West Coast Bancorp Reports 2009 Fourth Quarter Results

LAKE OSWEGO, Ore., Jan. 25 /PRNewswire-FirstCall/ -- West Coast Bancorp (Nasdaq: WCBO) ("Bancorp" or "Company") today announced a net loss for the fourth quarter of 2009 of $51.8 million or $3.32 loss per diluted share compared to a net loss for fourth quarter 2008 of $8.7 million or $.56 loss per diluted share. The Company's fourth quarter results were significantly impacted by establishment of a $23.4 million deferred tax asset valuation allowance, OREO valuation adjustments and losses upon dispositions totaling $14.5 million ($9.4 million after-tax), and a provision for credit losses of $35.2 million ($22.9 million after-tax). Combined these three items contributed approximately $73.1 million ($55.7 million after-tax) to the net loss for the fourth quarter. For the full year 2009, the Company reported a net loss of $94.2 million or $6.02 per diluted share, compared to a net loss of $6.3 million or $.41 per diluted share for the same period in 2008. As a result of the net loss in 2009 and recent federal tax law changes that enabled the Company to carry 2009 net operating tax losses back to additional prior tax years, the Company expects to receive a federal tax refund during the first quarter of 2010 of approximately $29 million.

Approval of New Common Shares and Conversion of Preferred Stock

As previously announced, on January 20, 2010, shareholders approved an increase in authorized common stock from 50.0 million shares to 250.0 million shares and the conversion of preferred stock issued in the Company's October private placement transactions into common stock. The private placement transactions resulted in gross proceeds to the Company of approximately $155.0 million and net proceeds of $139.2 million, of which $134.2 million was contributed to West Coast Bank on October 26, 2009.

As a result of the shareholder approvals, mandatorily convertible Series A preferred stock issued in the transactions will convert into 71.4 million shares of common stock on January 27, 2010. Including the Company's existing 15.6 million common shares, following conversion of the Series A preferred stock there will be approximately 87.1 million shares of common stock outstanding. Additionally, 121,328 shares of mandatorily convertible Series B preferred stock issued in the transactions became mandatorily convertible into a total of 6.1 million shares of common stock, but only after such shares have been transferred to third parties not affiliated with certain original investors in a widely dispersed offering.  Furthermore, certain investors in the transactions will continue to hold warrants to purchase at a price of $100 per preferred share an aggregate of 240,000 additional shares of Series B preferred stock convertible into 12,000,000 shares of common stock upon transfer to third parties in a widely disbursed offering.

"The successful private placements of $155 million during the fourth quarter of 2009 were an important accomplishment as the new capital enables the Company to refocus its efforts on growing loans while reducing its nonperforming assets," said Robert D. Sznewajs, President and CEO. "The combination of growing loans, reducing nonperforming assets and controlling operating expenses while maintaining capital ratios in excess of the regulatory requirements will allow us the opportunity to take advantage of market place opportunities in spite of these difficult economic times," continued Mr. Sznewajs.

Year End Regulatory Capital Ratios Enhanced by Private Capital Raise

West Coast Bank's year end 2009 regulatory capital ratios increased significantly from September 30, 2009 as a result of Bancorp's $134.2 million capital contribution to the Bank. Additionally, as shown in Table 1 below, the shareholder approvals to increase authorized common shares and to convert preferred shares to common shares will also result in significant improvements to Bancorp's regulatory capital ratios as the capital raised by Bancorp will now qualify as Tier 1 capital at the holding company level for regulatory purposes.

The Company's pro forma year end 2009 book value of $2.83 per share reflects the private capital investments and the conversion of the Series A preferred shares, but it does not include the impact of the future conversion of the Series B preferred shares.

