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, 1997
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: $11,415,000.
As of February 28, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $11,578,000 based upon the
last sale price on such date.
Number of shares of Common Stock of the registrant outstanding as of February
28, 1998:
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, 1997.
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
TABLE OF CONTENTS
Page
PART I
Item 1 Business 3
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 4(A) Executive officers of the registrant 17
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 18
Item 6 Management's Discussion and Analysis 19
Item 7 Financial Statements 27
Item 8 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons 27
Item 10 Executive Compensation 27
Item 11 Security Ownership of Certain Beneficial Owners and Management 27
Item 12 Certain Relationships and Related Transactions 27
PART IV
Item 13 Exhibits, List and Reports on Form 8-K 27
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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 (the "BHCA"). 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 B&PB stock was sold during 1995 and 1996.
The first contractual due date for the contingent cash payment was January 1998.
West Coast and B&PB's successor could not agree on the contingent payment
amount, if any, to be paid. As required under the agreement, the contingent
payment due date was extended to January 1999. 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 $1,269,000 or $.14 per share in 1997, as
compared with net income of $874,000 or $.10 per share in 1996.
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, 1997, Sunwest had total
consolidated assets of $130,553,000, total consolidated loans and leases of
$102,877,000, and total consolidated deposits of $115,568,000. For the year
ended December 31, 1997, Sunwest had net income of $2,743,000. Minority
shareholders' interest reduced the net income to the Company by $1,193,000.
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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 originations, on-line banking for business customers,
traveler's checks, safe deposit, Mastercard and Visa merchant deposit services,
ATM cards and computer accounting services, which include payroll, lockbox 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 all financial services companies located in
the market area in which Sunwest operates.
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
ECONOMIC CONDITIONS, GOVERNMENTAL POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between the
interest rates paid by the Company on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received by the Company on
its interest-earning assets, such as loans extended to its clients and
securities held in its investment portfolio, comprise the major portion of the
Company's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company cannot be predicted.
The business of the Company is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board implements national monetary policies
(with objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. Government securities by adjusting the required
level of reserves for depository institutions subject to its reserve
requirements and by varying the target federal funds and 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 earned on interest-earning assets and
paid on interest-bearing liabilities. The nature and impact on the Company and
the Bank of any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have 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 institutions are frequently made in the U.S.
Congress, in the state legislatures and before various bank regulatory agencies.
See "ITEM 1. BUSINESS - Supervision And Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
stockholders of the Company. Set forth below is a summary description of certain
laws and regulations which relate to the operations 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.
In recent years, significant legislative proposals and reforms affecting
the financial services industry have been discussed and evaluated by Congress.
Such proposals include legislation to revise the Glass-Steagall Act and the
BHCA, and to expand permissible activities for banks, principally to facilitate
the convergence of commercial and investment banking. Certain proposals also
sought to expand insurance activities of banks. It is unclear whether any of
these proposals, or any form of them, will be introduced in the current Congress
and become law. Consequently, it is not possible to determine what effect, if
any, they may have on the Company and the Bank.
West Coast
West Coast, as a registered bank holding company, is subject to regulation
under 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.
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, the Company is required by
the Federal Reserve Board to maintain certain levels of capital.
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.
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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 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.
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 Department of Financial Institutions.
West Coast's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As such, the Company is subject to the information, proxy solicitation,
insider trading, and other requirements and restrictions of the Exchange Act.
Sunwest Bank
Sunwest, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the California Commissioner
of Financial Institutions ("Commissioner") and the Federal Deposit Insurance
Corporation ("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
Commissioner has many of the same remedial powers.
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 1. BUSINESS - Supervision and
Regulation - Capital Standards."
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
Dividends and Other Transfers of Funds
West Coast is a legal entity separate and distinct from Sunwest. 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 Commissioner, 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 Commissioner also have authority to prohibit Sunwest from
engaging in activities that, in the FDIC's and the Commissioner'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 Commissioner 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 1998. At December 31, 1997, Sunwest had an
accumulated deficit, which prohibits it from payment of cash dividends without
prior regulatory approval.
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 collateral having a market value equal
to the amount required by law. 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 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.
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%. 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.
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1997 (dollars in thousands).
Actual Required Excess
Amount Ratio Amount Ratio Amount Ratio
Leverage
ratio $13,826 10.6% $5,240 4.0% $8,586 6.6%
Tier 1
risk-based
ratio $13,826 12.6% $4,388 4.0% $9,438 8.6%
Total
risk-based
ratio $15,209 13.9% $8,775 8.0% $6,434 5.9%
Prompt Corrective Action And Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 1997, the
Bank and the Company exceeded the required ratios for classification as "well
capitalized."
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.
A bank may fall into the critically undercapitalized category if its
"tangible equity" does not exceed two-percent of the bank's total assets.
Federal guidelines generally define "tangible equity" as a bank's tangible
assets less liabilities. Federal regulators may, among other alternatives,
require the appointment of a conservator or a receiver for a critically
undercapitalized bank. In California, the Commissioner may require the
appointment of a conservator or receiver for a state-chartered bank if its
tangible equity does not exceed three percent of the bank's total assets or $1
million.
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.
Safety And Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, an insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem 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 quality 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.
Premiums for Deposit Insurance
Sunwest's deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1997, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
group and supervisory subgroup assignment. Pursuant to the Budget Act, at
January 1, 1997, Sunwest began paying, in addition to its normal deposit
insurance premium as a member of the BIF, an amount equal to approximately 1.3
basis points per $100 of insured deposits toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery
of the savings and loan industry. Members of the Savings Association Insurance
Fund ("SAIF"), by contrast, pay, in addition to their normal deposit insurance
premium, approximately 6.4 basis points. Under the Budget Act, the FDIC is not
permitted to establish SAIF assessment rates that are lower than comparable BIF
assessment rates. Beginning no later than January 1, 2000, the rate paid to
retire the Fico Bonds will be equal for members of the BIF and the SAIF. The
Budget Act also provides for the merging of the BIF and the SAIF by January 1,
1999 provided there are no financial institutions still chartered as savings
associations at that time. Should the insurance funds be merged before January
1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.
Interstate Banking And Branching
The BHCA currently permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to certain
conditions, including certain nationwide- and state-imposed concentration
limits. The Bank has the ability, subject to certain restrictions, to acquire by
acquisition or merger branches outside its home state. The establishment of new
interstate branches is also possible in those states with laws that expressly
permit it. Interstate branches are subject to certain laws of the states in
which they are located. Competition may increase further as banks branch across
state lines and enter new markets.
Community Reinvestment Act And Fair Lending Developments
Sunwest 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. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a
performance-based evaluation system which bases CRA ratings on an institution's
lending service and investment performance. When a bank holding company applies
for approval to acquire a bank or other bank holding company, the Federal
Reserve Board will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. Based on an examination conducted during the third quarter of
1996, Sunwest was rated satisfactory.
Year 2000 Compliance
In May 1997, the Federal Financial Institutions Examination Council issued
an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there will be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies intend to conduct year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues. Sunwest was examined by the FDIC in February
1998 to determine if Sunwest was in compliance with the requirements of the
federal banking agencies regarding the year 2000 issue. Management believes that
the Company is in compliance with the requirements of the federal banking
agencies.
Current Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in the exchange. This statement
requires that liabilities and derivative securities incurred or obtained by
transferors as part of a transfer of financial assets be initially valued at
9
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
fair value, if practicable. It also requires that servicing rights and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Furthermore, SFAS No. 125 requires that debtors reclassify financial assets
pledged as collateral, and that secured parties recognize those assets and their
obligation to return them in certain circumstances in which the secured party
has taken control of those assets. Finally, SFAS No. 125 requires that a
liability be eliminated if either: (a) the debtor pays the creditor and is
relieved of its obligation for the liability, or (b) the debtor is legally
released from being the primary obligor under the liability, either judicially
or by the creditor. Accordingly, a liability is not considered extinguished by
an in-substance defeasance. In December 1996, the FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." SFAS No. 127 defers for one year the effective date of SFAS No. 125 as it
relates to transactions involving secured borrowings and collateral and
transfers and servicing of financial assets. The adoption of this pronouncement
did not have a material impact on the Company's consolidated financial position
or results of operations.
In August 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. The statement also requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures and requires a reconciliation of the numerators and
denominators between the two calculations. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The statements did not have a material impact on the
Company's previously reported earnings per share.
