Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Our management has evaluated, with the participation and under the supervision of our chief executive officer (“CEO”) and chief financial officer (“CFO”), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded that, as of such date, the Company’s disclosure controls and procedures are effective in ensuring that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated an communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
No change in the Company’s internal control over financial reporting occurred during our first quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None applicable.
Item 1A. Risk Factors
The following are risks that management believes are specific and material to our business. These risk factors should not be viewed as an all inclusive list or in any particular order. See “Item 1A. Risk Factors” of our 2008 10-K for additional risks that may affect our business and are not repeated in this report.
Future loan losses may exceed our allowance for loan losses.
We are subject to credit risk, which is the risk that borrowers will fail to repay loans in accordance with their terms. An extended recession or further weakening of the economy or a specific industry sector or a rapid change in interest rates could adversely affect our borrowers’ ability to repay loans. A sustained weakness in the relevant real estate markets could further adversely affect the value of the collateral for many of our loans. Developments of this nature could result in losses in excess of our allowance for credit losses. In addition, to the extent that loan payments from borrowers are not timely, the loans will be placed on nonaccrual status, thereby lowering earning assets balances, reducing future interest income, and, in certain circumstances, requiring reversal of previously accrued interest income.
We maintain an allowance for loan losses that represents management’s best estimate, as of a particular date, of the probable amount of loan receivables that the Bank will be unable to collect. When available information confirms that specific loans or portions of loans are uncollectible, those amounts are charged off against the allowance for loan losses. Our management establishes the allowance for loan losses based on a continual evaluation of lending concentrations, specific credit risks, changes in risk ratings, past loan loss experience, loan portfolio and collateral quality, and relevant economic, political, and regulatory conditions. Adverse changes in any of these or other factors that management considers relevant may result in an increase in the allowance for loan losses, which would require additional provision for credit losses. In addition, federal and state banking regulators periodically review our loan portfolio, including, without limitation, the allowance for loan losses and may require that the Bank increase the allowance or recognize loan charge-offs. Any additional provision for loan losses to increase the allowance for loan losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations. For more information on this topic, see “Allowance for Credit Losses and Net Loan Charge-offs” and related disclosures in Part 1, Item 2 of this report above, as well as the disclosure relating to our critical accounting policies included in our 2008 10-K.
Bancorp may need to raise additional capital in the future to enhance or maintain desired levels of capital, improve capital ratios, or increase liquidity available for operations.
Bancorp may need to seek additional capital and such capital may not be available to it. In the event Bancorp desires to raise additional capital, any equity or debt financing, if available at all, may not be available on terms that are favorable to the Company. In the case of equity financings, dilution to Bancorp’s shareholders could result and securities issued in any financing transaction may have rights, preferences and privileges that are senior to those of Bancorp’s current shareholders. Under Bancorp’s articles of incorporation, it may issue preferred equity with senior terms without first obtaining shareholder approval. Debt financing may include covenants that restrict Bancorp’s operations and interest charges would detract from future earnings. In the event additional capital is unavailable on acceptable terms we may instead take additional steps to preserve capital, including further slowing of lending activities and new loan commitments, offers to sell certain assets, increasing loan participations or eliminating our cash dividend to shareholders. During the third quarter of 2008, we reduced our cash dividend to $.01 per share as part of our efforts to preserve capital.
Home values may continue to decrease leading to additional and greater than anticipated loan charge-offs and valuation write downs and losses on sales of our other real estate owned (“OREO”) properties.
We foreclose on and take title to the real estate serving as collateral for many of our loans as part of our business. Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property. During 2008 and continuing into the first quarter of 2009, we have acquired a significant amount of OREO relating to loans originated in the two-step loan portfolio (“two-step loans”) and, to a lesser extent, other loan portfolios. Increased OREO balances lead to greater expenses as we incur costs to manage and dispose of the properties and, in certain cases, complete construction of structures prior to sale. We expect that our earnings in 2009 will be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, and other costs associated with property ownership, as well as by the funding costs associated with assets that are tied up in OREO. Additional decreases in market prices will lead to OREO write downs and losses on sale, with a corresponding expense in our income statement. We evaluate OREO property values periodically and write down the carrying value of the properties if the results of our evaluations require it. Further property write downs could have a material adverse effect on our financial condition and results of operations. We currently have $128.3 million in nonaccrual loans and $87.2 million of OREO properties.
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We face liquidity risks in the operation of our business.