Balance Sheet Changes

Key balance sheet changes in 2009 included the loan portfolio contracting significantly, deposit balances increasing, and the Company raising the substantial amount of additional capital noted above. The combination of these trends caused the investment securities portfolio to grow rapidly and represent 22% of total earning assets at December 31, 2009, up from 9% twelve months earlier. The Company's loan to deposit ratio declined from 102% at year end 2008 to 80% at December 31, 2009, demonstrating significant improvement in the Company's liquidity position and balance sheet flexibility to grow the loan portfolio going forward.

More specifically, total loans declined $340 million or 16% during 2009 to $1.72 billion at December 31, 2009 as the recession and the internal lending and capital management strategies dramatically affected new loan originations, particularly of construction and commercial loans. The construction loan portfolio contracted $186 million or 65% over the past twelve months alone. Throughout 2009, the local housing market continued to work through its oversupply as evidenced by the estimated 7,400 new housing permits issued in Oregon in 2009 as compared to the high water mark of 31,000 permits issued in 2005. In part due to borrowers having de-leveraged over the past year, commercial loan balances declined $112 million or 23% during 2009. The recession has also had a significant adverse effect on employment and manufacturing activity in the region. For example, the number of manufacturing jobs in Oregon peaked at 208,500 in 2006 and had fallen to 162,800 in December 2009, a decrease of 22% and 45,700 jobs.

Table 2 below shows period end loan balances by loan categories:

The Company's investment securities portfolio expanded from $199 million at December 31, 2008 to $562 million at year end 2009. The Company invested a significant amount of cash generated from the declining loan portfolio, the fourth quarter capital raise, and higher deposit balances in investment securities. The excess cash was primarily invested in mortgage backed and US government agency securities with an overall projected duration of 3.5 years at year end 2009. These securities were purchased to manage the Company's interest rate position while providing an adequate incremental return and sufficient cash flows for future loan growth.

Fourth quarter 2009 average total deposits of $2.15 billion increased 6% or $121 million from the final quarter in 2008. Most important, low cost core demand and savings deposit categories grew over $145 million or 18% over the same period. This further improved the Company's deposit mix, and combined with deposit pricing actions, helped reduce the rate paid on total deposits by 69 basis points to .99% year-over-year fourth quarter.

Fourth quarter 2009 average total time deposit balances declined $30 million from the same quarter of 2008 reflecting a $92 million reduction in average public balances in certificates of deposits. The Company elected to reduce such balances because pledging requirements for uninsured public deposits in both Oregon and Washington increased substantially during 2009 and to decrease higher cost deposits.

The number of core deposit accounts continued to grow in 2009, particularly in the core transaction deposit accounts that are often the foundation from which to build broader client relationships and future revenue opportunities.

Operating Results Reflect Difficult Economic Environment

As shown in table 6 below, the fourth quarter 2009 loss increased to $51.8 million from $8.7 million in the same quarter of 2008.

The Company's net interest margin compressed 65 basis points from the fourth quarter of 2008 to 3.05% in the most recent quarter, while net interest income declined $1.9 million from the fourth quarter of 2008 to $19.2 million. These declines were primarily caused by the considerable shift in the earning asset mix from higher yielding loan balances to lower yielding cash and investment securities balances, the lengthening of the Company's Federal Home Loan Bank borrowings in the first half of 2009, and the declining benefit from non-interest bearing demand deposit balances in the very low interest rate environment.

The table below illustrates the main components of net interest spread and the net interest margin for the periods shown:

Fourth quarter 2009 total non-interest loss was $6.1 million due to $14.5 million in OREO valuation adjustments and losses associated with OREO dispositions. In the final quarter of 2008 total non-interest income was $4.3 million, with OREO valuation adjustments and losses totaling $3.7 million. See table 8 below for details.

Excluding OREO valuation adjustments and losses on OREO dispositions, the Company's noninterest income increased $.3 million or 4% to $8.3 million year-over-year fourth quarter. Fourth quarter 2009 deposit service charges and trust and investment revenues were relatively unchanged from the same quarter in 2008. Mainly due to an increase in the number of deposit transaction accounts and associated cards, total payment systems revenues grew 8% from the fourth quarter of 2008. Gain on sales of loans declined from the fourth quarter of 2008 due to reduced originations and sales of residential mortgage loans and no gains on sales of Small Business Administration loans during the most recent quarter.