In August 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company has adopted
this statement and Management does not believe the statement had a material
impact on the Company's results of operations or financial position.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Management does not believe the statements will have a material impact on the
Company's results of operations or financial position when adopted.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in both annual financial statements and interim financial reports
issued to shareholders. The statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. Management does not believe the
statements will have a material impact on the Company's results of operations or
financial position when adopted.
EMPLOYEES
At December 31, 1997, West Coast and its subsidiaries employed 66 persons
of which 65 were full time. West Coast and its subsidiaries believe that their
employee relations are satisfactory.
10
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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
(in thousands) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
U.S. Treasury and other
government agency
securities $ - $ 2,607 $ 4,993 $ 1,966
Collateralized mortgage
obligations - - 1,587 -
Mortgage-backed
securities - - 10,428 714
Other securities - - 337 -
- --------------------------------------------------------------------------------
Total $ - $ 2,607 $17,345 $ 2,680
- --------------------------------------------------------------------------------
All investment securities are classified as available for sale at December 31,
1997. The following table discloses the maturity dates and average yields of the
investment securities at December 31, 1997. Mortgage-backed securities and
collateralized mortgage obligations are classified in accordance with their
estimated life. Expected maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations.
Due After One Due After Five Due After
Due Within Year But Within Years But Within Ten
One Year Five Years Ten Years Years
- --------------------------------------------------------------------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------
U.S. Treasury and other
government agency
securities $ 1,000 5.56% $ 3,498 6.19% $ 496 6.84% $ - .-%
Collateralized mortgage
obligations - - 1,587 8.79 - - - .-
Mortgage-backed
securities 531 6.46 6,283 7.07 3,613 7.91 - .-
Other Securities 337 - - - - - - .-
- --------------------------------------------------------------------------------
Total $ 1,868 4.81% $11,368 7.04% $ 4,109 7.78% $ - .-%
- --------------------------------------------------------------------------------
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, 1997 all interest bearing deposits with
financial institutions mature in one year or less.
11
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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) 1997 1996
- ----------------------------------------------------------
Commercial $ 29,425 $ 25,300
Real Estate - mortgage 67,970 54,938
Installment loans 5,755 2,728
Unearned income,
discounts and fees (273) (309)
- ----------------------------------------------------------
Total $ 102,877 $ 82,657
- ----------------------------------------------------------
The Company had no Real Estate - Construction loans at December 31, 1997 or
1996. Commercial loans are generally 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 the periods presented.
Commercial loans and Real Estate Mortgage loans have increased because of an
emphasis on marketing efforts and an improving economy during 1997. Installment
loans decreased in 1997 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, 1997, 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.
12
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
The following table sets forth the maturities for commercial loans at
December 31, 1997. These loans comprised 29% of the gross loan portfolio and are
classified according to changes in interest rates.
Maturing
- --------------------------------------------------------------------------------
Within After One
One Year But After
Year or Within Five
(in thousands) Less Five Years Years Total
- --------------------------------------------------------------------------------
Commercial $ 23,566 $ 3,667 $ 1,245 $ 28,478
- --------------------------------------------------------------------------------
Loans included above with:
Fixed rates $ 1,131 $ 3,667 $ 1,245 $ 6,043
Variable rates 22,435 - - 22,435
- --------------------------------------------------------------------------------
Total $ 23,566 $ 3,667 $ 1,245 $ 28,478
- --------------------------------------------------------------------------------
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) 1997 1996
- -----------------------------------------------------------
Allowance for possible credit
losses at beginning of $ 2,848 $ 3,820
period
Charge-offs:
Commercial (260) (512)
Real estate-mortgage (129) (513)
Installment loans to
individuals (21) (47)
Direct lease financing - -
- -----------------------------------------------------------
Total Charge-offs (410) (1,072)
- -----------------------------------------------------------
Recoveries:
Commercial 396 745
Real estate - construction - -
Real estate - mortgage 48 30
Installment loans to
individuals 45 94
Direct lease financing 9 7
- -----------------------------------------------------------
Total Recoveries 498 876
- -----------------------------------------------------------
Net recoveries (charge-offs) 88 (196)
Additions (reductions)
charged to provision for
possible credit losses (572) (668)
Other adjustment (1) - (108)
- -----------------------------------------------------------
Balance at end of period $ 2,364 $ 2,848
- -----------------------------------------------------------
Allowance for possible credit losses as a percentage of:
Average loans 2.66% 3.69%
Loans at end of period 2.30% 3.45%
Loans on nonaccrual and 90
days past due 7,625.80% 295.48%
Net (recoveries) charge-offs as a
percentage of:
Average loans (.10)% .25%
- -----------------------------------------------------------
(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. 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 $2,364,000, constituting
approximately 2.30% of loans outstanding at December 31, 1997, 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, 1997 and 1996 for each category as set forth below. The allowance includes
allocations for specific loans as well as general and supplemental allocations
for each category.
13
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
(dollars in thousands) 1997
- -----------------------------------------------------------
Percent of Loan
Category to
Allowance Total Loans
- -----------------------------------------------------------
Commercial $ 494 28.5%
Real estate mortgage 1,752 65.9
Installment loans 118 5.6
- -----------------------------------------------------------
Total $ 2,364 100.0%
- -----------------------------------------------------------
(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%
- -----------------------------------------------------------
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) 1997 1996
- ------------------------------------------------------------
Nonaccrual loans $ - $ 931
90 days past due loans and still
accruing 31 43
Restructured loans 2,104 3,116
Loans on nonaccrual and 90 days
past due/total loans .03% 1.18%
Loans on nonaccrual and 90 days
past due/total assets .02% .89%
- ------------------------------------------------------------
The changes in the levels of nonperforming loans during 1997 and 1996 are
discussed under "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of
Operations - Nonperforming Assets."
At December 31, 1997 the Company had no loans on nonaccrual status.
As of December 31, 1996, the Company had no accrued interest on loans on
nonaccrual status. If loans on nonaccrual at December 31, 1996 had performed in
accordance with original terms, interest income of the Company would have
increased by $66,000. Under the original terms of the restructured loans,
interest earned would have totaled $374,000 and $394,000 for the years ended
December 31, 1997 and 1996. Under the restructured terms of the loans, interest
income recorded amounted to $285,000 and $304,000 in 1997 and 1996,
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.
The following presents loans classified as substandard, doubtful and
special mention at December 31:
(in thousands) 1997 1996
- -------------------------------------------------------------
Substandard $ 3,713 $ 6,513
Doubtful 31 14
- -------------------------------------------------------------
Total $ 3,744 $ 6,527
- -------------------------------------------------------------
Special mention $ 6,929 $ 6,479
- -------------------------------------------------------------
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, 1997 where the known credit problems of the
borrower would cause the Company to have serious doubts as to the ability of
14
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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) 1997 1996
- ------------------------------------------------------------
Gross real estate owned $ 1,691 $ 1,692
Valuation allowance 540 449
- ------------------------------------------------------------
Net real estate owned $ 1,151 $ 1,243
- ------------------------------------------------------------
Percent of assets 0.9% 1.1%
- ------------------------------------------------------------
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 $100,000 during 1997, representing
0.9% of the Company's total income for that year, as compared with $272,000 or
2.5% of total income for 1996.
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) 1997
- -----------------------------------------------------------
Average Interest
Balance Rate
- -----------------------------------------------------------
Noninterest bearing
demand deposits $ 8,762 .-%
Interest bearing
demand deposits 32,173 1.89
Savings deposits 4,748 2.00
Time deposits 31,937 5.46
- -----------------------------------------------------------
Total $ 107,620 2.27%
- -----------------------------------------------------------
(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%
- -----------------------------------------------------------
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, 1997 were as
follows (dollars in thousands):
Percentage
Maturity Amount of Total
- -----------------------------------------------------------
0-3 Months $ 5,946 45.26%
3-6 Months 3,138 23.89
6-12 Months 3,950 30.07
Over 12 Months 102 0.78
- -----------------------------------------------------------
Total $ 13,136 100.00%
- -----------------------------------------------------------
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.
15
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
Selected Financial Ratios
The following table sets forth the ratios of net income 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.
1997 1996
- -----------------------------------------------------------
Ratio of net income to:
Average total assets 1.04% 0.80%
Average shareholders' equity 18.97 15.96
Ratio of average shareholders'
equity to average total assets 5.50 5.04
- -----------------------------------------------------------
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 1998, 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.
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.
