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, 2000
[ ] 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 31, 2000:
9,328,942
Transitional Small Business Disclosure Format Yes No X
-- --
This document contains a total of 19 pages.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
------------------------
ASSETS
<S> <C> <C>
Cash and due from banks .............................. $ 11,106 $ 5,574
Federal funds sold ................................... -- 6,250
Investment securities available-for-sale
at fair value ................................... 46,147 39,492
Loans ................................................ 132,731 133,008
Less allowance for loan losses ....................... (2,472) (2,457)
--------- ---------
Net loans ....................................... 130,259 130,551
--------- ---------
Real estate owned, net ............................... 13 502
Premises and equipment, net .......................... 876 1,041
Deferred taxes ....................................... 1,682 1,976
Other assets ......................................... 1,498 1,437
--------- ---------
$ 191,581 $ 186,823
========= =========
LIABILITIES
Deposits:
Demand, non interest-bearing .................... $ 61,933 $ 53,723
Savings, money market & interest-bearing demand . 51,540 50,738
Time certificates under $100,000 ................ 16,758 22,273
Time certificates of $100,000 or more ........... 29,933 31,912
--------- ---------
Total deposits .................................. 160,164 158,646
Federal Home Loan Bank borrowings .................... 10,000 8,000
Other borrowed funds ................................. 517 541
Capital lease obligation ............................. 81 158
Other liabilities .................................... 1,821 1,516
--------- ---------
Total liabilities ............................... 172,583 168,861
Commitments and contingencies
Minority interest in subsidiary ...................... 8,525 8,045
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, no par value - 30,000,000
shares authorized, 9,328,942 shares
issued and outstanding in 2000 and 1999 ......... 30,351 30,351
Accumulated deficit .................................. (18,975) (19,737)
Accumulated other comprehensive income - net of tax .. (903) (697)
--------- ---------
Total shareholders' equity ...................... 10,473 9,917
--------- ---------
$ 191,581 $ 186,823
========= =========
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-----------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans, including fees ...................... $3,265 $2,770 $6,545 $5,377
Federal funds sold ......................... 4 2 6 39
Investment securities ...................... 865 506 1,666 1,012
---------------------------------
Total interest income ................. 4,134 3,278 8,217 6,428
INTEREST EXPENSE:
Interest on deposits ....................... 989 687 1,949 1,381
Other ...................................... 172 84 331 150
---------------------------------
Total interest expense ................ 1,161 771 2,280 1,531
---------------------------------
Net interest income ................... 2,973 2,507 5,937 4,897
Provision for loan losses .................. -- -- -- --
---------------------------------
Net interest income after
provision for loan losses ............. 2,973 2,507 5,937 4,897
Other operating income ..................... 223 407 453 664
Other operating expenses ................... 2,043 1,974 3,949 3,944
Minority interest in net income
of subsidiary ............................ 302 394 638 673
---------------------------------
Income before income taxes ............ 851 546 1,803 944
Income tax expense ......................... 498 71 1,041 131
---------------------------------
Net income ............................ $ 353 $ 475 $ 762 $ 813
=================================
Basic and diluted earnings per share ....... $ .04 $ .05 $ .08 $ .09
=================================
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2000 1999 2000 1999
-----------------------------------
<S> <C> <C> <C> <C>
Net income ................................. $ 353 $ 475 $ 762 $ 813
Other comprehensive income, net of tax:
Unrealized loss on
available-for-sale investments
arising during period .................... (101) (135) (206) (147)
----------------------------------
Other comprehensive loss ................... (101) (135) (206) (147)
----------------------------------
Comprehensive income ....................... $ 252 $ 340 $ 556 $ 666
==================================
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Share-
-------------- Comprehensive Accumulated holders'
(in thousands) Shares Amount Income Deficit Equity
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 9,329 $30,351 $ (697) $ (19,737) $ 9,917
Net income ................. -- -- -- 762 762
Change in net unrealized
loss on available-for-sale
investments .............. -- -- (206) -- (206)
------------------------------------------------------
Balance at June 30, 2000 ... 9,329 $30,351 $ (903) $ (18,975) $ 10,473
======================================================
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------------------
Cash flows from operating activities:
<S> <C> <C>
Net income ..................................................................... $ 762 $ 813
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................................ 262 147
Amortization and accretion from investment securities......................... 27 112
Minority interest in net income of subsidiary ................................ 638 673
Write-down of real estate owned ................................................ 29 13
Decrease (increase) in other assets ............................................ 532 (52)
Increase (decrease) in other liabilities ....................................... 305 (27)
----------------
Net cash provided by operating activities ...................................... 2,555 1,679
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(in thousands) 2000 1999
<S> <C> <C>
Cash flows from investing activities: ..........................................
