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. The petitioners seek 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 believes the petition is without merit. The Company
filed a motion to dismiss on July 2, 2009, which remains pending.
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 residential
construction loan portfolio as a result of weakness in the residential housing
market and other factors. The recession affecting the economy generally has had
an adverse effect on the ability of borrowers to repay loans of all types,
including also commercial, commercial real estate and home equity loans and
lines of credit. Extended and 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, including, without limitation, the
allowance for credit losses, and may require that the Bank increase the
allowance 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 have a material adverse effect
on our financial condition and results of operations. For more information on
this topic, see “Allowance for Credit Losses and Net Loan Charge-offs” and
related disclosures in Part 1, Item 2 of this report above, as well as the
disclosure relating to our critical accounting policies included in our 2008
10-K.
We may need to raise additional
capital to enhance or maintain desired levels of capital, improve capital
ratios, and increase liquidity.
The Company has experienced four
consecutive quarters of significant operating losses and continues to face
elevated levels of nonperforming assets. Under these circumstances, the Company
is frequently evaluating its capital needs and alternatives and regulatory
capital ratios, and we are exploring alternatives for raising additional
capital, which may be required in the future. Equity or debt financing may not
be available to us on any terms. If financing is available, it may, in the case
of any equity financing, be available only on terms that are dilutive to
Bancorp’s shareholders. In addition, securities issued in an equity financing
may have rights, preferences and privileges, including rights to dividends that
are senior to those of Bancorp’s shareholders. Under Bancorp’s articles of
incorporation, it may issue preferred equity with senior terms and common stock
without first obtaining shareholder approval, although regulations of the Nasdaq
Stock Market require shareholder approval under certain circumstances. In the
event additional capital is unavailable on acceptable terms, we may instead take
additional steps to preserve capital, including further slowing of lending
activities and new loan commitments, offers to sell certain assets, increases in
loan participations or sales, or elimination of our cash dividend to
shareholders.
- 59 -
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 into the first and second 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 loan
portfolios. Increased OREO balances lead to greater expenses as we incur costs
to manage and dispose of the properties and, in certain cases, complete
construction of structures prior to sale. We expect that our earnings in 2009
will be negatively affected by various expenses associated with OREO, including
personnel costs, insurance and taxes, completion and repair costs, and other
costs associated with property ownership, as well as by the funding costs
associated with assets that are tied up in OREO. Additional decreases in market
prices will lead to OREO write downs and possibly losses on sale, with a
corresponding expense in our income statement. We evaluate OREO property values
periodically and write down the carrying value of the properties if the results
of our evaluations require it. Further property write downs could have a
material adverse effect on our financial condition and results of operations. At
June 30, 2009 we had $126.7 million in nonaccrual loans, the majority of which
was collateralized by real estate, and $83.8 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, if we
are limited in the types of deposits we can accept, if existing depositors
withdraw their deposits, or we are unable to renew at acceptable terms long-term
borrowings or short-term borrowings from the overnight inter-bank market, the
FHLB System, brokered deposits, or the Federal Reserve discount window.
Illiquidity may also arise if our regulatory capital levels decrease, our
lenders or borrowers require additional collateral to secure our repayment
obligations, or a large amount of our deposits are withdrawn. We may also
experience illiquidity due to unexpected cash outflows on committed lines of
credit or financial guarantees or due to unexpected events. The increasingly
competitive retail deposit environment increases liquidity risk (and increases
our cost of funds) as increasingly sophisticated depositors move funds more
frequently in search of higher rates or better opportunities. Regulatory
limitations currently limit our ability to utilize brokered deposits, which
further strains our sources of liquidity. The holding company’s liquidity may be
further negatively affected by regulatory or statutory restrictions on payment
of cash dividends by the Bank. We monitor our liquidity risk, including, without
limitation, through contingency planning and stress testing. We also seek to
avoid over concentration of funding sources and maturities and to establish and
maintain back-up funding facilities that we can draw down if normal funding
sources become unavailable. Since the beginning of this year, we have taken
significant steps to improve liquidity, including reducing loan balances,
increasing deposits, and increasing liquid balances in our investment portfolio
and cash held at the Federal Reserve Bank. We have also extended the maturities
on our long-term FHLB borrowings. If we fail to control our liquidity risks,
there may be materially adverse effects on our results of operations and
financial condition.