Year 2000 Compliance
Financial institutions have found the year 2000 problem to be many faceted.
Not only must they have their own computer systems assessed, tested and
validated, they must also gain an understanding of the efforts and progress
16
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
made by their customers and key vendors. And customers, when entrusting their
assets to an institution, must have confidence in the institution's strength in
general, and in its ability to weather the millennium change.
The Company is taking a proactive approach to assessing its risks related
to the year 2000 problem. Actions taken to date include establishment of a year
2000 plan that identifies steps to be taken to ensure that the risks to the
Company are identified and mitigated where possible. The plan includes a review
of customers and key vendors. Customers are apprised of the Company's progress
through newsletters and seminars sponsored by Sunwest.
The Company does not expect expenditures related to the year 2000 problem
to have a material adverse effect on the financial condition or results of
operations of the Company. The inability of a key vendor or customer to be
prepared for the year 2000 could 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, 1997 and 1996 were approximately $863,000 and $984,000,
respectively. For additional information concerning properties, see "Notes 6, 13
and 16 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 1997 and 1996, 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
$90,000 to $180,000 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 $865,000 has been incurred through December 31,
1997. The USTF limits the reimbursement per site to $1 million. WCV, Inc. has
been reimbursed $692,000 through December 31, 1997.
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
1997.
ITEM 4(A) EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 4, 1998, 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 59
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 President and a director of Centennial
Corporation since 1983; President of Pacific Western Aggregate Corporation since
1997; President of Pacific Western Equipment LLC since 1997; Vice Chairman of
the Board of Directors of The Centennial Group, Inc., a Delaware corporation
("CGI"), from February 1987 to December 1995; Until July 1993, Mr. Joseph held
various positions in CGI and its subsidiaries; 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.
17
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
Ronald R. White, Age 51
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 has served as President of Glacial Garden, Inc.
since 1992, Entican Enterprises since 1975 and Centennial Corporation since
1977. Mr. White has served, in the following capacities during the past five
years: Chairman of the Board of Directors, President and Chief Executive Officer
of CGI from February 1987 to December 1995; 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 47
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 56
Director, President and Chief Executive Officer, Sunwest and Sunwest
Leasing.
James G. LeSieur 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:
1997 1996
High Low High Low
- ----------------------------------------------------------
First Quarter $ .79 $ .53 $ .53 $.12
Second Quarter .88 .70 .50 .28
Third Quarter 1.50 .83 .50 .33
Fourth Quarter 1.63 1.09 .66 .50
Holders of Record
As of February 28, 1998, there were approximately 2,800 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. For additional information on dividends, see "ITEM 1. BUSINESS
SUPERVISION AND REGULATION - Dividends and Other Transfers of Funds.
18
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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, 1997 and 1996. 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 $1,269,000 or $.14 per share in 1997
versus $874,000 or $.10 per share in 1996. The increase in net income resulted
from higher net interest income reflecting asset growth of 20%, improved asset
quality resulting in reductions in the allowance for possible credit losses, and
reduced noninterest expenses. Net income in 1996 included high levels of
noninterest income from recoveries of nonaccrual interest from prior years, a
gain on sale of B&PB stock and a recognition of a deferred tax benefit of
$863,000.
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) 1997 1996
- ------------------------------------------------------------
Total assets $ 131 $ 109
Total loans and leases 103 83
Total deposits 115 96
- ------------------------------------------------------------
RESULTS OF OPERATIONS
General
The Company had net income of $1,269,000 in 1997 versus $874,000 in 1996,
an increase of $395,000. Factors contributing to the increase include higher net
interest income of $1,194,000 from asset growth, lower noninterest expense of
$473,000, 1996 nonrecurring losses from the sale of Sunwest shares ($246,000)
and the abandonment of a facility lease ($814,000). These factors were partially
offset by higher minority interest expense of $683,000, lower negative loan loss
provisions of $96,000, lower noninterest income of $860,000 due primarily to the
1996 gain on sales of B&BP stock, and higher recoveries of interest recoveries
on charged-off loans, a lower tax benefit recorded in 1997 ($537,000), and a
reduction in the gain on liquidation of WCV, Inc.
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
19
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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.
Net Interest Income
The increase in net interest income in 1997 resulted primarily from higher
volumes of interest earning assets.
The decline in net interest income in 1996 resulted primarily from lower
interest earning asset volumes. Average interest earning assets increased $14
million from 1996 to 1997 and decreased by $11 million from 1995 to 1996.
In 1997, 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 due to a decline in the rate of interest bearing liabilities that
exceeded a decline in the rate of interest earning assets.
The yield on interest earning assets declined due primarily to a 21 basis
point drop in the yield on loans. Loan yields have declined due to an
improvement in credit quality and strong competition in the Company's markets.
An increase in investment securities yields of 18 basis points partially offset
the decline in loan yields. Investment securities yields increased due to a
change in mix of the types of securities purchased. The ending investment
portfolio mix at December 31, 1997 included $12 million of mortgage backed
securities representing 69% of total investment securities, up from $2.6
million, or 49% of investment securities in 1996.
The yield on earning assets was also impacted by an increase in investments
as a percentage of earning assets from 6% in 1996 to 11% in 1997. Federal funds
sold declined from 13% to 10% in 1997.
In 1996, the net interest margin and the net yield on interest 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.
Interest expense increased in 1997 and declined in 1996 primarily from
changes in interest bearing liability volumes. In 1996 lower rates also
contributed to the decline. Average interest bearing liabilities increased by $4
million from 1996 to 1997 and decreased by $14 million from 1995 to 1996.
The rate on interest bearing liabilities declined 13 basis points from 1996
to 1997 due to a decline in notes and debentures payable outstanding. This
decline was partially offset by a 22 basis point increase in the rates paid on
time deposits. Average time deposits, the highest interest bearing deposits,
increased from 26% of average interest bearing deposits in 1996 to 30% in 1997.
The volume and rate increases in time deposits were due to Management's decision
to increase the amount of nationally gathered time deposits from its Money Desk
operation. Money Desk deposits bear a higher rate of interest than locally
gathered deposits.
The volume decline from 1995 to 1996 was primarily from the intentional
reduction in the Money Desk time deposits.
The average rates paid on interest bearing liabilities decreased by 45
basis points from 1995 to 1996.
Rates on interest bearing liabilities were lower in 1996 versus 1995
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.
Loans on which the accrual of interest had been discontinued at December
31, 1997 and 1996 amounted to $0 and $931,000, respectively. If these loans had
been current throughout their terms, net interest income would have increased
approximately $0 and $66,000 in 1996 and 1995, respectively. This would have
raised both the net yield on interest earning assets and the net interest margin
by 0% in 1997 and .07% in 1996, respectively.
20
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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 were computed based on daily balances. The
Company had no income or yield earned on tax exempt securities during any of the
periods presented.
(dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rates Balance Interest Rates
- --------------------------------------------------------------------------------
Assets
Loans, net of unearned loan fees &
discounts (1) $ 88,889 $ 9,281 10.44% $ 77,244 $ 8,226 10.65%
Investment securities 12,671 803 6.34 5,957 367 6.16
Federal funds sold 11,448 629 5.49 13,123 714 5.44
Interest bearing deposits
with banks 520 26 5.00 3,224 187 5.80
- --------------------------------------------------------------------------------
Interest earning assets 113,528 10,739 9.46 99,548 9,494 9.54
Allowance for possible credit
losses (2,745) (3,510)
Cash and due from banks 6,768 5,886
Other assets 4,097 6,782
- --------------------------------------------------------------------------------
Total assets $ 121,648 $108,706
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Time deposits $ 31,937 $ 1,743 5.46% $ 25,628 $ 1,342 5.24%
Interest bearing demand
deposits 32,173 608 1.89 31,499 606 1.92
Savings deposits 4,748 95 2.00 5,108 101 1.98
Notes Payable to affiliates - - .- 584 45 7.71
Other debt (2) 812 180 22.17 817 197 24.11
Convertible subordinated
debentures - - .- 2,391 284 11.88
- --------------------------------------------------------------------------------
Total interest bearing
liabilities 69,670 2,626 3.77 66,027 2,575 3.90
Demand deposits 38,762 34,558
Other liabilities 1,308 1,289
Minority Interest 5,218 1,356
Shareholders' equity 6,690 5,476
- --------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 121,648 $108,706
- --------------------------------------------------------------------------------
Net interest income $ 8,113 $ 6,919
Net interest margin 5.69% 5.64%
Net yield on interest earning assets 7.15 6.95
- --------------------------------------------------------------------------------
(1) Interest income includes loan fees of $154,000 and $205,000 for the years
ended December 31, 1997 and 1996, 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, in 1996, short-term debt owed to a former
officer of West Coast.
