisted of a $7.1 million net decrease in deposits and a $3.5
million repayment of subordinated debentures and other borrowed funds. These
decreases were offset by increases of $3.6 million from the sale of Sunwest
shares and $1.9 million from the sale of B&PB stock.
Page - 27
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
The Parent Company
West Coast's sources of liquidity are limited. West Coast has relied on
sales of assets and borrowings from officers/directors as sources of liquidity.
As a result of the sale of Sunwest shares and B&PB stock, West Coast was able to
repay all outstanding 10% debentures and all outstanding notes payable to
officers/directors. Dividends from subsidiaries ordinarily provide a source of
liquidity to a bank holding company. Sunwest is prohibited from paying cash
dividends without prior regulatory consent.
During 1996, West Coast did not receive any dividends from its
subsidiaries. West Coast does not expect to receive dividends from its
subsidiaries during 1997.
West Coast's primary source of cash in 1997 is expected to be the $493,000
purchase price adjustment from the sales of Sunwest shares. This was received in
February 1997. At December 31, 1996, West Coast had cash totaling $444,000.
West Coast paid $120,000 of accrued directors fees in February 1997. These
fees were accrued for the period October 1994 through January 1997. Directors
fees will now be paid at the rate of $250 per director per meeting attended.
West Coast anticipates other cash expenditures during 1997 to consist of debt
service payments and other operating expenses. West Coast's projected debt
service for 1997 includes quarterly payments on the notes payable of $12,000
each. Principal and interest outstanding under these notes totaled $475,000 at
December 31, 1996. Unpaid principal and interest is also due June 30, 1999. West
Coast anticipates that other operating expenses will be approximately $86,000
during 1997 excluding a $150,000 salary to the President of West Coast currently
being deferred. Prior years' salaries and incentives payable to the President
totaled $474,000 at December 31, 1996. These amounts can not be paid without
approval by the Federal Reserve Board and are currently being deferred. Funds to
repay the notes payable and deferred salaries will come from current cash
resources supplemented by sales of assets and possibly dividends from Sunwest.
CAPITAL RESOURCES AND DIVIDENDS
Sunwest had a 12.55%, 13.82% and 10.27% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at December 31, 1996, respectively. These
are above the regulatory minimums of 4.00%, 8.00% and 4.00%, respectively.
Sunwest is classified as a "Well Capitalized" depository institution.
The Company had no material commitments for capital expenditures as of
December 31, 1996.
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 liabilities.
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. Conversely, 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 $37.6 million at December 31,
1996. Market rates of interest did not change significantly during 1996 and
1995. The Company's net yield on interest earning assets increased from 6.33% in
1995 to 6.95% in 1996.
Page - 28
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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 December 31,
1996:
Over
One
91 Year
Two Through 181 Through Over
(dollars in thousands) Through 180 Through Five Five
Immediate 90 Days Days 365 Days Years Years Total
- --------------------------------------------------------------------------------
INTEREST EARNING ASSETS
Loans $ 31,504 $ 9,528 $ 11,837 $ 9,334 $ 17,885 $ 2,569 $ 82,657
Investments 10,100 1,290 592 100 4,573 714 17,369
- --------------------------------------------------------------------------------
Total interest
earning assets $ 41,604 $ 10,818 $ 12,429 $ 9,434 $ 22,458 $ 3,283 $100,026
- --------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Time certificates of deposit of $100,000
or more $ -- $ 4,347 $ 2,075 $ 1,762 $ 788 $ -- $ 8,972
Time certificates
of under $100,000 -- 4,813 4,671 7,650 1,126 -- 18,260
Other interest
bearing deposits 34,342 -- -- -- -- -- 34,342
Other interest
bearing liabilities -- 18 19 48 749 -- 834
- --------------------------------------------------------------------------------
Total interest bearing
liabilities $ 34,342 $ 9,178 $ 6,765 $ 9,460 $ 2,663 $ -- $ 62,408
- --------------------------------------------------------------------------------
Rate sensitive
gap $ 7,262 $ 1,640 $ 5,664 $ (26)$ 19,795 $ 3,283 $ 37,618
- --------------------------------------------------------------------------------
Cumulative rate
sensitive gap $ 7,262 $ 8,902 $ 14,566 $ 14,540 $ 34,335 $37,618 $ 37,618
- --------------------------------------------------------------------------------
Cumulative assets divided
by liabilities 121% 120% 129% 124% 155% 160% 160%
- --------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS
See "ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K" below for
consolidated financial statements filed as a part of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A Form 8-K was filed on October 29, 1996 disclosing that the Board of
Directors, based on the recommendation of the audit committee, engaged Arthur
Andersen LLP as the independent public accountants for West Coast Bancorp and
its subsidiaries (the "Registrant") and therefore dismissed KPMG Peat Marwick
LLP. On November 9, 1996 a Form 8-K/A was filed disclosing that KPMG Peat
Marwick LLP disagreed with the Registrant over the accounting principle adopted
to account for a contribution of $3.4 million made by the Registrant to its
wholly owned subsidiary during January 1995. The Registrant treated the
contribution as a repayment of management fees and included the amount in
earnings of the wholly owned subsidiary during the year ended December 31, 1995.
KPMG Peat Marwick LLP believes that the amount should have been treated as a
contribution of capital and treated as additional paid-in-capital in the books
of the wholly owned subsidiary.
The accounting principle in question did not affect the Registrant's
consolidated financial statements. Further, although no separate audit of the
financial statements of the wholly owned subsidiary was performed for the year
ended December 31, 1995, an opinion was received from a qualified independent
accountant (not the successor accountant) that concluded that the Registrant's
accounting for the repayment of management fees was in accordance with generally
accepted accounting principles.
The subject matter of the disagreement was discussed among KPMG Peat Marwick
LLP and the members of the Audit Committee of the Board of Directors of West
Coast Bancorp. West Coast Bancorp has authorized the former accountant to
respond fully to the inquiries of the successor accountant concerning the
subject matter of the disagreement. Although the Registrant disclosed the
disagreement to all of the prospective successor accountants interviewed during
the selection process, the decision to select Arthur Andersen LLP as the
successor
Page - 29
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
accountant was not based on their discussions of the Registrant's accounting
treatment of the repayment of management fees.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS
Except as presented below, 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 - Section
16(a) Beneficial Ownership Reporting Compliance" 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 10. 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 11. 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 12. 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 13. EXHIBITS, LIST 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-20 for
a list of the exhibits filed as part of this report. Executive
Compensation Plans and Arrangements. Reference is made to the Index of
Exhibits at page F-20 for a list of the exhibits filed as part of this
report.
(b) Reports on Form 8-K. The Company filed a report on Form 8-K on October
29, 1996 that provided a notice of change in independent accountants
and amended that filing with a Form 8-K/A on November 9, 1996 to
disclose a disagreement with a former accountant. See "ITEM 8 -
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE."
(c) Exhibits required by Item 601 of Regulation S-K. See Item 13(a) 3.
(d) Additional financial statements. Inapplicable.
Page - 30
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1996
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 25th day of
March, 1997.
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 25, 1997
- ------------------ President and
John B. Joseph Chief Executive Officer
(Principal Executive Officer)
/s/ Ronald R. White Executive Vice President March 25, 1997
- ------------------- and Director
Ronald R. White
/s/ Frank E. Smith Chief Financial Officer March 25, 1997
- ------------------- (Principal Financial
Frank E. Smith and Accounting Officer)
/s/ J. David Cheshier Director March 25, 1997
- ---------------------
J. David Cheshier
/s/ Dr. L. Wayne Gertmenian Director March 25, 1997
- ---------------------------
Dr. L. Wayne Gertmenian
/s/ Thomas A. Jones Director March 25, 1997
- -------------------
Thomas A. Jones
/s/ Lacy G. Marlette, Jr. Director March 25, 1997
- -------------------------
Lacy G. Marlette, Jr.
