UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31,
2011
Commission file number 0-10997
WEST COAST BANCORP
(Exact name of registrant as specified
in its charter)
Oregon
|
93-0810577
|
(State or other
jurisdiction
|
I.R.S. Employer Identification
Number
|
of incorporation or
organization)
|
|
5335 Meadows Road Suite 201, Lake
Oswego, Oregon 97035
(Address of principal executive offices)(Zip code)
(503) 684-0884
(Registrant's telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: Common Stock
(Title of Class)
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the
registrant is a well known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [ ] No [X]
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [X]
No [ ]
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
[ ] Large Accelerated Filer
[ X ] Accelerated Filer [ ] Non-accelerated Filer
[ ] Smaller Reporting Company
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes
[ ] No [X]
The aggregate market value of
registrants Common Stock held by non-affiliates of the registrant on June 30,
2011, was approximately $323,737,000.
The number of shares of registrants
Common Stock outstanding on January 31, 2012, was 19,298,992.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the West Coast Bancorp
Definitive Proxy Statement for the 2012 annual meeting of shareholders of West
Coast Bancorp are incorporated by reference into Part III of this Form 10-K.
Table of Contents
PART I
|
|
|
|
PAGE
|
|
|
Forward Looking Statement
Disclosure
|
|
2
|
ITEM
1.
|
|
BUSINESS
|
|
3
|
ITEM 1A.
|
|
RISK FACTORS
|
|
11
|
ITEM
1B.
|
|
UNRESOLVED STAFF COMMENTS
|
|
16
|
ITEM 2.
|
|
PROPERTIES
|
|
16
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
|
16
|
ITEM 4.
|
RESERVED
|
|
16
|
|
PART II
|
|
|
|
|
ITEM
5.
|
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
|
|
|
AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
17
|
ITEM 6.
|
|
SELECTED FINANCIAL DATA
|
|
19
|
ITEM
7.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
|
|
|
|
|
RESULTS OF OPERATIONS
|
|
21
|
ITEM 7A.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
|
|
52
|
ITEM
8.
|
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
54
|
ITEM 9.
|
|
CHANGES IN AND DISAGRREMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
|
101
|
ITEM 9A.
|
|
CONTROLS AND PROCEDURES
|
|
101
|
ITEM 9B.
|
OTHER INFORMATION
|
|
103
|
|
PART III
|
|
|
|
|
ITEM
10.
|
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
|
103
|
ITEM 11.
|
|
EXECUTIVE COMPENSATION
|
|
103
|
ITEM
12.
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
|
|
|
RELATED STOCK HOLDER MATTERS
|
|
104
|
ITEM 13.
|
|
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR
|
|
|
|
|
INDEPENDENCE
|
|
104
|
ITEM
14.
|
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
|
104
|
|
PART IV
|
|
|
|
|
ITEM
15.
|
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
105
|
SIGNATURES
|
|
|
106
|
INDEX TO EXHIBITS
|
|
107
|
1
Forward Looking Statement Disclosure
Statements in
this Annual Report of West Coast Bancorp (Bancorp or the Company) regarding
future events or performance are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the PSLRA) and are
made pursuant to the safe harbors of the PSLRA. The Companys actual results
could be quite different from those expressed or implied by the forward-looking
statements. Words such as could, may, should, plans, believes,
anticipates, estimates, predicts, expects, projects, potential, or
continue, or words of similar meaning, often help identify forward-looking
statements, which include any statements that expressly or implicitly predict
future events, results, or performance. Factors that could cause events, results
or performance to differ from those expressed or implied by our forward-looking
statements include, among others, risks discussed in Item 1A, Risk Factors of
this report, risks discussed elsewhere in the text of this report, as well as
the following specific factors:
-
General economic conditions, whether national or
regional, and conditions in real estate markets, that may hinder our ability
to increase lending activities or have an adverse effect on the demand for our
loans and other products, our credit quality and related levels of
nonperforming assets and loan losses, and the value and salability of the real
estate that we own or that is the collateral for many of our
loans;
-
Changing bank regulatory conditions, policies, or
programs, whether arising as new legislation or regulatory initiatives, that
could lead to restrictions on activities of banks generally or West Coast Bank
(the Bank) in particular, increased costs, including deposit insurance
premiums, price controls on debit card interchange, regulation or prohibition
of certain income producing activities, or changes in the secondary market for
bank loan and other products;
-
Competitive factors, including competition with
community, regional and national financial institutions, that may lead to
pricing pressures that reduce yields the Bank earns on loans and increase
rates the Bank pays on deposits, the loss of our most valued customers,
defection of key employees or groups of employees, or other
losses;
-
Increasing or decreasing interest rate
environments, including changes in the slope and level of the yield curve,
which may be caused by the Federal Reserve Banks public comments about future
direction and level of interest rates, that could lead to decreases in net
interest margin, lower net interest and fee income, including lower gains on
sales of loans, and changes in the value of our investment
securities;
-
Failure to develop, implement, and distribute
competitive and client value added products, that may adversely affect our
ability to generate profitable revenue sources;
-
Any failure to successfully implement expense
reduction initiatives and realize expected efficiencies, while retaining
revenues, that may result in us realizing less benefits from our cost
reduction initiatives than expected; and
-
Changes or failures in technology or third party
vendor relationships in important revenue production or service areas or
increases in required investments in technology that could reduce our
revenues, increase our costs, or lead to disruptions in our business.
Furthermore, forward-looking statements are subject to risks and
uncertainties related to the Companys ability to, among other things: dispose
of properties or other assets obtained through foreclosures at expected prices
and within a reasonable period of time; attract and retain key personnel;
generate loan and deposit balances at projected spreads; sustain fee generation
including gains on sales of loans; maintain asset quality and control risk;
limit the amount of net loan charge-offs; adapt to changing customer deposit,
investment and borrowing behaviors; control expenses; and monitor and manage its
financial reporting, operating and disclosure control environments.
Readers are cautioned not to place undue reliance on our forward-looking
statements, which reflect managements analysis only as of the date of the
statements. We do not intend to publicly revise or update forward-looking
statements to reflect events or circumstances that arise after the date of this
report.
Readers should carefully review all disclosures we file from time to time
with the Securities and Exchange Commission (SEC).
2
PART I
ITEM 1.
BUSINESS
General
West Coast
Bancorp (Bancorp or the Company) is a bank holding company headquartered in
Lake Oswego, Oregon. Bancorps principal business activities are conducted
through its full-service, commercial bank subsidiary, West Coast Bank (the
Bank), an Oregon state-chartered bank with deposits insured by the Federal
Deposit Insurance Corporation (FDIC). At December 31, 2011, the Bank had
facilities in 41 cities and towns in western Oregon and southwestern Washington,
operating a total of 55 full-service and five limited-service branches and a
Small Business Administration (SBA) lending office in Vancouver, Washington.
The Company, in January 2012, notified the FDIC and the Oregon Department of
Consumer and Business Services Division of Finance and Corporate Securities (the
DFCS) that it will close two limited service branches in April 2012. Bancorp
also owns West Coast Trust Company, Inc. (West Coast Trust), an Oregon trust
company that provides agency, fiduciary and other related trust services with
offices in Portland and Salem, Oregon.
Bancorp reports two principal operating segments in the notes to its
financial statements: West Coast Bank and West Coast Trust and parent company
related operations. For more information regarding Bancorps operating segments,
see Note 21 Segment and Related Information to the Companys audited
consolidated financial statements included under the section Financial
Statements and Supplementary Data in Item 8 of this report.
Historical Information.
Bancorp enjoyed a period of sustained growth from 2000 2007. However,
in late 2007, with the onset of a significant slowdown in economic activity and
unprecedented disruptions in the real estate and credit markets, the prior years
of growth ended, and the Company experienced significant net losses for two
consecutive years, including losses of $6.3 million in 2008 and $91.2 million in
2009, and its balance sheet contracted. During this period, the Bank experienced
significant loan losses, particularly in the residential real estate
construction area. The prolonged recession and severe slump in housing and other
real estate markets has continued to limit new residential real estate
construction and negatively impact the value of the property that serves as
collateral for many loans.
Beginning in 2008, Bancorp and the Bank took several steps to preserve
capital and sustain or improve regulatory capital ratios. The Bank carefully
managed its capital position; reducing risk weighted assets, and focused on
limiting operating expenses. During 2009 and 2010, Bancorp also raised a
significant amount of new capital.
As part of its capital raising efforts, in October 2009, Bancorp received
net proceeds of $139.2 million in a private capital raise (referred to in this
report as, the Private Capital Raise) in which it issued, after giving effect
to a one-for-five reverse split of the Companys common stock in May 2011 (see
Reverse Stock Split below): 14,288,490 shares of Common Stock; 121,328 shares
of mandatorily convertible cumulative participating preferred stock, Series B
(Series B Preferred Stock) convertible into 1,213,280 shares of Common Stock
upon satisfaction of certain conditions; and Class C Warrants exercisable for a
total of 240,000 shares of Series B Preferred Stock at a price of $100.00 per
share (the Class C Warrants) that are, in turn, convertible into 2,400,000
shares of Common Stock, also upon satisfaction of certain conditions. For
additional information regarding Reverse Stock Split, see Note 1 Summary of
Significant Accounting Policies to the Companys audited consolidated financial
statements included under Item 8 of this report.
Following the private capital raise, Bancorp conducted a rights offering
of up to 1.0 million shares of Common Stock at a subscription price of $10.00
per share during the first quarter 2010, with net proceeds of $9.3 million, and
in June 2010, Bancorp sold, through a discretionary equity issuance program, an
aggregate of .56 million shares of Common Stock at an average sales price of
$14.00 per share, with aggregate gross sales proceeds of $7.9 million.
Regulatory capital ratios at Bancorp and the Bank improved significantly
as a result of the Companys capital raising activities and efforts to reduce
risk weighted assets. These improvements have continued as Bancorp has generated
net income over the past 18 months. For additional information regarding
regulatory capital, see the discussion under the subheading Capital Resources
in Item 7 of this report.
Among the effects of recent events, the Bank has experienced a
significant reduction in the size of its loan portfolio and a significant
increase in its portfolio of investment securities. This shift in earning asset
mix has resulted in significant downward pressure on Bancorps net interest
income and margin. That said, management believes that the current strong
capital base and liquidity position, positions the Bank well for the future,
allowing the Company the operating flexibility to pursue its business strategies
going forward.
As of December 31, 2011, Bancorp had total assets of $2.43 billion, with
total net loans of $1.47 billion and total investment securities of $729.8
million. Bancorps total deposits at December 31, 2011, were $1.92 billion and
stockholders equity was $314.5 million. At December 31, 2010, Bancorp had total
assets of $2.46 billion, total net loans of $1.50 billion and total investment
securities of $646.1 million. Bancorps total deposits at December 31, 2010,
were $1.94 billion, with stockholders equity of $272.6 million. At December 31,
2011, tangible book value per share was $15.20 up from $13.02 at December 31,
2010.
3
Net income for
the year ending December 31, 2011 was $33.8 million or $1.58 per diluted share,
up from net income of $3.2 million or $.16 per diluted share for the year ending
December 31, 2010. The Company reported a net loss of $91.2 million or $29.15
per diluted share for the year ending December 31, 2009.
Bancorp and the Bank are each parties to an agreement with regulators.
For more information regarding these regulatory agreements, see the discussion
under the subheading Current Regulatory Actions in the section Supervision
and Regulation included in Item 1 of this report.
Reverse Stock Split.
As a
result of the Reverse Stock Split, the number of outstanding shares of common
stock declined from 96.4 million shares to 19.3 million shares as of May 19,
2011, and the number of authorized shares of common stock was reduced from 250
million to 50 million. Proportional adjustments were also made to the shares
available under the Companys stock incentive plans and the conversion or
exercise rights of the Company's outstanding preferred stock, restricted stock,
stock options and warrants. Outstanding preferred stock was unaffected by the
Reverse Stock Split, only resulting conversion rights into common stock reflect
the Reverse Stock Split.
West Coast Bank
The Bank traces its origins to a bank organized in 1925 under the name
The Bank of Newport. The Bank in its current form resulted from the merger on
December 31, 1998, of the Bank of Newport of Newport, Oregon, The Commercial
Bank of Salem, Oregon, Bank of Vancouver of Vancouver, Washington and Centennial
Bank of Olympia, Washington, into a single entity. This entity was re-named West
Coast Bank. The Banks headquarters is located in Lake Oswego,
Oregon.
The Banks Oregon branches are located in the following cities and towns:
Beaverton, Canby, Clackamas, Dallas, Depoe Bay, Dundee, Eugene (2), Forest
Grove, Gresham, Happy Valley, Hillsboro (2), Keizer (3), King City, Lake Oswego,
Lincoln City, McMinnville, Molalla, Monmouth, Mt. Angel, Newberg, Newport (2),
North Plains, Oregon City, Portland (5), Salem (5), Silverton, Stayton,
Sublimity, Tigard, Tualatin, Waldport, Wilsonville and Woodburn (3). The Banks
Washington branches are located in Centralia, Chehalis, Hoodsport, Lacey (2),
Olympia (2), Shelton, Tukwila and Vancouver (3).
The primary business strategy of the Bank is to provide comprehensive
banking and related financial services within its local communities. The Bank
emphasizes the diversity and accessibility of its product lines and services and
conducts its business consistent with its client value proposition, which is to
provide products typically associated with larger financial organizations, while
maintaining the local decision making authority, market knowledge and customer
service orientation typically associated with a community bank. The Bank focuses
on four targeted areas: 1) high value consumers, 2) small businesses that desire
streamlined packaged products, 3) commercial businesses that benefit from
customized lending, deposit, cash management, and investment solutions and 4)
the principals and employees of associated commercial clients who have a
commercial relationship with West Coast Bank.
For consumer banking customers, the Bank offers a variety of checking and
savings accounts, check cards, and competitive borrowing products. Consumer
accounts consist of three streamlined checking account types, each specifically
designed to meet the needs of a unique market segment. Because of the
straightforward and easy to understand product design, our branch staff are able
to quickly and easily help clients identify the account that best fits their
needs. Financing products for consumers include residential real estate mortgage
loans, home equity lines and loans, personal lines of credit and consumer credit
cards. Customers have access to the Banks products and services through a
variety of convenient channels such as 24 hour 7 day a week automated phone and
internet access, a personal customer service center accessed by phone, and ATMs,
as well as through our branch locations.
For business banking customers, the Bank offers customized deposit
products tailored for specific needs, including a variety of checking accounts;
sophisticated internet-based cash management and payment solution products, such
as iDeposit
SM
- remote deposit capture. The Bank recently began
offering a new business online suite of products called eBiz Access
PLUS
SM
, which offers commercial clients a customized Treasury
Management Online Banking system featuring enhanced security features, real time
customizable reports, and expanded treasury management services that are all
accessed through a customized dashboard.
Customized financing packages provide businesses
with a comprehensive suite of credit facilities that include general commercial
loans, revolving lines of credit, real estate loans and lines to support
construction, owner occupied and investor financing and SBA loans. The Bank also
offers business credit cards (VISA), extensive merchant service options,
equipment leasing through vendor alliances, and other types of business
credit.
4
The Bank is
committed to community banking and intends to remain community-focused.
Bancorps strategic vision includes greater commercial banking market
penetration, coupled with focused distribution capability in targeted Pacific
Northwest markets. The Bank intends to grow its distribution in target markets
through continued product expansion and use of new technology, including a full
range of transaction and payment system capabilities.
West Coast Trust
West Coast Trust provides trust services and life insurance products to
individuals, for-profit and not for-profit businesses and institutions. West
Coast Trust acts as fiduciary of estates and conservatorships, and as a trustee
under various wills, trusts, and pension and profit-sharing plans. The main
office of West Coast Trust is located at 1000 SW Broadway, Suite 1100, Portland,
Oregon 97205, (503) 279-3911. The market value of assets managed for others at
December 31, 2011, was $287.6 million.
West Coast Statutory Trusts III, IV,
V, VI, VII and VIII
West Coast Statutory Trusts III, IV, V, VI, VII and VIII are wholly-owned
subsidiary trusts of Bancorp formed to facilitate the issuance of trust
preferred securities. The trusts were organized in September 2003, March 2004,
April 2006, December 2006, March 2007 and June 2007, respectively, in connection
with six offerings of trust preferred securities. In September 2009, the Company
elected to defer interest payments related to all of its trust preferred
securities. During the second quarter of 2011, the Company paid all previously
deferred interest on its trust preferred securities and, following regulatory
approvals, continues to pay quarterly interest payments as they become due. For
more information regarding Bancorps issuance of trust preferred securities, see
Note 10 Junior Subordinated Debentures to the Companys audited financial
consolidated statements included under the section Financial Statements and
Supplementary Data in Item 8 of this report. For more information regarding
risks related to our trust preferred securities and junior subordinated
debentures see the discussion under the section Risk Factors in Item 1A of
this report.
Additional Information
Bancorps filings with the SEC, including its annual report on Form 10-K,
quarterly reports on Form 10-Q, periodic reports on Form 8-K and amendments to
these reports, are accessible free of charge at our website at
http://www.wcb.com
as soon as
reasonably practicable after filing with the SEC. By making this reference to
our website, we do not intend to incorporate into this report any information
contained in the website. The website should not be considered part of this
report.
The SEC maintains a website at
http://www.sec.gov
that contains periodic
reports, proxy and information statements, and other information regarding
issuers with publicly traded securities, including the Company.
Employees
At December 31, 2011, Bancorp and its
subsidiaries had approximately 718 employees. None of these employees are
represented by labor unions. Management believes that Bancorps relationship
with its employees is good. Bancorp emphasizes a positive work environment for
its employees and our work environment is measured annually utilizing an
anonymous employee survey. Results continue to indicate a high level of employee
satisfaction. Management continually strives to retain top talent as well as
provide career development opportunities to enhance skill levels. A number of
benefit programs are available to eligible employees.
Competition
Commercial banking in the state of Oregon and southwest Washington is
highly competitive with respect to providing banking services, including making
loans and attracting deposits.
The Bank competes with other banks, as well as with savings
and loan associations, savings banks, credit unions, mortgage companies,
investment banks, insurance companies, securities brokerages and other financial
institutions. Banking in Oregon and Washington is dominated by several large
banking institutions, including U.S. Bank, Wells Fargo Bank, Bank of America,
and JPMorgan Chase Bank, which together account for a majority of the total
commercial and savings bank loans and deposits in Oregon and Washington. These
competitors have significantly greater financial resources and offer a greater
number of branch locations, higher lending limits, and a variety of services not
offered by the Bank. The Bank has attempted to offset some of the advantages of
the larger competitors by leveraging technology and third party arrangements to
deliver contemporary product solutions and better compete in targeted customer
segments. The Bank has positioned itself successfully as a local alternative to
banking conglomerates that may be perceived by customers or potential customers
to be impersonal, out-of-touch with the community, or simply not interested in
providing banking products and services to some of the Banks target
customers.
In addition to larger institutions, numerous community banks and credit
unions operate in the Banks market areas. As a result of very weak real estate
market conditions over the past few years, a number of banks and credit unions
have developed a similar focus as the Bank. These institutions have further
increased competition, particularly in the Portland metropolitan area, where the
Bank has enjoyed growth in past years and focused much of its expansion efforts.
Additionally, a heightened focus by larger institutions on Bancorps target
market segments, such as small businesses, has led to intensified competition in
all aspects of Bancorps business.
The financial services industry has experienced widespread consolidation
over the last decade. Bancorp anticipates that consolidation among financial
institutions in its market areas will continue and perhaps accelerate as a
result of financial distress in the industry, intensified competition for the
same customer segments, and significantly increased regulatory burdens and rules
that are expected to increase expenses and put pressure on revenues.
5
Supervision and Regulation
Bancorp is an
Oregon corporation headquartered in Lake Oswego, Oregon, and is registered with
the Federal Reserve as a bank holding company. The Bank is an Oregon state bank
and is not a member of the Federal Reserve System. The Banks primary federal
regulator is the FDIC and, at the state level, the DFCS.
The laws and regulations applicable to Bancorp and its subsidiaries are
primarily intended to protect borrowers and depositors of the Bank and not
stockholders of Bancorp. Various proposals to change the laws and regulations
governing the banking industry are currently pending in Congress, in the state
legislatures and before the various bank regulatory agencies. As a result of
the Dodd-Frank Act (as defined below), the creation of the Consumer Financial Protection
Bureau and the current economic climate and regulatory environment, there is a
high likelihood of enactment of new banking legislation and promulgation of new
banking regulations. The following is a brief description of the significant
laws and regulations that govern our activities.
Bank Holding Company Regulation
As a registered bank holding company, Bancorp is subject to the
supervision of, and regular inspection by, the Federal Reserve pursuant to the
Bank Holding Company Act of 1956, as amended (the BHCA). In addition, pursuant
to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
and subject to certain conditions, the FDIC has backup enforcement authority
over bank holding companies, such as Bancorp, if the conduct or threatened
conduct of the bank holding company poses a risk to the Deposit Insurance Fund.
Bancorp must file reports with the Federal Reserve and must provide it with such
additional information as it may require. The BHCA restricts the direct and
indirect activities of Bancorp to banking, managing or controlling banks and
other subsidiaries authorized under the BHCA, and activities that are closely
related to banking or managing or controlling banks. Bank holding companies like
Bancorp must, among other things, obtain prior Federal Reserve approval before
they: (1) acquire direct or indirect ownership or control of any voting shares
of any bank or bank holding company that results in total ownership or control,
directly or indirectly, of more than 5% of the outstanding shares of any class
of voting securities of such bank or bank holding company; (2) merge or
consolidate with another bank holding company; or (3) acquire substantially all
of the assets of another bank or bank holding company.
Bank holding companies must also act as a source of financial and
managerial strength to subsidiary banks. This means that Bancorp is required to
commit, as necessary, resources to support the Bank.
Subsidiary banks of a bank holding company are subject to certain other
restrictions under the Federal Reserve Act and Regulation W which restricts
transactions with affiliates. These restrictions may limit Bancorps ability to
obtain funds from the Bank for its cash needs, including funds for payment of
interest on its junior subordinated debentures, cash dividends and operational
expenses.
6
Bank Regulation
General.
The Bank is an
Oregon state-bank and is not a member of the Federal Reserve System. The Bank
conducts banking business in Oregon and Washington. The Bank is subject to
supervision and regulation by the DFCS, the FDIC and to a lesser extent, the
Washington Department of Financial Institutions. The Bank's regulators conduct
regular examinations of the Bank and have the authority to prohibit the Bank
from engaging in unsafe or unsound banking practices.
Deposit Insurance.
Eligible deposits maintained at the Bank are insured by the FDIC up to
$250,000 per account, and from December 31, 2010, through December 31, 2012, a
depositors funds in a non-interest bearing transaction account or an Interest
on Lawyers Trust Account are fully insured. The Bank is required to pay
quarterly deposit insurance premiums to the FDIC. Premiums are based on an
assessment of how much risk a particular institution presents to the Deposit
Insurance Fund. Banks with higher levels of capital and a low degree of
supervisory concern are assessed lower premiums than banks with lower levels of
capital or a higher degree of supervisory concern. The FDIC may terminate
deposit insurance if it determines the institution involved has engaged in or is
engaging in unsafe or unsound banking practices, is in unsafe or unsound
condition, or has violated applicable laws, regulations or orders.
Community Reinvestment Act and Fair Lending and Reporting
Requirements.
The Bank is subject to the
Community Reinvestment Act of 1977, as amended (CRA) and to certain fair
lending and reporting requirements that relate primarily to home mortgage
lending operations. The CRA generally requires the federal banking agencies to
evaluate the record of a financial institution in meeting the credit needs of
its local communities, including low- and moderate-income neighborhoods,
consistent with the safe and sound operation of the institution. The federal
banking agencies may take into account compliance with the CRA when regulating
and supervising other activities, such as evaluating mergers, acquisitions and
applications to open a branch or facility. In connection with its assessment of
CRA performance, the FDIC assigns a rating of outstanding, satisfactory,
needs to improve or substantial noncompliance. The Banks most recent CRA
rating, based on an examination in September 2010, was satisfactory. There are
several rules and regulations governing fair lending and reporting practices by
financial institutions. A bank may be subject to substantial damages, penalties
and corrective measures for any violation of fair lending and reporting,
including credit reporting, laws and regulations.
Consumer Privacy And Information Security.
Financial Institutions, such as the Bank, are required by
statute and regulation to disclose their privacy policies. In addition, we must
appropriately safeguard our customers nonpublic, personal
information.
Consumer Financial Protection Bureau
. The Dodd-Frank Act, signed into law by the President on July 21,
2010, among other things, created a new Consumer Financial Protection Bureau
(CFPB). As required by the Dodd-Frank Act, jurisdiction for all existing consumer
protection laws and regulations has been transferred to the CFPB. In addition,
the CFPB is granted authority to promulgate new consumer protection regulations
for banks and nonbank financial firms offering consumer financial services or
products to ensure that consumer are protected from unfair, deceptive, or
abusive acts or practices. The CFPB has begun conducting studies of existing
consumer protection regulations to gauge their effectiveness and to solicit
comment on potential new regulations.
Non-Capital Safety and Soundness Standards.
The Federal Reserve and the FDIC have prescribed, by
regulation, non-capital safety and soundness standards for institutions under
their authority. These standards cover internal controls, information systems
and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits, and other
operational and managerial standards as the agency determines to be appropriate,
and standards for asset quality, earnings and stock valuation. An institution
that fails to meet these standards must develop a plan acceptable to the agency,
specifying the steps it will take to meet the standards. Failure to submit a
plan may subject the institution to regulatory sanctions. We believe the Bank is
in compliance with these standards.
7
Capital Adequacy Requirements
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum levels, the bank holding company or bank may, among other things,
be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for banks
and bank holding companies. Risk-based guidelines are designed to make capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off balance sheet exposure and to minimize
disincentives for holding liquid low-risk assets. Assets and off balance sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off balance sheet items.
The guidelines are minimums and the Federal Reserve may require that a
banking organization maintain ratios in excess of the minimums, particularly
organizations contemplating significant expansion. Current guidelines require
all bank holding companies and federally-regulated banks to maintain a minimum
risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1
capital. Tier 1 capital for bank holding companies includes common stockholders
equity, qualifying preferred stock and minority interests in equity accounts of
consolidated subsidiaries, minus certain deductions, including goodwill,
mortgage servicing assets, other identifiable intangible assets, and deferred
tax assets subject to a disallowance.
The Federal Reserve also monitors a leverage ratio, which is Tier 1
capital as a percentage of total quarterly average tangible assets. The
principal objective of the leverage ratio is to constrain the degree to which a
bank holding company may leverage its equity capital base. The Federal Reserve
requires a minimum leverage ratio of 3%.
For more information regarding the Bank and Bancorps capital and
leverage ratios, see the discussion under the section Capital Resources in the
Item 7 of this report. For more information regarding regulatory enforcement
actions that increase minimum ratios applicable to Bancorp and the Bank, see the
discussion under the subheading Current Regulatory Actions in this section
below.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA),
among other things, created a statutory framework of supervisory actions indexed
to the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories - well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized - depending on its total
risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio,
together with certain subjective factors including, but not limited to an
overall assessment of profitability, liquidity, interest rate sensitivity, and
the level and severity, especially relative to capital, of nonperforming and
classified assets. Undercapitalized, significantly undercapitalized, and
critically undercapitalized banks are subject to certain mandatory supervisory
corrective actions.
Pursuant to a Memorandum of Understanding (MOU) with the FDIC and DFCS,
the Bank must, among other things, maintain higher levels of capital than
required by published capital adequacy requirements, as discussed
above.
8
Dividends
Substantially
all of our activities are conducted through the Bank. Consequently, as the
parent company of the Bank, the Company receives substantially all of its
revenue as dividends from the Bank. The banking regulators may prohibit banks
and bank holding companies from paying dividends that would constitute an unsafe
or unsound banking practice. In addition, a bank may not pay cash dividends if
doing so would reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Oregon law also limits a
bank's ability to pay dividends.