21
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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.
1997 vs. 1996 1996 vs. 1995
- --------------------------------------------------------------------------------
(in thousands) Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------
Interest Income:
Loans and leases $1,219 $ (164) $1,055 $ (311) $ (111) $ (422)
Investment securities 425 11 436 (261) 5 (256)
Federal funds sold (92) 7 (85) (120) (59) (179)
Interest bearing deposits
with banks (138) (23) (161) (106) (37) (143)
- --------------------------------------------------------------------------------
Total 1,414 (169) 1,245 (798) (202) (1,000)
Interest Expense:
Time deposits 342 59 401 (602) (133) (735)
Interest bearing demand
deposits 13 (11) 2 (36) (19) (55)
Savings deposits (7) 1 (6) (7) 1 (6)
Notes payable to affiliates - - - (18) (5) (23)
Other debt (175) (171) (346) 66 (159) (93)
- --------------------------------------------------------------------------------
Total 173 (122) 51 (597) (315) (912)
- --------------------------------------------------------------------------------
Net change in net interest
income $1,241 $ (47) $1,194 $ (201) $ 113 $ (88)
- --------------------------------------------------------------------------------
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 1997 and
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 $6.5 million at December 31, 1996 to $3.7 million at December 31,
1997.
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, 1997 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 collectability 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 in
charge-offs 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 63% of charge-offs in 1997 and 48% in 1996. The current low level of
charge-offs relates primarily to the economy and real estate values improving in
southern California. The Company's net (recoveries) charge-offs as a percentage
of average loans were (.10)% in 1997 and .25% in 1996.
22
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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 $31,000 and $974,000 at December 31, 1997 and
1996, respectively. This amounted to .03% and 1.18% of total loans for the same
respective periods.
In 1997, nonperforming loans decreased by $943,000 primarily because of
repayments and charge-offs.
Real estate owned totaled $53,000, $1,098,000 and $1,151,000 at December
31, 1997 at West Coast, Sunwest and the Company, respectively. At December 31,
1996, real estate owned totaled $53,000, $1,190,000 and $1,243,000 at West
Coast, Sunwest and the Company, respectively. This represented 0.9% and 1.1% of
the Company's assets at December 31, 1997, and 1996, respectively.
Nonperforming assets (nonperforming loans and real estate owned combined)
totaled $53,000, $1,129,000 and $1,182,000 at December 31, 1997 at West Coast,
Sunwest and the Company, respectively. At December 31, 1996, nonperforming
assets totaled $53,000, $2,121,000 and $2,174,000 at West Coast, Sunwest and the
Company, respectively. This represented 1.0% and 2.0% of the Company's assets at
December 31, 1997 and 1996, respectively.
Restructured loans which were performing in compliance with their modified
terms totaled $2,104,000 and $3,116,000 at December 31, 1997 and 1996.
Restructured loans totaling $0 and $577,000 were on nonaccrual status at
December 31, 1997 and 1996.
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
decreased to $676,000 from $1,536,000 in 1996. Gain on sale of B&PB stock was
$436,000 higher in 1996 as West Coast sold all of its remaining B&PB shares.
Interest recoveries of $334,000 on charged off loans in 1996 was primarily from
recoveries on three loans.
Other Operating Expenses
Other operating expenses decreased from 1996 to 1997. 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) 1997 1996
- -------------------------------- ------------ -------------
Other operating expenses $ 7,218 $ 7,691
Other operating expenses
/Interest and other
operating income 63.2% 69.7%
Other operating expenses
/Average assets 5.9% 7.1%
- -------------------------------- ------------ -------------
Other operating expenses decreased by $473,000 or 6% from 1996 to 1997.
Declines were noted in most categories despite a growth in assets of 20%.
Salaries and employee benefits remained relatively flat. The number of employees
declined from 72 at the end of 1996 to 66 at the end of 1997. Reductions in
numbers of employees were offset by increased incentive compensation paid out
under Sunwest's performance compensation plan. Employees earned an average bonus
of approximately 10% of their salaries under the plan in 1997. The net cost of
operation of real estate owned declined by $172,000 in 1997 due to lower
adjustments of the valuation allowance for real estate owned. Regulatory fees
and assessments declined due to lower FDIC insurance assessment rates. Occupancy
and depreciation and amortization expenses declined in 1997 due to the closure
of the Santa Ana facility in April 1997. Professional services declined due to
lower accounting and tax fees resulting from a competitive bid process during
1996 which caused a change in accounting firms. Increases in data processing,
customer service expense and advertising and promotion are the result of the
growth in the Company's core business.
The Company is anticipating higher other operating expenses in 1998 related
to continued growth and the development of new products and services.
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.
23
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
This lease required 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.
Loss on Sale of Sunwest Shares
West Coast recorded a $246,000 loss on sale of its Sunwest shares in 1996
because the adjusted selling price of its shares was less than the book value of
the shares on September 13, 1996, the date of the sale.
(Loss) Gain on Liquidation of WCV, Inc.
The Company recorded a loss on the liquidation of WCV, Inc. of $7,000 in
1997 and a gain of $149,000 in 1996.
WCV, Inc. was substantially liquidated in 1993. Remaining activity consists
of the environmental cleanup and disposition of the sole remaining real estate
owned property. The gain in 1996 relates to refunds received from the California
Underground Storage Tank Cleanup Fund ("USTF"). Future costs of the cleanup are
estimated at $90,000 to $180,000 and 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 1997 and 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
$19,170,000 and standby and commercial letters of credit totaling $70,000 at
December 31, 1997. 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 19% at December 31,
1997 and 18% at December 31, 1996. 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 $8.8 million during
1997. Cash from operating activities increased cash by $2.3 million primarily
from $1.2 million of net income. Investing activities used $30.5 million in cash
and cash equivalents which consisted primarily of net loan increases of $20.1
million offset by decreases in investments of $12.1 million. Net cash of $19.4
million was used in financing activities and consisted of a $19.4 million net
increase in deposits.
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.
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 1997, West Coast did not receive any dividends from its
subsidiaries. West Coast does not expect to receive dividends from its
subsidiaries during 1998.
West Coast's primary source of cash in 1998 is expected to be earnings on
cash and short term investments. At December 31, 1997, West Coast had cash and
short term investments of $598,000.
West Coast anticipates cash expenditures during 1998 to consist of debt
service payments and other operating expenses. In January 1998, West Coast
executed a note and security agreement with a corporation owned by its President
and Chairman, John B. Joseph. The note is in the amount of $514,000 representing
unpaid fees for services. The note bears interest at 9%, payable monthly, with
principal due January 29, 2001. The note is secured by five shares of Sunwest
Bank stock. West Coast's projected debt service in 1998 for all notes payable is
expected to total $94,000. Principal and interest outstanding under these notes
totaled $966,000 at January 31, 1998. West Coast anticipates that other
24
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
operating expenses will be approximately $225,000 during 1998. Funds to meet
cash needs will come from current cash resources supplemented by sales of assets
and possibly dividends from Sunwest.
CAPITAL RESOURCES AND DIVIDENDS
Sunwest had a 12.66%, 13.88% and 10.55% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at December 31, 1997, 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, 1997.
The Company has not paid dividends and does not contemplate paying
dividends in 1998.
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 $49.1 million at December 31,
1997. Market rates of interest did not change significantly during 1997 and
1996. The Company's net yield on interest earning assets increased from 6.95% in
1996 to 7.15% in 1997.
