WEST COAST BANCORP AND SUBSIDIARIES
U.S. Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1999:
9,328,942
Transitional Small Business Disclosure Format Yes No X
-- --
This document contains a total of 23 pages.
1
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(in thousands, except share data) 1999 1998
(Unaudited)
-----------------------------
ASSETS
Cash and due from banks $ 8,868 $ 9,334
Federal funds sold 1,400 4,500
Investment securities available-for-sale
at fair value 34,055 29,128
Loans 134,411 109,547
Less allowance for loan losses (2,605) (2,444)
-----------------------------
Net loans 131,806 107,103
-----------------------------
Real estate owned, net 508 528
Premises and equipment, net 750 516
Deferred taxes 1,748 1,408
Other assets 1,296 1,267
-----------------------------
$ 180,431 $ 153,784
=============================
LIABILITIES
Deposits:
Demand, non interest-bearing $ 51,277 $ 47,254
Savings, money market & interest-bearing demand 47,677 45,510
Time certificates under $100,000 24,970 20,288
Time certificates of $100,000 or more 28,395 20,687
-----------------------------
Total deposits 152,319 133,739
Federal Home Loan Bank borrowings 8,000 2,000
Other borrowed funds 553 589
Capital lease obligation 191 265
Other liabilities 1,277 1,364
-----------------------------
Total liabilities 162,340 137,957
Commitments and contingencies
Minority interest in subsidiary 8,088 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 (20,027) (21,458)
Accumulated other comprehensive income - net of tax (321) (83)
-----------------------------
Total shareholders' equity 10,003 8,733
-----------------------------
$ 180,431 $ 153,784
=============================
(See accompanying notes to consolidated financial statements)
2
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended Nine Months Ended
(in thousands, September 30, September 30,
except share data) 1999 1998 1999 1998
----------------------------------------
INTEREST INCOME:
Loans, including fees $ 3,088 $ 2,693 $ 8,465 $ 7,855
Federal funds sold 22 295 61 684
Investment securities 558 316 1,570 843
----------------------------------------
Total interest income 3,668 3,304 10,096 9,382
INTEREST EXPENSE:
Interest on deposits 844 847 2,225 2,377
Other 113 49 263 150
----------------------------------------
Total interest expense 957 896 2,488 2,527
----------------------------------------
Net interest income 2,711 2,408 7,608 6,855
Provision for loan losses -- -- -- --
----------------------------------------
Net interest income after
provision for loan losses 2,711 2,408 7,608 6,855
Other operating income 400 191 1,064 544
Other operating expenses 1,899 1,854 5,843 5,642
Minority interest in net income
of subsidiary 504 344 1,177 834
Gain on liquidation of WCV, Inc. -- -- -- 1
----------------------------------------
Income before income taxes 708 401 1,652 924
Income tax expense 90 -- 221 --
----------------------------------------
Net income $ 618 $ 401 $ 1,431 $ 924
========================================
Basic and diluted earnings per share $ .07 $ .04 $ .15 $ .10
========================================
(See accompanying notes to consolidated financial statements)
3
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
------------------------------------------
Net income $ 618 $ 401 $ 1,431 $ 924
Other comprehensive income, net of tax:
Unrealized loss on
available-for-sale investments
arising during period (91) (38) (238) (57)
------------------------------------------
Other comprehensive loss (91) (38) (238) (57)
------------------------------------------
Comprehensive income $ 527 $ 363 $ 1,193 $ 867
==========================================
(See accompanying notes to consolidated financial statements)
4
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Common Stock Other Share-
------------- Accumulated Comprehensive holders'
(in thousands) Shares Amount Deficit Income Equity
-----------------------------------------------------
Balance at December 31, 1997 9,169 $ 30,176 $ (22,747) $ 39 $ 7,468
Net income - - 1,289 - 1,289
Stock options exercised 90 98 - - 98
Change in net unrealized
loss on available-for-sale
investments - - - (122) (122)
-----------------------------------------------------
Balance at December 31, 1998 9,259 $ 30,274 $ (21,458) $ (83) $ 8,733
Net income - - 1,431 - 1,431
Stock options exercised 70 77 - - 77
Change in net unrealized
loss on available-for-sale
investments - - - (238) (238)
