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Tough times felt by West Coast Bank

At West Coast Bank, where real estate lending has been a staple of the bank's business, the economic downturn has had a serious impact.

The Lake Oswego-based bank's net losses from real estate construction and development loans were worse than 96 percent of the bank's peers in the second quarter, according to uniform bank performance reports by the Federal Deposit Insurance Corporation.

Over 12 months ending in October, the bank's nonperforming loans saw a large increase, zooming from $7.9 million to $135.2 million.

Jeff Rulis, vice president and research analyst for D.A. Davidson and Co., in Lake Oswego, who specializes in analyzing bank stocks said West Coast is 'a little more stressed' than most banks in the area.

The average share of publicly traded banks in the Northwest analyzed by D.A. Davidson and Co. has a 3.66 percent ratio of nonperforming assets to performing assets.

'West Coast is about 7 percent now, almost double the bank average,' Rulis said.

'They could be one that may get a helping hand,' from the federal cash infusion into banks, he said.

But West Coast Bank officials are silent about whether the bank has applied for federal funds from the $700 billion bailout bill enacted by Congress last month. The deadline to apply to the U.S. Treasury was Nov. 14.

Bank president and chief operating officer Bob Sznewajs declined to comment on any involvement the bank may have with the U.S. Treasury or on whether the bank is eligible for the federal funds.

He believes the bank's financial position will see considerable improvement in the next 12 months.

The bank's recovery strategy involves avoiding new residential construction loans and closely evaluating new commercial construction loans.

West Coast Bank would have very far to fall to be in trouble - it still has $204 million in shareholder equity and remains well capitalized with a capital ratio of 10.78 percent.

But the bank's nonperforming loans have weakened its stock price, causing observers to speculate on whether West Coast Bank could be swallowed by another bank or be among those seeking federal aid.

To outsiders, it's unclear whether the bank's many depositors - West Coast Bank has the largest deposit base in the Portland/Vancouver area, the mid-Willamette Valley and also on the coast with 90,000 depositors - are attractive enough to outweigh buyers' potential concern over the bank's nonperforming loans.

Some interpret the silence about federal aid to mean the bank may not be a candidate for the government bailout program because of its high concentration of construction development loans.

Theresa Springer, senior loan officer for Pacific Residential Mortgage in West Portland, who once worked in the banking industry, said West Coast Bank was formed by combining local banks and historically has been heavy into real estate.

'The history of that bank is that it was a builder bank. That's where the basis of their business was when they merged,' she said.

But Sznewajs said the bank faces fewer real estate risks than other banks in the northwest.

'Of our total loan portfolio, real estate construction is relatively smaller than most other commercial banks,' he said. 'Relative to other banks, our exposure is quite modest.'

Sznewajs declined to comment on what analysts or others in the banking industry might be speculating about the future of West Cost Bank.

He agreed the bank has an attractive franchise and strong performing home equity and commercial loans, both items observers said may lure buyers to West Coast Bank.

'All our portfolios are performing very well, obviously, without the impact of the economy on the residential construction portfolio and the two-step portfolio,' Sznewajs said.

The two-step program funded construction on real estate projects and the mortgages for the projects' buyers. It was discontinued by the bank in the fourth quarter of 2007 due to significant instances of nonpayment of the loans.

Over the course of the last year West Coast Bank has worked to push the two-step program off its books, whittling away 75 percent of the loan portfolio's outstanding balance, reducing it from $399 to $98 million.

Doing so has required an increase in foreclosures, accounting for $48.1 million in real estate assets that were owned by the bank in the last quarter.

The bank also has $56 million in nonperforming assets stemming from unpaid loans for residential development and construction and unpaid loans for nonstandard mortgages.

While bank officials say they expect the nonperforming loans to cause an increase in foreclosures in the fourth quarter, they also believe buyer interest in foreclosed properties will keep future losses below their third quarter peak.

'We believe the nonperforming loans associated with the two-step have peaked and that there will be a pretty significant decline (in losses) that's going to occur in the next 12 months,' said Sznewajs.

'Clearly, as it is for all institutions, the residential portfolio is the portfolio where there is the strongest headwind.'

Steve Law, reporter for the Pamplin Media Group, contributed to this story.