25
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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,
1997:
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 $ 28,598 $ 11,021 $ 5,659 $ 16,977 $ 34,396 $ 6,226 $102,877
Investments 2,334 2,100 1,003 505 4,424 8,578 18,944
- --------------------------------------------------------------------------------
Total interest
earning assets $ 30,932 $ 13,121 $ 6,662 $ 17,482 $ 38,820 $ 14,804 $121,821
- --------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Time certificates of deposit of $100,000
or more $ -0- $ 5,847 $ 3,137 $ 4,053 $ -0- $ -0- $ 13,037
Time certificates of
under $100,000 -0- 6,846 6,458 7,187 1,679 -0- 22,170
Other interest
bearing deposits 36,745 -0- -0- -0- -0- -0- 36,745
Other interest bearing
liabilities -0- 22 27 54 676 -0- 779
- --------------------------------------------------------------------------------
Total interest bearing
liabilities $ 36,745 $ 12,715 $ 9,622 $ 11,294 $ 2,355 $ -0- $ 72,731
- --------------------------------------------------------------------------------
Rate sensitive
gap $ (5,813)$ 406 $ (2,960)$ 6,188 $ 36,465 $ 14,804 $ 49,090
- --------------------------------------------------------------------------------
Cumulative rate
sensitive gap $ (5,813)$ (5,407)$ (8,367)$ (2,179)$ 34,286 $ 49,090 $ 49,090
- --------------------------------------------------------------------------------
Cumulative assets divided
by liabilities 84.18% 89.07% 85.84% 96.90% 147.14% 167.50% 167.50%
- --------------------------------------------------------------------------------
26
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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
None.
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 no reports on Form 8-K during the
fourth quarter of 1997.
(c) Exhibits required by Item 601 of Regulation S-K. See Item 13(a) 3.
(d) Additional financial statements. Inapplicable.
27
<PAGE>
WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1997
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 27 day of
March, 1998.
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 27, 1998
- ------------------ President and
John B. Joseph Chief Executive Officer
(Principal Executive Officer)
/s/ Ronald R. White Executive Vice President March 27, 1998
- ------------------- and Director
Ronald R. White
/s/ Frank E. Smith Chief Financial Officer March 27, 1998
- ------------------- (Principal Financial
Frank E. Smith and Accounting Officer)
/s/ J. David Cheshier Director March 27, 1998
- ---------------------
J. David Cheshier
/s/ Dr. L. Wayne Gertmenian Director March 27, 1998
- ---------------------------
Dr. L. Wayne Gertmenian
/s/ Eric D. Hovde Director March 27, 1998
- -----------------
Eric D. Hovde
/s/ Thomas A. Jones Director March 27, 1998
- -------------------
Thomas A. Jones
/s/ Lacy G. Marlette, Jr. Director March 27, 1998
- -------------------------
Lacy G. Marlette, Jr.
28
<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, 1997 and 1996 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997 and 1996 F-3
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Public Accountants F-19
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 1997 1996
- --------------------------------------------------------------------------------
Cash and due from banks $ 7,041 $ 7,246
Federal funds sold 1,500 10,100
Interest bearing deposits with financial institutions 99 1,982
Investment securities held to maturity - approximate
fair value of $2,626 in 1996 - 2,607
Investment securities available for sale at fair value 17,345 2,680
Loans 102,877 82,657
Less allowance for possible credit losses (2,364) (2,848)
- --------------------------------------------------------------------------------
Net loans 100,513 79,809
- --------------------------------------------------------------------------------
Real estate owned, net 1,151 1,243
Premises and equipment, net 711 932
Deferred taxes 1,153 870
Other assets 1,108 1,518
- --------------------------------------------------------------------------------
$ 130,621 $ 108,987
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Deposits:
Demand, non-interest bearing $ 42,920 $ 33,983
Savings, money market and interest bearing demand 36,745 34,342
Time certificates under $100,000 22,169 18,260
Time certificates of $100,000 or more 13,136 8,972
- --------------------------------------------------------------------------------
Total deposits 114,970 95,557
- --------------------------------------------------------------------------------
Other borrowed funds 779 834
Other liabilities 1,363 1,642
- --------------------------------------------------------------------------------
Total liabilities 117,112 98,033
Commitments and contingencies
Minority interest in subsidiary 6,041 4,819
- --------------------------------------------------------------------------------
Shareholders' Equity
- --------------------------------------------------------------------------------
Common stock, no par value; 30,000,000 shares authorized;
9,168,942 shares issued and outstanding in 1997 and 1996 30,176 30,176
Securities valuation allowance 39 (25)
Accumulated deficit (22,747) (24,016)
- --------------------------------------------------------------------------------
Total shareholders' equity 7,468 6,135
- --------------------------------------------------------------------------------
$ 130,621 $ 108,987
- --------------------------------------------------------------------------------
(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 1997 1996
- --------------------------------------------------------------------------------
Loans, including fees $ 9,281 $ 8,226
Federal funds sold 629 714
Investment securities 803 367
Interest bearing deposits with banks 26 187
- --------------------------------------------------------------------------------
Total interest income 10,739 9,494
- --------------------------------------------------------------------------------
Interest Expense
- --------------------------------------------------------------------------------
Savings, money market and
interest bearing demand deposits 703 707
Time certificate deposits under $100,000 1,173 957
Time certificate deposits of $100,000 or more 570 385
- --------------------------------------------------------------------------------
Total interest on deposits 2,446 2,049
Other 180 526
- --------------------------------------------------------------------------------
Total interest expense 2,626 2,575
- --------------------------------------------------------------------------------
Net interest income 8,113 6,919
Provision (benefit) for possible credit losses (572) (668)
- --------------------------------------------------------------------------------
Net interest income after provision
(benefit) for possible credit losses 8,685 7,587
Other operating income 676 1,536
Other operating expenses 7,218 7,691
Minority interest in net income of subsidiary 1,193 510
Loss on abandonment of Santa Ana facility lease - 814
Loss on sale of Sunwest shares - 246
(Loss) gain on liquidation of WCV, Inc. (7) 149
- --------------------------------------------------------------------------------
Income before income taxes 943 11
Income tax (benefit) expense (326) (863)
- --------------------------------------------------------------------------------
Net income $ 1,269 $ 874
- --------------------------------------------------------------------------------
Basic and diluted earnings per share $ .14 $ .10
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Securities
Common stock Valuation Accumulated Shareholders'
Shares Amount Allowance Deficit Equity
- --------------------------------------------------------------------------------
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
Net income - - - 1,269 1,269
Change in securities
valuation allowance - - 64 - 64
- --------------------------------------------------------------------------------
Balance at
December 31, 1997 9,169 $ 30,176 $ 39 $ (22,747) $ 7,468
- --------------------------------------------------------------------------------
(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 1997 1996
- --------------------------------------------------------------------------------
Net income $ 1,269 $ 874
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 363 497
Provision (benefit) for possible credit losses (572) (668)
Minority interest in net income of subsidiary 1,193 510
Net change in receivables, payables and other assets 231 447
Write-down of real estate owned 92 441
Gain on sales of real estate owned - (91)
Loss on abandonment of Santa Ana facility lease - 814
Loss on sale of Sunwest Bank shares - 246
Gain on sale and liquidation of subsidiaries 7 (585)
Increase in deferred tax asset (283) (870)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 2,300 1,615
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities
- --------------------------------------------------------------------------------
Proceeds from maturity of interest bearing balances 1,982 3,535
Purchases of interest bearing deposits
with financial institutions (99) (1,584)
Proceeds from maturity of investment securities
held to maturity - 2,966
Proceeds from maturity of investment securities
available for sale 2,152 -
Purchase of investment securities available for sale (14,210) (2,703)
Net (increase) decrease in loans (20,132) (5,971)
Proceeds from sales of real estate owned - 3,267
Proceeds from sales of premises and equipment 11 -
Purchases of premises and equipment (167) (64)
Capital expenditures for real estate owned - -
- --------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (30,463) (554)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities
- --------------------------------------------------------------------------------
Net increase (decrease) in deposits 19,413 (7,105)
Sale of Business & Professional Bank stock - 1,888
Proceeds from sale of Sunwest Bank shares - 3,571
Repayment of notes payable to affiliates - (465)
Repayment of subordinated debt
and other borrowed funds (55) (3,511)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 19,358 (5,622)
- --------------------------------------------------------------------------------
Decrease in cash and cash equivalents (8,805) (4,561)
Cash and cash equivalents at beginning of year 17,346 21,907
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,541 $ 17,346
- --------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
- --------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 2,572 $ 2,603
Income taxes 4 7
Supplemental Schedule of Non-cash Investing and Financing Activities:
- --------------------------------------------------------------------------------
Reclassification of securities from
held to maturity to available for sale $ 2,607 $ -
Transfer of loans to real estate owned - 2,010
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
- --------------------------------------------------------------------------------
(See accompanying notes to consolidated financial statements)
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
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 B&PB stock was sold during 1995 and 1996.
The first contractual due date for the contingent cash payment is 1998. The due
date may extend to 2000 if the parties do not agree on the calculated amount
due. 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, 1997, all interest bearing deposits with
financial institutions mature in one year or less.