-----------------------------------------------------
Balance at September 30, 1999 9,329 $ 30,351 $ (20,027) $ (321) $ 10,003
=====================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(in thousands) 1999 1998
--------------------------
Cash flows from operating activities:
Net income $ 1,431 $ 924
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 227 254
Amortization and accretion from investment securities 341 97
Minority interest in net income of subsidiary 1,177 834
Gain on sale of real estate owned -- (10)
Write-down of real estate owned 20 16
Gain on sale and liquidation of subsidiaries -- (1)
Deferred tax benefit (47) (105)
State taxes payable 42 --
(Increase) decrease in other assets (29) 73
Increase (decrease) in other liabilities (128) 23
--------------------------
Net cash provided by operating activities 3,034 2,105
(Continued)
(See accompanying notes to consolidated financial statements)
5
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
(in thousands) September 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 3,831 3,500
Purchase of investment securities available-for-sale (9,813) (6,096)
Net increase in loans (25,064) (4,632)
Proceeds from sales of real estate owned 361 617
Purchase of premises and equipment (462) (131)
Proceeds from sales of premises and equipment -- 20
--------------------------
Net cash used in investing activities (31,147) (6,623)
Cash flows from financing activities:
Net increase in deposits 18,580 20,687
Cash payments on notes payable to affiliates (36) (102)
Repayment of other borrowed funds (74) (44)
Borrowed funds from Federal Home Loan Bank 6,000 --
Stock options exercised 77 98
--------------------------
Net cash provided by financing activities 24,547 20,639
--------------------------
Increase (decrease) in cash and cash equivalents (3,566) 16,121
Cash and cash equivalents at beginning of year 13,834 8,541
--------------------------
Cash and cash equivalents at end of year $ 10,268 $ 24,662
==========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,430 $ 2,496
Income taxes 95 107
Supplemental schedule of non-cash investing and financing activities:
Transfer from other liabilities to
other borrowed funds $ - $ 475
Transfer of loans to REO 361 -
(See accompanying notes to consolidated financial statements)
6
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
three and nine month periods ended September 30, 1999 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.
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
<PAGE>
(3) EARNINGS PER SHARE
The following is a reconciliation of basic earnings per share (EPS) to
diluted EPS for the three and nine months ended September 30, 1999 and
1998.
(dollars and shares in thousands)
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
-----------------------------------------------------------
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
-----------------------------------------------------------
Basic EPS:
Income available to
common shareholders $ 618 9,329 $ .07 $ 401 9,259 $ .04
Effect of dilutive
securities:
Stock options -- 10 -- -- 24 --
-----------------------------------------------------------
Diluted EPS:
Income available to
common shareholders
plus assumed
conversions $ 618 9,339 $ .07 $ 401 9,283 $ .04
===========================================================
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
-----------------------------------------------------------
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
-----------------------------------------------------------
Basic EPS:
Income available to
common shareholders $1,431 9,290 $ .15 $ 924 9,209 $ .10
Effect of dilutive
securities:
Stock options -- 13 -- -- 65 --
-----------------------------------------------------------
Diluted EPS:
Income available to
common shareholders
plus assumed
conversions $1,431 9,303 $ .15 $ 924 9,274 $ .10
===========================================================
8
<PAGE>
(4) LOANS
A summary of loans follows:
September 30, December 31,
(in thousands) 1999 1998
----------------------------
Commercial loans not secured by real estate $ 37,462 $ 34,318
Real estate mortgage loans 91,384 71,184
Real estate construction 2,258 376
Personal loans not secured by real estate 3,646 3,942
Unearned income, discounts and fees (339) (273)
----------------------------
$ 134,411 $ 109,547
============================
*Impaired loans have declined since December 31, 1998 due to a significant
nonaccrual loan paying off.
