WEST COAST BANCORP AND SUBSIDIARIES
U.S. Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from N/A to N/A
COMMISSION FILE NUMBER: 0-10897
WEST COAST BANCORP
(Exact name of small business issuer as
specified in its charter)
CALIFORNIA 95-3586860
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
535 E. First Street
Tustin, California 92780-3312
(Address of principal executive offices)
(714) 730-4499
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
Number of shares outstanding of each of the issuer's
classes of common equity as of July 30, 1999:
9,328,942
Transitional Small Business Disclosure Format Yes No X
-- --
This document contains a total of 22 pages.
1
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(in thousands, except share data) (Unaudited)
------------------------
ASSETS
Cash and due from banks $ 9,731 $ 9,334
Federal funds sold 2,350 4,500
Investment securities available-for-sale
at fair value 26,021 29,128
Loans 130,681 109,547
Less allowance for loan losses (2,449) (2,444)
------------------------
Net loans 128,232 107,103
------------------------
Real estate owned, net 876 528
Premises and equipment, net 625 516
Deferred taxes 1,616 1,408
Other assets 1,263 1,267
------------------------
$ 170,714 $ 153,784
========================
LIABILITIES
Deposits:
Demand, non interest-bearing $ 52,764 $ 47,254
Savings, money market & interest-bearing demand 45,871 45,510
Time certificates under $100,000 22,499 20,288
Time certificates of $100,000 or more 24,330 20,687
------------------------
Total deposits 145,464 133,739
Federal Home Loan Bank borrowings 6,000 2,000
Other borrowed funds 565 589
Capital lease obligation 219 265
Other liabilities 1,336 1,364
------------------------
Total liabilities 153,584 137,957
Commitments and contingencies
Minority interest in subsidiary 7,654 7,094
------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value - 30,000,000
shares authorized, 9,328,942 and 9,258,942 shares
issued and outstanding in 1999 and 1998, respectively 30,351 30,274
Accumulated deficit (20,645) (21,458)
Accumulated other comprehensive income - net of tax (230) (83)
------------------------
Total shareholders' equity 9,476 8,733
------------------------
$ 170,714 $ 153,784
========================
(See accompanying notes to consolidated financial statements)
2
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Six Months Ended Three Months Ended
(in thousands, June 30, June 30,
except share data) 1999 1998 1999 1998
------------------------------------------
INTEREST INCOME:
Loans, including fees $ 5,377 $ 5,161 $ 2,770 $ 2,588
Federal funds sold 39 389 2 220
Investment securities 1,012 526 506 284
Interest bearing deposits with banks -- 1 -- --
------------------------------------------
Total interest income 6,428 6,077 3,278 3,092
INTEREST EXPENSE:
Interest on deposits 1,381 1,529 687 801
Other 150 101 84 52
------------------------------------------
Total interest expense 1,531 1,630 771 853
------------------------------------------
Net interest income 4,897 4,447 2,507 2,239
Provision for loan losses -- -- -- --
------------------------------------------
Net interest income after
provision for loan losses 4,897 4,447 2,507 2,239
Other operating income 664 353 407 172
Other operating expenses 3,944 3,788 1,974 1,928
Minority interest in net income
of subsidiary 673 490 394 233
Gain (loss) on liquidation of WCV, Inc. -- 1 -- (1)
------------------------------------------
Income before income taxes 944 523 546 249
Income tax expense 131 -- 71 --
------------------------------------------
Net income $ 813 $ 523 $ 475 $ 249
==========================================
Basic and diluted earnings per share $ .09 $ .06 $ .05 $ .03
==========================================
(See accompanying notes to consolidated financial statements)
3
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
(in thousands) 1999 1998 1999 1998
----------------------------------------
Net income $ 813 $ 523 $ 475 $ 249
Other comprehensive income, net of tax:
Unrealized loss on
available-for-sale investments
arising during period (147) (19) (135) (13)
----------------------------------------
Other comprehensive loss (147) (19) (135) (13)
----------------------------------------
Comprehensive income $ 666 $ 504 $ 340 $ 236