INVESTMENT SECURITIES
The Company's securities portfolio includes U.S. Treasury, U.S. federal
agency, and mortgage backed 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. The Company had no investments
classified as held to maturity at December 31, 1997.
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 RATE SWAPS
Interest rate swaps are used in the Company's management of interest rate
sensitivity. The periodic net settlement for these interest rate swaps is
recorded as an adjustment to the net interest income or interest expense of the
related asset or liability.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
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 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. In addition, the regulatory agencies
periodically review the allowance for possible credit losses and such agencies
may require the Company to recognize additions to the allowance based on
information and factors available to them at the time of their examinations.
Accordingly, no assurance can be given that the Company will not recognize
additional provisions for possible credit losses with respect to its loan
portfolio.
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 possible credit losses through a charge to
provision for possible credit losses. Adjustments to impairment losses due to
changes in the fair value of impaired loans' collateral properties are included
in the provision for possible credit losses.
REAL ESTATE OWNED
Real estate owned consists of real estate acquired in settlement of loans.
Real estate owned is initially recorded at the lower of the recorded investment
in the loan or 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 and the terms of the sale.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
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 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 $1,352,000 and $1,083,000 were
maintained by Sunwest to satisfy Federal regulatory requirements at December 31,
1997 and 1996, respectively.
EARNINGS PER SHARE
Earnings per share calculations are computed as follows:
Per-Share
Income Shares Amount
- --------------------------------------------------------------------------------
For the year ended 1996:
Net Income $874,000
Basic and diluted
earnings per share
Income available to
common shareholders $874,000 9,168,942 $0.10
- --------------------------------------------------------------------------------
For the year ended 1997:
Net Income $1,269,000
Basic earnings per
share
Income available
to common
shareholders $1,269,000 9,168,942 $0.14
-----------
Options issued to
executives 15,204
Diluted earnings
per share $1,269,000 9,184,146 $0.14
- --------------------------------------------------------------------------------
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share for 1997 were determined on the assumptions
that the stock options were exercised in the periods when their exercise prices
were less than market price. Employee stock options are not included in the
earnings per share computations for 1996 as the effects of their inclusion would
have been anti-dilutive.
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," effective
December 15, 1997. All periods presented in the accompanying consolidated
financial statements have been restated to conform to SFAS No. 128. Adoption of
SFAS No. 128 did not change previously reported earnings per share for 1996.
RECLASSIFICATIONS
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in the exchange. This statement
requires that liabilities and derivative securities incurred or obtained by
transferors as part of a transfer of financial assets be initially valued at
fair value, if practicable. It also requires that servicing rights and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Furthermore, SFAS No. 125 requires that debtors reclassify financial assets
pledged as collateral, and that secured parties recognize those assets and their
obligation to return them in certain circumstances in which the secured party
has taken control of those assets. Finally, SFAS No. 125 requires that a
liability be eliminated if either: (a) the debtor pays the creditor and is
relieved of its obligation for the liability, or (b) the debtor is legally
released from being the primary obligor under the liability, either judicially
or by the creditor. Accordingly, a liability is not considered extinguished by
an in-substance defeasance. In December 1996, the FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." SFAS No. 127 defers for one year the effective date of SFAS No. 125 as it
relates to transactions involving secured borrowings and collateral and
transfers and servicing of financial assets. The adoption of this pronouncement
did not have a material impact on the Company's previously reported earnings per
share.
In August 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. The statement also requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures and requires a reconciliation of the numerators and
denominators between the two calculations. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The statements did not have a material impact on the
Company's reported earnings per share.
In August 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company has adopted
this statement and Management does not believe the statement had a material
impact on the Company's results of operations or financial position.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Management does not believe the statements will have a material impact on the
Company's results of operations or financial position when adopted.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in both annual financial statements and interim financial reports
issued to shareholders. The statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. Management does not believe the
statements will have a material impact on the Company's results of operations or
financial position when adopted.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
NOTE 2
INVESTMENT SECURITIES
A summary of held to maturity investment securities is as follows at
December 31 (in thousands):
Estimated
Year Amortized Gross Unrealized Fair
ended Cost Gains Losses Value
- -----------------------------------------------------------
1997 $ - $ - $ - $ -
1996 2,607 19 - 2,626
- -----------------------------------------------------------
All held to maturity securities at December 31, 1996 are mortgage-backed
securities. Securities previously classified as held to maturity were
reclassified as available for sale in 1997. These securities were previously
used as collateral for credit facilities at other banks. The securities were
reclassified when the collateral requirement was removed. The amortized cost of
these securities at the time of reclassification was $2,554,000. An unrealized
gain of $20,000 was recorded when the securities were reclassified. There were
no sales of investment securities held to maturity during 1997 or 1996.
A summary of available for sale investment securities is as follows at
December 31, 1997 (in thousands):
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------
U.S. Treasury
and other
government
agency
securities $ 4,974 $ 25 $ (6) $ 4,993
Collateralized
mortgage
obligations 1,623 - (36) 1,587
Mortgage-
backed
securities 10,295 133 - 10,428
Other Securities 337 - - 337
- --------------------------------------------------------------
Total $ 17,229 $ 158 $ (42) $ 17,345
- --------------------------------------------------------------
A summary of available for sale investment securities is as follows at
December 31, 1996 (in thousands):
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------
U.S. Treasury
and other
government
agency
securities $ 2,705 $ - $ (25) $ 2,680
Collateralized
mortgage
obligations - - - -
Mortgage-
backed
securities - - - -
- --------------------------------------------------------------
Total $ 2,705 $ - $ (25) $ 2,680
- --------------------------------------------------------------
At December 31, 1997, investment securities available for sale with a book
value of $5,379,000 were pledged as collateral to secure public funds and for
other purposes as required or permitted by law.
The amortized cost and estimated fair value of securities at December 31,
1997, by contractual maturity, are shown below. Mortgage-backed securities and
collateralized mortgage obligations are classified in accordance with their
estimated life. Expected maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations.
Amortized Estimated
(in thousands) Cost Fair Value
- --------------------------------------------------------------
Due in one year $ 1,866 $ 1,868
Due after one year through five
years 11,307 11,367
Due after five years through ten
years 4,056 4,110
Due after ten years - -
- --------------------------------------------------------------
$ 17,229 $ 17,345
- --------------------------------------------------------------
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
NOTE 3
LOANS
A summary of loans is as follows at December 31:
(in thousands) 1997 1996
- ------------------------------------------------------------
Commercial loans not secured by
real estate $ 29,425 $ 25,300
Real estate mortgage loans 67,970 54,938
Personal loans not secured by
real estate 5,755 2,728
Unearned income, discounts and
fees (273) (309)
- ------------------------------------------------------------
$ 102,877 $ 82,657
- ------------------------------------------------------------
Loans on which the accrual of interest had been discontinued or reduced at
December 31, 1997 and 1996 amounted to $0 and $931,000, respectively. If these
loans had been current throughout their terms, interest income would have
increased approximately $0 and $66,000 in 1997 and 1996, respectively.
The Company serviced loans for others totaling $3,390,000 and $3,908,000 at
December 31, 1997 and 1996, respectively. These loans are not included in the
accompanying consolidated balance sheets.
Loans totaling $5,289,000 at December 31, 1997 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 1997 and
1996.
NOTE 4
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
A summary of activity in the allowance for possible credit losses follows:
(in thousands) 1997 1996
- ------------------------------------------------------------
Balance at beginning of year $ 2,848 $ 3,820
Credits charged off (410) (1,072)
Recoveries on credits previously
charged off 498 876
- ------------------------------------------------------------
Net recoveries (charge-offs) 88 (196)
Provision (benefit) for possible
credit losses (572) (668)
Other adjustments(1) - (108)
- ------------------------------------------------------------
Balance at end of year $ 2,364 $ 2,848
- ------------------------------------------------------------
(1) Reclassification of previous recoveries.
A summary of investment in impaired loans by type is as follows at December
31:
(in thousands) 1997 1996
- ------------------------------------------------------------
Non accrual loans:
Single family residence $ - $ -
Nonresidential real estate
mortgage - 622
Commercial - 309
Restructured loans 2,104 3,116
- ------------------------------------------------------------
$ 2,104 $ 4,047
- ------------------------------------------------------------
The Company had no "other impaired loans" at December 31, 1997 and 1996.
