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, 1998
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.)
535 E. First Street
Tustin, California 92780-3312
(Address of Principal Executive Offices) (Zip Code)
(714) 730-4499
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.[ ]
Total revenues for the most recent fiscal year: $13,344,000.
As of February 28, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $8,423,000 based upon the
last sale price on such date.
Number of shares of Common Stock of the registrant outstanding as
of February 28, 1999:
9,258,942
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, 1998.
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WEST COAST BANCORP
Form 10-KSB for the year ended December 31, 1998
TABLE OF CONTENTS
Page
PART I
Item 1 Business 3
Item 2 Properties 19
Item 3 Legal Proceedings 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 4(A) Executive officers of the registrant 19
PART II
Item 5 Market for Common Equity and Related Stockholder
Matters 20
Item 6 Management's Discussion and Analysis 20
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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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 September 13, 1996, Western
Acquisitions, L.L.C. and Western Acquisition Partners, L.P., (collectively,
"Western"), affiliates of Hovde Financial, Inc., acquired a 43.5% interest in
Sunwest.
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 $1,289,000 or $.14 per share in 1998, as
compared with net income of $1,269,000 or $.14 per share in 1997.
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, 1998, Sunwest had total
consolidated assets of $153,728,000, total consolidated loans and leases of
$109,547,000, and total consolidated deposits of $134,152,000. For the year
ended December 31, 1998, Sunwest had net income of $2,636,000. Minority
shareholders' interest reduced the net income to the Company by $1,146,000.
Sunwest presently has three banking offices within Orange County,
California. The main office is located in Tustin at 535 East First Street.
Sunwest's two branch offices are located at 4770 Campus Drive, Newport Beach and
501 South Main Street, Orange.
Through its network of banking offices, Sunwest emphasizes personalized
service combined with services primarily directed to small and medium-sized
businesses and professionals. Although Sunwest focuses its marketing of services
to businesses and professionals, a wide range of consumer banking services are
made available to its customers.
Sunwest offers a wide range of deposit instruments. These include personal
and business checking and savings accounts, including interest bearing
negotiable order of withdrawal ("NOW") accounts, Super NOW accounts and money
market accounts, time deposits and individual retirement accounts.
Sunwest also engages in a 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
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services include extended weekday banking, drive-up and walk-up facilities,
merchant windows, ACH originations, on-line banking for business customers,
mutual funds, 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.
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
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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
quarterly 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. See "ITEM 1.
BUSINESS - Supervision And Regulation - Capital Standards."
West Coast is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve Board is also required
for the merger or consolidation of the Company and another bank holding company.
West Coast is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, West Coast, subject to the prior approval
of the Federal Reserve Board, may 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
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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."
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
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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 1999. At December 31, 1998, 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.
The following tables present the amounts of regulatory capital and the
capital ratios for the Company and the Bank, compared to their minimum
regulatory capital requirements as of December 31, 1998 (dollars in thousands).
The Company
Actual Required Excess
Amount Ratio Amount Ratio Amount Ratio
Leverage
ratio $15,896 10.35% $6,145 4.00% $9,751 6.35%
Tier 1 risk-
based ratio $15,896 13.02% $4,884 4.00% $11,012 9.02%
Total risk-
based ratio $17,511 14.27% $9,768 8.00% $7,743 6.27%
Sunwest
Actual Required Excess
Amount Ratio Amount Ratio Amount Ratio
Leverage
ratio $16,464 10.71% $6,148 4.00% $10,316 6.71%
Tier 1
risk-based $16,464 12.83% $5,133 4.00% $11,331 8.83%
ratio
Total
risk-based $18,079 14.08% $10,267 8.00% $7,812 6.08%
ratio
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
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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, 1998, the
Company and Sunwest 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, 1998, 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
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. However, as of January 1, 1999, there were still
financial institutions chartered as savings associations. 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.
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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 in complying with its CRA obligations.
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
1999 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 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. The
statement did not 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
9
<PAGE>
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. The statement did not have a
material impact on the Company's results of operations or financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management of the Company does not believe the
adoption of SFAS No. 133 will have a material impact on the Company's results of
operations or financial position when adopted.
EMPLOYEES
At December 31, 1998, West Coast and its subsidiaries employed 65 persons
of which 63 were full time. West Coast and its subsidiaries believe that their
employee relations are satisfactory.
10
<PAGE>
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 Operations - Net Interest Income."
Investment Securities
The Company maintains a portion of its assets in investment securities to
provide liquidity, generate a reasonable rate of return, meet pledging
requirements, and minimize risk. At December 31, 1998, all of the Company's
investment securities were classified as available-for-sale. Investment
securities classified as available-for-sale are stated at market value.
Available for Sale
- --------------------------------------------------------------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
U.S. Treasury and other
government agency
securities $ 1,010 $ 4,993
Collateralized mortgage
obligations 12,266 1,587
Mortgage-backed
securities 6,042 10,428
Corporate bonds 4,533 -
Trust preferred securities 4,869 -
Other securities 408 337
- --------------------------------------------------------------------------------
Total $29,128 $17,345
- --------------------------------------------------------------------------------
The following table discloses the maturity dates and average yields of the
investment securities at December 31, 1998. Mortgage-backed securities and
collateralized mortgage obligations are classified in accordance with their
estimated lives. 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 $ - -% $ 1,010 5.49% $ - -% $ -%
Collateralized mortgage
obligations 1,024 7.51 6,399 6.99 3,866 7.37 980 6.83
Mortgage-backed
securities 1,356 6.85 2,915 7.52 1,769 6.68 - -
Corporate bonds 1,016 5.40 1,506 6.86 2,010 6.98 - -
Trust preferred
securities - - 4,869 8.70 - - - -
Other Securities 408 - - - - - - -
- --------------------------------------------------------------------------------
Total $3,804 5.91% $16,699 7.48% $ 7,645 7.11% $980 6.83%
- --------------------------------------------------------------------------------
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.
11
<PAGE>
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) 1998 1997
- --------------------------------------------------------------------------------
Commercial $ 34,318 $ 29,425
Real Estate - mortgage 71,184 67,970
Real Estate - construction 376 -
Installment loans 3,942 5,755
Unearned income,
discounts and fees (273) (273)
- --------------------------------------------------------------------------------
Total $109,547 $ 102,877
- --------------------------------------------------------------------------------
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 range from 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 1998. Installment
loans decreased in 1998 because Sunwest has not been emphasizing this product.
Real estate mortgage and construction lending contain 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, 1998, the Company had no significant
loan concentrations other than those listed above.
Rate Sensitivity
Financial institutions are susceptible to fluctuations in interest rates.
To the degree that the average yield on assets responds differently to a change
in interest rates than does the average cost of funds sources, earnings will be
sensitive to interest rate changes.
The following table sets forth the maturities for commercial and real
estate-construction loans at December 31, 1998. These loans comprised 31% of the
gross loan portfolio and are classified according to changes in interest rates.
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Maturing
- --------------------------------------------------------------------------------
Within After One
One Year But After
Year or Within Five
(in thousands) Less Five Years Years Total
- --------------------------------------------------------------------------------
Commercial $26,438 $6,498 $1,382 $34,318
Real Estate-
construction 376 - - 376
Total $26,814 $6,498 $1,382 $34,694
- --------------------------------------------------------------------------------
Loans included above with:
Fixed rates $ 2,294 $6,498 $1,382 $10,174
Variable rates 24,520 - - 24,520
- --------------------------------------------------------------------------------
Total $26,814 $6,498 $1,382 $34,694
- --------------------------------------------------------------------------------
Allowance for Credit Losses
The following table discloses the activity in the allowance for credit
losses for the years ended December 31:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Allowance for credit losses at
beginning of period
$ 2,364 $ 2,848
Charge-offs:
Commercial - (260)
Real estate - construction (13) -
Real estate - mortgage (12) (129)
Installment loans to
individuals (12) (21)
Direct lease financing - -
- --------------------------------------------------------------------------------
Total Charge-offs (37) (410)
- --------------------------------------------------------------------------------
Recoveries:
Commercial 288 396
Real estate - construction - -
Real estate - mortgage 4 48
Installment loans to
individuals 25 45
Direct lease financing 5 9
- --------------------------------------------------------------------------------
Total Recoveries 322 498
- --------------------------------------------------------------------------------
Net recoveries (charge-offs) 285 88
Additions (reductions)
charged to provision for
credit losses (205) (572)
- --------------------------------------------------------------------------------
Balance at end of period $ 2,444 $ 2,364
- --------------------------------------------------------------------------------
Allowance for credit losses as a percentage of:
Average loans 2.35% 2.66%
Loans at end of period 2.23% 2.30%
Loans on nonaccrual and 90
days past due 179.57% 7,625.80%
Net (recoveries) charge-offs as a
percentage of:
Average loans (.27)% (.10)%
- --------------------------------------------------------------------------------
The allowance for credit losses is established by a provision for credit
losses charged against current period income. Credit losses are charged against
the allowance when, in Management's judgment, the credit 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
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, year 2000 exposure, trends in delinquency,
restructured and nonperforming loans, and are otherwise deemed necessary and
prudent by Management. Management believes that the allowance for credit losses
of $2,444,000, constituting approximately 2.23% of loans outstanding at December
31, 1998, was adequate to absorb known and inherent risks in the loan portfolio.
