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| WCBO > SEC Filings for WCBO > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
The following discussion should be read in conjunction with the audited consolidated financial statements and related notes to those statements of West Coast Bancorp ("Bancorp" or the "Company") that appear under the heading "Financial Statements and Supplementary Data" in Bancorp's Annual Report on Form 10-K for the year ended December 31, 2008 ("2008 10-K"), as well as the unaudited consolidated financial statements for the current quarter found under Item 1 above.
Forward Looking Statement Disclosure
Statements in this Quarterly Report of West Coast Bancorp ("Bancorp" or the "Company") regarding future events or performance are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA") and are made pursuant to the safe harbors of the PSLRA. The Company's actual results could be quite different from those expressed or implied by the forward-looking statements. Any statements containing the words "could," "may," "should," "plan," "believes," "anticipates," "estimates," "predicts," "expects," "projects," "potential," or "continue," or words of similar import, constitute "forward-looking statements," as do any other statements that expressly or implicitly predict future events, results, or performance. Factors that could cause results to differ from results expressed or implied by our forward-looking statements include, among others, risks discussed in the text of this Quarterly Report and the 2008 10-K (including under Item 1A. Risk Factors), as well as the following specific factors:
º General economic conditions, whether national or regional, and conditions in real estate markets, that may affect the demand for our loan and other products, lead to further declines in credit quality and increased loan losses, hinder our ability to increase lending activities, and negatively affect the value and salability of the real estate that we own or is the collateral for many of our loans;
º Changing business, banking, or regulatory conditions, policies, or programs, or new legislation or government or regulatory initiatives, that could lead to restrictions on activities of banks generally or West Coast Bank (the "Bank") in particular, changes in costs, including deposit insurance premiums, the elimination of FDIC programs expanding deposit insurance coverage on noninterest bearing deposit accounts and other accounts with balances up to $250,000, declines in consumer confidence in depository institutions generally or the Bank in particular, or changes in the secondary market for bank loan and other products;
º Competitive factors, including competition with community, regional and national financial institutions, that may lead to pricing pressures that reduce yields Bancorp achieves on loans and increase rates Bancorp pays on deposits, loss of Bancorp's most valued customers, defection of key employees or groups of employees, or other losses;
º Increasing or decreasing interest rate environments, including the slope and level of, as well as changes in, the yield curve, that could lead to decreases in net interest margin, lower net interest and fee income, including lower gains on sales of loans, and changes in the value of Bancorp's investment securities;
º Changes or failures in technology or third party vendor relationships in important revenue production or service areas or increases in required investments in technology that could reduce our revenues, increase our costs, or lead to disruptions in our business; and
º Any failure to receive shareholder approvals in connection with our recently completed capital raise. For more information regarding the capital raise, see the discussion under the subheading "Business Developments and Overview" below.
Furthermore, forward-looking statements are subject to risks and uncertainties related to the Company's ability to, among other things: dispose of properties or other assets obtained through foreclosures at expected prices and within a reasonable period of time; attract and retain key personnel; generate loan and deposit balances at projected spreads; sustain fee generation including gains on sales of loans; maintain asset quality and control risk; limit the amount of net loan charge-offs; adapt to changing customer deposit, investment and borrowing behaviors; control expense growth; and monitor and manage the Company's financial reporting, operating and disclosure control environments.
Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management's analysis only as of the date of the statements. Bancorp does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.
Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission ("SEC").
Management has identified our policies regarding our allowance for credit losses as our most critical accounting policies. Calculation of our allowance for credit losses is discussed in our 2008 10-K under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies."
Business Developments and Overview
On October 23, 2009, the Company entered into investment agreements with over 20 separate investors pursuant to which the Company issued in private placements an aggregate of $155.0 million of newly issued preferred stock and warrants of the Company (such transactions, the "capital raise"), including:
º 1,428,849 shares of Series A Mandatorily Convertible Cumulative Participating Preferred Stock, no par value ("Series A Preferred Stock");
º 121,328 shares of Series B Mandatorily Convertible Cumulative Participating Preferred Stock, no par value ("Series B Preferred Stock");
º Warrants (such warrants, the "Key Investor Warrants") to purchase an aggregate of 240,000 shares of Series B Preferred Stock at an exercise price of $100.00 per share; and
º Warrants (such warrants, the "Conditional Warrants") to purchase (i) an aggregate of 117,972 shares of Series A Preferred Stock at an exercise price of $25.00 per share, and (ii) an aggregate of 122,028 shares of Series B Preferred Stock at an exercise price of $25.00 per share.