The related impairment valuation allowances were $0 and $775,000 at December 31,
1997 and 1996, 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, 1997 and 1996, the
Company's average investment in impaired loans were $2,807,000 and $5,195,000,
and interest income recorded during this period was $172,000 and $261,000, of
which $0 and $42,000 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) 1997 1996
- -----------------------------------------------------------
Balance at beginning of year $ 449 $ 592
Losses charged off - (584)
Provision for estimated losses 91 441
- -----------------------------------------------------------
Balance at end of year $ 540 $ 449
- -----------------------------------------------------------
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
NOTE 6
PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
(in thousands) 1997 1996
- -----------------------------------------------------------
Furniture, fixtures and
equipment $ 2,753 $ 3,391
Leasehold improvements 1,531 2,295
Property under capital leases 445 445
Construction in progress 24 -
- -----------------------------------------------------------
4,753 6,131
Accumulated depreciation and
amortization (4,042) (4,923)
Valuation allowance (1) - (276)
- -----------------------------------------------------------
$ 711 $ 932
- -----------------------------------------------------------
(1) A valuation allowance was established to remove the net book value of all
leasehold improvements on a facility that Management abandoned 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, 1997 consisted of long-term
obligations to an unaffiliated party of $452,000 and a capital lease obligation
of $327,000. 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 8.50% at December 31, 1997.
The capital lease obligation outstanding at December 31, 1997 had a
calculated annual interest rate of 45% and matures on November 30, 2000. The
current liability portion of the amortizing capital lease is $62,000.
NOTE 8
INCOME TAXES
The Company had a $35,000 and $17,000 Federal and State current income tax
expense during 1997. For 1996 the Company had a $7,000 current income tax
expense for State and none for Federal. During 1997 deferred Federal and State
tax benefits of $308,000 and $68,000 were recognized, respectively. During 1996
deferred Federal and State tax benefits of $626,000 and $244,000 were
recognized, respectively.
The actual income tax expense (benefit) differed from the expected Federal
statutory rate as follows:
(in thousands) 1997 1996
- -----------------------------------------------------------
Expected tax expense (benefit) at
34% $ 319 $ 4
Change in the valuation allowance
for deferred tax assets (1,286) (1,183)
Net state franchise tax 216 51
Minority interest expense in
Sunwest earnings not deductible 405 173
Other 22 92
- -----------------------------------------------------------
$ (324) $ (863)
- -----------------------------------------------------------
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) 1997 1996
- -----------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 4,389 $ 5,113
Net capital loss carryforwards 1,233 1,138
Loans, due to allowance for
possible credit losses,
deferred loan origination fees
and costs, market value
adjustment of loans held for
sale and leases 384 551
Alternative minimum tax credit
carryforwards 540 495
Real estate owned 246 204
Loss and expense accruals and other 194 584
General business tax credit
carryforwards 127 128
Premises and Equipment 90 17
- -----------------------------------------------------------
Total gross deferred tax assets 7,203 8,230
Less valuation allowance (5,621) (6,909)
- -----------------------------------------------------------
Net deferred tax assets 1,582 1,321
Deferred tax liabilities:
Deferred State income taxes 336 451
Unrealized gain on available for
sale securities 47 -
- -----------------------------------------------------------
Total gross deferred tax
liabilities 383 451
- -----------------------------------------------------------
Net deferred tax asset $ 1,199 $ 870
- -----------------------------------------------------------
In 1997 and 1996 the valuation allowance decreased by $1,286,000 and
$1,183,000, respectively. The decreases were 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 years.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
Current income taxes payable at December 31, 1997 were $35,000 for Federal
and $11,000 for State. No current income tax refund receivable or payable
existed at December 31, 1996. The Company had net operating loss carryforwards
of $11.1 million for Federal income tax purposes at December 31, 1997 which
expire from 2005 to 2012 and $2.9 million for State franchise tax purposes which
expire from 2008 to 2012. The Company had a net capital loss carryforward of
$2.8 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 $127,000 available for tax purposes at
December 31, 1997 which expire from 1998 to 2000. The Company had alternative
minimum tax credit carryforwards of $226,000 available for Federal income tax
purposes and $315,000 available for State franchise tax purposes at December 31,
1997.
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, 1997 Sunwest had the following deferred tax items: gross
deferred tax assets of $3,816,000; a valuation allowance of $2,417,000; a gross
deferred tax liability of $700,000 and a net deferred tax asset of $1,199,000.
At December 31, 1997 Sunwest had net operating loss carryforwards of $7.3
million for Federal income tax purposes at December 31, 1997 which expire from
2005 to 2011 and $1.3 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, 1997 which expire from 1998 to 2000. Sunwest had alternative
minimum tax credit carryforwards of $123,000 available for Federal income tax
purposes and $233,000 available for State franchise tax purposes at December 31,
1997.
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, 1995 357,500 $ 1.06-2.75
Canceled - -
- ------------------------------------------------------------
Options outstanding at
December 31, 1996 357,500 1.06-2.75
Canceled - -
- ------------------------------------------------------------
Options outstanding at
December 31, 1997 357,500 $ 1.06-2.75
- ------------------------------------------------------------
Options exercisable at
December 31, 1997 357,500 $ 1.06-2.75
- ------------------------------------------------------------
NOTE 10
RELATED PARTY TRANSACTIONS
At December 31, 1997, loans to directors totaled $34,000. During the year
ended December 31, 1997, new loans totaling $36,000 were granted to directors
and repayments totaled $2,000. No loans to directors were granted or outstanding
in 1996.
These loans were made in the ordinary course of business. The loans were
granted on substantially the same terms, including interest rates and collateral
on loans, as those prevailing at the same time for comparable transactions for
others.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
NOTE 11
OTHER OPERATING INCOME
A summary of other operating income is as follows:
(in thousands) 1997 1996
- -----------------------------------------------------------
Depositor charges $ 551 $ 593
Gain on sale of B&PB shares - 436
Interest recoveries on charged off loans 44 409
Service charges, commissions & fees 53 54
Other income 28 44
- -----------------------------------------------------------
$ 676 $ 1,536
- -----------------------------------------------------------
NOTE 12
OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
(in thousands) 1997 1996
- -----------------------------------------------------------
Salaries and employee benefits $ 3,467 $ 3,488
Occupancy 863 984
Data processing 481 431
Customer service expense 464 366
Depreciation and amortization 362 497
Professional services 270 348
Advertising and promotion 260 203
Printing and postage 106 120
Net cost of operation of real estate
owned 100 272
Stationary and supplies 97 128
Insurance 62 101
Regulatory fees and assessments 60 200
Miscellaneous 626 553
- -----------------------------------------------------------
$ 7,218 $ 7,691
- -----------------------------------------------------------
NOTE 13
GAIN (LOSS) 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 $60,000 and $64,000 at December 31, 1997 and 1996, respectively.
The gain on liquidation of $149,000 in 1996 relates primarily to refunds of
$123,000 received in February 1996 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. The Company has no expected loss accrual as
all projected future costs are anticipated to be reimbursed from the USTF.
Future cleanup costs are expected to total between $90,000 to $180,000.
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.
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.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
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, 1997
- -----------------------------------------------------------
Carrying Estimated
(in thousands) Amount Fair Value
- -----------------------------------------------------------
Financial assets:
Cash, interest bearing deposits
and Federal funds $8,640 $8,640
Investment securities 17,345 17,345
Net loans 100,513 100,397
Financial liabilities:
Deposits 114,970 114,979
Other interest bearing
liabilities 779 779
- -----------------------------------------------------------
December 31, 1996
- -----------------------------------------------------------
Carrying Estimated
(in thousands) Amount Fair Value
- -----------------------------------------------------------
Financial assets:
Cash, interest bearing balances
and Federal funds $ 19,328 $ 19,328
Investment securities 5,312 5,306
Net loans 79,809 79,801
Financial liabilities:
Deposits 95,557 95,565
Other interest bearing
liabilities 834 834
- -----------------------------------------------------------
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 $56,000 and $60,000 were included in salaries and employee
benefits in 1997 and 1996, 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, 1997 and 1996 was
approximately $653,000 and $735,000, respectively. Rents paid were offset by
rental income of $176,000 and 159,000 in 1997 and 1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
Future minimum lease commitments under all non-cancelable leases at
December 31, 1997 are as follows:
Capital Operating
(in thousands) Leases Leases
- ------------------------------------------------------------
Year ending December 31:
1998 $ 197 $ 525
1999 205 495
2000 196 449
2001 - 403
2002 - 416
Thereafter - 391
- ------------------------------------------------------------
Total minimum lease payments $ 598 $ 2,679
- ------------------------------------------------------------
Less amounts representing interest
at approximately 45% and
executory costs 272
- ------------------------------------------------------------
Present value of minimum capital
lease payments included in
other liabilities $ 298
- ------------------------------------------------------------
Management exercised a lease buyout clause and abandoned an operating lease
located in Santa Ana, California during 1997. The buyout clause required
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 $406,000.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk to meet the financing needs of customers
and to reduce exposure to fluctuations in interest. These financial instruments
include interest rate swaps, various guarantees, commitments to extend credit
and standby and commercial letters of credit. At December 31, 1997 and 1996, the
Company had standby and commercial letters of credit of $70,000 and $63,000
outstanding and commitments to extend credit, totaling $19,170,000 and
$10,498,000, 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.