For additional information on the allowance for credit losses and net
charge-offs, see "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS - Results Of
Operations."
The Company established an allowance for credit losses at December 31, 1998
and 1997 for each category as set forth below. The allowance includes
allocations for specific loans as well as general and supplemental allocations
for each category.
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<PAGE>
(dollars in thousands) 1998
- --------------------------------------------------------------------------------
Percent of Loan
Category
Allowance to Total Loans
- --------------------------------------------------------------------------------
Commercial $ 599 31.3%
Real estate-mortgage 1,753 64.8
Real estate-construction 3 .3
Installment loans 89 3.6
- --------------------------------------------------------------------------------
Total $ 2,444 100.0%
- --------------------------------------------------------------------------------
(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%
- --------------------------------------------------------------------------------
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) 1998 1997
- --------------------------------------------------------------------------------
Nonaccrual loans $ 1,360 $ -
90 days past due loans and still
accruing 1 31
Restructured loans 2,070 2,104
Loans on nonaccrual and 90 days
past due/total loans 1.24% .03%
Loans on nonaccrual and 90 days
past due/total assets .89% .02%
- --------------------------------------------------------------------------------
The changes in the levels of nonperforming loans during 1998 and 1997 are
discussed under "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of
Operations - Nonperforming Assets."
If loans on nonaccrual at December 31, 1998 had performed in accordance
with original terms, interest income of the Company would have increased by
$112,000. Under the original terms of the restructured loans, interest earned
would have totaled $403,000 and $374,000 for the years ended December 31, 1998
and 1997, respectively. Under the restructured terms of the loans, interest
income recorded amounted to $280,000 and $285,000 in 1998 and 1997,
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) 1998 1997
- -------------------------------- ------------- -------------
Substandard $ 3,879 $ 3,713
Doubtful 1 31
- -------------------------------- ------------- -------------
Total $ 3,880 $ 3,744
- -------------------------------- ------------- -------------
Special mention $ 2,645 $ 6,929
- -------------------------------- ------------- -------------
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, 1998 where the known credit problems of the
borrower would cause the Company to have serious doubts as to the ability of
14
<PAGE>
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 deteriorate, 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 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) 1998 1997
- -------------------------------- ------------ -------------
Gross real estate owned $ 831 $ 1,691
Valuation allowance 303 540
- -------------------------------- ------------ -------------
Net real estate owned $ 528 $ 1,151
- -------------------------------- ------------ -------------
Percent of assets 0.3% 0.9%
- -------------------------------- ------------ -------------
Real estate owned consists of real estate acquired in settlement of loans.
Real estate owned is carried at the lower of cost or fair value, less estimated
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.
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 $55,000 during 1998, representing
0.4% of the Company's total income for that year, as compared with $100,000 or
0.9% of total income for 1997.
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) 1998
- --------------------------------------------------------------------------------
Average Balance Interest
Rate
- --------------------------------------------------------------------------------
Noninterest bearing
demand deposits $ 46,079 .-%
Interest bearing
demand deposits 38,049 1.89
Savings deposits 5,007 1.92
Time deposits 43,217 5.35
- --------------------------------------------------------------------------------
Total $ 132,352 2.36%
- --------------------------------------------------------------------------------
(dollars in thousands) 1997
- --------------------------------------------------------------------------------
Average Interest
Balance Rate
- --------------------------------------------------------------------------------
Noninterest bearing
demand deposits $ 38,762 .-%
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%
- --------------------------------------------------------------------------------
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, 1998 were as
follows (dollars in thousands):
Percentage
Maturity Amount of Total
- ------------------------- ---------------- ----------------
0-3 Months $ 5,852 3.81%
3-6 Months 8,598 5.59
6-12 Months 6,014 3.91
Over 12 Months 223 .15
- ------------------------- ---------------- ----------------
Total $ 20,687 13.46%
- ------------------------- ---------------- ----------------
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>
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.
1998 1997
- ------------------------------------ ----------- ----------
Ratio of net income to:
Average total assets .86% 1.04%
Average shareholders' equity 15.74 18.97
Ratio of average shareholders'
equity to average total assets 5.49 5.50
- ------------------------------------ ----------- ----------
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 1999, 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
is highly competitive. The increasingly competitive environment is a result 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
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
16
<PAGE>
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
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 has substantially completed renovation
for all mission-critical applications. Testing of all mission critical
applications is scheduled to be completed by March 31, 1999. 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, the Company has
implemented procedures 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 has been done 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 implemented 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
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.
Renovation and testing phases have been substantially completed for
mission-critical applications. Testing and renovation of non mission critical
areas are scheduled to be completed by June 30, 1999. 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 these goals.
17
<PAGE>
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:
o Established a Year 2000 Project Team led by senior management
o Completed inventory of application and system software and hardware
o Completed an inventory of infrastructure facilities
o Developed consolidated compliance plans and schedules for business
areas
o Built databases for inventory tracking and reporting
o Developed a database to log and track resolution of reported Y2K
problems
o Established budget and cost tracking systems
o Implemented broad awareness and education activities for employees
o Developed and implemented a customer inquiry response process
o Implemented vendor compliance verification
o Obtained readiness reports from 98% of mission critical vendors
o Mandated that all new and renewed contracts address Y2K compliance
issues
o Set up a dedicated test environment to simulate year 2000 conditions
o Developed test scripts for 98% of all mission critical applications
o Completed testing for 98% of all mission critical applications
o Assessed 100% of all critical customers
o Determined that 52 loan customers and 41 deposit customers require
ongoing review
o Developed a process for communicating Y2K impacts to customers,
correspondents, agencies, and vendors
o Developed a plan to address contingency implementation dates if
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
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 are 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 $50,000 through December 31, 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.
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.
18
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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, 1998 and 1997 were approximately $871,000 and $863,000,
respectively. For additional information concerning properties, see "Notes 6, 14
and 17 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"). Beginning in 1996
throughout 1998, 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 between $957,000 to $1,047,000 of which $867,000
has been incurred through December 31, 1998. The USTF limits the reimbursement
per site to $1 million. WCV, Inc. has been reimbursed $738,000 through December
31, 1998.
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 1998.
ITEM 4(A) EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 28, 1999, the executive officers of the Company are as
follows (Includes Name, Age, Position, and Principal Occupation and Affiliation
During Last Five Years):
Eric D. Hovde, Age 34
Chairman of the Board, President and Chief Executive Officer, West Coast.
Director Sunwest. Eric D. Hovde has been Chairman of the Board, President and
Chief Executive Officer of West Coast Bancorp since June 1998. Mr. Hovde has
been president of Hovde Financial, Inc. since 1987 and has been Chairman and
President of Hovde Securities, Inc. since 1989.
Frank E. Smith, Age 48
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 57
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. In 1991 Mr. LeSieur
assumed the position of President.
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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:
1998 1997
High Low High Low
- -------------------- --------- --------- --------- ---------
First Quarter $ 2.13 $ 1.22 $ .79 $.53
Second Quarter 1.88 1.69 .88 .70
Third Quarter 1.63 1.06 1.50 .83
Fourth Quarter 1.31 .94 1.63 1.09
Holders of Record
As of February 28, 1999, 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.
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, 1998 and 1997. 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 $1,289,000 or $.14 per share in 1998
versus $1,269,000 or $.14 per share in 1997. Pretax income before the provision
for credit losses and minority interest expense increased $668,000, or 43%, in
1998 from 1997. This increase resulted from higher net interest income
reflecting asset growth of 18%, offset by increases in operating expenses due to
the growth in the Company's core business.