Liquidity is crucial to the operation of Bancorp and the Bank. Liquidity risk is the potential that we will be unable to fund increases in assets or meet payment obligations, including obligations to depositors, as they become due because of an inability to obtain adequate funding or liquidate assets. For example, funding illiquidity may arise if we are unable to attract core deposits, if we are limited in the types of deposits we can accept, if existing depositors withdraw their deposits, or we are unable to renew at acceptable terms long-term borrowings or short-term borrowings from the overnight inter-bank market, the Federal Home Loan Bank System, brokered deposits, or the Federal Reserve discount window. Illiquidity may also arise if our regulatory capital levels decrease, our lenders require additional collateral to secure our repayment obligations, or a large amount of our deposits are withdrawn. We may also experience illiquidity due to unexpected cash outflows on committed lines of credit or financial guarantees or due to unexpected events. The increasingly competitive retail deposit environment increases liquidity risk (and increases our cost of funds) as increasingly sophisticated depositors move funds more frequently in search of higher rates or better opportunities. Regulatory limitations may limit our ability to utilize brokered deposits, which would further strain our liquidity. The holding company’s liquidity may be further negatively affected by regulatory or statutory restrictions on payment of cash dividends by the Bank. We monitor our liquidity risk, including, without limitation, through contingency planning and stress testing. We also seek to avoid over concentration of funding sources and maturities and to establish and maintain back-up funding facilities that we can draw down if normal funding sources become unavailable. If we fail to control our liquidity risks, there may be materially adverse effects on our results of operations and financial condition.
We operate in a heavily regulated industry with broad discretion given to our regulators. Any failure to comply with regulations and restrictions applicable to us could lead to restrictions on our operations and/or regulatory sanctions.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by the Oregon Division of Finance and Corporate Securities, the FDIC, and the Federal Reserve Board. As part of that regulation, we are subject to operating restrictions that may, among other things, prevent payment of dividends by the Company or the Bank, limit the rates we pay on deposits, limit our use of brokered deposits, including deposits obtained through our participation in the CDARS network, result in restrictions on access to other sources of liquidity, or restrict changes in our balance sheet. We must also meet regulatory capital requirements that are applicable to the Company and the Bank. Any failure or inability to meet these capital requirements would result in various mandatory supervisory actions and additional regulatory restrictions and could lead to regulatory sanctions and limitations on our access to certain sources of liquidity for the Bank. Accordingly, any such failure to comply with capital requirements or other regulations could have a material adverse effect on our financial condition and results of operations. At March 31, 2009, we exceeded regulatory benchmarks for “well-capitalized” institutions. There can be no assurance that the Company and the Bank will continue to do so.
The Congressional and regulatory response to the current economic and credit crisis could have an adverse effect on our business.
Federal and state legislators and regulators are expected to pursue increased regulation of how banks are operated and how loans are originated, purchased, and sold as a result of the current economic and credit crisis. Changes in the lending market and secondary markets for loans and related congressional and regulatory responses may impact how the Bank makes and underwrites loans, buys and sells such loans in secondary markets, and otherwise conducts its business. We are unable to predict whether any legislative or regulatory initiatives or actions will be implemented, what form they will take, whether they will be directed at the Bank, or whether such initiatives or actions, once they are initiated or taken, will thereafter continue to change. Any such actions could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition and results of operations.
Our business may be harmed by adverse events at other financial institutions.
Financial institutions are interrelated as a result of trading, clearing, correspondent banking, counterparty, and other relationships and because of regulatory factors. Bancorp enters into transactions with financial services companies, including commercial banks and correspondent banks. Many of these transactions expose Bancorp and the Bank to credit and bankruptcy risk in the event of a default or bankruptcy by a counter party. The Bank may also be negatively impacted by the failure of other banks. For example, as a depository of uninsured public funds, the Bank will be assessed, and the Bank is statutorily obligated to pay, a pro rata share of the losses of uninsured public funds held at a failed public depository in Oregon or Washington. In addition, assessments the Bank pays to the FDIC and others, including deposit insurance premiums, will increase even further in the event of bank failures or other adverse events affecting the banking system generally or the Bank in particular.
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Significant legal and regulatory actions could subject us to uninsured liabilities, associated reputational risk, and reduced revenues.
From time to time, we are sued for damages or threatened with lawsuits relating to various aspects of our operations. We may also be subject to investigations and possibly substantial civil money penalties assessed by, or other actions of, federal or state regulators in connection with violations or alleged violations of applicable laws, regulations or standards. We may incur substantial attorney fees and expenses in the process of defending against lawsuits or regulatory actions and our insurance policies may not cover, or cover adequately, the costs of adverse judgments, civil money penalties, and attorney fees and expenses. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our results of operations, capital, and financial condition.
We are subject to reputational risk, which is the potential that negative publicity regarding our business practices, whether true or not, could cause a decline in our customer base, stock price, or general reputation in the markets in which we operate. Reputational risk is heightened in the instance of publicity surrounding lawsuits or regulatory actions.
Market and other constraints on our construction loan origination volumes are expected to lead to decreases in our interest and fee income that are not expected to be offset by reductions in our noninterest expenses.