========================================
(See accompanying notes to consolidated financial statements)
4
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Common Stock Other Share-
------------- Comprehensive Accumulated holders'
(in thousands) Shares Amount Income Deficit Equity
--------------------------------------------------
Balance at December 31, 1998 9,259 $30,274 $ (83) $ (21,458) $ 8,733
Net income -- -- -- 813 813
Stock options exercised 70 77 -- -- 77
Change in net unrealized
loss on available-for-sale
investments -- -- (147) -- (147)
--------------------------------------------------
Balance at June 30, 1999 9,329 $30,351 $ (230) $ (20,645) $ 9,476
==================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
(in thousands) 1999 1998
---------------------
Cash flows from operating activities:
Net income $ 813 $ 523
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 147 175
Minority interest in net income of subsidiary 673 490
Gain on sale of real estate owned -- (10)
Write-down of real estate owned 13 16
Gain on sale and liquidation of subsidiaries -- (1)
Increase in deferred tax benefit (27) (127)
State taxes payable 36 --
Amortization and accretion from investment securities 112 28
Increase in other assets (25) (7)
Decrease in other liabilities (63) (21)
---------------------
Net cash provided by operating activities 1,679 1,066
(Continued)
(See accompanying notes to consolidated financial statements)
5
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
(in thousands) June 30,
1999 1998
---------------------
Cash flows from investing activities:
Proceeds from maturity of interest bearing balances $ - $ 99
Proceeds from maturities and paydowns of investment
securities available-for-sale 2,607 3,500
Purchase of investment securities available-for-sale (53) (5,931)
Net increase in loans (21,490) (6,903)
Proceeds from sales of real estate owned - 617
Purchase of premises and equipment (255) (111)
Proceeds from sales of premises and equipment - 20
---------------------
Net cash used in investing activities (19,191) (8,709)
Cash flows from financing activities:
Net increase in deposits 11,725 24,207
Cash payments on notes payable to affiliates (24) (24)
Repayment of other borrowed funds (46) (35)
Borrowed funds from Federal Home Loan Bank 4,000 -
Stock options exercised 77 98
---------------------
Net cash provided by financing activities 15,732 24,246
---------------------
(Decrease) increase in cash and cash equivalents (1,780) 16,603
Cash and cash equivalents at beginning of year 13,834 8,541
---------------------
Cash and cash equivalents at end of year $12,054 $25,144
=====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,532 $ 1,638
Income taxes 95 105
Supplemental schedule of non-cash investing and financing activities:
Transfer from other liabilities to
other borrowed funds - 475
Transfer of loans to REO 131 -
(See accompanying notes to consolidated financial statements)
6
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements reflect all
adjustments, consisting primarily of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair statement
of the results of operations for the interim periods. Results for the
six and three month periods ended June 30, 1999 and 1998 are not
necessarily indicative of results that may be expected for any other
interim period, or for the year as a whole. All significant
intercompany balances have been eliminated.
On September 13, 1996, Western Acquisition, L.L.C. and Western
Acquisition Partners, L.P. (collectively, "Western"), affiliates of
Hovde Financial, Inc., acquired a 43.5% interest in Sunwest Bank
("Sunwest").
Certain reclassifications have been made in the prior period financial
statements to conform to the presentation in the current period.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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. In May 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", that amends SFAS No. 133 and defers the effective date to fiscal
years beginning after June 15, 2000. 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.
7
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
(3) EARNINGS PER SHARE
The following is a reconciliation of basic earnings per share (EPS) to
diluted EPS for the six and three months ended June 30, 1999 and 1998.