On September 13, 1996, Western Acquisitions, L.L.C. and Western Acquisition
Partners, L.P., (collectively, "Western"), affiliates of Hovde Financial, Inc.,
acquired a 43.5% interest in Sunwest. Minority interest expense reduced pretax
income by $1.1 million and $1.2 milllion in 1998 and 1997, respectively.
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) 1998 1997
- ----------------------------- ------------ ----------------
Total assets $ 154 $ 131
Total loans and leases 110 103
Total deposits 134 115
- ----------------------------- ------------ ----------------
RESULTS OF OPERATIONS
General
The Company had net income of $1,289,000 in 1998 versus $1,269,000 in 1997,
an increase of $20,000. Pretax income before the provision for credit losses and
minority interest expense increased $668,000, or 43%, in 1998 from 1997. Factors
contributing to the increase include higher net interest income of $1,114,000
from asset growth, higher noninterest income of $111,000 due primarily to
increased service charges, and an increase of $8,000 in the gain on liquidation
of WCV, Inc. These factors were partially offset by higher noninterest expense
of $565,000. Net income was negatively affected, compared to 1997, by a lower
negative loan loss provision ($367,000) and higher tax expenses ($328,000).
20
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Net income in 1996 was $874,000, or $.10 per share. Factors contributing to
the 1997 increase over 1996 included higher net interest income of $1,194,000
from asset growth, lower noninterest expense of $473,000, and nonrecurring
losses in 1996 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 assets held for sale, 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.
Net Interest Income
The increases in net interest income in 1998 and 1997 resulted primarily
from higher volumes of interest earning assets. Average interest earning assets
increased $26 million from 1997 to 1998 and increased $14 million from 1996 to
1997.
In 1998, the net interest margin (yield on earning assets less the rate
paid on interest bearing liabilities) and net yield on interest earning assets
(net interest income divided by average earning assets) both decreased from the
prior year. This occurred due to a decline in the yield earned on interest
earning assets.
The yield on interest earning assets declined due primarily to a 37 basis
point drop in the yield on loans. Market rates for loans decreased in 1998 with
the "prime rate" decreasing 75 basis points between October and November.
Increased competition for loans also resulted in lower yields on loans. A
decrease in investment securities and Federal fund yields of 18 basis point
contributed to the decline on the interest earning asset yield. Investment
securities and Federal fund yields decreased primarily as a result of market
interest rate declines.
The yield on earning assets was also impacted by an increase in investments
as a percentage of average earning assets from 11% in 1997 to 15% in 1998.
In 1997, the net interest margin and the net yield on interest earning
assets both increased from the prior year. This occurred due to a decline in the
rate paid on interest bearing liabilities that exceeded a decline in the yield
earned on 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 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.
Interest expense increased in 1998 and 1997 primarily from changes in
interest bearing liability volumes. Average interest bearing liabilities
increased by $18 million from 1997 to 1998 and increased by $4 million from 1996
to 1997.
The rate paid on interest bearing liabilities increased 4 basis points from
1997 to 1998 due to increased use of time deposits, the highest cost deposits.
Average time deposits as a percentage of average interest bearing deposits
increased from 46% in 1997 to 50% in 1998.
Interest expense increased in 1997 compared to 1996 primarily from changes
in interest bearing liability volumes. Average interest bearing liabilities
increased by $4 million from 1996 to 1997.
The rate paid 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 increased from 41% of average interest
bearing deposits in 1996 to 46% 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.
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<PAGE>
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) 1998 1997
Average Average Average Average
Balance Interest Rates Balance Interest Rates
- ----------------------------------------- --------------- ----------- ----------
Assets
Loans, net of unearned loan fees
& discounts (1) $ 104,045 $ 10,473 10.07% $ 88,889 $ 9,281 10.44%
Investment securities 20,689 1,286 6.22 12,671 803 6.34
Federal funds sold 14,668 797 5.43 11,448 629 5.49
Interest bearing deposits
with banks 11 1 9.09 520 26 5.00
- --------------------------------------------------------------------------------
Interest earning assets 139,413 12,557 9.01 113,528 10,739 9.46
Allowance for credit losses (2,424) (2,745)
Cash and due from banks 8,603 6,768
Other assets 3,664 4,097
- --------------------------------------------------------------------------------
Total assets $ 149,256 $121,648
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Time deposits $ 43,217 $ 2,314 5.35% $ 31,937 $ 1,743 5.46%
Interest bearing demand
deposits 38,049 719 1.89 32,173 608 1.89
Savings deposits 5,007 96 1.92 4,748 95 2.00
FHLB borrowings 121 6 4.96 - - -
Other debt (2) 948 195 20.57 812 180 22.17
- --------------------------------------------------------------------------------
Total interest bearing
liabilities 87,342 3,330 3.81 69,670 2,626 3.77
Demand deposits 46,079 38,762
Other liabilities 1,115 1,308
Minority Interest 6,530 5,218
Shareholders' equity 8,190 6,690
- --------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 149,256 $121,648
- --------------------------------------------------------------------------------
Net interest income $ 9,227 $ 8,113
Net interest margin 5.20% 5.69%
Net yield on interest earning assets 6.62 7.15
- --------------------------------------------------------------------------------
(1) Interest income includes loan fees of $231,000 and $154,000 for the
years ended December 31, 1998 and 1997, respectively. Loans, net of
unearned loan fees and discounts, includes loans placed on nonaccrual.
(2) Other debt includes a capital lease, and notes payable to affiliates.
22
<PAGE>
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.
1998 vs. 1997 1997 vs. 1996
- --------------------------------------------------------------------------------
(in thousands) Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------
Interest Income:
Loans and leases $ 1,535 $(343) $ 1,192 $ 1,219 $(164) $ 1,055
Investment securities 499 (16) 483 425 11 436
Federal funds sold 175 (7) 168 (92) 7 (85)
Interest bearing deposits
with banks (37) 12 (25) (138) (23) (161)
- --------------------------------------------------------------------------------
Total 2,172 (354) 1,818 1,414 (169) 1,245
Interest Expense:
Time deposits 605 (34) 571 342 59 401
Interest bearing demand
deposits 111 - 111 13 (11) 2
Savings deposits 5 (4) 1 (7) 1 (6)
Other debt - 21 21 (175) (171) (346)
- --------------------------------------------------------------------------------
Total 721 (17) 704 173 (122) 51
- --------------------------------------------------------------------------------
Net change in net interest
income $ 1,451 $(337) $ 1,114 $ 1,241 $ (47) $ 1,194
- --------------------------------------------------------------------------------
Provision for Credit Losses
For the tables showing the Company's "Allowance for credit losses, net
charge-offs and provision for credit losses": See "ITEM 1 - BUSINESS - SELECTED
STATISTICAL INFORMATION - Allowance for credit losses."
The Company had a credit provision for credit losses in 1998 and 1997 due
to improvements in the Company's loan portfolio and recoveries of loan losses
from prior years.
Management has maintained the Company's allowance for 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
credit losses at December 31, 1998 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 exhibited positive trends for
several 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
credit losses and would adversely affect the financial condition and results of
operations of the Company. Future reversals of the allowance for credit losses
are not anticipated unless recoveries remain at high levels or the underlying
conditions of various classified loans improve. The high provisions for 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 35% of charge-offs in 1998 and 63% in 1997. 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 (.27)% in 1998 and (.10)% in 1997.
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<PAGE>
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 $1,361,000 and $31,000 at December 31, 1998 and
1997, respectively. This amounted to 1.24% and .03% of total loans for the same
respective periods.
In 1998, nonperforming loans increased by $1,330,000 primarily due to a
$1.2 million loan being placed on nonaccrual. The loan is secured by an office
building. The property is in escrow at $1.2 million and Sunwest is following the
buyer's SBA loan application with another financial institution. The Bank does
not anticipate any principal loss.
Real estate owned totaled $53,000, $475,000 and $528,000 at December 31,
1998 at West Coast, Sunwest and the Company, respectively. At December 31, 1997,
real estate owned totaled $53,000, $1,098,000 and $1,151,000 at West Coast,
Sunwest and the Company, respectively. This represented 0.3% and 0.9% of the
Company's assets at December 31, 1998, and 1997, respectively.
Nonperforming assets (nonperforming loans and real estate owned combined)
totaled $53,000, $1,836,000 and $1,889,000 at December 31, 1998 at West Coast,
Sunwest and the Company, respectively. At December 31, 1997, nonperforming
assets totaled $53,000, $1,129,000 and $1,182,000 at West Coast, Sunwest and the
Company, respectively. This represented 1.2% and 1.0% of the Company's assets at
December 31, 1998 and 1997, respectively.
