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 March 31, 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 April 30, 1999:
9,258,942
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
March 31, December 31,
(in thousands, except share data) 1999 1998
(Unaudited) (Audited)
---------------------------
ASSETS
Cash and due from banks $ 9,479 $ 9,334
Federal funds sold 2,800 4,500
Investment securities available-for-sale
at fair value 27,543 29,128
Loans 113,031 109,547
Less allowance for loan losses (2,375) (2,444)
---------------------------
Net loans 110,656 107,103
---------------------------
Real estate owned, net 522 528
Premises and equipment, net 571 516
Deferred taxes 1,422 1,408
Other assets 1,230 1,267
---------------------------
$ 154,223 $ 153,784
===========================
LIABILITIES
Deposits:
Demand, non interest-bearing $ 49,235 $ 47,254
Savings, money market & interest-bearing demand 43,855 45,510
Time certificates under $100,000 23,040 20,288
Time certificates of $100,000 or more 17,533 20,687
---------------------------
Total deposits 133,663 133,739
Federal Home Loan Bank borrowings 2,000 2,000
Note payable affiliates 577 589
Capital lease obligation 243 265
Other liabilities 1,317 1,364
---------------------------
Total liabilities 137,800 137,957
Commitments and contingencies
Minority interest in subsidiary 7,364 7,094
---------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value - 30,000,000
shares authorized, 9,258,942 shares
issued and outstanding in 1999 and 1998 30,274 30,274
Accumulated deficit (21,120) (21,458)
Accumulated other comprehensive income -
net of tax (95) (83)
---------------------------
Total shareholders' equity 9,059 8,733
---------------------------
$ 154,223 $ 153,784
===========================
(See accompanying notes to consolidated financial statements)
2
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended
(in thousands, March 31,
except share data) 1999 1998
---------------------------
INTEREST INCOME:
Loans, including fees $ 2,607 $ 2,573
Federal funds sold 37 169
Investment securities 506 242
Interest bearing deposits with banks -- 2
---------------------------
Total interest income 3,150 2,986
INTEREST EXPENSE:
Interest on deposits 694 729
Other 66 49
---------------------------
Total interest expense 760 778
---------------------------
Net interest income 2,390 2,208
Provision for loan losses -- --
---------------------------
Net interest income after
provision for loan losses 2,390 2,208
Other operating income 257 181
Other operating expenses 1,970 1,860
Minority interest in net income of subsidiary 279 257
Gain on liquidation of WCV, Inc. -- 2
---------------------------
Income before income taxes 398 274
Income tax expense 60 --
---------------------------
Net income $ 338 $ 274
===========================
Basic and diluted earnings per share $ . 04 $ . 03
===========================
(See accompanying notes to consolidated financial statements)
3
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended
March 31,
(in thousands) 1999 1998
---------------------------
Net income $ 338 $ 274
Other comprehensive income, net of tax:
Unrealized loss on
available-for-sale investments
arising during period (12) (6)
---------------------------
Other comprehensive loss (12) (6)
---------------------------
Comprehensive income $ 326 $ 268
===========================
(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 -- -- -- 338 338
Change in net unrealized
loss on available-for-sale
investments -- -- (12) -- (12)
------------------------------------------------
Balance at March 31, 1999 9,259 $30,274 $ (95) $ (21,120) $ 9,059
================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
(in thousands) 1999 1998
-------------------------
Cash flows from operating activities:
Net income $ 338 $ 274
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 71 85
Minority interest in net income of subsidiary 279 257
Write-down of real estate owned 6 25
Gain on sale and liquidation of subsidiaries -- (2)
Amortization and accretion from investment securities 64 11
Decrease (increase) in other assets 33 (22)
Decrease in other liabilities (46) (713)
-------------------------
Net cash provided by (used in) operating activities 745 (85)
(Continued)
(See accompanying notes to consolidated financial statements)
5
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WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
(in thousands) 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 1,487 2,599
Purchase of investment securities available-for-sale -- (1,586)
Net (increase) decrease in loans (3,553) 5,326
Purchase of premises and equipment (124) (83)
-------------------------
Net cash (used in) provided by investing activities (2,190) 6,355
Cash flows from financing activities:
Net (decrease) increase in deposits (76) 13,585
Cash payments on notes payable (12) (12)
Repayment of other borrowed funds (22) (12)
Transfer from accrued liabilities
to note payable affiliates -- 514
-------------------------
Net cash (used in) provided by financing activities (110) 14,075
-------------------------
(Decrease) increase in cash and cash equivalents (1,555) 20,345
Cash and cash equivalents at beginning of year 13,834 8,541
-------------------------
Cash and cash equivalents at end of year $ 12,279 $ 28,886
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 755 $ 737
Income taxes 10 70
Supplemental schedule of non-cash investing and financing activities:
Transfer of note payable from accrued liabilities
to note payable to affiliate - 514
(See accompanying notes to consolidated financial statements)
6
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
periods ended March 31, 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 February 29, 1996, West Coast Bancorp ("West Coast") and Sunwest
Bank ("Sunwest") entered into an agreement with Western Acquisitions,
L.L.C. ("Western"), an affiliate of Hovde Financial, Inc., for West
Coast to sell 35 existing shares of Sunwest for $2,520,000 and for
Sunwest to issue and sell 15 new shares for $1,051,000. On September
13, 1996, the sale closed. West Coast and Western own approximately
56.5% and 43.5% of Sunwest, respectively.