Page - 31
<PAGE>
ITEMS 7, 13(a)(1) and 13(a)(2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
West Coast Bancorp and Subsidiaries:
Consolidated Balance Sheets -
December 31, 1996 and 1995...........................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995...........................................F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1996 and 1995...............................F-3
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995...........................................F-4
Notes to Consolidated Financial Statements.............................F-5
Independent Auditors' Reports..........................................F-18
Responsibility for Financial Reporting.................................F-19
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,
Assets 1996 1995
- -------------------------------------------------------------------------------
Cash and due from banks $ 7,246$ 6,507
Federal funds sold 10,100 15,400
Interest bearing deposits with financial institutions 1,982 3,933
Investment securities held to maturity - approximate fair value of
$2,626 and $5,616 in 1996 and 1995, respectively 2,607 5,574
Investment securities available for sale at fair value 2,680 --
Loans 82,657 79,000
Less allowance for possible credit losses (2,848) (3,820)
- ------------------------------------------------------------------------------
Net loans 79,809 75,180
- ------------------------------------------------------------------------------
Real estate owned, net 1,243 2,637
Premises and equipment, net 932 1,790
Deferred taxes 870 --
Net assets held for sale -- 1,452
Other assets 1,518 1,181
- ------------------------------------------------------------------------------
$ 108,987$ 113,654
================================================================================
Liabilities
- --------------------------------------------------------------------------------
Deposits:
Demand, non-interest bearing $ 33,983 $ 35,983
Savings, money market and interest bearing demand 34,342 36,699
Time certificates under $100,000 18,260 22,372
Time certificates of $100,000 or more 8,972 7,608
- --------------------------------------------------------------------------------
Total deposits 95,557 102,662
- --------------------------------------------------------------------------------
Notes payable to affiliates -- 948
Other borrowed funds 834 599
Other liabilities 1,642 1,124
10% Convertible subordinated debentures -- 3,035
- --------------------------------------------------------------------------------
Total liabilities 98,033 108,368
Commitments and contingencies
Minority interest in subsidiary 4,819 --
- --------------------------------------------------------------------- ---------
Shareholders' Equity
- --------------------------------------------------------------------- ---------
Common stock, no par value; 30,000,000 shares authorized;
9,168,942 shares issued and outstanding in 1996 and 1995 30,176 30,176
Securities valuation allowance (25) --
Accumulated deficit (24,016) (24,890)
- --------------------------------------------------------------------- ---------
Total shareholders' equity 6,135 5,286
- --------------------------------------------------------------------- ---------
$ 108,987 $ 113,654
================================================================================
(See accompanying notes to consolidated financial statements)
F - 2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS West Coast Bancorp and Subsidiaries
(in thousands, except per share data)
Years ended December 31,
Interest Income 1996 1995
- --------------------------------------------------------------------------------
Loans, including fees $ 8,226 $ 8,648
Federal funds sold 714 893
Investment securities 367 623
Interest bearing deposits with banks 187 330
- --------------------------------------------------------------------- ---------
Total interest income 9,494 10,494
- --------------------------------------------------------------------- ---------
Interest Expense
- --------------------------------------------------------------------- ---------
Savings, money market and
interest bearing demand deposits 707 768
Time certificate deposits under $100,000 957 1,725
Time certificate deposits of $100,000 or more 385 352
- --------------------------------------------------------------------- ---------
Total interest on deposits 2,049 2,845
Other 526 642
- --------------------------------------------------------------------- ---------
Total interest expense 2,575 3,487
- --------------------------------------------------------------------- ---------
Net interest income 6,919 7,007
Provision (benefit) for possible credit losses (668) 389
- --------------------------------------------------------------------- ---------
Net interest income after provision
(benefit) for possible credit losses 7,587 6,618
Other operating income 1,536 958
Other operating expenses 7,691 8,537
Minority interest in net income of subsidiaries 510 --
Loss on abandonment of Santa Ana facility lease 814 --
Loss on sale of Sunwest shares 246 --
Gain on liquidation of WCV, Inc. 149 629
- --------------------------------------------------------------------- ---------
Income (loss) before income taxes 11 (332)
Income tax (benefit) expense (863) 7
- --------------------------------------------------------------------- ---------
Net income (loss) $ 874 $ (339)
- --------------------------------------------------------------------- ---------
Net income (loss) per common share $ .10 $ (.04)
- --------------------------------------------------------------------- ---------
Weighted average number of common and
common equivalent shares outstanding 9,169 9,177
- --------------------------------------------------------------------- ---------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Securities Share-
Common stock Valuation Accumulated holders'
Shares Amount Allowance Deficit Equity
- --------------------------------------------------------------------------------
Balance at
December 31, 1994 9,193 $ 30,200 $ (3) $ (24,551) $ 5,646
Net loss -- -- -- (339) (339)
Reversal of shares
previously issued
to employee (24) (24) -- -- (24)
Change in securities
valuation allowance -- -- 3 -- 3
- --------------------------------------------------------------------------------
Balance at
December 31, 1995 9,169 30,176 -- (24,890) 5,286
Net income -- -- -- 874 874
Change in securities
valuation allowance -- -- (25) -- (25)
- --------------------------------------------------------------------------------
Balance at
December 31, 1996 9,169 $ 30,176 $ (25) $ (24,016) $ 6,135
================================================================================
(See accompanying notes to consolidated financial statements)
F - 3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS West Coast Bancorp and Subsidiaries
(in thousands)
Years ended December 31,
Cash Flows from Operating Activities 1996 1995
- --------------------------------------------------------------------------------
Net income (loss) $ 874 $ (339)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 497 566
Provision (benefit) for possible credit losses (668) 389
Minority interest in net income of subsidiares 510 --
Net change in receivables, payables and other assets 447 746
Gain on sales of loans -- (126)
Proceeds from sales of loans originated for sale -- 1,996
Loans originated for sale -- (1,863)
Write-down of real estate owned 441 479
Gain on sales of real estate owned (91) (111)
Loss on abandonment of Santa Ana facility lease 814 --
Loss on sale of Sunwest Bank shares 246 --
Gain on sale and liquidation of subsidiaries (585) (629)
Increase in deferred tax asset (870) --
- --------------------------------------------------------------------------------
Net cash provided by operating activities 1,615 1,108
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities
- --------------------------------------------------------------------------------
Proceeds from maturity of interest bearing balances 3,535 3,854
Purchases of interest bearing deposits
with financial institutions (1,584) (3,759)
Proceeds from maturity of investment securities
held to maturity 2,966 307
Proceeds from maturity of investment securities
available for sale -- 2,000
Purchase of investment securities available for sale (2,703) --
Net (increase) decrease in loans (5,971) 4,167
Proceeds from sales of real estate owned 3,267 3,620
Proceeds from sales of premises and equipment -- 205
Purchases of premises and equipment (64) (393)
Capital expenditures for real estate owned -- (37)
- --------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (554) 9,964
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities
- --------------------------------------------------------------------------------
Net decrease in deposits (7,105) (16,607)
Sale of Sacramento First National Bank -- 3,512
Sale of Business & Professional Bank stock 1,888 387
Proceeds from sale of Sunwest Bank shares 3,571 --
Borrowings from affiliates -- 391
Repayment of notes payable to affiliates (465) (163)
Repayment of subordinated debt
and other borrowed funds (3,511) (322)
- --------------------------------------------------------------------------------
Net cash used in financing activities (5,622) (12,802)
- --------------------------------------------------------------------------------
Decrease in cash and cash equivalents (4,561) (1,730)
Cash and cash equivalents at beginning of year 21,907 23,637
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 17,346 $ 21,907
================================================================================
Supplemental Disclosures of Cash Flow Information:
- --------------------------------------------------------------------- ---------
Cash paid during the period for:
Interest $ 2,603 $ 3,511
Income taxes 7 7
Supplemental Schedule of Non-cash Investing and Financing Activities:
- --------------------------------------------------------------------- ---------
Transfer of loans to real estate owned $ 2,010 $ 2,236
Increase minority interest and other assets
for purchase adjustment 492 --
Transfer from notes payable to affiliates
to other borrowed funds 475 --
Assumption of real estate owned senior debt 213 --
Reclassification of fixed assets to other assets 133 --
Increase in premises & equipment and 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)
F - 4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
West Coast Bancorp ("West Coast"), through its remaining active majority
owned subsidiary, Sunwest Bank ("Sunwest"), provides banking services in Orange
County, California and is subject to competition from other financial
institutions. West Coast and Sunwest 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, a
bank holding Company, and its subsidiaries (collectively, the "Company"). On
February 29, 1996, West Coast and Sunwest entered into an agreement with Western
Acquisitions, L.L.C. and Western Acquisition Partners, L.P., (collectively,
"Western"), affiliates of Hovde Financial, Inc., for West Coast to sell 35
existing shares of Sunwest common stock for $2,520,000 and for Sunwest to issue
and sell 15 new shares of common stock for $1,051,000. On September 13, 1996 the
sale closed. As a result of these transactions West Coast and Western own
approximately 56.5% and 43.5% of Sunwest, respectively.
West Coast's sale of the 35 existing shares of Sunwest's common shares
included a purchase price adjustment based on Sunwest's financial performance
through December 31, 1996. Based on Sunwest's performance, an additional
$493,000 was paid from Western to West Coast in February 1997. West Coast
recorded a loss on the sale of the 35 shares of Sunwest stock of $246,000 during
1996. This occurred because the selling price of Sunwest stock was less than the
book value of outstanding shares at September 13, 1996.
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, shares of B&PB common stock
equivalent to 14.5% of B&PB's then outstanding common stock and the right to
receive a contingent cash payment. The stock was included in Net Assets Held for
Sale in the accompanying balance sheet. The B&PB stock was sold during 1995 and
1996. The first contractual due date for the contingent cash payment is in 1998.
Sacramento First's operating results were not included in the consolidated
financial statements for any of the periods presented in the accompanying
financial statements. The only other remaining subsidiary with activity during
the periods was WCV Inc. Its activity was limited to the restoration of one
remaining property.
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. All inter-company balances and transactions have been eliminated in
consolidation.
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, 1996, all interest bearing deposits with
financial institutions mature in one year or less.
INVESTMENT SECURITIES
The Company's securities portfolio include U.S. Treasury, U.S. federal
agency, and mutual fund securities. Securities are classified as held to
maturity when the Company has the ability and intent to hold the securities to
maturity. Securities held to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts using the level yield
method, adjusted for actual prepayments.
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 capital considerations, and other similar factors.
Securities available for sale are carried at fair value with unrealized gains
and losses (net of related income taxes) reported as a separate component of
stockholders' equity. The cost of securities sold is based on the specific
identification method.
The Company has no investments classified as held for trading purposes.
INTEREST ON LOANS
Loans on which the accrual of interest has been discontinued are designated
as non accrual 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
F - 5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
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 the process of collection or collection of the
principal and interest is deemed probable.
When a loan is placed on non accrual 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. Restructured loans are returned to accrual status when the
remaining loan balance, net of any charge-offs related to the restructure, is
estimated to be fully collectible by Management and performing in accordance
with the applicable loan terms.
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 placed on non accrual.
When a loan is paid off, any unamortized net loan origination fees are
recognized in interest income.
SALES OF LOANS
The Company has realized gains from the sale of the guaranteed and
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
Provisions (benefits) for possible credit losses are charged (credited) to
operations based on Management's evaluation of the potential losses in its loan
portfolio. The major factors considered in evaluating potential losses are
historical charge-off experience, delinquency rates, local and national economic
conditions, the borrower's ability to repay the loan and timing of repayments,
and the value of any related collateral. Management's estimate of fair value of
the collateral considers the current and anticipated future real estate market
conditions, thereby causing these estimates to be particularly susceptible to
changes that could result in a material adjustment to results of operations in
the future. Recovery of the carrying value of such loans and related real estate
is dependent, to a great extent, on economic, operating and other conditions
that may be beyond the Bank's control.