Proceeds from maturities and paydowns of investment securities
available-for-sale ........................................................ 1,202 2,607
Purchase of investment securities available-for-sale ........................ (8,642) (53)
Net decrease (increase) in loans ............................................ 292 (21,490)
Proceeds from sales of real estate owned .................................... 554 --
Purchase of premises and equipment .......................................... (96) (255)
---------------------
Net cash used in investing activities ....................................... (6,690) (19,191)
Cash flows from financing activities:
Net increase in deposits .................................................... 1,518 11,725
Principal payments on other borrowed funds .................................. (24) (24)
Repayment of capital lease obligation ....................................... (77) (46)
Borrowed funds from Federal Home Loan Bank .................................. 2,000 4,000
Stock options exercised ..................................................... -- 77
--------------------
Net cash provided by financing activities .................................. 3,417 15,732
--------------------
Decrease in cash and cash equivalents .......................................... (718) (1,780)
Cash and cash equivalents at beginning of year ................................. 11,824 13,834
--------------------
Cash and cash equivalents at end of year ....................................... $ 11,106 $ 12,054
====================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest .................................................................. $ 2,221 $ 1,532
Income taxes .............................................................. 250 95
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to REO .................................................. $ -- $ 131
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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
presentation of the results of operations for the interim periods.
Results for the three and six month periods ended june 30, 2000 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. These financial statements
should be read in conjunction with the Company's form 10KSB filed with
the Securities and Exchange Commission.
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.
(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. In June 1999, the FASB issued SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" which deferred the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
Management believes that the adoption of SFAS No. 133 will not have a
material impact on the Company's results of operations or financial
position when adopted.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." SFAS
No. 134 amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities," which establishes accounting and reporting standards for
certain activities of mortgage banking enterprises and other
enterprises that conduct operations that are substantially similar.
SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, the resulting mortgage-backed securities and other
retained interests should be classified in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," based on the company's ability and intent to sell or hold
those investments. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. The adoption of SFAS No. 134
did not have a material impact on the Company's results of operations
or financial position.
(3) EARNINGS PER SHARE
The following is a reconciliation of basic earnings per share (EPS) to
diluted EPS for the six and three month periods ended June 30, 2000 and
1999.
