For the third quarter of 2009, net interest income on a tax equivalent basis was $19.5 million, down from $24.2 million in the same quarter of 2008. Average interest earning assets increased $67.6 million, or 2.8%, to $2.5 billion in the third quarter of 2009 from $2.4 billion for the same period in 2008, while average interest bearing liabilities grew $101.9 million, or 5.5%, to $2.0 billion. Net interest income for the three months ended September 30, 2009, included a $.36 million adjustment to a tax equivalent basis, while the adjustment included in the same period of 2008 was $.43 million.
A material shift in earning asset mix from higher yielding loans to lower yielding investments and interest earning cash balances contributed to the significant decline in interest income. While our interest expense declined, it did not decline as much as interest income. We were unable to lower deposit rates as quickly as short term market interest rates declined due to a competitive environment for customer deposits within our markets associated with competitors’ attempting to shore up their liquidity positions. We also extended the maturity of customer time deposits and FHLB debt which increased interest expense. Finally the low interest rate environment reduced the benefit from our sizeable noninterest bearing deposit balances.
The net interest margin for the third quarter of 2009 declined to 3.14% from 4.02% in the third quarter of 2008. Average yields on earning assets decreased 1.32% to 4.53% in the third quarter of 2009 from 5.85% in the third quarter of 2008. Third quarter 2009 average rates paid on interest bearing liabilities decreased ..63% to 1.73% from 2.36% for the same period in 2008.
Changing interest rate environments, including the slope and level of, as well as changes in, the yield curve, and competitive pricing pressure, could lead to higher deposit costs, lower loan yields, reduced net interest margin and spread and lower loan fees, all of which could lead to additional pressure on our net interest income. At September 30, 2009, we remain relatively interest rate neutral, meaning that earning assets mature or reprice at about the same rate as interest bearing liabilities in a given time period. For more information see the discussion under the heading “Quantitative and Qualitative Disclosures about Market Risk” in our 2008 10-K.
Loans transitioning into nonaccrual status require interest income reversals, consequently decreasing interest income. We anticipate construction loan balances and associated loan fee revenue will continue to decline. Additionally, until our loan balances begin to expand and the value of noninterest bearing deposit balances increase, we project continued pressure on our net interest margin. Whether we will be able to expand our loan portfolio in the near future will be heavily dependent on economic conditions, which affect both loan demand and existing credit quality, although we believe our capital raise will improve our ability to respond to loan opportunities.
Provision for Credit Losses.Bancorp recorded provision for credit losses for the third quarters of 2009 and 2008 of $20.3 million and $9.1 million, respectively. The provision for credit losses associated with loans other than two-step loans was $19.6 million in the third quarter of 2009, up from $7.1 million in the same quarter of 2008. The combination of higher net charge-offs, higher general valuation allowances, a negative risk rating migration and a larger unallocated allowance contributed to the increased quarterly provision in the third quarter of 2009 compared to the third quarter of 2008. The provision for credit losses for the nine months ended September 30, 2009, was $54.8 million, up from $23.9 million in the same period in 2008. For more information, see the discussion under the subheading “Allowance for Credit Losses and Net Loan Charge-offs” below.
Noninterest Income. Total noninterest income of $5.0 million for the three months ended September 30, 2009, increased $3.9 million from $1.1 million in the third quarter of 2008. Third quarter 2008 noninterest income included the negative effects of an other-than-temporary impairment charge totaling $6.3 million. Excluding those effects, noninterest income declined year over year third quarter. Due to extended weakness and declining values in the housing market, third quarter OREO valuation adjustments and losses on sales totaled $4.0 million, of which $3.6 million were associated with two-step properties, compared to $1.4 million in the same quarter of 2008. Future financial results will be heavily dependent on the Company's ability to dispose of its OREO properties quickly and at prices that are in line with current expectations. Deposit service charge revenue declined 3% or $.1 million in the current quarter from the same period a year ago while payment systems revenues increased 7% or $.2 million from the third quarter of 2008 due to higher transaction volume per account. Trust and investment revenues declined 8% or $.1 million. Gain on sales of loans increased slightly from third quarter 2008 due in part to increased activity in sales in the secondary market for SBA loans. Noninterest income for the nine months ended September 30, 2009, was $15.3 million, down from $20.3 million in the first nine months of 2008.
Noninterest Expense.Noninterest expense for the three months ended September 30, 2009, was $23.5 million, an increase of $1.3 million compared to $22.2 million for the same period in 2008. Personnel expense decreased $.3 million or 2% in third quarter 2009 due to lower salary and benefit costs compared to third quarter 2008. This reflected the Company’s continued effort to manage salary expenses with restrictions on salary increases and the elimination of bonus compensation for most personnel. Additional efforts to control expenses are reflected in the combined decrease of $.8 million in expenses related to equipment, occupancy, professional, and marketing categories. Other noninterest expense was $4.6 million in third quarter 2009 compared to $2.3 million in the same period of 2008. Of the $2.3 million increase, $2.0 million was related to higher FDIC insurance rates and an FDIC insurance special assessment and OREO related expenses.
Noninterest expense for the nine months ended September 30, 2009, was $84.1 million, up from $67.8 million for the same period in 2008. Noninterest expense for the first nine months of 2009 includes the $13.1 million goodwill impairment charge recorded in first quarter 2009 and the special FDIC assessment charge of $1.2 million taken in second quarter 2009.
We have attempted to and continue to make efforts to increase operating efficiencies and control expenses without negative effects on our customers. We expect our noninterest expenses will continue to be affected by expenses associated with elevated levels of nonperforming assets and higher FDIC insurance premiums.
Changing business conditions, increased costs in connection with retention of, or a failure to retain key employees, lower loan production volumes causing deferred loan origination costs to decline, or a failure to manage our operating and control environments could adversely affect our ability to limit expense growth in the future.
Income taxes.The Company recorded a benefit from income taxes of $7.3 million in the third quarter 2009, compared to a tax benefit of $4.2 million for the same quarter 2008 primarily due to a larger net loss in the third quarter of 2009. For the nine months ended September 30, 2009, the benefit from income taxes was $21.8 million, compared to $2.7 million for the same period in 2008.
At September 30, 2009, the Company had $19.4 million in net deferred tax assets compared to $15.3 million at December 31, 2008. In the future, the Company may be required under current accounting rules to establish a valuation allowance against its net deferred tax assets. A deferred tax asset valuation allowance would reduce the net deferred tax asset balance with a corresponding charge to tax expense in the period in which it is established.
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Balance Sheet Overview
Period end total assets were $2.7 billion as of September 30, 2009, an increase of 5% since year end 2008. The period end combined investment securities portfolio and interest bearing cash balance of $614 million increased $415 million, from the December 31, 2008 balance. The primary factors which caused the growth in the investment portfolio and interest bearing cash balances were a decline in the loan portfolio of 12% or $243 million since December 31, 2008, and an increase in total deposits of 6% or $131 million over the same period. This also resulted in our loan to deposit ratio declining to 85% at September 30, 2009, from 102% at year end 2008. Unused commitments also continued to contract during the first three quarters of 2009 contributing to the reduction in risk weighted assets. The Company’s liquidity position improved further as a consequence of the $139.2 million capital raise, of which $134.2 million was contributed to the Bank.
Our long-term balance sheet management efforts are focused on growth in targeted areas that support our corporate objectives and include:
- Small business and middle market commercial lending;
- Owner occupied commercial real estate lending;
- Home equity lending; and
- Core deposit production.
Reflecting the weak economy and real estate market conditions, we expect our residential and commercial construction loan portfolios to continue to contract. We have implemented a more cautious approach to extending new credit in the residential and commercial construction, non-owner occupied commercial real estate and housing related commercial loan categories. However, the operating flexibility provided by our recent capital raise will allow us to become more active in soliciting prudent credit opportunities in the targeted loan categories listed above. Growth in our loan portfolio will be critical to our efforts to grow revenues.
We will continue to focus on generating demand and other retail, or “core,” deposits. In order to generate core deposits, we put an emphasis on launching transaction and depository services to satisfy the cash and deposit transaction needs of business customers. We believe our success in retaining and growing low cost demand deposit balances can be attributed to the availability of these sophisticated products, our continued emphasis on our free checking products for both the business and consumer segments, as well as our strong branch network and the strength of our employee base. Customer demand deposit balances and the attractiveness of interest bearing deposit products, such as money market and time deposit products, are influenced by the level and shape of the yield curve. This, in turn, influences whether we pursue time deposits or other funding sources on a short term basis.
The competition for local core deposit funding has been and continues to be intense. Due to heightened uncertainty about stability of the banking system, including community banks over the past year, larger deposit customers have diversified balances among multiple banks. Moreover, competitors of all types are aggressively pursuing FDIC insured deposits as a preferred source of funds. This includes aggressively priced nationwide, online deposit gathering efforts that do not require a local physical presence. Selective local market participants are also experiencing a need for higher deposit funding levels to improve their liquidity measures. These factors have not only impacted volume but also the cost of deposit funding relative to market interest rates.
Our ability to achieve loan and deposit growth in the future will be dependent on many factors, including economic conditions in our markets, our liquidity and capital positions, the effects of competition, the effect of our formal regulatory agreement, including limitations on growth in the Bank’s balance sheet, the health of the real estate market, and our ability to retain and add additional personnel and valued customers. FDIC policies, including whether the FDIC extends or modifies existing programs that expanded deposit insurance to cover unlimited balances on noninterest bearing demand accounts and the first $250,000 in other accounts, will also effect our ability to retain and grow deposits. A sustained fierce competitive environment, customer concerns regarding the safety of their deposits, or elimination of expanded FDIC deposit insurance programs could hinder our efforts to retain and grow our core deposit base in the future and maintain this integral source of liquidity for the Bank. Regulatory limitations on our ability to accept brokered deposits will also limit our deposit funding options.
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Cash and Cash Equivalents
Total cash and cash equivalents increased to $251.6 million at September 30, 2009, from $64.8 million at December 31, 2008. In addition, the Company received net proceeds of $139.2 million in the private placements announced on October 26, 2009. It is anticipated that the investment securities portfolio will expand in the fourth quarter of 2009 in an effort to enhance the yield on the Company’s liquid earning assets.
Investment Portfolio
The composition and carrying value of Bancorp’s investment portfolio is as follows:
| September 30, 2009 | | December 31, 2008 |
| Amortized | | Fair Value | | Unrealized | | Amortized | | Fair Value | | Unrealized |
| (Dollars in thousands) | Cost | | | | | Gain/(Loss) | | Cost | | | | Gain/(Loss) |
| U.S. Treasury securities | $ | 45,069 | | $ | 45,197 | | $ | 128 | | | $ | 200 | | $ | 223 | | $ | 23 | |
| U.S. Government agency securities | | 39,267 | | | 39,603 | | | 336 | | | | 7,310 | | | 7,387 | | | 77 | |
| Corporate securities | | 14,422 | | | 10,621 | | | (3,801 | ) | | | 12,608 | | | 10,877 | | | (1,731 | ) |
| Mortgage-backed securities | | 230,854 | | | 233,206 | | | 2,352 | | | | 94,846 | | | 92,566 | | | (2,280 | ) |
| Obligations of state and political subdivisions | | 69,968 | | | 73,903 | | | 3,935 | | | | 81,025 | | | 82,398 | | | 1,373 | |
| Equity and other securities | | 9,285 | | | 9,454 | | | 169 | | | | 5,161 | | | 5,064 | | | (97 | ) |
| Total Investment Portfolio | $ | 408,865 | | $ | 411,984 | | $ | 3,119 | | | $ | 201,150 | | $ | 198,515 | | $ | (2,635 | ) |
The September 30, 2009, investment portfolio balance of $412.0 million more than doubled from $198.5 million at December 31, 2008. At September 30, 2009, total investment securities available for sale had a pre-tax net unrealized gain of $3.1 million.We increased our investment securities balance as part of our effort to limit risk-weighted assets and to make additional securities available to meet pledging requirements for public deposits and government borrowing sources such as the Federal Home Loan Bank (“FHLB”).
In the third quarter of 2008, the Company recorded other than temporary impairment (“OTTI”) charges totaling $6.3 million pretax consisting of $.4 million relating to an investment in a Lehman Brothers bond, $3.1 million related to two pooled trust preferred investments in our corporate securities portfolio, and $2.8 million for an investment in Freddie Mac preferred stock held in our equity and other securities portfolio. The $3.1 million OTTI related to two pooled trust preferred investments was subsequently reversed as of March 31, 2009.
In the first quarter of 2009, the Company recorded OTTI charges totaling $.2 million pretax consisting of $.1 million relating to a Lehman Brothers bond held in our corporate securities portfolio and $.1 million for the investment in Freddie Mac preferred stock held in our equity and other securities portfolio. Both of these investments were sold in the second quarter of 2009 for no additional gain or loss.
For additional detail regarding our investment portfolio, see Note 3 “Investment Securities” and Note 12 “Fair Value Measurement” of our interim financial statements included under Item 1 of this report.
