Lower Credit Costs Return West Coast Banks to the Black

Profitability is back for many West Coast banks, due mostly to improved credit instead of long-awaited balance sheet growth.

Several banks of varying sizes in California and Oregon released loan-loss reserves during the fourth quarter as chargeoffs finally began to exceed provisions. While lower credit costs boosted bottom lines, tepid lending continued to dampen investors' enthusiasm. The mixed result also served as a reminder that a turnaround will be long and arduous.

Bankers "think that things are incrementally improving, but no one's ready to call for anywhere close to normalized loan growth," Michael Zaremski, an analyst at Credit Suisse, said Thursday.

Some analysts said credit costs, which have slowly fallen in recent quarters, are another small step in the right direction.

Pacific Continental Corp. in Eugene, Ore.; CVB Financial Corp. in Ontario, Calif.; PremierWest Bancorp in Medford, Ore., and Community West Bancshares in Goleta, Calif., all reported smaller loan-loss provisions compared to a quarter before.

Charging off more than they are setting aside "is an indication that they feel comfortable with their reserve levels and" future nonperforming assets, said Timothy Coffey, an analyst at FIG Partners LLC.

At Pacific Continental, nonperforming assets fell 19% from the third quarter, to $46.3 million at Dec. 31. The $1.2 billion-asset company charged off $4.4 million and reduced its loss provision 13% from the third quarter, to $3.3 million. This helped the company earn $1.2 million in the fourth quarter, compared to $24,000 a year earlier.

"We couldn't be more pleased," Roger Busse, the company's president and chief operating officer, said in a press release. "Coupled with the anticipated resolutions expected during the first quarter of 2011, the results suggest a trend of continued contraction in problem assets."

CVB was ahead of the curve when it began releasing reserves in the third quarter. In that period, the $6.4 billion-asset company charged off $52.1 million of problem loans and booked a $48.5 million provision.

Though net chargeoffs rose in the fourth quarter, to $65.5 million, CVB again released reserves, taking a $61.2 million provision.

At Oregon's PremierWest, reduced credit costs signaled a huge improvement. The $1.4 billion-asset company was threatened with delisting from the Nasdaq for its low stock price last year and is still operating under a regulatory order to boost capital ratios.

Despite losing money again in the fourth quarter, its deficit was less than analysts had expected, in part because the company did not record a loss provision. The company charged off $6.5 million. Despite an uptick in nonperforming loans, the company said it could release reserves because many of its problem loans already have adequate reserves.

Pacific Premier Bancorp in Costa Mesa, Calif., also cut provision expenses to zero in the fourth quarter.

Steven Gardner, the $827 million-asset company's president and chief executive, said in an interview Thursday that nonperforming assets are just 0.4% of the company's total assets, "which is substantially lower than the vast majority of banks operating in California."

"The reserves we have, after our analysis, are more than adequate to cover what we believe are potential losses," Gardner added.

PacWest Bancorp in Los Angeles was a notable exception. The $5.5 billion-asset company lost $7.7 million, largely due to a higher provision tied to the sale of $74 million in problem loans. PacWest boosted its allowance to 110.7% of nonaccrual loans, from 95.3% in the third quarter.

Still, an overall decline in bank stock prices suggested that investors are disappointed in what they've seen so far, said Aaron James Deer, an analyst at Sandler O'Neill & Partners. "The trends are more or less as expected, though it's clear that the improvement in credit quality is going to be a slow process," he said.

Coffey, the analyst at FIG, said he expects to see Southern California markets continue to progress faster than markets in the Pacific Northwest. Banks whose reserves exceed 2% to 2.5% of total loans will probably adopt similar strategies of charging off more than they set aside, he said. "I think you'll see continued improvement in credit quality and lowered credit costs but challenges in generating net interest income," he said.