WEST COAST BANCORP AND SUBSIDIARIES
U.S. Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from N/A to N/A
COMMISSION FILE NUMBER: 0-10897
WEST COAST BANCORP
(Exact name of small business issuer as
specified in its charter)
CALIFORNIA 95-3586860
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
535 E. FIRST STREET
Tustin, California 92780
(Address of principal executive offices)
(714) 730-4499
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
Number of shares outstanding of each of the issuer's
classes of common equity as of October 31, 1998:
9,258,942
Transitional Small Business Disclosure Format Yes No X
--- ---
This document contains a total of 25 pages.
1
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in thousands, except share data) 1998 1997
--------------------------
ASSETS
Cash and due from bank $ 9,662 $ 7,041
Federal funds sold 15,000 1,500
Interest-bearing deposits with
financial institutions -- 99
Investment securities available-for-sale
at fair value 19,673 17,345
Loans 107,575 102,877
Less allowance for loan losses (2,430) (2,364)
--------------------------
Net loans 105,145 100,513
--------------------------
Real estate owned, net 528 1,151
Premises and equipment, net 567 711
Deferred taxes 1,330 1,153
Other assets 1,036 1,108
--------------------------
$ 152,941 $ 130,621
==========================
LIABILITIES
Deposits:
Demand, non-interest bearing $ 46,879 $ 42,920
Savings, money market & interest bearing demand 45,443 36,745
Time certificates under $100,000 23,785 22,169
Time certificates of $100,000 or more 19,550 13,136
--------------------------
Total deposits 135,657 114,970
Other borrowed funds 904 779
Other liabilities 1,115 1,363
--------------------------
Total liabilities 137,676 117,112
Commitments and contingencies
Minority interest in subsidiary 6,832 6,041
--------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value - 30,000,000
shares authorized, 9,258,942 and 9,168,942
shares issued and outstanding in 1998 and
1997, respectively 30,274 30,176
Accumulated deficit (21,823) (22,747)
Accumulated other comprehensive income:
Net unrealized (loss) gain on available-for-sale
investments (18) 39
--------------------------
Total shareholders' equity 8,433 7,468
--------------------------
$ 152,941 $ 130,621
==========================
(See accompanying notes to consolidated financial statements)
2
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
(in thousands, September 30, September 30,
except share data) 1998 1997 1998 1997
-----------------------------------------
INTEREST INCOME:
Loans, including fees $ 7,855 $ 6,721 $ 2,693 $ 2,327
Investment securities 842 537 316 233
Federal funds sold 684 536 295 219
Deposits with banks 1 26 -- 2
-----------------------------------------
Total interest income 9,382 7,820 3,304 2,781
INTEREST EXPENSE:
Interest on deposits 2,377 1,750 847 640
Other 150 136 49 45
-----------------------------------------
Total interest expense 2,527 1,886 896 685
-----------------------------------------
Net interest income 6,855 5,934 2,408 2,096
Provision for loan losses -- (144) -- (144)
-----------------------------------------
Net interest income after
provision for loan losses 6,855 6,078 2,408 2,240
Other operating income 544 495 191 157
Other operating expenses 5,642 5,299 1,854 1,726
Minority interest in net income
of subsidiary 834 783 344 329
Gain (loss) on liquidation of
WCV, Inc. 1 (7) -- (3)
-----------------------------------------
Income before income taxes 924 484 401 339
Income tax (benefit) expense -- (326) -- (23)
-----------------------------------------
Net income $ 924 $ 810 $ 401 $ 362
=========================================
Basic and diluted earnings
per share $ .10 $ .09 $ .04 $ .04
=========================================
(See accompanying notes to consolidated financial statements)
3
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
(in thousands) 1998 1997 1998 1997
-----------------------------------------------
Net Income $ 924 $ 810 $ 401 $ 362
Other comprehensive income,
net of tax:
Unrealized gain/(loss) on
available-for-sale investments
arising during period (57) 74 (38) 34
-----------------------------------------------
Other comprehensive income (loss) (57) 74 (38) 34
-----------------------------------------------
Comprehensive income $ 867 $ 884 $ 363 $ 396
===============================================
(See accompanying notes to consolidated financial statements)
4
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Securities Share-
------------- Valuation Accum. holders'
(in thousands) Shares Amount Allowance Deficit Equity
--------------------------------------------------