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Loan Portfolio
The composition of the Bank’s loan portfolio is as follows for the periods shown:
| | September 30, | | % of total | | December 31, | | % of total | | Change | | | | | September 30, | | % of total |
| (Dollars in thousands) | | 2009 | | loans | | 2008 | | loans | | Amount | | % | | 2008 | | loans |
| Commercial loans | | $ | 406,807 | | 22.4 | % | | $ | 482,405 | | 23.4 | % | | $ | (75,598 | ) | | -15.7 | % | | $ | 498,715 | | 23.6 | % |
| Commercial real estate construction | | | 43,944 | | 2.4 | % | | | 92,414 | | 4.5 | % | | | (48,470 | ) | | -52.4 | % | | | 89,599 | | 4.2 | % |
| Residential real estate construction | | | 100,793 | | 5.5 | % | | | 139,651 | | 6.7 | % | | | (38,858 | ) | | -27.8 | % | | | 143,340 | | 6.9 | % |
| Two-step residential construction loans | | | 5,128 | | 0.3 | % | | | 53,084 | | 2.6 | % | | | (47,956 | ) | | -90.3 | % | | | 97,894 | | 4.6 | % |
| Total real estate construction loans | | | 149,865 | | 8.2 | % | | | 285,149 | | 13.8 | % | | | (135,284 | ) | | -47.4 | % | | | 330,833 | | 15.7 | % |
| Mortgage | | | 78,144 | | 4.3 | % | | | 87,628 | | 4.2 | % | | | (9,484 | ) | | -10.8 | % | | | 90,510 | | 4.3 | % |
| Nonstandard mortgage | | | 21,952 | | 1.2 | % | | | 32,597 | | 1.6 | % | | | (10,645 | ) | | -32.7 | % | | | 32,658 | | 1.5 | % |
| Home equity line of credit | | | 282,552 | | 15.5 | % | | | 272,983 | | 13.2 | % | | | 9,569 | | | 3.5 | % | | | 266,385 | | 12.7 | % |
| Total real estate mortgage loans | | | 382,648 | | 21.0 | % | | | 393,208 | | 19.0 | % | | | (10,560 | ) | | -2.7 | % | | | 389,553 | | 18.5 | % |
| Commercial real estate loans | | | 863,658 | | 47.4 | % | | | 882,092 | | 42.7 | % | | | (18,434 | ) | | -2.1 | % | | | 867,902 | | 41.1 | % |
| Installment and other consumer loans | | | 19,023 | | 1.0 | % | | | 21,942 | | 1.1 | % | | | (2,919 | ) | | -13.3 | % | | | 22,514 | | 1.1 | % |
| Total loans | | $ | 1,822,001 | | 100.0 | % | | $ | 2,064,796 | | 100.0 | % | | $ | (242,795 | ) | | -11.8 | % | | $ | 2,109,517 | | 100.0 | % |
The Bank’s total loan portfolio was $1.8 billion at September 30, 2009, a decrease of $243 million, or 12%, from December 31, 2008. Interest and fees earned on our loan portfolio is our primary source of revenue and the decline in loan originations will continue to have a negative impact on loan balances, interest income, and loan fees earned. We anticipate that continued weakness in the housing market will result in a continuing decline in construction loan balances for the remainder of 2009, and thus put continued downward pressure on loan related revenues. However, looking forward, with the additional capital raised, we are hopeful the economy will allow for an increased level of prudent loan originations to qualified borrowers.
At September 30, 2009, the Bank had outstanding loans to persons serving as directors, officers, principal stockholders and their related interests. These loans, when made, were on substantially the same terms, including interest rates, maturities and collateral, as comparable loans made to other customers of the Bank. At September 30, 2009, and December 31, 2008, Bancorp had no bankers’ acceptances.
Below is a discussion of our loan portfolio by category. In certain tables we distinguish loans other than two-step loans from those in our two-step loan portfolio. Management is providing this information to aid in the readers’ understanding of the impact of the two-step loan portfolio on our entire loan portfolio.
Commercial.The commercial loan portfolio decreased $76 million, or 16%, since year end 2008. The decline in this portfolio was a reflection of the adverse economic conditions reducing the demand for credit as well as fewer qualified borrowers. We also elected to limit new loan originations to customers in certain sectors, including businesses related to the housing industry, and decided to exit certain high risk client relationships. However, in terms of our long term strategy we expect the commercial loan portfolio to be an important contributor to growth in future revenues and the capital raise will support our efforts to strategically pursue opportunities in targeted commercial lending segments.
In originating commercial loans, our underwriting standards may include maximum loan to value ratios, target levels for debt service coverage and other financial covenants specific to the loan and the borrower. Common forms of collateral pledged to secure our commercial loans are real estate, accounts receivable, inventory, equipment, agricultural crops and/or livestock and marketable securities. Commercial loans typically have maximum terms of one to ten years and loan to value ratios in the range of 50% to 80%.
Real Estate Construction.The composition of real estate construction loans by type of project is as follows for the periods shown:
| | | | | | | | | | | | | | Change from | | | | | | |
| | September 30, 2009 | | December 31, 2008 | | December 31, 2008 | | September 30, 2008 |
| (Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Commercial construction | | $ | 43,944 | | 29 | % | | $ | 92,414 | | 32 | % | | $ | (48,470 | ) | | -52 | % | | $ | 89,599 | | 27 | % |
| Two-step loans | | | 5,128 | | 4 | % | | | 53,084 | | 19 | % | | | (47,956 | ) | | -90 | % | | | 97,894 | | 30 | % |
| Residential construction to builders | | | 55,227 | | 37 | % | | | 74,923 | | 26 | % | | | (19,696 | ) | | -26 | % | | | 72,215 | | 22 | % |
| Residential subdivision or site development | | | 45,566 | | 30 | % | | | 64,728 | | 23 | % | | | (19,162 | ) | | -30 | % | | | 71,125 | | 21 | % |
| Total real estate construction loans | | $ | 149,865 | | 100 | % | | $ | 285,149 | | 100 | % | | $ | (135,284 | ) | | -47 | % | | $ | 330,833 | | 100 | % |
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At September 30, 2009, the balance of real estate construction loans was $150 million, down $135 million or 47% from $285 million at December 31, 2008. Total real estate construction loans represented 8% of the loan portfolio at the end of the third quarter, down from 14% at December 31, 2008 and 16% a year ago. At September 30, 2009, or prior to considering the effects of the capital raise, the Bank was within the “Interagency Guidelines for Real Estate Lending Policies” and the “Commercial Real Estate Lending Joint Guidance” policy guidelines for concentrations in construction loans outstanding relative to the sum of Tier 1 capital and allowance for credit losses. We do not believe the September 30, 2009 level of our overall construction concentration is excessive in light of our current capital position.
Real estate construction loans to builders are generally secured by the property underlying the project that is being financed. Construction loans to builders and developers typically have terms from 12 to 24 months and initial loan to value ratios in the range of 60% to 85%, based on the estimated value of the collateral to be built at the time of loan origination. However, until the supply and demand for new homes is more in balance, there will be limited demand for new residential construction loans in the market place. We are not financing additional residential land or site development loans at this time. Limited financing may be made available under existing commitments for vertical construction financing to selective qualified builders.
Additional detail regarding construction and land loans is provided in the tables below. Land loans are carried in the Bank’s residential mortgage and commercial real estate portfolios, depending on the purpose of the loan, but such loans are included below due to their relationship to construction loans generally.
The composition of the residential construction and land loan portfolio by purpose is as follows for the periods shown:
| | West Coast Bancorp |
| | Residential construction and land loans including two-step loans |
| | September 30, 2009 | | December 31, 2008 | | September 30, 2008 |
| | | | | Percent of | | | | | Percent of | | | | | Percent of |
| (Dollars in thousands, unaudited) | | Amount | | total loans2 | | Amount | | total loans2 | | Amount | | total loans2 |
| Accruing residential construction loans and land loans | | | | | | | | | | | | | | | | | | |
| Land loans1 | | $ | 6,547 | | 0.4 | % | | $ | 17,887 | | 0.9 | % | | $ | 18,730 | | 0.9 | % |
| Site development | | | 18,781 | | 1.0 | % | | | 37,437 | | 1.8 | % | | | 57,394 | | 2.7 | % |
| Vertical construction | | | 44,899 | | 2.5 | % | | | 61,593 | | 3.0 | % | | | 66,098 | | 3.1 | % |
| Two-step residential construction to individuals | | | - | | 0.0 | % | | | 3,124 | | 0.2 | % | | | 14,904 | | 0.7 | % |
| Total accruing residential construction and land loans | | $ | 70,227 | | 3.9 | % | | $ | 120,041 | | 5.8 | % | | $ | 157,126 | | 7.4 | % |
| | | | | | | | | | | | | | | | | | | |
| Nonaccrual residential construction loans and land loans | | | | | | | | | | | | | | | | | | |
| Land loans1 | | $ | 8,236 | | 0.5 | % | | $ | 5,608 | | 0.3 | % | | $ | 5,308 | | 0.3 | % |
| Site development | | | 26,785 | | 1.5 | % | | | 27,291 | | 1.3 | % | | | 13,731 | | 0.7 | % |
| Vertical construction | | | 10,364 | | 0.6 | % | | | 9,703 | | 0.5 | % | | | 7,294 | | 0.3 | % |
| Two-step residential construction to individuals | | | 5,128 | | 0.3 | % | | | 49,960 | | 2.4 | % | | | 82,990 | | 3.9 | % |
| Total nonaccrual residential construction and land loans | | $ | 50,513 | | 2.8 | % | | $ | 92,562 | | 4.5 | % | | $ | 109,323 | | 5.2 | % |
| | | | | | | | | | | | | | | | | | | |
| Total residential construction and land loans | | | | | | | | | | | | | | | | | | |
| Land loans1 | | $ | 14,783 | | 0.8 | % | | $ | 23,495 | | 1.1 | % | | $ | 24,038 | | 1.1 | % |
| Site development | | | 45,566 | | 2.5 | % | | | 64,728 | | 3.1 | % | | | 71,125 | | 3.4 | % |
| Vertical construction | | | 55,263 | | 3.0 | % | | | 71,296 | | 3.5 | % | | | 73,392 | | 3.5 | % |
| Two-step residential construction to individuals | | | 5,128 | | 0.3 | % | | | 53,084 | | 2.6 | % | | | 97,894 | | 4.6 | % |
| Total residential construction and land loans | | $ | 120,740 | | 6.6 | % | | $ | 212,603 | | 10.3 | % | | $ | 266,449 | | 12.6 | % |
1 Land loans represent balances that are carried in the Company's residential real estate mortgage and commercial real estate loan portfolios.
2Calculations have been based on more detailed information and therefore may not recompute exactly due to rounding.
As shown in the table above, of the $120.7 million residential construction and land loans portfolio, $70.2 million was accruing and $50.5 million was nonaccruing at September 30, 2009. The nonaccrual loan balance declined 45% from $92.6 million at year end 2008, predominantly due to foreclosed two-step related properties taken into the Bank’s OREO portfolio. Site development loans totaled $45.6 million and accounted for the largest portion of the nonaccrual residential construction and land loan balances. At September 30, 2009, the residential vertical construction component amounting to $55.3 million in loans was comprised of $33 million in condominium loans, $17.9 million in speculative construction loans, and $4.4 million in pre-sold construction loans. Residential land loans totaled $14.8 million, which represented less than 1% of the Company’s total loan portfolio at September 30, 2009. Our land loans typically had loan to value ratios of 60% or less at the time of origination. Geographically, residential land loans were not heavily concentrated in any single county within our market areas.
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The components of our accruing residential and commercial construction and land loans outside the two-step portfolio are as follows for the dates shown:
| | West Coast Bancorp |
| | Accruing construction and land loans outside the two-step portfolio |
| | September 30, 2009 | | December 31, 2008 | | September 30, 2008 |
| | | | | Percent of | | | | | Percent of | | | | | Percent of |
| (Dollars in thousands, unaudited) | | Amount | | total loans2 | | Amount | | total loans2 | | Amount | | total loans2 |
| Land loans1 | | $ | 26,413 | | 1.4 | % | | $ | 40,492 | | 2.0 | % | | $ | 39,497 | | 1.9 | % |
| Residential construction loans other than two-step loans | | | 63,680 | | 3.5 | % | | | 99,030 | | 4.8 | % | | | 123,492 | | 5.9 | % |
| Commercial construction loans | | | 41,542 | | 2.3 | % | | | 89,694 | | 4.3 | % | | | 88,630 | | 4.2 | % |
| Total construction and land loans other than two-step loans | | $ | 131,635 | | 7.2 | % | | $ | 229,216 | | 11.1 | % | | $ | 251,619 | | 11.9 | % |
| | | | | | | | | | | | | | | | | | | |
| Components of residential construction and land loans other than two-step loans: | | | | | | | | | | | | | | | | | | |
| Land loans1 | | $ | 6,547 | | 0.4 | % | | $ | 17,887 | | 0.9 | % | | $ | 18,730 | | 0.9 | % |
| Site development | | | 18,781 | | 1.0 | % | | | 37,437 | | 1.8 | % | | | 57,394 | | 2.7 | % |
| Vertical construction | | | 44,899 | | 2.5 | % | | | 61,593 | | 3.0 | % | | | 66,098 | | 3.1 | % |
| Total residential construction and land loans other than two-step loans | | $ | 70,227 | | 3.9 | % | | $ | 116,917 | | 5.7 | % | | $ | 142,222 | | 6.7 | % |
| | | | | | | | | | | | | | | | | | | |
| Components of commercial construction and land loans: | | | | | | | | | | | | | | | | | | |
| Land loans1 | | $ | 19,866 | | 1.1 | % | | $ | 22,605 | | 1.1 | % | | $ | 20,767 | | 1.0 | % |
| Site development | | | 607 | | 0.0 | % | | | 607 | | 0.0 | % | | | 77 | | 0.0 | % |
| Vertical construction | | | 40,935 | | 2.2 | % | | | 89,087 | | 4.3 | % | | | 88,553 | | 4.2 | % |
| Total commercial construction and land loans | | $ | 61,408 | | 3.4 | % | | $ | 112,299 | | 5.4 | % | | $ | 109,397 | | 5.2 | % |
| | | | | | | | | | | | | | | | | | | |
| Components of total construction and land loans other than two-step loans: | | | | | | | | | | | | | | | | | | |
| Land loans1 | | $ | 26,413 | | 1.4 | % | | $ | 40,492 | | 2.0 | % | | $ | 39,497 | | 1.9 | % |
| Site development | | | 19,388 | | 1.1 | % | | | 38,044 | | 1.8 | % | | | 57,471 | | 2.7 | % |
| Vertical construction | | | 85,834 | | 4.7 | % | | | 150,680 | | 7.3 | % | | | 154,651 | | 7.3 | % |
| Total construction and land loans other than two-step loans | | $ | 131,635 | | 7.2 | % | | $ | 229,216 | | 11.1 | % | | $ | 251,619 | | 11.9 | % |
1 Land loans represent balances that are carried in the Company's residential real estate mortgage and commercial real estate loan portfolios.