For the Company, loans collectively reviewed for impairment include all
single-family loans excluding loans which are individually reviewed based on
specific criteria, such as delinquency, debt coverage, adequacy of collateral
and condition of collateral property. The Company's impaired loans within the
scope of Statement of Financial Accounting Standards No. 114 ("SFAS 114")
include nonaccrual loans (excluding those collectively reviewed for impairment),
certain restructured loans and certain performing loans less than 90 days
delinquent ("other impaired loans") that the Company believes will likely not be
collected in accordance with contractual terms of the loans.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Company continues to accrue interest on restructured loans since
full payment of principal and interest is expected and such loans are performing
or less than 90 days delinquent and therefore do not meet the criteria for
nonaccrual status.
The Company bases the measurement of loan impairment on the fair value of
the loans' collateral properties in accordance with SFAS 114. Impairment losses
are included in the allowance for loan losses through a charge to provision for
loan losses. Adjustments to impairment losses due to changes in the fair value
of impaired loans' collateral properties are included in the provision for loan
losses.
REAL ESTATE OWNED
Real estate owned consists of real estate acquired in settlement of loans.
Real estate owned is initially recorded at fair value at the time of
foreclosure, 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.
Once real estate is acquired and periodically thereafter, Management
obtains a valuation and an allowance for estimated losses is 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 valuation allowance may be necessary based on future economic conditions. 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
F - 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
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.
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. A
valuation allowance is established for any impaired long-lived assets.
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.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, investment securities with original maturities of less
than 90 days and Federal funds sold. Generally, Federal funds are purchased and
sold for one-day periods.
Non-interest earning cash reserves of $1,083,000 and $1,115,000 were
maintained by Sunwest to satisfy Federal regulatory requirements at December 31,
1996 and 1995, respectively.
NET INCOME (LOSS) PER SHARE
Employee stock options, convertible debentures and common stock warrants
are not included in the earnings per share computations as the effects of their
inclusion would have been anti-dilutive. Primary earnings per share approximate
fully diluted earnings per share.
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" in 1996. During 1996 Management elected to
abandon a facility lease when the lease cancellation clause becomes available
April 1, 1997. A valuation allowance for long-lived leasehold improvements of
$276,000 was established as required under SFAS 121.
The Company adopted Statement of Financial Accounting Standards No. 122
(SFAS 122), "Accounting for Mortgage Servicing Rights" during 1996. SFAS 122 had
no material impact on the Company's operations.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which permits either adoption of the new standard's principles
for recording the estimated value of stock-based compensation over the
applicable vesting period, or permits continued application of existing
accounting standards, with disclosure of any unrecorded cost under the new
standard and the related effect on earnings per share. The Company adopted SFAS
123 in 1996, and elected to adopt the disclosure provisions of the new standard
only. As the Company issued no stock-based compensation in 1996 and 1995
adoption of this standard had no effect on the Company's financial position or
disclosures for the years ended December 31, 1996 and 1995.
In 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" which
superseded SFAS 122. SFAS 125 is effective for all transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. Management does not expect adoption of SFAS 125 to have a material impact
on the Company's operations.
F - 7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
NOTE 2
INVESTMENT SECURITIES
All held to maturity securities are U.S. Treasury securities and
Obligations of other U.S. Government agencies. A summary of held to maturity
investment securities are as follows at December 31 (in thousands):
Estimated
Year Amortized Gross Unrealized Fair
ended Cost Gains Losses Value
- ----------- ------------- ---------- --------- ------------
1996 $ 2,607 $ 19 $ - $ 2,626
1995 5,574 42 - 5,616
- ----------- ------------- ---------- --------- ------------
At December 31, 1996, no held to maturity investment securities were
pledged. There were no sales of investment securities held to maturity during
1996 or 1995. Maturities of investment securities held to maturity at December
31, 1996 are as follows:
Amortized Estimated
(in thousands) Cost Fair Value
- -------------------------------- ------------ -------------
Due in one year $ - $ -
Due after one year through five
years 2,607 2,626
- -------------------------------- ------------ -------------
$ 2,607 $ 2,626
- -------------------------------- ------------ -------------
All available for sale securities are U.S. Treasury securities and
Obligations of other U.S. Government agencies. A summary of available for sale
investment securities are as at December 31 (in thousands):
Estimated
Year Amortized Gross Unrealized Fair
ended Cost Gains Losses Value
- ---------- ------------ ------------ -------- -------------
1996 $ 2,705 $ - $ (25) $ 2,680
- ---------- ------------ ------------ -------- -------------
The Company had no investment securities available for sale at December 31,
1995.
At December 31, 1996, investment securities available for sale with a book
value of $973,000 were pledged as collateral to secure court ordered and public
deposits and treasury, tax and loan accounts.
Maturities of investment securities available for sale at December 31, 1996
are as follows:
Amortized Estimated
(in thousands) Cost Fair Value
- -------------------------------- ------------ -------------
Due in one year $ - $ -
Due after one year through five
years 1,991 1,966
Due after five years through ten
years - -
Due after ten years 714 714
- -------------------------------- ------------ -------------
$ 2,705 $ 2,680
- -------------------------------- ------------ -------------
NOTE 3
LOANS
A summary of loans are as follows at December 31:
(in thousands) 1996 1995
- ---------------------------------- ------------ -----------
Commercial loans not secured by
real estate $ 25,300 $ 20,391
Real estate mortgage loans 54,938 56,959
Personal loans not secured by
real estate 2,728 2,023
Unearned income, discounts and
fees (309) (373)
- ---------------------------------- ------------ -----------
$ 82,657 $ 79,000
- ---------------------------------- ------------ -----------
Loans on which the accrual of interest had been discontinued or reduced at
December 31, 1996 and 1995 amounted to $931,000 and $4,153,000, respectively. If
these loans had been current throughout their terms, interest income would have
increased approximately $66,000 and $326,000 in 1996 and 1995, respectively.
The Company serviced loans for others totaling $3,908,000 and $4,749,000 at
December 31, 1996 and 1995, respectively. These loans are not included in the
accompanying consolidated balance sheets.
Loans totaling $5,633,000 at December 31, 1996 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 1996 and
1995.
F - 8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
NOTE 4
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
A summary of activity in the allowance for possible credit losses follows:
(in thousands) 1996 1995
- ------------------------------------ ----------- -----------
Balance at beginning of year $ 3,820 $ 4,649
Credits charged off (1,072) (2,156)
Recoveries on credits previously
charged off 876 938
- ------------------------------------ ----------- -----------
Net charge-offs (196) (1,218)
Provision (benefit) for possible
credit losses (668) 389
Other adjustments(1) (108) -
- ------------------------------------ ----------- -----------
Balance at end of year $ 2,848 $ 3,820
- ------------------------------------ ----------- -----------
(1) Reclassification of previous recoveries.
A summary of investment in impaired loans by type are as follows at
December 31:
(in thousands) 1996 1995
- ---------------------------------- ------------ ------------
Non accrual loans:
Single family residence $ - $ 185
Nonresidential real estate
mortgage 622 2,583
Commercial 309 1,385
Restructured loans 3,116 2,536
- ---------------------------------- ------------ ------------
$ 4,047 $ 6,689
- ---------------------------------- ------------ ------------
The Company had no "other impaired loans" at December 31, 1996 and 1995.
The related impairment valuation allowances were $775,000 and $1,074,000 at
December 31, 1996 and 1995, respectively. These amounts were included as part of
the allowance for possible credit losses in the accompanying consolidated
balance sheets. The provision for losses and any related recoveries are recorded
as part of the provision for possible credit losses on loans in the accompanying
statements of operations. During the years ended December 31, 1996 and 1995, the
Company's average investment in impaired loans were $5,195,000 and $8,586,000,
and interest income recorded during this period was $261,000 and $409,000, of
which $42,000 and $46,000 were recorded using the cash basis method of
accounting described above, respectively.
NOTE 5
VALUATION ALLOWANCE FOR REAL ESTATE OWNED
A summary of activity in the valuation allowance for real estate owned is
as follows:
(in thousands) 1996 1995
- ------------------------------------ --------- ------------
Balance at beginning of year $ 592 $ 777
Losses charged off (584) (664)
Provision for estimated losses 441 479
- ------------------------------------ --------- ------------
Balance at end of year $ 449 $ 592
- ------------------------------------ --------- ------------
NOTE 6
PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
(in thousands) 1996 1995
- ------------------------------------ ----------- ----------
Furniture, fixtures and equipment
$ 3,391 $ 3,554
Leasehold improvements 2,295 2,227
Property under capital leases 445 439
- ------------------------------------ ----------- ----------
6,131 6,220
Accumulated depreciation and
amortization (4,923) (4,430)
Valuation allowance (1) (276) -
- ------------------------------------ ----------- ----------
$ 932 $ 1,790
- ------------------------------------ ----------- ----------
(1) A valuation allowance was established to remove the net book value of all
leasehold improvements on a facility that Management plans on abandoning in
1997. This adjustment was included in the income statement category "Loss
on abandonment of Santa Ana facility."
NOTE 7
OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1996 consisted of long-term
obligations to an unaffiliated party of $474,000 and a capital lease obligation
of $360,000. An unaffiliated party purchased notes from an affiliated party
during 1996 and agreed to extend the maturity date to June 30, 1999. These notes
have an interest rate of prime plus 2%. Prime was 8.25% at December 31, 1996.
The capital lease obligation outstanding at December 31, 1996 had a
calculated annual interest rate of 45% and matures on November 30, 2000. The
current liability portion of the amortizing capital lease is $33,000. Other
borrowed funds at December 31, 1995 consisted of an agreement for payment of
judgment with a former officer totaling $223,000 and a capital lease obligation
totaling $376,000. The obligation due under the agreement with
F - 9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
the former officer had an interest rate of 10% and was paid in April, 1996.