Pursuant to the MOU with the FDIC and
DFCS, the Bank is prohibited from paying dividends without the consent of the
FDIC and DFCS. Pursuant to a Written Agreement (Written Agreement) with the
Federal Reserve Bank of San Francisco (Reserve Bank) and DFCS, Bancorp is
prohibited from paying dividends and making payments of interest or principal on
subordinated indebtedness or trust preferred securities without the prior
consent of the Reserve Bank, the Director of Banking Supervision and Regulation
of the Board of Governors of the Federal Reserve System (the Federal Reserve
Director), and the DFCS. Since June 2011, the Company has received permission
to pay all interest payments on subordinated indebtedness from our regulatory
authorities; however, there is no assurance that future approvals will be
received. For more information regarding regulatory actions, see the discussion
under the subheading Current Regulatory Actions in this section
below.
Other Laws and Regulations
Interstate Banking and
Branching.
Subject to certain
restrictions, adequately capitalized and managed bank holding companies may
purchase banks in any state, and adequately capitalized and managed banks may
merge with banks in other states or otherwise expand across state lines. Bank
regulators are required to consult with community organizations before
permitting an interstate institution to close a branch in a low income
area.
Monetary and Fiscal Policy
Effects on Interest Rates.
Banking is a
business which depends on interest rate differentials. In general, the major
portion of a banks earnings derives from the differences between: (i) interest
received by a bank on loans extended to its customers and the yield on
securities held in its investment portfolio; and (ii) the interest paid by a
bank on its deposits and its other borrowings (the banks cost of funds.)
Thus, our earnings and growth are constantly subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary, fiscal and related policies of the United States and its agencies,
particularly the Federal Reserve and the U.S. Treasury. The nature and timing of
changes in such policies and their impact cannot be predicted.
The Volcker Rule.
The Dodd-Frank Act implements the "Volcker Rule, which
prohibits banking entities such as Bancorp and the Bank from engaging in
certain short-term proprietary trading activities and investments. Transactions
in certain instruments, including obligations of the U.S. Government or a U.S.
Government agency, government-sponsored enterprises, and state and local
governments will be exempt from the prohibitions. The Volcker Rule also
prohibits Bancorp and the Bank from owning, sponsoring, or having certain
relationships with any hedge funds or private equity funds subject to certain
exemptions. The prohibitions and restrictions of the Volcker Rule will not take
effect until after publication of final interagency rules implementing the
Volcker Rule. Upon effectiveness of the final interagency rules, Bancorp and the
Bank will be afforded a two-year conformance period during which they can wind
down, sell, or otherwise conform their respective activities, investments and
relationships to the requirements of the Volcker Rule. When promulgated, Bancorp
and the Bank will review the implications of the final interagency rules on
their respective investments and relationships and will take all necessary
actions to maintain regulatory compliance.
Overdraft
Programs.
The Electronic Funds Transfer
Act (the EFTA) provides a basic framework for establishing the rights,
liabilities, and responsibilities of consumers who use electronic funds transfer
(EFT) systems. The EFTA is implemented by the Federal Reserve's Regulation E,
which governs transfers initiated through ATMs, point-of-sale terminals, payroll
cards, automated clearinghouse (ACH) transactions, telephone bill-payment
plans, or remote banking services. Regulation E requires consumers to opt in
(affirmatively consent) to participation in the Bank's overdraft service program
for ATM and one-time debit card transactions before overdraft fees may be
assessed on the consumers account. Notice of the opt-in right must be provided
to all new customers who are consumers, and the customer's affirmative consent
must be obtained, before charges may be assessed on the consumer's account for
paying such overdrafts.
Regulation E also provide bank customers
with an ongoing right to revoke consent to participation in an overdraft service
program for ATM and one-time debit card transactions and prohibits banks from
conditioning the payment of overdrafts for checks, ACH transactions, or other
types of transactions that overdraw the consumer's account on the consumer's
opting into an overdraft service for ATM and one-time debit card transactions.
For customers who do not affirmatively consent to overdraft service for ATM and
one-time debit card transactions, a bank must provide those customers with the
same account terms, conditions, and features that it provides to consumers who
do affirmatively consent, except for the overdraft service for ATM and one-time
debit card transactions.
On November 24, 2010, the FDIC issued FIL-81-2010 to
provide guidance (Overdraft Guidance) on automated overdraft service
programs to ensure that a bank mitigates the risks associated with offering
automated overdraft payment programs and complies with all consumer protection
laws and regulations.
Regulation E and the Overdraft Guidance
may have a substantial negative impact on the Bank's revenue from overdraft
service fees and non-sufficient funds (NSF) charges if customers elect to not
opt-in or subsequently elect to opt-out. For more information regarding risks
facing Bancorp and the Bank, see the discussion under the section Risk Factors
in Item 1A of this report.
9
Current Regulatory Actions
Regulatory
Order.
On October 18, 2011, the Bank received
a regulatory order (Order) from the FDIC relating to its overdraft practices.
As part of the Order, the Bank agreed to implement certain procedural
improvements relating to its compliance function and overdraft program, pay a
civil money penalty of $390,000, and make restitution to certain customers in
accordance with the formula set out in the Order of approximately
$246,000.
Additional information regarding the Order is available in the Companys
Current Report on Form 8-K, reporting entry into the agreement with the FDIC,
filed with the SEC on October 24, 2011.
Bank Memorandum of Understanding
. On October 6, 2010, the Bank entered into a MOU with the FDIC and DFCS.
The MOU requires that during the life of the MOU the Bank may not pay dividends
without the written consent of the FDIC and DFCS and that the Bank maintain
higher levels of capital than required by published capital adequacy
requirements.
Holding Company Written Agreement.
On December 15, 2009, Bancorp entered into a Written Agreement
with the Reserve Bank and DFCS. The Written Agreement requires that as long as
the Written Agreement is in effect, Bancorp may not:
-
Declare or pay any dividends
without the prior written approval of the Reserve Bank, the Federal Reserve
Director, and the DFCS;
-
Directly or indirectly take dividends or any other
form of payment representing a reduction in capital at the Bank without the
prior written approval of the Reserve Bank and the DFCS;
-
Make any payments of interest or principal on
subordinated indebtedness or trust preferred securities without the prior
written approval of the Reserve Bank, the Federal Reserve Director, and the
DFCS; or
-
Directly or indirectly incur, increase, or
guarantee any debt without the prior written approval of the Reserve Bank and
the DFCS.
10
ITEM 1A.
RISK
FACTORS
The following
are risks that management believes are specific to our business. This should not
be viewed as an all-inclusive list or in any particular order.
Future loan losses may exceed our
allowance for credit losses.
We are subject to credit risk, which is the risk that borrowers will fail
to repay loans in accordance with their terms. We maintain an allowance for
credit losses that represents managements best estimate, as of a particular
date, of the probable amount of loan receivables and unfunded commitments that
the Bank will be unable to collect. The process we use to estimate losses
inherent in our loan portfolio involves difficult, subjective, and complex
judgments, including forecasts of economic conditions and how these economic
forecasts might affect the ability of our borrowers to repay their loans. These
matters are inherently uncertain, which may, in turn, impact the reliability of
estimates. In addition, if our estimates prove to be inaccurate and economic
conditions are significantly less favorable than expected or we experience a
rapid change in interest rates, our borrowers ability to repay loans could be
adversely affected. Developments of this nature could result in losses in excess
of our allowance for credit losses. If we determine that it is appropriate to
increase the allowance for credit losses to address changing conditions, we will
do so through additional provision for credit losses. Any additional provision
for credit losses results in a decrease in net income and may have a material
adverse effect on our financial condition, results of operations and regulatory
capital position. For more information regarding the Companys allowance for
credit losses, see the discussion under the subheading Allowance for Credit
Losses and Critical Accounting Policies included in Item 7 of this report.
A large percentage of our loan
portfolio is secured by real estate. As a result, we are particularly vulnerable
to continued deterioration in the real estate market in our market areas and
other effects.
Approximately 79% of our loan portfolio is secured by real estate. As a
result, we are vulnerable to declines in real estate values in the markets in
which we operate. We have experienced declining real estate values over the last
four years and high levels of net charge-offs and provision for credit losses.
While net charge-offs and provision for credit losses have declined, if we
experience increases in delinquencies with respect to commercial real estate or
other real estate related loans, or continued declines in real estate market
values, we would expect increased loan charge-offs and additional provision for
credit losses, which could have a material adverse effect on our business,
financial condition and results of operations. Because of our significant
concentration in loans secured by real estate, we are particularly vulnerable to
such effects.
The recession has been particularly
severe in the market areas we serve and our results of operations may be
adversely affected if the local economies do not improve.
Substantially all of our loans and loan opportunities are to businesses
and individuals in our markets in Washington and Oregon. As evidenced by the
unemployment rate in Oregon, which hovered at or above 10% from January 2009
through 2010 and remained elevated at 8.9% in December 2011, our region has been
severely impacted by the same challenges facing the economy nationally and
perhaps more so. The region has also experienced severe declines in residential
and commercial real estate values. If we experience further deterioration in
economic conditions or a prolonged delay in economic recovery in our market
areas, we could face the following consequences, any of which could materially
and adversely affect our business: the value of assets that serve as collateral
for our loans, especially real estate, may decline further; loan delinquencies,
foreclosures and losses on loans and other real estate owned properties (OREO)
could increase; demand for our products and services may decrease or fail to
accelerate; and access to low cost or non-interest bearing deposits may
decrease.
Financial services legislation and
regulatory reforms may have a significant impact on our businesses and results
of operations.
Many of the provisions of Dodd-Frank have extended implementation periods
and delayed effective dates and will require extensive additional rulemaking by
regulatory authorities and multiple additional studies. Dodd-Frank, including
future rules implementing its provisions and the interpretations of those rules,
could result in a number of adverse impacts on us. The levels of capital and
liquidity with which Bancorp and the Bank must maintain to operate may be
increased, resulting in decreased leverage and reduced earnings. We may also be
subjected to new and/or higher fees to various regulatory entities, including
but not limited to deposit insurance premiums to the FDIC. The Bank may also be
subject to additional regulations under the newly established CFPB which has
been given broad authority to implement new consumer protection regulations.
These and other provisions of Dodd-Frank could limit our ability to pursue
business opportunities we might otherwise consider, impose additional costs on
us, result in significant loss of revenue, impact the value of assets we hold,
or otherwise significantly adversely affect our businesses.
11
Amendments to Regulation E, the FDICs Overdraft Guidance, and any new
regulations may impact our customers participation in the Bank’s overdraft service program and our
overdraft fee income may be negatively affected.
Regulation E
requires customers who desire to participate in a regulated banks overdraft
service program for ATM and one-time-debit card transactions to affirmatively
opt-in to the program. Although the majority of our customers have elected to
opt-in to the Banks overdraft program, we are not able to predict future
customer behavior or determine whether new customers will elect to opt-in. FDIC
Overdraft Guidance that became effective July 2011, requires banks to, among
other things, establish an outreach program to customers who excessively
overdraw their account and advise them of lower cost alternatives, institute
appropriate daily limits on customer costs and consider eliminating overdraft
fees for transactions that overdraw an account by a de minimus amount. The CFPB
has indicated that it will be reviewing the overdraft practices of financial
institutions and the Office of the Comptroller of the Currency, the primary
regulator of national banks, has issued a proposed regulation that is more
restrictive than Regulation E and the FDICs guidance. Therefore, further
regulation regarding overdraft practices is possible. If customers do not elect
to participate or remain in our overdraft protection program, an important
source of noninterest income will be negatively affected.
The Order requires the Bank to mail
an opt-in notice to customers to continue participation in the Banks overdraft
service program for ATM and one-time-debit card transactions and customer may
elect to opt-out or fail to respond.
The Order requires the Bank to mail a new opt-in notice to all customers
who prior to December 20, 2011, opened a checking account with and affirmatively
elected to participate in the Banks overdraft service program for ATM and
one-time-debit card transactions. If the customer does not respond within thirty
three days from the date of the mailing, then the Bank must remove the customer
from participation in the program. The new opt-in notice is being mailed in
February 2012, and we do not know how many customers will opt-out or fail to
respond. If a substantial number of customers opt-out or fail to respond, there
may be a material adverse effect on our non-interest income.
Congressional and regulatory
initiatives could have an adverse effect on our business.
Federal and state legislators and regulators continue to pursue increased
regulation of how loans are originated, purchased, and sold, and properties are
foreclosed. These legislative and regulatory responses may impact how the Bank
conducts business, makes and underwrites loans, and buys and sells loans in
secondary markets, or lead to changes in the banking industry, lending markets
and secondary markets for loans generally. We are unable to predict whether any
legislative or regulatory initiatives will be implemented or what form they will
take. Any such actions could affect us in substantial and unpredictable ways and
could have an adverse effect on our business, financial condition and results of
operations. For more information regarding the regulatory environment in which
we operate, see the discussion under the subheading Supervision and Regulation
included in Item 1 of this report.
Significant legal and regulatory
actions could subject us to uninsured liabilities, associated reputational risk,
and reduced revenues.
From time to time, we are sued for damages or threatened with lawsuits
relating to various aspects of our operations. We may also be subject to
investigations and possibly substantial civil money penalties assessed by, or
other actions of, federal or state regulators in connection with violations or
alleged violations of applicable laws, regulations or standards. We may incur
substantial attorney fees and expenses in the process of defending against
lawsuits or regulatory actions and our insurance policies may not cover, or
cover adequately, the costs of adverse judgments, civil money penalties, and
attorney fees and expenses. As a result, we may be exposed to substantial
uninsured liabilities, which could adversely affect our results of operations,
financial condition, and regulatory capital.
We are subject to reputational risk, which is the potential that negative
publicity regarding our business practices, whether true or not, could cause a
decline in our customer base, stock price, or general reputation in the markets
in which we operate. Reputational risk is heightened in the instance of
publicity surrounding lawsuits or regulatory actions. We are presently subject
to regulatory agreements with the primary regulators for Bancorp and the Bank.
These agreements restrict our activities and could negatively affect our
reputation.
Payment systems revenue may be
impacted by governmental or payment network action.
Effective October 1, 2011, the maximum permissible interchange fee that
certain large banks (with more than $10 billion in assets) may charge merchants
for various covered debit card transactions was limited by regulation. Even
though we are not covered by the regulation, revenue derived from interchange
fees may decrease if the Federal Reserve amends its regulations governing the
amount of interchange fees. In addition, the payment card networks may change
the amount of interchange fees paid to issuers. The Bank is a Visa debit card
issuer and derives noninterest income in the form of interchange fees from its
debit cards. A decrease in the amount of interchange fees paid to Bank could
have a material adverse effect on our business and results of operations.
12
Customers may elect to move their
accounts to other depository institutions as a result of our new monthly service
fees, which may negatively affect our liquidity and fee income.
The Bank
offers deposit products to its customers, including checking accounts and money
market accounts that provide an important source of liquidity and fee income to
the Bank. In the first quarter of 2012 the Bank notified customers that it would
begin charging a monthly service fee for checking accounts and money market
accounts unless minimum balances were maintained. Customer acceptance of these
new features is unknown and it is possible that customers will elect to move
their account balances to other depository institutions, which could have an
adverse effect on our business and results of operations.
We may fail to realize the
anticipated cost savings and other financial benefits of our expense reduction
initiatives.
During 2011 Bancorp and the Bank undertook a number of initiatives to
reduce expenses. These initiatives included closing five branches, prepaying
certain FHLB debt and restructuring a number of contracts with third party
vendors. We may not realize the anticipated cost savings of these initiatives.
If we fail to do so, there could be an adverse effect on our results of
operations and prospects.
Impairment of investment securities
could negatively impact our results of operations.
At December 31, 2011, our investment securities portfolio included
several securities with unrecognized losses, including, among those, four pooled
trust preferred securities with a total amortized cost of $13.8 million and a
fair market value of $8.0 million. One of these pooled trust preferred
securities was considered other-than-temporarily impaired at December 31, 2011.
For additional detail regarding these securities, see Note 2 Investment
Securities to the Companys audited financial consolidated statements included
under the section Financial Statements and Supplementary Data in Item 8 of
this report. We evaluate the securities portfolio, including expected cash
values and the value of any collateral, each reporting period as required by
generally accepted accounting principles to determine whether a particular
security is other-than-temporary impaired. There can be no assurance that we
will not recognize one or more impairment charges in future periods with respect
to these or other investment securities. The impact of these impairment matters
could have a material adverse effect on our business and results of
operations.
Bancorp is restricted from paying
cash dividends on its Common Stock, and these restrictions may continue for a
significant period of time.
Pursuant to Bancorps
Written Agreement with the Reserve Bank and the DFCS, Bancorp is prohibited,
without prior consent of the Reserve Bank, the Federal Reserve Director and the
DFCS, from paying dividends, making payments on its junior subordinated
securities, or extending credit or otherwise supplying funds to or engaging in
certain transactions with the Bank. Additionally, even if Bancorp obtains
regulatory approval to pay dividends on Common Stock, we may not pay any such
cash dividends unless we are current on interest payments on our junior
subordinated debentures issued in connection with our trust preferred
securities. For these and other reasons, Bancorp may not resume paying cash
dividends on its Common Stock for some time into the future, if at all.
Bancorp is a separate and distinct
legal entity from its subsidiaries. Substantially all of Bancorps funds and
revenue are received as dividends from the Bank, which is currently restricted
from paying dividends. The Bank may not pay dividends to Bancorp in the near
future.
Substantially all of Bancorps funds and revenue are received as
dividends paid from the Bank. Pursuant to the MOU the Bank is prohibited from
paying dividends to Bancorp without the consent of the FDIC and the DFCS. We do
not know when the FDIC and DFCS would consent to a request from the Bank to pay
dividends to Bancorp. In the event the Bank continues to be unable to pay
dividends to Bancorp, Bancorp may not be able to service debt or pay other
obligations. The inability to receive dividends from the Bank could have a
material adverse effect on Bancorps business, financial condition, including
liquidity, and results of operations.
During the third quarter of
2009, we began deferring regularly scheduled interest payments on the junior
subordinated debentures issued in connection with our trust preferred
securities. Under the terms of the junior subordinated debentures and the trust
documents, we have the contractual right to defer payments of interest for up to
20 consecutive quarterly periods without default. During the deferral period,
the respective trusts will likewise suspend the declaration and payment of
dividends on the trust preferred securities. If the Company fails to bring the
deferred payments current prior to the end of the deferral period, then we may
be deemed to be in default under the terms of the debentures and subject to
various penalties. Commencing in the second quarter of 2011, the Company, with
regulatory approval, paid all previously deferred interest and resumed making
interest payments on its junior subordinated debentures. There is no assurance
that future regulatory approval to make such interest payments will be
granted.
13
Rapidly changing interest rates or
prolonged low interest rates could reduce our net interest margin, net interest
income, and net income.
Interest and fees on loans and investment securities,
net of interest paid on deposits and borrowings, are the principal source of our
revenues and thus a driver an important driver of net income. Interest rates and
changes in those influence our net interest margin and are subject to many
factors beyond our control. As interest rates change, net interest income is
affected. It could also lead to decreased demand for loans and other products
that are priced based on interest rates. Rapid increases in interest rates could
result in interest expense increasing faster than interest income because of
mismatches in financial instrument maturities. Rapid decreases in interest rates
could result in interest income decreasing faster than interest expense, for
example, if management is unable to match decreases in earning assets yields,
with reduced rates paid on deposits or borrowings. Additionally, extended
periods of low market interest rates, such as we have today and are likely to
continue for the near future based on the Federal Reserves announcements
regarding monetary policy, may adversely affect our net interest spread and net
interest income because our earning assets yield decreases and stays low during
a time that our cost of interest bearing liabilities is already low and cannot
be correspondingly reduced further.
For more information regarding interest rates, see the
discussion under the section Quantitative and Qualitative Disclosures about
Market Risk in the Item 7A of this report.
We face liquidity risks in the
operation of our business.
Liquidity is crucial to the operation of Bancorp and the Bank. Liquidity
risk is the potential that Bancorp or the Bank will be unable to fund increases
in assets or meet payment obligations, including obligations to the Banks
depositors, as they become due because of an inability to obtain adequate
funding or liquidate assets at a reasonable cost. Funding illiquidity may arise
at the Bank if we are unable to, at reasonable terms, attract and retain
deposits, secure or renew borrowings from the overnight inter-bank market, the
FHLB, or the Federal Reserve discount window, or access other sources of
liquidity, as described in more detail under the heading Liquidity and Sources
of Funds in Item 7 of this report. Changes or disruptions to the FHLB system
could adversely impact our ability to meet our short-term and long-term
liquidity requirements. If we fail to monitor and control our liquidity risks,
there may be materially adverse effects on our results of operations and
financial condition.
We face operational risks that may
result in unexpected losses.
We face various operational risks that arise from the potential that
inadequate information systems, operational problems, failures in internal
controls, breaches of our security systems, fraud, the execution of unauthorized
transactions by employees, or any number of other unforeseen events could result
in unexpected losses. Additionally, third party vendors provide key components
of our business infrastructure such as internet connections, network access,
data reporting, and data processing. Any problems caused by third parties could
adversely affect our ability to deliver products and services to our customers
and our revenues, expenses, and earnings. Replacing third party vendors, should
that be necessary, may entail significant delay and expense.
Our information systems may
experience an interruption or breach in security.
The Bank relies on its computer information systems in the conduct of its
business. The Bank has policies and procedures in place to protect against and
reduce the occurrences of failures, interruptions, or breaches of security of
these systems, however, there can be no assurance that these policies and
procedures will eliminate the occurrence of failures, interruptions or breaches
of security or that they will adequately restore or minimize any such events.
The occurrence of a failure, interruption or breach of security of the Bank's
computer information systems could result in a loss of information, business or
regulatory scrutiny, or other events, any of which could have a material adverse
effect on our financial condition or results of operations.
The financial services industry is
very competitive and failure to develop, implement, and distribute competitive
products to generate profitable revenue sources or to implement expense
reduction initiatives, while maintaining revenues and efficiencies, could affect
our net income.
We face competition in attracting and retaining deposits, making loans
and providing other financial services. Our competitors include other community
banks, larger banking institutions, and a wide range of other financial
institutions, such as credit unions, government-sponsored enterprises, mutual
fund companies, insurance companies and other non-bank businesses. Many of these
competitors have substantially greater resources than us. The challenging real
estate market conditions and modest loan demand over the past few years have
caused intense pricing pressures for loans to qualified borrowers, which impacts
spreads we obtain on loans. For a more complete discussion of our competitive
environment, see the discussion under the heading Competition included in Item
1 of this report. If we are unable to compete effectively, we will lose market
share, and income from loans and other products may be reduced.
Inability to hire or retain key
professionals, management and staff could adversely affect our revenues and net
income.
We rely on key personnel to
manage and operate our business, including, but not limited to, major revenue
generating functions such as our loan and deposit portfolios. The loss of key
staff may adversely affect our ability to maintain and manage these portfolios
effectively, which could negatively affect our revenues and
earnings.
14
Market and other constraints on our
loan origination volumes may lead to continued pressure on our interest and fee
income.
Due to the
continued weak economic conditions in the markets in which we operate and other
factors, we expect continued pressure on new loan origination volumes in the
near term, particularly with respect to construction loans, relative to such
volumes generated in the pre-recession period. If we are unable to increase loan
volumes, there will be continued pressure on our interest income and fees
generated from our lending operations. Unless we are able to offset the lower
interest income and fees with increased activity in other areas of our
operations, our total revenues may decline relative to our total noninterest
expenses. We expect that it may be difficult to find new revenue sources in the
near term.
Our products and services are
delivered on a technological platform that is subject to rapid change and
transformation.
The financial services industry is
undergoing rapid technological change and we face constant evolution of customer
demand for technology-driven financial and banking products and services. Many
of our competitors have substantially greater resources to invest in
technological improvement and product development, marketing, and
implementation. Any failure to successfully keep pace with and fund
technological innovation in the markets in which we compete could have a
material adverse impact on our business and results of
operations.
Our Common Stock trades in
relatively limited volumes and a significant percentage continues to be owned by
investors in the October 2009 private capital raise, which may result in a share
price that is volatile and which may be subject to downward pricing pressure in
the event significant shareholders decide to dispose of shares of our Common
Stock.
Our Common Stock trades on the NASDAQ Global Select Market under the
symbol WCBO" and trading volume is modest. The limited trading market for our
Common Stock may lead to exaggerated fluctuations in market prices and possible
market inefficiencies, as compared to a more actively traded stock. It may also
make it more difficult to dispose of our shares at expected prices, especially
for holders seeking to dispose of a large number of our shares. In addition, if
a large shareholder or group of investors in our private capital raise elects to
sell their shares, such sales or attempted sales could result in significant
downward pressure on the market price of our Common Stock and actual price
declines.
Natural disasters could affect our
ability to operate.
Our market areas are located in earthquake zones and our coastal markets
are located in areas that are susceptible to tsunamis. Natural disasters can
disrupt our operations, result in damage to our market areas and negatively
affect the local economies in which we operate.
We cannot predict whether or to what extent damage caused by future
earthquakes or tsunamis will affect our operations or the economies in our
market areas, but such events could result in an inability to continue business
operations or cause a decline in loan originations, a decline in the value or
destruction of properties securing our loans and an increase in the risk of
delinquencies, foreclosures or loan losses.
15
ITEM 1B.
UNRESOLVED STAFF
COMMENTS
None.
ITEM 2.
PROPERTIES
The principal properties owned by the Bank include a 40,000-square-foot
office and branch facility in downtown Salem, Oregon, a 15,600-square-foot
office and branch facility in Newport, Oregon, and a 12,000-square-foot branch
and office facility in Lacey, Washington. In total, the Bank owns 26 buildings,
primarily to house branch offices. The Bank leases the land under seven
buildings and owns the land under 19 buildings. In addition, the Bank leases 41
office spaces and buildings for branch locations.
Other non-branch office facilities are located in leased office space,
including our headquarters office in Lake Oswego, Oregon, office and processing
space in Salem, Oregon, where the Banks data center is located, space in
Wilsonville, Oregon, where its loan servicing and operations center is located,
space in Vancouver, Washington, and Lake Oswego, Oregon, where we have lending
personnel and a branch office, and space in downtown Portland, where we have
commercial banking personnel, West Coast Investment Services and West Coast
Trust. In addition, we lease two smaller office spaces for lending personnel in
Tukwila and Tacoma, Washington.
The aggregate monthly rental on 48 leased properties is approximately
$366,000.
ITEM 3.
LEGAL
PROCEEDINGS
On June 24, 2009, West Coast Trust was served with an Objection to
Personal Representative's Petition and Petition for Surcharge of Personal
Representative in Linn County Circuit Court. The petition was filed by the
beneficiaries of the estate of Archie Q. Adams, for which West Coast Trust acts
as the personal representative. The petitioners allege a breach of fiduciary
duty with respect to West Coast Trust's prior sale of real property owned by the
Adams estate and sought relief in the form of a surcharge to West Coast Trust of
$215,573,115.60, the amount of the alleged loss to the estate. West Coast Trust
filed a motion to dismiss on July 2, 2009, which was granted in a letter ruling
dated September 15, 2009. Petitioners appealed and briefs have been filed. The
Company believes the appeal and underlying petition are without merit.
Bancorp and its subsidiaries are periodically party to litigation arising
in the ordinary course of business. Based on information currently known to
management, although there are uncertainties inherent in litigation, we do not
believe there is any legal action to which Bancorp or any of its subsidiaries is
a party that, individually or in the aggregate, will have a materially adverse
effect on Bancorps financial condition and results of operations, cash flows,
or liquidity.
ITEM 4.