Restructured loans, all of which were performing in compliance with their
modified terms, totaled $2,070,000 and $2,104,000 at December 31, 1998 and 1997.
No restructured loans were on nonaccrual status at December 31, 1998 and 1997.
Other Operating Income
A summary of other operating income by category is presented in NOTE 12 of
the Notes to the Consolidated Financial Statements. Other operating income
increased to $787,000 from $676,000 in 1997. The income was due primarily to
increases in depository charges and service charges. The service charge increase
included ten months of income from the sale of mutual funds to commercial
customers, compared to none in 1997. Mutual funds were a new product offered by
the Bank in 1998.
Other Operating Expenses
Other operating expenses increased from 1997 to 1998. A summary of the
operating expenses is presented in NOTE 13 of the Notes to the Consolidated
Financial Statements.
A summary of other operating expenses follows:
(dollars in thousands) 1998 1997
- ---------------------------------- ------------ ------------
Other operating expenses $ 7,783 $ 7,218
Other operating expenses
/Interest and other operating
income 58.3% 63.2%
Other operating expenses
/Average assets 5.2% 5.9%
- ---------------------------------- ------------ ------------
Other operating expenses increased by $565,000 or 8% from 1997 to 1998. The
increase is primarily due to increases in salaries and employee benefits and
professional services. The number of employees declined from 66 at the end of
1997 to 65 at the end of 1998. Reductions in numbers of employees were offset by
increased incentive compensation paid out under Sunwest's performance
compensation plan. Employees earned an average of approximately 12% of their
salaries under the plan in 1998. Professional services increased primarily due
to recruitment fees, marketing fees, and Y2K consulting fees. The net cost of
operation of real estate owned declined by $46,000 in 1998 due to lower
adjustments of the valuation allowance for real estate owned. Occupancy and
depreciation declined in 1998 due primarily to the closure of the Santa Ana
facility in April 1997. 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 1999 related
to continued growth and the development of new products and services. Sunwest
has engaged a consultant to assess its operations and to provide recommendations
for improving revenues and expense ratios. The Company expects the costs of the
engagement will be recovered through earnings enhancements the first year.
24
<PAGE>
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) Gain on Liquidation of WCV, Inc.
WCV. Inc. was substantially liquidated in 1993. Remaining activity consists
of the environmental cleanup and disposition of the sole remaining real estate
owned property. 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 9 of the Notes to the
Consolidated Financial Statements. A tax benefit was recognized in 1997 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 borrowings. The Company had loan commitments of
$24,415,000 and standby and commercial letters of credit totaling $421,000 at
December 31, 1998. 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, excluding pledged amounts, and Federal funds sold divided by
total assets) was 21% at December 31, 1998 and 19% at December 31, 1997. 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 increased by $5.3 million during
1998. Cash from operating activities increased cash by $2.6 million primarily
from $1.3 million of net income. Investing activities used $17.7 million in cash
and cash equivalents which consisted primarily of net loan increases of $6.4
million and net increases in investments of $11.9 million. Net cash of $20.4
million was used in financing activities and consisted of a $18.8 million net
increase in deposits and a $2.0 million increase in FHLB borrowings.
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 1998, West Coast did not receive any dividends from its
subsidiaries. West Coast does not currently expect to receive dividends from its
subsidiaries during 1999.
West Coast's primary source of cash in 1999 is expected to be earnings on
cash and short term investments. At December 31, 1998, West Coast had cash and
short term investments of $357,000.
West Coast anticipates cash expenditures during 1999 to consist of debt
service payments and other operating expenses. In January 1998, West Coast
executed a note and security agreement with a company owned by one of its
directors, John B. Joseph. The original amount of the note was $514,000
representing unpaid fees for services. The current balance of this note is
$414,000 which reflects principal payments totaling $100,000 paid from June
through October 1998. 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. On June 9, 1998, the Company executed a note in the amount of
$450,000 to Eric D. Hovde, Chairman and President of West Coast. The note
replaced an existing note, payable to an unrelated third party that was
purchased from the third party by Mr. Hovde. The note bears interest at prime
plus 2% with principal payments of $12,000 due quarterly and a maturity date of
June 30, 1999. At this time management believes that the maturity date will be
extended; however, no amendments have yet been made to the note. West Coast's
25
<PAGE>
projected debt service in 1999 for all notes payable is expected to total
$84,000. Principal and interest outstanding under these notes totaled $839,000
at December 31, 1998. West Coast anticipates that other operating expenses will
be approximately $87,000 during 1999. 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
The Company had a 13.02%, 14.27% and 10.35% Tier 1 risk-based capital,
total risk-based capital and leverage ratio at December 31, 1998, 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, 1998. The Company has not paid dividends and does not
contemplate paying dividends in 1999.
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 $53.8 million at December 31,
1998. Market rates of interest did not change significantly during 1997. Rates
declined in the last quarter of 1998 with the Fed funds rate decreasing 75 basis
points due to actions taken by the Federal Reserve Bank. The Company's net yield
on interest earning assets decreased from 7.15% in 1997 to 6.62% in 1998.
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, 1998:
Over
One
91 Year
Immediate Through 181 Through Over
(dollars in thousands) Through 180 Through Five Five
90 Days Days 365 Days Years Years Total
- --------------------------------------------------------------------------------
INTEREST EARNING ASSETS
Loans $75,800 $ 9,395 $ 8,821 $11,770 $ 3,761 $109,547
Investments and
Federal funds 6,506 823 1,312 5,459 19,528 33,628
- --------------------------------------------------------------------------------
Total interest
earning assets $82,306 $10,218 $10,133 $17,229 $23,289 $143,175
- --------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Time certificates
of deposit of $100,000
or more $ 5,852 $ 8,598 $ 6,014 $ 223 $ - $ 20,687
Time certificates
of under $100,000 9,160 4,831 5,174 1,123 - 20,288
Other interest
bearing deposits 45,510 - - - - 45,510
Other interest
bearing liabilities 30 182 2,037 605 - 2,854
- --------------------------------------------------------------------------------
Total interest
bearing liabilities $60,552 $13,611 $13,225 $ 1,951 $ - $ 89,339
- --------------------------------------------------------------------------------
Rate sensitive
gap $21,754 $(3,393) $(3,092) $15,278 $23,289 $ 53,836
- --------------------------------------------------------------------------------
Cumulative rate
sensitive gap $21,754 $18,361 $15,269 $30,547 $53,836 $ 53,836
- --------------------------------------------------------------------------------
Cumulative assets
divided by liabilities 135.93% 124.76% 117.47% 134.19% 160.26% 160.26%
- --------------------------------------------------------------------------------
26
<PAGE>
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 1998.
(c) Exhibits required by Item 601 of Regulation S-K. See Item 13(a) 3.
(d) Additional financial statements. Inapplicable.
27
<PAGE>
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 30th day of
March, 1999.