Balance at December 31, 1997 9,169 $30,176 $ 39 $ (22,747) $ 7,468
Net income - - - 924 924
Stock options exercised 90 98 - - 98
Change in securities
valuation allowance - - (57) - (57)
--------------------------------------------------
Balance at September 30, 1998 9,259 $30,274 $ (18) $ (21,823) $ 8,433
==================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(in thousands) 1998 1997
---------------------
Cash flows from operating activities:
Net income $ 924 $ 810
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 254 283
Provision for loan losses - (144)
Net change in receivables, payables and other assets 186 (173)
Gain on sale of real estate owned (10) -
Write-downs of real estate owned 16 25
Minority interest expense 834 783
Gain (loss) on discontinued businesses (1) 4
---------------------
Net cash provided by operating activities 2,203 1,588
(See accompanying notes to consolidated financial statements)
5
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
(in thousands) 1998 1997
---------------------
Cash flows from investing activities:
Proceeds from maturity of interest bearing cash
with an original maturity greater than 90 days $ 99 $ 1,982
Purchases of interest bearing deposits with
financial institutions -- (99)
Purchase of investment securities available-for-sale (6,096) (13,213)
Proceeds from maturity of investment securities
available for sale 3,500 1,206
Net increase in loans (4,632) (15,382)
Proceeds on sale of real estate owned 617 --
Purchase of premises and equipment (131) (101)
Proceeds from sales of premises and equipment 20 -
---------------------
Net cash used in investing activities (6,623) (25,607)
Cash flows from financing activities:
Net increase in deposits 20,687 19,444
Payments for notes payable to affiliates
and other borrowed funds (146) (38)
---------------------
Net cash provided by financing activities 20,541 19,406
---------------------
Increase (decrease) in cash and cash equivalents 16,121 (4,613)
Beginning cash and cash equivalents 8,541 17,346
---------------------
Ending cash and cash equivalents $24,662 $12,733
=====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,496 $ 1,866
Income taxes 107 4
Supplemental schedule of non-cash investing and financing activities:
Transfer of investment security from held to maturity
to available for sale $ -- $ 2,553
Transfer from other liabilities to
other borrowed funds 475 --
(See accompanying notes to consolidated financial statements)
6
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements reflect all
adjustments, consisting primarily of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair statement
of the results of operations for the interim periods. Results for the
nine and three month periods ended September 30, 1998 and 1997 are not
necessarily indicative of results that may be expected for any other
interim period, or for the year as a whole. All significant
intercompany balances have been eliminated.
On February 29, 1996, West Coast Bancorp ("West Coast") and Sunwest
Bank ("Sunwest") entered into an agreement with Western Acquisitions,
L.L.C. ("Western"), an affiliate of Hovde Financial, Inc., for West
Coast to sell 35 existing shares of Sunwest for $2,520,000 and for
Sunwest to issue and sell 15 new shares for $1,051,000. On September
13, 1996, the sale closed. West Coast and Western own approximately
56.5% and 43.5% of Sunwest, respectively.
Certain reclassifications have been made in the prior periods financial
statements to conform to the presentation in the current period.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for all entities for reporting
comprehensive income and its components in financial statements. This
statement requires that all items which 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. Comprehensive income is equal
to net income plus the change in "other comprehensive income", as
defined by SFAS No. 130. The only component of other comprehensive
income currently applicable to the Company is the net unrealized gain
or loss on available-for-sale investments. SFAS No. 130 requires that
an entity: (a) classify items of other comprehensive income by their
nature in a financial statement, and (b) report the accumulated balance
of other comprehensive income separately from common stock and retained
earnings in the equity section of the balance sheet. This statement is
effective for financial statements issued for fiscal years beginning
after December 15, 1997.
7
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
(3) EARNINGS PER SHARE
The following is a reconciliation of basic earnings per share (EPS) to
diluted EPS for the nine and three months ended September 30, 1998 and
1997.
