Over the past several years West Coast Bancorp in Lake Oswego, Ore., has been bulking up in the state's fastest-growing cities by adding more branches and commercial lenders to attract more business customers.
Now that the Oregon economy is finally ramping back up, West Coast's investments should pay off handsomely as both new and existing customers draw more on their lines of credit, analysts say.
In November the $1.8 billion-asset company snagged six lenders - and $56 million worth of agricultural loans - from Washington Mutual Inc.'s now-defunct commercial unit. About 40 other commercial lenders have defected to West Coast from bigger banks in recent years.
"We now have the largest deposit market share of any community bank in the Portland/Vancouver [Wash.] area, and we're very oriented toward business customers," said president and chief executive Robert D. Sznewajs. "This gives us an excellent position to take advantage of growth opportunities in those markets, and our share in them is just going to grow even more."
Mr. Sznewajs is aiming for earnings growth of at least 10% per quarter and wants to keep its return on equity ratio above 15%. In the fourth quarter its earnings rose 16%, to $5.8 million, its return on assets was 1.31%, and its return on equity was 15.90%.
Joseph K. Morford of Royal Bank of Canada's RBC Capital Markets in San Francisco said the former Wamu lenders will probably generate "outsized loan growth" for West Coast in the next several quarters, which should help West Coast achieve its goals.
Moreover, the $56 million ag loan portfolio from Wamu boosted loan growth to over 30% last quarter, and that should give the bottom line a good lift, Mr. Morford said. (Even without the Wamu portfolio, West Coast's loans grew 16% in the fourth quarter, he said.)
Brad Milsaps, an analyst with First Horizon National Corp.'s FTN Midwest Research Securities Corp. in Nashville, says West Coast has prepared itself well to capitalize on the Pacific Northwest's economic rebound.
Last year more than 34,000 jobs were created in Oregon, the most since 1999, according to the Oregon Employment Department. Oregon took longer to recover from the recession than other states, because manufacturing is such a big part of its economy. But thanks to increased global demand, manufacturing has recovered; meanwhile, the state economy has continued to diversify.
West Coast has spent several years building its infrastructure. In addition to the 50 new hires, it has opened 11 branches, mainly in Portland, the state's largest and most vibrant market, but in others as well.
"The groundwork is laid out now for West Coast to take much more market share from the top five banks in those markets - all of which are out-of-state, larger institutions," Mr. Milsaps said. "I don't see any reason why they couldn't get double-digit earnings growth for the next couple of years."
Mr. Morford pointed out that West Coast faces fierce competition from the bigger banks and from community bank companies such as the $4.9 billion-asset Umpqua Holdings Corp. in Portland and the $1 billion-asset Cascade Bancorp in Bend, Ore.
"We're seeing intense price competition on the lending side there, and increasingly on the deposit side as well," he said. "West Coast is going to really try to leverage the relationships they already have with customers, but the others are doing that as well."
Even so, Mr. Morford has raised his 2005 earnings-per-share estimate 5 cents, to $1.55. His EPS forecast for 2006 is $1.70, which would top 2004's by about 9%.
Five years ago West Coast was a much different company. Buying four community banks in Oregon and Washington between December 1995 and December 1998 tripled its assets, to $1.25 billion.
But the rapid growth proved unwieldy, and in 1999 the company put its four bank charters into one. It also consolidated four loan production offices and laid off 75 employees.
Despite the cost savings from those moves, earnings dropped throughout 1999 and in parts of 2000, and performance ratios fell well below industry averages.
Analysts say West Coast's concentration on fixed-rate commercial real estate loans funded primarily by certificates of deposit made it too liability-sensitive. Whenever interest rates rose, margins were squeezed as deposits repriced much faster than loans. On top of that, a reliance on slower-growth markets - even after the four acquisitions - stymied loan growth.
West Coast's stock also took a beating, falling more than 50% in a two-year span.
James Bradshaw, an analyst at D.A. Davidson & Co. in Portland, said that as the 1990s were winding down the board decided to make changes.
"The original management team had built the bank from a start-up to $1 billion in assets," Mr. Bradshaw said. "But then the board decided it was time to move to a more professional manager who had experience running a large company."
Apparently seeing the writing on the wall, then-CEO Victor L. Bartruff abruptly resigned in June 1999. Six months later the board brought on Mr. Sznewajs, U.S. Bancorp's head of retail banking at the time, along with several members of his management team at the Minneapolis company.
The new management got right to work hiring commercial lenders with huge books of business in Oregon's hottest markets. Over the next several years West Coast began to book a lot more adjustable-rate commercial and industrial loans, and that has made the company asset-sensitive. (At the end of 2004 its commercial real estate loans were less than 50% of total loans for the first time.)
The refocusing brought in more low-cost deposits from business customers and gave West Coast the opportunity to cross sell-new offerings such as online cash management, online check imaging, and online merchant services. It invested heavily in technology to add those products to its menu.
As West Coast's performance improved, so did its stock price. It was trading at $24.40 late Friday, versus around $10 four years ago.
"This is a compelling stock right now, as West Coast is a more mature company than it was even a year ago," Mr. Bradshaw said. Nonetheless, he has a "sell" recommendation on the stock, because like community banking as a whole, he said, it is slightly overvalued.
Mr. Sznewajs said he may consider buying other banks, but, "We just have a group of professional people now who are committed to growing the bank organically."
As for a possible sale of West Coast, FTN's Mr. Milsaps said that although it is attractive, few would want to pay the premium price the company would probably command. It is currently trading at 2.4 times book value.
"At this point West Coast is in such good shape, there's really no reason for them to seek a sale," Mr. Milsaps said. "They've earned their independence."