NOTE 8
INCOME TAXES
The Company had a $7,000 State current income tax expense during 1996 and
1995. During 1996 deferred Federal and State tax benefits of $626,000 and
$244,000 were recognized, respectively. No deferred Federal or State tax expense
or benefit was recognized in 1995 and no current Federal tax expense or benefit
was recognized during 1996 and 1995.
The actual income tax expense (benefit) differed from the expected Federal
statutory rate as follows:
(in thousands) 1996 1995
- ------------------------------------ --------- ------------
Expected tax expense (benefit) at
34% $ 4 $ (113)
Change in the valuation
allowance for deferred tax
assets (1,183) 74
Net state franchise tax 51 (24)
Minority interest expense in
Sunwest earnings not deductible 173 -
Other 92 70
- ------------------------------------ --------- ------------
$ (863) $ 7
- ------------------------------------ --------- ------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 are as
follows:
(in thousands) 1996 1995
- ------------------------------------ --------- ------------
Deferred tax assets
Net operating loss carryforwards $ 5,113 $ 5,287
Net capital loss carryforwards 1,138 1,297
Loans, due to allowance for
possible credit losses,
deferred loan origination fees
and costs, market value
adjustment of loans held for
sale and leases 551 789
Alternative minimum tax credit
carryforwards 495 508
Real estate owned 204 269
Loss and expense accruals and other 584 319
General business tax credit
carryforwards 128 130
Premises and Equipment 17 -
- ------------------------------------ --------- ------------
Total gross deferred tax assets 8,230 8,599
Less valuation allowance (6,909) (8,092)
- ------------------------------------ --------- ------------
Net deferred tax assets 1,321 507
Deferred tax liabilities
Deferred State income taxes 451 285
Premises and equipment - 222
- ------------------------------------ --------- ------------
Total gross deferred tax
liabilities 451 507
- ------------------------------------ --------- ------------
Net deferred tax asset $ 870 $ -
- ------------------------------------ --------- ------------
In 1996 and 1995 the valuation allowance (decreased) increased by
$(1,183,000) and $74,000, respectively. The 1996 decrease was due to recognizing
that part of the deferred tax asset that is more likely than not to be utilized
in the future and due to earnings during the year.
No current income tax refund receivable or payables existed at December 31,
1996 or 1995. The Company had net operating loss carryforwards of $13.5 million
for Federal income tax purposes at December 31, 1996 which expire from 2005 to
2011 and $4.6 million for State franchise tax purposes which expire from 2008 to
2011. The Company had a net capital loss carryforward of $2.5 million for
Federal and State purposes. The Federal capital loss expires in 2000 versus no
expiration for the State capital loss. The Company had general business tax
credit carryforwards of $128,000 available for tax purposes at December 31, 1996
which expire from 1997 to 2000. The Company had alternative minimum tax credit
carryforwards of $191,000 available for Federal income tax purposes and $304,000
available for State franchise tax purposes at December 31, 1996.
F - 10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
Due to the sale of Sunwest's minority shares on September 13, 1996, Sunwest
is required to file a separate standalone tax return versus previously being
consolidated with the Company's return. Since the remaining entities included in
the Company's tax return have no significant current operating income,
utilization of the Company's deferred tax assets will likely be limited to
amounts available for Sunwest on its standalone tax return.
At December 31, 1996 Sunwest had the following deferred tax items: gross
deferred tax assets of $4,936,000; a valuation allowance of $3,806,000; a gross
deferred tax liability of $260,000 and a net deferred tax asset of $870,000.
At December 31, 1996 Sunwest had net operating loss carryforwards of $9.2
million for Federal income tax purposes at December 31, 1996 which expire from
2005 to 2011 and $2.8 million for State franchise tax purposes which expire from
2008 to 2011. Sunwest had no capital loss carryforwards. Sunwest had general
business tax credit carryforwards of $127,000 available for tax purposes at
December 31, 1996 which expire from 1997 to 2000. Sunwest had alternative
minimum tax credit carryforwards of $92,000 available for Federal income tax
purposes and $222,000 available for State franchise tax purposes at December 31,
1996.
NOTE 9
STOCK OPTION PLAN
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 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.
A summary of stock option transactions for the 1988 Plan follows:
Number of Price per
Shares Share
- ------------------------------ ------------- --------------
Options outstanding at
December 31, 1994 415,000 $ .88-2.75
Canceled (57,500) .88-2.75
- ------------------------------ ------------- --------------
Options outstanding at
December 31, 1995 357,500 1.06-2.75
Canceled - -
- ------------------------------ ------------- --------------
Options outstanding at
December 31, 1996 357,500 $ 1.06-2.75
- ------------------------------ ------------- --------------
Options exercisable at
December 31, 1996 336,500 $ 1.06-2.75
- ------------------------------ ------------- --------------
NOTE 10
RELATED PARTY TRANSACTIONS
Related party payables are summarized as follows:
Notes 10%
(in thousands) Payable Debentures
- ---------------------------------- ---------- --------------
Balance at December 31, 1994 $ 720 $ 1,817
Additions 389 -
Payments (161) -
- ---------------------------------- ----------- ------------
Balance at December 31, 1995 948 1,817
Affiliated sale to non-affiliate (468) -
Payments (480) (1,817)
- ---------------------------------- ----------- ------------
Balance at December 31, 1996 $ - $ -
- ---------------------------------- ----------- ------------
The notes payable were to certain Officers or Directors or their
affiliates. The 10% debentures represent West Coast's 10% Convertible
Subordinated Debentures owned by certain Officers and Directors. The 10%
convertible subordinated debentures were repaid on October 16, 1996, prior to
their stated maturity of December 15, 1996. No gain or loss on extinguishment
was recognized. No related party loans receivable were outstanding for any of
the periods. In the opinion of Management, all transactions with related parties
were either on terms similar to transactions with non-affiliated parties or on
terms beneficial to the Company as compared with similar transactions with
non-affiliated parties.
F - 11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
NOTE 11
OTHER OPERATING INCOME
A summary of other operating income is as follows:
(in thousands) 1996 1995
- ----------------------------------------- -------- --------
Depositor charges $ 593 $ 663
Gain on sale of B&PB shares 436 12
Interest recoveries on charged off loans 409 70
Service charges, commissions & fees 54 65
Net gain on sales of loans - 126
Other income 44 22
- ----------------------------------------- -------- --------
$ 1,536 $ 958
- ----------------------------------------- -------- --------
NOTE 12
OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
(in thousands) 1996 1995
- ----------------------------------------- -------- --------
Salaries and employee benefits $ 3,488 $ 4,002
Occupancy 984 982
Depreciation and amortization 497 566
Data processing 431 434
Customer service expense 366 350
Professional services 348 385
Net cost of operation of real estate
owned 272 296
Advertising and promotion 203 100
Regulatory fees and assessments 200 362
Stationary and supplies 128 153
Printing and postage 120 112
Insurance 101 143
Loss from facility lease adjustment - 155
Miscellaneous 553 497
- ----------------------------------------- -------- --------
$ 7,691 $ 8,537
- ----------------------------------------- -------- --------
NOTE 13
GAIN ON LIQUIDATION OF WCV, INC.
During November 1992, the Board of Directors of WCV, Inc., resolved to
liquidate WCV, Inc. The liquidation of WCV, Inc. was substantially completed in
1993. Included in other liabilities is the remaining net liability related to
WCV, Inc. of $64,000 and $99,000 at December 31, 1996 and 1995, respectively.
The gain on liquidation of $149,000 in 1996 and $629,000 in 1995 relates
primarily to refunds of $123,000 received in February 1996 and $469,000 received
in November 1995 from the California Underground Storage Tank Cleanup Fund
("USTF"). Payments were received from the USTF in connection with claims for
reimbursement of costs incurred by WCV, Inc. from the cleanup of an
environmentally impaired property. Reversals of future estimated costs based on
expected reimbursement from the USTF were also recorded in 1995. The Company has
no expected loss accrual all projected future costs are anticipated to be
reimbursement from the USTF. Future cleanup costs are expected to total
approximately $50,000.
NOTE 14
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of financial instruments for both assets and
liabilities are made at a discrete point in time based on relevant market
information and information about the financial instruments. Because no active
market exists for a significant portion of the Company's financial instruments,
fair value estimates are based on judgments regarding current economic
conditions, risk characteristics of various financial instruments, prepayment
assumptions, future expected loss experience and other such factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
The Company intends to hold the majority of its assets and liabilities to
their stated maturities. Thus, management does not believe that the bulk sale
concepts applied to certain problem loans for purposes of measuring the impact
of credit risk on fair values of said assets is reasonable to the operations of
the Company and does not fairly present the values realizable over the long term
on assets that will be retained by the Company. Therefore, the Company does not
intend to realize any significant differences between carrying balance and fair
value disclosures through sale or other disposition. No attempt should be made
to adjust stockholders' equity to reflect the following fair value disclosures
as management believes them to be inconsistent with the philosophies and
operations of the Company.
In addition, the fair value estimates are based on existing on-and
off-balance sheet financial instruments without attempting to estimate the value
of existing and anticipated future customer relationships and the value of
assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include the branch network, deferred tax assets and premises and
equipment.
F - 12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
Fair value estimates, methods, and assumptions are set forth below:
CASH, INTEREST BEARING DEPOSITS WITH FINANCIAL INSTITUTIONS AND FEDERAL 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
For loans, fair value is estimated using quoted market prices for similar
loans. For loans for which no quoted market price is readily available, fair
value is estimated by 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.