WEST COAST BANCORP
(Registrant)
By
/s/ Eric D. Hovde
Eric D. Hovde
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/ Eric D. Hovde Chairman of the Board, March 30, 1999
- -----------------
Eric D. Hovde President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Frank E. Smith Chief Financial Officer March 30, 1999
Frank E. Smith (Principal Financial
and Accounting Officer)
/s/ Thomas A. Jones Director March 30, 1999
- -------------------
Thomas A. Jones
/s/ John B. Joseph Director March 30, 1999
- ------------------
John B. Joseph
/s/ James G. LeSieur, III Director March 30, 1999
- -------------------------
James G. LeSieur, III
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, 1998 and 1997.........................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997.........................................F-3
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1998 and 1997...................................F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998 and 1997.............................F-3
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997.........................................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 1998 1997
- -------------------------------------------------------------------- -----------
Cash and due from banks $ 9,334 $ 7,041
Federal funds sold 4,500 1,500
Interest bearing deposits with financial institutions - 99
Investment securities available-for-sale at fair value 29,128 17,345
Loans 109,547 102,877
Less allowance for credit losses (2,444) (2,364)
- -------------------------------------------------------------------- -----------
Net loans 107,103 100,513
- -------------------------------------------------------------------- -----------
Real estate owned, net 528 1,151
Premises and equipment, net 516 711
Deferred taxes 1,408 1,153
Other assets 1,267 1,108
- -------------------------------------------------------------------- -----------
$ 153,784 $ 130,621
- -------------------------------------------------------------------- -----------
Liabilities
- -------------------------------------------------------------------- -----------
Deposits:
Demand, non-interest bearing $ 47,254 $ 42,920
Savings, money market and interest bearing demand 45,510 36,745
Time certificates under $100,000 20,288 22,169
Time certificates of $100,000 or more 20,687 13,136
- -------------------------------------------------------------------- -----------
Total deposits 133,739 114,970
- -------------------------------------------------------------------- -----------
Federal Bank borrowings 2,000 -
Note payable affiliates 589 452
Capital lease obligation 265 327
Other liabilities 1,364 1,363
- -------------------------------------------------------------------- -----------
Total liabilities 137,957 117,112
Commitments and contingencies (Note 17)
Minority interest in subsidiary 7,094 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 other comprehensive income, net of tax (83) 39
Accumulated deficit (21,458) (22,747)
- -------------------------------------------------------------------- -----------
Total shareholders' equity 8,733 7,468
- -------------------------------------------------------------------- -----------
$ 153,784 $ 130,621
- --------------------------------------------------------------------------------
(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 1998 1997
- --------------------------------------------------------- -------- --------
Loans, including fees $ 10,473 $ 9,281
Federal funds sold 797 629
Investment securities 1,286 803
Interest bearing deposits with banks 1 26
- --------------------------------------------------------- -------- --------
Total interest income 12,557 10,739
- --------------------------------------------------------- -------- --------
Interest Expense
- --------------------------------------------------------- -------- --------
Savings, money market and interest bearing demand deposits 816 703
Time certificate deposits under $100,000 1,403 1,173
Time certificate deposits of $100,000 or more 909 570
- --------------------------------------------------------- -------- --------
Total interest on deposits 3,128 2,446
Other 202 180
- --------------------------------------------------------- -------- --------
Total interest expense 3,330 2,626
- --------------------------------------------------------- -------- --------
Net interest income 9,227 8,113
Provision (benefit) for credit losses (205) (572)
- --------------------------------------------------------- -------- --------
Net interest income after provision (benefit) for
credit losses 9,432 8,685
Other operating income 787 676
Other operating expenses 7,783 7,218
Minority interest in net income of subsidiary 1,146 1,193
Gain (loss) on liquidation of WCV, Inc. 1 (7)
- ---------------------------------------------------------- -------- --------
Income before income taxes 1,291 943
Income tax (benefit) expense 2 (326)
- ---------------------------------------------------------- -------- --------
Net income $ 1,289 $ 1,269
- ---------------------------------------------------------- -------- --------
Basic and diluted earnings per share $ .14 $ .14
- ---------------------------------------------------------- -------- --------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Years ended December 31,
1998 1997
- -------------------------------------------------------- -------- --------
Net income $ 1,289 $ 1,269
Other comprehensive income, net of tax:
Unrealized gain (loss) on available-for-sale
investments arising during period (122) 64
- ------------------------------------------------------ -------- --------
Other comprehensive income (loss) (122) 64
- ------------------------------------------------------ -------- --------
Comprehensive income $ 1,167 $ 1,333
- ------------------------------------------------------ -------- --------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands) Accumulated
Other
Common stock Comprehensive Accumulated Shareholders'
Shares Amount Income Deficit Equity
- --------------------------------------------------- ----------- ------------ ---
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,
net of tax - - 64 - 64
- ---------------------------------- ----------- ------------ ----------------- --
Balance at
December 31, 1997 9,169 30,176 39 (22,747) 7,468
Net income 1,289 1,289
Stock options
exercised 90 98 - - 98
Change in securities
valuation allowance,
net of tax - - (122) - (122)
- ---------------------------------- ----------- ------------ ----------------- --
Balance at
December 31, 1998 9,259 $ 30,274 $ (83) $ (21,458) $ 8,733
- ---------------------------------- ----------- ------------ ----------------- --
(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 1998 1997
- ------------------------------------------------------------------ -------------
Net income $ 1,289 $ 1,269
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 325 363
Provision (benefit) for credit losses (205) (572)
Minority interest in net income of subsidiary 1,146 1,193
Write-down of real estate owned 16 92
Gain on sales of real estate owned (10) -
Gain on sale and liquidation of subsidiaries (1) 7
Increase in deferred tax asset (105) (283)
Amortization and accretion from investment
securities (275) (60)
Accrual for lease loss 150 -
(Increase) decrease in other assets (145) 417
Increase (decrease) in other liabilities 365 (186)
- ------------------------------------------------------------------ -------------
Net cash provided by operating activities 2,550 2,240
- ------------------------------------------------------------------ -------------
Cash Flows from Investing Activities
- ------------------------------------------------------------------ -------------
Proceeds from maturity of interest bearing balances 99 1,982
Purchases of interest bearing deposits with
financial institutions - (99)
Proceeds from maturity of investment securities
available-for-sale 3,982 2,152
Purchase of investment securities available-for-sale (15,855) (14,150)
Net increase in loans (6,385) (20,132)
Proceeds from sales of real estate owned 617 -
Proceeds from sales of premises and equipment 61 11
Purchases of premises and equipment (203) (167)
- ------------------------------------------------------------------ -------------
Net cash used in investing activities (17,684) (30,403)
- ------------------------------------------------------------------ -------------
Cash Flows from Financing Activities
- ------------------------------------------------------------------ -------------
Net increase in deposits 18,769 19,413
Cash payments on notes payable (377) (22)
Repayment of other borrowed funds (63) (33)
Borrowed funds from Federal Home Loan Bank 2,000 -
Stock options exercised 98 -
- ------------------------------------------------------------------ -------------
Net cash provided by financing activities 20,427 19,358
- ------------------------------------------------------------------ -------------
Increase (decrease) in cash and cash equivalents 5,293 (8,805)
Cash and cash equivalents at beginning of year 8,541 17,346
- ------------------------------------------------------------------ -------------
Cash and cash equivalents at end of year $ 13,834 $ 8,541
- ------------------------------------------------------------------ -------------
Supplemental Disclosures of Cash Flow Information:
- ------------------------------------------------------------------ -------------
Cash paid during the period for:
Interest $ 3,327 $ 2,572
Income taxes 107 4
Supplemental Schedule of Non-cash Investing
and Financing Activities:
- ------------------------------------------------------------------ -------------
Reclassification of securities from
held-to-maturity to available-for-sale $ - $ 2,607
Transfer from accrued liabilities to
note payable to 514 -
Loan to facilitate sale of other real estate owned 496 -
- ------------------------------------------------------------------ -------------
(See accompanying notes to consolidated financial statements)
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS West Coast Bancorp and Subsidiaries
December 31, 1998 and 1997
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
West Coast Bancorp ("West Coast"), through its majority owned subsidiary,
Sunwest Bank ("Sunwest"), provides banking services in Orange County,
California. 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
September 13, 1996, Western Acquisitions, L.L.C. and Western Acquisition
Partners, L.P., (collectively, "Western"), affiliates of Hovde Financial, Inc.,
acquired a 43.5% interest in Sunwest.
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.
INVESTMENT SECURITIES
The Company's securities portfolio includes U.S. Treasury, U.S. federal
agency, mortgage backed securities, collateralized mortgage obligations and
corporate debt securities.
Securities are classified as available-for-sale when the Company intends to
hold the securities for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available-for- sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Company's assets and liabilities,
liquidity demands, regulatory 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 accumulated other
comprehensive income. The cost of securities sold is based on the specific
identification method.
The Company has no investments classified as held-to-maturity.
INTEREST RATE SWAPS
Interest rate swaps are used in the Company's management of interest rate
sensitivity. The periodic net settlement for interest rate swaps is recorded as
an adjustment to the net interest income or interest expense of the related
asset or liability.
INTEREST ON LOANS
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued when
reasonable doubt exists as to the full, timely collection of interest or
principal and, generally, when a loan becomes contractually past due by ninety
days or more with respect to principal or interest. The accrual of interest may
be continued on a loan contractually past due 90 days or more with respect to
principal or interest if the loan is in the process of collection or collection
of the principal and interest is deemed probable.
When a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period income. Interest 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.
F-5
<PAGE>
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 nonaccrual.
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 CREDIT LOSSES
Provisions (benefits) for credit losses are charged (credited) to
operations based on Management's evaluation of the estimated losses in its loan
portfolio. The major factors considered in evaluating 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 Company's control. In addition, the regulatory agencies
periodically review the allowance for 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 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 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. Impairment losses are included in the
allowance for credit losses through a charge to provision for credit losses.