Certain reclassifications have been made in the prior period financial
statements to conform to the presentation in the current period.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship
must be highly effective in achieving offsetting changes in fair value
or cash flows. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. Management of the Company does not believe the
adoption of SFAS No. 133 will have a material impact on the Company's
results of operations or financial position when adopted.
7
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
(3) EARNINGS PER SHARE
The following is a reconciliation of basic earnings per share (EPS) to
diluted EPS for the three month periods ended March 31, 1999 and 1998.
Three months ended March 31, 1999:
(dollars and shares in thousands) Net Per Share
Income Shares Amount
-----------------------------
Basic EPS:
Income available to common shareholders $ 338 9,259 $ 0.04
Effect of Dilutive Securities:
Stock options - 4 -
-----------------------------
Diluted EPS:
Income available to common shareholders
plus assumed conversions $ 338 9,263 $ 0.04
=============================
Three months ended March 31, 1998:
Net Per Share
Income Shares Amount
-----------------------------
Basic EPS:
Income available to common shareholders $ 274 9,169 $ 0.03
Effect of Dilutive Securities:
Stock options - 86 -
-----------------------------
Diluted EPS:
Income available to common shareholders
plus assumed conversions $ 274 9,255 $ 0.03
=============================
(4) LOANS
A summary of loans follows:
March 31, December 31,
(in thousands) 1999 1998
-------------------------
Commercial loans not secured by real estate $ 35,155 $ 34,318
Real estate mortgage loans 73,240 71,184
Real estate construction 880 376
Personal loans not secured by real estate 4,031 3,942
Unearned income, discounts and fees (275) (273)
-------------------------
$ 113,031 $ 109,547
=========================
8
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WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
(5) OTHER OPERATING INCOME
A summary of other operating income follows:
Three Months Ended
March 31,
(in thousands) 1999 1998
-------------------------
Depositor charges $ 165 $ 139
Service charges, commissions & fees 43 12
Other income 49 30
-------------------------
$ 257 $ 181
=========================
(6) OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
Three Months Ended
March 31,
(in thousands) 1999 1998
-------------------------
Salaries and employee benefits $ 982 $ 972
Professional services 204 66
Occupancy 166 173
Customer service 158 103
Data processing 139 129
Depreciation and amortization 71 85
Advertising and promotion 69 66
Stationary and supplies 28 20
Printing & postage 26 23
Telephone and telefax 24 19
Director fees 13 50
Regulatory fees and assessments 8 8
Net cost of operation of real estate owned 5 29
Miscellaneous 77 117
-------------------------
$ 1,970 $ 1,860
=========================
9
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 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 month periods ended March 31, 1999 and 1998. The discussion should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto appearing elsewhere in this report.
Certain statements in this Report on Form 10-Q 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 $338,000, or $.04 per share, during the three
months ended March 31, 1999, as compared with income of $274,000, or $.03 per
share, during the same period in 1998. The 1999 figures include the effects of
recording a tax provision of $60,000 compared to none in 1998. The higher pretax
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:
March 31, December 31, March 31, December 31,
1999 1998 1998 1997
(in thousands) -------------------------------------------------------------
Total assets $ 154,223 $ 153,784 $ 144,505 $ 130,621
Loans 113,031 109,547 97,554 102,877
Deposits 133,663 133,739 128,555 114,970
The $10 million increase in total assets from March 31, 1998 to March 31, 1999,
occurred primarily due to a $15 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 $5
million, an increase in borrowings and other liabilities of $3 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
MARCH 31, 1999
(Unaudited)
RESULTS OF OPERATIONS
NET INTEREST INCOME
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 $18 million, or 14% in 1999.