RESERVED
16
PART II
ITEM 5.
|
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Stock Price and Dividends
Bancorp Common
Stock trades on the NASDAQ Global Select Market under the symbol WCBO. The
high and low closing sale prices per share of our Common Stock for each quarter
during the last two years are shown in the table below, together with dividend
information for each period. The prices below do not include retail mark-ups,
mark-downs or commissions, may not represent actual transactions and are not
adjusted for dividends. As of December 31, 2011, there were approximately 1,600
holders of record of our Common Stock.
|
|
|
2011
|
|
2010
|
|
|
|
Market Price
|
|
Market Price
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
1st Quarter
|
|
$
|
17.90
|
|
$
|
14.55
|
|
$
|
15.00
|
|
$
|
10.25
|
|
2nd Quarter
|
|
$
|
18.25
|
|
$
|
15.00
|
|
$
|
17.20
|
|
$
|
12.75
|
|
3rd Quarter
|
|
$
|
18.03
|
|
$
|
12.96
|
|
$
|
13.75
|
|
$
|
10.30
|
|
4th Quarter
|
|
$
|
16.74
|
|
$
|
13.75
|
|
$
|
14.70
|
|
$
|
12.25
|
Bancorp dividends are limited under federal and Oregon laws and
regulations pertaining to Bancorps financial condition. Payment of dividends by
the Bank is also subject to limitation under state and federal banking laws and
by actions of state and federal banking regulators. The Company has not paid any
dividends to stockholders since second quarter 2009. For more information on
this topic, see the discussion under the section Supervision and Regulation
included in Item 1 of this report and the section Liquidity and Sources of
Funds included in Item 7 of this report.
Under Bancorps Written Agreement with the Reserve Bank and the DFCS,
Bancorp may not pay cash dividends without prior regulatory approval. Similarly,
the Bank may not pay dividends to Bancorp without consent of the FDIC and
DFCS.
Information regarding securities authorized for issuance under equity
compensation plans is incorporated by reference from Part III, Item 12 of this
report.
Issuer Purchases of Equity
Securities
The following table provides information about purchases of Common Stock
by the Company during the quarter ended December 31, 2011:
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
Maximum Number of Shares
Remaining
|
|
|
|
Total Number of Shares
|
|
Average Price Paid
|
|
Purchased as Part of Publicly
|
|
at Period End that May Be
Purchased
|
|
Period
|
|
Purchased/Cancelled
1
|
|
per
Share
|
|
Announced Plans or Programs
2
|
|
Under the Plans or
Programs
|
|
10/1/11 - 10/31/11
|
|
(947
|
)
|
|
$
|
14.46
|
|
-
|
|
1,051,821
|
|
11/1/11 - 11/30/11
|
|
-
|
|
|
$
|
0.00
|
|
-
|
|
1,051,821
|
|
12/1/11 - 12/31/11
|
|
(463
|
)
|
|
$
|
14.82
|
|
-
|
|
1,051,821
|
|
Total for quarter
|
|
(1,410
|
)
|
|
|
|
|
-
|
|
|
1
|
|
Shares repurchased by Bancorp during the quarter include shares
repurchased from employees in connection with cancellation of restricted
stock to pay withholding taxes totaling 947 shares, 0 shares, and 463
shares, respectively, for the periods indicated. There were no shares
repurchased in the periods indicated pursuant to the Companys corporate
stock repurchase program publicly announced in July 2000 (the Repurchase
Program) and described in footnote 2 below.
|
2
|
|
Under the Repurchase Program, the
board of directors originally authorized the Company to purchase up to
330,000 common shares, which amount was increased by 550,000 shares in
September 2000, by 1.0 million shares in September 2001, by 1.0 million
shares in September 2002, and by 1.0 million shares in April 2004, and by
1.0 million shares in September 2007 for a total authorized repurchase
amount as of December 31, 2011, of approximately 4.9 million shares, 1.05
million shares remain available for repurchase under the plan. Regulatory
approval is required for share repurchases.
|
17
Five Year Stock Performance Graph
The following chart compares the yearly
percentage change in the cumulative shareholder return on our Common Stock
during the five years ended December 31, 2011, with (1) the Total Return Index
for the NASDAQ Stock Market (U.S. Companies) and (2) the Total Return Index for
NASDAQ Bank Stocks. This comparison assumes $100.00 was invested on December 31,
2006, in our Common Stock and the comparison groups and assumes the reinvestment
of all cash dividends prior to any tax effect and retention of all stock
dividends. Bancorps total cumulative return was -89.2% over the five year
period ended December 31, 2011, compared to -46.0% and 13.1% for the NASDAQ Bank
Stocks and NASDAQ composite, respectively.
|
Period
Ended
|
Index
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
12/31/10
|
12/31/11
|
West Coast Bancorp
|
100
|
54.8
|
20.8
|
6.7
|
9.8
|
10.8
|
NASDAQ Composite
|
100
|
110.6
|
66.6
|
96.6
|
114.0
|
113.1
|
NASDAQ Bank Index
|
100
|
80.4
|
63.3
|
52.9
|
60.4
|
54.0
|
18
ITEM 6.
SELECTED FINANCIAL
DATA
Consolidated Five Year Financial
Data
The following selected consolidated
five year financial data should be read in conjunction with Bancorps audited
consolidated financial statements and the related notes to those statements
presented in Item 8 of this report.
(Dollars in
thousands, except per share data)
|
|
|
As of and For the Year ended December
31,
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Interest income
|
$
|
98,675
|
|
|
$
|
105,576
|
|
|
$
|
112,150
|
|
|
$
|
140,846
|
|
|
$
|
183,190
|
|
Interest expense
|
|
17,921
|
|
|
|
22,269
|
|
|
|
33,423
|
|
|
|
48,696
|
|
|
|
68,470
|
|
Net interest income
|
|
80,754
|
|
|
|
83,307
|
|
|
|
78,727
|
|
|
|
92,150
|
|
|
|
114,720
|
|
Provision for credit losses
|
|
8,133
|
|
|
|
18,652
|
|
|
|
90,057
|
|
|
|
40,367
|
|
|
|
38,956
|
|
Net interest income (loss) after provision for credit
losses
|
|
72,621
|
|
|
|
64,655
|
|
|
|
(11,330
|
)
|
|
|
51,783
|
|
|
|
75,764
|
|
Noninterest income
|
|
31,819
|
|
|
|
32,697
|
|
|
|
9,129
|
|
|
|
24,629
|
|
|
|
33,498
|
|
Noninterest expense
|
|
90,875
|
|
|
|
90,337
|
|
|
|
108,288
|
|
|
|
90,323
|
|
|
|
85,299
|
|
Income (loss) before income taxes
|
|
13,565
|
|
|
|
7,015
|
|
|
|
(110,489
|
)
|
|
|
(13,911
|
)
|
|
|
23,963
|
|
Provision (benefit) for income taxes
|
|
(20,212
|
)
|
|
|
3,790
|
|
|
|
(19,276
|
)
|
|
|
(7,598
|
)
|
|
|
7,121
|
|
Net income (loss)
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
$
|
(91,213
|
)
|
|
$
|
(6,313
|
)
|
|
$
|
16,842
|
|
|
Net interest income on a tax equivalent basis
2
|
$
|
81,870
|
|
|
$
|
84,478
|
|
|
$
|
80,222
|
|
|
$
|
93,901
|
|
|
$
|
116,361
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per share
|
$
|
1.65
|
|
|
$
|
0.16
|
|
|
$
|
(29.15
|
)
|
|
$
|
(2.05
|
)
|
|
$
|
5.40
|
|
Diluted earnings
(loss) per share
|
$
|
1.58
|
|
|
$
|
0.16
|
|
|
$
|
(29.15
|
)
|
|
$
|
(2.05
|
)
|
|
$
|
5.20
|
|
Cash
dividends
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.10
|
|
|
$
|
1.45
|
|
|
$
|
2.55
|
|
Period end book
value per common share
|
$
|
15.20
|
|
|
$
|
13.04
|
|
|
$
|
35.10
|
|
|
$
|
63.15
|
|
|
$
|
66.75
|
|
Weighted average
common shares outstanding
|
|
19,007
|
|
|
|
17,460
|
|
|
|
3,102
|
|
|
|
3,094
|
|
|
|
3,101
|
|
Weighted average
diluted shares outstanding
|
|
19,940
|
|
|
|
18,059
|
|
|
|
3,102
|
|
|
|
3,094
|
|
|
|
3,209
|
|
|
Total assets
|
$
|
2,429,887
|
|
|
$
|
2,461,059
|
|
|
$
|
2,733,547
|
|
|
$
|
2,516,140
|
|
|
$
|
2,646,614
|
|
Total deposits
|
$
|
1,915,569
|
|
|
$
|
1,940,522
|
|
|
$
|
2,146,884
|
|
|
$
|
2,024,379
|
|
|
$
|
2,094,832
|
|
Total long-term borrowings
|
$
|
120,000
|
|
|
$
|
168,599
|
|
|
$
|
250,699
|
|
|
$
|
91,059
|
|
|
$
|
83,100
|
|
Total loans, net
|
$
|
1,466,089
|
|
|
$
|
1,496,053
|
|
|
$
|
1,686,352
|
|
|
$
|
2,035,876
|
|
|
$
|
2,125,752
|
|
Stockholders equity
|
$
|
314,479
|
|
|
$
|
272,560
|
|
|
$
|
249,058
|
|
|
$
|
198,187
|
|
|
$
|
208,241
|
|
Financial ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets
|
|
1.37
|
%
|
|
|
0.13
|
%
|
|
|
-3.49
|
%
|
|
|
-0.25
|
%
|
|
|
0.66
|
%
|
Return on average
equity
|
|
11.79
|
%
|
|
|
1.21
|
%
|
|
|
-45.66
|
%
|
|
|
-3.06
|
%
|
|
|
7.93
|
%
|
Average equity to
average assets
|
|
11.64
|
%
|
|
|
10.32
|
%
|
|
|
7.64
|
%
|
|
|
8.04
|
%
|
|
|
8.37
|
%
|
Dividend payout
ratio
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
-0.34
|
%
|
|
|
-70.73
|
%
|
|
|
47.51
|
%
|
Efficiency ratio
1
|
|
80.44
|
%
|
|
|
78.14
|
%
|
|
|
122.34
|
%
|
|
|
72.79
|
%
|
|
|
56.90
|
%
|
Net loans to
assets
|
|
60.34
|
%
|
|
|
60.79
|
%
|
|
|
61.69
|
%
|
|
|
80.91
|
%
|
|
|
80.33
|
%
|
Average yields
earned
2
|
|
4.29
|
%
|
|
|
4.40
|
%
|
|
|
4.71
|
%
|
|
|
5.92
|
%
|
|
|
7.72
|
%
|
Average rates
paid
|
|
1.15
|
%
|
|
|
1.27
|
%
|
|
|
1.76
|
%
|
|
|
2.60
|
%
|
|
|
3.76
|
%
|
Net interest spread
2
|
|
3.14
|
%
|
|
|
3.13
|
%
|
|
|
2.95
|
%
|
|
|
3.32
|
%
|
|
|
3.96
|
%
|
Net interest margin
2
|
|
3.52
|
%
|
|
|
3.48
|
%
|
|
|
3.33
|
%
|
|
|
3.90
|
%
|
|
|
4.86
|
%
|
Nonperforming assets
to total assets
|
|
2.94
|
%
|
|
|
4.09
|
%
|
|
|
5.59
|
%
|
|
|
7.86
|
%
|
|
|
1.12
|
%
|
Allowance for loan
losses to total loans
|
|
2.35
|
%
|
|
|
2.62
|
%
|
|
|
2.23
|
%
|
|
|
1.40
|
%
|
|
|
2.16
|
%
|
Allowance for credit
losses to total loans
|
|
2.40
|
%
|
|
|
2.67
|
%
|
|
|
2.29
|
%
|
|
|
1.45
|
%
|
|
|
2.53
|
%
|
Net loan charge-offs
to average loans
|
|
0.87
|
%
|
|
|
1.05
|
%
|
|
|
4.21
|
%
|
|
|
3.04
|
%
|
|
|
0.34
|
%
|
Allowance for credit
losses to nonperforming loans
|
|
88.63
|
%
|
|
|
67.07
|
%
|
|
|
39.68
|
%
|
|
|
23.46
|
%
|
|
|
207.75
|
%
|
Allowance for loan
losses to nonperforming loans
|
|
86.73
|
%
|
|
|
65.68
|
%
|
|
|
38.74
|
%
|
|
|
22.67
|
%
|
|
|
177.53
|
%
|
1
|
|
The efficiency ratio has been
computed as noninterest expense divided by the sum of net interest income
on a tax equivalent basis and noninterest income excluding gains/losses on
sales of securities.
|
2
|
|
Interest earned on nontaxable
securities has been computed on a 35% tax equivalent
basis.
|
19
Consolidated Quarterly Financial
Data
The following table presents selected
consolidated quarterly financial data for each quarter of 2010 and 2011. The
financial information contained in this table reflects all adjustments, which,
in the opinion of management, are necessary for a fair presentation of the
results of the interim periods.
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
Interest income
|
$
|
23,932
|
|
|
$
|
24,721
|
|
|
$
|
25,104
|
|
|
$
|
24,918
|
|
Interest expense
|
|
5,992
|
|
|
|
5,380
|
|
|
|
3,143
|
|
|
|
3,406
|
|
Net interest
income
|
|
17,940
|
|
|
|
19,341
|
|
|
|
21,961
|
|
|
|
21,512
|
|
Provision for credit losses
|
|
1,499
|
|
|
|
1,132
|
|
|
|
3,426
|
|
|
|
2,076
|
|
Noninterest income
|
|
6,419
|
|
|
|
8,414
|
|
|
|
8,070
|
|
|
|
8,916
|
|
Noninterest expense
|
|
22,744
|
|
|
|
22,620
|
|
|
|
22,958
|
|
|
|
22,553
|
|
Income before income
taxes
|
|
116
|
|
|
|
4,003
|
|
|
|
3,647
|
|
|
|
5,799
|
|
Provision (benefit) for income taxes
|
|
(17,646
|
)
|
|
|
(2,273
|
)
|
|
|
(987
|
)
|
|
|
694
|
|
Net income
|
$
|
17,762
|
|
|
$
|
6,276
|
|
|
$
|
4,634
|
|
|
$
|
5,105
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.87
|
|
|
$
|
0.31
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
Diluted
|
$
|
0.83
|
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
$
|
0.25
|
|
|
Return on average assets
1
|
|
2.88
|
%
|
|
|
1.00
|
%
|
|
|
0.76
|
%
|
|
|
0.84
|
%
|
Return on average equity
1
|
|
23.68
|
%
|
|
|
8.55
|
%
|
|
|
6.58
|
%
|
|
|
7.56
|
%
|
|
1
Ratios have been
annualized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
Interest income
|
$
|
25,509
|
|
|
$
|
26,053
|
|
|
$
|
26,816
|
|
|
$
|
27,198
|
|
Interest expense
|
|
3,620
|
|
|
|
4,178
|
|
|
|
7,906
|
|
|
|
6,565
|
|
Net interest
income
|
|
21,889
|
|
|
|
21,875
|
|
|
|
18,910
|
|
|
|
20,633
|
|
Provision for credit losses
|
|
1,693
|
|
|
|
1,567
|
|
|
|
7,758
|
|
|
|
7,634
|
|
Noninterest income
|
|
8,595
|
|
|
|
8,069
|
|
|
|
9,625
|
|
|
|
6,408
|
|
Noninterest expense
|
|
23,330
|
|
|
|
23,003
|
|
|
|
22,909
|
|
|
|
21,095
|
|
Income (loss) before
income taxes
|
|
5,461
|
|
|
|
5,374
|
|
|
|
(2,132
|
)
|
|
|
(1,688
|
)
|
Provision (benefit) for income taxes
|
|
3,549
|
|
|
|
(676
|
)
|
|
|
1,717
|
|
|
|
(800
|
)
|
Net income
(loss)
|
$
|
1,912
|
|
|
$
|
6,050
|
|
|
$
|
(3,849
|
)
|
|
$
|
(888
|
)
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
|
($0.20
|
)
|
|
|
($0.05
|
)
|
Diluted
|
$
|
0.09
|
|
|
$
|
0.29
|
|
|
|
($0.20
|
)
|
|
|
($0.05
|
)
|
|
Return on average assets
1
|
|
0.31
|
%
|
|
|
0.96
|
%
|
|
|
-0.58
|
%
|
|
|
-0.13
|
%
|
Return on average equity
1
|
|
2.75
|
%
|
|
|
8.84
|
%
|
|
|
-5.92
|
%
|
|
|
-1.42
|
%
|
1
Ratios have been annualized.
20
ITEM
7.
|
MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
|
The following discussion should be read
in conjunction with the audited consolidated financial statements and related
notes to those statements during the periods included in the consolidated
financial statements of West Coast Bancorp and its subsidiaries that appear in
Item 8 Financial Statements and Supplementary Data of this report. References
to we, our or us refer to West Coast Bancorp and its
subsidiaries.
Forward-Looking Statement Disclosure
Statements in this Annual Report of
West Coast Bancorp (Bancorp or the Company) regarding future events or
performance are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the PSLRA) and are made pursuant to
the safe harbors of the PSLRA. The Companys actual results could be quite
different from those expressed or implied by the forward-looking statements.
Words such as could, may, should, plans, believes, anticipates,
estimates, predicts, expects, projects, potential, or continue, or
words of similar meaning, often help identify forward-looking statements,
which include any statements that expressly or implicitly predict future events,
results, or performance. Factors that could cause events, results or performance
to differ from those expressed or implied by our forward-looking statements
include, among others, risks discussed in Item 1A, Risk Factors of this
report, risks discussed elsewhere in the text of this report, as well as the
following specific factors:
-
General economic conditions, whether national or regional, and
conditions in real estate markets, that may hinder our ability to increase
lending activities or have an adverse effect on the demand for our loans and
other products, our credit quality and related levels of nonperforming assets
and loan losses, and the value and salability of the real estate that we own
or that is the collateral for many of our loans;
-
Changing bank regulatory conditions, policies, or programs, whether
arising as new legislation or regulatory initiatives, that could lead to
restrictions on activities of banks generally or West Coast Bank (the Bank)
in particular, increased costs, including deposit insurance premiums, price
controls on debit card interchange, regulation or prohibition of certain
income producing activities, or changes in the secondary market for bank loan
and other products;
-
Competitive factors, including competition with community, regional and
national financial institutions, that may lead to pricing pressures that
reduce yields the Bank earns on loans and increase rates the Bank pays on
deposits, the loss of our most valued customers, defection of key employees or
groups of employees, or other losses;
-
Increasing or decreasing interest rate environments, including changes
in the slope and level of the yield curve, which may be caused by the Federal
Reserve Banks public comments about future direction and level of interest
rates, that could lead to decreases in net interest margin, lower net interest
and fee income, including lower gains on sales of loans, and changes in the
value of our investment securities;
-
Failure to develop, implement, and distribute competitive and client
value added products, that may adversely affect our ability to generate
profitable revenue sources;
-
Any
failure to successfully implement expense reduction initiatives and realize
expected efficiencies, while retaining revenues, that may result in us
realizing less benefits from our cost reduction initiatives than expected; and
-
Changes or failures in technology or
third party vendor relationships in important revenue production or service
areas or increases in required investments in technology that could reduce our
revenues, increase our costs, or lead to disruptions in our
business.
Furthermore, forward-looking statements
are subject to risks and uncertainties related to the Companys ability to,
among other things: dispose of properties or other assets obtained through
foreclosures at expected prices and within a reasonable period of time; attract
and retain key personnel; generate loan and deposit balances at projected
spreads; sustain fee generation including gains on sales of loans; maintain
asset quality and control risk; limit the amount of net loan charge-offs; adapt
to changing customer deposit, investment and borrowing behaviors; control
expenses; and monitor and manage its financial reporting, operating and
disclosure control environments.
Readers are cautioned not to place
undue reliance on our forward-looking statements, which reflect managements
analysis only as of the date of the statements. We do not intend to publicly
revise or update forward-looking statements to reflect events or circumstances
that arise after the date of this report.
Readers should carefully review all
disclosures we file from time to time with the Securities and Exchange
Commission (SEC).
21
Overview
2011 Financial review
The Companys operating results in 2011
show several favorable trends. During 2011, we recorded:
-
Net
income of $33.8 million compared to $3.2 million in 2010;
-
A
return on average assets of 1.37%, an increase from .13% in 2010;
-
A reversal of the Companys deferred
tax asset valuation allowance in the fourth quarter of 2011, which was the
most significant factor in the Company recording a benefit for income taxes of
$20.2 million in 2011 compared to a provision for income taxes of $3.8 million
in 2010;
-
An
average rate paid on total deposits of .26%, a decline from .60% in 2010;
-
A
provision for credit losses of $8.1 million, down $10.6 million from $18.7
million in 2010;
-
Net
loan charge-offs of $13.2 million, a decline from $17.0 million in 2010; and
-
Net
Other Real Estate Owned (OREO) valuation adjustments and gains and losses on
sales of $3.2 million, a reduction from $4.4 million in 2010.
The financial condition of Bancorp and
the Bank also continued to strengthen in 2011, as evidenced by:
-
Increasing the Banks Total and Tier 1 risk-based capital ratios to
19.92% and 18.66%, respectively, at December 31, 2011, up from 18.05% and
16.79% at December 31, 2010;
-
Improving the Banks leverage ratio to 14.09% at December 31, 2011,
from 12.51% a year ago; and
-
Reducing total nonperforming assets by 29% or $29.3 million over the
past twelve months to $71.4 million at year end.
In addition, the Bank completed a
number of expense reduction initiatives in 2011, with related one-time expense
of $1.3 million, which are expected to reduce our expenses by $2.6 to $2.8
million in 2012. Also, the Bank prepaid its $168.6 million in term Federal Home
Loan Bank (FHLB) borrowings resulting in a prepayment charge of $7.1 million,
an action that will reduce interest expense approximately $3.2 million in 2012
and also in future years. Concurrently with the prepayment of the borrowings,
the Bank elected to enter into $120.0 million of new term borrowings with FHLB
in an effort to maintain the interest rate sensitivity position within its
balance sheet. The duration of the new term borrowings increased to
approximately three and a half years compared to two years for the borrowing
that were prepaid.
Regulatory Order.
On October 18, 2011, the Bank received
a regulatory order (Order) from the Federal Deposit Insurance Corporation
(FDIC) relating to its overdraft practices. As part of the order, the Bank
agreed to implement certain procedural improvements relating to its compliance
function and overdraft program, require certain customers who previously elected
to opt-in to allow the Bank to pay overdrafts resulting from ATM and point of
sale transactions to opt-in again in order for the Bank to continue paying such
overdrafts, to pay a civil money penalty of $390,000, and make restitution
payments to certain customers totaling $246,000. Many of the procedural
improvements required by the Order are underway or have been completed. For
information regarding the risks facing the Bank, see the discussion under the
section Risk Factors in Item 1A of this report.
For more information, see the
discussion under the subheading Current Regulatory Actions in the section
Supervision and Regulation included in Item 1 of this report.
22
Income Statement Overview
Our net income for the full year 2011
was $33.8 million, compared to $3.2 million in 2010 and a net loss of $91.2
million in 2009. Earnings per diluted share for the years ended December 31,
2011, and 2010, was $1.58 and $.16, respectively, while the loss per diluted
share for the year ended December 31, 2009, was $29.15. Return on average equity
improved to 11.8% in 2011 from 1.2% in 2010 and -45.7% in 2009. As discussed
below, the improved year-over-year net income was primarily due to a reversal of
the Companys deferred tax asset valuation allowance and a reduction in
provision for credit losses in 2011.
Net Interest Income, Average
Balances, Yields Earned, and Rates Paid
. The
following table displays information on net interest income, average yields
earned and rates paid, as well as net interest spread and margin information on
a tax equivalent basis for the periods indicated. The adjustment to a taxable
equivalent basis increases interest income by an estimate of the additional
yield that would have been received by the Company if its tax-exempt securities
had been taxable at the statutory rate. This information can be used to follow
the changes in our yields and rates and the changes in our earning assets and
liabilities over the past three years:
(Dollars in thousands)
|
Year Ended December 31,
|
|
Increase (Decrease)
|
|
Percentage Change
|
|
2011
|
|
2010
|
|
2009
|
|
11-10
|
|
10-09
|
|
11-10
|
|
10-09
|
Interest and fee income
1
|
$
|
99,791
|
|
|
$
|
106,747
|
|
|
$
|
113,645
|
|
|
($6,956
|
)
|
|
($6,898
|
)
|
|
-6.5
|
%
|
|
-6.1
|
%
|
Interest expense
|
$
|
17,921
|
|
|
$
|
22,269
|
|
|
$
|
33,423
|
|
|
($4,348
|
)
|
|
($11,154
|
)
|
|
-19.5
|
%
|
|
-33.4
|
%
|
Net interest income
1
|
$
|
81,870
|
|
|
$
|
84,478
|
|
|
$
|
80,222
|
|
|
($2,608
|
)
|
|
$4,256
|
|
|
-3.1
|
%
|
|
5.3
|
%
|
|
Average interest earning assets
|
$
|
2,324,016
|
|
|
$
|
2,425,073
|
|
|
$
|
2,410,755
|
|
|
($101,057
|
)
|
|
$14,318
|
|
|
-4.2
|
%
|
|
0.6
|
%
|
Average interest bearing liabilities
|
$
|
1,558,434
|
|
|
$
|
1,751,296
|
|
|
$
|
1,897,170
|
|
|
($192,862
|
)
|
|
($145,874
|
)
|
|
-11.0
|
%
|
|
-7.7
|
%
|
|
Average interest earning assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest
bearing liabilities
|
|
149.13
|
%
|
|
|
138.47
|
%
|
|
|
127.07
|
%
|
|
10.65
|
%
|
|
11.40
|
%
|
|
|
|
|
|
|
Average yield earned
1
|
|
4.29
|
%
|
|
|
4.40
|
%
|
|
|
4.71
|
%
|
|
-0.11
|
%
|
|
-0.31
|
%
|
|
|
|
|
|
|
Average rate paid
|
|
1.15
|
%
|
|
|
1.27
|
%
|
|
|
1.76
|
%
|
|
-0.12
|
%
|
|
-0.49
|
%
|
|
|
|
|
|
|
Net interest spread
1
|
|
3.14
|
%
|
|
|
3.13
|
%
|
|
|
2.95
|
%
|
|
0.01
|
%
|
|
0.18
|
%
|
|
|
|
|
|
|
Net interest margin
1
|
|
3.52
|
%
|
|
|
3.48
|
%
|
|
|
3.33
|
%
|
|
0.04
|
%
|
|
0.15
|
%
|
|
|
|
|
|
|
1
Interest earned on nontaxable securities has been computed on a 35% tax
equivalent basis.
Net interest income on a tax equivalent
basis totaled $81.9 million for the year ended December 31, 2011, a decrease of
$2.6 million or 3.1% from $84.5 million in 2010. The net interest margin
increased four basis points to 3.52% in 2011 from 3.48% in 2010. Adjusting for
the FHLB borrowing prepayment charges of $7.1 million in 2011 and $2.3 million
in 2010, the net interest margin in 2011 was 3.83%, up from 3.58% in 2010. The
increase in net interest income and margin from 2010 to 2011, after the
adjustment to remove the effects of the prepayment charges, was mainly due to
lower rates paid on interest bearing deposits, a change in deposit mix to lower
cost demand deposits, as well as lower cash balances at the Federal Reserve. The
combined favorable effect from these factors more than offset the impact from
lower loan balances and lower yields on total earning assets in 2011 compared to
2010. In 2009, net interest income on a tax equivalent basis was $80.2 million
and the net interest margin was 3.33%. The $4.3 million increase in net
interest income and 15 basis point increase in net interest margin from 2009 to
2010 was mainly due to lower rates paid on interest bearing deposits, a change
in deposit mix to lower cost demand deposits, as well as lower cash balances at
the Federal Reserve and lower nonaccrual loan balances. These trends more than
offset lower loan balances, a significant shift in the Companys earning assets
mix from loan to investment securities balances, lower yield on earning assets,
and the $2.3 million charge associated with prepaying a portion of our FHLB debt
in 2010.