2 Calculations have been based on more detailed information and therefore may not recompute exactly due to rounding.
At September 30, 2009, there were $131.6 million in accruing construction and land loans, a decline of 48% or $120.0 million from September 30, 2008. Accruing residential land and site development loans were $25.3 million, down 67% from $76.1 million a year ago. As a result of contracting accruing construction and land loan balances, we expect a declining trend in migration to nonaccrual status from such loans.
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Real Estate Mortgage.The following table presents the components of our real estate mortgage loan portfolio:
| | | | | | | | | | | | | Change from | | | | | | |
| September 30, 2009 | | December 31, 2008 | | December 31, 2008 | | September 30, 2008 |
| (Dollars in thousands) | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Mortgage | $ | 78,144 | | 20 | % | | $ | 87,628 | | 22 | % | | $ | (9,484 | ) | | -11 | % | | $ | 90,510 | | 23 | % |
| Nonstandard mortgage product | | 21,952 | | 6 | % | | | 32,597 | | 8 | % | | | (10,645 | ) | | -33 | % | | | 32,658 | | 9 | % |
| Home equity loans and lines of credit | | 282,552 | | 74 | % | | | 272,983 | | 70 | % | | | 9,569 | | | 4 | % | | | 266,385 | | 68 | % |
| Total real estate mortgage | $ | 382,648 | | 100 | % | | $ | 393,208 | | 100 | % | | $ | (10,560 | ) | | -3 | % | | $ | 389,553 | | 100 | % |
At September 30, 2009, real estate mortgage loan balances were $382.6 million or approximately 20% of the Company’s total loan portfolio. This included $22.0 million in our nonstandard mortgage product, a decline from $32.6 million at December 31, 2008 due to very limited new nonstandard mortgage loan originations, charge-offs, and borrower pay downs. At September 30, 2009, the allowance for credit losses associated with nonstandard loans was $1.8 million.
Home equity lines and loans represented about 74% or $282.6 million of the real estate mortgage portfolio. The Bank’s home equity lines and loans were almost entirely generated within our market area and they were all originated through our branches. The portfolio grew steadily over the past few years as a result of focused and on going marketing efforts; however, growth has slowed over the past year as a result of the Bank’s ongoing analysis of market conditions and adjustments being made to our pricing and underwriting standards, along with decreased customer demand. As shown below, the home equity line utilization percentage averaged approximately 60% at September 30, 2009, and has been fairly consistent across the year of origination.
| | Year of Origination |
| | Year to Date | | | | | | | | | | | | | | | | | | | | | | 2003& | | | | |
| (Dollars in thousands) | | 9/30/09 | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | Earlier | | Total |
| Home Equity Lines | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commitments | | $ | 29,759 | | | $ | 66,842 | | | $ | 83,864 | | | $ | 85,961 | | | $ | 63,012 | | | $ | 29,732 | | | $ | 60,127 | | | $ | 419,297 | |
| Outstanding Balance | | | 17,796 | | | | 41,457 | | | | 54,314 | | | | 53,447 | | | | 40,369 | | | | 16,302 | | | | 28,732 | | | | 252,417 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utilization | | | 59.8 | % | | | 62.0 | % | | | 64.8 | % | | | 62.2 | % | | | 64.1 | % | | | 54.8 | % | | | 47.8 | % | | | 60.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Home Equity Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Balance | | | 3,188 | | | | 9,057 | | | | 6,969 | | | | 5,191 | | | | 1,383 | | | | 1,098 | | | | 3,249 | | | | 30,135 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Home Equity Outstanding | | $ | 20,984 | | | $ | 50,514 | | | $ | 61,283 | | | $ | 58,638 | | | $ | 41,752 | | | $ | 17,400 | | | $ | 31,981 | | | $ | 282,552 | |
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As indicated in the table below, the average Beacon score for the home equity line and loan portfolios were 762 and 730, respectively. While the delinquencies and charge-offs have been modest within these portfolios, we anticipate the weak economy coupled with high unemployment in our markets will lead to increased delinquencies and charge-offs going forward.
The following table presents an overview of home equity lines of credit and loans as of the dates shown:
| | | | | | | | | | | | | | | |
| September 30, 2009 | | December 31, 2008 |
| (Dollars in thousands) | Lines | | Loans | | Lines | | Loans |
| Total Outstanding Balance | $ | 252,417 | | | $ | 30,135 | | | $ | 239,457 | | | $ | 33,526 | |
| | | | | | | | | | | | | | | | |
| Average Current Beacon Score | | 762 | | | | 730 | | | | 763 | | | | 729 | |
| | | | | | | | | | | | | | | | |
| Delinquent % 30 Days or Greater | | 0.16 | % | | | 0.20 | % | | | 0.04 | % | | | 0.22 | % |
| % Net Charge-Offs Year to Date | | 0.59 | % | | | 1.64 | % | | | 0.05 | % | | | 0.28 | % |
| | | | | | | | | | | | | | | | |
| % 1st Lien Position | | 38 | % | | | 38 | % | | | 34 | % | | | 39 | % |
| % 2nd Lien Position | | 62 | % | | | 62 | % | | | 66 | % | | | 61 | % |
| | | | | | | | | | | | | | | | |
| Overall Original Loan-to-Value | | 63 | % | | | 62 | % | | | 65 | % | | | 64 | % |
| | | | | | | | | | | | | | | | |
| Original Loan-to-Value < 80% | | 79 | % | | | 67 | % | | | 75 | % | | | 66 | % |
| Original Loan-to-Value > 80, < 90% | | 20 | % | | | 24 | % | | | 24 | % | | | 28 | % |
| Original Loan-to-Value > 90, < 100% | | 1 | % | | | 9 | % | | | 1 | % | | | 6 | % |
| | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | | |
| Related Loans and Deposits1 | $ | 332,836 | | | $ | 17,866 | | | $ | 367,956 | | | $ | 20,857 | |
1These amounts represent the total amount of other loan and deposit balances associated with our customers having a home equity line or loan.
The following table shows home equity lines of credit and loans by market areas at the date shown and indicates a geographic distribution of balances representative of our branch presence in these markets:
| (Dollars in thousands) | September 30, | | Percent of | | December 31, | | Percent of |
| Region | 2009 | | total | | 2008 | | total |
| Portland, Oregon / Vancouver, Washington | $ | 120,649 | | 43 | % | | $ | 114,148 | | 42 | % |
| Willamette Valley (Salem, Eugene) | | 85,861 | | 30 | % | | | 85,293 | | 31 | % |
| Western Washington (Olympia, Seattle) | | 37,469 | | 13 | % | | | 36,499 | | 14 | % |
| Oregon Coast (Newport, Lincoln City) | | 26,967 | | 10 | % | | | 25,032 | | 9 | % |
| Central Oregon (Bend, Redmond) | | 8,568 | | 3 | % | | | 8,553 | | 3 | % |
| Other | | 3,038 | | 1 | % | | | 3,458 | | 1 | % |
| Total home equity loans and lines of credit | $ | 282,552 | | 100 | % | | $ | 272,983 | | 100 | % |
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Commercial Real Estate.The composition of commercial real estate loan types based on collateral is as follows:
| | September 30, 2009 | | December 31, 2008 |
| (Dollars in thousands) | | Amount | | Percent | | Amount | | Percent |
| Office Buildings | | $ | 188,323 | | | 21.8 | % | | $ | 195,033 | | | 22.1 | % |
| Retail Facilities | | | 117,401 | | | 13.6 | % | | | 118,072 | | | 13.4 | % |
| Commercial/Agricultural | | | 62,255 | | | 7.2 | % | | | 65,177 | | | 7.4 | % |
| Multi-Family - 5+ Residential | | | 59,596 | | | 6.9 | % | | | 59,386 | | | 6.7 | % |
| Medical Offices | | | 58,405 | | | 6.8 | % | | | 62,111 | | | 7.1 | % |
| Industrial parks and related | | | 56,046 | | | 6.5 | % | | | 58,514 | | | 6.6 | % |
| Manufacturing Plants | | | 52,174 | | | 6.0 | % | | | 42,102 | | | 4.8 | % |
| Hotels/Motels | | | 37,473 | | | 4.3 | % | | | 36,478 | | | 4.1 | % |
| Land Development and Raw Land | | | 27,082 | | | 3.1 | % | | | 31,582 | | | 3.6 | % |
| Mini Storage | | | 26,114 | | | 3.0 | % | | | 27,725 | | | 3.2 | % |
| Assisted Living | | | 22,233 | | | 2.6 | % | | | 20,360 | | | 2.3 | % |
| Food Establishments | | | 18,445 | | | 2.1 | % | | | 18,897 | | | 2.1 | % |
| Other | | | 138,111 | | | 16.1 | % | | | 146,655 | | | 16.6 | % |
| Total commercial real estate loans | | $ | 863,658 | | | 100.0 | % | | $ | 882,092 | | | 100.0 | % |
As shown above, the term commercial real estate portfolio balance decreased $18.4 million or 2% from December 31, 2008 to September 30, 2009. The decline occurred in the non-owner occupied segment which, by occupancy type, represented approximately 51% of the total commercial real estate loan portfolio at September 30, 2009. At September 30, 2009, or prior to considering the effects of the capital raise, the Bank was within the “Interagency Guidelines for Real Estate Lending Policies” and the “Commercial Real Estate Lending Joint Guidance” policy guidelines for concentrations in construction loans outstanding relative to the sum of Tier 1 capital and allowance for credit losses. Office buildings and retail facilities account for 35% of the collateral securing the $863.7 million term commercial real estate portfolio at the end of the third quarter. The term commercial real estate portfolio is seasoned. We believe the Bank’s underwriting of term commercial real estate loans is consistent with the industry with loan to value ratios generally not exceeding 75% at origination and debt service coverage ratios generally at 120% or better at origination. In considering new origination activity for this portfolio, we will continue to concentrate on owner-occupied real estate financing, and will begin to consider non owner-occupied financing opportunities within the range of our risk parameters, expertise, and real estate concentration policy limits.
The composition of the commercial real estate loan portfolio by occupancy type is as follows:
| | September 30, 2009 | | December 31, 2008 | | Change |
| (Dollars in thousands) | | Amount | | Mix
Percent | | Amount | | Mix
Percent | | Amount | | Mix
Percent |
| Owner occupied | | $ | 424,577 | | | 49 | % | | $ | 416,817 | | | 47 | % | | $ | 7,760 | | | | 2 | % |
| Non-owner occupied | | | 439,081 | | | 51 | % | | | 465,275 | | | 53 | % | | | (26,194 | ) | | | -2 | % |
| Total commercial real estate loans | | $ | 863,658 | | | 100 | % | | $ | 882,092 | | | 100 | % | | $ | (18,434 | ) | | | | |
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Credit Management
Credit risk is inherent in our lending activities. We manage the general risks inherent in the loan portfolio by following loan policies and underwriting practices designed to result in prudent lending activities. In addition, we attempt to manage our risk through our credit administration and credit review functions that are designed to help confirm our credit standards are being followed. Through the credit review function we monitor credit related policies and practices on a post approval basis. Significant findings and periodic reports are communicated to the chief credit officer and chief executive officer and, in certain cases, to the Loan, Investment, and Asset Liability Committee, which is made up of certain directors. Credit risk in the loan portfolio can be amplified by concentrations. We manage our concentration risk on an ongoing basis by establishing a maximum amount of credit that may be extended to any one borrower and by employing concentration limits that regulate exposure levels by portfolio segment. Concentration limits for construction and term real estate are well defined and are consistent with requirements as outlined in our formal regulatory agreement.
Our residential construction portfolio, consisting of loans to developers and builders, is a portfolio we consider to have higher risk. The current downturn in residential real estate has slowed land, lot and home sales within our markets, has resulted in lengthening the marketing period for completed homes and has negatively affected borrower liquidity and collateral values. We have been reducing our exposure in residential construction, including establishing new targets to lower our concentration levels in loans of this type. We also expect the downturn in housing to continue to increase the risk profile of related commercial borrowers, particularly those that are involved in commercial activities that support the supply chain of products and services used by the housing industry. Accordingly, we are monitoring the financial condition of existing borrowers within this commercial loan segment and are selectively managing the level of loan exposure downward. An important component of managing our residential construction portfolio involves stress testing, at both a portfolio and individual borrower level. Our stress test for individual residential construction borrowers focuses on examining project performance relative to cash flow and collateral value under a range of assumptions that include interest rates, net operating income, and capitalization rate assumptions. This level of risk monitoring helps the Bank identify potential problem loans early and put together action plans, which may include requiring borrowers to replenish interest reserves, decrease construction draws, or transfer the borrowing relationship to our special asset team for closer monitoring.