(5) OTHER OPERATING INCOME
A summary of other operating income follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
----------------------------------------------------
Depositor charges $ 218 $ 152 $ 587 $ 428
Service charges, commissions
& fees 24 34 106 69
Other income 158 5 371 47
----------------------------------------------------
$ 400 $ 191 $1,064 $ 544
====================================================
(6) OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
---------------------------------------------
Salaries and employee benefits $ 852 $ 954 $ 2,766 $ 2,883
Occupancy 216 170 587 551
Customer service 170 129 485 364
Professional services 158 97 512 255
Data processing 150 138 432 400
Depreciation and amortization 80 79 226 254
Advertising and promotion 72 92 208 232
Printing & postage 30 25 83 79
Telephone and telefax 25 24 77 65
Stationary and supplies 22 34 87 82
Collection 12 6 27 14
Net cost of operation of REO 11 (3) 39 50
Insurance 10 10 29 30
Regulatory fees and assessments 9 8 26 25
Miscellaneous 82 91 259 358
---------------------------------------------
$ 1,899 $ 1,854 $ 5,843 $ 5,642
=============================================
9
<PAGE>
(7) INCOME TAXES
The Company and Sunwest recognized state income tax expense of $90,000 and
$221,000 during the three and nine months ended September 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.
10
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 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
three and nine month periods ended September 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 $618,000, or $.07 per share, and $1,431,000,
or $.15 per share, during the three and nine months ended September 30, 1999, as
compared with net income of $401,000, or $.04 per share, and $924,000, or $.10
per share, during the same respective periods in 1998. The 1999 figures included
the effects of recording a tax provision of $221,000 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:
September 30, December 31, September 30, December 31,
1999 1998 1998 1997
(in thousands) ---------------------------------------------------------------
Total assets $ 180,431 $ 153,784 $ 152,941 $ 130,621
Loans 134,411 109,547 107,575 102,877
Deposits 152,319 133,739 135,657 114,970
The $27 million increase in total assets from December 31, 1998 to September 30,
1999 occurred primarily due to a $24 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 $19
million, an increase in borrowings and other liabilities of $7 million and
earnings of over $1 million.
11
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $303,000, or 12.6%, in the third quarter of 1999
and $753,000, or 11.0%, in the nine month period ended September 30, 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 and lower
yields on interest bearing liabilities 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 $19.2 million, or
13.0%, in the three months ended September 30, 1999 compared to the same period
in 1998 and increased $16.9 million, or 12.2%, in the first nine months of 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 both the three and nine months ended
September 30, 1999 compared to the same periods in 1998. The net yield on
interest earning assets (net interest income divided by average earning assets)
remained relatively the same for the third quarter of 1999 compared to 1998 and
declined 8 basis points for the first nine months of 1999 compared to 1998. This
was a result of a decline in the general level of interest rates during the past
year offset in part 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 76 basis points and 87 basis points in the three and nine month
periods ended September 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 deposit volumes and borrowings from the Federal Home Loan Bank of San
Francisco. Average interest bearing liabilities increased by $11.5 million and
$8.4 million in the three and nine periods ended September 30, 1999 compared to
the same periods in 1998. Average noninterest bearing demand deposits increased
by $6.2 million and $7.6 million for the three and nine months ended in 1999
compared to the same periods in 1998.
The rates paid on interest bearing liabilities declined 19 basis points and 39
basis points for the three and nine months ended September 30, 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.