Changing interest rate environments,
including the slope, level of, and changes in the yield curve, competitive
pricing pressure, and changing economic conditions, could lead to higher deposit
costs, lower loan yields, reduced net interest margin and spread and lower loan
fees, all of which could lead to additional pressure on our net interest income.
For more information regarding interest rates, see the discussion under the
section Quantitative and Qualitative Disclosures about Market Risk in the Item
7A of this report.
As of December 31, 2011, the Bank had
$729.7 million in floating and adjustable rate loans with interest rate floors,
with $550.9 million of these loans at their floor rate. At year end 2010, $668.4
million in floating and adjustable rate loans had interest rate floors, with
$444.3 million at their floor rate. The floors have benefited the Companys loan
yield and net interest income and margin over the past few years given the
extremely low market interest rate environment. If interest rates rise, the
Company anticipates yields on loans at floors will lag underlying changes in
market interest rates, although the overall effect will depend on how quickly
and dramatically market interest rates rise, as well as how the slope of the
market yield curve changes.
Until our loan balances begin to expand
and become a larger component of our overall earning assets balance and the
value of non-interest bearing deposit balances increase, we project continued
pressure on the Companys yield on earning assets and net interest income and
margin. Whether we will be able to expand our loan portfolio in 2012 will be
primarily dependent on increased economic activity and market conditions,
including the effects of competitive pressures, all of which will affect loan
demand from qualified clients and credit quality.
23
The following table sets forth, for the
periods indicated, information with regard to (1) average balances of assets and
liabilities, (2) the total dollar amounts of interest income on interest earning
assets and interest expense on interest bearing liabilities, (3) resulting
yields and rates, (4) net interest income and (5) net interest spread.
Nonaccrual loans have been included in the tables as loans carrying a zero
yield. Loan fees are recognized as income using the interest method over the
life of the loan.
|
Year Ended
December 31,
|
(Dollars in thousands)
|
2011
|
|
2010
|
|
2009
|
|
Average
|
|
Interest
|
|
|
|
|
Average
|
|
Interest
|
|
|
|
|
Average
|
|
Interest
|
|
|
|
|
Outstanding
|
|
Earned/
|
|
Yield/
|
|
Outstanding
|
|
Earned/
|
|
Yield/
|
|
Outstanding
|
|
Earned/
|
|
Yield/
|
|
Balance
|
|
Paid
|
|
Rate
1
|
|
Balance
|
|
Paid
|
|
Rate
1
|
|
Balance
|
|
Paid
|
|
Rate
1
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due from banks
|
$
|
67,332
|
|
|
$
|
184
|
|
0.27
|
%
|
|
$
|
188,925
|
|
|
$
|
493
|
|
0.26
|
%
|
|
$
|
136,944
|
|
|
$
|
366
|
|
0.27
|
%
|
Federal funds sold
|
|
3,796
|
|
|
|
3
|
|
0.08
|
%
|
|
|
6,194
|
|
|
|
6
|
|
0.09
|
%
|
|
|
6,673
|
|
|
|
6
|
|
0.09
|
%
|
Taxable securities
2
|
|
677,840
|
|
|
|
16,177
|
|
2.39
|
%
|
|
|
547,960
|
|
|
|
14,493
|
|
2.64
|
%
|
|
|
276,852
|
|
|
|
8,646
|
|
3.12
|
%
|
Nontaxable securities
3
|
|
57,053
|
|
|
|
3,190
|
|
5.59
|
%
|
|
|
58,139
|
|
|
|
3,346
|
|
5.76
|
%
|
|
|
72,770
|
|
|
|
4,270
|
|
5.87
|
%
|
Loans, including fees
4
|
|
1,517,995
|
|
|
|
80,237
|
|
5.29
|
%
|
|
|
1,623,855
|
|
|
|
88,409
|
|
5.44
|
%
|
|
|
1,917,516
|
|
|
|
100,357
|
|
5.23
|
%
|
Total interest earning assets
|
|
2,324,016
|
|
|
|
99,791
|
|
4.29
|
%
|
|
|
2,425,073
|
|
|
|
106,747
|
|
4.40
|
%
|
|
|
2,410,755
|
|
|
|
113,645
|
|
4.71
|
%
|
|
Allowance for loan losses
|
|
(38,456
|
)
|
|
|
|
|
|
|
|
|
(42,003
|
)
|
|
|
|
|
|
|
|
|
(37,363
|
)
|
|
|
|
|
|
|
Premises and equipment
|
|
25,919
|
|
|
|
|
|
|
|
|
|
27,517
|
|
|
|
|
|
|
|
|
|
31,309
|
|
|
|
|
|
|
|
Other assets
|
|
149,315
|
|
|
|
|
|
|
|
|
|
165,284
|
|
|
|
|
|
|
|
|
|
210,575
|
|
|
|
|
|
|
|
Total assets
|
$
|
2,460,794
|
|
|
|
|
|
|
|
|
$
|
2,575,871
|
|
|
|
|
|
|
|
|
$
|
2,615,276
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
$
|
362,334
|
|
|
$
|
226
|
|
0.06
|
%
|
|
$
|
335,134
|
|
|
$
|
447
|
|
0.13
|
%
|
|
$
|
298,002
|
|
|
$
|
776
|
|
0.26
|
%
|
Savings
|
|
112,385
|
|
|
|
125
|
|
0.11
|
%
|
|
|
103,531
|
|
|
|
278
|
|
0.27
|
%
|
|
|
89,903
|
|
|
|
714
|
|
0.79
|
%
|
Money market
|
|
654,329
|
|
|
|
1,723
|
|
0.26
|
%
|
|
|
659,542
|
|
|
|
3,939
|
|
0.60
|
%
|
|
|
617,881
|
|
|
|
8,194
|
|
1.33
|
%
|
Time deposits
|
|
217,149
|
|
|
|
2,899
|
|
1.34
|
%
|
|
|
388,500
|
|
|
|
7,466
|
|
1.92
|
%
|
|
|
587,299
|
|
|
|
14,758
|
|
2.51
|
%
|
Short-term borrowings
5
|
|
14,653
|
|
|
|
1,004
|
|
6.85
|
%
|
|
|
7,570
|
|
|
|
494
|
|
6.52
|
%
|
|
|
44,220
|
|
|
|
806
|
|
1.82
|
%
|
Long-term borrowings
5
6
|
|
197,584
|
|
|
|
11,944
|
|
6.05
|
%
|
|
|
257,019
|
|
|
|
9,645
|
|
3.75
|
%
|
|
|
259,865
|
|
|
|
8,175
|
|
3.15
|
%
|
Total interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
1,558,434
|
|
|
|
17,921
|
|
1.15
|
%
|
|
|
1,751,296
|
|
|
|
22,269
|
|
1.27
|
%
|
|
|
1,897,170
|
|
|
|
33,423
|
|
1.76
|
%
|
Demand deposits
|
|
592,630
|
|
|
|
|
|
|
|
|
|
540,280
|
|
|
|
|
|
|
|
|
|
499,283
|
|
|
|
|
|
|
|
Other liabilities
|
|
23,332
|
|
|
|
|
|
|
|
|
|
18,486
|
|
|
|
|
|
|
|
|
|
19,044
|
|
|
|
|
|
|
|
Total liabilities
|
|
2,174,396
|
|
|
|
|
|
|
|
|
|
2,310,062
|
|
|
|
|
|
|
|
|
|
2,415,497
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
286,398
|
|
|
|
|
|
|
|
|
|
265,809
|
|
|
|
|
|
|
|
|
|
199,779
|
|
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders' equity
|
$
|
2,460,794
|
|
|
|
|
|
|
|
|
$
|
2,575,871
|
|
|
|
|
|
|
|
|
$
|
2,615,276
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
81,870
|
|
|
|
|
|
|
|
|
$
|
84,478
|
|
|
|
|
|
|
|
|
$
|
80,222
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
Net interest margin
|
|
|
|
|
|
|
|
3.52
|
%
|
|
|
|
|
|
|
|
|
3.48
|
%
|
|
|
|
|
|
|
|
|
3.33
|
%
|
1
|
|
Yield/rate
calculations have been based on more detailed information and therefore
may not recompute exactly due to rounding.
|
2
|
|
2011 and 2010 do not
include Federal Home Loan Bank stock balances. In 2011 and 2010, FHLB
stock is included in other assets. 2009 investment securities includes
Federal Home Loan Bank stock balances.
|
3
|
|
Interest earned on
nontaxable securities has been computed on a 35% tax equivalent basis. The
tax equivalent basis adjustment for the years ended December 31, 2011,
2010, and 2009, was $1.1 million, $1.2 million, and $1.5 million,
respectively.
|
4
|
|
Includes balances of
loans held for sale and nonaccrual loans.
|
5
|
|
Includes portion of
$7.1 million prepayment fee in connection with prepaying $168.6 million in
FHLB borrowings in the year 2011. The maximum amount of short-term
borrowings held during the year was $39.2 million and $17.6 million for
the years ended December 31, 2011 and 2010, respectively.
|
6
|
|
Includes junior
subordinated debentures with average balance of $51.0 million for 2011,
2010, and 2009.
|
24
Net Interest Income Changes Due to
Rate and Volume.
The following table sets
forth the dollar amounts of the changes in consolidated net interest income
attributable to changes in volume and to changes in interest rates. Changes not
due solely to volume or rate and changes due to new product lines, if any, are
allocated to volume.
|
Year Ended December
31,
|
|
2011 compared to 2010
|
|
2010 compared to 2009
|
(Dollars in thousands)
|
Increase (Decrease) due
to:
|
|
Total Increase
|
|
Increase (Decrease) due
to:
|
|
Total
Increase
|
|
Volume
|
|
Yield/Rate
|
|
(Decrease)
|
|
Volume
|
|
Yield/Rate
|
|
(Decrease)
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning balances due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
banks
|
$
|
(317
|
)
|
|
$
|
8
|
|
|
$
|
(309
|
)
|
|
$
|
98
|
|
|
$
|
29
|
|
|
$
|
127
|
|
Federal funds sold
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Investment security income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on taxable securities
|
|
3,903
|
|
|
|
(2,219
|
)
|
|
|
1,684
|
|
|
|
8,637
|
|
|
|
(2,789
|
)
|
|
|
5,848
|
|
Interest on nontaxable securities
1
|
|
(63
|
)
|
|
|
(93
|
)
|
|
|
(156
|
)
|
|
|
(859
|
)
|
|
|
(66
|
)
|
|
|
(925
|
)
|
Loans, including fees on loans
|
|
(4,699
|
)
|
|
|
(3,473
|
)
|
|
|
(8,172
|
)
|
|
|
(12,182
|
)
|
|
|
234
|
|
|
|
(11,948
|
)
|
Total
interest income
1
|
|
(1,178
|
)
|
|
|
(5,778
|
)
|
|
|
(6,956
|
)
|
|
|
(4,306
|
)
|
|
|
(2,592
|
)
|
|
|
(6,898
|
)
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
36
|
|
|
|
(257
|
)
|
|
|
(221
|
)
|
|
|
97
|
|
|
|
(425
|
)
|
|
|
(328
|
)
|
Savings
|
|
24
|
|
|
|
(177
|
)
|
|
|
(153
|
)
|
|
|
108
|
|
|
|
(545
|
)
|
|
|
(437
|
)
|
Money market
|
|
(31
|
)
|
|
|
(2,185
|
)
|
|
|
(2,216
|
)
|
|
|
552
|
|
|
|
(4,807
|
)
|
|
|
(4,255
|
)
|
Time deposits
|
|
(3,446
|
)
|
|
|
(1,121
|
)
|
|
|
(4,567
|
)
|
|
|
(4,618
|
)
|
|
|
(2,674
|
)
|
|
|
(7,292
|
)
|
Short-term borrowings
2
|
|
462
|
|
|
|
48
|
|
|
|
510
|
|
|
|
(668
|
)
|
|
|
356
|
|
|
|
(312
|
)
|
Long-term borrowings
2 3
|
|
(2,231
|
)
|
|
|
4,530
|
|
|
|
2,299
|
|
|
|
(90
|
)
|
|
|
1,560
|
|
|
|
1,470
|
|
Total
interest expense
|
|
(5,186
|
)
|
|
|
838
|
|
|
|
(4,348
|
)
|
|
|
(4,619
|
)
|
|
|
(6,535
|
)
|
|
|
(11,154
|
)
|
Increase (decrease) in net interest income
1
|
$
|
4,008
|
|
|
$
|
(6,616
|
)
|
|
$
|
(2,608
|
)
|
|
$
|
313
|
|
|
$
|
3,943
|
|
|
$
|
4,256
|
|
1
|
|
Tax exempt income has been
adjusted to a tax-equivalent basis using a 35% tax equivalent
basis.
|
2
|
|
Includes portion of $7.1 million
prepayment fee in connection with prepaying $168.6 million in FHLB
borrowings in the year 2011. The year ending 2010 includes a $2.3 million
prepayment fee in connection with prepaying $99.1 million in FHLB
borrowings.
|
3
|
|
Long-term borrowings include junior
subordinated debentures.
|
For the year ended December 31, 2011, lower loan balances and yield on
those balances were the main drivers of the $7.0 million decline in interest
income as compared to 2010. Reduced interest expense in 2011, principally caused
by a decline in time deposit balances and lower deposit rates, in money market
and time deposits categories more than offset the decline in interest income.
However, the $7.1 million charge associated with prepaying FHLB borrowings in
2011 compared to $2.3 million in such charges in 2010 caused net interest income
to decline $2.6 million year-over-year. The $6.9 million decline in interest
income during 2010 compared to 2009 was chiefly due to lower loan balances.
However, lower interest expense in 2010 caused by a decline in time deposit
balances and lower deposit rates, primarily in money market and time deposits
categories, more than offset the decline in interest income and the 2010 FHLB
prepayment charge resulting in a $4.3 million increase in net interest income in
2010 compared to 2009.
Provision for Credit
Losses
. The provision for credit losses is
comprised of two primary components, a provision for loan losses related to
outstanding loans and a provision for losses related to unfunded commitments.
The provision for credit losses reflects changes in the credit quality of the
entire loan portfolio. The provision for credit losses is recorded to bring the
allowance for loan losses and the reserve for unfunded commitments to amounts
considered appropriate by management based on factors which are described in the
Credit Management and Allowance for Credit Losses and Net Loan Charge-offs
sections in this Item 7 of this report.
The provision for credit losses was
$8.1 million, $18.7 million, and $90.1 million for the years ended December 31,
2011, 2010 and 2009, respectively, while net loan charge-offs were $13.2
million, $17.0 million, and $80.6 million, over those same years. The provision
for credit losses decreased $10.6 million in 2011 compared to 2010, primarily
due to a significant reduction in unfavorable loan risk rating migration within
the Companys loan portfolio and lower net loan charge-offs in the commercial,
residential real estate construction, and mortgage categories, as well as in
nonstandard mortgages, which was only partially offset by higher home equity and
commercial real estate net charge-offs.
25
The $18.7 million provision for credit
losses in 2010 was significantly lower than the $90.1 million provision for
credit losses in 2009. The 2009 provision reflected a substantial unfavorable
loan risk rating migration and material net charge-offs within the loan
portfolio in 2009, which resulted in, among other things, a substantial increase
in the general valuation allowances within the allowance for credit losses model
during 2009 and also in 2010.
The level of the Companys future
provisioning will be heavily dependent on the local real estate market for both
residential and commercial properties, general economic conditions nationally
and in the areas in which we do business, and the effects of any changes in
interest rates.
Noninterest Income
. Our noninterest income for the year ended December 31, 2011,
was $31.8 million down $.9 million or 3% compared to $32.7 million in 2010. As a
result of implementing the FDIC guidance on overdraft programs in second quarter
2011, deposit service charges in 2011 declined $2.3 million or 15% from 2010.
Payment systems related revenues increased $.9 million in 2011 compared to 2010
mainly as a result of an increase in number of deposit transaction accounts and
associated cards as well as higher transaction volumes. Trust and investment
service revenue increased 6% or $.2 million in 2011 compared to 2010. In 2011,
gains on sales of loans were $1.3 million, up 12% from $1.2 million for 2010.
This increase was due to a higher volume of sales of residential mortgage loans.
The Company recorded net gains on sales of securities of $.7 million in 2011
compared to $1.6 million in 2010. The $1.2 million decrease in OREO valuation
adjustments, which is a component of noninterest income, compared to 2010 was
primarily due to a reduction in OREO property balances as well as a slower
decline in residential real estate property values within our markets in 2011.
Total noninterest income before the effects of OREO losses was $35.1 million in
2011 compared to $37.1 million in 2010.
Our noninterest income for the year
ended December 31, 2010, was $32.7 million up $23.6 million or 258%, compared to
$9.1 million in 2009. The 2010 increase predominantly reflected a $22.5 million
decrease in losses related to OREO property sales and valuation adjustments from
2009. In the fourth quarter of 2009, the Company also sold 69 OREO properties
with a book value of $18.9 million in a bulk sale. The Company recorded a loss
on sale of $6.7 million associated with this transaction.
Our ability to increase noninterest
income in the future will be dependent on many factors, including the effects of
legislation, pricing changes by the payment card networks, or regulations
limiting bank activities. Our ability to retain and grow deposit balances, level
of interest rates, and the success in developing and distributing new products
could also be impacted by the factors noted above. For example, if the payment
card networks were to lower debit or credit card interchange rates the Companys
revenues in its payment systems business could be materially and adversely
affected. Additional OREO valuation adjustments and competitive factors could
also adversely affect our noninterest income.
The following table illustrates the
components and change in noninterest income for the periods shown:
(Dollars in thousands)
|
Full year
|
|
Full year
|
|
2011 to 2010
|
|
Full year
|
|
2010 to 2009
|
|
2011
|
|
2010
|
|
Change
|
|
2009
|
|
Change
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
$
|
13,353
|
|
|
$
|
15,690
|
|
|
$
|
(2,337
|
)
|
|
$
|
15,765
|
|
|
$
|
(75
|
)
|
Payment
systems related revenue
|
|
12,381
|
|
|
|
11,393
|
|
|
|
988
|
|
|
|
9,399
|
|
|
|
1,994
|
|
Trust
and investment services revenues
|
|
4,503
|
|
|
|
4,267
|
|
|
|
236
|
|
|
|
4,101
|
|
|
|
166
|
|
Gains
on sales of loans
|
|
1,335
|
|
|
|
1,197
|
|
|
|
138
|
|
|
|
1,738
|
|
|
|
(541
|
)
|
Other
|
|
2,949
|
|
|
|
3,003
|
|
|
|
(54
|
)
|
|
|
4,438
|
|
|
|
(1,435
|
)
|
Other-than-temporary impairment losses
|
|
(179
|
)
|
|
|
-
|
|
|
|
(179
|
)
|
|
|
(192
|
)
|
|
|
192
|
|
Gain on
sales of securities, net
|
|
713
|
|
|
|
1,562
|
|
|
|
(849
|
)
|
|
|
833
|
|
|
|
729
|
|
Total
|
|
35,055
|
|
|
|
37,112
|
|
|
|
(2,057
|
)
|
|
|
36,082
|
|
|
|
1,030
|
|
|
OREO
gains (losses) on sale, net
|
|
1,596
|
|
|
|
2,234
|
|
|
|
(638
|
)
|
|
|
(1,725
|
)
|
|
|
3,959
|
|
OREO
valuation adjustments
|
|
(4,832
|
)
|
|
|
(6,649
|
)
|
|
|
1,817
|
|
|
|
(18,562
|
)
|
|
|
11,913
|
|
OREO
loss on bulk sale
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,666
|
)
|
|
|
6,666
|
|
Total
|
|
(3,236
|
)
|
|
|
(4,415
|
)
|
|
|
1,179
|
|
|
|
(26,953
|
)
|
|
|
22,538
|
|
|
Total noninterest income
|
$
|
31,819
|
|
|
$
|
32,697
|
|
|
$
|
(878
|
)
|
|
$
|
9,129
|
|
|
$
|
23,568
|
|
26
Noninterest Expense.
Total noninterest expense of $90.9 million in
2011, increased $.6 million, or .6%, from $90.3 million in 2010. The $2.7
million increase in salaries and employee benefits expense was largely caused by
higher incentive and commission expenses as well as $1.3 million in expense
related to cost reduction initiatives, which we anticipate will reduce our
expense base in 2012. The increase in salaries and benefits was nearly offset by
a decrease in other noninterest expense which was attributable, in part, to
decreases in FDIC insurance premiums and OREO expenses as well as an accrual for
a contingent liability made in 2010 which was partially reversed in
2011.
Additionally,
equipment and occupancy expenses collectively decreased $.4 million in 2011
compared to 2010 partly as a result of cost savings associated with five branch
closures in 2011. Payment system related expenses increased $.4 million in 2011
over 2010 due to higher transaction volumes.
Noninterest
expense in 2010 decreased $18.0 million, or 17%, from $108.3 million in 2009,
primarily due to a $13.1 million goodwill impairment charge taken in the first
quarter 2009 and a $3.4 million decrease in the Companys FDIC insurance
premiums in 2010. The decrease in FDIC insurance expense in 2010 was due to a
combination of an industry wide special assessment charge of $1.2 million in
2009 and a decrease in our insurance premium assessment rate in 2010.
Changing business
conditions, increased costs in connection with retention of, or a failure to
retain key employees, lower loan production volumes causing deferred loan
origination costs to decline, unexpected increases in OREO expenses, or a
failure to manage our operating and control environments could adversely affect
our ability to limit expense growth in the future.
The following
table illustrates the components and changes in noninterest expense for the
periods shown:
(Dollars in thousands)
|
Full year
|
|
Full year
|
|
2011 to 2010
|
|
Full year
|
|
2010 to 2009
|
|
2011
|
|
2010
|
|
Change
|
|
2009
|
|
Change
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
$
|
48,587
|
|
$
|
45,854
|
|
$
|
2,733
|
|
|
$
|
44,608
|
|
$
|
1,246
|
|
Equipment
|
|
6,113
|
|
|
6,247
|
|
|
(134
|
)
|
|
|
8,120
|
|
|
(1,873
|
)
|
Occupancy
|
|
8,674
|
|
|
8,894
|
|
|
(220
|
)
|
|
|
9,585
|
|
|
(691
|
)
|
Payment
systems related expense
|
|
5,141
|
|
|
4,727
|
|
|
414
|
|
|
|
4,036
|
|
|
691
|
|
Professional fees
|
|
4,118
|
|
|
3,991
|
|
|
127
|
|
|
|
4,342
|
|
|
(351
|
)
|
Postage, printing and office supplies
|
|
3,265
|
|
|
3,148
|
|
|
117
|
|
|
|
3,201
|
|
|
(53
|
)
|
Marketing
|
|
3,003
|
|
|
3,086
|
|
|
(83
|
)
|
|
|
2,990
|
|
|
96
|
|
Communications
|
|
1,549
|
|
|
1,525
|
|
|
24
|
|
|
|
1,574
|
|
|
(49
|
)
|
Goodwill impairment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
13,059
|
|
|
(13,059
|
)
|
Other
noninterest expense
|
|
10,425
|
|
|
12,865
|
|
|
(2,440
|
)
|
|
|
16,773
|
|
|
(3,908
|
)
|
Total noninterest expense
|
$
|
90,875
|
|
$
|
90,337
|
|
$
|
538
|
|
|
$
|
108,288
|
|
$
|
(17,951
|
)
|
27
Income Taxes.
The Company recorded a benefit for income taxes of
$20.2 million for the full year 2011 compared to a provision of $3.8 million for
2010. The tax benefit for 2011 was primarily the result of fully reversing the
Companys deferred tax asset valuation allowance. The Company recorded a tax
benefit of $19.3 million in 2009.
The following table shows the components
of the tax provision (benefit) for the periods shown:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
2011 to 2010
|
|
|
|
|
|
2010 to 2009
|
|
Full
year 2011
|
|
Full
year 2010
|
|
Change
|
|
Full
year 2009
|
|
Change
|
Provision (benefit) for income taxes net of
reversal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(establishment) of deferred tax asset valuation allowance
|
$
|
3,252
|
|
|
$
|
-
|
|
|
$
|
(3,252
|
)
|
|
$
|
(40,275
|
)
|
|
$
|
(40,275
|
)
|
Provision (benefit) for income taxes from deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
tax asset valuation
allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Establishment of deferred tax asset valuation allowance
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,296
|
|
|
|
23,296
|
|
Reversal of deferred tax asset
valuation allowance
|
|
(23,464
|
)
|
|
|
-
|
|
|
|
23,464
|
|
|
|
-
|
|
|
|
-
|
|
Unrealized loss on securities
|
|
-
|
|
|
|
(1,197
|
)
|
|
|
(1,197
|
)
|
|
|
(2,297
|
)
|
|
|
(1,100
|
)
|
Change in deferred tax
assets-tax return adjustments
|
|
-
|
|
|
|
4,987
|
|
|
|
4,987
|
|
|
|
-
|
|
|
|
(4,987
|
)
|
Total provision (benefit) for income
taxes
|
$
|
(20,212
|
)
|
|
$
|
3,790
|
|
|
$
|
24,002
|
|
|
$
|
(19,276
|
)
|
|
$
|
(23,066
|
)
|
As of December 31, 2009, the Company
determined that it was appropriate to establish a deferred tax asset valuation
allowance of $21.0 million, reducing the Companys net deferred tax asset to
$3.2 million. The net deferred tax asset was the amount that the Company
determined was more likely than not to be realized. As of December 31, 2010,
following adjustments during the year, the Companys deferred tax asset
valuation allowance had increased to $23.5 million against the deferred tax
asset balance of $29.3 million for a net deferred tax asset of $5.8 million. As
of December 31, 2011, the Company determined it was appropriate to fully reverse
the deferred tax asset valuation allowance. Based on the analysis of positive
and negative evidence at December 31, 2011, including the Companys return to
profitability over the past six quarters, no deferred tax asset valuation
allowance was deemed necessary as of December 31, 2011.
The reconciliation
between the Companys effective tax rate on income (loss) and the statutory rate
is as follows:
(Dollars in thousands)
|
Year ended December
31,
|
|
2011
|
|
2010
|
|
2009
|
Expected federal income tax (benefit)
provision
1
|
$
|
4,612
|
|
|
$
|
2,385
|
|
|
$
|
(38,671
|
)
|
State income tax, net of federal income tax effect
|
|
422
|
|
|
|
66
|
|
|
|
(3,504
|
)
|
Interest on obligations of state and
political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
exempt
from federal tax
|
|
(755
|
)
|
|
|
(901
|
)
|
|
|
(1,148
|
)
|
Federal low income housing tax credits
|
|
(535
|
)
|
|
|
(427
|
)
|
|
|
(972
|
)
|
Bank owned life insurance
|
|
(305
|
)
|
|
|
(302
|
)
|
|
|
(307
|
)
|
Goodwill impairment
|
|
-
|
|
|
|
-
|
|
|
|
4,570
|
|
Change in deferred tax asset valuation
allowance
|
|
(23,464
|
)
|
|
|
2,465
|
|
|
|
20,999
|
|
Other, net
|
|
(187
|
)
|
|
|
504
|
|
|
|
(243
|
)
|
Total
(benefit) provision for income taxes
|
$
|
(20,212
|
)
|
|
$
|
3,790
|
|
|
$
|
(19,276
|
)
|
1
|
|
Federal income tax
provision applied at 34% in 2011 and 2010 and 35% in
2009.
|
For more
information regarding the Companys income taxes, see Note 16 Income Taxes to
the Companys audited consolidated financial statements included under the
section Financial Statements and Supplementary Data in Item 8 of this
report.
28
Balance Sheet Overview
Balance sheet highlights are as follows:
-
Total assets were $2.4 billion as of December 31, 2011, down slightly
from $2.5 billion at December 31, 2010;
-
Total loans remained relatively
unchanged at $1.5 billion as compared to loan balances a year
ago;
-
The combined balance of total cash and
cash equivalents and investment securities was substantial at $822.1 million
at December 31, 2011, and represented 36% of earning assets at year end, as
compared to $824.1 million and 35%, respectively, at December 31,
2010;
-
Time deposits declined $102 million in
2011 while noninterest bearing and interest bearing demand deposits
collectively grew by $115 million, causing total deposits to remain relatively
unchanged at $1.9 billion at December 30, 2011, as compared to year end
2010.