(dollars and shares in thousands,
except per share amounts)
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
-------------------------------------------------------
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
-------------------------------------------------------
Basic EPS:
Income available to
common shareholders $ 924 9,209 $ .10 $ 810 9,169 $ .09
Effect of Dilutive
Securities:
Stock options 65 --
-------------------------------------------------------
Diluted EPS:
Income available to
common shareholders
plus assumed
conversions $ 924 9,274 $ .10 $ 810 9,169 $ .09
=======================================================
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
-------------------------------------------------------
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
-------------------------------------------------------
Basic EPS:
Income available to
common shareholders $ 401 9,259 $ .04 $ 362 9,169 $ .04
Effect of Dilutive
Securities:
Stock options 24 --
-------------------------------------------------------
Diluted EPS:
Income available to
common shareholders
plus assumed
conversions $ 401 9,283 $ .04 $ 362 9,169 $ .04
=======================================================
8
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
(4) LOANS
A summary of loans follows:
September 30, December 31,
(in thousands) 1998 1997
-----------------------------
Real estate mortgage loans $ 68,516 $ 67,970
Commercial loans not secured by real estate 34,798 29,425
Personal loans not secured by real estate 4,486 5,755
Less unearned income, discounts and fees (225) (273)
-----------------------------
$ 107,575 $ 102,877
=============================
(5) OTHER OPERATING INCOME
A summary of other operating income follows:
Nine Months Ended Three Months Ended
September 30, September 30,
(in thousands) 1998 1997 1998 1997
---------------------------------------------
Depositor charges $428 $412 $152 $133
Service charges, commissions
& fees 69 38 34 14
Other income 47 45 5 10
---------------------------------------------
$544 $495 $191 $157
=============================================
9
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
(6) OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
Nine Three
Months Ended Months Ended
September 30, September 30,
(in thousands) 1998 1997 1998 1997
--------------------------------------
Salaries and employee benefits $ 2,883 $ 2,569 $ 954 $ 854
Occupancy 551 689 170 177
Data processing 400 360 138 118
Customer service 364 349 129 113
Professional services 255 204 97 103
Depreciation and amortization 254 283 79 87
Advertising and promotion 232 185 92 56
Stationary and supplies 82 66 34 28
Printing & postage 79 80 25 26
Telephone and telefax 65 58 24 18
Net cost of operation of REO 50 11 (3) 5
Insurance 30 46 10 15
Regulatory fees and assessments 25 45 8 15
Collection 14 36 6 7
Miscellaneous 358 318 91 104
--------------------------------------
$ 5,642 $ 5,299 $1,854 $ 1,726
======================================
10
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
The following presents management's discussion and analysis of the consolidated
financial condition and operating results of West Coast Bancorp (as a separate
entity "West Coast" and together with its subsidiaries the "Company") for the
nine and three month periods ended September 30, 1998 and 1997. The discussion
should be read in conjunction with the Company's consolidated financial
statements and the accompanying notes appearing elsewhere in this report.
Certain statements in this Report on Form 10-QSB constitute "forward-looking
statements" under the Private Securities Litigation Act of 1995 which involve
risk 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 area in which the Company
conducts its operations, fluctuations in interest rates, credit quality, year
2000 issues and government regulation. For additional information regarding
these factors, see "Item 1. Business - Summary of Business Considerations and
Certain Factors that May Affect Future Results of Operations and/or Stock Price"
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
GENERAL
The Company recorded net income of $924,000, or $.10 per share, and $401,000, or
$.04 per share, during the nine and three months ended September 30, 1998, as
compared with net income of $810,000, or $.09 per share, and $362,000, or $.04
per share, during the same respective periods in 1997. The 1997 figures included
the effects of recording a tax benefit of $307,000 in June 1997 and $23,000 in
September 1997. The higher pre-tax income in 1998 versus 1997 occurred primarily
because Sunwest had higher earnings in 1998. Sunwest's higher earnings were
primarily due to increased growth in net interest income from growth in assets
and deposits.