(dollars and shares in thousands)
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
--------------------------------------------------------
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
--------------------------------------------------------
Basic EPS:
Income available to
common shareholders $ 813 9,271 $ .09 $ 523 9,184 $ .06
Effect of dilutive
securities:
Stock options -- 13 -- -- 85 --
--------------------------------------------------------
Diluted EPS:
Income available to
common shareholders
plus assumed
conversions $ 813 9,284 $ .09 $ 523 9,269 $ .06
========================================================
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
--------------------------------------------------------
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
--------------------------------------------------------
Basic EPS:
Income available to
common shareholders $ 475 9,282 $ .05 $ 249 9,199 $ .03
Effect of dilutive
securities:
Stock options - 24 - - 85 -
--------------------------------------------------------
Diluted EPS:
Income available to
common shareholders
plus assumed
conversions $ 475 9,306 $ .05 $ 249 9,284 $ .03
========================================================
8
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
(4) LOANS
A summary of loans follows:
June 30, December 31,
(in thousands) 1999 1998
--------------------------
Commercial loans not secured by real estate $ 37,606 $ 34,318
Real estate mortgage loans 87,539 71,184
Real estate construction 1,809 376
Personal loans not secured by real estate 4,085 3,942
Unearned income, discounts and fees (358) (273)
--------------------------
$ 130,681 $ 109,547
==========================
(5) OTHER OPERATING INCOME
A summary of other operating income follows:
Six Months Ended Three Months Ended
June 30, June 30,
(in thousands) 1999 1998 1999 1998
----------------------------------------------
Depositor charges $370 $276 $205 $137
Service charges, commissions
& fees 81 34 38 22
Other income 213 43 164 13
----------------------------------------------
$664 $353 $407 $172
==============================================
(6) OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
Six Months Ended Three Months Ended
June 30, June 30,
(in thousands) 1999 1998 1999 1998
-------------------------------------
Salaries and employee benefits $1,914 $1,929 $ 932 $ 957
Occupancy 371 381 205 208
Professional services 354 158 150 92
Customer service 315 235 157 132
Data processing 282 262 143 133
Depreciation and amortization 147 175 76 90
Advertising and promotion 136 140 67 74
Stationery and supplies 65 48 37 28
Printing and postage 53 54 27 31
Telephone and telefax 52 41 28 22
Net cost of operation of REO 28 53 23 24
Insurance 19 20 10 10
Regulatory fees and assessments 17 17 9 9
Collection 15 8 9 3
Miscellaneous 176 267 101 115
-------------------------------------
$3,944 $3,788 $1,974 $1,928
=====================================
9
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
The following presents management's discussion and analysis of the consolidated
financial condition and operating results of West Coast Bancorp (as a separate
entity "West Coast" and together with its subsidiaries the "Company") for the
six and three month periods ended June 30, 1999 and 1998. The discussion should
be read in conjunction with the Company's unaudited consolidated financial
statements and the notes thereto appearing elsewhere in this report.
Certain statements in this Report on Form 10-QSB constitute "forward-looking
statements" under the Private Securities Litigation Act of 1995 which involve
risk and uncertainties. The Company's actual results may differ significantly
from the results discussed in such forward-looking statements. Factors that
might cause such a difference include but are not limited to economic
conditions, competition in the geographic and business areas in which the
Company conducts its operations, fluctuations in interest rates, credit quality,
year 2000 issues 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" contained in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998.
GENERAL
The Company recorded net income of $813,000, or $.09 per share, and $475,000, or
$.05 per share, during the six and three months ended June 30, 1999, as compared
with net income of $523,000, or $.06 per share, and $249,000, or $.03 per share,
during the same respective periods in 1998. The 1999 figures included the
effects of recording a tax provision of $131,000 compared to none in 1998. The
higher pre-tax income in 1999 versus 1998 occurred primarily because Sunwest had
higher earnings in 1999. Sunwest's higher earnings were primarily due to
increased growth in net interest income and fees from growth in assets and
deposits.
The Company had total assets, loans and deposits as follows:
June 30, December 31, June 30, December 31,
1999 1998 1998 1997
(in thousands) --------------------------------------------------------
Total assets $170,714 $153,784 $155,826 $130,621
Loans 130,681 109,547 109,809 102,877
Deposits 145,464 133,739 139,177 114,970
The $15 million increase in total assets from June 30, 1998 to June 30, 1999
occurred primarily due to a $21 million increase in loans at Sunwest from
increased marketing efforts and due to the expanding economy in Orange County,
California. The increase in assets was funded by an increase in deposits of $6
million, an increase in borrowings and other liabilities of $7 million and
earnings of over $1 million.
10
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $450,000, or 10.1%, in the six month period ended
June 30, 1999 and $268,000, or 12.0%, in the second quarter of 1999 compared to
the same periods in 1998. The increase in net interest income in 1999 resulted
primarily from higher volumes of interest earning assets offset by lower yields
on loans. The improved mix of interest earning assets and deposits favorably
impacted net interest income. Average interest earning assets increased $15.7
million, or 11.8% in the first six months of 1999 compared to 1998 and increased
$13.4 million, or 9.7% in the three months ended June 30, 1999 compared to the
same period in 1998.