<TABLE>
<CAPTION>
(dollars and shares in thousands)
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
-----------------------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
common shareholders $ 762 9,329 $ .08 $ 813 9,271 $ .09
Effect of dilutive
securities:
Stock options -- 6 -- -- 13 --
---------------------------------------------------
Diluted EPS:
Income available to
common shareholders
plus assumed
conversions ....... $ 762 9,335 $ .08 $ 813 9,284 $ .09
===================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
---------------------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
common shareholders $ 353 9,329 $ .04 $ 475 9,282 $ .05
Effect of dilutive
securities:
Stock options -- 4 -- -- 24 --
-------------------------------------------------
Diluted EPS:
Income available to
common shareholders
plus assumed
conversions ....... $ 353 9,333 $ .04 $ 475 9,306 $ .05
=================================================
</TABLE>
<PAGE>
(4) LOANS
A summary of loans follows:
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 2000 1999
------------------------
<S> <C> <C>
Commercial loans not secured by real estate $ 40,332 $ 42,162
Real estate mortgage loans ................ 87,843 87,548
Real estate construction .................. 1,800 1,957
Personal loans not secured by real estate . 3,087 1,698
Unearned income, discounts and fees ....... (331) (357)
------------------------
$ 132,731 $ 133,008
========================
</TABLE>
(5) OTHER OPERATING INCOME
A summary of other operating income follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2000 1999 2000 1999
------------------------------------
<S> <C> <C> <C> <C>
Depositor charges .......... $185 $205 $381 $370
Service charges, commissions
& fees ................... 31 38 60 81
Other income ............... 7 164 12 213
------------------------------------
$223 $407 $453 $664
====================================
</TABLE>
(6) OTHER OPERATING EXPENSES
A summary of other operating expenses is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2000 1999 2000 1999
---------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 1,017 $ 932 $ 1,952 $ 1,914
Occupancy ..................... 281 205 487 371
Customer service .............. 224 157 413 315
Data processing ............... 139 143 283 282
Depreciation and amortization . 130 76 261 147
Professional services ......... 94 150 172 354
Advertising and promotion ..... 47 67 82 136
Stationery and supplies ....... 29 37 49 65
Telephone and telefax ......... 21 28 44 52
Printing & postage ............ 19 27 37 53
Collection .................... 19 9 19 15
Insurance ..................... 18 10 18 19
Regulatory fees and assessments 13 9 27 17
Net cost of operation of REO .. (112) 23 (103) 28
Miscellaneous ................. 104 101 208 176
---------------------------------------
$ 2,043 $ 1,974 $ 3,949 $ 3,944
=======================================
</TABLE>
<PAGE>
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 six month periods ended June 30, 2000 and 1999. 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-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
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, 1999.
GENERAL
The Company recorded net income of $353,000 and $762,000, or $.04 and $.08 per
share, during the three and six month periods ended June 30, 2000, as compared
with income of $475,000 and $813,000, or $.05 and $.09 per share, during the
same respective periods in 1999. The 2000 figures include the effects of
recording a tax provision of $498,000 and $1,041,000 during the three and six
month periods of 2000 compared to $71,000 and $131,000 in 1999. The higher
pretax income in 2000 versus 1999 occurred primarily because Sunwest had higher
earnings in 2000. Sunwest's higher earnings were primarily due to growth in net
interest income and fees from growth in assets and deposits.
The Company had total assets, loans and deposits as follows:
<TABLE>
<CAPTION>
June 30, December 31, June 30, December 31,
2000 1999 1999 1998
(in thousands) -------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $191,581 $186,823 $170,714 $153,784
Loans ...... 132,731 133,008 130,681 109,547
Deposits ... 160,164 158,646 145,464 133,739
</TABLE>
The $21 million increase in total assets from June 30, 1999 to June 30, 2000,
occurred primarily due to a $20 million increase in investment securities at
Sunwest. The increase in assets was funded by an increase in deposits of $15
million, an increase in borrowings and other liabilities of $4 million and
earnings of $2 million. Deposits increased as a result of marketing efforts and
due to the expanding economy in Orange County, California. Loan growth has been
hampered by a larger than normal number of loan payoffs during the first six
months of 2000. Lower loan growth can reduce net interest income growth as funds
are invested in lower yielding securities.
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
The increase in net interest income in 2000 resulted primarily from higher
volumes of interest earning assets. The improved mix of interest earning assets
and deposits favorably impacted net interest income. Average interest earning
assets increased $31 million, or 21% in the first three months of 2000 compared
to 1999 and increased $30 million, or 20% in the six months ended june 30, 2000
compared to the same period in 1999.