Our balance sheet
management efforts are now focused on:
-
Shifting our earning asset mix toward loan balances by increasing new
loan origination production within our concentration parameters to targeted
customer segments as opportunities arise;
-
Continuing to resolve nonaccrual loans
and dispose of OREO properties; and
-
Managing the size of our balance sheet
and continuing to maintain strong capital ratios and liquidity position until
we have more certainty regarding economic conditions.
Given the continued weak commercial and residential real estate markets
in our operating area, we expect our real estate construction loan originations
and balances to remain at modest levels in 2012. We do, however, anticipate more
opportunities for growth within the term commercial real estate and commercial
loan categories. Our ability to achieve loan growth will be dependent on many
factors, including the effects of competition, health of the real estate market,
economic conditions in our markets, retention of key personnel and valued
customers, and our ability to close loans in the pipeline.
Cash and Cash
Equivalents
Total cash and cash equivalents balances of $92.2 million at December 31,
2011, decreased $85.8 million from $178.0 million at December 31, 2010. This
decrease was primarily due to the investment of cash into our investment
securities portfolio in 2011.
(Dollars in thousands)
|
Dec.
31,
|
|
% of
|
|
Dec. 31,
|
|
% of
|
|
Change
|
|
Dec. 31,
|
|
% of
|
|
2011
|
|
total
|
|
2010
|
|
total
|
|
Amount
|
|
%
|
|
2009
|
|
total
|
Cash and Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from
banks
|
$
|
59,955
|
|
65
|
%
|
|
$
|
42,672
|
|
24
|
%
|
|
$
|
17,283
|
|
|
41
|
%
|
|
$
|
47,708
|
|
16
|
%
|
Federal
funds sold
|
|
4,758
|
|
5
|
%
|
|
|
3,367
|
|
2
|
%
|
|
|
1,391
|
|
|
41
|
%
|
|
|
20,559
|
|
7
|
%
|
Interest-bearing deposits in
other banks
|
|
27,514
|
|
30
|
%
|
|
|
131,952
|
|
74
|
%
|
|
|
(104,438
|
)
|
|
-79
|
%
|
|
|
234,830
|
|
77
|
%
|
Total cash and cash equivalents
|
$
|
92,227
|
|
100
|
%
|
|
$
|
177,991
|
|
100
|
%
|
|
$
|
(85,764
|
)
|
|
-48
|
%
|
|
|
303,097
|
|
100
|
%
|
29
Investment
Portfolio
The following table shows the amortized cost and fair value of Bancorps
investment portfolio. At December 31, 2011, Bancorp had no securities classified
as held to maturity.
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Net
|
(Dollars in thousands)
|
Amortized
|
|
|
|
Unrealized
|
|
Amortized
|
|
|
|
Unrealized
|
|
Cost
|
|
Fair
Value
|
|
Gain/(Loss)
|
|
Cost
|
|
Fair
Value
|
|
Gain/(Loss)
|
U.S. Treasury securities
|
$
|
200
|
|
$
|
203
|
|
|
3
|
|
|
$
|
14,347
|
|
$
|
14,392
|
|
|
45
|
|
U.S.
Government agency securities
|
|
216,211
|
|
|
219,631
|
|
|
3,420
|
|
|
|
193,901
|
|
|
194,230
|
|
|
329
|
|
Corporate securities
|
|
14,351
|
|
|
8,507
|
|
|
(5,844
|
)
|
|
|
14,499
|
|
|
9,392
|
|
|
(5,107
|
)
|
Mortgage-backed securities
|
|
419,510
|
|
|
428,725
|
|
|
9,215
|
|
|
|
359,965
|
|
|
363,618
|
|
|
3,653
|
|
Obligations of state and political
subdivisions
|
|
56,003
|
|
|
60,732
|
|
|
4,729
|
|
|
|
51,111
|
|
|
52,645
|
|
|
1,534
|
|
Equity investments and other securities
|
|
11,318
|
|
|
12,046
|
|
|
728
|
|
|
|
11,423
|
|
|
11,835
|
|
|
412
|
|
Total
Investment Portfolio
|
$
|
717,593
|
|
$
|
729,844
|
|
$
|
12,251
|
|
|
$
|
645,246
|
|
$
|
646,112
|
|
$
|
866
|
|
At December 31,
2011, the estimated fair value of the investment portfolio was $729.8 million,
an increase of $83.7 million or 13% from $646.1 million at year end 2010. The
estimated net unrealized gain on the investment portfolio at December 31, 2011,
was $12.3 million, or 1.7% of the total portfolio, compared to $.9 million and
.1% respectively, at year end 2010. During 2011 the net unrealized gain on the
mortgage-backed securities increased by $5.6 million from $9.2 million while the
net unrealized gains in the U.S. Government agency and obligations of state and
political subdivisions categories increased by $3.1 million and $3.2 million,
respectively.
During 2011, in
terms of amortized cost, we increased our investment securities balance by $72.4
million principally due to our efforts to reduce cash balances. The purchases
over the past year were primarily of US Government agency securities with 3 to 5
year maturities and 10 to 15 year fully amortizing US Agency mortgage backed
securities. Our U.S. Government agency securities balance increased by $25.4
million during 2011, as part of our efforts to maintain portfolio
diversification, provide collateral for public funds and borrowings sources, and
to reduce low yielding cash and cash equivalent balances.
For more
information regarding the Companys fair value calculations, see Note 18 Fair
Value Measurement and Fair Value of Financial Instruments to the Companys
audited consolidated financial statements included under the section Financial
Statements and Supplementary Data in Item 8 of this report.
At December 31,
2011, the corporate securities portfolio included four pooled trust preferred
securities with amortized cost of $13.8 million and an estimated fair market
value of $8.0 million resulting in an estimated $5.8 million unrealized loss.
This unrealized loss was associated with the decline in market value since
purchase of our investments in pooled trust preferred securities issued by banks
and insurance companies. Continued wide credit and liquidity spreads contributed
to the unrealized loss associated with these securities.
In the second
quarter of 2011, the Company recorded a credit related OTTI charge of $.2
million pretax related to one of the pooled trust preferred securities which
also was placed on nonaccrual status at the same time. We do not intend to sell
this security, and it is not likely that we will be required to sell this
security, but we do not expect to recover the entire amortized cost basis of the
security. The amount of OTTI related to credit losses recognized in earnings
represents the amortized cost of the security that we do not expect to recover
and is based on the estimated cash flow expected from the security, discounted
by the estimated future coupon rates of the security. We estimate cash flows
based on the performance of the underlying collateral for the security and the
overall structure of the security. Factors considered in the performance of
underlying collateral include current default and deferral rates, estimated
future default, deferral and recovery rates, and prepayment rates. Factors
considered in the overall structure of the security include the impact of the
underlying collateral cash flow on debt coverage tests and subordination levels.
The remaining impairment on this security that is related to all other factors
is recognized in other comprehensive income. Given regulatory guidelines on
expectation of full payment of interest and principal as well as extended
principal in kind payments, this pooled trust preferred security was placed on
nonaccrual status. In addition, in October 2011 the Company placed a second
pooled trust preferred security with principal in kind payments on nonaccrual
status. While this security had an impairment loss of $1.6 million at December
31, 2011, based on our projections of future interest and principal payments,
this security had no credit related OTTI as of December 31, 2011. At year end
2011, the pooled trust preferred securities were rated C or better by the rating
agencies that cover these securities. They have several features that reduce
credit risk, including seniority over certain tranches in the same pool and the
benefit of certain collateral coverage tests.
30
At
December 31, 2011, our mortgage-backed securities portfolio, which grew by $59.5
million in 2011, had an amortized cost base of $419.5 million and a fair market
value of $428.7 million. This portfolio consisted of U.S. Agency backed
mortgages with an amortized cost of $332.3 million and U.S. Government backed
mortgage securities with an amortized cost of $87.3 million. Floating or
adjustable rate securities represented $20.5 million of this portfolio while the
remainder consisted of fixed rate securities. Ten and fifteen year pass-through
mortgages, with a projected average life of 3.1 years represented the majority
of fixed rate securities within this portfolio. Mortgage backed securities are
subject to prepayment risk. Rising prepayments reduces the projected average
life and accelerates the amortization of premium thus reducing the income from
this portfolio. At December 31, 2011, the bank owned no privately issued
mortgage backed securities.
Our portfolio of
securities representing obligations of state and political subdivisions had a
fair value of $60.7 million, with an amortized cost of $56.0 million, indicating
an unrealized gain of $4.7 million. At December 31, 2011, the ratings associated
with the securities in this segment were: 7% AAA, 74% AA, 10% A, 7% BBB, and 2%
non-rated. At December 31, 2010, the ratings associated with the securities in
this segment were: 9% AAA, 59% AA, 18% A, 9% BBB and 5% non-rated.
At December 31,
2011, our equity and other investment securities had a fair value of $12.0
million and consisted of three investments in mutual fund shares and three
investments in government backed Housing and Urban Development (HUD) Bonds. In
addition to interest income, these investments provide the Bank with a Community
Reinvestment Act (CRA) benefits.
The following table summarizes the contractual maturities and weighted
average yields on Bancorps investment securities:
|
|
|
|
|
|
|
After
|
|
|
|
|
After
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
One year
|
|
|
|
One through
|
|
|
|
|
Five through
|
|
|
|
|
Due after
|
|
|
|
|
|
|
|
|
|
|
or less
|
|
Yield
|
|
five
years
|
|
Yield
|
|
ten
years
|
|
Yield
|
|
ten
years
|
|
Yield
|
|
Total
|
|
Yield
|
U.S. Treasury securities
|
$
|
203
|
|
4.50
|
%
|
|
$
|
-
|
|
-
|
|
|
$
|
-
|
|
-
|
|
|
$
|
-
|
|
-
|
|
|
$
|
203
|
|
4.50
|
%
|
U.S.
Government agency securities
|
|
502
|
|
0.63
|
%
|
|
|
189,062
|
|
2.25
|
%
|
|
|
30,067
|
|
2.21
|
%
|
|
|
-
|
|
-
|
|
|
|
219,631
|
|
2.24
|
%
|
Obligations of state and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions
1
|
|
1,107
|
|
6.40
|
%
|
|
|
17,391
|
|
5.44
|
%
|
|
|
31,584
|
|
6.33
|
%
|
|
|
10,650
|
|
5.22
|
%
|
|
|
60,732
|
|
5.88
|
%
|
Other securities
2
|
|
4
|
|
6.00
|
%
|
|
|
2,535
|
|
4.24
|
%
|
|
|
160,371
|
|
2.93
|
%
|
|
|
286,368
|
|
3.58
|
%
|
|
|
449,278
|
|
3.35
|
%
|
Total
1
|
$
|
1,816
|
|
4.59
|
%
|
|
$
|
208,988
|
|
2.54
|
%
|
|
$
|
222,022
|
|
3.32
|
%
|
|
$
|
297,018
|
|
3.64
|
%
|
|
$
|
729,844
|
|
2.64
|
%
|
1
|
|
Yields are stated on a federal tax
equivalent basis at 35%.
|
2
|
|
Contractual maturities do not reflect
prepayments on mortgage-backed and asset-backed securities.
Actual
durations are anticipated to be significantly shorter than contractual
maturities.
|
The projected
average life, or expected duration, based upon maturity date and estimated
prepayment speeds, of Bancorps investment portfolio decreased from 3.3 years at
December 31, 2010 to 2.5 years at December 31, 2011. While the investment
portfolio grew during 2011, the Company elected to maintain a relatively short
expected duration in light of the historically low market interest rate
environment. Management may consider selling certain securities and realizing
gains and/or losses in the Companys investment portfolio on an on-going basis
as part of Bancorps overall business strategy. For more information regarding
Bancorps investment securities, see Note 2 Investment Securities to the
Companys audited consolidated financial statements included under the section
Financial Statements and Supplementary Data in Item 8 of this
report.
31
FHLB Securities
At December 31,
2011, Bancorp owned FHLB stock of $12.1 million, unchanged from year end 2010.
The FHLB stock is carried at amortized cost which equals its par value because
the shares can only be redeemed with the FHLB at par. The Bank is required to
maintain a minimum level of investment in FHLB stock based on specific
percentages of its outstanding mortgages and FHLB advances. Stock redemptions
are at the discretion of the FHLB or of the Company upon prior notice to the
FHLB of five years for FHLB Class B stock or six months for FHLB Class A stock.
The Company analyzes FHLB stock for OTTI. The evaluation of OTTI on FHLB stock
is based on an assessment of the ultimate recoverability of cost rather than
recognizing temporary declines in value. The Company analyzed FHLB stock for
OTTI and concluded that no impairment existed at December 31, 2011.
Loan
Portfolio
The following
table provides the composition of the loan portfolio and the balance of our
allowance for loan losses as of the dates shown:
|
December
31,
|
(Dollars in thousands)
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Commercial
|
$
|
299,766
|
|
|
20
|
%
|
|
$
|
309,327
|
|
|
20
|
%
|
|
$
|
370,077
|
|
|
21
|
%
|
|
$
|
482,405
|
|
|
23
|
%
|
|
$
|
504,101
|
|
|
23
|
%
|
Real
estate construction
|
|
30,162
|
|
|
2
|
%
|
|
|
44,085
|
|
|
3
|
%
|
|
|
99,310
|
|
|
6
|
%
|
|
|
285,149
|
|
|
14
|
%
|
|
|
517,988
|
|
|
24
|
%
|
Real estate mortgage
|
|
324,994
|
|
|
22
|
%
|
|
|
349,016
|
|
|
23
|
%
|
|
|
374,668
|
|
|
22
|
%
|
|
|
393,208
|
|
|
19
|
%
|
|
|
330,803
|
|
|
15
|
%
|
Commercial real estate
|
|
832,767
|
|
|
55
|
%
|
|
|
818,577
|
|
|
53
|
%
|
|
|
862,193
|
|
|
50
|
%
|
|
|
882,092
|
|
|
43
|
%
|
|
|
796,622
|
|
|
37
|
%
|
Installment and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consumer
|
|
13,612
|
|
|
1
|
%
|
|
|
15,265
|
|
|
1
|
%
|
|
|
18,594
|
|
|
1
|
%
|
|
|
21,942
|
|
|
1
|
%
|
|
|
23,155
|
|
|
1
|
%
|
Total loans
|
|
1,501,301
|
|
|
100
|
%
|
|
|
1,536,270
|
|
|
100
|
%
|
|
|
1,724,842
|
|
|
100
|
%
|
|
|
2,064,796
|
|
|
100
|
%
|
|
|
2,172,669
|
|
|
100
|
%
|
|
Allowance for loan losses
|
|
(35,212
|
)
|
|
2.35
|
%
|
|
|
(40,217
|
)
|
|
2.62
|
%
|
|
|
(38,490
|
)
|
|
2.23
|
%
|
|
|
(28,920
|
)
|
|
1.40
|
%
|
|
|
(46,917
|
)
|
|
2.16
|
%
|
|
Total loans, net
|
$
|
1,466,089
|
|
|
|
|
|
$
|
1,496,053
|
|
|
|
|
|
$
|
1,686,352
|
|
|
|
|
|
$
|
2,035,876
|
|
|
|
|
|
$
|
2,125,752
|
|
|
|
|
The Companys loan
portfolio of $1.5 billion at December 31, 2011, decreased $35.0 million or 2%
from December 31, 2010. The most significant decline within the loan portfolio
occurred in the real estate mortgage and real estate construction loan
categories. Total real estate construction loans represented 2% of the loan
portfolio at the end of 2011, a reduction from 3% at December 31, 2010, and down
from 24% at its peak at year end 2007. At 55% of the loan portfolio, commercial
real estate represented the largest component of the loan portfolio at year end
2011, as has been the case historically. Interest and fees earned on our loan
portfolio is our primary source of revenue, and the decline in loan balances has
had a significant negative impact on interest income and loan fees earned. A
decline in loan balances may have a material adverse impact on the Companys
revenues and results of operations.
32
Loans held for sale at December 31, 2011 were $3.3 million compared to
$3.1 million at December 31, 2010. The majority of our loan sales involve
residential real estate mortgage loans. These loan sales have no recourse,
however sales are subject to proper compliance with standard underwriting rules
that if not met, may allow the secondary market buyer to require the Company to
repurchase the note. To date, the Company has received few requests to
repurchase notes from secondary market purchasers and related expenses have not
been material. However, there can be no assurance that we will not receive
additional and increased requests to repurchase loans, in which case possible
losses to the Bank could be material to results of operations. Also, from time
to time, the Company sells the guaranteed portions of SBA loans with servicing
rights and obligations usually retained.
At December 31,
2011, and 2010, we had $5.6 million and $5.0 million, respectively, in
outstanding loans to persons serving as directors, senior officers, principal
stockholders and their related interests. These loans were made substantially on
the same terms, including interest rates, maturities and collateral, as those
made to other customers of the Bank. At December 31, 2011, and 2010, the Bank
had no bankers acceptances.
The following table presents the maturity
distribution and interest rate sensitivity of the Companys loan portfolio by
category at December 31, 2011:
(Dollars in thousands)
|
Commercial
|
|
Real estate
|
|
Real estate
|
|
Commercial
|
|
Installment
|
|
|
|
|
loans
|
|
construction
|
|
mortgage
|
|
real
estate
|
|
and
other
|
|
Total
|
Maturity distribution:
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
$
|
159,576
|
|
$
|
27,756
|
|
$
|
12,431
|
|
$
|
54,006
|
|
$
|
4,121
|
|
$
|
257,890
|
Due
after one through five years
|
|
100,356
|
|
|
2,406
|
|
|
104,712
|
|
|
235,550
|
|
|
3,791
|
|
|
446,815
|
Due after five years
|
|
39,834
|
|
|
-
|
|
|
207,851
|
|
|
543,211
|
|
|
5,700
|
|
|
796,596
|
Total
|
$
|
299,766
|
|
$
|
30,162
|
|
$
|
324,994
|
|
$
|
832,767
|
|
$
|
13,612
|
|
$
|
1,501,301
|
Interest rate sensitivity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-interest rate
loans
|
$
|
82,841
|
|
$
|
7,517
|
|
$
|
78,050
|
|
$
|
221,468
|
|
$
|
6,382
|
|
$
|
396,258
|
Floating or adjustable
interest rate loans
2
|
|
216,925
|
|
|
22,645
|
|
|
246,944
|
|
|
611,299
|
|
|
7,230
|
|
|
1,105,043
|
Total
|
$
|
299,766
|
|
$
|
30,162
|
|
$
|
324,994
|
|
$
|
832,767
|
|
$
|
13,612
|
|
$
|
1,501,301
|
1
|
|
The table is based on
stated maturities, not expected maturities or durations.
|
2
|
|
Certain loans contain
provisions which place maximum or minimum limits on interest rates or
interest rate changes. Adjustable rate loans include all loans whose rates
could change prior to maturity.
|
The table above
breaks down our loan portfolio by stated maturity and interest rate type. Most
of our loans have maturity dates beyond five years. However, only 26% of our
loans are at a fixed rate until their maturity date. The remaining 74% of our
loans have interest rates which adjust prior to the stated maturity. The above
table does not take into account unscheduled payment of principal which could
occur prior to the stated maturity or scheduled interest rate
adjustments.
Below is a
discussion of our loan portfolio by category.
Commercial.
The composition of commercial loans as of December 31, 2011, and December
31, 2010 was as follows:
(Dollars in thousands)
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
|
Percent
|
|
December 31,
2011
|
|
of
total
|
|
December 31,
2010
|
|
of
total
|
|
Change
|
|
change
|
Commercial lines of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitment
|
$
|
450,414
|
|
|
|
|
|
$
|
448,042
|
|
|
|
|
|
$
|
2,372
|
|
|
1
|
%
|
Outstanding balance
|
|
187,899
|
|
|
63
|
%
|
|
|
187,983
|
|
|
61
|
%
|
|
|
(84
|
)
|
|
0
|
%
|
Utilization %
|
|
41.7
|
%
|
|
|
|
|
|
42.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial term loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitment
|
$
|
111,867
|
|
|
|
|
|
$
|
121,344
|
|
|
|
|
|
$
|
(9,477
|
)
|
|
-8
|
%
|
Outstanding balance
|
|
111,867
|
|
|
37
|
%
|
|
|
121,344
|
|
|
39
|
%
|
|
|
(9,477
|
)
|
|
-8
|
%
|
|
Total commercial lines and loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitment
|
$
|
562,281
|
|
|
|
|
|
$
|
569,386
|
|
|
|
|
|
$
|
(7,105
|
)
|
|
-1
|
%
|
Outstanding balance
|
|
299,766
|
|
|
100
|
%
|
|
|
309,327
|
|
|
100
|
%
|
|
|
(9,561
|
)
|
|
-3
|
%
|
33
At
December 31, 2011, total commercial loans and lines of credit at $299.8 million
represented approximately 20% of the Companys total loan portfolio. The total
commercial loan and line balance declined $9.6 million or 3% from $309.3 million
at year end 2010. This decline was due to a reduction in commercial term loan
balances during 2011. At year end 2011, commercial term loans accounted for
$111.9 million or 37% of the total commercial outstanding balance as compared to
$121.3 million a year ago. Commercial lines of credit accounted for $187.9
million or 63% of this portfolio. While origination of commercial term loan and
line originations increased in 2011 compared to 2010, the weak economic
environment has caused loan origination volumes to lag pre-recession levels.
Commercial line utilization also remained relatively unchanged from year end
2010 to year end 2011, towards the low end of our customers historical
utilization range. Commercial term loans are typically intermediate to long-term
(two to ten years) secured credit used to finance capital equipment while
commercial lines of credit are generally revolving loans typically used to
finance short-term or seasonal working capital needs.
Since the onset of
the recessionary environment the Company elected to limit new loan originations
to customers in certain sectors, including businesses related to the housing
industry, and to exit certain high risk client relationships. However, in terms
of our long term strategy, we continue to expect commercial businesses to be an
important contributor to growth in loan balances and future revenues.
In originating
commercial loans and lines, our underwriting standards may include maximum loan
to value ratios, minimum target levels for debt service coverage and other
financial covenants specific to the loan and the borrower. Common forms of
collateral pledged to secure our commercial loans are real estate, accounts
receivable, inventory, equipment, agricultural crops and/or livestock and
marketable securities. Commercial loans and lines of credit typically have
maximum terms of one to ten years and loan to value ratios in the range of 50%
to 80% at origination.
Real
Estate Construction.
The
composition of our real estate construction portfolio as of December 31, 2011,
2010, and 2009, is presented in the following table:
(Dollars in thousands)
|
December 31, 2011
|
|
December 31, 2010
|
|
Change
|
|
December 31, 2009
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Commercial construction
|
$
|
17,538
|
|
|
58
|
%
|
|
$
|
19,781
|
|
|
45
|
%
|
|
$
|
(2,243
|
)
|
|
-11
|
%
|
|
$
|
29,615
|
|
|
30
|
%
|
Two-step residential construction loans
|
|
628
|
|
|
2
|
%
|
|
|
1,132
|
|
|
3
|
%
|
|
|
(504
|
)
|
|
-45
|
%
|
|
|
2,407
|
|
|
2
|
%
|
Residential construction to
builders
|
|
6,162
|
|
|
20
|
%
|
|
|
12,301
|
|
|
28
|
%
|
|
|
(6,139
|
)
|
|
-50
|
%
|
|
|
44,786
|
|
|
45
|
%
|
Residential subdivision or site development
|
|
5,935
|
|
|
20
|
%
|
|
|
10,903
|
|
|
24
|
%
|
|
|
(4,968
|
)
|
|
-46
|
%
|
|
|
22,590
|
|
|
23
|
%
|
Net deferred fees
|
|
(101
|
)
|
|
0
|
%
|
|
|
(32
|
)
|
|
0
|
%
|
|
|
(69
|
)
|
|
-216
|
%
|
|
|
(88
|
)
|
|
0
|
%
|
Total real estate construction
loans
|
$
|
30,162
|
|
|
100
|
%
|
|
$
|
44,085
|
|
|
100
|
%
|
|
$
|
(13,923
|
)
|
|
-32
|
%
|
|
$
|
99,310
|
|
|
100
|
%
|
At
December 31, 2011, the balance of real estate construction loans was $30.2
million, down $13.9 million or 32% from $44.1 million at December 31, 2010,
which in turn was down from $99.3 million at December 31, 2009. Our construction
loan portfolio has contracted dramatically as a result of weak real estate
market conditions and our efforts to work through problem credits within this
portfolio.
34
Real estate construction loans to builders are generally secured by the
property underlying the project that is being financed. Construction loans to
builders and developers typically have terms from 12 to 24 months and initial
loan to value ratios in the range of 60% to 80% based on the estimated as-is
and as-proposed values of the project at the time of loan
origination.
At December 31,
2011, the Banks real estate construction concentration was 14% relative to Tier
1 capital and allowance for credit losses and was well within the Interagency
Guidelines for Real Estate Lending and the Commercial Real Estate Lending Joint
Guidance policy guidelines which set forth a 100% limit for such ratio. New loan
origination activity in this loan category has been and continues to be limited
due to the prolonged weakness in real estate market conditions.
Real
Estate Mortgage.
The
following table presents the components of our real estate mortgage loan
portfolio:
(Dollars in thousands)
|
December 31,
2011
|
|
December 31,
2010
|
|
Change
|
|
December 31,
2009
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Mortgage
|
$
|
58,099
|
|
18
|
%
|
|
$
|
67,525
|
|
19
|
%
|
|
$
|
(9,426
|
)
|
|
-14
|
%
|
|
$
|
74,977
|
|
20
|
%
|
Nonstandard mortgage product
|
|
8,511
|
|
3
|
%
|
|
|
12,523
|
|
4
|
%
|
|
|
(4,012
|
)
|
|
-32
|
%
|
|
|
20,108
|
|
5
|
%
|
Home equity loans and lines of
credit
|
|
258,384
|
|
79
|
%
|
|
|
268,968
|
|
77
|
%
|
|
|
(10,584
|
)
|
|
-4
|
%
|
|
|
279,583
|
|
75
|
%
|
Total real estate
mortgage
|
$
|
324,994
|
|
100
|
%
|
|
$
|
349,016
|
|
100
|
%
|
|
$
|
(24,022
|
)
|
|
-7
|
%
|
|
$
|
374,668
|
|
100
|
%
|
The total real
estate mortgage loan portfolio was $325.0 million or approximately 22% of the
Companys total loan portfolio at December 31, 2011, a reduction of $24.0
million from $349.0 million twelve months earlier. This included a $4.0 million
or 32% decline in our nonstandard mortgage product to $8.5 million, primarily
due to transfers to OREO. At December 31, 2011, mortgage loans measured $58.1
million, of which $29.4 million consisted of standard residential mortgage loans
to homeowners. The remaining $28.7 million was associated with commercial
interests utilizing residences as collateral. Such commercial interests included
$18.6 million related to businesses, $1.6 million related to condominiums, and
$4.3 million related to residential land.
At year end 2011,
home equity lines and loans of $258.4 million, which declined $10.6 million from
$269.0 million a year earlier, represented 79% of the real estate mortgage
portfolio. The Banks home equity portfolio was almost entirely generated within
our market area and through our branch network. The home equity portfolio peaked
at year end 2009 but the balances have trended lower as new loan and line
originations within this portfolio slowed significantly over the past few years.
This was a result of the Banks ongoing analysis of market conditions and
corresponding adjustments made to our pricing and underwriting standards as well
as reduced customer demand. As shown below, the year end 2011 home equity line
utilization percentage for loans originated in 2011 averaged approximately 50%,
which was below that of loans originated in prior years.