Current economic conditions are the most challenging the banking industry has faced in many years, and we expect economic pressures to continue through 2009 and into 2010. Consequently, we are highly focused on monitoring and managing credit risk across all of our loan portfolios. As part of our ongoing lending process, internal risk ratings are assigned to each commercial, commercial real estate and real estate construction loan before the funds are advanced to the customer. Credit risk ratings are based on our assessment of the borrower’s credit worthiness and the quality of our collateral position at the time a particular loan is made. Thereafter, credit risk ratings are evaluated on an ongoing basis focusing on our interpretation of relevant risk factors known to us at the time of each evaluation. Large credit relationships have their credit risk rating reviewed at least annually, and given current economic conditions, risk rating evaluations may occur more frequently. Our relationship managers play a critical element in this process by evaluating the ongoing financial condition of each borrower in their respective portfolio of loans. These activities include, but are not limited to, maintaining open communication channels with borrowers, analyzing periodic financial statements and cash flow projections, evaluating collateral, monitoring covenant compliance, and evaluating the financial capacity of guarantors. Collectively, these activities represent an ongoing process which results in an assessment of credit risk associated with each commercial, commercial real estate, and real estate construction loan consistent with our internal risk rating guidelines. Our risk rating process is a critical component in estimating the required allowance for credit losses, as discussed in the Allowance for Credit Losses section which follows. Credit files are also examined periodically on a sample test basis by our credit review department and internal auditors, as well as by regulatory examiners. Examinations by our credit review department and regulatory examiners can lead to additional changes in risk ratings, which, in turn, may lead to additional provision for credit losses in a particular period to keep our allowance for credit losses in line with revised expectations.
Although a risk of nonpayment exists with respect to all loans, certain specific types of risks are associated with different types of loans. The expected source of repayment of Bancorp’s loans is generally the cash flow of a particular project, income from the borrower's business, proceeds from the sale of real property, proceeds of refinancing, or personal income. Real estate is frequently a material component of collateral for our loans. Risks associated with loans secured by real estate include decreasing land and property values, material increases in interest rates, deterioration in local economic conditions, changes in tax policies, and tightening credit or refinancing markets. In addition, we face increased risks if we have a concentration of loans within any one area. See “Risk Factors” under Part II, Item 1A of this report and in our 2008 10-K.
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Nonperforming Assets and Delinquencies
Nonperforming Assets.Nonperforming assets consist of nonaccrual loans, loans past due more than 90 days and still accruing interest and OREO. The following table presents information with respect to total nonaccrual loans by category and OREO for the periods shown.
| Total loan portfolio, nonperforming assets: | | September 30, 2009 | | December 31, 2008 | | | | | | | | | | September 30, 2008 |
| (Dollars in thousands) | | Amount | | Percent of
loan
category | | Amount | | Percent of
loan
category | | Change | | Percent | | Amount | | Percent of
loan
category |
| Commercial loans | | $ | 49,871 | | | | 12.3 | % | | $ | 6,250 | | | | 1.3 | % | | $ | 43,621 | | | | 697.9 | % | | $ | 6,651 | | | | 1.3 | % |
| Real estate construction loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate construction | | | 2,449 | | | | 5.6 | % | | | 2,922 | | | | 3.2 | % | | | (473 | ) | | | -16.2 | % | | | - | | | | 0.0 | % |
| Residential real estate construction | | | 37,149 | | | | 36.9 | % | | | 40,752 | | | | 29.2 | % | | | (3,603 | ) | | | -8.8 | % | | | 21,024 | | | | 4.3 | % |
| Two-step residential construction | | | 5,128 | | | | 100.0 | % | | | 49,960 | | | | 94.1 | % | | | (44,832 | ) | | | -89.7 | % | | | 82,990 | | | | 67.8 | % |
| Total real estate construction loans | | | 44,726 | | | | 29.8 | % | | | 93,634 | | | | 32.8 | % | | | (48,908 | ) | | | -52.2 | % | | | 104,014 | | | | 26.5 | % |
| Real estate mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage | | | 12,498 | | | | 16.0 | % | | | 8,283 | | | | 9.5 | % | | | 4,215 | | | | 50.9 | % | | | 6,384 | | | | 7.3 | % |
| Nonstandard mortgage product | | | 10,810 | | | | 49.2 | % | | | 15,229 | | | | 46.7 | % | | | (4,419 | ) | | | -29.0 | % | | | 11,834 | | | | 38.8 | % |
| Home equity line of credit | | | 1,599 | | | | 0.6 | % | | | 1,043 | | | | 0.4 | % | | | 556 | | | | 53.3 | % | | | 644 | | | | 0.2 | % |
| Total real estate mortgage loans | | | 24,907 | | | | 6.5 | % | | | 24,555 | | | | 6.2 | % | | | 352 | | | | 1.4 | % | | | 18,862 | | | | 5.0 | % |
| Commercial real estate loans | | | 12,463 | | | | 1.4 | % | | | 3,145 | | | | 0.4 | % | | | 9,318 | | | | 296.3 | % | | | 5,636 | | | | 0.7 | % |
| Installment and other consumer loans | | | 39 | | | | 0.2 | % | | | 6 | | | | 0.0 | % | | | 33 | | | | 550.0 | % | | | 14 | | | | 0.1 | % |
| Total nonaccrual loans | | | 132,006 | | | | 7.2 | % | | | 127,590 | | | | 6.2 | % | | | 4,416 | | | | 3.5 | % | | | 135,177 | | | | 6.3 | % |
| 90 day past due and accruing interest | | | - | | | | | | | | - | | | | | | | | - | | | | | | | | - | | | | | |
| Total nonperforming loans | | | 132,006 | | | | 7.2 | % | | | 127,590 | | | | 6.2 | % | | | 4,416 | | | | 3.5 | % | | | 135,177 | | | | 6.3 | % |
| Other real estate owned | | | 76,570 | | | | | | | | 70,110 | | | | | | | | 6,460 | | | | 9.2 | % | | | 48,121 | | | | | |
| Total nonperforming assets | | | 208,576 | | | | | | | | 197,700 | | | | | | | | 10,876 | | | | | | | | 183,298 | | | | | |
| |
| Nonperforming loans to total loans | | | 7.25 | % | | | | | | | 6.18 | % | | | | | | | | | | | | | | | 6.41 | % | | | | |
| Nonperforming assets to total assets | | | 7.86 | % | | | | | | | 7.86 | % | | | | | | | | | | | | | | | 7.12 | % | | | | |
| |
| Delinquent loans 30-89 days past due | | $ | 13,136 | | | | | | | $ | 6,850 | | | | | | | $ | 6,286 | | | | | | | $ | 15,008 | | | | | |
| Delinquent loans to total loans | | | 0.72 | % | | | | | | | 0.34 | % | | | | | | | | | | | | | | | 0.71 | % | | | | |
| |
| Loans other than two-step loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual loans | | $ | 126,878 | | | | | | | $ | 77,630 | | | | | | | $ | 49,248 | | | | | | | $ | 52,187 | | | | | |
| Other real estate owned | | | 20,014 | | | | | | | | 10,088 | | | | | | | | 9,926 | | | | | | | | 3,446 | | | | | |
| Total nonperforming assets | | $ | 146,892 | | | | | | | $ | 87,718 | | | | | | | $ | 59,174 | | | | | | | $ | 55,633 | | | | | |
| |
| Nonperforming loans to total loans | | | 6.10 | % | | | | | | | 3.86 | % | | | | | | | 2.24 | % | | | | | | | 2.59 | % | | | | |
| Nonperforming assets to total assets | | | 5.54 | % | | | | | | | 3.49 | % | | | | | | | 2.05 | % | | | | | | | 2.16 | % | | | | |
| |
| Two-step loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual two-step loans | | $ | 5,128 | | | | | | | $ | 49,960 | | | | | | | $ | (44,832 | ) | | | | | | $ | 82,990 | | | | | |
| Other real estate owned two-step loans | | | 56,556 | | | | | | | | 60,022 | | | | | | | | (3,466 | ) | | | | | | | 44,675 | | | | | |
| Total nonperforming two-step assets | | $ | 61,684 | | | | | | | $ | 109,982 | | | | | | | $ | (48,298 | ) | | | | | | $ | 127,665 | | | | | |
| |
| Nonperforming two-step assets to total assets | | | 2.32 | % | | | | | | | 4.37 | % | | | | | | | -2.05 | % | | | | | | | 4.96 | % | | | | |
At September 30, 2009, total nonperforming assets were $208.6 million, or 7.86% of total assets, relatively unchanged from $197.7 million, or 7.86%, at December 31, 2008. Nonperforming assets other than two-step loans increased from $87.7 million, or 3.49% of total assets at year end 2008, to $146.9 million, or 5.54% of total assets at September 30, 2009. At September 30, 2009, such nonperforming assets had been written down 26% from their original principal loan balance. The largest increase was in nonaccruing commercial loans where five commercial relationships represent $40.9 million of the $49.9 million nonaccrual commercial balance at September 30, 2009. Nonperforming assets associated with two-step loans declined to $62 million from $110 million at December 31, 2008, mainly due to the disposition of 135 two-step related OREO properties during the first nine months of 2009. The amount and level of nonaccrual loans depends on portfolio growth, portfolio seasoning, problem loan recognition and resolution through collections, sales or charge-offs. The performance of any one loan can be affected by external factors, such as economic or market conditions, or factors particular to a borrower, such as actions of a borrower’s management or conditions affecting a borrower’s business.
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The following table shows the components of our nonaccrual residential and commercial construction and land loans outside the two-step portfolio as of the dates shown.
| | Nonaccrual construction and land loans outside the two-step portfolio |
| | September 30, 2009 | | December 31, 2008 | | Change | | September 30, 2008 |
| (Dollars in thousands, unaudited) | | Amount | | Percent of
loan
category2 | | Amount | | Percent of
loan
category2 | | Amount | | Percent | | Amount | | Percent of
loan
category2 |
| Land loans1 | | $ | 9,232 | | | 25.9 | % | | $ | 5,794 | | | 12.5 | % | | $ | 3,438 | | | | 59.3 | % | | $ | 5,308 | | | 3.2 | % |
| |
| Residential construction loans other than two-step loans | | | 37,149 | | | 36.8 | % | | | 36,994 | | | 27.2 | % | | | 155 | | | | 0.4 | % | | | 13,731 | | | 8.2 | % |
| Commercial construction loans | | | 2,449 | | | 5.6 | % | | | 2,922 | | | 3.2 | % | | | (473 | ) | | | -16.2 | % | | | 7,294 | | | 4.3 | % |
| Total nonaccrual construction and land loans other than | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| two-step loans | | $ | 48,830 | | | 27.1 | % | | $ | 45,710 | | | 16.6 | % | | $ | 3,120 | | | | 6.8 | % | | $ | 26,333 | | | 15.6 | % |
| |
| Components of nonaccrual residential construction and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| land loans other than two-step loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Land loans1 | | $ | 8,236 | | | 55.7 | % | | $ | 5,608 | | | 23.9 | % | | $ | 2,628 | | | | 46.9 | % | | $ | 5,308 | | | 3.2 | % |
| Site development | | | 26,785 | | | 58.8 | % | | | 27,291 | | | 42.2 | % | | | (506 | ) | | | -1.9 | % | | | 13,731 | | | 8.2 | % |
| Vertical construction | | | 10,364 | | | 18.8 | % | | | 9,703 | | | 13.6 | % | | | 661 | | | | 6.8 | % | | | 7,294 | | | 4.3 | % |
| Total nonaccrual residential construction and land loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| other than two-step loans | | $ | 45,385 | | | 39.3 | % | | $ | 42,602 | | | 26.7 | % | | $ | 2,783 | | | | 6.5 | % | | $ | 26,333 | | | 15.6 | % |
| |
| Components of nonaccrual commercial construction and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| land loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Land loans1 | | | 996 | | | 4.8 | % | | | 186 | | | 0.8 | % | | $ | 810 | | | | 435.5 | % | | | - | | | 0.0 | % |
| Site development | | | - | | | 0.0 | % | | | - | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | 0.0 | % |
| Vertical construction | | | 2,449 | | | 5.6 | % | | | 2,922 | | | 3.2 | % | | | (473 | ) | | | -16.2 | % | | | - | | | 0.0 | % |
| Total nonaccrual commercial construction and land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| loans | | $ | 3,445 | | | 5.3 | % | | $ | 3,108 | | | 2.7 | % | | $ | 337 | | | | 10.8 | % | | $ | - | | | 0.0 | % |
| |
| Components of total nonaccrual construction and land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| loans other than two-step loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Land loans1 | | $ | 9,232 | | | 25.9 | % | | $ | 5,794 | | | 12.5 | % | | $ | 3,438 | | | | 59.3 | % | | $ | 5,308 | | | 1.9 | % |
| Site development | | | 26,785 | | | 58.0 | % | | | 27,291 | | | 41.8 | % | | | (506 | ) | | | -1.9 | % | | | 13,731 | | | 4.9 | % |
| Vertical construction | | | 12,813 | | | 13.0 | % | | | 12,625 | | | 7.7 | % | | | 188 | | | | 1.5 | % | | | 7,294 | | | 2.6 | % |
| Total nonaccrual construction and land loans other than | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| two-step loans | | $ | 48,830 | | | 27.1 | % | | $ | 45,710 | | | 16.6 | % | | $ | 3,120 | | | | 6.8 | % | | $ | 26,333 | | | 9.5 | % |
| 1 | | Land loans represent balances that are carried in the Company's residential real estate mortgage and commercial real estate loan portfolios. |
| 2 | | Calculations have been based on more detailed information and therefore may not recompute exactly due to rounding. |
As indicated in the above table and reflecting the difficulties in the housing market, the majority of the $48.8 million in nonaccrual construction and land loan balances outside the two-step portfolio were related to residential construction loans. The residential construction and land loan nonaccrual balance of $45.4 million increased modestly from year end 2008, with the highest level of nonperforming assets continuing within the site development component.