The estimated fair values of the Company's financial instruments are as follows:
December 31, 1996
- --------------------------------- -------------------------
Carrying Estimated
(in thousands) Amount Fair Value
- --------------------------------- ----------- -------------
Financial assets:
Cash, interest bearing deposits
and Federal funds $ 19,328 $ 19,328
Investment securities 5,312 5,306
Net Loans 79,809 79,801
Financial liabilities:
Deposit 95,557 95,565
Other interest bearing
liabilities 834 834
- --------------------------------- ----------- -------------
December 31, 1995
- --------------------------------- -------------------------
Carrying Estimated
(in thousands) Amount Fair Value
- --------------------------------- ----------- -------------
Financial assets:
Cash, interest bearing balances
and Federal funds $ 25,840 $ 25,840
Investment securities 5,574 5,616
Net Loans 75,180 75,217
Financial liabilities:
Deposits 102,662 102,724
Other interest bearing
liabilities 4,582 4,582
- --------------------------------- ----------- -------------
NOTE 15
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 additional profit sharing
contribution on behalf of the eligible employees. The Company's contributions of
approximately $60,000 and $66,000 were included in salaries and employee
benefits in 1996 and 1995, respectively.
NOTE 16
COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities for corporate offices and branch
operations and equipment under non-cancelable long-term operating leases.
Facility lease expense for the years ended December 31, 1996 and 1995 was
approximately $735,000 and $699,000, respectively. Rents paid were offset by
rental income of $159,000 and $127,000 in 1996 and 1995, respectively.
F - 13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
Future minimum lease commitments under all non-cancelable leases at
December 31, 1996 are as follows:
Capital Operating
(in thousands) Leases Leases
- ------------------------------------ -------- -------------
Year ending December 31:
1997 $ 189 $ 575
1998 197 527
1999 205 490
2000 196 445
2001 - 402
Thereafter - 845
- ------------------------------------ -------- -------------
Total minimum lease payment $ 787 $ 3,284
- ------------------------------------ -------- -------------
Less amounts representing
interest at approximately
45% and executory cost 427 -
- ------------------------------------ -------- -------------
Present value of minimum
capital lease payments
included in other liabilities $ 360 $ -
- ------------------------------------ -------- -------------
Management intends to exercise a lease buyout clause and abandon an
operating lease located in Santa Ana, California. The buyout clause requires
compensation for three years of rental payments totaling $484,000. This payment
and related costs were accrued in December 1996.
Amortization expense for capital leases is included with depreciation
expense. Total minimum sublease rental income to be received in the future under
non-cancelable subleases is $198,000.
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, 1996 and 1995, the
Company had standby and commercial letters of credit of $63,000 and $425,000
outstanding and commitments to extend credit, including mortgage warehouse lines
of credit, totaling $10,498,000 and $10,637,000, 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.
LITIGATION
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 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.
NOTE 16
REGULATORY MATTERS
WEST COAST
Based upon its examination of West Coast as of September 30, 1993, the FRB
and West Coast entered into a Written Agreement 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 its subsidiary banks and to
service its current debt, refrain from paying dividends, incurring debt,
assessing or collecting management or service fees from its subsidiary 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. The Company is not
subject to capital adequacy provisions since consolidated total assets are below
$150 million.
Based upon its examination of West Coast as of September 30, 1996, the FRB
concluded that West Coast was in substantial compliance with the Agreement.
SUNWEST
Sunwest is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possible additional discretionary-- actions
by regulators that, if undertaken, could have a direct material effect on
Sunwest's financial statements. Under capital adequacy guidelines and the
F - 14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of Sunwest's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. Sunwest's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by the regulators to ensure capital
adequacy require Sunwest to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that Sunwest
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation ("FDIC") categorized Sunwest as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized Sunwest must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that Management believes have
changed the institution's category. At December 31, 1995 Sunwest was classified
as adequately capitalized.
Sunwest's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest rate risk.
<TABLE>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- -------------------------- ------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------- ------------- ----------- ------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets) $ 12,190 13.8% $ =>7,056 =>8.0% $ =>8,821 =>10.0%
Tier 1 Capital (to Risk-Weighted Assets) 11,066 12.6 =>3,528 =>4.0 =>5,292 =>6.0
Tier 1 Capital (to Average Assets) 11,066 10.3 =>4,309 =>4.0 =>5,386 =>5.0
</TABLE>
A concurrent examination of Sunwest was completed by the FDIC and State
Banking Department during the third quarter of 1996. The FDIC and State Banking
Department subsequently notified Sunwest that their Orders were terminated due
to continued improvements of the Bank's financial condition. As evidence of its
commitment to continued improvement, the Bank's Board of Directors passed a
resolution to retain satisfactory management; maintain a Tier 1 capital to total
asset ratio of at least 7.0 percent; reduce assets adversely classified during
the July 29, 1996 exam to $9.1 million or less at December 31, 1996, to $7.5
million or less by June 30, 1997 and $6.0 million or less by December 31, 1997;
and furnish a quarterly written progress report to the FDIC Regional Director.
At December 31, 1996, Sunwest had $7.7 million of adversely classified loans
from the July 29, 1996 exam.
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. At December 31,
1996 this would allow $1.1 million of advances. Such loans or extensions of
credit to West Coast must be secured at the time of transaction by collateral
having a market value of 100% to 130%, depending on the collateral, of the
amount funded. West Coast would need approval of the Federal Reserve Board to
effect the transaction. Various laws and regulations limit the amount of
dividends which a bank can pay without obtaining prior approval from bank
regulators. At December 31, 1996, Sunwest is restricted from paying any cash
dividend without prior regulatory approval.
F - 15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
NOTE 17
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
West Coast Bancorp `s condensed balance sheets as of December 31, are as
follows:
(in thousands) 1996 1995
- -------------------------------------- ---------- ---------
Assets
Cash and short-term investments $ 444 $ 203
Investment in:
Sunwest Bank 11,058 8,349
Business & Professional Bank - 1,452
WCV, Inc. 247 98
Other assets 576 144
- -------------------------------------- ---------- ---------
$ 12,325 $ 10,246
- -------------------------------------- ---------- ---------
Liabilities and Shareholders' Equity
Notes payable $ 474 $ 1,171
10% Convertible subordinated
debentures - 3,035
Minority interest 4,819 -
Other liabilities 897 754
- -------------------------------------- ---------- ---------
Total liabilities 6,190 4,960
- -------------------------------------- ---------- ---------
Shareholders' equity:
Common stock 30,176 30,176
Accumulated deficit (24,041) (24,890)
- -------------------------------------- ---------- ---------
Total shareholders' equity 6,135 5,286
- -------------------------------------- ---------- ---------
$ 12,325 $ 10,246
- -------------------------------------- ---------- ---------
West Coast Bancorp's condensed statements of operations for the years ended
December 31, are as follows:
(in thousands) 1996 1995
- ---------------------------------------- --------- --------
Income
Interest income from subsidiaries $ 31 $ -
- ---------------------------------------- --------- --------
31 -
- ---------------------------------------- --------- --------
Expenses
Interest expense 356 474
Salaries and employee benefits 163 239
Professional services 67 70
Management fees repaid to Sunwest
Bank - 3,400
Other expenses 78 89
- ---------------------------------------- --------- --------
664 4,272
- ---------------------------------------- --------- --------
Equity in undistributed net income
of subsidiaries (1) 1,322 3,924
Gain on sale of B&PB shares 436 13
Loss on sale of Sunwest shares 246 -
- ---------------------------------------- --------- --------
Income (loss) before income taxes 879 (335)
Income taxes 5 4
- ---------------------------------------- --------- --------
Net income (loss) $ 874 $ (339)
- ---------------------------------------- --------- --------
(1) Includes a $3.4 million management fee repayment from West Coast to
Sunwest in 1995.
West Coast Bancorp's condensed statements of cash flows for the years ended
December 31, are as follows:
(in thousands) 1996 1995
- ---------------------------------------- -------- ---------
Cash flows from operating activities:
Net income (loss) $ 874 $ (339)
Equity in net income of subsidiaries (1,322) (3,924)
Increase in other liabilities 30 251
Gain on sale of B&PB stock (436) (12)
Loss on sale of Sunwest shares 246 -
- ---------------------------------------- -------- ---------
Net cash used in operating activities (608) (4,024)
- ---------------------------------------- -------- ---------
Cash flows from investing activities:
Sale of Sunwest stock 2,520 -
Decrease in advances to subsidiaries 113 273
Capital infusion into Sunwest Bank - (300)
Decrease in other assets 60 207
- ---------------------------------------- -------- ---------
Net cash provided by investing
activities 2,693 180
- ---------------------------------------- -------- ---------
Cash flows from financing activities:
Increases (decreases) in notes payable
and subordinated debt (3,732) 140
Sale of Sacramento First - 3,511
Sale of B&PB shares 1,888 388
- ---------------------------------------- -------- ---------
Net cash (used in) provided by
financing activities (1,844) 4,039
- ---------------------------------------- -------- ---------
Increase in cash 241 195
Cash at beginning of year 203 8
- ---------------------------------------- -------- ---------
Cash at end of year $ 444 $ 203
- ---------------------------------------- -------- ---------
Supplemental schedule of non-cash financing activities
- -----------------------------------------------------------
Issuance of new Sunwest common shares
to minority shareholders $ 1,080 $ -
Reclassify other liability to notes
payable - 311
- ---------------------------------------- -------- ---------
Supplemental disclosure of cash flow information
- ---------------------------------------- -------- ---------
Cash paid during the year for:
Interest $ 368 $ 474
Income taxes 5 4
- ---------------------------------------- -------- ---------
West Coast's sources of liquidity are 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 prior
regulatory consent.
During 1996, West Coast did not receive any dividends from its
subsidiaries. West Coast does not expect to receive dividends from its
subsidiaries during
F - 16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1996 and 1995
1997. At December 31, 1996, West Coast had cash totaling $444,000.
West Coast's primary source of cash in 1997 is expected to be the $493,000
purchase price adjustment from the sale of Sunwest shares. This amount was
received in February 1997. West Coast paid $120,000 of past due directors fees
in February 1997. West Coast anticipates other cash expenditures during 1997 to
consist of debt service payments and other operating expenses. West Coast's
projected debt service for 1997 includes quarterly payments on the notes payable
of $12,000 each.