The Company had total assets, loans and deposits as follows:
September 30, December 31, September 30, December 31,
1998 1997 1997 1996
------------------------------------------------------------------
(in thousands)
Total assets $152,941 $130,621 $129,632 $108,987
Loans 107,575 102,877 98,006 82,657
Deposits 135,657 114,970 115,001 95,557
11
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
The $23 million increase in total assets from September 30, 1997 to September
30, 1998 occurred primarily due to a $21 million increase in deposits at Sunwest
from increased marketing efforts and due to the expanding economy in Orange
County, California.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $921,000, or 16%, during the first nine months of
1998 as compared to the same period in 1997. Sunwest's net interest income
increased $954,000 due to a $1,561,000 increase in interest income, partially
offset by a $607,000 increase in interest expense. The increase in interest
income was due to an increase in interest earning assets offset to an extent by
a decline in the average yield earned on such assets. The increase in interest
expense was due primarily to an increase in the volume of interest-bearing
deposits, primarily time deposits. Net interest margin declined from 5.71% in
1997 to 5.18% in 1998 primarily due to a decline in the percentage of loans to
earning assets from 78% in 1997 to 75% in 1998. An increase in time deposits as
a percentage of deposits from 29% in 1997 to 33% in 1998 also contributed to a
decline in the net interest margin. Net interest income is expected to increase
in the future as Sunwest increases its earning assets through its marketing
efforts and the expanding economy in Orange County, California. Recent
reductions in interest rates will lower the Company's net interest margin due to
the fact that interest earning assets exceed interest-bearing liabilities.
Increased competition in the Company's market area for loans and deposits may
also result in a lower net interest margin.
12
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
The following table sets forth the Company's average balance sheets, yields on
earning assets, rates paid on interest-bearing liabilities, net interest margins
and net yields on interest-earning assets for the nine and three month periods
ended September 30, 1998 and 1997 (dollars in millions):
Nine Months Ended September 30,
1998 1997
Average Yields/ Average Yields/
Balance Rates Balance Rates
----------------------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 103.0 10.17% $ 85.8 10.44%
Investment securities 18.6 6.03 11.1 6.45
Federal funds sold 16.5 5.53 13.1 5.46
Interest-bearing deposits
with financial institutions .- 7.02 .7 5.24
----------------------------------------------
Total interest-earning assets 138.1 9.06 110.7 9.42
Allowance for credit losses (2.3) (2.8)
Cash and due from banks 8.2 6.6
Other assets 3.7 4.0
----------------------------------------------
$ 147.7 $ 118.5
==============================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 43.6 5.42% $ 30.4 5.39%
Savings deposits 5.0 1.98 4.7 1.98
Interest-bearing demand deposits 37.2 1.89 31.6 1.88
Other 1.0 20.76 1.0 22.11
----------------------------------------------
Total interest-bearing liabilities 86.8 3.88 67.7 3.71
Minority interest 6.4 5.1
Demand deposits 45.4 37.9
Other liabilities 1.1 1.3
Shareholders' equity 8.0 6.5
----------------------------------------------
$ 147.7 $ 118.5
==============================================
Net interest margin 5.18% 5.71%
Net yield on interest-earning assets 6.62 7.15
13
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
(Continued)
Three Months Ended September 30,
1998 1997
Average Yields/ Average Yields/
Balance Rates Balance Rates
----------------------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 106.8 10.08% $ 88.3 10.54%
Investment securities 19.8 6.38 14.5 6.42
Federal funds sold 21.0 5.61 16.1 5.45
Interest-bearing deposits
with financial institutions .0 0.00 .1 6.20
----------------------------------------------
Total interest-earning assets 147.6 8.95 119.0 9.35
Allowance for credit losses (2.4) (2.7)
Cash and due from banks 8.8 7.0
Other assets 3.4 4.0
----------------------------------------------
$ 157.4 $ 127.3
==============================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 46.2 5.39% $ 33.6 5.50%
Savings deposits 5.1 1.98 4.7 2.02
Interest-bearing demand deposits 40.8 1.95 32.1 1.90
Other 1.0 19.25 1.0 22.30
----------------------------------------------
Total interest-bearing liabilities 93.1 3.85 71.4 3.84
Minority interest 6.6 5.4
Demand deposits 48.3 42.5
Other liabilities 1.1 1.2
Shareholders' equity 8.3 6.8
----------------------------------------------
$ 157.4 $ 127.3
==============================================
Net interest margin 5.10% 5.51%
Net yield on interest-earning assets 6.52 7.04
14
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
The increases (decreases) in interest income and expense and net interest income
resulting from changes in average assets, liabilities and interest rates for the
1998 versus 1997 periods are summarized as follows (in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------------------------------------
Asset/ Interest Asset/ Interest
Liability Rate Liability Rate
Changes Changes Total Changes Changes Total
----------------------------------------------------------
Changes in:
Interest income $1,763 $ (201) $1,562 $ 623 $ (100) $ 523
Interest expense 612 29 641 212 (1) 211
----------------------------------------------------------
Net interest income $1,151 $ (230) $ 921 $ 411 $ (99) $ 312
==========================================================
Loans on which the accrual of interest had been discontinued at September 30,
1998 and 1997 amounted to $1,632,000 and $701,000, respectively. If these loans
had been current throughout their terms, it is estimated that net interest
income would have increased by approximately $25,000 and $18,000 in the third
quarters of 1998 and 1997, respectively. This would have raised the net yield on
interest-earning assets and the net interest margin by approximately 7 and 6
basis points during the third quarters of 1998 and 1997, respectively.