The net interest margin (yield on interest earning assets less the rate paid on
interest bearing liabilities) declined 31 basis points and 13 basis points in
the three months and six months ended June 30, 2000 compared to the same
respective periods in 1999. The net yield on interest earning assets (net
interest income divided by average earning assets) decreased 10 basis points in
the second quarter of 2000 but maintained an increase of 5 basis points in the
first six months of 2000 as compared to the same periods in 1999. This was a
result of an increase in the general level of interest rates during the past
year offset in part by a shift in the mix of earning assets and deposits.
Increases in interest rates on interest-bearing liabilities were higher than the
increase in interest rates on earning assets. Loan yields were significantly
impacted by an increase in the "prime rate" of 175 basis points from the prior
year.
The yield on interest earning assets increased primarily due to an increase in
loan yields of 38 basis points and 42 basis points in the three and six months
of 2000, respectively as compared to the same periods in 1999. This was caused
by the increase in the prime rate noted above, offset in part by competitive
pressures on loan yields in the Company's markets. The yield on investment
securities has increased as a result of higher interest rates and investing in
corporate bonds and extending maturities. The unrealized loss on
available-for-sale investments has increased as a result of higher interest
rates.
Interest expense increased in 2000 as a result of increased volumes and higher
interest rates. Average interest-bearing liabilities increased by $22 million in
the three and six months of 2000 as compared to the same periods in 1999. The
rates paid on interest-bearing liabilities increased 72 basis points and 66
basis points for the second quarter and first six months from year ago levels.
This was due to increases in overall interest rate levels. In addition, average
Federal Home Loan Bank borrowings as a percentage of average interest-bearing
liabilities increased from 3% in 1999 to 8% in the first six months and 4% in
1999 to 9% in 2000 for the second quarter. 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.
However, asset growth over the past year has relied to a greater extent on
increases in borrowed funds with higher rates, thereby increasing the rate paid
on interest-bearing liabilities.
<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 six month periods
ended June 30, 2000 and 1999 (dollars in millions):
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
Average Yields/ Average Yields/
Balance Rates Balance Rates
----------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Loans, net of unearned income,
discounts and fees ................. $ 135.2 9.66% $ 119.5 9.28%
Investment securities ................... 46.2 7.49 31.2 6.48
Federal funds sold ...................... .3 6.13 0.2 4.82
---------------------------------------
Total interest earning assets ........... 181.7 9.10 150.9 8.69
Allowance for loan losses ............... (2.5) (2.4)
Cash and due from banks ................. 10.6 10.1
Other assets ............................ 4.0 3.7
---------------------------------------
$ 193.8 $ 162.3
=======================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits .......................... $ 51.0 5.52% $ 42.2 4.68%
Interest-bearing demand deposits ....... 47.2 2.30 39.6 1.81
Savings deposits ....................... 4.6 1.27 4.8 1.33
FHLB borrowings ........................ 9.6 6.12 3.4 4.92
Other debt ............................. .6 15.79 1.0 19.66
---------------------------------------
Total interest-bearing liabilities ..... 113.0 4.11 91.0 3.39
Demand deposits ........................ 60.2 52.9
Other liabilities ...................... 1.7 1.4
Minority interest ...................... 8.4 7.5
Shareholders' equity ................... 10.5 9.5
---------------------------------------
$ 193.8 $ 162.3
=======================================
Net interest margin ................... 4.99% 5.30%
Net yield on interest earning assets .. 6.55 6.65
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
Average Yields/ Average Yields/
Balance Rates Balance Rates
----------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Loans, net of unearned income,
discounts and fees ............ $ 134.7 9.72% $ 115.6 9.30%
Investment securities .............. 44.4 7.51 31.8 6.37
Federal funds sold ................. .2 5.34 1.6 4.84
---------------------------------------
Total interest earning assets ...... 179.3 9.17 149.0 8.63
Allowance for loan losses .......... (2.5) (2.3)
Cash and due from banks ............ 9.9 10.2
Other assets ....................... 4.5 4.0
--------------------------------------