NOTE 18
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows (in thousands, except per share
data):
1996 March 31 June 30 September 30 December 31 Total
- ---------------------------------------------- ---------------- -------------- -
Total interest income $ 2,389 $ 2,348 $ 2,372 $ 2,385 $ 9,494
Total interest expense 722 666 611 576 2,575
Net interest income 1,667 1,682 1,761 1,809 6,919
Provision (benefit) for
possible credit losses (14) (42) (180) (432) (668)
Net income (loss) before
income taxes (271) 92 603 (413) 11
Net income (loss) (271) 85 603 457 874
Net income (loss) per
common share (.03) .01 .07 .05 0.10
1995
Total interest income $ 2,646 $ 2,634 $ 2,673 $ 2,541 $ 10,494
Total interest expense 871 817 999 800 3,487
Net interest income 1,775 1,817 1,674 1,741 7,007
Provision (benefit) for
possible credit losses 178 (116) 152 175 389
Net income (loss) before
income taxes (239) (36) (320) 263 (332)
Net income (loss) (239) (43) (320) 263 (339)
Net income (loss) per
common share (.03) -- (.04) .03 (.04)
During the fourth quarter of 1996, West Coast recorded a $814,000 expected
loss on abandonment of a facility lease and a $870,000 deferred income tax
benefit. During the fourth quarter of 1995, West Coast recorded a $629,000 gain
from liquidation of WCV, Inc. This resulted from the USTF reimbursement and the
expectation that future cleanup costs will be reimbursed by the USTF.
F - 17
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
of West Coast Bancorp
We have audited the accompanying consolidated balance sheet of West Coast
Bancorp (a California corporation) and subsidiaries as of December 31, 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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 audit provides 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, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Orange County, California
March 3, 1997
The Board of Directors
of West Coast Bancorp
We have audited the accompanying consolidated balance sheet of West Coast
Bancorp and subsidiaries (the Company) as of December 31, 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flow for the year ended December 31, 1995. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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, 1995, and the results of their operations
and their cash flows for the year ended December 31, 1995 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Orange County, California
February 29, 1996
F - 18
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
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 communicating corporate policy throughout the
organization.
West Coast Bancorp's 1996 consolidated financial statements have been
audited by Arthur Andersen 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, both jointly and separately, to discuss financial reporting matters
and audit and control functions.
/s/ John B. Joseph
John B. Joseph
Chairman of the Board and President
March 25, 1997
/s/ Frank E. Smith
Frank E. Smith
Senior Vice President and
Chief Financial Officer
March 25, 1997
F - 19
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
EXHIBITS
Number Description Page No.
3.01 Amended Articles of Incorporation of West Coast,
filed as Exhibit 3.1(c) *
3.02 Amended Bylaws of West Coast, filed as Exhibit 3.2(d) *
10.01 Form of Indemnification Agreement entered into
and between West Coast and its directors and
certain of its officers, filed
as Exhibit 10.13(a) (1) *
10.02 Form of West Coast 1988 Stock Option Plan, filed
as Exhibit 10.14(b) (1) *
10.03 Promissory Note of West Coast dated as of June 30, 1991
and payable to The Centennial Group, Inc.
filed as Exhibit 10.4(d) *
10.04 Promissory Note of West Coast dated as of June 30, 1991
and payable to Centennial Capital, Inc.
filed as Exhibit 10.5(d) *
10.05 West Coast Bancorp 401(k) Profit Sharing Plan Document,
Trust and Summary Plan Description filed as Exhibit 10.06 (e) *
10.06 Agreement between West Coast and B&PB to sell Sacramento
First to B&PB dated June 30, 1994 (f) *
10.07 Stock Purchase agreement among Western, West Coast and Sunwest
to purchase Sunwest stock filed as Exhibit 10.19(g) *
10.08 Stock Purchase agreement among Western and West Coast
to purchase B&PB stock filed as Exhibit 10.20(g) *
10.09 Employment effective September 1, 1996 by and between Sunwest
and James G. LeSieur (1) F-22
10.10 Employment effective September 1, 1996 by and between Sunwest
and Frank E. Smith (1) F-26
10.11 Promissory note modification agreement made as of
July 3, 1996, by Robert McKernan and West Coast F-30
21 Subsidiaries of West Coast F-32
23 Consent of Independent Auditors - Arthur Andersen LLP F-33
23.1 Consent of Independent Auditors - KPMG Peat Marwick LLP F-34
27 Financial Data Schedule
(1) These are executive compensation plans or arrangements as reported under
ITEM 13 part (a) 3 of this Form 10K
F - 20
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
(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 Report on Form 8-K filed on June 30, 1994
with the commission, and which is incorporated herein by reference
(g) To West Coast's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 filed with the commission, and which is
incorporated herein by reference
* Not Applicable
F - 21
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
EXHIBIT 10.09
EMPLOYMENT AGREEMENT
Agreement made effective as of September 1, 1996, by and between
Sunwest Bank ("Company") and James G. LeSieur, III ("Executive").
WHEREAS, the Board of Directors of the Company ("Board") desires to
ensure the mutual benefits of the employment relationship with the Executive
including continual service, effective leadership, and appropriate
representation of the Company by the Executive; and
WHEREAS, the Executive is willing to serve the Company on the terms and
conditions herein provided;
NOW, THEREFORE, in order to effect the foregoing, the parties hereto
wish to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the executive, and the
Executive hereby agrees to serve the Company, on the terms and conditions set
forth herein.
2. Position and Responsibilities. The Executive shall serve as
President and Chief Executive Officer of the Company and shall have such
responsibilities, duties and authority as are generally associated with such
positions and as may from time to time be assigned to the Executive by the Board
that are consistent with such responsibilities, duties and authority. During the
term of this Agreement, the Executive shall devote substantially all his time,
attention, skill and efforts during normal business hours to the business and
affairs of the Company.
3. Term of Agreement. This Agreement shall commence on September 1,
1996 and shall continue in effect until August 31, 1997; provided, however, that
commencing on September 1, 1997 and each September 1 thereafter, the term of
this Agreement shall be automatically extended for one additional year without
action by the parties unless at least 60 days prior to such September 1st date,
the Company or the Executive shall have given written notice to the other that
this Agreement shall not be extended.
4. Compensation and Related Matters.
(a) Salary. During the period of the Executive's employment
hereunder, the Company shall pay to the executive a base salary of
$140,000 per year, payable at regular intervals in accordance with the
Company's normal payroll practices now or hereafter in effect.
(b) Incentive/Bonus Payments. During the period of the
Executive's employment hereunder, the Executive shall participate in
the Sunwest Bank Employee Incentive Program subject to the terms and
conditions of such program.
(c) Special Bonus. If during the period of the Executive's
employment hereunder, the Company, (i) is merged with and into another
Person, (ii) 80% or more of its shares are sold to another Person or
(iii) substantially all its assets are sold or transferred to another
Person (in each case, being a "Control Transaction"), then, at the
closing of such Control Transaction, the Executive shall be entitled to
receive a lump sum cash bonus payment equal to a specified percentage
by which the Purchase Price (as hereinafter defined) exceeds the sum of
(x) $9,500,000 plus (y) the additional equity capital, if any,
hereinafter infused into the Company before the closing of any Control
Transaction (such sum being the "Base"). The amount of such bonus shall
be computed as follows:
- If the Purchase Price is $10,500,000 or below, the
Executive's bonus will be equal to 2% of the
difference between the Purchase Price and the Base;
F - 22
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
- If the Purchase Price is between $10,500,001 and
$11,500,000, the Executive's bonus will be equal to
3% of the difference between the Purchase Price and
the Base;
- If the Purchase Price is between $11,500,001 and
$12,500,000, the Executive's bonus will be equal to
4% of the difference between the Purchase Price and
the Base; or
- If the Purchase Price is greater than $12,500,000,
the Executive's bonus will be equal to 5% of the
difference between the Purchase Price and the Base;
provided, however, that the maximum bonus payable under this Paragraph
4(c) shall not exceed $300,000. For purposes of this Paragraph 4(c) the
term "Purchase Price" shall mean the entire amount of consideration
paid in the Control Transaction including, without limitation, cash,
securities, notes, future or contingent payment rights, other personal
or real property or any combination thereof. For purposes of
calculating the Purchase Price, securities which are included in the
Purchase Price and which are traded on a national securities exchange
or quoted on the NASDAQ National Market System shall be valued at the
mean between the latest bid and asked prices prior to the closing of
the Control Transaction. The value of all other securities or property
to be paid in the Control Transaction whose value can not be readily
determined shall be mutually agreed by the parties.
(d) Expenses. During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt
reimbursement for all reasonable and customary expenses incurred by the
Executive in performing services hereunder in accordance with the
general policies and procedures established by the Company.
(e) Employee Benefits. During the period of the Executive's
employment hereunder, the Executive shall be entitled to participate in
all employee benefit plans or arrangements of the Company on the same
basis as other employees of the Company including, without limitation,
plans or arrangements providing medical insurance, dental insurance,
life insurance, disability insurance, sick leave, vacation, retirement
and automobile allowance.
5. Termination by the Company.
(a) Cause. The Company shall have the right to terminate the
Executive's employment hereunder for cause. The term "cause," as used
herein, shall refer only to the following events:
(i) personal dishonesty, incompetence or willful
misconduct;
(ii) breach of fiduciary duty involving personal profit;
(iii) intentional failure to perform stated duties;
(iv) willful violation of any law, rule, regulation or
final cease and desist order (other than traffic
violations or similar minor offenses); or
(v) material breach of any provision of this Agreement.