12
<PAGE>
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 three and nine month periods
ended September 30, 1999 and 1998 (dollars in millions):
Three Months Ended September 30,
1999 1998
Average Yields/ Average Yields/
Balance Rates Balance Rates
-----------------------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 132.6 9.32% $ 106.8 10.08%
Investment securities 32.6 6.85 19.8 6.38
Federal funds sold 1.6 5.37 21.0 5.61
-----------------------------------------------
Total interest-earning assets 166.8 8.80 147.6 8.95
Allowance for loan losses (2.5) (2.4)
Cash and due from banks 10.0 8.8
Other assets 3.9 3.4
-----------------------------------------------
$ 178.2 $ 157.4
===============================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 50.0 4.93% $ 46.2 5.39%
Interest-bearing demand deposits 42.8 1.97 40.8 1.95
Savings deposits 4.8 1.24 5.1 1.98
FHLB borrowings 6.0 5.10 -- --
Other debt 1.0 19.30 1.0 19.25
-----------------------------------------------
Total interest-bearing liabilities 104.6 3.66 93.1 3.85
Demand deposits 54.5 48.3
Other liabilities 1.4 1.1
Minority interest 7.8 6.6
Shareholders' equity 9.9 8.3
-----------------------------------------------
$ 178.2 $ 157.4
===============================================
Net interest margin 5.14% 5.10%
Net yield on interest-earning assets 6.50 6.52
13
<PAGE>
Nine Months Ended September 30,
1999 1998
Average Yields/ Average Yields/
Balance Rates Balance Rates
-----------------------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 121.4 9.30% $ 103.0 10.17%
Investment securities 32.0 6.53 18.6 6.03
Federal funds sold 1.6 5.02 16.5 5.53
-----------------------------------------------
Total interest-earning assets 155.0 8.68 138.1 9.06
Allowance for loan losses (2.4) (2.3)
Cash and due from banks 10.1 8.2
Other assets 4.0 3.7
-----------------------------------------------
$ 166.7 $ 147.7
===============================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 44.4 4.81% $ 43.6 5.42%
Interest-bearing demand deposits 41.1 1.84 37.2 1.89
Savings deposits 4.8 1.37 5.0 1.98
FHLB borrowings 3.9 5.01 -- --
Other debt 1.0 43.30 1.0 20.76
-----------------------------------------------
Total interest-bearing liabilities 95.2 3.49 86.8 3.88
Demand deposits 52.9 45.4
Other liabilities 1.3 1.1
Minority interest 7.5 6.4
Shareholders' equity 9.8 8.0
-----------------------------------------------
$ 166.7 $ 147.7
===============================================
Net interest margin 5.20% 5.18%
Net yield on interest-earning assets 6.54 6.62
14
<PAGE>
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):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
Asset/ Interest Asset/ Interest
Liability Rate Liability Rate
Changes Changes Total Changes Changes Total
----------------------------------------------------------
Changes in:
Interest income $ 568 $ (204) $ 364 $ 1,405 $ (691) $ 714
Interest expense 45 (61) (16) 53 (237) (184)
----------------------------------------------------------
Net interest income $ 523 $ (143) $ 380 $ 1,352 $ (454) $ 898
==========================================================
Loans on which the accrual of interest had been discontinued at September 30,
1999 and 1998 amounted to $888,000 and $1,632,000, respectively. If these loans
had been current throughout their terms, it is estimated that net interest
income would have increased by approximately $27,000 and $25,000 in the third
quarters of 1999 and 1998, respectively. This would have raised the net yield on
interest-earning assets and the net interest margin by approximately 6 and 7
basis points during the third quarters of 1999 and 1998, respectively. The
nonaccrual loans decreased due to a loan that 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):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------------------------------
Allowance for loan losses
balance at beginning of period $ 2,449 $ 2,393 $ 2,444 $ 2,364
Charge-offs -- (14) (93) (37)
Recoveries 156 51 254 103
--------------------------------------------
Net recoveries 156 37 161 66
Provision for loan losses -- -- -- --
--------------------------------------------
Allowance for loan losses
balance at end of period $ 2,605 $ 2,430 $ 2,605 $ 2,430
============================================
All of the above charge-offs and recoveries were at Sunwest. The net recoveries
during the three and nine months ended in 1999 are a result of improved asset
quality and the high levels of charge-offs in previous years.