The net interest margin (yield on interest earning assets less the rate paid on
interest bearing liabilities) was flat in the first six months of 1999 compared
to 1998 and increased by 23 basis points in the second quarter of 1999 versus
the second quarter of 1998. The net yield on interest earning assets (net
interest income divided by average earning assets) declined ten basis points for
the first six months of 1999 and increased 14 basis points in the second quarter
of 1999 compared to 1998. This was a result of a decline in the general level of
interest rates during the past year offset by shifting the mix of earning assets
into assets with higher yields. Loan yields were significantly impacted by a
decline in the "prime rate" of 75 basis points from the prior year.
The yield on interest earning assets declined primarily due to a drop in loan
yields of 91 basis points and 85 basis points in the six and three month periods
ended June 30, 1999 compared to the same periods in 1998. This was caused by the
drop in the prime rate noted above along with competitive pressures on loan
yields in the Company's markets. This impact was offset to some extent by a
reduction of investments in Federal funds with a corresponding increased
investment in higher yielding investment securities. The yield on investment
securities has increased as a result of investing in corporate bonds and
extending maturities.
Interest expense declined in 1999 as a result of a decline in rates offset by
increased volumes. Average interest bearing liabilities increased by $6.6
million in the first six months of 1999 and $4.1 in the second quarter of 1999
compared to the same periods in 1998. Average noninterest bearing demand
deposits increased by $8.2 million for the six month and $7.8 million for the
three month periods in 1999 compared to 1998.
The rates paid on interest bearing liabilities declined 50 basis points in the
first six months of 1999 and 53 basis points in the second quarter of 1999
compared to the same periods in 1998. This was due to reductions in overall
interest rate levels and a reduction in time deposits as a percentage of
interest bearing deposits in 1999. The Company's deposits are concentrated in
low and noninterest bearing transaction accounts that are not as sensitive to
interest rate changes as the Company's interest earning assets are. Future asset
growth will rely to a greater extent on increases in time deposits and borrowed
funds, potentially increasing the rate paid on interest bearing liabilities.
11
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
The following table sets forth the Company's average balance sheets, yields on
earning assets, rates paid on interest-bearing liabilities, net interest margins
and net yields on interest-earning assets for the six and three month periods
ended June 30, 1999 and 1998 (dollars in millions):
Six Months Ended June 30,
1999 1998
Average Yields/ Average Yields/
Balance Rates Balance Rates
------------------------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 115.6 9.30% $ 101.1 10.21%
Investment securities 31.8 6.37 18.0 5.83
Federal funds sold 1.6 4.84 14.2 5.47
------------------------------------------------
Total interest earning assets 149.0 8.63 133.3 9.11
Allowance for loan losses (2.3) (2.4)
Cash and due from banks 10.2 8.0
Other assets 4.0 3.8
------------------------------------------------
$ 160.9 $ 142.7
================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits 41.7 4.74% $ 42.4 5.43%
Interest-bearing demand deposits 40.2 1.78 35.4 1.86
Savings deposits 4.8 1.44 5.0 1.99
FHLB borrowings 2.7 4.94 -- --
Other debt 1.0 19.38 1.0 21.62
------------------------------------------------
Total interest bearing liabilities 90.4 3.39 83.8 3.89
Demand deposits 52.1 43.9
Other liabilities 1.3 1.1
Minority interest 7.4 6.2
Shareholders' equity 9.7 7.7
------------------------------------------------
$ 160.9 $ 142.7
================================================
Net interest margin 5.24% 5.22%
Net yield on interest earning assets 6.57 6.67
12
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
Three Months Ended June 30,
1999 1998
Average Yields/ Average Yields/
Balance Rates Balance Rates
------------------------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 119.5 9.28% $ 102.2 10.13%
Investment securities 31.2 6.48 19.5 5.82
Federal funds sold 0.2 4.82 15.8 5.56
------------------------------------------------
Total interest earning assets 150.9 8.69 137.5 8.99
Allowance for loan losses (2.4) (2.4)
Cash and due from banks 10.1 8.2
Other assets 3.7 3.9
------------------------------------------------
$ 162.3 $ 147.2
================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 42.2 4.68% $ 44.7 5.43%
Interest-bearing demand deposits 39.6 1.81 36.0 1.89
