Financial Performance
Dear Shareholder:
The following is a summary of our financial condition and results of operations at December 31, 2009, and for the three months and fiscal year then ended. The summary information is derived from our year-end financial statements, which are unaudited. Our external auditors are expected to complete the audit over the next several weeks, including an evaluation of the Bank’s deferred tax asset. Should it be necessary to reserve against the Bank’s deferred tax asset, in whole or in part, the financial results may change. Any reserve against the deferred tax asset would result in a larger net loss for 2009, a lower book value per share, and a higher Texas Ratio. Regulatory capital ratios however would not change, due to the mechanics of those calculations, with the Bank remaining “well-capitalized” under any potential outcome relative to the deferred tax asset.
Northwest Bank reported a net loss of $480,000 in the fourth quarter of 2009. The loss was largely attributed to further reductions in the carrying value of nonperforming assets as appraised values on real property collateral continued to decline, falling below the asset carrying values. This loss compares to a third quarter 2009 net loss of $347,000, which was also impacted by real estate valuation declines.
For 2009, Northwest Bank reported a net loss of $2,770,000, compared to a net loss of $1,855,000 for 2008. The 2009 net loss was primarily due to 1) OREO costs of $1,288,000 which included a $1,000,000 loss on the sale of a townhouse development in Central Oregon and a $255,000 valuation write-down of a Medford lot development, 2) a significantly increased provision for loan losses which was the result of charge-offs on nonperforming loans recognizing further declines in real estate values from this prolonged economic downturn and the difficulty in determining a realistic “market” value under current conditions, 3) legal costs associated with disposition and collection of nonperforming assets, and 4) the impact of increased FDIC insurance premiums. For the fourth quarter of 2009 the Bank was profitable on a pre-tax, pre-provision basis, despite the aforementioned costs.
Total loans decreased $1,173,000 in the fourth quarter to $102,242,000 at December 31, 2009. New loan commitments in the fourth quarter totaled $11,656,000, which resulted in loan balances of $5,574,000. These new loans were offset by desired loan runoff and further write-down of certain nonperforming loans to their expected disposition value, again barring any further market decline. For the full year total loans declined $4,692,000, with desired runoff exceeding new loans made. 2009 new loan commitments totaled $49,785,000 which resulted in loan balances of $32,102,000, representing 31% of total loans at December 31, 2009. Deposits declined $1,557,000 in the fourth quarter of 2009 to $110,773,000, and for the full year declined $1,816,000. Over the course of 2009 the mix of the deposit portfolio improved significantly, with a 112% or $13,391,000 increase in noninterest deposits which represented 23% of total deposits at December 31, 2009, compared to 11% of total deposits one year earlier. Interest bearing demand deposits increased $11,166,000 or 32% for the year. These deposits were offset by the elimination of higher priced certificates of deposit, including the continuing strategic elimination of non-core national and brokered certificates of deposit which were reduced $11,647,000 in 2009 to $6,880,000 representing 6 percent of total deposits at December 31, 2009. The Bank’s certificates of deposit remain concentrated in fully insured local customer CDs through the CDARs program (see our website for details on CDARs), reflecting the ongoing national concerns over safety and quality, yet CDs were still reduced throughout the course of 2009. The Bank’s liquidity position remains strong, with 15 percent of total assets in cash and liquid investments totaling $19,359,000. Total equity was $17,564,000, which equates to a book value per share of $7.20, and reflects $1,618,000 in additional capital raised through December 31, 2009 through a local stock offering, which remains open through February 15, 2010. 58% of the new capital was raised through existing shareholders, including the Bank’s Board of Directors, with the remaining 42% from new local shareholders. The Bank remains “well-capitalized” under the banking regulation definitions, with a leveraged capital ratio of 10.42% at December 31, 2009. “Well-capitalized” status requires that a bank’s leveraged capital ratio be in excess of 5%.
The Net Interest Margin improved 43 basis points in the fourth quarter to 3.96%. The level of interest reversals on loans placed on nonaccrual in the quarter was less than in the previous quarter, and the margin was further increased by the continuing improvement in the Bank’s deposit mix and elimination of higher cost funding. The Net Interest Margin for the full year was 3.71%, impacted significantly by the level of loans on nonaccrual status. The Bank’s cost of deposits was reduced 15 basis points to .96% in the fourth quarter, the result of the significant improvement in the mix of the Bank’s deposit portfolio achieved through the successful integration of many new business and private banking client relationships.