As presented in table 9 below, fourth quarter 2009 total non-interest expense of $24.2 million increased 7% or $1.6 million from the final quarter in 2008. The combination of $1.1 million higher equipment and occupancy expenses related to review and disposal of fixed assets, a $.4 million increase in FDIC deposit insurance premiums and a $1.4 million increase in OREO operating expenses caused the fourth quarter year-over-year expense increase. Despite lower deferred loan origination expenses and more personnel in the special assets functions, total personnel expense fell slightly in the most recent quarter compared to the fourth quarter of 2008. For the full year, personnel expense was $44.6 million or 6% lower than in 2008.

Federal Tax Refund, Income Taxes and Deferred Tax Asset Valuation Allowance

Due to recent tax law changes, which apply only to banks that did not receive government assistance through the US Treasury Department's Troubled Asset Relief Program, the Company can carry back its tax losses from 2009 to offset federal taxes paid in the previous five years as opposed to the two year carry back under the prior tax laws.  Due to these tax law changes and the Company's tax losses in 2009, the Company will receive an estimated $29 million federal tax refund in early 2010 for losses incurred during 2009.

Furthermore, the Company established a $23.4 million valuation allowance against the deferred tax asset balance as of December 31, 2009, which reduced its year end deferred tax asset to $2.2 million. The primary factors in this decision were the Company's continuing and cumulative losses over the past two years. As shown in table 10 below, the $23.4 million valuation allowance resulted in a fourth quarter 2009 income tax expense of $5.5 million, rather than the $17.8 million benefit for income taxes that would have been recognized in the fourth quarter of 2009 without establishing the valuation allowance. Looking forward management will review the deferred tax asset valuation allowance on a quarterly basis. Any future reversals of the deferred tax asset valuation allowance, as a result of the Company returning to profitability, would decrease the Company's income tax expense and increase its after tax net income in the periods of reversals.

Credit Quality

Total net charge-offs measured $35.9 million in the most recent quarter, up from $21.0 million in the fourth quarter of 2008. Over half of the increase in net charge-offs can be attributed a $10.2 million increase in commercial loan net charge-offs. Net charge-offs also increased in the residential construction, mortgage, and commercial real estate categories. Fourth quarter 2009 net charge-offs reflected the Company aggressively managing its nonperforming assets and the continuing challenges in real estate markets and adverse economic conditions in our markets. The unemployment rates in Oregon and Washington at 11.0% and 9.5%, respectively, in December 2009 remain elevated.

The Company recorded a fourth quarter 2009 provision for credit losses of $35.2 million, up from $16.5 million in the same quarter of 2008. The significant loan net charge-offs and a continued negative loan risk rating migration during the fourth quarter, along with higher general valuation allowances in the 2009 year end allowance model, affected the provision for credit losses in the final quarter of 2009. The level of the Company's future provisioning will be heavily dependent on the local real estate market, the level of interest rates, and general economic conditions nationally and in the areas in which we do business.

The total allowance for credit losses increased from $29.9 million or 1.45% of total outstanding loan balances at year end 2008 to $39.4 million or 2.29% at December 31, 2009. The unallocated portion of the allowance for loan losses amounted to $5.0 million or 12.7% of the total allowance for credit losses at year end 2009, up from $1.9 million and 6.4%, respectively, twelve months earlier. The Company's estimate of appropriate reserve amounts will continue to be primarily dependent on the loan portfolio's credit quality performance trends, including net charge-offs, which will be heavily dependent on local economic conditions.