Savings deposits 4.8 1.33 5.1 1.95
FHLB borrowings 3.4 4.92 - -
Other debt 1.0 19.66 1.1 18.96
------------------------------------------------
Total interest bearing liabilities 91.0 3.39 86.9 3.92
Demand deposits 52.9 45.1
Other liabilities 1.4 1.0
Minority interest 7.5 6.3
Shareholders' equity 9.5 7.9
------------------------------------------------
$ 162.3 $ 147.2
================================================
Net interest margin 5.30% 5.07%
Net yield on interest earning assets 6.65 6.51
13
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
The increases (decreases) in interest income and expense and net interest income
resulting from changes in average assets, liabilities and interest rates for the
1999 versus 1998 periods are summarized as follows (in thousands):
Six Months Ended June 30, Three Months Ended June 30,
-----------------------------------------------------------
Asset/ Interest Asset/ Interest
Liability Rate Liability Rate
Changes Changes Total Changes Changes Total
-----------------------------------------------------------
Changes in:
Interest income $ 826 $(475) $ 351 $ 408 $(222) $ 186
Interest expense 5 (172) (167) (31) (94) (125)
-----------------------------------------------------------
Net interest income $ 821 $(303) $ 518 $ 439 $(128) $ 311
===========================================================
Loans on which the accrual of interest had been discontinued at June 30, 1999
and 1998 amounted to $1,122,000 and $1,253,000, respectively. If these loans had
been current throughout their terms, it is estimated that net interest income
would have increased by approximately $35,000 and $17,000 in the second quarters
of 1999 and 1998, respectively. This would have raised the net yield on
interest-earning assets and the net interest margin by approximately 9 and 5
basis points during the second quarters of 1999 and 1998, respectively. The loan
on nonaccrual was placed back on accrual status in July 1999 after the
underlying property was sold to a new owner. Interest of approximately $110,000
was recovered as part of the transaction.
NONPERFORMING ASSETS AND PROVISION FOR LOAN LOSSES
The following table summarizes the activity in the allowance for loan losses
during the periods indicated (in thousands):
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
---------------------------------------
Allowance for loan losses
balance at beginning of period $ 2,444 $ 2,364 $ 2,375 $ 2,367
Charge-offs (93) (23) -- (9)
Recoveries 98 52 74 35
---------------------------------------
Net recoveries 5 29 74 26
Provision for loan losses -- -- -- --
---------------------------------------
Allowance for loan losses
balance at end of period $ 2,449 $ 2,393 $ 2,449 $ 2,393
=======================================
All the above charge-offs and recoveries were at Sunwest. The net recoveries
during the six and three months ended in 1999 are a result of improved asset
quality and the high levels of charge-offs in previous years.
14
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
Management believes that the allowance for loan losses at June 30, 1999 of
$2,449,000 or 1.87% of loans is adequate to absorb known and inherent risks in
the Company's loan portfolio. The ultimate collectibility of a substantial
portion of the Company's loans, as well as its financial condition, is affected
by general economic conditions and the real estate market in California.
California has experienced, and may continue to experience, volatile economic
conditions. These conditions could adversely affect certain borrowers' ability
to repay loans. While the Southern California and Orange County economies have
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 loan losses and would adversely affect the financial
condition and results of operations of the Company.
A summary of nonperforming assets follows (dollars in thousands):
June 30, December 31, June 30, December 31,
1999 1998 1998 1997
-------------------------------------------------------
Nonaccrual loans $1,122 $1,360 $1,253 $ -
Loans 90 days past due
and still accruing - 1 1 31
-------------------------------------------------------
Nonperforming loans 1,122 1,361 1,254 31
Real estate owned 876 528 528 1,151
-------------------------------------------------------
Nonperforming assets $1,998 $1,889 $1,782 $1,182
=======================================================
Nonperforming loans/
Total loans .86% 1.24% 1.14% .03%
Nonperforming assets/
Total assets 1.17 1.23 1.14 .90
=======================================================
Nonperforming assets have increased approximately $816,000 from December 31,
1997. The increase is due primarily to one loan placed on nonaccrual in the
second quarter of 1998. In July 1999, this loan was placed on accrual status and
is no longer considered impaired.