Adjustments to impairment losses due to changes in the fair value of impaired
loans' collateral properties are included in the provision for credit losses.
REAL ESTATE OWNED
Real estate owned consists of real estate acquired in settlement of loans.
Real estate owned is carried at the lower of cost or fair value, less estimated
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.
Once real estate is acquired and periodically thereafter, Management
obtains a valuation and an allowance for estimated losses is provided 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
for real estate owned 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
F-6
<PAGE>
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. Valuation allowances are provided against assets
which are not likely to be realized.
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 $2,092,000 and $1,352,000 were
required by Sunwest to satisfy Federal regulatory requirements at December 31,
1998 and 1997, respectively.
EARNINGS PER SHARE
Earnings per share calculations are computed as follows:
Per-Share
Income Shares Amount
------------ ------------ ----------
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
and directors 15,204
Diluted earnings
per share $1,269,000 9,184,146 $0.14
- ------------------------- ------------ ------------ ----------
For the year ended 1998:
Net Income $1,289,000
Basic earnings per
share
Income available
to common
shareholders $1,289,000 9,221,442 $0.14
----------
Options issued to
executives
and directors 53,832
Diluted earnings
per share $1,289,000 9,275,274 $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 were determined on the assumptions that the
stock options were exercised in the periods when their exercise prices were less
than market price.
RECLASSIFICATIONS
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
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
F-7
<PAGE>
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. The
statement did not 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. The statement did not have a
material impact on the Company's results of operations or financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management of the Company does not believe the
adoption of SFAS No. 133 will have a material impact on the Company's results of
operations or financial position when adopted.
NOTE 2
INVESTMENT SECURITIES
At December 31, 1998 and 1997 all investment securities were classified as
available-for-sale. A summary of the Bank's investment portfolio is as follows
at December 31, 1998 (in thousands):
Estimated
Amortized Gross Unrealized Fair
------------------
Cost Gains Losses Value
- ------------------- ----------- --------- -------- -----------
U.S. Treasury
and other
government
agency
securities $ 995 $ 15 $ - $ 1,010
Collateralized
mortgage
obligations 12,493 - (227) 12,266
Mortgage-
backed
securities 5,927 115 - 6,042
Corporate bonds 4,595 - (62) 4,533
Trust preferred
securities 4,960 - (91) 4,869
Other securities 408 - - 408
- ------------------- ----------- --------- -------- -----------
- ------------------- ----------- --------- -------- -----------
Total $ 29,378 $ 130 $ (380) $ 29,128
- ------------------- ----------- --------- -------- -----------
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
- ------------------- ----------- --------- -------- -----------
At December 31, 1998, investment securities available-for-sale with a book
value of $10,575,000 were pledged as collateral to secure public funds and for
other purposes as required or permitted by law.
Proceeds from maturities of debt securities during 1998 and 1997 were
$3,982,000 and $2,152,000, respectively. Gains and losses on investment
securities are determined on the specific identification method and are included
in other income.
F-8
<PAGE>
The amortized cost and estimated fair value of securities at December 31,
1998, by contractual maturity, are shown below. Mortgage-backed securities and
collateralized mortgage obligations are classified in accordance with their
estimated lives. 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 $ 3,841 $ 3,804
Due after one year through five
years 16,783 16,699
Due after five years through ten
years 7,764 7,645
Due after ten years 990 980
- -------------------------------- ------------ -------------
$ 29,378 $ 29,128
- -------------------------------- ------------ -------------
NOTE 3
LOANS
A summary of loans is as follows at December 31:
(in thousands) 1998 1997
- ---------------------------------- ------------ ------------
Commercial loans not secured by
real estate $ 34,318 $ 29,425
Real estate mortgage loans 71,184 67,970
Real estate construction 376 -
Personal loans not secured by
real estate 3,942 5,755
Unearned income, discounts and
fees (273) (273)
- ---------------------------------- ------------ ------------
$ 109,547 $102,877
- ---------------------------------- ------------ ------------
Loans on which the accrual of interest had been discontinued or reduced at
December 31, 1998 and 1997 amounted to $1,360,000 and $0, respectively. If these
loans had been current throughout their terms, interest income would have
increased approximately $112,000 and $0 in 1998 and 1997, respectively.
The Company serviced loans for others totaling $1,512,000 and $3,390,000 at
December 31, 1998 and 1997, respectively. These loans are not included in the
accompanying consolidated balance sheets.
Loans totaling $2,070,000 at December 31, 1998 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 1998 and
1997.
NOTE 4
ALLOWANCE FOR CREDIT LOSSES
A summary of activity in the allowance for credit losses follows:
(in thousands) 1998 1997
- ------------------------------------ ----------- -----------
Balance at beginning of year $ 2,364 $ 2,848
Credits charged off (37) (410)
Recoveries on credits previously
charged off 322 498
- ------------------------------------ ----------- -----------
Net recoveries 285 88
Provision (benefit) for credit
losses (205) (572)
- ------------------------------------ ----------- -----------
Balance at end of year $ 2,444 $ 2,364
- ------------------------------------ ----------- -----------
A summary of investment in impaired loans by type is as follows at December
31:
(in thousands) 1998 1997
- ---------------------------------- ------------ ------------
Nonaccrual loans:
Nonresidential real estate
mortgage $ 1,360 $ -
Restructured loans 2,070 2,104
- ---------------------------------- ------------ ------------
$ 3,430 $ 2,104
- ---------------------------------- ------------ ------------
The Company had no "other impaired loans" at December 31, 1998 and 1997.
The related impairment valuation allowances were $960,000 and $884,000 at
December 31, 1998 and 1997, respectively. These amounts were included as part of
the allowance for credit losses in the accompanying consolidated balance sheets.
The provision for losses and any related recoveries are recorded as part of the
provision for credit losses on loans in the accompanying statements of
operations. During the years ended December 31, 1998 and 1997, the Company's
average investment in impaired loans were $3,190,000 and $2,807,000, and
interest income recorded during this period was $198,000 and $172,000. None of
these amounts were recorded using the cash basis method of accounting described
above.
F-9
<PAGE>
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) 1998 1997
- ------------------------------------ --------- ------------
Balance at beginning of year $ 540 $ 449
Losses charged off (237) -
Provision for estimated losses - 91
- ------------------------------------ --------- ------------
Balance at end of year $ 303 $ 540
- ------------------------------------ --------- ------------
NOTE 6
PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
(in thousands) 1998 1997
- ------------------------------------ ----------- --------
Furniture, fixtures and equipment
$ 2,803 $ 2,753
Leasehold improvements 1,564 1,531
Property under capital leases 445 445
Construction in progress 19 24
- ------------------------------------ ----------- --------
4,831 4,753
Accumulated depreciation and
amortization (4,315) (4,042)
- ------------------------------------ ----------- --------
$ 516 $ 711
- ------------------------------------ ----------- --------
NOTE 7
FEDERAL HOME LOAN BANK BORROWINGS
As of December 31, 1998, the Company had available lines of credit totaling
$4,000,000 with the Federal Home Loan Bank (FHLB) secured by FHLB stock and
qualifying investment securities. The advances outstanding at December 31, 1998
are as follows:
Amount Maturity Date Interest Rate
- --------------------- --------------------- -----------------
$2,000,000 December 9, 1999 4.91%
- --------------------- --------------------- -----------------
NOTE 8
OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1998 consisted of long-term
obligations to affiliated parties of $589,000 and a capital lease obligation of
$265,000. A director purchased a note from an unaffiliated party during 1998.
The terms of the note remained unchanged with an interest rate of prime plus 2%
and a maturity date of June 30, 1999. Prime was 7.75% at December 31, 1998.
In April 1998, an accrued liability payable to an affiliate of a director
was converted to a long-term note. The terms of this note include a fixed
interest rate of 9.00% and maturity date of January 29, 2001. This note is
secured by five shares of Sunwest common stock.
The capital lease obligation outstanding at December 31, 1998 has an
imputed interest rate of 45% and matures on November 30, 2000. The current
liability portion of the amortizing capital lease is $107,000.