Impaired loans have not changed significantly from the amounts reported at
December 31, 1997.
15
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
NONPERFORMING ASSETS AND PROVISION FOR LOAN LOSSES
The following table summarizes the activity in the allowance for loan losses
during the periods indicated (in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------------------------------
Allowance for loan losses
balance at beginning of period $ 2,364 $ 2,848 $ 2,393 $ 2,740
Charge-offs (37) (328) (14) (134)
Recoveries 103 295 51 209
-------------------------------------------
Net recoveries (charge-offs) 66 (33) 37 75
Provision for loan losses -- (144) -- (144)
-------------------------------------------
Allowance for loan losses
balance at end of period $ 2,430 $ 2,671 $ 2,430 $ 2,671
===========================================
All of the above charge-offs and recoveries were at Sunwest. The net recoveries
during the nine and three months ended in 1998 are a result of improved asset
quality and the high levels of charge-offs in previous years.
Management believes that the allowance for loan losses at September 30, 1998 of
$2,430,000 or 2.26% of loans was adequate to absorb known and inherent risks in
the Company's loan portfolio. The ultimate collectibility of a substantial
portion of the Company's loans, as well as its financial condition, is affected
by general economic conditions and the real estate market in California.
California has experienced, and may continue to experience, volatile economic
conditions. These conditions have adversely affected certain borrowers' ability
to repay loans. While the Southern California and Orange County economies have
exhibited positive trends in the past few years, 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 loan losses and would adversely affect the
financial condition and results of operations of the Company.
16
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
A summary of nonperforming assets follows (dollars in thousands):
September 30, December 31, September 30, December 31,
1998 1997 1997 1996
-----------------------------------------------------------
Nonaccrual loans $ 1,632 $ -- $ 701 $ 931
Loans 90 days past due
and still accruing 2 31 31 43
-----------------------------------------------------------
Nonperforming loans 1,634 31 732 974
Real estate owned 528 1,151 1,218 1,243
-----------------------------------------------------------
Nonperforming assets $ 2,162 $ 1,182 $ 1,950 $ 2,217
===========================================================
Nonperforming loans/
Total loans 1.52% .03% .75% 1.18%
Nonperforming assets/
Total assets 1.41 .90 1.50 2.03
===========================================================
Nonperforming assets have increased approximately $1 million from December 31,
1997. The increase is due primarily to one loan placed on nonaccrual in the
second quarter. The loan is expected to be placed back on accrual status during
fourth quarter of 1998.
Restructured loans that were performing substantially in accordance with their
modified terms totaled $3,027,000 at September 30, 1998. No restructured loans
were on nonaccrual status at September 30, 1998.
OTHER OPERATING INCOME
Other operating income increased by $49,000 for the nine months ended September
30, 1998, as compared with the same period in 1997. See note (5) of the notes to
consolidated financial statements.