Restructured loans that were performing substantially in accordance with their
modified terms totaled $2.1 at June 30, 1999. No restructured loans were on
nonaccrual status at June 30, 1999.
15
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
OTHER OPERATING INCOME
Other operating income increased by $311,000 for the six and three months ended
June 30, 1999, respectively, as compared with the same periods in 1998,
primarily as a result of recoveries of interest on loans on nonaccrual in prior
years, increased deposit services charges and sales of mutual funds in 1999. See
note (5) of the notes to the unaudited consolidated financial statements. Other
income includes recoveries of interest on loans on nonaccrual in prior years of
$202,000 and $45,000 for the six and three month periods ended June 30, 1999,
respectively.
OTHER OPERATING EXPENSES
Other operating expenses increased $156,000 from the six months ended June 30,
1998 to the same period in 1999. The largest increase was in professional
services expense which increased $196,000. Approximately $139,000 of this
increase was the result of hiring a consulting firm to conduct a profit
improvement study. Higher professional service expenses also resulted from
outsourced internal audit services and fees paid to hire new employees. See note
(6) of the notes to consolidated financial statements. Total other operating
expenses expressed in dollars and as a percentage of total revenues and average
assets follows (dollars in thousands):
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------------------------------
Other operating expenses $ 3,944 $ 3,788 $ 1,974 $ 1,928
Other operating expenses
(annualized)/average assets 4.90 5.31 4.87 5.24%
Other operating expenses/net interest
income and other operating income 70.9% 78.9% 67.7% 80.0%
===========================================
The other operating expense ratios declined as a result of expenses growing at a
slower rate than assets and revenue; however, as the Company grows it is likely
that operating expenses will also increase. The Company engaged an outside
consultant to assist the Company in reviewing all significant business processes
during 1999. The purpose of this review was to streamline processes to reduce
expenses and improve the delivery of products and services to the Company's
customers. The external costs of this review are expected to be less than
$150,000. Although the Company expects the cost of this review to be recovered
through productivity and revenue enhancements, there are no assurances that the
expected results will be achieved. The Company is currently assessing its
facilities needs in light of its expected future growth and possible expansion
into other areas of Orange County. Although no commitments for new facilities
have been made, it is likely that additional investments in facilities will be
made during 1999.
16
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
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
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 substantially all mission-
critical applications was 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.
17
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
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 substantially
complete. Renovation and testing phases have been substantially completed for
mission-critical applications. Testing and renovation of non mission-critical
areas were substantially 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.
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 substantially all 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 all mission critical applications
o Completed testing for substantially all mission critical applications
o Assessed all critical customers
o Developed a process for communicating Y2K impacts to customers,
correspondents, agencies, and vendors o Developed and tested a plan to
address contingency implementation dates if remediation does not
proceed as planned
18
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
COST OF YEAR 2000 READINESS - The Company currently estimates that it will incur
additional incremental out-of-pocket costs of about $113,000. These costs
include equipment and software purchases that may be capitalized as fixed assets
and 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 $120,000 through June 30, 1999. The
Company's current estimates of the costs necessary to implement and test its
year 2000 readiness are based on the facts and circumstances existing today. The
estimates were made using assumptions of future events including the continued
availability of certain resources, implementation success and other factors. New
developments may occur that could affect the Company's estimates for year 2000
compliance. These developments include, but are not limited to: (a) the
availability and cost of personnel trained in this area, (b) the ability to
locate and correct all relevant computer code and equipment issues, and (c) the
planning and implementation success needed to achieve full compliance.
The amount of resources directed to ensuring year 2000 readiness have slowed,
and will continue to slow, the development of new business and technology
initiatives that provide new products and services to the Company's customers or
that enhance effectiveness and profitability of existing products and services.
The effects on the Company of delays in other business and technology
initiatives are not determinable at this time, but are not expected to have a
material effect on the financial condition of the Company. In addition, since
there is no uniform definition of year 2000 "compliance" and not all customer
situations can be anticipated, the Company may experience claims as a result of
the year 2000 transition. It is uncertain whether sufficient insurance coverage
will be available to satisfy any claims asserted. Additionally, the Company
continues to communicate with significant customers and vendors to determine the
extent of risk created by those third parties' failure to remediate their own
year 2000 issues. However, it is not possible, at present, to determine the
financial effect if significant customer and vendor remediation efforts are not
resolved in a timely manner.