The Conditional Warrants are only exercisable if our shareholders have not approved before March 1, 2010 (such approvals, the "shareholder approvals"), (i) an amendment to our Restated Articles of Incorporation to increase the number of authorized shares of our common stock to 250,000,000 and (ii) the issuance of shares of our common stock upon conversion of the preferred stock (including the preferred stock issueable upon exercise of the warrants), as required by applicable rules of the NASDAQ Stock Market, and will thereafter expire upon receipt of the shareholder approvals.
The shares of Series A Preferred Stock issued in the transaction will automatically convert into 71,442,450 shares of common stock at a per common share conversion price of $2.00 (subject to certain adjustments) upon receipt of the shareholder approvals.
The shares of Series B Preferred Stock issued in the transaction will automatically convert into an aggregate of 6,066,400 shares of common stock at a per common share conversion price of $2.00 (subject to certain adjustments) upon receipt of shareholder approval and transfer of the Series B Preferred Stock to third parties in a widely dispersed offering, as defined in the terms of the Series B Preferred Stock.
The shares of Series B Preferred Stock received upon exercise of the Key Investor Warrants are mandatorily convertible into an aggregate of 12,000,000 shares of common stock following satisfaction of the conditions to mandatory conversion of the Series B Preferred Stock as described above.
The net proceeds to the Company from the capital raise, after estimated direct expenses of $15.8 million, were $139.2 million, of which $5 million was retained by Bancorp and $134.2 million was contributed to the Bank as a capital contribution. For more information regarding the effect of the capital raise on the Company's capital, see the discussion under the subheading "Capital Resources" below.
See Part II, Item 1A "Risk Factors" for a discussion of the risks to the Company if the shareholder approvals are not obtained in a timely manner.
For additional details regarding the capital raise and the terms of the securities issued in the capital raise, see our Current Report on Form 8-K dated October 22, 2009 and filed with the SEC on October 28, 2009 (the "October 8-K").
The Bank entered into a Stipulation and Consent with the Federal Deposit Insurance Corporation ("FDIC") and the Oregon Division of Finance and Corporate Securities, the Bank's primary regulators, under which the Bank agreed to the issuance of an Order to Cease and Desist (the "formal regulatory agreement") effective October 22, 2009. Our formal regulatory agreement requires that the Bank, among other matters, increase capital, maintain certain liquidity measurements, reduce problem assets, and strengthen certain operating procedures and policies. Among other requirements, the Bank is required to maintain a Tier 1 capital to total assets leverage ratio ("leverage ratio") at least equal to or greater than 10% and a ratio of qualifying total capital to risk-weighted assets ("total capital ratio") at least equal to or greater than 12%. With the completed capital raise, the Bank has successfully met the requirements for new capital, and the Bank's pro forma risk-based capital and liquidity measurements would have exceeded the requirements of our formal regulatory agreement with respect to Tier 1 and total risk-based capital as of September 30, 2009.
For additional details regarding our formal regulatory agreement, see the October 8-K.
On September 23, 2009, the Company announced that it had suspended payment of cash dividends to shareholders and exercised its right to defer regularly scheduled interest payments on outstanding junior subordinated debentures related to its trust preferred securities. 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. Both of these actions were taken at the request of the Federal Reserve and in an effort to preserve capital.
In July 2009, the Bank reopened the newly renovated Woodburn West branch in Woodburn, Oregon. Also in July 2009, West Coast Bank was voted the number one bank in the Mid-Willamette Valley by the Salem Statesman Journal's website survey of favorite businesses.
As previously reported, we adjusted our business focus in an effort to respond to adverse economic conditions in the areas in which we do business, as well as precipitous declines in real estate prices and lower real estate sales activity in our markets. These conditions, together with the particular effects of the Bank's two-step residential construction lending program on our level of nonperforming assets, have put significant strain on our financial condition and had an adverse effect on our operating results. In response to the situation, we have developed and implemented certain strategies, some of which are expected to be short term in nature. These strategies have included to:
º Proactively address pressure on our capital ratios by reducing risk weighted assets;
º Selectively reduce loan concentrations and manage credit exposures;
º Aggressively reduce nonperforming assets;
º Enhance our liquidity position; and
º Reduce controllable operating expenses.
We have significantly reduced loan balances, risk-weighted assets and our concentration in construction loans over the past nine months. With respect to new term commercial real estate lending, we have concentrated on owner occupied properties. The decrease in loan balances, when combined with increases in deposits, enabled us to substantially increase our investment securities portfolio and interest bearing cash balances and meet certain pledging requirements for uninsured public deposits and government agency loans. While improving liquidity, the shift from loans to investment securities and interest bearing cash balances has had a negative impact on our net interest margin and income, which both continued to decline in the third quarter of 2009. We have had four consecutive quarters of operating losses, including a net loss of $12.4 million, or $.79 per diluted share, for the most recent quarter ended September 30, 2009.