The net interest margin (yield on interest earning assets less the rate paid on
interest bearing liabilities) and the net yield on interest earning assets (net
interest income divided by average earning assets) both declined in 1999. This
was a result of a decline in the general level of interest rates during the past
year. 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 96 basis point
drop in loan yields. 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 $9 million
from 1998.
The rates paid on interest bearing liabilities declined 45 basis points from
year ago levels. This was due to reductions in overall interest rate levels and
a reduction in time deposits as a percentage of interest bearing deposits from
50% in 1998 to 46% 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
MARCH 31, 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 three month periods ended
March 31, 1999 and 1998 (dollars in millions):
1999 1998
Average Yields/ Average Yields/
Balance Rates Balance Rates
----------------------------------------------
ASSETS
Loans, net of unearned income,
discounts and fees $ 111.8 9.33% $ 100.0 10.29%
Investment securities 32.3 6.47 16.5 5.85
Federal funds sold 3.1 4.81 12.6 5.36
Interest bearing deposits
with financial institutions - 4.74 .1 14.29
----------------------------------------------
Total interest earning assets 147.2 8.56 129.2 9.24
Allowance for loan losses (2.4) (2.3)
Cash and due from banks 10.3 7.8
Other assets 4.5 3.7
----------------------------------------------
$ 159.6 $ 138.4
==============================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits $ 41.1 4.81% $ 40.1 5.44%
Interest-bearing demand deposits 40.9 1.76 34.8 1.84
Savings deposits 5.0 1.53 4.9 1.94
FHLB borrowings 2.0 5.00 - -
Other debt .8 20.02 1.2 15.22
----------------------------------------------
Total interest bearing liabilities 89.8 3.38 81.0 3.83
Demand deposits 51.3 42.6
Other liabilities 1.3 1.0
Minority interest 7.2 6.1
Shareholders' equity 10.0 7.7
----------------------------------------------
$ 159.6 $ 138.4
==============================================
Net interest margin 5.18% 5.41%
Net yield on interest earning assets 6.50 6.83
12
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 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):
Three Months Ended March 31,
---------------------------------------
Asset/ Interest
Liability Rate
Changes Changes Total
---------------------------------------
Changes in:
Interest income $ 407 $ (243) $ 164
Interest expense 27 (70) (43)
---------------------------------------
Net interest income $ 380 $ (173) $ 207
========================================
Loans on which the accrual of interest had been discontinued at March 31, 1999
and 1998 amounted to $1,238,000 and $0, respectively. If these loans had been
current throughout their terms, it is estimated that net interest income would
have increased by approximately $41,000 and $0 in the first quarters of 1999 and
1998, respectively. This would have raised the net yield on interest earning
assets and the net interest margin by approximately 11 and 0 basis points during
the first quarters of 1999 and 1998, respectively.
13
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Unaudited)
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
March 31,
1999 1998
---------------------------------
Allowance for loan losses
balance at beginning of period $ 2,444 $ 2,364
Charge-offs (93) (14)
Recoveries 24 17
---------------------------------
Net (charge-offs) recoveries (69) 3
Provision for loan losses - -
---------------------------------
Allowance for loan losses
balance at end of period $ 2,375 $ 2,367
=================================
All the above charge-offs and recoveries were at Sunwest. The net charge-offs
during the first quarter 1999 are primarily the result of a single charge-off.
Management believes that the allowance for loan losses at March 31, 1999 of
$2,375,000 or 2.10% of loans was adequate to absorb known and inherent risks in
the Company's loan portfolio. The ultimate collectibility of a substantial
portion of the Company's loans, as well as its financial condition, is affected
by general economic conditions and the real estate market in California.
California has experienced, and may continue to experience, volatile economic
conditions. These conditions have adversely affected certain borrowers' ability
to repay loans. While 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 possible loan losses and would adversely affect the
financial condition and results of operations of the Company.
14
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Unaudited)
A summary of nonperforming assets follows (dollars in thousands):
March 31, December 31, March 31, December 31,
1999 1998 1998 1997
----------------------------------------------------
Nonaccrual loans $ 1,238 $ 1,360 $ - $ -
Loans 90 days past due
and still accruing - 1 31 31
----------------------------------------------------
Nonperforming loans 1,238 1,361 31 31
Real estate owned 522 528 1,127 1,151
----------------------------------------------------
Nonperforming assets $ 1,760 $ 1,889 $ 1,158 $ 1,182
====================================================
Nonperforming loans/
Total loans 1.10% 1.24% .03% .03%
Nonperforming assets/
Total assets 1.14% 1.23% .80% .90%
====================================================
Nonperforming assets have increased approximately $578,000 from December 31,
1997. The increase is due primarily to one loan placed on nonaccrual in the
second quarter of 1998. The Bank does not anticipate any principal loss on this
loan.