$ 191.2 $ 160.9
======================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Time deposits ...................... $ 51.6 5.41% $ 41.7 4.74%
Interest-bearing demand deposits ... 46.3 2.25 40.2 1.78
Savings deposits ................... 4.9 1.27 4.8 1.44
FHLB borrowings .................... 9.0 6.12 2.7 4.94
Other debt ......................... .7 16.66 1.0 19.38
--------------------------------------
Total interest-bearing liabilities . 112.5 4.05 90.4 3.39
Demand deposits .................... 58.4 52.1
Other liabilities .................. 1.7 1.3
Minority interest .................. 8.2 7.4
Shareholders' equity ............... 10.4 9.7
--------------------------------------
$ 191.2 $ 160.9
======================================
Net interest margin ................ 5.11% 5.24%
Net yield on interest earning assets 6.62 6.57
</TABLE>
<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
2000 versus 1999 periods are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------
Asset/ Interest Asset/ Interest
Liability Rate Liability Rate
Changes Changes Total Changes Changes Total
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Changes in:
Interest income $ 649 $ 207 $ 856 $1,331 $ 458 $1,789
Interest expense 236 154 390 484 265 749
-------------------------------------------------------
Net interest income . $ 413 $ 53 $ 466 $ 847 $ 193 $1,040
=======================================================
</TABLE>
Loans on which the accrual of interest had been discontinued at June 30, 2000
and 1999 amounted to $467,000 and $1,122,000, respectively. If these loans had
been current throughout their terms, it is estimated that net interest income
would have increased by approximately $19,000 and $32,000 in the second quarter
of 2000 and 1999, respectively. This would have raised the net yield on interest
earning assets and the net interest margin by approximately 5 basis points and
11 basis points during the second quarter of 2000 and 1999, respectively.
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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-----------------------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses
balance at beginning of period $ 2,468 $ 2,375 $ 2,457 $ 2,444
Charge-offs ....................... (17) -- (17) (93)
Recoveries ........................ 21 74 32 98
----------------------------------------
Net recoveries .................... 4 74 15 5
Provision for loan losses ......... -- -- -- --
----------------------------------------
Allowance for loan losses
balance at end of period ..... $ 2,472 $ 2,449 $ 2,472 $ 2,449
========================================
</TABLE>
All the above charge-offs and recoveries were at Sunwest. The net recoveries
during the three and six months ended June 30, 2000, were primarily the result
of improved asset quality.
<PAGE>
Management believes that the allowance for loan losses at June 30, 2000 of
$2,472,000 or 1.86% 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 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):
<TABLE>
<CAPTION>
June 30, December 31, June 30, December 31,
2000 1999 1999 1998
-------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans ...... $ 467 $ 505 $1,122 $1,360
Loans 90 days past due
and still accruing -- -- -- 1
-----------------------------------------
Nonperforming loans ... 467 505 1,122 1,361
Real estate owned ..... 13 502 876 528
-----------------------------------------
Nonperforming assets .. $ 480 $1,007 $1,998 $1,889
=========================================
Nonperforming loans/
Total loans ....... .35% .38% .86% 1.24%
Nonperforming assets/
Total assets ...... .25% .54% 1.17% 1.23%
========================================
</TABLE>
Nonperforming assets have declined approximately $1,409,000 from December 31,
1998. The decrease is due primarily to the sale of real estate owned and one
loan placed on nonaccrual in the second quarter of 1998 that was subsequently
repaid in 1999 and one real estate owned that was sold in the second quarter of
2000.
Impaired loans have not changed significantly from the amounts reported at
December 31, 1999.
Restructured loans that were performing substantially in accordance with their
modified terms totaled $2.0 million at June 30, 2000. No restructured loans were
on nonaccrual status at June 30, 2000.
OTHER OPERATING INCOME
Other operating income declined by $184,000 and $211,000 for the three and six
months ended June 30, 2000, as compared with the same periods in 1999, primarily
as a result of lower other income. Other income includes recoveries of interest
on loans on nonaccrual in prior years of $155,000 and $200,000 for the three and
six month periods ended June 30, 1999, respectively. See note (5) of the notes
to consolidated financial statements.