If the Company exercises its right under this Paragraph 5(a), the
Executive's right to receive salary and all other benefits provided for
hereunder shall terminate immediately upon the effective date of the
termination for cause.
(b) At Will. The Company shall have the right to terminate the
Executive's employment hereunder, without cause, upon the payment or
provision to the Executive of his salary set forth in Paragraph 4(a)
for the remaining term of this Agreement; provided, however, in no
event shall such payment be for less than twelve months salary.
(c) Supervisory Suspension. If the Executive is suspended
and/or temporarily prohibited from participating in the conduct of the
Company's affairs by a notice served under Section 8(e)(3) or (g) (1)
of the Federal Deposit Insurance Act or similar statute, rule or
regulation, the Company's obligations under this Agreement shall be
F - 23
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Company
may, in its discretion, (I) pay the Executive all or part of the
compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(d) Regulatory Removal. If the Executive is removed and/or
permanently prohibited from participating in the conduct of the
Company's affairs by an order issued under Section 8(e)(4) or (g)(1) of
the Federal Deposit Insurance Act or similar statute, rule or
regulation, all obligations of the Company under this Agreement shall
terminate as of the effective date of the order.
6. Waivers not to be Continued. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver or
as a consent to any subsequent breach by the other party.
7. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice.
A. If to the Company, to:
535 East First Street
Tustin, CA 92680
Attention: Chairman of the Board
B. If to the Executive, to:
James G. LeSieur, III
535 East First Street
Tustin, CA 92680
and to such other or additional person or person as either party shall have
designated to the other party in writing by like notice.
8. Unauthorized Disclosure. During the period of his employment
hereunder and for a period of two years following the cessation of such
employment (irrespective of the reason therefor), the Executive shall not,
except as required by any court, supervisory authority or administrative agency,
without the written consent of the Board or a person authorized thereby,
disclose to any person, other than an employee of the Company or a person to
whom disclosure is reasonably necessary or appropriate in connection with the
performance by the Executive of his duties as an employee of the Company, any
confidential information obtained by him while in the employ of the Company;
provided, however, that confidential information shall not include any
information known generally to the public (other than as a result of
unauthorized disclosure by the executive).
9. Arbitration. Any dispute or controversy arising or in connection
with this Agreement shall be settled exclusively by arbitration in the State of
California in accordance with the rules of the American Arbitration Association
then in effect. Notwithstanding the pendency of any such dispute or controversy,
the Company will continue to pay the Executive's full compensation in effect
when the notice giving rise to the dispute was given and continue the Executive
as a participant in all compensation, employee benefits and executive benefits
in which the Executive was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved, except that no such
continuation of compensation or benefits shall apply if the executive is
terminated for cause under Paragraph 5(a) hereof. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction.
10. General Provisions.
(a) Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof,
and supersedes and replaces all prior agreements among or between the
parties. No amendment, waiver or termination of any of the provisions
hereof shall be effective unless in writing and signed by
F - 24
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
the party against whom it is sought to be enforced. Any written
amendment, waiver, or termination hereof executed by the company and
the Executive shall be binding upon them and upon all other Persons,
without the necessity of securing the consent of any other Person, and
no Person shall be deemed to be a third-party beneficiary under this
Agreement.
(b) Person. "Person" as used in this Agreement means a natural
person, joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or any
other legally cognizable entity.
(c) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all
of which taken together shall constitute one and the same Agreement.
(d) No Waiver. Except as otherwise expressly set forth herein,
no failure on the part of any party hereto to exercise and no delay in
exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right,
power or remedy hereunder preclude any other or future exercise thereof
or the exercise of any other right, power or remedy.
(e) Headings. The headings of the paragraphs of this Agreement
have been inserted for convenience of reference only and shall in no
way restrict or modify any of the terms or provisions hereof.
(f) Severability. If for any reason any provision of this
Agreement is held invalid or unenforceable, such invalidity or
unenforceability shall not affect the validity or enforceability of any
other provision of this Agreement. If any provision of this Agreement
shall be held invalid or unenforceable in apart, such invalidity or
unenforceability shall in no way effect the rest of such provision not
held so invalid, and the rest of such provision, together with all
other provisions of this Agreement, shall to the full extent consistent
with law continue in full force and effect.
(g) Governing Law. This Agreement shall be governed and
construed and the legal relationships of the parties determined in
accordance with the laws of the State of California applicable to
contracts executed and to be performed solely in the State of
California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above mentioned.
ATTEST: SUNWEST BANK
________________________________ By: __________________________
---------------------------
---------------------------
THE EXECUTIVE
_______________________________ /s/ James G. LeSieur
Witness James G. LeSieur, III
F - 25
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
Agreement made effective as of September 1, 1996, by and between
Sunwest Bank ("Company") and Frank E. Smith ("Executive").
WHEREAS, the Board of Directors of the Company ("Board") desires to
ensure the mutual benefits of the employment relationship with the Executive
including continual service, effective leadership, and appropriate
representation of the Company by the Executive; and
WHEREAS, the Executive is willing to serve the Company on the
terms and conditions herein provided;
NOW, THEREFORE, in order to effect the foregoing, the parties hereto
wish to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the executive, and the
Executive hereby agrees to serve the Company, on the terms and conditions set
forth herein.
2. Position and Responsibilities. The Executive shall serve as Senior
Vice President and Chief Financial Officer of the Company and shall have such
responsibilities, duties and authority as are generally associated with such
positions and as may from time to time be assigned to the Executive that are
consistent with such responsibilities, duties and authority. During the term of
this Agreement, the Executive shall devote substantially all his time,
attention, skill and efforts during normal business hours to the business and
affairs of the Company.
3. Term of Agreement. This Agreement shall commence on September 1,
1996 and shall continue in effect until August 31, 1997; provided, however, that
commencing on September 1, 1997 and each September 1 thereafter, the term of
this Agreement shall be automatically extended for one additional year without
action by the parties unless at least 60 days prior to such September 1st date,
the Company or the Executive shall have given written notice to the other that
this Agreement shall not be extended.
4. Compensation and Related Matters.
(a) Salary. During the period of the Executive's employment
hereunder, the Company shall pay to the executive a base salary of
$125,000 per year, payable at regular intervals in accordance with the
Company's normal payroll practices now or hereafter in effect.
(b) Incentive/Bonus Payments. During the period of the
Executive's employment hereunder, the Executive shall participate in
the Sunwest Bank Employee Incentive Program subject to the terms and
conditions of such program.
(c) Special Bonus. If during the period of the Executive's
employment hereunder, the Company, (i) is merged with and into another
Person, (ii) 80% or more of its shares are sold to another Person or
(iii) substantially all its assets are sold or transferred to another
Person (in each case, being a "Control Transaction"), then, at the
closing of such Control Transaction, the Executive shall be entitled to
receive a lump sum cash bonus payment equal to a specified percentage
by which the Purchase Price (as hereinafter defined) exceeds the sum of
(x) $9,500,000 plus (y) the additional equity capital, if any,
hereinafter infused into the Company before the closing of any Control
Transaction (such sum being the "Base"). The amount of such bonus shall
be computed as follows:
- If the Purchase Price is $10,500,000 or below, the
Executive's bonus will be equal to 1% of the
difference between the Purchase Price and the Base;
F - 26
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
- If the Purchase Price is between $10,500,001 and
$11,500,000, the Executive's bonus will be equal to
1.5% of the difference between the Purchase Price and
the Base;
- If the Purchase Price is between $11,500,001 and
$12,500,000, the Executive's bonus will be equal to
2% of the difference between the Purchase Price and
the Base; or
- If the Purchase Price is greater than $12,500,000,
the Executive's bonus will be equal to 2.5% of the
difference between the Purchase Price and the Base;
provided, however, that the maximum bonus payable under this Paragraph
4(c) shall not exceed $150,000. For purposes of this Paragraph 4(c) the
term "Purchase Price" shall mean the entire amount of consideration
paid in the Control Transaction including, without limitation, cash,
securities, notes, future or contingent payment rights, other personal
or real property or any combination thereof. For purposes of
calculating the Purchase Price, securities which are included in the
Purchase Price and which are traded on a national securities exchange
or quoted on the NASDAQ National Market System shall be valued at the
mean between the latest bid and asked prices prior to the closing of
the Control Transaction. The value of all other securities or property
to be paid in the Control Transaction whose value can not be readily
determined shall be mutually agreed by the parties.
(d) Expenses. During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt
reimbursement for all reasonable and customary expenses incurred by the
Executive in performing services hereunder in accordance with the
general policies and procedures established by the Company.
(e) Employee Benefits. During the period of the Executive's
employment hereunder, the Executive shall be entitled to participate in
all employee benefit plans or arrangements of the Company on the same
basis as other employees of the Company including, without limitation,
plans or arrangements providing medical insurance, dental insurance,
life insurance, disability insurance, sick leave, vacation, retirement
and automobile allowance.
5. Termination by the Company.
(a) Cause. The Company shall have the right to terminate the
Executive's employment hereunder for cause. The term "cause," as used
herein, shall refer only to the following events:
(i) personal dishonesty, incompetence or willful
misconduct;
(ii) breach of fiduciary duty involving personal profit;
(iii) intentional failure to perform stated duties;
(iv) willful violation of any law, rule, regulation or
final cease and desist order (other than traffic
violations or similar minor offenses); or
(v) material breach of any provision of this Agreement.
If the Company exercises its right under this Paragraph 5(a), the
Executive's right to receive salary and all other benefits provided for
hereunder shall terminate immediately upon the effective date of the
termination for cause.
(b) At Will. The Company shall have the right to terminate the
Executive's employment hereunder, without cause, upon the payment or
provision to the Executive of his salary set forth in Paragraph 4(a)
for the remaining term of this Agreement; provided, however, in no
event shall such payment be for less than twelve months salary.