Impaired loans have not changed significantly from the amounts reported at
December 31, 1998.
Restructured loans that were performing substantially in accordance with their
modified terms totaled $2.1 million at March 31, 1999. No restructured loans
were on nonaccrual status at March 31, 1999.
OTHER OPERATING INCOME
Other operating income increased by $76,000 for the three months ended March 31,
1999, as compared with the same period in 1998, primarily as a result of
increased deposit services charges and sales of mutual funds in 1999. See note
(5) of the notes to consolidated financial statements.
15
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Unaudited)
OTHER OPERATING EXPENSES
Other operating expenses increased $110,000 in the three months ended March 31,
1999 from the same period in 1998. The largest increase was in professional
services expense which increased $138,000. Approximately $90,000 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):
Three Months Ended
March 31,
1999 1998
---------------------------
Other operating expenses $ 1,970 $ 1,860
Other operating expenses
(annualized)/average assets 4.94% 5.38%
Other operating expenses/net interest income
and other operating income 70.7% 77.9%
===========================
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
$130,000. 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
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WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 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
MARCH 31, 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 well underway.
Renovation and testing phases have been substantially completed for
mission-critical applications. Testing and renovation of non mission critical
areas are scheduled to be completed by June 30, 1999. These goals are in line
with the guidelines of the Federal Financial Institutions Examination Council
(FFIEC). To the extent that compliance is possible from the Company's internal
efforts alone, the Company is taking steps necessary to accomplish these goals.
When compliance also depends on the conduct of others, the Company is working
with its vendors and business partners to secure compliance and to obtain
appropriate assurances that those externally developed systems are or will
become compliant on a timely basis and will not interfere with the Company's
business operations. While the Company is committed to taking every reasonable
action in this regard, expected of a prudent business, the Company is not in a
position to guarantee the performance of others or to predict whether any of the
assurances that others provide may prove later to be inaccurate or overly
optimistic. Since beginning the year 2000 project, the Company has:
o Established a Year 2000 Project Team led by senior management
o Completed inventory of application and system software and hardware
o Completed an inventory of infrastructure facilities
o Developed consolidated compliance plans and schedules for business
areas
o Built databases for inventory tracking and reporting
o Developed a database to log and track resolution of reported Y2K
problems
o Established budget and cost tracking systems
o Implemented broad awareness and education activities for employees
o Developed and implemented a customer inquiry response process
o Implemented vendor compliance verification
o Obtained readiness reports from 98% of mission critical vendors
o Mandated that all new and renewed contracts address Y2K compliance
issues
o Set up a dedicated test environment to simulate year 2000 conditions
o Developed test scripts for all mission critical applications
o Completed testing for 98% of all mission critical applications
o Assessed 100% of all critical customers
o Determined that 52 loan customers and 41 deposit customers require
ongoing review
o Developed a process for communicating Y2K impacts to customers,
correspondents, agencies, and vendors
o Developed a plan to address contingency implementation dates if
remediation does not proceed as planned
18
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Unaudited)
COST OF YEAR 2000 READINESS - The Company currently estimates that it will incur
additional incremental out-of-pocket costs of about $185,000. These costs
include equipment and software purchases that may be amortized for up to five
years and the cost of consultants to assist the Company with its year 2000
readiness efforts. Internal and external costs specifically associated with
modifying internal-use software for the year 2000 are charged to expense as
incurred. All of these costs are being funded through operating cash flows.
Costs expensed to date for incremental costs associated with the year 2000 issue
were approximately $235,000 through March 31, 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 $60,000 and
$50,000, respectively, during the three months ended March 31, 1999. 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.
19
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Unaudited)
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.
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 17% at March 31, 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 quarter 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 March 31, 1999, West Coast had cash and short term investments totaling
$317,000. 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 on June 30, 1999. At this time management believes that the
maturity date will be extended; however, no amendments have yet been made to the
note. West Coast's projected debt service for the remainder of 1999 is expected
to total $63,000. West Coast anticipates that other operating expenses will be
approximately $70,000 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
The Company had a 12.87%, 14.12% and 10.40% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at March 31, 1999, respectively. Sunwest
had a 13.33%, 14.58% and 10.78% Tier 1 risk-based capital, total risk-based
capital and leverage ratio at March 31, 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 March 31,
1999.
20
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
MARCH 31, 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 March 31, 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 May 12, 1999
----------------------------------------- ----------------------
Eric D. Hovde Date
Chief Executive Officer
/s/Frank E. Smith May 12, 1999
----------------------------------------- ----------------------
Frank E. Smith Date
Chief Financial Officer
22
<PAGE>
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