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The following table presents activity in the total OREO portfolio for the periods shown.
| (Dollars in thousands) | | Total OREO activity | | Total short sales | | Total OREO property sales
and short sales |
| Full year 2008: | | Amount | | Number | | Amount | | Number | | Amount | | Number |
| Beginning balance January 1, 2008 | | $ | 3,255 | | | | 15 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 87,799 | | | | 336 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 1,329 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (4,785 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (17,488 | ) | | | (63 | ) | | $ | (11,448 | ) | | | (40 | ) | | $ | (28,936 | ) | | | (103 | ) |
| Ending balance December 31, 2008 | | $ | 70,110 | | | | 288 | | | | | | | | | | | | | | | | | |
| |
| Quarterly 2009: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance January 1, 2009 | | $ | 70,110 | | | | 288 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 25,249 | | | | 79 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 682 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (4,761 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (4,091 | ) | | | (18 | ) | | $ | (3,450 | ) | | | (11 | ) | | $ | (7,541 | ) | | | (29 | ) |
| Ending balance March 31, 2009 | | $ | 87,189 | | | | 349 | | | | | | | | | | | | | | | | | |
| |
| Additions to OREO | | | 13,663 | | | | 48 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 1,156 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (3,064 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (15,114 | ) | | | (62 | ) | | $ | (1,686 | ) | | | (5 | ) | | $ | (16,800 | ) | | | (67 | ) |
| Ending balance June 30, 2009 | | $ | 83,830 | | | | 335 | | | | | | | | | | | | | | | | | |
| |
| Additions to OREO | | | 11,109 | | | | 36 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 955 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (3,797 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (15,527 | ) | | | (70 | ) | | $ | (3,260 | ) | | | (14 | ) | | $ | (18,787 | ) | | | (84 | ) |
| Ending balance September 30, 2009 | | $ | 76,570 | | | | 301 | | | | | | | | | | | | | | | | | |
| |
| Year to date 2009: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance January 1, 2009 | | $ | 70,110 | | | | 288 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 50,021 | | | | 163 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 2,793 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (11,622 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (34,732 | ) | | | (150 | ) | | $ | (8,396 | ) | | | (30 | ) | | $ | (43,128 | ) | | | (180 | ) |
| Ending balance September 30, 2009 | | $ | 76,570 | | | | 301 | | | | | | | | | | | | | | | | | |
OREO is real property of which the Bank has taken possession either through a deed-in-lieu of foreclosure, non-judicial foreclosure, judicial foreclosure or similar process in partial or full satisfaction of a loan or loans. The Company held 301 OREO properties at September 30, 2009, with a total net book value of $76.6 million. Of these, 233 were related to the two-step program. OREO is recorded at the lower of the carrying amount of the loan or fair value less estimated costs to sell. During the first nine months of 2009, the Company sold 150 OREO properties, 122 of which were two-step related. During the same period, the Bank closed 30 short sales of which 13 were two-step related.
Short sales occur when we accept an agreement with a loan obligor to sell the Bank's collateral on a loan that produces net proceeds that is less than what is owed. The obligor receives no proceeds; however, the debt is fully extinguished. A short sale is an alternative to foreclosure. The losses on short sales and valuation adjustments on loans prior to taking ownership of property in OREO are recorded directly to the allowance for loan losses. Management is responsible for estimating the fair market value of OREO and utilizes appraisals and internal judgments in its assessment of fair market value and estimated selling costs. This amount becomes the property’s book value at the time it is taken into OREO. Any valuation adjustments based on our determination of estimated fair market value less cost to sell at the date a particular property is acquired are charged to the allowance for loan losses at that time. Management then periodically reviews OREO to determine whether the property continues to be carried at the lower of its recorded book value or estimated fair value, net of estimated costs to sell. Any further OREO valuation adjustments or subsequent gains or losses upon final disposition of OREO are charged to other noninterest income. Expenses from the acquisition, maintenance and disposition of OREO properties are included in other noninterest expense in the statements of income (loss). It will be critical to our operating results for us to dispose of OREO properties in a timely fashion and at valuations that are consistent with our expectations. We have incurred significant charges to noninterest income in the first nine months of 2009 due to valuation adjustments and losses upon final disposition, including $4.0 million in the current quarter. Continued decline in market values in our area would lead to additional valuation adjustment, which would have an adverse effect on our results of operation.
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The following table presents activity related to the other than two-step OREO portfolio for the periods shown.
| (Dollars in thousands) | | Other than two-step related
OREO activity | | Other than two-step short
sales | | Other than two-step OREO
property sales and short sales |
| Full year 2008: | | Amount | | Number | | Amount | | Number | | Amount | | Number |
| Beginning balance January 1, 2008 | | $ | - | | | | 1 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 11,936 | | | | 42 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 10 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (499 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (1,359 | ) | | | (6 | ) | | $ | - | | | | - | | | $ | (1,359 | ) | | | (6 | ) |
| Ending balance December 31, 2008 | | $ | 10,088 | | | | 37 | | | | | | | | | | | | | | | | | |
| |
| Quarterly 2009: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance January 1, 2009 | | $ | 10,088 | | | | 37 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 4,614 | | | | 17 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 14 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (651 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (195 | ) | | | (1 | ) | | $ | (948 | ) | | | (4 | ) | | $ | (1,143 | ) | | | (5 | ) |
| Ending balance March 31, 2009 | | $ | 13,870 | | | | 53 | | | | | | | | | | | | | | | | | |
| |
| Additions to OREO | | | 3,841 | | | | 15 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 76 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (744 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (2,845 | ) | | | (11 | ) | | $ | (509 | ) | | | (2 | ) | | $ | (3,354 | ) | | | (13 | ) |
| Ending balance June 30, 2009 | | $ | 14,198 | | | | 57 | | | | | | | | | | | | | | | | | |
| |
| Additions to OREO | | | 8,979 | | | | 27 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 86 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (450 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (2,799 | ) | | | (16 | ) | | $ | (2,616 | ) | | | (11 | ) | | $ | (5,415 | ) | | | (27 | ) |
| Ending balance September 30, 2009 | | $ | 20,014 | | | | 68 | | | | | | | | | | | | | | | | | |
| |
| Year to date 2009: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance January 1, 2009 | | $ | 10,088 | | | | 37 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 17,434 | | | | 59 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 176 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (1,845 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (5,839 | ) | | | (28 | ) | | $ | (4,073 | ) | | | (17 | ) | | $ | (9,912 | ) | | | (45 | ) |
| Ending balance September 30, 2009 | | $ | 20,014 | | | | 68 | | | | | | | | | | | | | | | | | |
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The following table presents activity in the two-step OREO portfolio and short sales completed for the periods shown.
| (Dollars in thousands) | | Two-step related OREO activity | | Two-step short sales | | Total two-step OREO
property sales and short
sales |
| Full year 2008: | | Amount | | Number | | Amount | | Number | | Amount | | Number |
| Beginning balance January 1, 2008 | | $ | 3,255 | | | | 14 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 75,863 | | | | 294 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 1,319 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (4,286 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (16,129 | ) | | | (57 | ) | | $ | (11,448 | ) | | | (40 | ) | | $ | (27,577 | ) | | | (97 | ) |
| Ending balance December 31, 2008 | | $ | 60,022 | | | | 251 | | | | | | | | | | | | | | | | | |
| |
| Quarterly 2009: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance January 1, 2009 | | $ | 60,022 | | | | 251 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 20,635 | | | | 62 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 668 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (4,110 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (3,896 | ) | | | (17 | ) | | $ | (2,502 | ) | | | (7 | ) | | $ | (6,398 | ) | | | (24 | ) |
| Ending balance March 31, 2009 | | $ | 73,319 | | | | 296 | | | | | | | | | | | | | | | | | |
| |
| Additions to OREO | | | 9,822 | | | | 33 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 1,080 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (2,320 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (12,269 | ) | | | (51 | ) | | $ | (1,177 | ) | | | (3 | ) | | $ | (13,446 | ) | | | (54 | ) |
| Ending balance June 30, 2009 | | $ | 69,632 | | | | 278 | | | | | | | | | | | | | | | | | |
| |
| Additions to OREO | | | 2,130 | | | | 9 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 869 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (3,347 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (12,728 | ) | | | (54 | ) | | $ | (644 | ) | | | (3 | ) | | $ | (13,372 | ) | | | (57 | ) |
| Ending balance September 30, 2009 | | $ | 56,556 | | | | 233 | | | | | | | | | | | | | | | | | |
| |
| Year to date 2009: | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance January 1, 2009 | | $ | 60,022 | | | | 251 | | | | | | | | | | | | | | | | | |
| Additions to OREO | | | 32,587 | | | | 104 | | | | | | | | | | | | | | | | | |
| Capitalized improvements | | | 2,617 | | | | | | | | | | | | | | | | | | | | | |
| Valuation adjustments | | | (9,777 | ) | | | | | | | | | | | | | | | | | | | | |
| Disposition of OREO properties and short sales | | | (28,893 | ) | | | (122 | ) | | $ | (4,323 | ) | | | (13 | ) | | $ | (33,216 | ) | | | (135 | ) |
| Ending balance September 30, 2009 | | $ | 56,556 | | | | 233 | | | | | | | | | | | | | | | | | |
During the third quarter we disposed of 57 two-step properties, 54 of which were OREO sales and 3 of which were short sales. The combined balance of OREO properties sold and loans associated with short sales was $13.4 million. The majority of the OREO properties continued to be acquired through non-judicial foreclosures. At September 30, 2009, we had 38 two-step OREO sales and short sales pending, as compared to 42 pending sales at June 30, 2009.
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Delinquencies.Bancorp also monitors delinquencies, defined as loan balances 30-89 days past due, not on nonaccrual status, as an indicator of future nonperforming assets. Total delinquencies were $13.1 million or .72% of total loans at September 30, 2009, up from $8.1 million or .39% at December 31, 2008 and down slightly from $15.0 million or .71% at September 30, 2008.
The following table summarizes total delinquent loan balances by type of loan as of the dates shown:
| | September 30, 2009 | | December 31, 2008 | | September 30, 2008 |
| (Dollars in thousands) | | Amount | | Percent of
loan
category | | Amount | | Percent of
loan
category | | Amount | | Percent of
loan
category |
| Loans 30-89 days past due, not in nonaccrual status | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 637 | | | | 0.16 | % | | $ | 2,814 | | | | 0.58 | % | | $ | 299 | | | | 0.06 | % |
| Commercial real estate construction | | | 5,438 | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 1,909 | | | | 2.13 | % |
| Residential real estate construction | | | 3,068 | | | | 12.37 | % | | | 698 | | | | 0.50 | % | | | 6,224 | | | | 4.34 | % |
| Two-step residential construction | | | - | | | | 3.04 | % | | | 1,242 | | | | 2.34 | % | | | 4,089 | | | | 4.18 | % |
| Total real estate construction | | | 8,506 | | | | 5.68 | % | | | 1,940 | | | | 0.68 | % | | | 12,222 | | | | 3.69 | % |
| Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage | | | 921 | | | | 1.18 | % | | | 810 | | | | 0.92 | % | | | 595 | | | | 0.67 | % |
| Nonstandard mortgage product | | | 1,341 | | | | 6.11 | % | | | 965 | | | | 3.10 | % | | | 840 | | | | 2.48 | % |
| Home equity lines of credit | | | 472 | | | | 0.17 | % | | | 159 | | | | 0.06 | % | | | 634 | | | | 0.24 | % |
| Total real estate mortgage | | | 2,734 | | | | 0.75 | % | | | 1,934 | | | | 0.49 | % | | | 2,069 | | | | 0.53 | % |
| Commercial real estate | | | 1,242 | | | | 0.14 | % | | | 1,324 | | | | 0.15 | % | | | 307 | | | | 0.04 | % |
| Installment and consumer | | | 17 | | | | 0.09 | % | | | 80 | | | | 0.36 | % | | | 111 | | | | 0.49 | % |
| Total loans 30-89 days past due, not in nonaccrual status | | $ | 13,136 | | | | | | | $ | 8,092 | | | | | | | $ | 15,008 | | | | | |
| |
| Delinquent loans past due 30-89 days to total loans | | | 0.72 | % | | | | | | | 0.39 | % | | | | | | | 0.71 | % | | | | |
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Allowance for Credit Losses and Net Loan Charge-offs
Allowance for Credit Losses.An allowance for credit losses has been established based on management’s best estimate, as of the balance sheet date, of probable losses inherent in the loan portfolio. Please see the Company’s 2008 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Credit Losses and Net Loan Charge-offs” for a discussion of methodologies underlying the calculation of the Company’s allowance for credit losses. Our policy is to generally record impairments associated with collateral dependent loans as charge-offs promptly following our determination that an impairment exists. In certain cases where we have identified and estimated an impairment but are still evaluating additional information, specific reserves may be established for collateral dependent impaired loans. Upon receipt of required information, specific reserves are discontinued and charge-offs for impairments are processed. In addition, net overdraft losses are included in the calculation of the allowance for credit losses per the guidance provided by regulatory authorities early in 2005, “Joint Guidance on Overdraft Protection Programs.”
The Company maintains its allowance for credit losses by charging a provision for credit losses against income in periods in which management believes additional allowance is appropriate to accommodate its estimate of losses in the loan portfolio. The evaluation of the adequacy of specific and general valuation allowances is an ongoing process. This process includes analysis of information derived from many sources: historical loss trends, portfolio risk rating migrations, delinquency and nonaccrual loan growth, portfolio diversification, current and anticipated economic conditions, the effectiveness of loan policies and collection practices, expertise of credit personnel, regulatory guidance and other factors.