The long-term note obligations outstanding at December 31, 1998 are as
follows:
Amount Maturity Date Interest Rates
- --------------------- ------------------- -----------------
$414,000 January 29, 2001 9.00%
175,000 June 30, 1999 9.75%
- --------------------- ------------------- -----------------
$589,000
- --------------------- ------------------- -----------------
NOTE 9
INCOME TAXES
The Company had a $83,000 and $24,000 Federal and State current income tax
expense during 1998. For 1997 the Company had a $15,000 current income tax
expense for State and $35,000 for Federal. During 1998 deferred Federal and
State tax benefits of $54,000 and $51,000 were recognized, respectively. During
1997 deferred Federal and State tax benefits of $308,000 and $68,000 were
recognized, respectively.
The actual income tax expense (benefit) differed from the expected Federal
statutory rate as follows:
(in thousands) 1998 1997
- ------------------------------------ --------- ------------
Expected tax expense at
34% $ 439 $ 319
Change in the valuation allowance
for deferred tax assets (1,029) (1,286)
Net state franchise tax 236 216
Minority interest expense in
Sunwest earnings not deductible 390 405
Other (34) 20
- ------------------------------------ --------- ------------
$ 2 $ (326)
- ------------------------------------ --------- ------------
F-10
<PAGE>
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) 1998 1997
- ------------------------------------- ---------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 3,671 $ 4,389
Net capital loss carryforwards 1,236 1,233
Loans, due to allowance for credit
losses, deferred loan
origination fees and costs,
market value adjustment of loans
held for sale and leases 8 338
Alternative minimum tax credit
carryforwards 574 540
Real estate owned 138 246
Loss and expense accruals and
other 217 194
General business tax credit
carryforwards 127 127
Premises and equipment 149 90
- ------------------------------------- ---------- -----------
Total gross deferred tax assets 6,120 7,157
Less valuation allowance (4,592) (5,621)
- ------------------------------------- ---------- -----------
Net deferred tax assets 1,528 1,536
Deferred tax liabilities:
Deferred State income taxes 223 336
Unrealized (loss) gain on
available-for-sale securities (103) 47
- ------------------------------------- ---------- -----------
Total gross deferred tax liabilities 120 383
- ------------------------------------- ---------- -----------
Net deferred tax asset $ 1,408 $ 1,153
- ------------------------------------- ---------- -----------
In 1999 and 1997 the valuation allowance decreased by $1,025,000 and
$1,286,000, 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.
No current income tax refund receivable or payable existed at December 31,
1998. Current income taxes payable at December 31, 1997 were $35,000 for Federal
and $11,000 for State. The Company had net operating loss carryforwards of $10.2
million for Federal income tax purposes at December 31, 1998 which expire from
2005 to 2012 and $1.7 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, 1998
which expire from 1999 to 2000. The Company had alternative minimum tax credit
carryforwards of $263,000 available for Federal income tax purposes and $310,000
available for State franchise tax purposes at December 31, 1998.
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, 1998 Sunwest had the following deferred tax items: gross
deferred tax assets of $2,774,000; a valuation allowance of $1,320,000; a gross
deferred tax liability of $46,000 and a net deferred tax asset of $1,408,000.
At December 31, 1998 Sunwest had net operating loss carryforwards of $5.3
million for Federal income tax purposes at December 31, 1998 which expire from
2005 to 2011. Sunwest had no net operating loss carryforwards for State
franchise tax purposes. Sunwest had no capital loss carryforwards. Sunwest had
general business tax credit carryforwards of $127,000 available for tax purposes
at December 31, 1998 which expire from 1999 to 2000. Sunwest had alternative
minimum tax credit carryforwards of $160,000 available for Federal income tax
purposes and $228,000 available for State franchise tax purposes at December 31,
1998.
NOTE 10
STOCK OPTION PLAN
During 1988, the Company adopted the West Coast Bancorp 1988 Stock Option
Plan (the "1988 Plan"). The 1988 Plan provided for the grant of both options
that were 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 were eligible to receive options.
Non-employee directors of the Company were 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 determined the persons to
whom options were granted, the vesting schedule and the purchase price of the
common stock subject to each option, provided that such purchase price not be
less than 100% of the fair value of the common stock at the time the option was
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 expire not later
than 5 years from the date of grant. The 1988 Plan expired in September 1998.
F-11
<PAGE>
A summary of stock option transactions for the 1988 Plan follows:
Number of Price per
Shares Share
- ------------------------------ ------------- --------------
Options outstanding at
December 31, 1996 357,500 $ 1.06-2.75
Canceled - -
Exercised - -
- ------------------------------ ------------- --------------
Options outstanding at
December 31, 1997 357,500 1.06-2.75
Canceled 30,000 2.75
Exercised 90,000 1.06-1.13
- ------------------------------ ------------- --------------
Options outstanding at
December 31, 1998 237,500 $ 1.06-2.75
- ------------------------------ ------------- --------------
Options exercisable at
December 31, 1998 237,500 $ 1.06-2.75
- ------------------------------ ------------- --------------
NOTE 11
RELATED PARTY TRANSACTIONS
At December 31, 1998, loans to directors totaled $85,000. During the year
ended December 31, 1998, new loans totaling $81,000 were granted to directors
and repayments totaled $30,000. 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.
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.
NOTE 12
OTHER OPERATING INCOME
A summary of other operating income is as follows:
(in thousands) 1998 1997
- ----------------------------------------- -------- --------
Depositor charges $ 600 $ 551
Interest recovered on loans charged
off in prior years 43 44
Service charges, commissions & fees 105 53
Other income 39 28
- ----------------------------------------- -------- --------
$ 787 $ 676
- ----------------------------------------- -------- --------
NOTE 13
OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
(in thousands) 1998 1997
- ----------------------------------------- -------- --------
Salaries and employee benefits $ 3,810 $ 3,467
Occupancy 871 863
Customer service expense 543 464
Data processing 541 481
Professional services 428 270
Depreciation and amortization 325 362
Advertising and promotion 318 260
Stationary and supplies 109 97
Printing and postage 106 106
Net cost of operation of real estate
owned 54 100
Miscellaneous 678 748
- ----------------------------------------- -------- --------
$ 7,783 $ 7,218
- ----------------------------------------- -------- --------
NOTE 14
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 both at December 31, 1998 and 1997. Beginning in 1996
throughout 1998, 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. 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 15
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.
F-12
<PAGE>
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.
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 Federal Home Loan Bank borrowings. The fair value of
other interest bearing liabilities is estimated using market rates for
instruments with similar characteristics.
INTEREST RATE SWAPS
The fair value of interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the agreements at the reporting date,
taking into account current interest rates and the current creditworthiness of
the swap counter parties.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit cannot be readily
determined.
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1998
- --------------------------------- -------------------------
Carrying Estimated
(in thousands) Amount Fair Value
- --------------------------------- ----------- -------------
Financial assets:
Cash, interest bearing deposits
and Federal funds $13,834 $13,834
Investment securities 29,128 29,128
Net loans 107,103 107,982
Interest rate swaps - (16)
Financial liabilities:
Deposits 133,739 133,016
Other interest bearing
liabilities 2,854 2,854
- --------------------------------- ----------- -------------
December 31, 1997
- --------------------------------- -------------------------
Carrying Estimated
(in thousands) Amount Fair Value
- --------------------------------- ----------- -------------
Financial assets:
Cash, interest bearing balances
and Federal funds $8,640 $8,640
Investment securities 17,345 17,345
Net loans 100,513 100,397
Interest rate swaps - (40)
Financial liabilities:
Deposits 114,970 114,979
Other interest bearing
liabilities 779 779
- --------------------------------- ----------- -------------
F-13
<PAGE>
NOTE 16
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.
Beginning in 1998 eligible employees have the option on a quarterly basis to
change the status of their enrollment and/or the amount of their deferral. 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 $65,000 and $56,000 were included in salaries and employee
benefits in 1998 and 1997, respectively.
NOTE 17
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, 1998 and 1997 was
approximately $615,000 and $653,000, respectively. Rents paid were offset by
rental income of $233,000 and 176,000 in 1998 and 1997, respectively.
Future minimum lease commitments under all non-cancelable leases at
December 31, 1998 are as follows:
Capital Operating
(in thousands) Leases Leases
- ------------------------------------ -------- -------------
Year ending December 31:
1999 $ 205 $ 552
2000 196 517
2001 - 483
2002 - 508
2003 - 530
Thereafter - -
- ------------------------------------ -------- -------------
Total minimum lease payments $ 401 $ 2,590
- ------------------------------------ -------- -------------
Less amounts representing interest
at approximately 45% and
executory costs 136
- ------------------------------------ -------- -------------
Present value of minimum capital
lease payments included in
other liabilities $ 265
- ------------------------------------ -------- -------------
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 $326,000.