17
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
OTHER OPERATING EXPENSES
Other operating expenses increased $343,000 from the nine months ended September
30, 1997 to the same period in 1998 primarily due to salary expense. See note
(6) of the notes to consolidated financial statements. Total other operating
expenses expressed in dollars and as a percentage of total revenues and average
assets follows (dollars in thousands):
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
----------------------------------------------
Other operating expenses $ 5,642 $ 5,299 $ 1,854 $ 1,726
Other operating expenses
(annualized)/average assets 5.09% 5.96% 4.71% 5.42%
Other operating expenses/interest
and other operating income 56.8% 63.7% 53.1% 58.7%
==============================================
The decline in the other expense ratios is primarily a result of the increases
in assets and income exceeding the increase in expenses. As the Company grows it
is likely that operating expenses will also increase. The Company is currently
planning to engage an outside consultant to assist the Company in reviewing all
significant business processes during 1999. The purpose of this review will be
to streamline processes to reduce expenses and improve the delivery of products
and services to the Company's customers. The external costs of this review are
expected to be less than $150,000. Although the Company expects the cost of this
review to be recovered through productivity and revenue enhancements, there are
no assurances that the expected results will be achieved. The Company is
currently assessing its facilities needs in light of its expected future growth
and possible expansion into other areas of Orange County. Although no
commitments for new facilities have been made, it is likely that additional
investments in facilities will be made during 1999.
YEAR 2000 ISSUE
BACKGROUND - The year 2000 issue refers to computer programs being written using
two digits rather than four to define an applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have a
two-digit field to define the year may recognize a date using "00" as the year
1900 rather than the year 2000. Preparing for the year 2000 is said to be one of
the biggest challenges any company has had to face to date. Predictions of
computer crashes, building lock downs, and business failures may sound
exaggerated, but the problems are real. Left uncorrected, the year 2000 problem
could cause massive miscalculations, lost data, and equipment failures. The
computer related challenges and potential risks associated with the turn of the
century are significant for all businesses. One of the greatest risks is not
moving quickly enough to find, fix, and test for possible problems before
year-end 1999. Similar to other companies, the Company faces the challenge of
ensuring that all computer-related functions will work properly in the year 2000
and beyond and that adequate contingency plans are in place to mitigate possible
18
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
interruptions in critical services and products. If the necessary modifications
and implementations are not made on a timely basis, the year 2000 issue could
have a material, adverse effect on the business, consolidated financial
position, results of operations or cash flows of the Company.
APPROACH TO READINESS - The Company established a Year 2000 Project Team led by
the president of Sunwest to manage the Company's year 2000 readiness. The
Project Team is made up of senior managers of all departments. A project
coordinator assists with documenting the Company's progress and managing the
databases created to assist in the management of the project. Status reports are
reviewed at the monthly board of directors' meetings. The Company's year 2000
project is well underway and the Company's plan is to have renovation largely
completed for mission-critical applications by the end of 1998. This will allow
for broad testing and clean-up well before the year 2000. An impact analysis of
the Company's data processing environments, systems, and applications was
conducted to identify and assess their date sensitivity. An inventory database
of these items was developed in preparation for remediation tracking and
reporting of the potential areas of impact. In addition, plans have been
developed and are being implemented to address and track compliance in the
following areas:
Infrastructure - The Company's physical facilities, including building security
systems, fire alarm systems, and equipment, have been reviewed to determine the
state of year 2000 readiness.
Business partners (suppliers/vendors) - Review of the year 2000 efforts of the
Company's suppliers and business partner relationships to encourage the timely
resolution of product or service compliance issues in a manner consistent with
the year 2000 project goals of the Company. The Company requires a review of all
new business partners for year 2000 readiness.
Employee awareness - The Company believes that employee awareness and
understanding of the year 2000 issue is essential to the success of the project.
Employees must be able to communicate confidently regarding year 2000 issues
with customers. An aware organization is one that will be able to recognize and
take proactive measures regarding potential problem areas.
Customer awareness - The Company has taken a leadership role in communicating
the year 2000 issue to its customers and community. The Company has conducted
seminars and has made literature available related to the year 2000 issue.
Risk assessment and customer readiness - Business failures of key borrowers and
depositors could adversely impact the Company. The Company has developed a
program to assess the year 2000 readiness of all key customers and groups of
customers. The program includes assessing risk through the use of
questionnaires, interviews, site visits and a review of business practices.
Independent third party assessment - The Company's year 2000 readiness efforts
19
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
have been and will continue to be assessed by the FDIC and the California
Department of Financial Institutions. Failure to meet the readiness standards
could subject the Company to enforcement actions. The Company has engaged
independent third parties to conduct reviews of the Company's efforts to provide
additional assurance of compliance.