Following our capital raise, we expect to begin considering new lending opportunities for non-owner occupied properties that are within our risk parameters and concentration limits for non-owner occupied commercial real estate loans relative to capital. In light of our recent capital raise and improved capital position, we also expect to selectively and prudently pursue other new business opportunities that are consistent with our existing business strategies, credit policies and lending expertise. We anticipate becoming more active in marketing efforts for loans to qualified borrowers in targeted customer segments, and particularly commercial loans, in order to increase our loan balances, which will be a key factor in improving the Company's revenues. We will also consider adding experienced relationship managers if such opportunities become available to us. While such renewed marketing efforts will take some time to have a meaningful impact on net interest income and margin, these efforts are expected to allow us to return to profitability sooner than without the new capital.
Reflecting the challenging economic environment, we will continue to focus on operating efficiently and controlling expenses in ways that have the least impact on our customers.
We continue to believe that in order to achieve long-term growth and accomplish our long-term financial objectives we will have to successfully execute our five defined long-term strategies:
º Focus on profitable customer segments;
º Exploit local market opportunities;
º Design and support value added products;
º Expand branch distribution; and
º Maintain community focus and high employee and customer satisfaction.
These strategies are designed to direct our tactical investment decisions to accomplish our financial objectives. To produce net interest income, the key component of our revenues, and consistent earnings growth over the long-term, we recognize that we must generate loan and deposit growth at acceptable interest rate spreads. Net interest income is sensitive to our ability to attract and retain lending officers, close loans in the pipeline and maintain asset quality at an acceptable level. Any failure in that regard could negatively affect our ability to meet our goals. To generate and grow loans and deposits now and in the future, we believe that we must focus on a number of areas, including but not limited to, the quality and breadth of our branch network, our sales practices, customer and employee satisfaction and retention, technology, product innovation, vendor relationships and providing competitive rates. Our ability to attract and grow low cost deposits will be important to fund any future loan growth and grow revenues.
We also consider noninterest income important to our continued financial success. Fee income generation is primarily related to our loan and deposit operations, such as deposit service charges, fees from payment system products (interchange, merchant services, ACH, check and credit card) and fees on sales of financial products, including residential mortgages and trust and investment products. Many of the products and services that generate fee income are offered through relationships with third party providers, thus we are dependent on the continuity of those relationships to support this important source of income.
Financial Overview.
Bancorp's net loss was $12.4 million, or $.79 per diluted share, for the three months ended September 30, 2009, compared to a net loss of $2.3 million, or $.15 per diluted share, for the three months ended September 30, 2008. The Company's net loss for the nine months ended September 30, 2009, was $42.3 million, or $2.71 per diluted share, down from net income of $2.4 million or $.15 per diluted share for the same period in 2008. The primary contributors to our net losses continue to be contracting net interest income and elevated provision for credit losses.
Bancorp's net interest income was $19.1 million in the third quarter 2009, a $4.6 million decrease from the same period in 2008. The 19% third quarter decline in net interest income from the same period in 2008 was primarily a consequence of a sizeable shift in the earning asset mix from higher yielding loan balances to lower yielding investment securities and interest bearing cash balances at the Federal Reserve Bank associated with our goals of maintaining capital ratios and enhancing liquidity. The lengthening of maturities for certificate of deposit balances and particularly Federal Home Loan Bank ("FHLB") borrowings and a declining benefit from our sizable, low cost core deposit balances in this unusually low interest rate environment also had a negative effect on net interest income.
Noninterest income was $5.0 million for third quarter 2009, an increase of $3.9 million compared to the same period in 2008. The increase in noninterest income was primarily the result of an impairment charge of $6.3 million taken in the third quarter of 2008 related to the investment securities portfolio. Other real estate owned ("OREO") valuation adjustments increased $2.6 million in third quarter 2009 compared to the same period last year.
Noninterest expense was $23.5 million for third quarter 2009, an increase of 6% compared to the same period in 2008. The primary drivers of the increase in noninterest expense were costs associated with managing OREO properties and a significant increase in FDIC insurance expense. All other noninterest expenses outside of OREO and FDIC costs decreased 3% in the third quarter of 2009 compared to the same period in 2008 as a result of our efforts to reduce controllable expenses.
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