Due to existing conditions in housing markets in the areas in which we operate and other factors, we project that our construction loan originations will be materially constrained throughout 2009. This will reduce interest income and fees generated from this part of our business. We expect that it will be difficult to find new revenue sources in the near term to offset expected declines in our interest income. While we have implemented noninterest expense reductions in light of the unfavorable environment, we do not expect these expense reductions to completely offset revenue declines, at least in the near term, particularly in light of our increased OREO expenses and expected increase in FDIC insurance premium rates.
The value of securities in our investment securities portfolio may be negatively affected by disruptions in the market for these securities.
In addition to interest rate risk typically associated with an investment portfolio, the market for certain investment securities held within our investment portfolio has over the past year become much less liquid. This coupled with uncertainly surrounding the credit risk associated with the underlying collateral has caused material discrepancies in valuation estimates obtained from third parties. We value some of our investments using internally developed cash flow and valuation models, which include certain subjective estimates which we believe, are reflective of the estimates a purchaser of such securities would use if such a transaction were to occur. The volatile market may affect the value of these securities, such as through reduced valuations due to the perception of heightened credit and liquidity risks, in addition to interest rate risk typically associated with these securities. There can be no assurance that the declines in market value associated with these disruptions will not result in impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our results of operation, financial condition, and capital ratios. For additional discussion of our investment securities, see Notes 3 and 12 of the notes to our consolidated financial statements included in Part 1, Item 1 of this report.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (c) | | The following table provides information about repurchases of common stock by the Company during the quarter ended March 31, 2009: |
| | | | | | Total Number of Shares | | |
| | | | | | Purchased as Part of Publicly | | Maximum Number of Shares Remaining |
| | Total Number of Shares | | Average Price Paid | | Announced Plans or Programs | | at Period End that May Be Purchased |
| Period | | Purchased (1) | | per Share | | (2) | | Under the Plans or Programs |
| 1/1/09 - 1/31/09 | | 21 | | $3.36 | | - | | 1,051,821 |
| 2/1/09 - 2/28/09 | | 233 | | $1.72 | | - | | 1,051,821 |
| 3/1/09 - 3/31/09 | | - | | $0.00 | | - | | 1,051,821 |
| Total for quarter | | 254 | | | | - | | |
| | (1) | | Shares repurchased by Bancorp during the quarter include shares repurchased from employees in connection with stock option swap exercises and cancellation of restricted stock to pay withholding taxes totaling 21 shares, 233 shares, and 0 shares, respectively, for the periods indicated. There were no shares repurchased in the periods indicated pursuant to the Company’s corporate stock repurchase program publicly announced in July 2000 (the “Repurchase Program”) and described in note 2 below. |
| |
| (2) | | Under the Repurchase Program, the board of directors originally authorized the Company to repurchase up to 330,000 common shares, which amount was increased by 550,000 shares in September 2000, by 1.0 million shares in September 2001, by 1.0 million shares in September 2002, by 1.0 million shares in April 2004, and by 1.0 million shares in September 2007 for a total authorized repurchase amount as of March 31, 2009, of approximately 4.9 million shares. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Bancorp held its Annual Meeting of Shareholders on April 29, 2009. Below is a brief description of matters considered and voted on by shareholders and the number of votes cast for, against or withheld on such matters.
1. Electing nine directors to serve for one-year terms.
| Director | | Votes for | | Votes withheld | |
| Lloyd D. Ankeny | 11,968,494 | 476,836 |
| Michael J. Bragg | 12,072,477 | 372,853 |
| Duane C. McDougall | 11,961,529 | 483,801 |
| Steven J. Oliva | 12,090,183 | 355,147 |
| Steven N. Spence | 11,999,644 | 445,686 |
| Robert D. Sznewajs | 11,990,565 | 454,765 |
| David J. Truitt | 12,121,832 | 323,498 |
| Nancy A. Wilgenbusch | 11,996,492 | 448,838 |
2. Amendments to the 2002 Stock Incentive Plan.
| Votes for | | Votes against | | Abstentions | |
| 7,553,835 | 569,027 | 264,658 |
3. Ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2009.
| Votes for | | Votes against | | Abstentions | |
| 12,226,137 | 113,082 | 106,109 |
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Item 5. Other Information
None
Item 6. Exhibits
| | Exhibit No. | | Exhibit | |
| 31.1 | | Certification of CEO under Rule 13(a) – 14(a) of the Exchange Act. |
| 31.2 | | Certification of CFO under Rule 13(a) – 14(a) of the Exchange Act. |
| 32 | | Certification of CEO and CFO under 18 U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | WEST COAST BANCORP |
| | (Registrant) |
| |
| |
| |
| Dated: May 11, 2009 | /s/ Robert D. Sznewajs | |
| | Robert D. Sznewajs |
| | President and Chief Executive Officer |
| |
| |
| |
| Dated: May 11, 2009 | /s/ Anders Giltvedt | |
| | Anders Giltvedt |
| | Executive Vice President and Chief Financial Officer |
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