Other elements of the Company's year 2000 program include overall program
management, monitoring and control, risk management, compliance test management,
quality assurance, communications, and support services.
PROGRESS TO DATE - The Company's year 2000 readiness project is well underway
and the Company's plan is to have testing largely completed for mission-critical
applications by the end of 1998. This will allow for renovation and clean-up
well before the year 2000. These goals are in line with the guidelines of the
Federal Financial Institutions Examination Council (FFIEC). To the extent that
compliance is possible from the Company's internal efforts alone, the Company is
taking steps necessary to accomplish that goal. When compliance also depends on
the conduct of others, the Company is working with its vendors and business
partners to secure compliance and to obtain appropriate assurances that those
externally developed systems are or will become compliant on a timely basis and
will not interfere with the Company's business operations. While the Company is
committed to taking every reasonable action in this regard, expected of a
prudent business, the Company is not in a position to guarantee the performance
of others or to predict whether any of the assurances that others provide may
prove later to be inaccurate or overly optimistic. Since beginning the year 2000
project, the Company has:
- -Established a Year 2000 Project Team led by senior management
- -Completed inventory of application and system software and hardware
- -Completed an inventory of infrastructure facilities
- -Developed consolidated compliance plans and schedules for business areas
- -Built databases for inventory tracking and reporting
- -Developed a database to log and track resolution of reported Y2K problems
- -Established budget and cost tracking systems
- -Implemented broad awareness and education activities for employees
- -Developed and implemented a customer inquiry response process
- -Implemented vendor compliance verification
- -Obtained readiness reports from 97% of mission critical vendors
- -Mandated that all new and renewed contracts address Y2K compliance issues
- -Set up a dedicated test environment to simulate year 2000 conditions
- -Developed test scripts for 98% of all mission critical applications
- -Completed testing for 61% of all mission critical applications
- -Assessed 100% of all critical customers
- -Determined that 22% of loan customers are large enough to require ongoing
review
- -Developed a process for communicating Y2K impacts to customers, correspondents,
agencies, and vendors -Developed a plan to address contingency implementation
dates when remediation does not proceed as planned
COST OF YEAR 2000 READINESS - The Company currently estimates that it will incur
additional incremental out-of-pocket costs of about $200,000. These costs
include equipment and software purchases that may be amortized for up to five
20
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
years and the cost of consultants to assist the Company with its year 2000
readiness efforts. Internal and external costs specifically associated with
modifying internal-use software for the year 2000 will be charged to expense as
incurred. All of these costs are being funded through operating cash flows.
Costs expensed to date for incremental costs associated with the year 2000 issue
were approximately $26,000 through September 30, 1998. The Company's current
estimates of the costs necessary to implement and test its year 2000 readiness
are based on the facts and circumstances existing today. The estimates were made
using assumptions of future events including the continued availability of
certain resources, implementation success and other factors. New developments
may occur that could affect the Company's estimates for year 2000 compliance.
These developments include, but are not limited to: (a) the availability and
cost of personnel trained in this area, (b) the ability to locate and correct
all relevant computer code and equipment issues, and (c) the planning and
implementation success needed to achieve full compliance.
The amount of resources directed to ensuring year 2000 readiness have slowed,
and will continue to slow, the development of new business and technology
initiatives that provide new products and services to the Company's customers or
that enhance effectiveness and profitability of existing products and services.
The effects on the Company of delays in other business and technology
initiatives are not determinable at this time, but are not expected to have a
material effect on the financial condition of the Company. In addition, since
there is no uniform definition of year 2000 "compliance" and not all customer
situations can be anticipated, the Company may experience claims as a result of
the year 2000 transition. It is uncertain whether sufficient insurance coverage
will be available to satisfy any claims asserted. Additionally, the Company
continues to communicate with significant customers and vendors to determine the
extent of risk created by those third parties' failure to remediate their own
year 2000 issues. However, it is not possible, at present, to determine the
financial effect if significant customer and vendor remediation efforts are not
resolved in a timely manner.
