Financial Performance

Dear Shareholder:

We are pleased to announce that Northwest Bank made considerable progress in 2011 in reducing our net loss from the prior year and in significantly reducing our nonperforming assets.  Both of these accomplishments took an extremely focused team to achieve, and while our results are not what we would like to be reporting, we are very proud of the progress that was made in 2011. 

Northwest Bank reported a net loss of $61,000 for the fourth quarter of 2011, compared to net earnings in each of the prior two quarters of $15,000 and $110,000, in the third and second quarters, respectively, and a loss of $668,000 in the fourth quarter of 2010.  The loss in the fourth quarter of 2011 was primarily due to the disposition of a jointly owned land development project in Medford to the lead banking member in this project.  We again reduced our allowance for loan losses, as we significantly reduced the risk profile of our loan portfolio, primarily having borrowers retire higher risk loans, and we continue to recover losses on loans previously charged off.  The results of the third quarter personnel reduction was fully realized in the fourth quarter, as was the successful renegotiation of the leases on both our Lake Oswego location and our previously closed Portland branch. 

For the full year Northwest Bank reported a net loss of $613,000, compared to a net loss of $1,872,000 in 2010.  The 2011 loss was largely attributed to other real estate owned valuation adjustments that reflect a continuation of the significantly depressed real estate market, and recognized losses as we sold two properties at less than our previous carrying values.  The good news is that we reduced our other real estate owned portfolio by 53%, and the portfolio now consists of only three remaining properties, one of which is pending sale in January with no additional loss. The 2011 results also include a negative provision for loan losses, which is the result of significant recoveries combined with a marked improvement in overall asset quality of the loan portfolio.  These factors, in turn, reflect our intentional reduction in the size of our loan portfolio, particularly in higher risk loan categories. Total noninterest expense, excluding other real estate owned expenses, was reduced 17 percent from 2010; excluding the costs of closure of the Portland branch and certain other non-recurring legal expenses, total noninterest expense was reduced 20 percent from the prior year.  These reductions reflect cost containment across all expense categories as our dedicated team and board continued to focus on a return to financial stability and profitability. 

Our liquidity remains strong, with $33,278,000 in cash and investments at December 31, 2011, an increase of $4,102,000 from September 30, 2011, and representing 32% of total assets.  The increase in liquidity results from a combination of growth in noninterest deposits, and the exit of higher risk loans combined with the early payoff of certain other loans to market competitive pressure.  The high level of liquidity is deemed prudent with the impending maturities of certain certificates of deposit in the first half of 2012, but does negatively impact the bank’s earnings due to the low yielding market opportunities available in which these funds can be invested short-term. 

Total loans decreased $1,933,000 in the fourth quarter to $70,066,000 at December 31, 2011, and decreased $11,865,000 from the year prior. Total construction, land acquisition and development loans, the riskiest category of loans in this prolonged real estate recession, were reduced $5,823,000 or 55 percent over the course of 2011.  New loan production in the fourth quarter and the full year of 2011 totaled $3,461,000 and $17,358,000 in loan commitments, respectively, with $2,812,000 and $12,872,000 reflected in the outstanding balances, respectively, at December 31, 2011. 

Total deposits increased $1,961,000 in the fourth quarter, to $95,170,000, with the growth in noninterest-bearing deposits. Total deposits declined $20,988,000 from year-end 2010, primarily due to the maturities of higher cost reciprocal CDARs and national certificates of deposit, which were not replaced. The deposit mix continues to improve and remains favorable relative to our peers with noninterest deposits representing 32% of total deposits at December 31, 2011, up from 29% at September 30, 2011 and 24% at December 31, 2010.  Noncore certificates of deposit have been reduced significantly and systematically, down $11,012,000 or 54% since year-end 2010, with further reduction planned over the next several quarters to both improve the net interest margin and reduce excess liquidity.