- 49 -
The following table is a summary of activity in the allowance for credit losses for the periods presented.
| (Dollars in thousands) | | Three months ended
September 30, 2009 | | Three months ended
December 31, 2008 | | Three months ended
June 30, 2009 |
| Loans outstanding at end of period | | $ | 1,822,001 | | | $ | 2,064,796 | | | $ | 1,917,028 | |
| Average loans outstanding during the period | | | 1,865,051 | | | | 2,092,926 | | | | 1,971,467 | |
| |
| Allowance for credit losses, beginning of period | | | 38,569 | | | | 34,444 | | | | 38,463 | |
| Provision for credit losses loans other than two-step loans | | | 19,575 | | | | 11,741 | | | | 9,004 | |
| Provision for credit losses two-step loans | | | 725 | | | | 4,776 | | | | 2,389 | |
| Total provision for credit losses | | | 20,300 | | | | 16,517 | | | | 11,393 | |
| Loan charge-offs: | | | | | | | | | | | | |
| Commercial | | | (5,869 | ) | | | (3,208 | ) | | | (1,725 | ) |
| Commercial real estate construction | | | (325 | ) | | | (1,422 | ) | | | - | |
| Residential real estate construction | | | (7,797 | ) | | | (5,299 | ) | | | (4,891 | ) |
| Two-step residential construction | | | (766 | ) | | | (6,176 | ) | | | (2,392 | ) |
| Total real estate construction | | | (8,888 | ) | | | (12,897 | ) | | | (7,283 | ) |
| Mortgage | | | (3,018 | ) | | | (1,640 | ) | | | (1,244 | ) |
| Nonstandard mortgage | | | (726 | ) | | | (2,495 | ) | | | (320 | ) |
| Home equity | | | (204 | ) | | | (121 | ) | | | (529 | ) |
| Total real estate mortgage | | | (3,948 | ) | | | (4,256 | ) | | | (2,093 | ) |
| Commercial real estate | | | (67 | ) | | | (782 | ) | | | (172 | ) |
| Installment and consumer | | | (146 | ) | | | (29 | ) | | | (267 | ) |
| Overdraft | | | (287 | ) | | | (401 | ) | | | (230 | ) |
| Total loan charge-offs | | | (19,205 | ) | | | (21,573 | ) | | | (11,770 | ) |
| Recoveries: | | | | | | | | | | | | |
| Commercial | | | 125 | | | | 122 | | | | 392 | |
| Commercial real estate construction | | | - | | | | - | | | | - | |
| Residential real estate construction | | | (14 | ) | | | - | | | | 14 | |
| Two-step residential construction | | | 41 | | | | 319 | | | | 3 | |
| Total real estate construction | | | 27 | | | | 319 | | | | 17 | |
| Mortgage | | | - | | | | - | | | | - | |
| Nonstandard mortgage | | | 1 | | | | 38 | | | | - | |
| Home equity | | | 1 | | | | 2 | | | | - | |
| Total real estate mortgage | | | 2 | | | | 40 | | | | - | |
| Commercial real estate | | | 147 | | | | - | | | | - | |
| Installment and consumer | | | 18 | | | | 15 | | | | 16 | |
| Overdraft | | | 53 | | | | 50 | | | | 58 | |
| Total recoveries | | | 372 | | | | 546 | | | | 483 | |
| Net loan charge-offs | | | (18,833 | ) | | | (21,027 | ) | | | (11,287 | ) |
| Allowance for credit losses, end of period | | $ | 40,036 | | | $ | 29,934 | | | $ | 38,569 | |
| |
| Components of allowance for credit losses | | | | | | | | | | | | |
| Allowance for loan losses | | $ | 39,075 | | | $ | 28,920 | | | $ | 37,700 | |
| Reserve for unfunded commitments | | | 961 | | | | 1,014 | | | | 869 | |
| Total allowance for credit losses | | $ | 40,036 | | | $ | 29,934 | | | $ | 38,569 | |
| |
| Net loan charge-offs to average loans annualized | | | 4.01 | % | | | 4.00 | % | | | 2.30 | % |
| |
| Allowance for loan losses to total loans | | | 2.14 | % | | | 1.40 | % | | | 1.97 | % |
| Allowance for credit losses to total loans | | | 2.20 | % | | | 1.45 | % | | | 2.01 | % |
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Changes in the allowance for credit losses in the third quarter of 2009 were due primarily to charge-offs associated with residential construction and commercial loans and higher general valuation allowances. At September 30, 2009, the Company’s allowance for credit losses was $40.0 million, consisting of a $35.2 million formula allowance, no specific allowance, a $3.9 million unallocated allowance and a $.9 million reserve for unfunded commitments. At December 31, 2008, our allowance for credit losses was $29.9 million, consisting of a $27.0 million formula allowance, no specific allowance, a $1.9 million unallocated allowance and a $1.0 million reserve for unfunded commitments. At September 30, 2009, the allowance for credit losses was 2.20% of total loans compared to 1.45% at year end December 31, 2008.
The following table is a summary of activity in the allowance for credit losses for the periods presented.
| (Dollars in thousands) | | Nine months ended
September 30, 2009 | | Nine months ended
September 30, 2008 |
| Allowance for credit losses, beginning of period | | | 29,934 | | | | 54,903 | |
| Provision for credit losses loans other than two-step loans | | | 48,607 | | | | 19,126 | |
| Provision for credit losses two-step loans | | | 6,217 | | | | 4,724 | |
| Total provision for credit losses | | | 54,824 | | | | 23,850 | |
| Loan charge-offs: | | | | | | | | |
| Commercial | | | (8,869 | ) | | | (3,256 | ) |
| Commercial real estate construction | | | (324 | ) | | | - | |
| Residential real estate construction | | | (17,789 | ) | | | (4,806 | ) |
| Two-step residential construction | | | (6,833 | ) | | | (36,307 | ) |
| Total real estate construction | | | (24,946 | ) | | | (41,113 | ) |
| Mortgage | | | (5,280 | ) | | | (713 | ) |
| Nonstandard mortgage | | | (2,975 | ) | | | - | |
| Home equity | | | (2,014 | ) | | | (127 | ) |
| Total real estate mortgage | | | (10,269 | ) | | | (840 | ) |
| Commercial real estate | | | (646 | ) | | | (44 | ) |
| Installment and consumer | | | (545 | ) | | | (502 | ) |
| Overdraft | | | (766 | ) | | | (927 | ) |
| Total loan charge-offs | | | (46,041 | ) | | | (46,682 | ) |
| Recoveries: | | | | | | | | |
| Commercial | | | 734 | | | | 81 | |
| Commercial real estate construction | | | - | | | | - | |
| Residential real estate construction | | | - | | | | - | |
| Two-step residential construction | | | 195 | | | | 2,020 | |
| Total real estate construction | | | 195 | | | | 2,020 | |
| Mortgage | | | 3 | | | | - | |
| Nonstandard mortgage | | | 1 | | | | - | |
| Home equity | | | 1 | | | | 30 | |
| Total real estate mortgage | | | 5 | | | | 30 | |
| Commercial real estate | | | 147 | | | | - | |
| Installment and consumer | | | 56 | | | | 63 | |
| Overdraft | | | 182 | | | | 179 | |
| Total recoveries | | | 1,319 | | | | 2,373 | |
| Net loan charge-offs | | | (44,722 | ) | | | (44,309 | ) |
| Allowance for credit losses, end of period | | $ | 40,036 | | | $ | 34,444 | |
| |
| Components of allowance for credit losses | | | | | | | | |
| Allowance for loan losses | | $ | 39,075 | | | $ | 33,498 | |
| Reserve for unfunded commitments | | | 961 | | | | 946 | |
| Total allowance for credit losses | | $ | 40,036 | | | $ | 34,444 | |
| |
| Net loan charge-offs to average loans annualized | | | 3.06 | % | | | 2.73 | % |
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Overall, we believe that the allowance for credit losses is adequate to absorb losses in the loan portfolio at September 30, 2009, although there can be no assurance that future loan losses will not exceed our current estimates. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. It requires difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are uncertain. Therefore, we cannot provide assurance that, in any particular period, we will not have sizeable credit losses in relation to the amount reserved. We may later need to significantly adjust the allowance for credit losses considering factors in existence at such time, including economic, market, or business conditions and the results of ongoing internal and external examination processes. Please see Part II, Item 1A “Risk Factors” in this report and risk factors described in our 2008 10-K.
Net Loan Charge-offs.For the quarter ended September 30, 2009, total net loan charge-offs were $18.8 million compared to $11.3 million for the quarter ended June 30, 2009. The 2009 year to date annualized net loan charge-offs to total average loans outstanding was 3.06%, up from 2.73% in the same period of 2008. For the nine months ended September 30, 2009, total net loan charge-offs were $44.7 million up from $44.3 million for the same period in 2008.
Deposits and Borrowings
The following table summarizes the quarterly average dollar amount in, and the average interest rate paid on, each of the deposit and borrowing categories for the third quarters of 2009 and 2008.
| | Third Quarter 2009 | | Third Quarter 2008 |
| (Dollars in thousands) | | Quarterly Average
Balance | | Percent
of total | | Rate
Paid | | Quarterly Average
Balance | | Percent
of total | | Rate
Paid |
| Demand deposits | | $ | 508,758 | | | 23.6 | % | | | - | | | $ | 482,780 | | | 23.6 | % | | | - | |
| Interest bearing demand | | | 311,319 | | | 14.4 | % | | | 0.26 | % | | | 276,973 | | | 13.5 | % | | | 0.56 | % |
| Savings | | | 93,611 | | | 4.3 | % | | | 0.79 | % | | | 71,035 | | | 3.5 | % | | | 0.44 | % |
| Money market | | | 635,511 | | | 29.4 | % | | | 1.38 | % | | | 672,051 | | | 32.8 | % | | | 2.06 | % |
| Time deposits | | | 610,907 | | | 28.3 | % | | | 2.42 | % | | | 543,451 | | | 26.6 | % | | | 3.20 | % |
| Total deposits | | | 2,160,106 | | | 100.0 | % | | | 1.49 | % | | | 2,046,290 | | | 100.0 | % | | | 2.19 | % |
| |
| Short-term borrowings | | | 109 | | | | | | | 4.46 | % | | | 140,967 | | | | | | | 2.79 | % |
| Long-term borrowings1 | | | 314,190 | | | | | | | 2.98 | % | | | 159,291 | | | | | | | 4.37 | % |
| Total borrowings | | | 314,299 | | | | | | | 2.98 | % | | | 300,258 | | | | | | | 3.63 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total deposits and borrowings | | $ | 2,474,405 | | | | | | | 1.73 | % | | $ | 2,346,548 | | | | | | | 2.36 | % |
| 1 | | Long-term borrowings include junior subordinated debentures. |
Third quarter 2009 average total deposits increased 6% or $113.8 million from third quarter 2008. Our deposit mix remained fairly consistent with the same quarter in 2008, with a slight increase in interest bearing demand, savings, and time deposits categories and a decline in the money market category. The average rate paid on total deposits in the third quarter of 2009 declined to 1.49% from 2.19% the third quarter of 2008 primarily due to lower market interest rates. Whether we will be successful maintaining and growing our low cost deposit base will depend on various factors, including deposit pricing, client behavior, regulatory limitations, and our success in competing for deposits in uncertain economic and market conditions.
The time deposits category includes certificates of deposit, as well as brokered deposits, which include both wholesale brokered deposits and deposits arising out of the Company’s participation in the Certificate of Deposit Account Registry Service (“CDARS”) network that are treated as brokered deposits for regulatory purposes. The CDARS network uses a deposit matching program to match CDARS deposits in other participating banks, dollar for dollar, enabling participating institutions to make additional FDIC coverage available to customers. At September 30, 2009, brokered deposits totaled $85.6 million or 4% of period end deposits, of which $33.0 million were CDARS deposits and $52.6 million were wholesale brokered deposits compared to $71.0 million in brokered deposits at December 31, 2008. CDARS deposits declined $38.0 million during the first nine months of 2009. Under our formal agreement, the Bank may not accept, renew or rollover brokered deposits without regulatory approval and is subject to limitations on the rates it can pay on deposits.
The combined average borrowing amount from the FHLB and the Federal Reserve Bank (“FRB”) increased $14.0 million in the quarter ended September 30, 2009, compared to the same period last year. We also extended the maturities of our FHLB borrowings to reduce interest rate sensitivity on such borrowings. We believed the FHLB borrowings were competitively priced relative to interest bearing deposits, including certificates of deposit in the current market conditions.
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Our deposit and borrowing cost decreased 63 basis points since the third quarter of 2008, primarily reflecting the decline in market interest rates over the past year. The future funding mix will depend on and be affected by funding needs, customer demand, regulatory or government actions, the effects of our formal regulatory agreement, the level of pledging required to support public deposits, the level of FDIC insurance available to customers and the relative cost and availability of other funding sources. At September 30, 2009, the balance of junior subordinated debentures issued in connection with our prior issuances of trust preferred securities was $51.0 million, unchanged from December 31, 2008. Under the terms of our trust preferred securities, Bancorp may defer payment of interest at its sole discretion. In light of continued operating losses, Bancorp elected during the third quarter of 2009 to defer interest payments on its trust preferred securities to preserve cash balances. The Company will accrue interest expense on its trust preferred securities and may not pay dividends on its capital stock until all accrued but unpaid interest has been paid in full. Accrued but unpaid interest on our trust preferred securities as of September 30, 2009, was $.4 million. We cannot resume interest payments on our trust preferred securities without prior regulatory approval. For additional detail regarding Bancorp’s outstanding debentures, see Note 10 in the financial statements included under Item 1 of this report.