(Dollars in thousands)
|
Year of
Origination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
&
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Earlier
|
|
Total
|
Home equity lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
$
|
21,721
|
|
|
$
|
22,320
|
|
|
$
|
27,278
|
|
|
$
|
52,963
|
|
|
$
|
66,152
|
|
|
$
|
69,236
|
|
|
$
|
126,317
|
|
|
$
|
385,987
|
|
Outstanding balance
|
|
10,901
|
|
|
|
11,685
|
|
|
|
15,076
|
|
|
|
33,705
|
|
|
|
44,570
|
|
|
|
46,458
|
|
|
|
73,589
|
|
|
|
235,984
|
|
|
Utilization at year end
(1)
|
|
50.2
|
%
|
|
|
52.4
|
%
|
|
|
55.3
|
%
|
|
|
63.6
|
%
|
|
|
67.4
|
%
|
|
|
67.1
|
%
|
|
|
58.3
|
%
|
|
|
61.1
|
%
|
|
Home equity loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance
|
|
827
|
|
|
|
1,153
|
|
|
|
2,737
|
|
|
|
6,521
|
|
|
|
4,566
|
|
|
|
2,683
|
|
|
|
2,760
|
|
|
|
21,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total home equity outstanding
|
$
|
11,728
|
|
|
$
|
12,838
|
|
|
$
|
17,813
|
|
|
$
|
40,226
|
|
|
$
|
49,136
|
|
|
$
|
49,141
|
|
|
$
|
76,349
|
|
|
$
|
257,231
|
|
(1)
|
|
For the purposes of utilization percentages,
the outstanding balance does not include deferred costs and fees of $1.3
million
|
Approximately 40% of the Banks home equity
portfolio is in first lien position at year end 2011, and this collateral
position helps mitigate overall portfolio risk. There were other types of loans
as well as deposits derived from our home equity borrowers at year end 2011,
which we believe were a result of our home equity line and loan portfolios being
sourced to relationship customers through the Companys branch
network.
35
The following
table shows home equity lines of credit and loans by metropolitan service. The
majority of our home equity lines and loans are secured by homes in the
Portland-Beaverton, Oregon, Vancouver, Washington and Salem, Oregon markets,
where the majority of our branches are also located.
(Dollars in thousands)
|
|
December 31,
2011
|
|
December 31,
2010
|
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
Region
|
|
Amount
|
|
total
|
|
Amount
|
|
total
|
Portland-Beaverton, Oregon / Vancouver,
Washington
|
|
|
122,543
|
|
47.4
|
%
|
|
|
127,479
|
|
47.4
|
%
|
Salem, Oregon
|
|
|
61,019
|
|
23.6
|
%
|
|
|
62,533
|
|
23.2
|
%
|
Oregon non-metropolitan area
|
|
|
27,419
|
|
10.6
|
%
|
|
|
27,615
|
|
10.3
|
%
|
Olympia, Washington
|
|
|
17,268
|
|
6.7
|
%
|
|
|
17,236
|
|
6.4
|
%
|
Washington non-metropolitan area
|
|
|
12,859
|
|
5.0
|
%
|
|
|
14,489
|
|
5.4
|
%
|
Bend, Oregon
|
|
|
4,377
|
|
1.7
|
%
|
|
|
5,692
|
|
2.1
|
%
|
Other
|
|
|
12,899
|
|
5.0
|
%
|
|
|
13,924
|
|
5.2
|
%
|
Total
home equity loan and line portfolio
|
|
$
|
258,384
|
|
100.0
|
%
|
|
$
|
268,968
|
|
100.0
|
%
|
Commercial
Real Estate.
The composition of commercial
real estate loan types based on collateral is as follows:
(Dollars in thousands)
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Office Buildings
|
|
$
|
173,295
|
|
20.8
|
%
|
|
$
|
182,376
|
|
22.3
|
%
|
Retail Facilities
|
|
|
118,678
|
|
14.3
|
%
|
|
|
108,874
|
|
13.3
|
%
|
Industrial parks and
related
|
|
|
55,392
|
|
6.7
|
%
|
|
|
59,493
|
|
7.3
|
%
|
Multi-Family - 5+ Residential
|
|
|
63,027
|
|
7.6
|
%
|
|
|
58,606
|
|
7.2
|
%
|
Medical Offices
|
|
|
60,993
|
|
7.3
|
%
|
|
|
55,294
|
|
6.8
|
%
|
Commercial/Agricultural
|
|
|
60,094
|
|
7.2
|
%
|
|
|
54,361
|
|
6.6
|
%
|
Manufacturing
Plants
|
|
|
51,852
|
|
6.2
|
%
|
|
|
47,341
|
|
5.8
|
%
|
Hotels/Motels
|
|
|
35,893
|
|
4.3
|
%
|
|
|
35,724
|
|
4.4
|
%
|
Assisted Living
|
|
|
22,040
|
|
2.6
|
%
|
|
|
25,669
|
|
3.1
|
%
|
Mini Storage
|
|
|
19,037
|
|
2.3
|
%
|
|
|
24,678
|
|
3.0
|
%
|
Land Development and Raw
Land
|
|
|
17,278
|
|
2.1
|
%
|
|
|
19,534
|
|
2.4
|
%
|
Food Establishments
|
|
|
19,054
|
|
2.3
|
%
|
|
|
16,370
|
|
2.0
|
%
|
Other
|
|
|
136,134
|
|
16.3
|
%
|
|
|
130,257
|
|
15.8
|
%
|
Total
commercial real estate loans
|
|
$
|
832,767
|
|
100.0
|
%
|
|
$
|
818,577
|
|
100.0
|
%
|
The commercial
real estate portfolio increased $14.2 million or 2% during 2011. At year end
2011, office buildings represented the largest collateral segment, and accounted
for 21% of the collateral securing the commercial real estate portfolio, a
slight decline from year end 2010. Retail facilities, which accounted for the
second largest collateral segment, increased slightly to 14% during 2011.
Commercial real estate markets continue to be vulnerable to financial and
valuation pressures that may limit refinance options and negatively impact
borrowers ability to perform under existing loan agreements. Declining values
of commercial real estate or higher market interest rates may have a further
adverse effect on the ability of borrowers with maturing loans to satisfy loan
to value ratios required to renew such loans. The Companys underwriting of
commercial real estate loans generally includes loan to value ratios at
origination not exceeding 75% and debt service coverage ratios at 120% or
better.
The composition of the commercial real estate loan portfolio by occupancy
type is as follows:
|
December
31,
|
|
December
31,
|
|
Change
|
(Dollars in thousands)
|
2011
|
|
2010
|
|
|
|
|
Mix
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Owner occupied
|
$
|
390,589
|
|
47
|
%
|
|
$
|
383,047
|
|
47
|
%
|
|
$
|
7,542
|
|
2
|
%
|
Non-owner occupied
|
|
442,178
|
|
53
|
%
|
|
|
435,530
|
|
53
|
%
|
|
|
6,648
|
|
2
|
%
|
Total
commercial real estate loans
|
$
|
832,767
|
|
100
|
%
|
|
$
|
818,577
|
|
100
|
%
|
|
$
|
14,190
|
|
|
|
36
The owner
occupied and non-owner occupied categories of the Companys commercial real
estate portfolio increased by 2% in 2011 and the mix between owner occupied and
non-owner occupied collateral types within the total commercial real estate
portfolio remained unchanged from year end 2010 at 47% and 53%, respectively.
Given the relative modest new originations over the past few years, we believe
our commercial real estate portfolio to be a relatively mature portfolio. At
December 31, 2011, the Banks commercial real estate concentration, at 123%
relative to Tier 1 capital and allowance for credit losses, was well within the
Interagency Guidelines for Real Estate Lending and the Commercial Real Estate
Lending Joint Guidance policy guidelines which set forth a 300% limit for such
ratio.
The following table shows the commercial real estate portfolio by current
property location:
(Dollars in thousands)
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Number of
|
|
Percent of total
|
|
branches by
|
Region
|
|
Amount
|
|
loans
|
|
loans by market
|
|
market
|
Portland-Beaverton, Oregon
/ Vancouver, Washington
|
|
$
|
429,806
|
|
721
|
|
51.6
|
%
|
|
41.7
|
%
|
Salem, Oregon
|
|
|
156,033
|
|
386
|
|
18.8
|
%
|
|
35.0
|
%
|
Oregon non-metropoliton
area
|
|
|
53,548
|
|
157
|
|
6.4
|
%
|
|
8.3
|
%
|
Seattle-Tacoma-Bellevue,
Washington
|
|
|
38,363
|
|
48
|
|
4.6
|
%
|
|
0.0
|
%
|
Washington
non-metropoliton area
|
|
|
30,116
|
|
103
|
|
3.6
|
%
|
|
0.0
|
%
|
Olympia, Washington
|
|
|
31,116
|
|
77
|
|
3.7
|
%
|
|
15.0
|
%
|
Bend, Oregon
|
|
|
24,316
|
|
24
|
|
2.9
|
%
|
|
0.0
|
%
|
Other
|
|
|
69,469
|
|
105
|
|
8.4
|
%
|
|
0.0
|
%
|
Total commercial real
estate loans
|
|
$
|
832,767
|
|
1,621
|
|
100.0
|
%
|
|
100.0
|
%
|
As shown in
the table above, the properties within our commercial real estate portfolio at
year end 2011 are predominantly located in geographic areas where we have branch
presence. At year end 2011 the average loan balance in our commercial real
estate portfolio was approximately $.5 million.
The following table shows the commercial real estate portfolio by year of
stated maturity:
|
|
December 31, 2011
|
|
|
|
|
|
Number of
|
|
Percent of
|
(Dollars in thousands)
|
|
Amount
|
|
loans
|
|
total
|
2012
|
|
$
|
54,006
|
|
92
|
|
6.5
|
%
|
2013
|
|
|
56,025
|
|
113
|
|
6.7
|
%
|
2014 and after
|
|
|
722,736
|
|
1,416
|
|
86.8
|
%
|
Total
commercial real estate loans
|
|
$
|
832,767
|
|
1,621
|
|
100.0
|
%
|
At year end
2011, the stated loan maturities in 2012 and 2013 totaled $110.0 million or
13.2% of the $832.8 million total commercial real estate portfolio.
37
Credit Management
.
Credit risk is
inherent in our lending activities. We manage the general risks in the loan
portfolio by following loan policies and underwriting practices designed to
result in prudent lending activities. In addition, we attempt to manage our risk
through our credit administration and credit review functions that are designed
to help confirm our credit standards are being followed. Through the credit
review function we monitor credit related policies and practices on a post
approval basis. Significant findings and periodic reports are communicated to
the chief credit officer and chief executive officer and, in certain cases, to
the Loan, Investment, & Asset/Liability Committee, which is comprised of
certain directors. Credit risk in the loan portfolio can be amplified by loan
concentrations. We manage our concentration risk on an ongoing basis by
establishing a maximum amount of credit that may be extended to any one borrower
and by employing concentration limits that regulate exposure levels by product
type and portfolio category. We also employ concentration limits by geography
for certain commercial and residential real estate loans.
Our residential construction portfolio, consisting of developers and
builders, is a portfolio we consider to have higher risk. The prolonged downturn
in residential real estate has slowed land, lot and home sales within our
markets and has resulted in lengthening the absorption period for completed
homes and has negatively affected borrower liquidity and collateral values. We
have continued to reduce our exposure to residential construction by controlling
origination activity and managing down loans to existing borrowers. Until our
regional economy generates and sustains higher levels of overall business
activity and employment levels, financial pressures will continue to challenge
borrowers in many industry segments. We are closely monitoring our credit
exposure in both owner occupied and non-owner occupied term real estate. An
important component of managing risk in the commercial real estate portfolio
involves stress testing, at both a portfolio and individual borrower level. Our
stress test for individual commercial real estate borrowers focuses on examining
project performance relative to cash flow and collateral value under a range of
assumptions that include interest rates, absorption, unit sales prices, and
capitalization rates. This level of risk monitoring assists the Bank to identify
potential problem loans early and develop action plans on a timely basis, which
may include requiring borrowers to provide curtailments, pledge additional
collateral, or transfer the borrowing relationship to our special asset team for
closer monitoring.
The prolonged duration of the economic downturn coupled with elevated
unemployment levels has also impacted our portfolio of home equity loans and
lines. We analyze our home equity portfolio on an ongoing basis. Our process
typically involves updating credit scores, tracking past dues, line utilization
rates, and assessing collateral exposure. Based on our analysis we may request
certain borrowers to consider restructuring their credit facility with the
Bank.
Current economic conditions continue to challenge the banking industry.
Consequently, we are tightly focused on monitoring and managing credit risk
across all of our loan portfolios. As part of our ongoing lending process, a
risk analysis is prepared for each primary credit action with the borrower
before the funds are advanced. Most borrowers are assigned individual risk
ratings which are based on our assessment of the borrowers credit worthiness
and the quality of our collateral position at the time a particular loan is
made. Thereafter, credit risk ratings are evaluated on an ongoing basis focusing
on our interpretation of relevant risk factors known to us at the time of each
evaluation. Large credit relationships have their credit risk rating reviewed at
least annually, and given current economic conditions, risk rating evaluations
may occur more frequently. Our relationship managers play a critical role in
this process by evaluating the ongoing financial condition of each borrower in
their respective portfolio of loans. These activities include, but are not
limited to, maintaining open communication channels with borrowers, analyzing
periodic financial statements and cash flow projections, tracking financial
trends, evaluating collateral, monitoring covenant compliance, and evaluating
the financial capacity of guarantors. Collectively, these activities represent
an ongoing process that results in an assessment of credit risk associated with
each commercial, real estate construction and commercial real estate loan
consistent with our internal risk rating guidelines. Our risk rating process is
a central component in estimating the required allowance for credit losses, as
discussed in the Allowance for Credit Losses section which follows. Credit files
are also examined periodically on a sample test basis by our credit review
department and internal auditors, as well as by regulatory examiners.
Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. The
expected source of repayment of loans is generally the cash flow of a particular
project, income from the borrower's business, conversion of trading assets to
cash, proceeds from the sale of real property, proceeds of refinancing, or
personal income. Real estate is frequently a material component of collateral
for our loans. Risks associated with loans secured by real estate include the
risks of decreasing land and property values, material increases in interest
rates, deterioration in local economic conditions, changes in tax policies, and
tightening credit or refinancing markets. A concentration of loans within any
one market area may increase these risks.
38
Nonperforming Assets, Troubled Debt
Restructurings, OREO and Delinquencies
Nonperforming assets.
The
following table presents information with respect to nonperforming assets as of
the dates shown:
|
|
December 31,
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Nonperforming
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
7,750
|
|
|
$
|
13,377
|
|
|
$
|
36,211
|
|
|
$
|
6,250
|
|
|
$
|
2,401
|
|
Real estate
construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate construction
|
|
|
3,750
|
|
|
|
4,077
|
|
|
|
1,488
|
|
|
|
2,922
|
|
|
|
-
|
|
Residential real
estate construction
|
|
|
2,073
|
|
|
|
6,615
|
|
|
|
22,373
|
|
|
|
90,712
|
|
|
|
22,121
|
|
Total real estate construction
|
|
|
5,823
|
|
|
|
10,692
|
|
|
|
23,861
|
|
|
|
93,634
|
|
|
|
22,121
|
|
Real estate
mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
6,161
|
|
|
|
9,318
|
|
|
|
11,563
|
|
|
|
8,283
|
|
|
|
552
|
|
Nonstandard
mortgage
|
|
|
3,463
|
|
|
|
5,223
|
|
|
|
8,752
|
|
|
|
15,229
|
|
|
|
-
|
|
Home equity loans and lines of
credit
|
|
|
2,325
|
|
|
|
950
|
|
|
|
2,036
|
|
|
|
1,043
|
|
|
|
-
|
|
Real estate
mortgage
|
|
|
11,949
|
|
|
|
15,491
|
|
|
|
22,351
|
|
|
|
24,555
|
|
|
|
552
|
|
Commercial real estate
|
|
|
15,070
|
|
|
|
21,671
|
|
|
|
16,778
|
|
|
|
3,145
|
|
|
|
1,353
|
|
Installment and other
consumer
|
|
|
5
|
|
|
|
-
|
|
|
|
144
|
|
|
|
6
|
|
|
|
-
|
|
Total
loans on nonaccrual status
|
|
|
40,597
|
|
|
|
61,231
|
|
|
|
99,345
|
|
|
|
127,590
|
|
|
|
26,427
|
|
Loans past due 90 days or
more but not on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonaccrual
status
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other real estate owned
|
|
|
30,823
|
|
|
|
39,459
|
|
|
|
53,594
|
|
|
|
70,110
|
|
|
|
3,255
|
|
Total nonperforming
assets
|
|
$
|
71,420
|
|
|
$
|
100,690
|
|
|
$
|
152,939
|
|
|
$
|
197,700
|
|
|
$
|
29,682
|
|
Percentage of nonperforming assets
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total
assets
|
|
|
2.94
|
%
|
|
|
4.09
|
%
|
|
|
5.60
|
%
|
|
|
7.86
|
%
|
|
|
1.12
|
%
|
|
Total assets
|
|
$
|
2,429,887
|
|
|
$
|
2,461,059
|
|
|
$
|
2,733,547
|
|
|
$
|
2,516,140
|
|
|
$
|
2,646,614
|
|
Nonperforming
assets consist of nonaccrual loans, loans past due more than 90 days and still
accruing interest, and OREO. At December 31, 2011, total nonperforming assets
were $71.4 million, or 2.9% of total assets, which was down from $100.7 million,
or 4.1% of total assets, at December 31, 2010. The balance of total
nonperforming assets reflected write downs totaling $47.0 million or 40% from
the original loan principal balance compared to write downs of 35% twelve months
ago. The decline in total nonperforming assets in 2011 was primarily caused by
the combination of OREO sales, nonaccrual loan pay-downs and payoffs, and net
charge-offs exceeding the inflow of additional nonaccrual loans. Total
nonaccrual loans declined by $20.6 million or 34%, to $40.6 million at December
31, 2011, from $61.2 million at year end 2010. During 2011, nonaccrual loan
balances declined across all major loan categories.
Generally, loans are placed on nonaccrual status and no interest is
accrued when factors indicate collection of interest or principal in accordance
with the contractual terms is doubtful or when the principal or interest payment
becomes 90 days past due. For such loans, previously accrued but uncollected
interest is reversed and charged against current earnings and additional income
is only recognized to the extent payments are subsequently received and the loan
is placed back on an interest accruing status. Interest income foregone on
nonaccrual loans was approximately $4.1 million, $6.5 million, and $10.7 million
in 2011, 2010, and 2009, respectively.
A loan is considered to be impaired when it is probable that we will be
unable to collect all amounts due according to the contractual terms of the loan
agreement or when it has been restructured in a troubled debt restructuring. At
December 31, 2011, 2010, and 2009, Bancorp had loans that were considered to be
impaired, which include troubled debt restructurings, of $56.4 million, $76.7
million, and $98.8 million, respectively. Impaired loans are measured based on
the present value of expected future cash flows, discounted at the loans
effective interest rate or, as a practical expedient, at the loans observable
market price or the fair market value of the collateral less selling costs if
the loan is collateral dependent. Loans that are measured at lower of cost or
fair value and certain large groups of smaller balance homogeneous loans
collectively measured for impairment are excluded from impairment measurement.
Impaired loans are charged off promptly to the allowance for loan losses when
management believes, after considering economic, market, and business
conditions, collection efforts, collateral position, and other factors deemed
relevant, that the borrowers financial condition is such that collection of
principal and interest is not probable.
For the years ended December 31, 2011, 2010, and 2009, interest income
recognized on impaired loans totaled $1,035,000, $568,000, and $526,000,
respectively. Interest income on loans is accrued daily on the principal balance
outstanding.
Troubled Debt Restructurings.
At December 31,
2011, Bancorp had $37.6 million in loans classified as troubled debt
restructurings of which $15.8 million was on an interest accruing status, with
the remaining $21.8 million on nonaccrual status. Troubled debt restructurings
were $57.8 million at December 31, 2010, of which $15.5 million was on an
interest accruing status, with the remaining $42.3 million on nonaccrual status.
All troubled debt restructurings were considered impaired at year end 2011 and
2010. The modifications granted on troubled debt restructurings were due to
borrower financial difficulty, and generally provide for a modification of loan
terms. The decrease in troubled debt restructurings reflects a decrease in the
number of loan modifications in 2011. For more information regarding Bancorps
troubled debt restructurings and loans, see Note 3 Loans and Allowance for
Credit Losses to the Companys audited consolidated financial statements
included under the section Financial Statements and Supplementary Data in Item
8 of this report.
39
Other Real
Estate Owned.
The following table presents
activity in the total OREO portfolio for the periods shown:
(Dollars in thousands)
|
|
December 31, 2011
|
|
December 31,
2010
|
|
|
Amount
|
|
# of properties
|
|
Amount
|
|
# of properties
|
Beginning
balance
|
|
$
|
39,459
|
|
|
402
|
|
|
$
|
53,594
|
|
|
672
|
|
Additions to OREO
|
|
|
21,139
|
|
|
74
|
|
|
|
25,199
|
|
|
123
|
|
Capitalized
improvements
|
|
|
523
|
|
|
-
|
|
|
|
3,185
|
|
|
-
|
|
Valuation adjustments
|
|
|
(4,832
|
)
|
|
-
|
|
|
|
(6,649
|
)
|
|
-
|
|
Disposition of OREO
properties
|
|
|
(25,466
|
)
|
|
(212
|
)
|
|
|
(35,870
|
)
|
|
(393
|
)
|
Ending balance
|
|
$
|
30,823
|
|
|
264
|
|
|
$
|
39,459
|
|
|
402
|
|
OREO is real
property that the Bank has taken possession of either through a deed-in-lieu of
foreclosure, non-judicial foreclosure, judicial foreclosure or similar process
in full or partial satisfaction of a loan or loans. During 2011, the Company
remained focused on OREO property disposition activities, resulting in the sale
of $25.5 million in OREO property compared to $35.9 million in 2010. The Company
assumed $21.1 million in additional OREO properties in 2011, down from $25.2
million in 2010. Reflecting lower OREO balances as well as a slowing trend in
declines in local residential real estate market values, OREO valuation
adjustments fell to $4.8 million in 2011 from $6.6 million in 2010. At December
31, 2011, the OREO portfolio consisted of 264 properties valued at $30.8
million. At December 31, 2011, OREO balances reflected write-downs totaling 53%
from the original loan principal, essentially unchanged from a year ago. The
largest categories of the OREO balance at December 31, 2011, were attributable
to income producing properties followed by homes and land, all of which are
located within our footprint. The residential site development balance and
number of such properties declined in 2011 due to continued lot sales and
significantly fewer new such properties taken under possession during the year
compared to recent years.
OREO is recorded at the lower of the carrying amount of the loan or fair
value less estimated costs to sell. Management is responsible for estimating the
fair market value of OREO and utilizes appraisals and internal judgments in its
assessment of fair market value and estimated selling costs. This estimate
becomes the propertys book value at the time it is taken into OREO. If the
estimate is below the carrying value of the related loan, the amount of the
required adjustment is charged to the allowance for loan losses at the time the
property is taken into OREO. Management then periodically reviews OREO to
determine whether the property continues to be carried at the lower of its
recorded book value or fair value, net of estimated costs to sell. Any further
OREO valuation adjustments or subsequent gains or losses upon final disposition
of OREO are charged to other noninterest income.
Expenses from the acquisition, maintenance and disposition of OREO
properties are included in other noninterest expense in the consolidated
statements of income (loss). It will be critical to our operating results for us
to dispose of OREO properties in a timely fashion and at valuations that are
consistent with our expectations. Continued decline in market values in our area
would lead to additional valuation adjustments, which would have an adverse
effect on our results of operations.
The following table presents categories of the OREO portfolio for the
periods shown:
(Dollars in thousands)
|
|
December 31,
|
|
# of
|
|
December 31,
|
|
# of
|
|
|
2011
|
|
properties
|
|
2010
|
|
properties
|
Income producing
properties
|
|
$
|
10,282
|
|
15
|
|
$
|
5,162
|
|
7
|
Homes
|
|
|
6,008
|
|
17
|
|
|
17,297
|
|
69
|
Land
|
|
|
5,049
|
|
16
|
|
|
5,135
|
|
12
|
Residential site developments
|
|
|
3,506
|
|
146
|
|
|
7,340
|
|
245
|
Lots
|
|
|
2,932
|
|
51
|
|
|
3,700
|
|
56
|
Condominiums
|
|
|
2,252
|
|
9
|
|
|
128
|
|
2
|
Multifamily
|
|
|
428
|
|
4
|
|
|
697
|
|
11
|
Commercial site developments
|
|
|
366
|
|
6
|
|
|
-
|
|
-
|
Total
|
|
$
|
30,823
|
|
264
|
|
$
|
39,459
|
|
402
|
In addition to
OREO sales, the Bank also completed 13 short sales in 2011 for total proceeds of
$3.2 million. Short sales occur when we accept an agreement with a borrower to
sell the Bank's collateral on a loan that produces net proceeds that are less
than what is owed. The obligor receives no proceeds; however, the debt is fully
extinguished. A short sale is an alternative to foreclosure. The losses on short
sales and valuation adjustments on loans prior to taking property into OREO are
recorded directly to the allowance for loan losses.
40
Delinquencies.
Bancorp also
monitors delinquencies, defined as balances 30-89 days past due, not in
nonaccrual status, as an important indicator for future nonperforming assets.
Total delinquencies were $4.3 million or 0.28% of total loans at December 31,
2011, up from $2.7 million or 0.18% at December 31, 2010, and reduction from
$8.4 million or .49% at year end 2009. The largest increases in delinquencies
were in the commercial and commercial real estate portfolios. The amount of
delinquencies and the percentage of categories or total loans represented by
delinquencies may increase or decrease by a fair amount from period to period
and not necessarily reflect a negative or positive trend in the underlying
credit quality of the loan portfolio.
The following table summarizes total delinquent loan balances by type of
loan for the periods shown:
|
|
December 31,
|
(Dollars in thousands)
|
|
2011
|
|
% of
|
|
2010
|
|
% of
|
|
2009
|
|
% of
|
|
|
Amount
|
|
category
|
|
Amount
|
|
category
|
|
Amount
|
|
category
|
|
Commercial
|
|
$
|
683
|
|
|
0.23
|
%
|
|
$
|
52
|
|
|
0.02
|
%
|
|
$
|
1,151
|
|
|
0.31
|
%
|
Real estate construction
|
|
|
-
|
|
|
0.00
|
%
|
|
|
-
|
|
|
0.00
|
%
|
|
|
606
|
|
|
0.61
|
%
|
Real estate
mortgage
|
|
|
2,389
|
|
|
0.74
|
%
|
|
|
2,062
|
|
|
0.59
|
%
|
|
|
2,649
|
|
|
0.71
|
%
|
Commercial real estate
|
|
|
1,145
|
|
|
0.14
|
%
|
|
|
555
|
|
|
0.07
|
%
|
|
|
3,962
|
|
|
0.46
|
%
|
Installment and other
consumer
|
|
|
56
|
|
|
0.41
|
%
|
|
|
52
|
|
|
0.34
|
%
|
|
|
59
|
|
|
0.32
|
%
|
Total loans 30-89 days past due,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not in
nonaccrual status
|
|
$
|
4,273
|
|
|
|
|
|
$
|
2,721
|
|
|
|
|
|
$
|
8,427
|
|
|
|
|
|
Delinquent loans to total
loans
|
|
|
0.28
|
%
|
|
|
|
|
|
0.18
|
%
|
|
|
|
|
|
0.49
|
%
|
|
|
|
41
Allowance for Credit Losses and Net
Loan Charge-offs
Allowance
for Credit Losses.
An allowance for credit
losses has been established based on managements best estimate, as of the
balance sheet date, of probable losses inherent in the loan portfolio. The
actual losses may vary significantly from the estimated amounts. For more
information regarding the Companys allowance for credit losses, see the
discussion under the subheading Allowance for Credit Losses in the section
Critical Accounting Policies included in Item 7 of this report below. The
allowance for credit losses is comprised of two primary components: the
allowance for loan losses, which is the sum of the specific reserve, formula and
unallocated allowance relating to loans in the loan portfolio, and the reserve
for unfunded commitments. Our methodology for determining the allowance for
credit losses consists of several key elements, which include:
-
Specific Reserve Allowances.