Total equity was $8,805,000 at December 31, 2011, which equates to a book value per share of $3.57.  Our risk based capital ratios, which are preliminary pending the filing of our quarterly regulatory reports, continue to exceed the published regulatory guidelines for “Well Capitalized” institutions, although we continue to work toward meeting the levels established in our consent agreement. Our leverage capital ratio was 8.37% at December 31, 2011 compared to the standard 5% required for “Well Capitalized” status, and we have agreed with our regulatory agencies to increase this ratio to at least 10%.  Our total risk based capital ratio was 11.05% at December 31, 2011 compared to the 10% required for “Well Capitalized” status, but short of the 12% that we have agreed to with our regulatory agencies. We are actively continuing to explore a range of alternatives aimed at achieving this goal.

The net interest margin was 3.92% in the fourth quarter, an improvement over the 3.86% in the third quarter of 2011, and significantly improved from 3.48% for the same quarter in the prior year.  The third and fourth quarters of 2011 both benefited from our decision to enforce prepayment penalties and the redeployment of some low yielding liquid investments into longer term investments.  The net interest margin for the full year was 3.85% compared to 3.90% in 2010, heavily influenced by our strong liquidity position in 2011 as we retain a greater-than-normal focus on liquidity in this prolonged and historically low interest rate environment.  

Nonperforming assets (loans 90 days or more past due or on nonaccrual, plus Other Real Estate Owned) were $3,824,000 or 3.54% of total assets at December 31, 2011, down $1,317,000 or 26% from September 30, 2011 and a 48% or $3,589,000 improvement from 2010. Fourth quarter 2011 activity included new nonperforming assets of $95,000, while sales and settlement proceeds totaled $916,000 and additional valuation reductions and charge-offs totaled $496,000.  For the full year only $459,000 was added to nonperforming assets, indicative of a stabilized loan portfolio and suggestive that we may have reached the bottom of the market value deterioration.  There were no loans past due 30-89 days at December 31, 2011. Details about the nonperforming assets can be found in the table below:

The allowance for loan losses stands at 2.21% of loans outstanding at December 31, 2011, compared to 2.65% at September 30, 2011, and down from 3.11% at December 31, 2010.  All of the nonperforming loans reflected above are carried at the lower of their expected liquidation value or the loan balance and thus have no allowance for loan losses set aside, which has the effect of reducing the overall level of the allowance for loan losses.  Additionally the impact of the significantly improved risk profile of the loan portfolio is a reduction in the level of allowance for loan losses needed to support potential future losses.

The Bank’s real estate acquisition and development portfolio, exclusive of the nonperforming loans reflected above, was $4,189,000 at December 31, 2011, which represents loans to borrowers whom we believe are strong and reputable, with solid repayment capacity and/or collateral strength. As mentioned above we have made considerable progress in reducing this portfolio over the past year, and while we do expect some further reduction in 2012 we are not actively focused on reduction due to the solid credit quality in this remaining portfolio. 

We remain highly focused on complying with the provisions of the Consent Agreement entered into with our regulatory agencies in 2010, and we believe we have satisfied the majority of the provisions of the agreement. We have provided responses to the FDIC and the Oregon Department of Consumer and Business Services, and we continually keep those agencies updated on our progress. We believe the bank is positioned to withstand the protracted weakness in the regional and national economy, while also seeking opportunities to raise capital should the appropriate opportunities arise.

Our team continues to seek business opportunities which include credit relationships that reflect our mission as a business and private bank. Our 2012 objectives remain unchanged and are as follows, each of which also supports the actions required by our consent agreement:

• Raising additional capital;
• Reducing our nonperforming assets;
• Achieving sustained profitability;
• Staying true to our mission of local relationship banking;
• Continuing our focus on cost control, accountability and transparency; and
• Retaining our high performing employees.

We believe all of these measures will translate into stabilizing and setting the course for improving shareholder value.

If you have any questions regarding the Bank’s financial results, please contact me at (503) 906-3941.

Sincerely,

Susan Campo
Chief Financial Officer

Report to Shareholders

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