(c) Supervisory Suspension. If the Executive is suspended and/or
temporarily prohibited from participating in the conduct of the
Company's affairs by a notice served under Section 8(e)(3) or (g) (1)
of the Federal Deposit Insurance Act or similar statute, rule or
regulation, the Company's obligations under this Agreement shall be
F - 27
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Company
may, in its discretion, (I) pay the Executive all or part of the
compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(d) Regulatory Removal. If the Executive is removed and/or
permanently prohibited from participating in the conduct of the
Company's affairs by an order issued under Section 8(e)(4) or (g)(1) of
the Federal Deposit Insurance Act or similar statute, rule or
regulation, all obligations of the Company under this Agreement shall
terminate as of the effective date of the order.
6. Waivers not to be Continued. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver or
as a consent to any subsequent breach by the other party.
7. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice.
A. If to the Company, to:
535 East First Street
Tustin, CA 92680
Attention: Chairman of the Board
B. If to the Executive, to:
Frank E. Smith
535 East First Street
Tustin, CA 92680
and to such other or additional person or person as either party shall have
designated to the other party in writing by like notice.
8. Unauthorized Disclosure. During the period of his employment
hereunder and for a period of two years following the cessation of such
employment (irrespective of the reason therefor), the Executive shall not,
except as required by any court, supervisory authority or administrative agency,
without the written consent of the Board or a person authorized thereby,
disclose to any person, other than an employee of the Company or a person to
whom disclosure is reasonably necessary or appropriate in connection with the
performance by the Executive of his duties as an employee of the Company, any
confidential information obtained by him while in the employ of the Company;
provided, however, that confidential information shall not include any
information known generally to the public (other than as a result of
unauthorized disclosure by the executive).
9. Arbitration. Any dispute or controversy arising or in connection
with this Agreement shall be settled exclusively by arbitration in the State of
California in accordance with the rules of the American Arbitration Association
then in effect. Notwithstanding the pendency of any such dispute or controversy,
the Company will continue to pay the Executive's full compensation in effect
when the notice giving rise to the dispute was given and continue the Executive
as a participant in all compensation, employee benefits and executive benefits
in which the Executive was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved, except that no such
continuation of compensation or benefits shall apply if the executive is
terminated for cause under Paragraph 5(a) hereof. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction.
10. General Provisions.
(a) Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof,
and supersedes and replaces all prior agreements among or between the
parties. No amendment, waiver or termination of any of the provisions
hereof shall be effective unless in writing and signed by
F - 28
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
the party against whom it is sought to be enforced. Any written
amendment, waiver, or termination hereof executed by the company and
the Executive shall be binding upon them and upon all other Persons,
without the necessity of securing the consent of any other Person, and
no Person shall be deemed to be a third-party beneficiary under this
Agreement.
(b) Person. "Person" as used in this Agreement means a natural
person, joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or any
other legally cognizable entity.
(c) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all
of which taken together shall constitute one and the same Agreement.
(d) No Waiver. Except as otherwise expressly set forth herein,
no failure on the part of any party hereto to exercise and no delay in
exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right,
power or remedy hereunder preclude any other or future exercise thereof
or the exercise of any other right, power or remedy.
(e) Headings. The headings of the paragraphs of this Agreement
have been inserted for convenience of reference only and shall in no
way restrict or modify any of the terms or provisions hereof.
(f) Severability. If for any reason any provision of this
Agreement is held invalid or unenforceable, such invalidity or
unenforceability shall not affect the validity or enforceability of any
other provision of this Agreement. If any provision of this Agreement
shall be held invalid or unenforceable in apart, such invalidity or
unenforceability shall in no way effect the rest of such provision not
held so invalid, and the rest of such provision, together with all
other provisions of this Agreement, shall to the full extent consistent
with law continue in full force and effect.
(g) Governing Law. This Agreement shall be governed and
construed and the legal relationships of the parties determined in
accordance with the laws of the State of California applicable to
contracts executed and to be performed solely in the State of
California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above mentioned.
ATTEST: SUNWEST BANK
________________________________ By: _______________________________
-------------------------------
-------------------------------
THE EXECUTIVE
_________________________________ /s/ Frank E. Smith
Witness Frank E. Smith
F - 29
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
EXHIBIT 10.10
PROMISSORY NOTE MODIFICATION AGREEMENT
This Promissory Note Modification Agreement (this "Agreement") is made as of
July 3, 1996, by ROBERT MCKERNAN, an individual ("McKernan"), and WEST COAST
BANCORP, a California corporation ("Borrower").
Factual Background
A. Borrower executed a Promissory Note dated June 30, 1991 (the "CGI Note"), as
maker, in favor of The Centennial Group, Inc., "Centennial") as payee, in the
stated principal amount of $531,855.85. The CGI Note was modified on June 30,
1994 by way of a Promissory Note Modification Agreement of same date.
B. Borrower executed a Promissory Note dated June 30, 1991 (the "CCI Note"), as
maker, in favor of Centennial Capital, Inc., as payee, in the stated principal
amount of $33,536.29. Centennial Capital, Inc. has assigned its interest in the
CCI Note to Centennial. The CCI Note was modified on June 30, 1994 by way of a
Promissory Note Modification Agreement of same date.
C. McKernan by way of assignments Dated July 2, 1996 became the Owner of the CGI
Note and CCI Note.
D. Pursuant to the term of this Agreement, Borrower and McKernan have agreed to
modify the CGI Note and CCI Note (collectively the "McKernan Notes") as set
forth below.
Agreement
Therefore, Borrower and McKernan agree as follows:
1. Recitals. The recitals set forth above in the Factual Background are true,
accurate and correct.
2. Modification of Note. Effective as of July 3, 1996, and pursuant to the
conditions in section 3 of this Agreement, the McKernan Notes are hereby amended
as follows:
2.1 All prior installment due as of June 30, 1996 will be modified to be paid
according to the following paragraphs (a), (b) and (c):
(a) The Maturity Date of the Note will be extended to June 30, 1999.
(b) Borrower will make quarterly payments on the McKernan Notes of $12,000
beginning on September 30, 1996 and each quarter thereafter until maturing June
30, 1999 when all principal plus accrued interest will be due and payable. Each
quarterly payment will be applied to principal first with all remaining unpaid
interest accruing on the Note. McKernan will credit the $12,000 quarterly
payment by applying $11,280 to the CGI Note and $720 to the CCI Note.
(c) All other terms of the McKernan Notes will remain the same.
3. Borrower Requirements
Borrower agrees to satisfy each of the following:
3.1 Borrower shall provide McKernan with fully executed originals of this
Agreement, and any other documents which McKernan may require or request in
accordance with this Agreement.
4. Borrower's representations and Warranties.
F - 30
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
4.1 All representations and warranties made and given by Borrower in this
Agreement and any and all documents executed in connection with this Agreement
are true, accurate and correct.
4.2 Borrower has obtained any and all approvals from any local, state or federal
agencies and/or banking authorities and its Board of Directors to enter into
this Agreement.
4.3 Borrower continues to be a corporation which is duly organized and validly
existing under the laws of the State of California, and qualified to do business
in the State of California.
5. Incorporation. This Agreement shall form a part of the McKernan Notes, and
all references to the McKernan Notes shall mean that document as hereby
modified.
6. No Impairment. Except as specifically hereby amended, the McKernan Notes
shall remain unaffected by this Agreement and shall remain in full force and
effect.
7. Integration. The McKernan Notes, including this Agreement: (a) integrate all
the terms and conditions mentioned in or incidental to the McKernan Notes; (b)
supersede all oral negotiations and prior and other writing with respect to
their subject matter; and (c) are intended by the parties as the final
expression of the agreement with respect to the terms and conditions set forth
in those documents and as the complete and exclusive statement of the terms
agreed to by the parties. If there is any conflict between the terms, conditions
and provisions of this Agreement and those of any other agreement or instrument,
the terms, conditions and provisions of this Agreement shall prevail.
8. Miscellaneous. This Agreement and any attached consents or exhibits requiring
signatures may be executed in counterparts, and all counterparts shall
constitute but one and the same document. If any court of competent jurisdiction
determines any provision of this Agreement or any of the other loan documents to
be invalid, illegal or unenforceable, that portion shall be deemed severed from
the rest, which shall remain in full force and effect as though the invalid,
illegal or unenforceable portion had never been a part of the McKernan Notes.
This Agreement shall be governed by the laws of the State of California, without
regard to the choice of law rules of that State. As used here, the word
"include(s)" means "include(s), without limitation," and the word "including"
means "including, but not limited to."
West Coast Bancorp, a California corporation
By: /s/ John B. Joseph
Name: John B. Joseph
Title: CEO
ROBERT MCKERNAN, an individual
By: /s/Robert McKernan
Name: Robert McKernan
F - 31
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
EXHIBIT 21
WEST COAST BANCORP
Subsidiaries of West Coast Bancorp
Subsidiaries
Centennial Beneficial Loan Corp.
Chancellor Financial Services, Inc.
WCV, Inc. (formerly Heritage Thrift & Loan)
North Orange County Bancorp
Sunwest Leasing Corp.
Sunwest Bank
West Coast Reality Finance
F - 32
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
West Coast Bancorp
Newport Beach, California
As independent public accountants, we hereby consent to the incorporation of our
report dated March 3, 1997 included in this Form 10-KSB into the Company's
previously filed Registration Statement File No. 33-25859 on Form S-8.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Orange County, California
March 24, 1997
F - 33
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
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 February 29,
1996, relating to the consolidated balance sheet of West Coast Bancorp and
subsidiaries as of December 31, 1995, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows the year ended
December 31, 1995, which report appears in the December 31, 1996, annual report
on Form 10-KSB of West Coast Bancorp.
KPMG PEAT MARWICK LLP
/s/ KPMG PEAT MARWICK LLP
Orange County, California
March 24, 1997
F - 34
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1996
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