We operate in a heavily regulated
industry with broad discretion given to our regulators. Any failure to comply
with regulations and restrictions applicable to us could lead to restrictions on
our operations and/or regulatory sanctions.
We
operate in a highly regulated industry and are subject to examination,
supervision, and comprehensive regulation by the Oregon Division of Finance and
Corporate Securities, the FDIC, and the Federal Reserve Board. As part of the
regulation of the Bank, we are subject to operating restrictions that, among
other things, prevent payment of dividends by the Company or the Bank without
prior consent, limit the rates we pay on deposits, restrict our use of brokered
deposits, including deposits obtained through our participation in the CDARS
network, restrict our access to other sources of liquidity, 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
capital requirements would 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. At June 30, 2009, we exceeded regulatory benchmarks for
“well-capitalized” institutions. There can be no assurance that the Company and
the Bank will continue to do so.
The Congressional and regulatory
response to the current economic and credit crisis could have an adverse effect
on our business.
Federal
and state legislators and regulators are expected to pursue increased regulation
of how banks are operated and how loans are originated, purchased, and sold as a
result of the current economic and credit crisis. Changes in the lending market
and secondary markets for loans and related congressional and regulatory
responses may impact how the Bank makes and underwrites loans, buys and sells
such loans in secondary markets, and otherwise conducts its business. We are
unable to predict whether any legislative or regulatory initiatives or actions
will be implemented, what form they will take, whether they will be directed at
the Bank, or whether such initiatives or actions, once they are initiated or
taken, will thereafter continue to change. Any such actions could affect us in
substantial and unpredictable ways and could have an adverse effect on our
business, financial condition and results of operations.
- 60 -
Our business may be harmed by
adverse events at other financial institutions.
Financial
institutions are interrelated as a result of trading, clearing, correspondent
banking, counterparty, and other relationships and because of regulatory
factors. Bancorp enters into transactions with financial services companies,
including commercial banks and correspondent banks. Many of these transactions
expose Bancorp and the Bank to credit and bankruptcy risk in the event of a
default or bankruptcy by a counter party. The Bank may also be negatively
impacted by the failure of other banks. For example, as a depository of
uninsured public funds, the Bank will be assessed, and the Bank is statutorily
obligated to pay, a pro rata share of the losses of uninsured public funds held
at a failed public depository in Oregon or Washington. In addition, assessments
the Bank pays to the FDIC and others, including deposit insurance premiums, will
increase even further in the event of bank failures or other adverse events
affecting the banking system generally or the Bank in particular.
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.
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.
Significant legal and regulatory
actions could subject us to uninsured liabilities, associated reputational risk,
and reduced revenues.
From time
to time, we are sued for damages or threatened with lawsuits relating to various
aspects of our operations. We may also be subject to investigations and possibly
substantial civil money penalties assessed by, or other actions of, federal or
state regulators in connection with violations or alleged violations of
applicable laws, regulations or standards. We may incur substantial attorney
fees and expenses in the process of defending against lawsuits or regulatory
actions and our insurance policies may not cover, or cover adequately, the costs
of adverse judgments, civil money penalties, and attorney fees and expenses. As
a result, we may be exposed to substantial uninsured liabilities, which could
adversely affect our results of operations, capital, and financial condition.
We are
subject to reputational risk, which is the potential that negative publicity
regarding our business practices, whether true or not, could cause a decline in
our customer base, stock price, or general reputation in the markets in which we
operate. Reputational risk is heightened in the instance of publicity
surrounding lawsuits or regulatory actions.