Specific reserve allowances may be
established when management can estimate the amount of an impairment of a
loan, typically on a non real estate collateralized loan or to address the
unique risks associated with a group of loans or particular type of credit
exposure. The Company does not establish specific reserve allowances on
collateral dependent impaired loans. Impairment amounts related to these loans
are charged off to the allowance for credit losses when impairment is
established.
-
Formula
Allowance.
The formula allowance is
calculated by applying loss factors to individual loans based on the
assignment of risk ratings, or through the assignment of loss factors to
homogenous pools of loans. Changes in risk ratings of both performing and
nonperforming loans affect the amount of the formula allowance. Loss factors
are based on our historical loss experience and such other data as management
believes to be pertinent, and may be adjusted for significant factors that, in
managements judgment, affect the collectability of the portfolio as of the
evaluation date.
-
Unallocated Allowance.
The
unallocated loan loss allowance represents an amount for imprecision or
uncertainty that is inherent in estimates used to determine the allowance. In
determining whether to carry an unallocated allowance and, if so, the amount
of the allowance, management considers a variety of qualitative factors,
including regional economic and business conditions that impact important
categories of our portfolio, loan growth rates, the depth and skill of lending
staff, the interest rate environment, and the results of bank regulatory
examinations and findings of our internal credit analysts.
-
Reserve for Unfunded
Commitments.
A reserve for unfunded
commitments is maintained at a level that, in the opinion of management, is
adequate to absorb probable losses associated with commitments to lend funds
under existing agreements; for example, the Banks commitment to fund advances
under lines of credit. The reserve amount for unfunded commitments is
determined based on our methodologies described above with respect to the
formula allowance. As our unfunded commitments decrease due to the transition
to a funded loan, the corresponding reserve for unfunded commitments will
decrease.
At December
31, 2011, the allowance for credit losses was $36.0 million or 2.40% of total
loans, consisting of a $30.3 million formula allowance, a $4.4 million
unallocated allowance, a $.5 million specific reserve allowance and a $.8
million reserve for unfunded commitments. The $.5 million specific reserve
allowance was maintained on performing, impaired loans considered to be troubled
debt restructurings that are on an interest accruing status. At December 31,
2011, within the formula allowance, the Company had $.7 million allocated to
overdrafts. At December 31, 2010, the allowance for credit losses was $41.1
million or 2.67% of total loans, consisting of a $33.5 million formula
allowance, a $6.2 million unallocated allowance and a $.6 million specific
reserve allowance and a $.8 million reserve for unfunded commitments.
During 2011, our net charge-offs exceeded provision for credit losses by
$5.1 million, decreasing the allowance for credit losses. This partly reflected
a lower risk profile of the loan portfolio and also the Company releasing
reserves as certain loans moved from being included in the formula valuation
allowance to being individually measured for impairment.
Overall, we believe that the allowance for credit losses is adequate to
absorb losses in the loan portfolio at December 31, 2011. The process for
determining the adequacy of the allowance for credit losses is critical to our
financial results. It requires difficult, qualitative and complex judgments as a
result of the need to make estimates about the effect of matters that are
uncertain. Therefore, we cannot provide assurance that, in any particular
period, we will not have sizeable credit losses in relation to the amount
reserved. We may later need to significantly adjust the allowance for credit
losses considering factors in existence at such time, including economic,
market, or business conditions and the results of ongoing internal and external
examination processes.
42
Changes in the total allowance for credit losses for full
years ended December 31, 2011, through December 31, 2007, are presented in the
following table:
|
|
December
31,
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Loans outstanding at end of period
|
|
$
|
1,501,301
|
|
|
$
|
1,536,270
|
|
|
$
|
1,724,842
|
|
|
$
|
2,064,796
|
|
|
$
|
2,172,669
|
|
Average loans outstanding during the period
|
|
$
|
1,516,409
|
|
|
$
|
1,622,445
|
|
|
$
|
1,914,975
|
|
|
$
|
2,146,870
|
|
|
$
|
2,094,977
|
|
|
Allowance for credit losses, beginning of
period
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
$
|
29,934
|
|
|
$
|
54,903
|
|
|
$
|
23,017
|
|
Allowance for loan losses, from acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(3,393
|
)
|
|
|
(5,229
|
)
|
|
|
(22,411
|
)
|
|
|
(6,464
|
)
|
|
|
(3,798
|
)
|
Commercial real estate construction
|
|
|
(1,321
|
)
|
|
|
(811
|
)
|
|
|
(325
|
)
|
|
|
(1,422
|
)
|
|
|
-
|
|
Residential real estate construction
|
|
|
(736
|
)
|
|
|
(2,211
|
)
|
|
|
(28,287
|
)
|
|
|
(10,105
|
)
|
|
|
-
|
|
Two-step residential construction
|
|
|
(31
|
)
|
|
|
(554
|
)
|
|
|
(6,963
|
)
|
|
|
(42,483
|
)
|
|
|
(2,540
|
)
|
Total real estate
construction
|
|
|
(2,088
|
)
|
|
|
(3,576
|
)
|
|
|
(35,575
|
)
|
|
|
(54,010
|
)
|
|
|
(2,540
|
)
|
Mortgage
|
|
|
(816
|
)
|
|
|
(2,430
|
)
|
|
|
(10,022
|
)
|
|
|
(1,811
|
)
|
|
|
-
|
|
Nonstandard mortgage
|
|
|
(488
|
)
|
|
|
(2,224
|
)
|
|
|
(3,666
|
)
|
|
|
(3,036
|
)
|
|
|
-
|
|
Home equity
|
|
|
(4,467
|
)
|
|
|
(2,807
|
)
|
|
|
(3,394
|
)
|
|
|
(249
|
)
|
|
|
(71
|
)
|
Total real estate
mortgage
|
|
|
(5,771
|
)
|
|
|
(7,461
|
)
|
|
|
(17,082
|
)
|
|
|
(5,096
|
)
|
|
|
(71
|
)
|
Commercial real estate
|
|
|
(2,526
|
)
|
|
|
(1,321
|
)
|
|
|
(5,383
|
)
|
|
|
(826
|
)
|
|
|
-
|
|
Installment and
consumer
|
|
|
(539
|
)
|
|
|
(706
|
)
|
|
|
(840
|
)
|
|
|
(531
|
)
|
|
|
(254
|
)
|
Overdraft
|
|
|
(1,093
|
)
|
|
|
(1,183
|
)
|
|
|
(1,054
|
)
|
|
|
(1,328
|
)
|
|
|
(1,050
|
)
|
Total loans charged
off
|
|
|
(15,410
|
)
|
|
|
(19,476
|
)
|
|
|
(82,345
|
)
|
|
|
(68,255
|
)
|
|
|
(7,713
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,336
|
|
|
|
1,073
|
|
|
|
1,005
|
|
|
|
203
|
|
|
|
269
|
|
Commercial real estate construction
|
|
|
88
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential real estate construction
|
|
|
190
|
|
|
|
697
|
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
Two-step residential construction
|
|
|
-
|
|
|
|
|
|
|
|
241
|
|
|
|
2,339
|
|
|
|
7
|
|
Total real estate
construction
|
|
|
278
|
|
|
|
697
|
|
|
|
285
|
|
|
|
2,339
|
|
|
|
7
|
|
Mortgage
|
|
|
133
|
|
|
|
247
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
Nonstandard mortgage
|
|
|
6
|
|
|
|
5
|
|
|
|
1
|
|
|
|
38
|
|
|
|
-
|
|
Home equity
|
|
|
84
|
|
|
|
128
|
|
|
|
35
|
|
|
|
32
|
|
|
|
33
|
|
Total real estate
mortgage
|
|
|
223
|
|
|
|
380
|
|
|
|
47
|
|
|
|
70
|
|
|
|
33
|
|
Commercial real estate
|
|
|
48
|
|
|
|
28
|
|
|
|
151
|
|
|
|
-
|
|
|
|
2
|
|
Installment and
consumer
|
|
|
61
|
|
|
|
92
|
|
|
|
65
|
|
|
|
78
|
|
|
|
112
|
|
Overdraft
|
|
|
247
|
|
|
|
203
|
|
|
|
219
|
|
|
|
229
|
|
|
|
220
|
|
Total recoveries
|
|
|
2,193
|
|
|
|
2,473
|
|
|
|
1,772
|
|
|
|
2,919
|
|
|
|
643
|
|
Net loans charged off
|
|
|
(13,217
|
)
|
|
|
(17,003
|
)
|
|
|
(80,573
|
)
|
|
|
(65,336
|
)
|
|
|
(7,070
|
)
|
Provision for credit losses
loans other than two-step loans
|
|
|
8,101
|
|
|
|
18,098
|
|
|
|
83,756
|
|
|
|
30,867
|
|
|
|
7,976
|
|
Provision for credit losses two-step loans
|
|
|
32
|
|
|
|
554
|
|
|
|
6,301
|
|
|
|
9,500
|
|
|
|
30,980
|
|
Total provision for credit losses
|
|
|
8,133
|
|
|
|
18,652
|
|
|
|
90,057
|
|
|
|
40,367
|
|
|
|
38,956
|
|
Allowance for credit losses, end of
period
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
$
|
29,934
|
|
|
$
|
54,903
|
|
|
Components of allowance for credit
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
$
|
35,212
|
|
|
$
|
40,217
|
|
|
$
|
38,490
|
|
|
$
|
28,920
|
|
|
$
|
46,917
|
|
Reserve
for unfunded commitments
|
|
|
771
|
|
|
|
850
|
|
|
|
928
|
|
|
|
1,014
|
|
|
|
7,986
|
|
Total allowance for credit losses
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
$
|
29,934
|
|
|
$
|
54,903
|
|
|
Ratio of net loans charged off to
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans
outstanding
|
|
|
0.87
|
%
|
|
|
1.05
|
%
|
|
|
4.21
|
%
|
|
|
3.04
|
%
|
|
|
0.34
|
%
|
Ratio of allowance for loan losses to end of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period loans
|
|
|
2.35
|
%
|
|
|
2.62
|
%
|
|
|
2.23
|
%
|
|
|
1.40
|
%
|
|
|
2.16
|
%
|
Ratio of allowance for credit losses to end
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
loans
|
|
|
2.40
|
%
|
|
|
2.67
|
%
|
|
|
2.29
|
%
|
|
|
1.45
|
%
|
|
|
2.53
|
%
|
43
Net Loan Charge-offs.
During 2011, total net loan charge-offs were $13.2 million, a decline
from $17.0 million in 2010, and a significant reduction from $80.6 million in
2009. Net loan charge-offs reflect the realization of net losses in the loan
portfolio that were recognized previously through the provision for credit
losses. The total net loan charge-off to total average loans outstanding was
.87% for the year ended 2011, down from 1.05% in 2010 and 4.21% in 2009. Net
charge-offs increased in home equity and commercial real estate categories in
2011, but were more than offset by the declines in net charge-offs in
commercial, residential real estate construction, mortgage and nonstandard
mortgage categories.
The following table summarizes net loan charge-offs by type of loan for
the periods shown:
(Dollars in thousands)
|
|
December 31,
2011
|
|
December 31,
2010
|
|
|
Net loan charge-
|
|
% of average
loan
|
|
Net loan charge-
|
|
% of average
loan
|
|
|
offs
|
|
category
|
|
offs
|
|
category
|
Commercial
|
|
|
2,057
|
|
0.69
|
%
|
|
|
4,156
|
|
1.26
|
%
|
Commercial real estate construction
|
|
|
1,233
|
|
7.39
|
%
|
|
|
811
|
|
3.61
|
%
|
Residential real estate
construction
|
|
|
577
|
|
3.35
|
%
|
|
|
2,068
|
|
4.00
|
%
|
Total real estate construction
|
|
|
1,810
|
|
5.34
|
%
|
|
|
2,879
|
|
3.88
|
%
|
Mortgage
|
|
|
683
|
|
1.10
|
%
|
|
|
2,183
|
|
3.16
|
%
|
Nonstandard mortgage
|
|
|
482
|
|
4.59
|
%
|
|
|
2,219
|
|
15.27
|
%
|
Home equity
|
|
|
4,383
|
|
1.66
|
%
|
|
|
2,679
|
|
0.96
|
%
|
Total real estate mortgage
|
|
|
5,548
|
|
1.65
|
%
|
|
|
7,081
|
|
1.95
|
%
|
Commercial real
estate
|
|
|
2,478
|
|
0.30
|
%
|
|
|
1,293
|
|
0.15
|
%
|
Installment and consumer
|
|
|
478
|
|
3.67
|
%
|
|
|
614
|
|
4.12
|
%
|
Overdraft
|
|
|
846
|
|
64.99
|
%
|
|
|
980
|
|
68.87
|
%
|
Total loan net charge-offs
|
|
$
|
13,217
|
|
0.87
|
%
|
|
$
|
17,003
|
|
1.05
|
%
|
44
Deposits and
Borrowings
We predominantly rely on customer
deposits complemented by FHLB borrowings to fund earning assets. The composition
of our funding mix has and will continue to depend on our funding needs,
customer demand for various deposit products, interest rate risk position,
funding costs of the various alternatives, the level and shape of the yield
curve, collateral requirements for borrowings, the relative cost and
availability of other funding sources including government lending or investment
programs, and credit market conditions. Borrowings may be used to manage
short-term and long-term funding needs when they are less expensive than
deposits, or when necessary to adjust our interest rate risk position.
The following table summarizes the
average amount of, and the average rate paid on, each of the deposit and
borrowing categories for the periods shown:
|
|
2011
|
|
2010
|
|
2009
|
(Dollars in thousands)
|
|
Average Balance
|
|
Percent
of total
|
|
Rate
Paid
|
|
Average Balance
|
|
Percent
of total
|
|
Rate
Paid
|
|
Average Balance
|
|
Percent
of total
|
|
Rate
Paid
|
Demand deposits
|
|
$
|
592,630
|
|
30.6
|
%
|
|
-
|
|
|
$
|
540,280
|
|
26.7
|
%
|
|
-
|
|
|
$
|
499,283
|
|
23.9
|
%
|
|
-
|
|
Interest bearing demand
|
|
|
362,334
|
|
18.7
|
%
|
|
0.06
|
%
|
|
|
335,134
|
|
16.5
|
%
|
|
0.13
|
%
|
|
|
298,002
|
|
14.2
|
%
|
|
0.26
|
%
|
Savings
|
|
|
112,385
|
|
5.8
|
%
|
|
0.11
|
%
|
|
|
103,531
|
|
5.1
|
%
|
|
0.27
|
%
|
|
|
89,903
|
|
4.3
|
%
|
|
0.79
|
%
|
Money market
|
|
|
654,329
|
|
33.7
|
%
|
|
0.26
|
%
|
|
|
659,542
|
|
32.5
|
%
|
|
0.60
|
%
|
|
|
617,881
|
|
29.5
|
%
|
|
1.33
|
%
|
Total non-time
deposits
|
|
|
1,721,678
|
|
88.8
|
%
|
|
0.12
|
%
|
|
|
1,638,487
|
|
80.8
|
%
|
|
0.28
|
%
|
|
|
1,505,069
|
|
71.9
|
%
|
|
0.64
|
%
|
Time deposits
|
|
|
217,149
|
|
11.2
|
%
|
|
1.34
|
%
|
|
|
388,500
|
|
19.2
|
%
|
|
1.92
|
%
|
|
|
587,299
|
|
28.1
|
%
|
|
2.51
|
%
|
Total
deposits
|
|
|
1,938,827
|
|
100
|
%
|
|
0.26
|
%
|
|
|
2,026,987
|
|
100
|
%
|
|
0.60
|
%
|
|
|
2,092,368
|
|
100
|
%
|
|
1.17
|
%
|
|
Short-term
borrowings
|
|
|
14,653
|
|
|
|
|
6.85
|
%
|
|
|
7,570
|
|
|
|
|
6.52
|
%
|
|
|
44,220
|
|
|
|
|
1.82
|
%
|
Long-term borrowings
1
|
|
|
197,584
|
|
|
|
|
6.05
|
%
|
|
|
257,019
|
|
|
|
|
3.75
|
%
|
|
|
259,865
|
|
|
|
|
3.15
|
%
|
Total
borrowings
|
|
|
212,237
|
|
|
|
|
6.10
|
%
|
|
|
264,589
|
|
|
|
|
3.83
|
%
|
|
|
304,085
|
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and
borrowings
|
|
$
|
2,151,064
|
|
|
|
|
1.15
|
%
|
|
$
|
2,291,576
|
|
|
|
|
1.27
|
%
|
|
$
|
2,396,453
|
|
|
|
|
1.76
|
%
|
1
|
|
Long-term borrowings include
junior subordinated debentures.
|
Average total deposits in 2011
decreased 4.3% or $88.2 million from 2010, and the average rate paid on total
deposits was .26% in 2011 a decline of 34 basis points from .60% in 2010. The
increase in rates paid on long-term borrowings to 6.05% for 2011, from 3.75% in
2010, was due to the $7.1 million prepayment charge associated with the
prepayment of $168.6 million in FHLB borrowings in 2011.
Deposit funding obtained from
depositors within our market area remains a key strategic focus for us, and our
marketing efforts are primarily focused on long-term growth in business and
consumer relationships with deposit accounts and balances in lower cost
categories such as demand deposits, interest bearing demand, savings and money
market accounts. Whether we will be successful maintaining and growing our
deposit base, and particularly our low cost deposit base, will depend on various
risk factors including deposit pricing, the effects of changing product pricing
and of competitive pricing pressure, changing customer deposit behavior,
regulatory changes, consumers evaluation of bank stability, market interest
rates and our success in competing for deposits in uncertain economic and market
conditions. Adverse developments with respect to any of these risk factors could
limit our ability to attract or retain deposits.
The time deposits category
predominantly includes certificates of deposit originated at our branches with,
as discussed below, a modest amount of time deposits obtained from internet
listing services, and through brokers. During 2011, we reduced total time
deposit balances by $171.4 million or 44.1% as we elected to reduce higher rate
funding in light of lower loan balances and excess balance sheet liquidity at
very low yields.
45
At December 31, 2011, brokered
deposits totaled $6.0 million, or an immaterial .3% of period end total
deposits, of which all were wholesale brokered deposits compared to $30.4
million in total brokered deposits at December 31, 2010, of which $29.9 million
were wholesale brokered deposits and $.5 million were reciprocal deposits
arising out of the Companys participation in the Certificate of Deposit Account
Registry Service (CDARS) network. CDARS deposits are treated as brokered
deposits for regulatory purposes. While as of year end 2011, the Company had no
plans to renew maturing brokered deposits, we may consider taking wholesale
brokered deposits and CDARS deposits in the future if management determines that
it is appropriate to maintain or grow our deposit funding base in such manner.
As of December 31, 2011, time
deposits are presented below at the earlier of the next repricing date or
maturity:
|
|
Time deposits
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
of $100,000 or more
|
|
Other time deposits
|
|
Total time deposits
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Reprice/mature in 3 months
or less
|
|
$
|
20,511
|
|
37.7
|
%
|
|
$
|
38,760
|
|
32.6
|
%
|
|
$
|
59,271
|
|
34.3
|
%
|
Reprice/mature after 3 months through 6
months
|
|
|
9,147
|
|
16.8
|
%
|
|
|
22,421
|
|
18.9
|
%
|
|
|
31,568
|
|
18.2
|
%
|
Reprice/mature after 6
months through one year
|
|
|
12,037
|
|
22.1
|
%
|
|
|
29,504
|
|
24.9
|
%
|
|
|
41,541
|
|
24.0
|
%
|
Reprice/mature after one year through five
years
|
|
|
12,755
|
|
23.4
|
%
|
|
|
27,982
|
|
23.6
|
%
|
|
|
40,737
|
|
23.5
|
%
|
Reprice/mature after five
years
|
|
|
-
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
|
|
-
|
|
0.0
|
%
|
Total
|
|
$
|
54,450
|
|
100.0
|
%
|
|
$
|
118,667
|
|
100.0
|
%
|
|
$
|
173,117
|
|
100.0
|
%
|
Approximately 76% of our time
deposits will mature and reprice in the next 12 months. Historically, the
Company has been able to retain and or expand time deposits by increasing rates
paid, which increases our funding cost when such strategies are implemented. The
level of time deposits in the future depends on customer preferences for time
deposits, market interest rates and the slope of the yield curve, our need for
deposit funding volume, customer perceptions of the Bank, as well as the pricing
required to retain and attract time deposits relative to other funding
alternatives including borrowings from the FHLB.
|
|
December 31,
|
|
December 31,
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
Time deposits less than
$100,000
|
|
$
|
118,667
|
|
69
|
%
|
|
$
|
187,423
|
|
68
|
%
|
Time deposits $100,000 to $250,000
|
|
|
37,357
|
|
21
|
%
|
|
|
64,528
|
|
23
|
%
|
Time deposits greater than
$250,000
|
|
|
17,093
|
|
10
|
%
|
|
|
23,460
|
|
9
|
%
|
Total time
deposits
|
|
$
|
173,117
|
|
100
|
%
|
|
$
|
275,411
|
|
100
|
%
|
As shown above, time deposits of
$100,000 or more represented about 31% of total time deposits at year end 2011,
down from 32% at December 31, 2010. This was caused primarily by time deposits
moving into other deposit products or leaving the bank.
As of December 31, 2011, long-term
and short-term borrowings through the FHLB had the following terms remaining to
their contractual maturities:
(Dollars in thousands)
|
|
Due in three
|
|
Three months
|
|
Due after one
year
|
|
Due after
|
|
|
|
|
|
months or less
|
|
through one year
|
|
through five years
|
|
five years
|
|
Total
|
Short-term
borrowings
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Long-term borrowings
1
|
|
|
-
|
|
|
-
|
|
|
120,000
|
|
|
-
|
|
|
120,000
|
Total
borrowings
|
|
$
|
-
|
|
$
|
-
|
|
$
|
120,000
|
|
$
|
-
|
|
$
|
120,000
|
1
|
|
Based on contractual
maturities.
|
46
Average total borrowings decreased
$52.5 million in 2011 compared to 2010. This was largely due to the prepayment
of about $168.6 million of FHLB borrowings in the third and fourth quarters of
2011, of which $120.0 million was re-borrowed. The Bank is paying a rate of
1.05% on the new borrowings down from 3.19% on the amount prepaid.
At December 31, 2011, six
wholly-owned subsidiary grantor trusts established by Bancorp had issued and
sold $51.0 million of trust preferred securities that remain outstanding. Trust
preferred securities accrue and pay distributions periodically at specified
annual rates as provided in each indenture. The trusts used all of the net
proceeds from each sale of trust preferred securities to purchase a like amount
of junior subordinated debentures of the Company. The junior subordinated
debentures are the sole assets of the trusts. The Companys obligations under
the junior subordinated debentures and related documents, taken together,
constitute a full and unconditional guarantee by the Company of the obligations
of the trusts. The trust preferred securities are mandatorily redeemable upon
the maturity of the junior subordinated debentures and may be subject to earlier
redemption as provided in the indentures. The Company has the right to redeem
the junior subordinated debentures in whole (but not in part) on or after
specific dates, at a redemption price specified in the indentures plus any
accrued but unpaid interest to the redemption date. At December 31, 2011, the
Company had no plans to redeem these junior subordinated debentures.
The following table is a summary of
outstanding trust preferred securities at December 31, 2011:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
security
|
|
Rate
|
|
|
|
|
Rate at
|
|
|
|
Next possible
|
Issuance Trust
|
|
Issuance date
|
|
amount
|
|
type
1
|
|
Initial rate
|
|
12/31/11
|
|
Maturity date
|
|
redemption date
2
|
West Coast Statutory Trust
III
|
|
September 2003
|
|
$
|
7,500
|
|
Variable
|
|
6.75
|
%
|
|
3.51
|
%
|
|
September 2033
|
|
Currently
redeemable
|
West Coast Statutory Trust IV
|
|
March 2004
|
|
$
|
6,000
|
|
Variable
|
|
5.88
|
%
|
|
3.35
|
%
|
|
March 2034
|
|
Currently redeemable
|
West Coast Statutory Trust
V
|
|
April 2006
|
|
$
|
15,000
|
|
Variable
|
|
6.79
|
%
|
|
1.98
|
%
|
|
June 2036
|
|
Currently
redeemable
|
West Coast Statutory Trust VI
|
|
December 2006
|
|
$
|
5,000
|
|
Variable
|
|
7.04
|
%
|
|
2.23
|
%
|
|
December 2036
|
|
Currently redeemable
|
West Coast Statutory Trust
VII
|
|
March 2007
|
|
$
|
12,500
|
|
Variable
|
|
6.90
|
%
|
|
2.10
|
%
|
|
June 2037
|
|
June 2012
|
West Coast Statutory Trust VIII
|
|
June 2007
|
|
$
|
5,000
|
|
Variable
|
|
6.74
|
%
|
|
1.93
|
%
|
|
June 2037
|
|
June 2012
|
|
|
Total
|
|
$
|
51,000
|
|
|
|
Weighted rate
|
|
|
2.41
|
%
|
|
|
|
|
1
|
|
The variable rate preferred
securities reprice quarterly.
|
2
|
|
Securities are redeemable at the
option of Bancorp following these dates.
|
The interest rates on all issued
trust preferred securities reset quarterly and are tied to the London Interbank
Offered Rate (LIBOR) rate. There were no purchases, redemptions, or maturities
of trust preferred securities in 2011. The Company exercised its right to defer
regularly scheduled interest payments on junior subordinated debentures related
to its trust preferred securities in the third quarter of 2009. During the
second quarter of 2011, the holding company paid all previously deferred
interest on its trust preferred securities while commencing to pay quarterly
interest payments due. The average balance of junior subordinated debentures in
2011 was $51.0 million, unchanged from 2010.
47
Capital Resources
The Federal Reserve and the FDIC
have established minimum requirements for capital adequacy for bank holding
companies and state non-member banks. For more information on this topic, see
the discussion under the subheading Capital Adequacy Requirements in the
section Supervision and Regulation included in Item 1 of this report. The
following table summarizes the capital measures of Bancorp and the Bank at
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank-level
|
|
|
West Coast
Bancorp
|
|
West Coast Bank
|
|
guideline requirements
|
|
|
December 31,
|
|
December 31,
|
|
Adequately
|
|
Well
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
Capitalized
|
|
Capitalized
|
Tier 1 risk-based capital
ratio
|
|
|
19.36
|
%
|
|
|
17.47
|
%
|
|
|
18.66
|
%
|
|
|
16.79
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
Total risk-based capital ratio
|
|
|
20.62
|
%
|
|
|
18.74
|
%
|
|
|
19.92
|
%
|
|
|
18.05
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
Leverage ratio
|
|
|
14.61
|
%
|
|
|
13.02
|
%
|
|
|
14.09
|
%
|
|
|
12.51
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
Total stockholders'
equity
|
|
$
|
314,479
|
|
|
$
|
272,560
|
|
|
$
|
352,187
|
|
|
$
|
310,487
|
|
|
|
|
|
|
|
Bancorps total risk-based capital
ratio improved to 20.62% at December 31, 2011, up from 18.74% at December 31,
2010. During 2011, Bancorp's Tier 1 risk-based capital ratio increased to 19.36%
from 17.47%, while its leverage ratio increased to 14.61% from 13.02%. The
total capital ratio at the Bank improved to 19.92% at December 31, 2011, from
18.05% at December 31, 2010, while the Banks Tier 1 capital ratio increased
from 16.79% to 18.66% over the same period. The leverage ratio at the Bank
improved to 14.09% at December 31, 2011, from 12.51% at December 31, 2010.
Bancorp and the Bank capital ratios improved over year end 2010 principally as a
result of 2011 operating profitability and the impact of the reversal of the
deferred tax asset valuation allowance in the fourth quarter 2011.