Cost control, accountability and transparency remain an ever present focus of the Bank. The fourth quarter of each 2009 and 2008 included the reversal of bonus accruals, with no bonuses paid out to the Executive Team for either 2008 or 2009, and no discretionary bonuses paid to non-executive staff for 2009. Most staffing positions budgeted for 2009 remain unfilled. Although we have experienced staffing turnover in 2009, we have capitalized on the opportunity to hire highly seasoned, accomplished banking talent well known within our market area, and will continue to seek out exceptional local talent in 2010.
Nonperforming assets (loans 90 days or more past due or on nonaccrual, plus Other Real Estate Owned) are $12,025,000 or 9.33% of total assets at December 31, 2009, up from $7,094,000 or 5.46% at September 30, 2009, and $7,037,000 or 5.32% at December 31, 2008. Loans past due 30-89 days remain negligible at $56,000 at December 31, 2009. Additional information about nonperforming assets can be found in the table below.
The Allowance for Loan Losses stands at 1.67% of loans outstanding at December 31, 2009, compared to 1.64% at September 30, 2009 and 1.49% one year earlier. All nonaccrual loans, with the exception of one for which a valuation is currently underway, are considered impaired and are carried at the lower of their expected liquidation value or the loan balance. As a result, loans charged-off totaled $2,996,000 for 2009, $821,000 of which was charged off in the fourth quarter, down slightly from 2008 total loan charge-offs of $3,110,000.
We remain disappointed in the level of nonperforming assets, and continue to work diligently on the aggressive pursuit of liquidation alternatives for each of the nonperforming assets. Details of the nonperforming assets are included in the table below.
| Collateral | Carrying Value | Year Loan Originated | Status |
| Nonperforming Loans: | |||
| Commercial R/E, Bend (bankruptcy) | $3,000,000 | 2005 | Court proceeding |
| Printing Equipment/Receivables, Portland | 224,000 | 2005 | Liquidating |
| Land/Lot Development, Eugene | 1,925,000 | 2006 | Negotiating Sale |
| Notes Secured by R/E, Portland | 791,000 | 2006 | Pursuing Sale |
| Leased Autos, Portland | 451,000 | 2006 | Liquidating |
| USDA Gty Agricultural R/E, Sherwood | 856,000 | 2007 | Pursuing Sale and Guaranty |
| Commercial Land, Bend | 760,000 | 2007 | Negotiating Sale |
| Timber & R/E, Columbia Gorge | 1,143,000 | 2008 | Negotiating Sale |
| Unsecured, Portland (bankruptcy judgment) | 78,000 | 2008 | Payment Plan |
| Total Nonperforming Loans | $9,228,000 | ||
| OREO: | |||
| Land/Lot Development, Beaverton | $1,231,000 | 2006 | Purchase Option, 50% closing mid February |
| Land/Lot Development, Medford | 849,000 | 2006 | Pursuing Sale |
| Residential Construction, Eagle Crest | 506,000 | 2006 | Negotiating Sale |
| Lot Development, Springfield | 76,000 | 2006 | Negotiating Sale of 2 remaining lots |
| Small Acreage, Gilchrest | 135,000 | 2008 | Pursuing Sale |
| Total OREO | $2,797,000 | ||
| Total Nonperforming Assets | $12,025,000 |
The Bank’s real estate acquisition and development portfolio, exclusive of the nonperforming loans, is $16,425,000 at December 31, 2009, $2,342,000 of which represents short-term residential construction loans to accommodate the sale of lot developments, many of which are nearing completion and payoff. Our goal remains to meaningfully reduce, if not eliminate, this exposure in 2010 through asset sales and/or refinancing activity.
The economic environment remains strained with the road to recovery moving further out into the future. We believe we are nearing the residential real estate market bottom, however, the economic, political and regulatory environment will all play heavily into whether this holds true. We remain cautiously optimistic that we have identified and adequately reserved for potential credit issues, barring further market deterioration. In certain markets real estate values have fallen 50 to 80 percent, and Northwest Bank has been impacted by this. Our loan portfolio is actively monitored for any signs of credit quality deterioration. We believe we have conservatively underwritten our commercial real estate portfolio, with underwriting to an average 63% of market value for owner occupied commercial real estate and 53% for investor commercial real estate.
Our top priorities remain the reduction of nonperforming assets, adherence to our core mission by growth in quality loans and deposit relationships with local businesses and private banking clients, further strengthening of our liquidity and a return to profitability. We are leveraging the very strong 2009 momentum in new quality loan and deposit relationships to extend our outreach and growth prospects for the future, as evidenced by a continuing strong pipeline of opportunities. Our banking team and Board remain committed to the continued building of a strong and successful bank for our shareholders, clients, and community.
If you have any questions regarding the Bank’s financial condition, please contact Sue Campo, CFO at (503) 906-3941.Sincerely,
Karen Lantz Fornshell
President & CEO
Report to Shareholders
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