Market and other constraints on our
construction loan origination volumes are expected to lead to decreases in our
interest and fee income that are not expected to be offset by reductions in our
noninterest expenses.
Due to
existing conditions in housing markets in the areas in which we operate and
other factors, we project that our construction loan originations will be
materially constrained throughout 2009. This is expected to continue to reduce
interest income and fees generated from this part of our business. In the near
term we anticipate that it may be difficult to find new revenue sources to
offset such declines in our interest income. While we have implemented
noninterest expense reductions in light of the unfavorable environment, we do
not expect these expense reductions to completely offset revenue declines, at
least in the near term.
- 61 -
The
value of securities in our investment securities portfolio may be negatively
affected by disruptions in the market for these securities.
In
addition to interest rate risk typically associated with an investment
portfolio, the market for certain investment securities held within our
investment portfolio has over the past year become much less liquid. This
coupled with uncertainly surrounding the credit risk associated with the
underlying collateral has caused material discrepancies in valuation estimates
obtained from third parties. We value some of our investments using internally
developed cash flow and valuation models, which include certain subjective
estimates which we believe, are reflective of the estimates a purchaser of such
securities would use if such a transaction were to occur. The volatile market
may affect the value of these securities, such as through reduced valuations due
to the perception of heightened credit and liquidity risks, in addition to
interest rate risk typically associated with these securities. There can be no
assurance that the declines in market value associated with these disruptions
will not result in impairments of these assets, which would lead to accounting
charges that could have a material adverse effect on our results of operation,
financial condition, and capital ratios. For additional discussion of our
investment securities, see Notes 3 and 12 of the notes to our consolidated
financial statements included in Part 1, Item 1 of this report.
- 62 -
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 June 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
|
|
at Period End that May Be Purchased
|
|
Period
|
|
Purchased(1)
|
|
per Share
|
|
Programs(2)
|
|
Under the Plans or
Programs
|
|
4/1/09 - 4/30/09
|
|
|
8,753
|
|
|
|
$2.43
|
|
|
|
-
|
|
|
|
1,051,821
|
|
|
5/1/09 -
5/31/09
|
|
|
-
|
|
|
|
$0.00
|
|
|
|
-
|
|
|
|
1,051,821
|
|
|
6/1/09 - 6/30/09
|
|
|
-
|
|
|
|
$0.00
|
|
|
|
-
|
|
|
|
1,051,821
|
|
|
Total for quarter
|
|
8,753
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(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 8,753 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 June 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
- 63 -
Item 5. Other Information
As discussed in Note 1 of the notes to our
consolidated financial statements included in Part 1, Item 1 of this report we
adopted FASB Staff Position (“FSP”) EITF 03-6-1 “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” as of
January 1, 2009. This FSP requires that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method described in SFAS No. 128, “Earnings
per Share” and must be applied retrospectively for all periods presented in the
financial statements. Adoption of FSP EITF 03-6-1 had no effect on the basic
loss per share for the year ended December 31, 2008 and reduced basic earnings
per share for the years ended December 31, 2007 and 2006 from $1.09 to $1.08 and
from $1.95 to $1.93 respectively. Similarly the diluted loss per share for the
year ended December 31, 2008 was unchanged and diluted earnings per share for
the years ended December 31, 2007 and 2006 was reduced from $1.05 to $1.04 and
from $1.86 to $1.84 respectively
Item 6. Exhibits
|
|
Exhibit No
.
|
|
Exhibit
|
|
|
|
10.1
|
|
2002 Stock Incentive Plan, as amended.
|
|
|
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.
|
- 64 -
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: August 7,
2009
|
/s/ Robert D. Sznewajs
|
|
|
|
Robert
D. Sznewajs
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
Dated: August 7,
2009
|
/s/ Anders Giltvedt
|
|
|
|
Anders
Giltvedt
|
|
|
Executive Vice President and Chief Financial
Officer
|
- 65
-
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