West Coast Bancorp: Wishful Thinking?

First, an excerpt from the Portland Business Journal assessing West Coast Bancorp's FQ2'08 results, released July 21:

"West Coast Bancorp (WCBO), reported nearly $2.7 million in earnings, or $0.17/share, for Q2. That was a 67% drop from Q2'07, when the bank reported earnings of $8.1M, or $0.50/share. Revenue dropped 18%, from nearly $54.9M last year to $44.8M in Q2'08... The biggest factor in West Coast's declining revenue and profits is the bank's reversals of interest on two-step loans. These short-term loans were made to individuals to finance building houses, and in many cases borrowers have been unable to pay the loans, or the value of the built house has fallen enough so that they owe more than the house is worth. West Coast's total two-step loan balance was $146 million at the end of June, down $111 million since last year. West Coast Bancorp stopped making these loans in October, and its loss allowances for these loans is dropping."

On a July 21 conference call announcing FQ2'08 results, West Coast Bancorp executives discuss some of the difficulties the bank is facing on those two-step loans and rising bank-owned properties:

Robert D. Sznewajs, President, CEO, West Coast Bancorp: The team of people that we put together to deal with the collection and the ultimate disposition of the loans associated with the two-step program are performing well. We have a very high level of confidence in what they’re doing. We’ve had some sales but we’re in the early stage of that. We’ve had both short sales as well as sales in the loans have been in OREO themselves. [REO= Real Estate Owned: Property owned by a lender, generally a bank. - Ed.]

Anders Giltvedt, EVP, CFO:

A significant decline in the [inaudible] commission expense was more than offset by regular merit increases and additional employees as well as material lower deferred costs for salary reimbursement. The latter contracted 38% or $0.7 million in the most recent quarter resulting from significant lower loan origination, the majority of which was caused by lower or no origination of two-step loans.

Hadley S. Robbins, EVP, CCO:

Through June 30 $21 million in charge offs had been processed against the two-step allowance for credit losses related to non-accrual two-step loans. This represents a charge off percentage of about 18% relative to the original loan balance before impairment... two-step loan portfolio activity during the second quarter. June 30 outstanding loans in the two-step portfolio were $146 million or 7% of total bank loans down from $211 million at March 31 or 10% of total loans. At quarter end there were 480 two-step loans with outstanding commitments of $158 million down from 702 loans at $246 million at March 31. As of June 30 there were 83 loans in the non-standard program with an outstanding principal balance of $31 million. Delinquent non-standard loans 30 to 89 days past due were about $3.8 million or about 12% overall... Non-performing assets consisting of REO and non-accrual loans increased $31 million from $94 million at March 31 to $125 million at June 30 which was consistent with our expectations. Most of this increase is attributed to higher REO levels. At June 30 we had 101 properties in REO with a book value of $26 million up from $5.7 million at March 31. Non-accrual loans increased $10 million from $89 million at March 31 to $99 million at June 30. Second quarter net charge offs were $8.5 million versus $20 million the first quarter and this was largely because of the lower number of new loans that were added to non-accrual during the second quarter.

Later on in the call:

Lewis Feldman – Wells Capital Management

In terms of your houses in OREO, what is your ballpark holding time? How long will you hold that before you will mark it down substantially just to get it moving?

Hadley S. Robbins

As you understand, we’re still just early in to – and I assume you’re talking about the two-step portfolio?

Lewis Feldman – Wells Capital Management

For the most part, yes sir.

Hadley S. Robbins

We’re early in to the cycle and we really don’t have I believe the experiences in marketing those to provide a good sense of what the timeline is. Naturally we feel a sense of urgency and we want to move the properties intelligently out of the portfolio.

Anders Giltvedt

What I would add to that Hadley is I think if you’d look at the projects we had going back a few months, as to the inflows and outflows, the outflows to date are slightly better than we expected a few months back.

Lewis Feldman – Wells Capital Management

Hadley, if you feel you lack the experience, where will you get that from?

Hadley S. Robbins

In terms of actually selling the homes?

Lewis Feldman – Wells Capital Management

Yes.

Hadley S. Robbins

Well, my hope is that the marketplace gives us the opportunity to actually sell the homes. We’re in the period at which a lot of activity has historically occurred. As I mentioned, it’s softer and so I’m hopeful that the remaining parts of July/August/September will provide us more indications of what the activity level might be as well as what the overall net coastings from those sales will be.