<PAGE>
OTHER OPERATING EXPENSES
Other operating expenses increased $69,000 and $5,000 in the three and six
months ended June 30, 2000 from the same periods in 1999. The increase was
primarily attributed to the increase in the Occupancy and Depreciation expenses
which increased $130,000 or 46.3% and $230,000 or 44.4% for the three and six
months of 2000, respectively, as compared to the same periods in 1999. The
increase was partially offset by professional services expense which declined
$56,000 and $182,000 for the three and six month periods in 2000. Approximately
$90,000 of the decline in the first six months was the result of hiring a
consulting firm to conduct a profit improvement study in 1999. Moreover, a gain
of $119,000 on the sale of REO was realized in the second quarter of 2000. As a
result, the increase in Other Operating Expenses was slightly reduced. 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Other operating expenses ............ $ 2,043 $ 1,974 $ 3,949 $ 3,944
Other operating expenses
(annualized)/average assets .... 4.22% 4.87% 4.13% 4.90%
Other operating expenses/net interest
income and other operating income 63.9% 67.7% 61.8% 70.9%
================================================
</TABLE>
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 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.
Year 2000 Compliance
During 1999, the Company completed its plan to address the year 2000 date
change. The Company has not experienced any failures or disruptions in its
systems since the date change and does not anticipate any date change problems
in the future. However, management will continue to monitor, throughout the
year, its systems and interactions with vendors, customers and other third
parties to ensure that all systems continue to function properly. The costs of
the year 2000 project through June 30, 2000 totaled approximately $216,000.
These costs include equipment and software purchased that are being amortized
for up to five years. Internal and external costs specifically associated with
modifying internal-use software for the year 2000 were expensed as incurred. No
future expenditures are currently anticipated.
INCOME TAXES
The Company recognized income tax expense of $498,000 and $71,000, during the
three month periods ended June 30, 2000 and 1999, respectively. Income tax
expense of $1,041,000 and $131,000 were recognized during the six month periods
ended June 30, 2000 and 1999, respectively. Income tax expense is higher in 2000
due to higher earnings and due to Sunwest fully recognizing the benefits of its
net operating tax loss carryforwards for financial statement purposes. Sunwest
began recording income tax expense at the rate of 41.25% in the fourth quarter
of 1999.
<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 17% at June 30, 2000 and 17% at December 31,
1999. 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 2000 West Coast did not receive any dividends
from its subsidiaries. West Coast does not currently expect to receive dividends
from its subsidiaries during 2000.
At June 30, 2000, West Coast had cash and short term investments totaling
$221,000. No significant cash receipts are expected for the remainder of 2000.
West Coast anticipates cash expenditures during 2000 to consist of debt service
payments and other operating expenses. West Coast has a note payable of $375,000
due to its Chairman on November 30, 2000. At this time management believes that
the maturity date will be extended or the note exchanged for common stock;
however, no amendments have yet been made to the note. Except for the final
payment on the note payable, West Coast's projected debt service for the
remainder of 2000 is expected to total $37,000. West Coast anticipates that
other operating expenses will be approximately $54,000 during the remainder of
2000. 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 12.53%, 13.79% and 10.40% Tier 1 risk-based capital, total
risk-based capital and leverage ratio at June 30, 2000, respectively. Sunwest
had a 13.36%, 14.61% and 10.86% Tier 1 risk-based capital, total risk-based
capital and leverage ratio at June 30, 2000, 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,
2000.
<PAGE>
WEST COAST BANCORP AND SUBSIDIARIES
JUNE 30, 2000
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 June 30, 2000
(b) Reports on Form 8-K
None
<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 11, 2000
----------------- ----------------------
Eric D. Hovde Date
Chief Executive Officer
/s/Frank E. Smith August 11, 2000
----------------- ----------------------
Frank E. Smith Date
Chief Financial Officer