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Capital Resources
The following table summarizes the consolidated risk-based capital ratios of Bancorp and the Bank for the periods shown.
| | September 30, 2009 | | December 31, 2008 |
| (Dollars in thousands) | | Actual Amount | | Ratio | | Amount
Required For
Well
Capitalized
Status | | Minimum
percent
required for
Well
Capitalized | | Actual Amount | | Ratio | | Amount
Required For
Well
Capitalized
Status | | Minimum
percent
required for
Well
Capitalized |
| Tier 1 capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stockholders' equity | | $ | 161,683 | | | | | | | | | | | | | | $ | 198,187 | | | | | | | | | | | |
| Qualifying capital securities | | | 51,000 | | | | | | | | | | | | | | | 51,000 | | | | | | | | | | | |
| Less: Goodwill and intangibles | | | 716 | | | | | | | | | | | | | | | 14,054 | | | | | | | | | | | |
| Other adjustments | | | (1,940 | ) | | | | | | | | | | | | | | 1,468 | | | | | | | | | | | |
| West Coast Bancorp total tier 1 capital | | $ | 210,027 | | | | 9.79 | % | | $ | 128,725 | | | 6 | % | | $ | 236,601 | | | 9.96 | % | | $ | 142,523 | | | 6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stockholders' equity | | $ | 206,058 | | | | | | | | | | | | | | $ | 241,701 | | | | | | | | | | | |
| Qualifying capital securities | | | - | | | | | | | | | | | | | | | - | | | | | | | | | | | |
| Less: Goodwill and intangibles | | | 716 | | | | | | | | | | | | | | | 14,054 | | | | | | | | | | | |
| Other adjustments | | | (1,909 | ) | | | | | | | | | | | | | | 1,519 | | | | | | | | | | | |
| West Coast Bank total tier 1 capital | | $ | 203,433 | | | | 9.49 | % | | $ | 128,630 | | | 6 | % | | $ | 229,166 | | | 9.66 | % | | $ | 142,367 | | | 6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier 2 capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses allowed | | $ | 26,981 | | | | | | | | | | | | | | $ | 29,695 | | | | | | | | | | | |
| West Coast Bancorp total tier 2 capital | | $ | 26,981 | | | | | | | | | | | | | | $ | 29,695 | | | | | | | | | | | |
| |
| Allowance for credit losses allowed | | $ | 26,961 | | | | | | | | | | | | | | $ | 29,663 | | | | | | | | | | | |
| West Coast Bank total tier 2 capital | | $ | 26,961 | | | | | | | | | | | | | | $ | 29,663 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| West Coast Bancorp | | $ | 237,008 | | | | 11.05 | % | | $ | 214,541 | | | 10 | % | | $ | 266,296 | | | 11.21 | % | | $ | 237,538 | | | 10 | % |
| West Coast Bank | | | 230,394 | | | | 10.75 | % | | | 214,383 | | | 10 | % | | | 258,829 | | | 10.91 | % | | | 237,278 | | | 10 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Leverage ratio | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| West Coast Bancorp | | $ | 210,027 | | | | 7.88 | % | | $ | 133,259 | | | 5 | % | | $ | 236,601 | | | 9.46 | % | | $ | 125,058 | | | 5 | % |
| West Coast Bank | | | 203,433 | | | | 7.64 | % | | | 133,066 | | | 5 | % | | | 229,166 | | | 9.17 | % | | | 124,910 | | | 5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tangible equity ratio | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| West Coast Bancorp | | $ | 160,967 | | | | 6.07 | % | | | | | | | | | $ | 184,133 | | | 7.16 | % | | | | | | | |
| West Coast Bank | | | 205,342 | | | | 7.75 | % | | | | | | | | | | 227,647 | | | 8.90 | % | | | | | | | |
| |
| Risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Risk weighted assets on balance sheet | | $ | 2,031,626 | | | | | | | | | | | | | | $ | 2,233,791 | | | | | | | | | | | |
| Risk weighted assets off balance sheet exposure | | | 127,555 | | | | | | | | | | | | | | | 155,877 | | | | | | | | | | | |
| Less: Goodwill and intangibles | | | 716 | | | | | | | | | | | | | | | 14,054 | | | | | | | | | | | |
| Less: Disallowed allowance for loan losses | | | 13,055 | | | | | | | | | | | | | | | 239 | | | | | | | | | | | |
| Other adjustments | | | - | | | | | | | | | | | | | | | - | | | | | | | | | | | |
| West Coast Bancorp risk weighted assets | | $ | 2,145,410 | | | | | | | | | | | | | | $ | 2,375,375 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Risk weighted assets on balance sheet | | $ | 2,030,067 | | | | | | | | | | | | | | $ | 2,231,228 | | | | | | | | | | | |
| Risk weighted assets off balance sheet exposure | | | 127,555 | | | | | | | | | | | | | | | 155,877 | | | | | | | | | | | |
| Less: Goodwill and intangibles | | | 716 | | | | | | | | | | | | | | | 14,054 | | | | | | | | | | | |
| Less: Disallowed allowance for loan losses | | | 13,074 | | | | | | | | | | | | | | | 271 | | | | | | | | | | | |
| Other adjustments | | | - | | | | | | | | | | | | | | | - | | | | | | | | | | | |
| West Coast Bank total risk weighted assets | | $ | 2,143,832 | | | | | | | | | | | | | | $ | 2,372,780 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average total assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| West Coast Bancorp | | $ | 2,665,186 | | | | | | | | | | | | | | $ | 2,501,151 | | | | | | | | | | | |
| West Coast Bank | | | 2,661,320 | | | | | | | | | | | | | | | 2,498,199 | | | | | | | | | | | |
| |
| Total assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| West Coast Bancorp | | $ | 2,653,357 | | | | | | | | | | | | | | $ | 2,573,046 | | | | | | | | | | | |
| West Coast Bank | | | 2,649,223 | | | | | | | | | | | | | | | 2,556,695 | | | | | | | | | | | |
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The FRB and the FDIC have established minimum requirements for capital adequacy for bank holding companies and state non-member banks. The requirements address both risk-based capital and leveraged capital. The regulatory agencies may also establish higher minimum requirements for particular institutions if, for example, an institution has previously or is currently receiving special attention or is perceived to have a high susceptibility to credit, interest rate or other risk. The FRB and FDIC risk-based capital guidelines require banks and bank holding companies to have a ratio of tier one capital to total risk-weighted assets of at least 6%, and a ratio of total capital to total risk-weighted assets of 10% or greater to be considered well capitalized. In addition, the leverage ratio (Tier 1 capital divided by total assets less intangibles) is required to be at least 5% to be considered well capitalized. At September 30, 2009, Bancorp and the Bank maintained capital ratios sufficient to be considered “Well Capitalized” under the regulatory risk-based capital guidelines.
The risk-based capital ratios of Bancorp include $51.0 million of trust preferred securities that qualify as Tier 1 capital at September 30, 2009, under guidance issued by the Board of Governors of the Federal Reserve System. Bancorp expects to rely on common equity, preferred stock and trust preferred securities to remain well capitalized, although it does not expect to issue additional trust preferred securities in the near future due to current market conditions.
Bancorp’s stockholders' equity was $162 million at September 30, 2009, down from $198 million at December 31, 2008. The total capital ratio at the Bank was 10.75% at September 30, 2009, a decrease from 10.91% at December 31, 2008, while Bank Tier 1 capital decreased from 9.66% to 9.49% over the same period. The reduction in the Company’s risk weighted assets during the first three quarters was not sufficient to offset the negative impact of the Company’s operating losses.
Under our formal regulatory agreement, the Bank is required to maintain a leverage ratio of not less than 10% and a total risk-based capital ratio of not less than 12% in future periods covered by the formal agreement. Including the recent capital contribution to the Bank associated with the capital raise, both such Bank capital ratios exceed the requirements in our formal regulatory agreement.
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The Company closely monitors and manages its capital position and evaluates its capital needs. Over the last year, the Company attempted to preserve capital by slowing new loan originations and reducing existing commitments selectively as well as by eliminating the dividend on our common stock and deferring interest payments on our trust preferred securities. The Company recently completed a capital raise of $155 million through private placements of preferred stock and warrants. As part of these transactions, Bancorp contributed $134.2 million in proceeds to the Bank, materially increasing the Bank’s capital ratios. The Bank’s pro forma capital ratios are shown in the table below and include the $134.2 million contribution from Bancorp as if it had occurred on September 30, 2009. Subject to, and upon receipt of, shareholder approval Bancorp’s risk-based capital ratios will increase when the preferred stock issued in the capital raise converts to common stock. Until conversion into common stock, preferred stock is not counted as capital in the risk-based capital ratios of Bancorp. Future risk-based capital ratios will be different from those displayed in the table and are dependent upon many factors, all of which are expected to change, and there can be no assurance that our shareholders will approve the conversion of preferred stock issued in the capital raise to common stock and necessary increase in Bancorp’s authorized shares of common stock. See “Risk Factors” below.
The following table illustrates the pro forma impact of our capital raise on the risk-based capital and capital ratios of the Bank and Bancorp at September 30, 2009.
| | September 30, 2009 |
| | | | | | Pro forma |
| | Actual | | Prior to conversion of
preferred stock to
common stock1,2 | | Post conversion of
preferred stock to
common stock1,3 |
| West Coast Bank | | | | | | | | | | | | |
| Tier 1 capital ratio | | | 9.49 | % | | | 15.75 | % | | | 15.75 | % |
| Total capital ratio | | | 10.75 | % | | | 17.01 | % | | | 17.01 | % |
| Leverage ratio | | | 7.64 | % | | | 12.08 | % | | | 12.08 | % |
| Total equity to assets ratio | | | 7.78 | % | | | 12.23 | % | | | 12.23 | % |
| |
| West Coast Bancorp | | | | | | | | | | | | |
| Tier 1 capital ratio | | | 9.79 | % | | | 9.79 | % | | | 16.28 | % |
| Total capital ratio | | | 11.05 | % | | | 11.05 | % | | | 17.54 | % |
| Leverage ratio | | | 7.88 | % | | | 7.88 | % | | | 12.45 | % |
| Total equity to assets ratio | | | 6.09 | % | | | 6.09 | % | | | 10.78 | % |
| 1 | | Assumes $134.2 million capital contribution to the Bank from West Coast Bancorp occurred on September 30, 2009. Direct costs of the private placement are based upon best estimates. |
| 2 | | Prior to the conversion of Series A and Series B preferred stock into common stock, the preferred stock is required to be excluded from regulatory capital at West Coast Bancorp for the purpose of calculating risk-based capital ratios. |
| 3 | | Pro forma risk-based capital ratios for West Coast Bancorp assume that shareholder approval and conversion of preferred stock to common stock occurred on September 30, 2009. |
At September 30, 2009, the Company’s book value per share was $10.33. Assuming completion of the capital raise and the conversion of the Series A Preferred Stock and Series B Preferred Stock to common stock occurred on September 30, 2009, the Company’s pro forma book value per share would have been $3.23 at such date.
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Liquidity and Sources of Funds
The Bank’s sources of funds include customer deposits, advances from the FHLB, maturities of investment securities, sales of “Available for Sale” securities, loan and OREO sales, loan repayments, net income, if any, loans taken out at the Federal Reserve discount window, and the use of Federal Funds markets. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows, loan and OREO sales and unscheduled loan prepayments are not. Deposit inflows, loan and OREO sales, and unscheduled loan prepayments are influenced by general interest rate levels, interest rates available on other investments, competition, market and general economic conditions and other factors. In addition, government programs, such as the FDIC’s Transaction Account Guarantee Program, may influence deposit behaviors.
Deposits are our primary source of new funds. Over the past 12 months our loan to deposit ratio declined from 102% to 85% at September 30, 2009. This was a result of loans declining $288 million and deposits increasing $94 million. Lower loan balances combined with higher deposit balances and borrowings allowed us to increase our investment securities portfolio and interest bearing cash balances. The Bank increased liquid assets in an effort to satisfy increasing pledging requirements and the shared liability structure for uninsured public funds in Oregon and Washington as well as to enhance its balance sheet liquidity position in the uncertain economic environment in which we operate.
Our formal regulatory agreement requires that the Bank maintain a primary liquidity ratio in excess of 15% and net non-core funding dependency ratio below 25%. The primary liquidity ratio is equal to the sum of net cash, short-term, and marketable assets divided by the sum of net deposits and short-term liabilities. The net non-core funding dependency ratio is non-core liabilities less short term investments divided by long term assets. At September 30, 2009, prior to the recent capital raise, these ratios were 28% and 10%, respectively, and well within the liquidity requirements in the formal regulatory agreement. As a result of the recent capital raise, these ratios have improved further.
At September 30, 2009, the Bank had outstanding borrowings of $263 million, against its $316 million in established borrowing capacity with the FHLB, as compared to $223 million at December 31, 2008. The Bank’s borrowing facility is subject to collateral and stock ownership requirements, as well as prior FHLB consent to each advance. The Bank also had a Federal Funds line of credit agreement with a correspondent financial institution of $5 million at September 30, 2009, of which none was outstanding at September 30, 2009, and December 31, 2008. The use of such Federal Funds lines is subject to certain conditions. Additionally, the Bank had an available discount window credit line with the FRB of approximately $42 million at September 30, 2009, with no balance outstanding at either September 30, 2009, or December 31, 2008. As with the other lines, the FRB line is subject to collateral requirements, must be repaid within 90 days, and each advance is subject to prior FRB consent.