Interest rate swap agreements involve the exchange of fixed and floating
rate interest payments based on a notional principal amount and maturity date.
The Company minimizes credit risk on interest rate swaps by performing credit
reviews of the counter party.
At December 31, 1997, interest rate swaps with a notional amount of
$1,792,000 were outstanding. The interest rate swaps were acquired in connection
with a purchase of loans from another party. The loans pay a fixed rate of
interest which is converted to a variable rate of interest through the interest
rate swap. The interest rate swaps expire in 1999 and 2000. At December 31,
1997, the interest rate swaps had an estimated negative market value of $40,000.
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 17
REGULATORY MATTERS
WEST COAST
An examination of West Coast as of September 30, 1997 was completed by the
FRB in the fourth quarter of 1997. The FRB subsequently notified West Coast that
its regulatory agreement was terminated due to improved financial conditions at
West Coast and Sunwest.
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 condition.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
Under capital adequacy guidelines and the 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, 1997, that Sunwest
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, 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 below. There
are no conditions or events since that notification that Management believes
have changed the institution's category. Sunwest's actual capital amounts and
ratios are also presented in the table. No amount was deducted from capital for
interest rate risk.
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $15,209 13.9% $ =>8,775 =>8.0% $ =>10,969 =>10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 13,826 12.6 =>4,388 =>4.0 => 6,581 => 6.0
Tier 1 Capital
(to Average Assets) 13,826 10.6 =>5,240 =>4.0 => 6,550 => 5.0
A concurrent examination of Sunwest was completed by the FDIC and the
Department of Financial Institutions during the third quarter of 1997. The FDIC
subsequently notified Sunwest that the Bank's Board of Directors resolution
committing to continued improvement at the Bank was no longer required because
of the improved financial condition of the Bank.
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,
1997 this would allow $0.7 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. Various laws and regulations limit the amount of dividends which
a bank can pay without obtaining prior approval from bank regulators. At
December 31, 1997, Sunwest is restricted from paying any cash dividend without
prior regulatory approval.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
NOTE 18
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
West Coast Bancorp's condensed balance sheets as of December 31, are as
follows:
(in thousands) 1997 1996
- -----------------------------------------------------------
Assets
Cash and short-term investments $ 598 $ 444
Investment in:
Sunwest Bank 13,895 11,058
WCV, Inc. 241 247
Other assets 67 576
- -----------------------------------------------------------
$ 14,801 $ 12,325
- -----------------------------------------------------------
Liabilities and Shareholders' Equity
Notes payable $ 452 $ 474
Minority interest 6,041 4,819
Other liabilities 840 897
- -----------------------------------------------------------
Total liabilities 7,333 6,190
- -----------------------------------------------------------
Shareholders' equity:
Common stock 30,176 30,176
Accumulated deficit (22,708) (24,041)
- -----------------------------------------------------------
Total shareholders' equity 7,468 6,135
- -----------------------------------------------------------
$ 14,801 $ 12,325
- -----------------------------------------------------------
West Coast Bancorp's condensed statements of operations for the years ended
December 31, are as follows:
(in thousands) 1997 1996
- -----------------------------------------------------------
Income
Interest income from subsidiaries $ 33 $ 31
- -----------------------------------------------------------
33 31
- -----------------------------------------------------------
Expenses
Interest expense 27 356
Salaries and employee benefits 114 163
Professional services 85 67
Other expenses 76 78
- -----------------------------------------------------------
302 664
- -----------------------------------------------------------
Equity in undistributed net income of
subsidiaries 1,542 1,322
Gain on sale of B&PB shares - 436
Loss on sale of Sunwest shares - 246
- -----------------------------------------------------------
Income before income taxes 1,273 879
Income taxes 4 5
- -----------------------------------------------------------
Net income $ 1,269 $ 874
- -----------------------------------------------------------
West Coast Bancorp's condensed statements of cash flows for the years ended
December 31, are as follows:
(in thousands) 1997 1996
- -----------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,269 $ 874
Equity in net income of subsidiaries (1,543) (1,322)
(Decrease) increase in other
liabilities (48) 30
Gain on sale of B&PB stock - (436)
Loss on sale of Sunwest shares - 246
- -----------------------------------------------------------
Net cash used in operating activities (322) (608)
- -----------------------------------------------------------
Cash flows from investing activities:
Sale of Sunwest stock - 2,520
(Increase) decrease in advances to
subsidiaries (9) 113
Decrease in other assets 508 60
- -----------------------------------------------------------
Net cash provided by investing
activities 499 2,693
- -----------------------------------------------------------
Cash flows from financing activities:
Increases (decreases) in notes payable
and subordinated debt 23 (3,732)
Sale of B&PB shares - 1,888
- -----------------------------------------------------------
Net cash used in financing activities
(23) (1,844)
- -----------------------------------------------------------
Increase in cash 154 241
Cash at beginning of year 444 203
- -----------------------------------------------------------
Cash at end of year $ 598 $ 444
- -----------------------------------------------------------
Supplemental schedule of non-cash financing activities
- -----------------------------------------------------------
Issuance of new Sunwest common shares
to minority share holders $ - $ 1,080
Supplemental disclosure of cash flow information
- -----------------------------------------------------------
Cash paid during the year for:
Interest $ 27 $ 368
Income taxes 5 5
- -----------------------------------------------------------
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 1997, West Coast did not receive any dividends from its
subsidiaries. West Coast does not expect to receive dividends from its
subsidiaries during 1998. At December 31, 1997, West Coast had cash totaling
$598,000.
West Coast's primary source of cash in 1998 is expected to be earnings on
existing cash balances. West Coast anticipates other cash expenditures during
1998 to consist of debt service payments and other operating expenses. West
Coast's projected debt service for 1998 includes payments on the notes payable
totaling $96,000.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
West Coast anticipates other cash expenditures during 1998 to consist of debt
service payments and other operating expenses. West Coast's projected debt
service for 1998 includes payments on the notes payable totaling $96,000.
NOTE 19
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows (in thousands, except per share
data):
1997 March 31 June 30 September 30 December 31 Total
- --------------------------------------------------------------------------------
Total interest income $ 2,425 $ 2,616 $ 2,781 $ 2,917 $ 10,739
Total interest expense 565 636 685 740 2,626
Net interest income 1,860 1,980 2,096 2,177 8,113
Provision (benefit) for
possible credit losses - - (144) (428) (572)
Net income before
income taxes 37 110 339 457 943
Net income 37 411 362 459 1,269
Net income per common
share - basic and
diluted 0.00 0.04 0.04 0.05 0.14
1996
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 -
basic and diluted (.03) .01 .07 .05 .10
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.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
of West Coast Bancorp:
We have audited the accompanying consolidated balance sheets of West Coast
Bancorp (a California corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Orange County, California
March 6, 1998
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 1997 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 6, 1998
/s/ Frank E. Smith
Frank E. Smith
Senior Vice President and
Chief Financial Officer
March 6, 1998
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 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) *
10.09 Employment effective September 1, 1996 by and between
Sunwest and James G. LeSieur (1) *
10.10 Employment effective September 1, 1996 by and between
Sunwest and Frank E. Smith (1) *
10.11 Promissory note modification agreement made as of
July 3, 1996, by Robert McKernan and West Coast *
21 Subsidiaries of West Coast F-22
23 Consent of Independent Public Accountants - Arthur Andersen LLP F-23
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 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*
*All subsidiaries are California corporations
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1997 and 1996
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 6, 1998 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
Orange County, California
March 6, 1998
F-23
<PAGE>
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