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, 1998 and 1997, the
Company had standby and commercial letters of credit of $421,100 and $70,000
outstanding and commitments to extend credit, totaling $24,415,000 and
$19,170,000, 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, 1998 and 1997, the Company had interest rate swaps with
outstanding notional amounts of $656,000 and $1,792,000, respectively. The
interest rate swaps were acquired in connection with a purchase of loans from
another party. The loans pay a fixed rate of interest that is converted to a
variable rate of interest through the interest rate swap. As a result of an
early payoff on one of the loans, on July 9, 1998, the Company terminated one of
the interest rate swaps which had a notional amount of $878,000. The Company
received a prepayment penalty of $44,000 on the loan and paid a termination fee
F-14
<PAGE>
of $11,000 on the interest rate swap. The remaining interest rate swap expires
in 2000. At December 31, 1998 the interest rate swap had an estimated negative
market value of $16,000.
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 financial position or results of
operations.
NOTE 18
REGULATORY MATTERS
West Coast and Sunwest are 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 the Company's financial condition. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company'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 the Company and 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,
1998, that the Company and Sunwest meet all capital adequacy requirements.
As of December 31, 1998 and 1997, Sunwest was categorized 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. The Company's and Sunwest's
actual capital amounts and ratios are also presented in the table. No amount was
deducted from capital for interest rate risk.
F-15
<PAGE>
The Company
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, 1998:
Total Capital
(to Risk-Weighted Assets) $17,511 14.3% $=>9,768 =>8.0% $ =>12,210 =>10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 15,896 13.0 =>4,884 =>4.0 =>7,326 =>6.0
Tier 1 Capital
(to Average Assets) 15,896 10.4 =>6,145 =>4.0 =>7,682 =>5.0
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $14,797 13.5% $=>8,778 =>8.0% $ =>10,973 =>10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 13,442 12.3 =>4,389 =>4.0 =>6,584 =>6.0
Tier 1 Capital
(to Average Assets) 13,442 10.6 =>5,093 =>4.0 =>6,367 =>5.0
Sunwest
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, 1998:
Total Capital
(to Risk-Weighted Assets) $18,079 14.1% $=>10,267 =>8.0% $=>12,833 =>10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 16,464 12.8 =>5,133 =>4.0 =>7,700 =>6.0
Tier 1 Capital
(to Average Assets) 16,464 10.7 =>6,148 =>4.0 =>7,684 =>5.0
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
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,
1998 this would allow $0.8 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, 1998, Sunwest is restricted from paying any cash dividend without
prior regulatory approval.
F-16
<PAGE>
NOTE 19
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
West Coast Bancorp's condensed balance sheets as of December 31, are as
follows:
(in thousands) 1998 1997
- -------------------------------------- ---------- ---------
Assets
Cash and short-term investments $ 357 $ 598
Investment in:
Sunwest Bank 16,316 13,895
WCV, Inc. 241 241
Other assets 56 67
- -------------------------------------- -------- --------
$ 16,970 $ 14,801
- -------------------------------------- -------- --------
Liabilities and Shareholders' Equity
Notes payable $ 589 $ 452
Minority interest 7,094 6,041
Other liabilities 554 840
- -------------------------------------- -------- --------
Total liabilities 8,237 7,333
- -------------------------------------- -------- --------
Shareholders' equity:
Common stock 30,274 30,176
Accumulated deficit (21,541) (22,708)
- -------------------------------------- -------- --------
Total shareholders' equity 8,733 7,468
- -------------------------------------- -------- --------
$ 16,970 $ 14,801
- -------------------------------------- -------- --------
West Coast Bancorp's condensed statements of operations for the years ended
December 31, are as follows:
(in thousands) 1998 1997
- ---------------------------------------- ------ ------
Income
Interest income from subsidiaries $ 21 $ 33
- ---------------------------------------- ------ ------
21 33
- ---------------------------------------- ------ ------
Expenses
Interest expense 61 27
Salaries and employee benefits 39 114
Professional services 71 85
Other expenses 52 76
- ---------------------------------------- ------ ------
223 302
- ---------------------------------------- ------ ------
Equity in undistributed net income of
subsidiaries 1,491 1,542
- ---------------------------------------- ------ ------
Income before income taxes 1,289 1,273
Income taxes - 4
- ---------------------------------------- ------ ------
Net income $1,289 $1,269
- ---------------------------------------- ------ ------
West Coast Bancorp's condensed statements of cash flows for the years ended
December 31, are as follows:
(in thousands) 1998 1997
- ---------------------------------------- -------- ---------
Cash flows from operating activities:
Net income $ 1,289 $ 1,269
Equity in net income of subsidiaries (1,491) (1,542)
Depreciation 13 13
(Increase) decrease in other assets (1) 494
Increase (decrease) in other
liabilities 247 (48)
- ---------------------------------------- -------- ---------
Net cash provided by operating activities 57 186
- ---------------------------------------- -------- ---------
Cash flows from investing activities:
Increase in advances to subsidiaries (19) (9)
- ---------------------------------------- -------- ---------
Net cash used in
investing activities (19) (9)
- ---------------------------------------- -------- ---------
Cash flows from financing activities:
Cash payments on notes payable (377) (23)
Stock options exercised 98 -
- ---------------------------------------- -------- ---------
Net cash used in
financing activities (279) (23)
- ---------------------------------------- -------- ---------
(Decrease) increase in cash (241) 154
Cash at beginning of year 598 444
- ---------------------------------------- -------- ---------
Cash at end of year $ 357 $ 598
- ---------------------------------------- -------- ---------
Supplemental schedule of non-cash financing activities
- -----------------------------------------------------------
Transfer from accrued liabilities to
note payable to affiliates $ 514 $ -
Supplemental disclosure of cash flow information
- ---------------------------------------- -------- ---------
Cash paid during the year for:
Interest $ 61 $ 27
Income taxes - 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 1998, West Coast did not receive any dividends from its
subsidiaries. West Coast does not currently expect to receive dividends from its
subsidiaries during 1999. At December 31, 1998, West Coast had cash totaling
$357,000.
West Coast's primary source of cash in 1999 is expected to be sales of
assets and earnings on cash and short-term investments. West Coast anticipates
other cash expenditures during 1999 to consist of debt service payments on notes
payable totaling $84,000 and approximately $87,000 for other operating expenses.
F-17
<PAGE>
West Coast Bancorp and Subsidiaries
December 31, 1998
NOTE 20
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows (in thousands, except per share
data):
1998 March 31 June 30 September 30 December 31 Total
- ----------------------- --------- -------- ------------ ----------- -------
Total interest income $2,986 $3,092 $3,304 $3,175 $12,557
Total interest expense 778 853 896 803 3,330
Net interest income 2,208 2,239 2,408 2,372 9,227
Provision (benefit) for
credit losses - - - (205) (205)
Net income before
income taxes 274 249 401 367 1,291
Net income 274 249 401 365 1,289
Net income per common
share - basic and
diluted .03 .03 .04 .04 .14
1997
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
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 - .04 .04 .05 .14
F-18
<PAGE>
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, 1998 and
1997, and the related consolidated statements of operations, comprehensive
income, shareholders' equity and cash flows for 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 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 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Orange County, California
February 19, 1999
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 1998 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/ Eric D. Hovde
Eric D. Hovde
Chairman of the Board and President
February 19, 1999
/s/ Frank E. Smith
Frank E. Smith
Senior Vice President and
Chief Financial Officer
February 19, 1999
F-19
<PAGE>
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 stoc 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 10-KSB
F-20
<PAGE>
(a) to West Coast's Registration Statement on Form S-1
(Registration No. 33-24069) filed with the Commission on August 31, 1988,
and which is incorporated herein by reference
(b) to Amendment No. 1 to West Coast's Registration
Statement on Form S-1 (Registration No. 33-24069)
filed with the Commission on October 21, 1988, and
which is incorporated herein by reference
(c) to West Coast's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 filed with the
Commission, and which is incorporated herein by
reference
(d) to West Coast's Annual Report on form 10-K for the
fiscal year ended December 31, 1991 filed with the
Commission, and which is incorporated herein by
reference
(e) to West Coast's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 filed with the
Commission, and which is incorporated herein by
reference
(f) to West Coast's 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>
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>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 19, 1999 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
February 19, 1999
F-23
<PAGE>
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