INCOME TAXES
The Company and Sunwest did not recognize any income tax expense or benefit
during the nine and three months ended September 30, 1998. Sunwest recognized a
tax benefit of $307,000 and $23,000 during the second and third quarters of
1997, respectively. The tax benefit was recognized after performing the
quarterly analysis of the valuation allowance for deferred taxes. The valuation
allowance was reduced because it was deemed more likely than not that a portion
of the deferred tax asset will be recognized as a benefit.
Sunwest had $3.1 million of net deferred tax assets and approximately $7.3
million of net operating loss carryforwards at December 31, 1997. Excluding the
Sunwest amounts, the Company had $3.8 million of net operating loss
carryforwards at December 31, 1997.
For all the periods presented a valuation allowance has been recorded to offset
most or all of the deferred tax assets of Sunwest and the Company. The valuation
21
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
allowance was established due to uncertainty of future earnings at both Sunwest
and the Company. As of December 31, 1997, Sunwest has recognized a $1.2 million
deferred tax asset due to its improved earnings and expected tax preference
items. Sunwest and the Company may adjust the valuation allowance and the
corresponding tax benefit in earnings in 1998 based on increases in expected
earnings and changes in tax preference items.
LIQUIDITY
The Company
Liquidity, as it relates to banking, represents the ability to obtain funds to
meet loan commitments and to satisfy demand for deposit withdrawals.
The principal sources of funds that provide liquidity for Sunwest are maturities
of investment securities and loans, collections on loans, increased deposits and
temporary borrowings. The Company's liquid asset ratio (the sum of cash,
investments available-for-sale, excluding pledged amounts, and Federal funds
sold divided by total assets) was 25% at September 30, 1998 and 16% at December
31, 1997. The Company believes it has sufficient liquid resources, as well as
available credit facilities, to enable it to meet its operating needs.
THE PARENT COMPANY
West Coast's 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 the first nine months of 1998 West Coast did not receive any dividends
from its subsidiaries. West Coast does not expect to receive dividends from its
subsidiaries during 1998.
At September 30, 1998, West Coast had cash and short term investments totaling
$445,000. No significant cash receipts are expected for the remainder of 1998.
West Coast anticipates cash expenditures during 1998 to consist of debt service
payments and other operating expenses. West Coast's projected debt service for
the remainder of 1998 is expected to total $64,000. West Coast anticipates that
other operating expenses will be approximately $26,000 during the remainder of
1998. Funds to meet cash needs will come from current cash resources
supplemented by sales of assets and possibly dividends from Sunwest.
22
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
CAPITAL RESOURCES AND DIVIDENDS
Sunwest had a 12.48%, 13.73% and 9.85% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at September 30, 1998, respectively. West
Coast Bancorp had a 12.33%, 13.58% and 9.71% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at September 30, 1998, respectively. These
are above the regulatory minimums of 4.00%, 8.00% and 4.00%, respectively. West
Coast Bancorp and Sunwest are considered "well capitalized" under the regulatory
capital guidelines.
The Company had no material commitments for capital expenditures as of September
30, 1998.
23
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
SEPTEMBER 30, 1998
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------------
NONE
Item 2. Changes in Securities
- -----------------------------------
NONE
Item 3. Defaults Upon Senior Securities
- ---------------------------------------------
NONE
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------------
West Coast Bancorp held its Annual Meeting of Shareholders (the "Meeting") on
August 25, 1998.
At the Meeting, the following individuals were elected to serve as directors
until the 1999 Annual Meeting of Shareholders and until their successors are
elected and have qualified:
Authority
Name of Director Votes For Withheld
Eric D. Hovde 5,969,945 149,035
Thomas A. Jones 6,006,235 112,745
John B. Joseph 5,798,344 320,636
James G. LeSieur, III. 5,974,860 144,120
Ronald R. White 5,829,854 289,126
Item 5. Other Information
- -------------------------------
NONE
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule for September 30, 1998
(b) Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WEST COAST BANCORP
/s/Eric D. Hovde November 13, 1998
---------------------------------------- ----------------------
Eric D. Hovde Date
Chief Executive Officer
/s/Frank E. Smith November 13, 1998
----------------------------------------- ----------------------
Frank E. Smith Date
Chief Financial Officer
25
<PAGE>
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