15
<PAGE>
Management believes that the allowance for loan losses at September 30, 1999 of
$2,605,000 or 1.94% 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):
September 30, December 31, September 30, December 31,
1999 1998 1998 1997
-----------------------------------------------------------
Nonaccrual loans $ 888 $ 1,360 $ 1,632 $ --
Loans 90 days past due
and still accruing -- 1 2 31
-----------------------------------------------------------
Nonperforming loans 888 1,361 1,634 31
Real estate owned 508 528 528 1,151
-----------------------------------------------------------
Nonperforming assets $1,396 $ 1,889 $ 2,162 $ 1,182
===========================================================
Nonperforming loans/
Total loans .66% 1.24% 1.52% .03%
Nonperforming assets/
Total assets .77 1.23 1.41 .90
===========================================================
Nonperforming assets have decreased from $1,889,000 at December 31, 1998 to
$1,396,000 at September 30, 1999 due primarily to a decline in nonperforming
loans. The decrease is due to one nonaccrual loan being placed on accrual status
in the second quarter of 1999 offset partially by another loan being placed on
nonaccrual in the third quarter of 1999.
Restructured loans that were performing substantially in accordance with their
modified terms totaled $2.0 at September 30, 1999. No restructured loans were on
nonaccrual status at September 30, 1999.
Impaired loans have declined since December 31, 1998 due to a significant
nonaccrual loan paying off.
16
<PAGE>
OTHER OPERATING INCOME
Other operating income increased by $209,000 and $520,000 for the three and nine
months ended September 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 service charges and an insurance reimbursement
of $61,000 on a 1998 lawsuit. See note (5) of the notes to consolidated
financial statements. Other income includes recoveries of prior years' interest
on loans on nonaccrual in prior years of $93,000 and $295,000 for the three and
nine month periods ended September 30, 1999, respectively.
OTHER OPERATING EXPENSES
Other operating expenses increased $201,000 from the nine months ended September
30, 1998 to the same period in 1999. The increase was due primarily to increases
of $257,000 in professional services expense and $121,000 in customer services
expense offset by a decrease of $117,000 in salary and employee benefit
expenses. The largest portion of the professional services increase was
approximately $139,000, which 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, fees paid to hire new
employees and fees paid to generate loan leads. The customer services expense
increase resulted primarily from planned deposit growth in the Bank. See note
(6) of the notes to the unaudited consolidated financial statements. Total other
operating expenses expressed in dollars and as a percentage of total revenues
and average assets follows (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------------------------
Other operating expenses $ 1,899 $ 1,854 $ 5,843 $ 5,642
Other operating expenses
(annualized)/average assets 4.26% 4.71% 4.67% 5.09%
Other operating expenses/net interest
income and other operating income 61.0% 71.3% 67.4% 76.3%
==========================================
The decline in the other expense ratios is primarily a result of the increases
in assets and income exceeding the increase in expenses. As the Company grows it
is likely that operating expenses will also increase. The outside consulting
firm that was engaged to conduct a profit improvement study has completed their
review. 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 approximated $139,000. The Company
expects the cost of this review to be recovered through productivity and revenue
enhancements in 1999. 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 2000.
17
<PAGE>
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.
18
<PAGE>
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
19
<PAGE>
COST OF YEAR 2000 READINESS - The Company currently estimates that it will incur
additional incremental out-of-pocket costs of about $39,000. 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 $200,000 through September 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 $90,000 and
$221,000 during the three and nine months ended September 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.
20
<PAGE>
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 16% at September 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 nine 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 September 30, 1999, West Coast had cash and short term investments totaling
$297,000. 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's projected debt service for
the remainder of 1999 is expected to total $21,000. West Coast anticipates that
other operating expenses will be approximately $17,000 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 11.71%, 12.96% and 10.33% Tier 1 risk-based capital,
total risk-based capital and leverage ratio at September 30, 1999, respectively.
Sunwest had a 13.21%, 14.46% and 10.75% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at September 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 September
30, 1999.
21
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
SEPTEMBER 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
- -----------------------------------------------------------------
NONE
Item 5. Other Information
- -------------------------------
NONE
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule for September 30, 1999
(b) Reports on Form 8-K
None
22
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WEST COAST BANCORP
/s/Eric D. Hovde November 12, 1999
----------------------------------------- ----------------------
Eric D. Hovde Date
Chief Executive Officer
/s/Frank E. Smith November 12, 1999
----------------------------------------- ----------------------
Frank E. Smith Date
Chief Financial Officer
23
<PAGE>
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