Total non-performing assets declined 27% or $55.7 million to $152.9 million or 5.6% of total assets as of December 31, 2009 from $208.6 million and 7.9% at September 30, 2009, and $197.7 million and 7.9% at year end 2008. The balance of total nonperforming assets at year end reflected write downs totaling over $90 million or 38% from the original loan principal balance compared to write downs of 29% at the end of the third quarter. The fourth quarter disposition of $42.3 million in OREO properties, $35.9 million in loan net charge-offs, and $14.5 million in OREO valuation allowances more than offset the $29.4 million fourth quarter inflow of new nonaccrual loans. Two-step nonperforming assets were $28.1 million at December 31, 2009, down from $110.0 million twelve months earlier and from $61.7 million at the end of the third quarter.

At December 31, 2009, total delinquent loans 30-89 days past due was $8.4 million or .49% of total loans, a decline from $13.1 million and .72% at September 30, 2009.

Total nonaccrual loans declined by $32.7 million in the fourth quarter to $99.3 million at year end 2009. This decline was driven by a $20.9 million reduction in nonaccrual construction loans and a $13.7 million decline in nonaccrual commercial loans. Fourth quarter nonaccrual construction loans fell due to net charge-offs, a lower inflow of new nonaccrual loan balances from the residential construction portfolio compared to prior quarters, and the Company taking ownership of more primarily residential site development and construction properties related to loans previously on nonaccrual status. Also, the Company impaired a number of large commercial loans in the fourth quarter. At December 31, 2009, the total nonaccrual loan portfolio had been written down 30% compared to 24% as of September 30, 2009.

The Company's OREO property disposition activities were strong during the final quarter of 2009. Including the bulk sale of 69 properties with a book value of $18.9 million, the Company disposed of 165 OREO properties with a book value of $42.3 million during the fourth quarter. The number of closed OREO sales outside the bulk sale accelerated from 70 to 96 quarter over quarter. Of the 165 properties sold in the quarter, 121 were properties associated with previous two-step loans and 44 properties related to other loans. The December 31, 2009 total OREO portfolio consisted of 672 properties valued at $53.6 million. The OREO balance reflected a write-down of 49% from the original principal of the loans compared to 38% at the end of the third quarter. The majority of the properties added to OREO during the fourth quarter consisted of 405 lots within 9 site development projects.  These lots contributed to the reduction in the average OREO property book value to $80,000 at December 31, 2009 from $254,000 at September 30, 2009. The projects are primarily located in Seattle, Maple Valley, Vancouver, Washougal, and Puyallup in the state of Washington and in Salem, Oregon.

As of December 31, 2009 there were 43 OREO property sales pending with a book value of $10.9 million. Future financial results will be heavily dependent on the Company's ability to dispose of its OREO properties at prices that are in line with current valuation expectations.

Other

The Company will hold a Webcast conference call Monday, January 25, 2010, at 11:00 a.m. Pacific Time, during which the Company will discuss fourth quarter 2009 results and key activities. To access the conference call via a live Webcast, go to www.wcb.com and click on Investor Relations and the "4th Quarter 2009 Earnings Conference Call" tab. The conference call may also be accessed by dialing (877) 247-4281 Conference ID#: 48338219 a few minutes prior to 11:00 a.m. Pacific Time. The call will be available for replay by accessing the Company's website at www.wcb.com and following the same instructions.

West Coast Bancorp is a Northwest bank holding company with $2.7 billion in assets and 65 offices in Oregon and Washington.  The Company combines the sophisticated products and expertise of larger banks with the local decision making, market knowledge and customer service of a community bank.  For more information, visit the Company's web site at www.wcb.com.

Forward Looking Statements:

Statements in this release regarding future events, performance or results are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA") and are made pursuant to the safe harbors of the PSLRA.  These statements can be identified by words in this release by words such as "expects," "believes," or "will."  Actual results could be quite different from those expressed or implied by the forward-looking statements. Do not unduly rely on forward-looking statements.  They give our expectations about the future and are not guarantees.  Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date.

The following table presents information with respect to the Company's allowance for credit losses.

The following table presents information about the Company's total delinquent loans.

The following table presents information about the Company's activity in other real estate owned.

SOURCE West Coast Bancorp