The holding company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the holding company’s liquidity, which is used to pay interest on Bancorp’s trust preferred securities, any shareholder cash dividends and other expenses, comes from dividends declared and paid by the Bank. In addition, the holding company may receive cash from the exercise of options and the issuance of equity securities. The holding company also retained $5.0 million from the $139.2 million net proceeds in the recently completed capital raise. The remaining $134.2 million was contributed to the Bank. Under our formal regulatory agreement with our regulators, the Bank may not pay dividends to the holding company without prior regulatory approval. At September 30, 2009, the holding company did not have any borrowing arrangements of its own.
Management expects to continue to primarily rely on customer deposits, advances from the FHLB, cash flow from investment securities, and sales of “Available for Sale” securities, as its most important source of liquidity. In addition, the Bank may obtain additional liquidity from loan and OREO sales, loan repayments, internet deposit listing services, net income, federal funds markets, the Federal Reserve discount window and other borrowings. Although deposit balances at times have shown historical growth, such balances may be influenced by changes in the financial services industry, regulatory changes, interest rates available on other investments, changes in consumer confidence in depository institutions, general economic conditions, competition, customer management of cash resources and other factors. Borrowings may be used on a short-term and long-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a long-term basis to support expanded lending activities and to match maturities, duration, or repricing intervals of assets. The sources of such funds may include, but are not limited to, Federal Funds purchased, reverse repurchase agreements and borrowings from the FHLB. One or more of these sources may be limited if we fail to maintain our status as a “well-capitalized” institution.
See also Part II, Item I.A. “Risk Factors.”
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Off-Balance Sheet Arrangements
The Company’s primary off-balance sheet arrangements consist of commitments to make loans and extend credit. The following table summarizes the Bank’s off balance sheet unfunded commitments as of the dates displayed.
| (Dollars in thousands) | | Contract or
Notional Amount
September 30, 2009 | | Contract or
Notional Amount
December 31, 2008 |
| Financial instruments whose contract amounts represent credit risk: | | | | | | |
| Commitments to extend credit in the form of loans | | | | | | |
| Commercial | | $ | 268,265 | | $ | 348,428 |
| Real estate construction | | | | | | |
| Two-step loans | | | - | | | 152 |
| Other than two-step loans | | | 20,123 | | | 52,845 |
| Total real estate construction | | | 20,123 | | | 52,997 |
| Real estate mortgage | | | | | | |
| Mortgage | | | 6,687 | | | 2,251 |
| Non-standard mortgage | | | - | | | - |
| Home equity line of credit | | | 168,466 | | | 190,122 |
| Total real estate mortgage loans | | | 175,153 | | | 192,373 |
| Commercial real estate | | | 13,852 | | | 18,916 |
| Installment and consumer | | | 13,522 | | | 15,779 |
| Other1 | | | 15,422 | | | 8,251 |
| Standby letters of credit and financial guarantees | | | 10,582 | | | 14,030 |
| Account overdraft protection instruments | | | 76,704 | | | 59,175 |
| Total | | $ | 593,623 | | $ | 709,949 |
| 1 | | The category “other” represents unfunded commitments extended to clients or borrowers that have not yet been fully executed.
While we believe these unfunded commitments to be binding, they are not yet categorized nor have they been placed into our loan system. |
The Bank’s unfunded commitments to make loans decreased $116 million, or 16%, since December 31, 2008, primarily as a result of the $80 million or 23% reduction in commercial loan commitments and the $33 million, or 62%, decline in unfunded commitments in its real estate construction portfolio. Unfunded loan commitments that extend for a period longer than one year qualify as risk weighted assets and impact our risk-based capital ratios. By decreasing the volume of unfunded loan commitments extended longer than one year, risk weighted assets decline, and all else equal, the Bank and Bancorp’s regulatory capital ratios improve. Since December 31, 2008, we increased our off-balance sheet commitments related to our account overdraft protection plans by $18 million. These account overdraft protection instruments can be revoked at any time and therefore were not included in the calculation of the Company’s risk weighted assets for risk-based capital purposes. Consistent with our current efforts to prudently manage capital, we have taken steps to reduce our risk weighted assets.
For a further discussion of off-balance sheet arrangements, see Note 23, “Financial Instruments with Off-Balance Sheet Risk.”in our 2008 10-K financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the market risks disclosure under Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2008 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during our third quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On June 24, 2009, the Company's subsidiary, West Coast Trust, was served with an Objection to Personal Representative's Petition and Petition for Surcharge of Personal Representative in Linn County Circuit Court. The petition was filed by the beneficiaries of the estate of Archie Q. Adams, for which West Coast Trust acts as the personal representative. The petitioners allege a breach of fiduciary duty with respect to West Coast Trust's prior sale of real property owned by the Adams estate and sought relief in the form of a surcharge to West Coast Trust of $215,573,115.60, the amount of the alleged loss to the estate. The Company filed a motion to dismiss on July 2, 2009, which was granted in a letter ruling dated September 15, 2009. The Company is uncertain whether the dismissal of the petition will be appealed. The Company continues to believe the petition is without merit
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. We have experienced significant and continuing losses in our loan portfolio as the economic recession generally has had an adverse effect on the ability of borrowers to repay loans of all types, including most significantly, residential construction and commercial loans. We have recently also experienced some increased weakness in our portfolios of commercial real estate and home equity loans and lines of credit. Continued weakness in the economy or specific industry sectors could have a further adverse effect on the ability of our borrowers to repay loans. In addition, continued weakness in real estate markets could further adversely affect the value and marketability of the collateral for many of our loans. Any of these factors could result in loan losses in excess of our allowance for credit losses, which is based on currently available information.
We maintain an allowance for credit losses that represents management’s best estimate, as of a particular date, of the probable amount of loan commitments and 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 credit losses. Our management establishes the allowance for credit losses based on its evaluation, as of a particular date, 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 credit losses, which would require additional provision for credit losses. In addition to internal reviews, federal and state banking regulators periodically review our loan portfolio, and may require that the Bank increase our allowance for credit losses or recognize loan charge-offs, resulting in additional provision for credit losses. Provisioning for credit losses results in a decrease in net income, and possibly risk-based capital, and may continue to have a material adverse effect on our results of operations and financial condition. 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.
If shareholders fail to approve the issuance and authorization of additional shares of common stock in connection with the recently completed capital raise, certain provisions of securities issued in the transaction will take effect that could have a material adverse effect on our company and its shareholders.
On October 23, 2009, we entered into investment agreements pursuant to which we raised $155.0 million in the aggregate through private placements of newly issued shares of our Series A Preferred Stock and Series B Preferred Stock and certain warrants. See the discussion under the subheading “Business Developments and Overview” in Part I, Item 2 of this report. As part of the capital raise, we will seek shareholder approval of the issuance of our common stock to investors upon conversion of the Series A Preferred Stock and Series B Preferred Stock (including the preferred stock issueable upon exercise of the warrants) and an amendment to our Restated Articles of Incorporation to increase the number of authorized shares of our common stock to 250,000,000. If the shareholder approvals are not obtained before March 1, 2010, the Series A Preferred Stock would not convert to common stock and on and after March 1, 2010:
the Series A Preferred Stock and Series B Preferred Stock would accrue dividends at an annual rate of 15% calculated on the base value applicable to shares of preferred stock, which is $2.00 per share of common stock into which such preferred stock in convertible (referred to as, “Special Dividends”). As a result, we would be required to accrue total dividends on newly issued shares of preferred stock of as much as $23.3 million per year;
the conditional warrants issued in the capital raise will be exercisable for an aggregate of (i) 117,972 shares of Series A Preferred Stock, and (ii) 122,028 shares of Series B Preferred Stock at an implied initial exercise price of $0.50 per underlying common share, which is substantially lower than the current market price of our common stock;
any shares of Series A Preferred Stock and Series B Preferred Stock issued upon exercise of the warrants would also accrue Special Dividends of as much as $7.2 million per year in the event our warrants are exercised in full;
we will be prohibited from paying any dividends on our common stock and from redeeming, purchasing or acquiring any shares of our common stock; and
we will not have enhanced our holding company's capital structure as we intended in completing the capital raise.
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The accrual of Special Dividends and the failure of the capital raise to achieve its desired purpose of increasing our holding company's level of Tier 1 capital could have a material adverse effect on our results of operations, financial condition, and regulatory capital.
Real estate values may continue to decline 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 throughout the first three quarters 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 segments of our loan portfolio. 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 operating results throughout 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. Any additional decreases in market prices will lead to OREO write downs and possibly losses on sale, with a corresponding expense in our income statement in each case. We evaluate OREO property values periodically and write down the carrying value of the properties if the results of our evaluations require it. At September 30, 2009, we had $132.0 million in nonaccrual loans, the majority of which was collateralized by real estate, and $76.6 million of OREO properties.
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 and other types of deposits, if existing depositors withdraw significant amounts of 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 FHLB System, or the Federal Reserve discount window. Also, the holding company’s liquidity may be negatively affected by the regulatory and statutory limitations on payment of cash dividends by the Bank. Under our formal regulatory agreement, the Bank is required to maintain certain liquidity ratios. If we fail to maintain our liquidity and control our liquidity risks, we may face additional regulatory sanctions, and 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 additional 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 the regulation of the Bank, we entered into a formal regulatory agreement with our regulators that subjects us to significant operating restrictions and regulatory requirements that, among other things, prohibit payment of dividends without prior consent, limit the rates we pay on deposits, require us to take certain actions to correct deficiencies identified by our regulators, restrict our use of brokered deposits, including CDARS deposits, require us to comply with loan concentration restrictions, and limit 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 requirements could result in various supervisory actions and additional regulatory restrictions. Any failure to maintain compliance with capital requirements or other regulations or supervisory actions by our regulators could have a material adverse effect on our financial condition and results of operations.
The Congressional and State 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 regulations applicable to the operation of depository institutions, such as regulations limiting certain fees applicable to deposit accounts or credit cards, could limit important sources of revenue for the Bank. Additionally, changes in the regulations applicable to FDIC deposit insurance, including expiration of temporary measures taken by the FDIC during the financial crisis, could reduce the amounts of insurance or circumstances in which insurance is available with respect to deposit accounts, which may negatively affect our ability to attract and retain deposits. Changes in the lending market and secondary markets for loans and related congressional and regulatory responses may also 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 will be implemented, what form they will take, 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.
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Deferred tax assets may require a valuation allowance or may be disallowed in the calculation of our risk-based capital ratios.
Our deferred tax assets are subject to an analysis that evaluates future realization through the recognition of tax deductions. Certain indicators, including sustained net losses, may cause the Company to recognize a deferred tax asset valuation allowance which essentially increases tax expense and lowers the carrying value of deferred tax assets. As a result, we may have substantially higher income tax expense. At September 30, 2009, we had $19.4 million in net deferred tax assets.
In addition, risk-based capital rules require a calculation evaluating the Company’s deferred tax asset balance for realization against estimated pre-tax future income and net operating loss carry backs. Under the rules of this calculation, we may incur future deferred tax asset disallowances that materially reduce our risk-based capital ratios.
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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 September 30, 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 |
| 7/1/09 - 7/31/09 | | | - | | | | $0.00 | | | | - | | | | 1,051,821 | |
| 8/1/09 - 8/31/09 | | | - | | | | $0.00 | | | | - | | | | 1,051,821 | |
| 9/1/09 - 9/30/09 | | | - | | | | $0.00 | | | | - | | | | 1,051,821 | |
| Total for quarter | | - | | | | | | | | - | | | | | |
| | (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 0 shares, 0 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 September 30, 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
None
Item 5. Other Information
None
Item 6. Exhibits
| | Exhibit No. | | Exhibit | |
| | 3.1 | | Articles of Amendment Designating the Terms of Mandatorily Convertible Cumulative Participating Preferred Stock, Series A of West Coast Bancorp. Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated October 22, 2009, and filed with the Securities and Exchange Commission on October 28, 2009 (the “October 8-K”). |
| 3.2 | | Articles of Amendment Designating the Terms of Mandatorily Convertible Cumulative Participating Preferred Stock, Series B of West Coast Bancorp. Incorporated by reference to Exhibit 3.2 to the October 8-K. |
| 3.3 | | Articles of Amendment Designating the Terms of Series C Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.3 to the October 8-K. |
| 4.1 | | Form of Class B Warrant. Incorporated by reference to Exhibit 4.1 to the October 8-K. |
| 4.2 | | Form of Class C Warrant. Incorporated by reference to Exhibit 4.2 to the October 8-K. |
| 4.3 | | Form of Class D Warrant. Incorporated by reference to Exhibit 4.3 to the October 8-K. |
| 4.4 | | Tax Benefit Preservation Plan, dated as of October 23, 2009, between West Coast Bancorp and Wells Fargo Bank, National Association. Incorporated by reference to Exhibit 4.4 to the October 8-K. |
| 10.1 | | Form of Investment Agreement, dated as of October 23, 2009 by and between West Coast Bancorp and the investors party thereto. Incorporated by reference to Exhibit 10.1 to the October 8-K. |
| 10.2 | | Order to Cease and Desist issued by the FDIC and Oregon Division of Finance and Corporate Securities to West Coast Bank on October 22, 2009. Incorporated by reference to Exhibit 10.2 to the October 8-K. |
| 10.3 | | Stipulation and Consent to the Issuance of an Order to Cease and Desist among West Coast Bank and the FDIC and Oregon Division of Finance and Corporate Securities entered into on October 15, 2009. Incorporated by reference to Exhibit 10.3 to the October 8-K. |
| 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: November 5, 2009 | /s/ Robert D. Sznewajs | |
| | Robert D. Sznewajs | |
| | President and Chief Executive Officer |
| |
| |
| |
| Dated: November 5, 2009 | /s/ Anders Giltvedt | |
| | Anders Giltvedt |
| | Executive Vice President and Chief Financial Officer |
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