INCOME TAXES
The Company and Sunwest recognized state income tax expense of $131,000 and
$71,000 during the six and three months ended June 30, 1999, compared to none
for the same periods in 1998. Sunwest had $2.8 million of net deferred tax
assets and approximately $5.3 million of net operating loss carryforwards for
federal purposes, and none for state at December 31, 1998. Excluding the Sunwest
amounts, the Company had $4.9 million of net operating loss carryforwards at
December 31, 1998.
For all the periods presented a valuation allowance has been recorded to offset
most or all of the deferred tax assets of Sunwest and the Company. The valuation
allowance was established due to uncertainty of future earnings at both Sunwest
and the Company. At December 31, 1998, Sunwest had a $1.5 million deferred tax
asset based upon estimates of future earnings and tax preference items. Sunwest
and the Company may adjust the valuation allowance and the corresponding tax
benefit in 1999 based on changes in estimated future earnings increases and tax
preference items.
19
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
(Unaudited)
LIQUIDITY
The Company
Liquidity, as it relates to banking, represents the ability to obtain funds to
meet loan commitments and to satisfy demand for deposit withdrawals.
The principal sources of funds that provide liquidity for Sunwest are maturities
of investment securities and loans, collections on loans, increased deposits and
temporary borrowings. The Company's liquid asset ratio (the sum of cash,
investments available-for-sale, excluding pledged amounts, and Federal funds
sold divided by total assets) was 14% at June 30, 1999 and 21% at December 31,
1998. The Company believes it has sufficient liquid resources, as well as
available credit facilities, to enable it to meet its operating needs.
THE PARENT COMPANY
West Coast's sources of liquidity are limited. West Coast has relied on sales of
assets and borrowings from officers/directors as sources of liquidity. Dividends
from subsidiaries ordinarily provide a source of liquidity to a bank holding
company. Sunwest is prohibited from paying cash dividends without prior
regulatory consent.
During the first six months of 1999 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 June 30, 1999, West Coast had cash and short term investments totaling
$344,000. No significant cash receipts are expected for the remainder of 1999.
West Coast anticipates cash expenditures during 1999 to consist of debt service
payments and other operating expenses. West Coast has a note payable of $417,000
due to its Chairman. The maturity date on this note payable was June 30, 1999
and has been extended until June 30, 2000. West Coast's projected debt service
for the remainder of 1999 is expected to total $42,000. West Coast anticipates
that other operating expenses will be approximately $54,000 during the remainder
of 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
West Coast Bancorp had a 13.30%, 14.55% and 10.70% Tier 1 risk-based capital,
total risk-based capital and leverage ratio at June 30, 1999, respectively.
Sunwest had a 13.80%, 15.05% and 11.10% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at June 30, 1999, 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 June 30,
1999.
20
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
JUNE 30, 1999
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------------
NONE
Item 2. Changes in Securities
- -----------------------------------
NONE
Item 3. Defaults Upon Senior Securities
- ---------------------------------------------
NONE
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------------
West Coast Bancorp held its Annual Meeting of Shareholders (the "Meeting") on
June 22, 1999.
At the Meeting, the following individuals were elected to serve as directors
until the 2000 Annual Meeting of Shareholders and until their successors are
elected and have qualified:
Authority
Name of Director Votes For Withheld
Robert W. Hodgson 5,515,409 81,578
Eric D. Hovde 5,509,359 87,628
James G. LeSieur, III. 5,515,889 81,098
Richard L. Shepley 5,514,289 82,698
Item 5. Other Information
- -------------------------------
NONE
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule for June 30, 1999
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WEST COAST BANCORP
/s/Eric D. Hovde August 13, 1999
-------------------------------------- ----------------------
Eric D. Hovde Date
Chief Executive Officer
/s/Frank E. Smith August 13, 1999
-------------------------------------- ----------------------
Frank E. Smith Date
Chief Financial Officer
22
<PAGE>
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