The total risk based capital ratios
of Bancorp included $51.0 million of junior subordinated debentures, all of
which qualifies as Tier 1 capital at December 31, 2011, and 2010, under guidance
issued by the Federal Reserve. The $51 million in junior subordinated debentures
was grandfathered in as qualifying for Tier 1 capital under the Dodd-Frank Act
which specified that for bank holding companies under $15 billion in total
assets, debt and equity instruments under certain conditions will qualify for
Tier 1 treatment. Bancorp expects to continue to rely on common equity and
junior subordinated debentures to remain well capitalized, although it does not
expect to issue additional junior subordinated debentures in the near term.
The Company closely monitors and
manages its equity and regulatory capital position. Bancorps stockholders
equity was $314.5 million at December 31, 2011, up from $272.6 million at
December 31, 2010. Total equity increased by $41.9 million in 2011 due primarily
to net income of $33.8 million, and an increase in unrealized gains on
investment securities during the year. As a result of a rights offering with net
proceeds in the amount of $9.3 million, a discretionary equity issuance program
with aggregate gross sales proceeds of $7.9 million, as well as net income of
$3.2 million in 2010, capital grew by $23.5 million that year. During 2009, the
Company raised $155.0 million in gross proceeds through a private capital raise,
and it also suspended its quarterly shareholder cash dividend, which cannot be
reinstated without regulatory consent. For additional steps the Company has
taken to increase and preserve capital, see the discussion under the heading
Historical Information in Item 1 of this report.
Bancorp believes its capital at the
present time is sufficient and has no current plan to raise additional capital.
Notwithstanding this, Bancorp may take steps to raise additional capital in the
future, and the Company may offer and issue equity, hybrid equity or debt
instruments, including convertible preferred stock or subordinated debt in that
process. Any equity or debt financing, if available at all, may be dilutive to
existing shareholders or include covenants or other restrictions that limit the
Companys activities.
48
Liquidity and Sources of Funds
The Banks primary sources of funds
include available cash, customer deposits, advances from the FHLB, maturities of
investment securities, sales of Available for Sale securities, loan and OREO
sales, loan repayments, net income, if any, and loans taken out at the Federal
Reserve discount window. Scheduled loan repayments and investment securities
maturities are a relatively stable source of funds, while deposit inflows, loan
and OREO sales and unscheduled loan prepayments are not. Deposit inflows, loan
and OREO sales and unscheduled loan prepayments are influenced by general
interest rate levels, interest rates available on other investments, client
behavior, competition, investment alternatives, market and general economic
factors.
Deposits are the primary source of
new funds. Total deposits were $1.9 billion at December 31, 2011, relatively
unchanged from year end 2010. Over the past 12 months the Companys loan to
deposit ratio remained relatively unchanged and measured 78% at December 31,
2011, as reductions in time deposit balances offset increased non-time deposit
balances and the decline in the loan portfolio. At December 31, 2011, the
investment securities portfolio was $729.8 million and represented 32% of total
earning assets. In light of the substantial liquidity position, a portion of
which carried a higher cost of funds than amounts being earned and therefore has
an adverse impact on net interest income and operating results, we reduced time
deposits, including brokered and internet deposits, and FHLB borrowings during
2011.
The following table summarizes the
Banks primary liquidity, on balance sheet liquidity, and net non-core funding
dependency ratios for the periods shown. The primary liquidity ratio represents
the sum of net cash, short-term and marketable assets and available borrowing
lines divided by total deposits. The on-balance sheet liquidity ratio consists
of the sum of net cash, short-term and marketable assets divided by total
deposits. The net non-core funding dependency ratio is non-core liabilities less
short-term investments divided by long-term assets. The Banks primary liquidity
and on-balance sheet liquidity ratio increased during 2011 and together with the
net non-core funding dependency were strong at December 31, 2011.
|
|
December
31,
|
|
|
2011
|
|
2010
|
Primary liquidity
|
|
45
|
%
|
|
37
|
%
|
On-balance sheet liquidity
|
|
26
|
%
|
|
15
|
%
|
Net non-core funding dependency
|
|
6
|
%
|
|
6
|
%
|
At December 31, 2011, the Bank had
outstanding borrowings of $120.0 million against its $440.4 million in
established borrowing capacity with the FHLB. The Banks borrowing facility at
year end 2011 was subject to collateral and stock ownership requirements.
Additionally, at December 31, 2011, the Bank had an available discount window
credit line with the Federal Reserve of approximately $40.3 million with no
balance outstanding. As with the other lines, each advance under the credit
arrangement with the Federal Reserve is subject to prior Federal Reserve
consent. For more information regarding the Companys outstanding borrowings,
see Note 9 Borrowings to the Companys audited consolidated financial
statements included under the section Financial Statements and Supplementary
Data in Item 8 of this report.
The holding company is a separate
entity from the Bank and must provide for its own liquidity. Substantially all
of the holding companys liquidity, which is required to pay interest on
Bancorps junior subordinated debentures, shareholder cash dividends, if any,
and other expenses, comes from dividends declared and paid by the Bank. In
addition, the holding company may receive cash from the exercise of options and
the issuance of equity securities. Under the Written Agreement, Bancorp may not
directly or indirectly take dividends or other forms of payment representing a
reduction in capital from the Bank without the prior written approval of the
Reserve Bank and the DFCS. Also, under our MOU, the Bank may not pay dividends
to the holding company without the consent of the FDIC and the DFCS. At December
31, 2011, the holding company did not have any borrowing arrangements of its
own.
Management expects to continue
relying on customer deposits, cash flow from investment securities, and sales of
Available for Sale securities, as its most important sources of liquidity. In
addition, the Bank may from time to time obtain additional liquidity from loan
and OREO sales, loan repayments, federal funds markets, brokered deposits,
internet deposit listing services, the Federal Reserve discount window, and
other borrowings as well as from net income. Borrowings may be used on a
short-term and long-term basis to compensate for reductions in other sources of
funds. Borrowings may also be used on a long-term basis to support expanded
lending activities and to match maturities, duration, or repricing intervals of
assets. The sources of such funds may include, but are not limited to, Federal
Funds purchased, reverse repurchase agreements and borrowings from the FHLB.
For more information on this topic,
see the discussion under the section Risk Factors included in Item 1A of this
report.
49
Off Balance Sheet Arrangements
At December 31, 2011, the Bank had
commitments to extend credit of $574.3 million, which was substantially
unchanged from $571.6 million at December 31, 2010. For additional information
regarding off balance sheet arrangements and future financial commitments, see
Note 19 Financial Instruments with Off Balance Sheet Risk to the Companys
audited consolidated financial statements included under the section Financial
Statements and Supplementary Data in Item 8 of this report. We are party to
many contractual financial obligations, including repayment of borrowings,
operating lease payments and commitments to extend credit.
The table below presents certain
future financial obligations including payments required under retirement plans
which are included in Other long-term liabilities:
|
|
Payments due within time period at December 31,
2011
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Due After Five
|
|
|
|
|
|
0-12 Months
|
|
1-3 Years
|
|
4-5 Years
|
|
Years
|
|
Total
|
Operating leases
1
|
|
$
|
4,134
|
|
$
|
7,810
|
|
$
|
5,764
|
|
$
|
8,027
|
|
$
|
25,735
|
Junior subordinated debentures
2
3
|
|
|
2,893
|
|
|
2,207
|
|
|
2,207
|
|
|
72,799
|
|
|
80,106
|
Long-term borrowings
3
|
|
|
5,345
|
|
|
133,160
|
|
|
42,690
|
|
|
-
|
|
|
181,195
|
Other long-term liabilities
|
|
|
213
|
|
|
413
|
|
|
416
|
|
|
1,055
|
|
|
2,097
|
Total
|
|
$
|
12,585
|
|
$
|
143,590
|
|
$
|
51,077
|
|
$
|
81,881
|
|
$
|
289,133
|
1
|
|
Operating leases do not include
increases in common area charges.
|
2
|
|
Junior subordinated debenture
obligations reflect contractual maturities which are 30 years from
origination and do not reflect possible call dates.
|
3
|
|
Long-term borrowings and junior
subordinated debenture obligations reflect interest payment obligations
based on December 31, 2011 contractual interest
rates.
|
50
Critical Accounting Policies
We have identified our accounting
policies related to our estimation of the allowance for credit losses, valuation
of other real estate owned (OREO), and estimates relating to income taxes as
policies that are most critical to an understanding of our financial condition
and operating results. Application of these policies and calculation of these
amounts involve difficult, subjective, and complex judgments, and often involve
estimates about matters that are inherently uncertain. These policies are
discussed in greater detail below, as well as in Note 1 Summary of Significant
Accounting Policies to the Companys audited consolidated financial statements
included under the section Financial Statements and Supplementary Data Item 8
of this report.
Allowance for Credit Losses.
Our methodology for establishing the
allowance for credit losses considers a series of risk factors, both
quantitative and qualitative, to reflect changes in the collectability of the
portfolio not captured solely by the historical loss data. These factors augment
actual loss experience and help to estimate the probability of loss within the
loan portfolio based upon emerging or inherent risk trends. Qualitative factors
include concentration, past due, non-accrual/adversely classified and troubled
debt restructuring trends. New products and expansion into new geographic
regions can increase the uncertainties in managements evaluation of the factors
that are part of establishment of an allowance for credit losses that is
believed to be adequate. Changes in any of the above factors could have a
significant effect on the calculation of the allowance for credit losses in any
given period. This discussion should be read in conjunction with our audited
consolidated financial statements and related notes included in Item 8 of this
report, and the section Allowance for Credit Losses and Net Loan Charge-offs
in this Item 7 of this report.
Valuation of OREO.
The Bank takes possession of OREO as
part of its lending business, as real estate serves as collateral for many of
the Banks loans. OREO is initially recorded in our financial statements at the
lower of the carrying amount of the loan or fair value of the property less the
estimated costs to sell the property. Management considers third party
appraisals as well as independent fair market value assessments from realtors or
persons involved in selling OREO in determining the fair value of particular
properties. Accordingly, the valuation of OREO is subject to significant
external and internal judgment. If there is a difference between managements
assessment of fair value less estimated cost to sell and the carrying value of
the loan at the date a particular property is transferred into OREO, the
difference is charged to the allowance for credit losses. Thereafter, management
periodically assesses its estimate of fair value, often by means of new
appraisals or reduction of property listing price. Any resulting decreases in
the fair value of OREO are considered valuation adjustments and trigger a
corresponding charge to the line item Other real estate owned sales and
valuation adjustments and (loss) gain on sales within total noninterest income
of the consolidated statements of income (loss). At December 31, 2011, the Bank
had $30.8 million of OREO.
Income Taxes.
We are subject to the income tax laws of
the United States and primarily the state of Oregon. We account for income taxes
using the asset and liability method in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income
Taxes. Our income tax benefit or expense is estimated and reported in the
Consolidated Statements of Income (Loss) and includes both current and deferred
tax expense or benefits and reflects taxes to be paid or refunded for the
current period. Current taxes payable represent the Companys expected federal
and state tax liability and are reported in other liabilities on the
consolidated balance sheets.
We determine our deferred income
taxes using the balance sheet method, under which the net deferred tax asset or
liability is based on the tax effects of the differences between the book and
tax bases of assets and liabilities, and changes in tax rates and laws are
recognized in the period in which they occur. Deferred income tax expense or
benefit is recorded based on changes in deferred tax assets and liabilities
between periods. The Company records net deferred tax assets to the extent these
assets will more likely than not be realized. In making the determination
whether a deferred tax asset is more likely than not to be realized, management
seeks to evaluate all available positive and negative evidence including the
possibility of future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial
results. A deferred tax asset valuation allowance is established to reduce the
net carrying amount of deferred tax assets if it is determined to be more likely
than not that all or some portion of the deferred tax asset will not be
realized.
A significant element of objective
evidence is the Companys demonstrated return to profitability over consecutive
quarters and positive projected financial results. Based on its evaluation of
the positive and negative evidence, management determined it was appropriate to
establish a deferred tax asset valuation allowance of $21 million as of December
31, 2009, and an allowance of $23.5 million as of December 31, 2010. Based on
the analysis of positive and negative evidence at December 31, 2011, including
the Companys return to profitability over the last six consecutive quarters, no
deferred tax asset valuation allowance was deemed necessary as of December 31,
2011. As a result, the deferred tax asset valuation allowance of $23.5 million
was reversed in the fourth quarter of 2011. Going forward, management will
review the deferred tax asset on a quarterly basis.
The income tax laws of the
jurisdictions in which we operate are complex and subject to different
interpretations. In establishing a provision for income tax expense or benefit,
we make judgments and interpretations about the application of these complex tax
laws. Our interpretations are subject to change and may be subject to external
review during examination by taxing authorities. Disputes may arise over our tax
positions. See Note 16 Income Taxes to the Companys audited consolidated
financial statements included under the section Financial Statements and
Supplementary Data in Item 8 of this report.
51
ITEM 7A.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Interest rate, credit and operations
risks are the most significant market risks impacting our performance. Other
types of market risk, such as foreign currency exchange rate risk and commodity
price risk, do not arise in the normal course of our business activities. We
rely on loan reviews, prudent loan underwriting standards and an adequate
allowance for credit losses to attempt to mitigate credit risk. Interest rate
risk is reviewed at least quarterly by the Asset Liability Management Committee
(ALCO) which includes senior management representatives. The ALCO manages our
balance sheet to maintain net interest income and present value of equity within
acceptable ranges.
Asset/liability management
simulation models are used to measure interest rate risk. The models quantify
interest rate risk by simulating forecasted net interest income over a 12-month
time horizon under various rate scenarios, as well as monitoring the change in
the present value of equity under the same rate scenarios. The present value of
equity is defined as the difference between the market value of current assets
less current liabilities. By measuring the change in the present value of equity
under different rate scenarios, management can identify interest rate risk that
may not be evident in simulating changes in forecasted net interest income.
Readers are referred to the sections, Forward Looking Statement Disclosure and
Risk Factors of this report in connection with this discussion of market
risks.
The following table shows the
approximate percentage changes in forecasted net interest income over a 12-month
period and in the present value of equity under several rate scenarios. For the
net interest income analysis, three rate scenarios are compared to a stable
(unchanged from December 31, 2011) rate scenario:
Stable rate scenario compared to:
|
Percent Change in
Net Interest
Income
2011
|
Percent Change in
Net Interest
Income
2010
|
Up 200 basis points
|
2.5%
|
1.9%
|
Up 100 basis points
|
1.4%
|
.1%
|
Down 100 basis points
|
-5.3%
|
-1.4%
|
As illustrated in the above table,
we estimate our balance sheet was slightly asset sensitive over a 12 month
horizon at December 31, 2011, meaning that interest earning assets are expected
to mature or reprice more quickly than interest-bearing liabilities in a given
period. A decrease in market rates of interest could adversely affect net
interest income, while an increase in market rates may increase net interest
income slightly. At December 31, 2010, we also estimated that our balance sheet
was slightly asset sensitive. We attempt to limit our interest rate risk through
managing the repricing characteristics of our assets and liabilities.
For the present value of equity
analysis, the results are compared to the net present value of equity using the
yield curve as of December 31, 2011. This curve is then shifted up and down and
the net present value of equity is computed. The net present value of equity is
the difference between the present value of assets and the present value of
liabilities. It is useful for assessing longer term interest rate risk. This
table does not include flattening or steepening yield curve effects.
December 31, 2011
Change in Interest
Rates
|
Percent Change in
Present Value of
Equity
|
Up 200 basis points
|
-3.8%
|
Up 100 basis points
|
-2.2%
|
Down 100 basis points
|
-5.3%
|
It should be noted that the
simulation model does not take into account future management actions that could
be undertaken should a change occur in actual market interest rates during the
year. Also, certain assumptions are required to perform modeling simulations
that may have a significant impact on the results. These include important
assumptions regarding the level of interest rates and balance changes on deposit
products that do not have stated maturities, as well as the relationship between
loan yields and deposit rates relative to market interest rates. These
assumptions have been developed through a combination of industry standards and
future expected pricing behavior but could be significantly influenced by future
competitor pricing behavior. The model also includes assumptions about the
composition of the balance sheet. The results derived from the simulation model
could vary significantly due to external factors such as changes in the
prepayment assumptions, early withdrawals of deposits and competition. Any
transaction activity will also have an impact on the asset/liability position as
new assets are acquired and added.
52
Interest Rate Sensitivity (Gap)
Table
The primary objective of our
asset/liability management is to maximize net interest income while maintaining
acceptable levels of interest-rate sensitivity. We seek to meet this objective
through influencing the maturity and repricing characteristics of our assets and
liabilities.
The following table sets forth the
estimated maturity and repricing and the resulting interest rate gap between
interest earning assets and interest bearing liabilities at December 31, 2011.
The amounts in the table are derived from internal Bank data regarding
maturities and next repricing dates including contractual repayments.
|
|
Estimated Maturity or Repricing at December 31,
2011
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After
|
|
|
|
|
|
|
0-3 Months
|
|
4-12 Months
|
|
1-5 Years
|
|
Five Years
|
|
Total
|
Interest Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning
balances due from banks
|
|
$
|
27,514
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,514
|
|
Federal funds
sold
|
|
|
4,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,758
|
|
Trading
assets
|
|
|
747
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
747
|
|
Investments
available for sale
1 2
|
|
|
55,103
|
|
|
|
96,911
|
|
|
|
377,502
|
|
|
|
200,328
|
|
|
|
729,844
|
|
Loans held for
sale
|
|
|
3,281
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,281
|
|
Loans, including
fees
|
|
|
568,300
|
|
|
|
201,426
|
|
|
|
627,293
|
|
|
|
104,282
|
|
|
|
1,501,301
|
|
Total
interest earning assets
|
|
$
|
659,703
|
|
|
$
|
298,337
|
|
|
$
|
1,004,795
|
|
|
$
|
304,610
|
|
|
|
2,267,445
|
|
Allowance for loan
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,212
|
)
|
Cash and due from
banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,955
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,699
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,429,887
|
|
|
Interest Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings,interest
bearing demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
money markets
3
|
|
$
|
53,500
|
|
|
$
|
135,964
|
|
|
$
|
447,354
|
|
|
$
|
483,672
|
|
|
$
|
1,120,490
|
|
Time
deposits
|
|
|
59,268
|
|
|
|
73,112
|
|
|
|
40,737
|
|
|
|
-
|
|
|
|
173,117
|
|
Borrowings
2
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
120,000
|
|
Junior subordinated
debentures
|
|
|
51,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,000
|
|
Total
interest bearing liabilities
|
|
$
|
163,768
|
|
|
$
|
209,076
|
|
|
$
|
608,091
|
|
|
$
|
483,672
|
|
|
|
1,464,607
|
|
Other
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650,801
|
|
Total
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,115,408
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,479
|
|
Total
liabilities & stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,429,887
|
|
|
Interest
sensitivity gap
|
|
$
|
495,935
|
|
|
$
|
89,261
|
|
|
$
|
396,704
|
|
|
$
|
(179,062
|
)
|
|
$
|
802,838
|
|
Cumulative interest
sensitivity gap
|
|
$
|
495,935
|
|
|
$
|
585,196
|
|
|
$
|
981,900
|
|
|
$
|
802,838
|
|
|
|
|
|
Cumulative interest
sensitivity gap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
a percentage of total assets
|
|
|
20
|
%
|
|
|
24
|
%
|
|
|
40
|
%
|
|
|
33
|
%
|
|
|
|
|
1
|
|
Equity investments have been
placed in the 0-3 month category.
|
2
|
|
Repricing is based on anticipated
call dates and may vary from contractual maturities.
|
3
|
|
Repricing is based on estimated
average lives.
|
Certain shortcomings are inherent in
the method of analysis presented in the foregoing table. For example, savings,
interest bearing demand and money market deposit accounts will very likely
experience a change in deposit rates more frequently than in their estimated
average lives. Additionally, although certain assets and liabilities may have
similar maturities and periods of repricing, they may react differently to
changes in market interest rates and be impacted by loans that have reached
their floor. Also, interest rates on assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
assets and liabilities may follow changes in market interest rates. Given these
shortcomings, management believes that rate risk is best measured by simulation
modeling as opposed to measuring interest rate risk through interest rate gap
measurement.
53
ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The following audited consolidated
financial statements and related documents are set forth in this Annual Report
on Form 10-K on the pages indicated:
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
|
|
55
|
CONSOLIDATED BALANCE SHEETS
|
|
56
|
CONSOLIDATED STATEMENTS OF INCOME
(LOSS)
|
|
57
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
58
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
59
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
|
|
60
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
61
|
54
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
West Coast Bancorp
Lake Oswego, Oregon
We have audited the accompanying
consolidated balance sheets of West Coast Bancorp and subsidiaries (the
Company) as of December 31, 2011 and 2010, and the related consolidated
statements of income (loss), comprehensive income (loss), changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2011. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of West Coast Bancorp and subsidiaries as of December 31, 2011 and
2010, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2011, in conformity with accounting
principles generally accepted in the United States of America.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2011, based on the criteria established in
Internal Control Integrated
Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated
February 24, 2012 expressed an unqualified opinion on the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE
LLP
Portland, Oregon
February 24, 2012
55
WEST COAST BANCORP
CONSOLIDATED
BALANCE SHEETS
As
of December 31 (Dollars and shares in thousands)
|
|
2011
|
|
2010
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
59,955
|
|
|
$
|
42,672
|
|
Federal funds
sold
|
|
|
4,758
|
|
|
|
3,367
|
|
Interest-bearing deposits in other banks
|
|
|
27,514
|
|
|
|
131,952
|
|
Total cash and cash equivalents
|
|
|
92,227
|
|
|
|
177,991
|
|
Trading securities
|
|
|
747
|
|
|
|
808
|
|
Investment securities
available for sale, at fair value
|
|
|
|
|
|
|
|
|
(amortized cost:
$717,593 and $645,246, respectively)
|
|
|
729,844
|
|
|
|
646,112
|
|
Federal Home Loan Bank stock, held at
cost
|
|
|
12,148
|
|
|
|
12,148
|
|
Loans held for
sale
|
|
|
3,281
|
|
|
|
3,102
|
|
Loans
|
|
|
1,501,301
|
|
|
|
1,536,270
|
|
Allowance for loan
losses
|
|
|
(35,212
|
)
|
|
|
(40,217
|
)
|
Loans,
net
|
|
|
1,466,089
|
|
|
|
1,496,053
|
|
Premises and equipment,
net
|
|
|
24,374
|
|
|
|
26,774
|
|
Other real estate owned, net
|
|
|
30,823
|
|
|
|
39,459
|
|
Core deposit intangible,
net
|
|
|
-
|
|
|
|
358
|
|
Bank owned life insurance
|
|
|
26,228
|
|
|
|
25,313
|
|
Other assets
|
|
|
44,126
|
|
|
|
32,941
|
|
Total
assets
|
|
$
|
2,429,887
|
|
|
$
|
2,461,059
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
621,962
|
|
|
$
|
555,766
|
|
Savings and interest
bearing demand
|
|
|
495,117
|
|
|
|
445,878
|
|
Money
market
|
|
|
625,373
|
|
|
|
663,467
|
|
Time
deposits
|
|
|
173,117
|
|
|
|
275,411
|
|
Total deposits
|
|
|
1,915,569
|
|
|
|
1,940,522
|
|
|
Long-term
borrowings
|
|
|
120,000
|
|
|
|
168,599
|
|
Junior subordinated debentures
|
|
|
51,000
|
|
|
|
51,000
|
|
Reserve for unfunded
commitments
|
|
|
771
|
|
|
|
850
|
|
Other liabilities
|
|
|
28,068
|
|
|
|
27,528
|
|
Total
liabilities
|
|
|
2,115,408
|
|
|
|
2,188,499
|
|
|
Commitments and contingent
liabilities (Notes 12 and 19)
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred stock: no par value, 10,000 shares
authorized;
|
|
|
|
|
|
|
|
|
Series B issued and
outstanding: 121 at December 31, 2011 and December 31, 2010
|
|
|
21,124
|
|
|
|
21,124
|
|
Common stock: no par
value, 50,000 shares authorized;
|
|
|
|
|
|
|
|
|
issued and
outstanding: 19,298 at December 31, 2011 and 19,286 at December 31,
2010
|
|
|
230,966
|
|
|
|
229,722
|
|
Retained earnings
|
|
|
54,952
|
|
|
|
21,175
|
|
Accumulated other
comprehensive income
|
|
|
7,437
|
|
|
|
539
|
|
Total
stockholders' equity
|
|
|
314,479
|
|
|
|
272,560
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,429,887
|
|
|
$
|
2,461,059
|
|
See notes to consolidated financial
statements.
56
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended December 31 (Dollars and shares in thousands,
except per share amounts)
|
|
2011
|
|
2010
|
|
2009
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
80,237
|
|
|
$
|
88,409
|
|
|
$
|
100,356
|
|
Interest on taxable
investment securities
|
|
|
16,177
|
|
|
|
14,493
|
|
|
|
8,646
|
|
Interest on nontaxable investment
securities
|
|
|
2,074
|
|
|
|
2,175
|
|
|
|
2,776
|
|
Interest on deposits in
other banks
|
|
|
184
|
|
|
|
493
|
|
|
|
366
|
|
Interest on federal funds sold
|
|
|
3
|
|
|
|
6
|
|
|
|
6
|
|
Total interest
income
|
|
|
98,675
|
|
|
|
105,576
|
|
|
|
112,150
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, interest bearing demand deposits
and money market
|
|
|
2,074
|
|
|
|
4,664
|
|
|
|
9,684
|
|
Time deposits
|
|
|
2,899
|
|
|
|
7,466
|
|
|
|
14,758
|
|
Short-term borrowings
|
|
|
1,004
|
|
|
|
494
|
|
|
|
806
|
|
Long-term
borrowings
|
|
|
3,626
|
|
|
|
6,176
|
|
|
|
6,693
|
|
Borrowings prepayment charge
|
|
|
7,140
|
|
|
|
2,326
|
|
|
|
-
|
|
Junior subordinated
debentures
|
|
|
1,178
|
|
|
|
1,143
|
|
|
|
1,482
|
|
Total
interest expense
|
|
|
17,921
|
|
|
|
22,269
|
|
|
|
33,423
|
|
Net interest
income
|
|
|
80,754
|
|
|
|
83,307
|
|
|
|
78,727
|
|
Provision for credit losses
|
|
|
8,133
|
|
|
|
18,652
|
|
|
|
90,057
|
|
Net interest income (loss)
after provision for credit losses
|
|
|
72,621
|
|
|
|
64,655
|
|
|
|
(11,330
|
)
|
|
NONINTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit
accounts
|
|
|
13,353
|
|
|
|
15,690
|
|
|
|
15,765
|
|
Payment systems related
revenue
|
|
|
12,381
|
|
|
|
11,393
|
|
|
|
9,399
|
|
Trust and investment services
revenue
|
|
|
4,503
|
|
|
|
4,267
|
|
|
|
4,101
|
|
Gains on sales of
loans
|
|
|
1,335
|
|
|
|
1,197
|
|
|
|
1,738
|
|
Other real estate owned valuation
adjustments and (loss) gain on sales
|
|
|
(3,236
|
)
|
|
|
(4,415
|
)
|
|
|
(26,953
|
)
|
Gain (loss) on securities,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of securities,
net
|
|
|
713
|
|
|
|
1,562
|
|
|
|
833
|
|
Other-than-temporary
impairment losses on securities
|
|
|
(1,636
|
)
|
|
|
-
|
|
|
|
(6,738
|
)
|
Portion of other-than-temporary, non-credit
related losses
|
|
|
|
|
|
|
|
|
|
|
|
|
recognized in other comprehensive income
|
|
|
1,457
|
|
|
|
-
|
|
|
|
6,546
|
|
Total net gains on
securities
|
|
|
534
|
|
|
|
1,562
|
|
|
|
641
|
|
Other noninterest income
|
|
|
2,949
|
|
|
|
3,003
|
|
|
|
4,438
|
|
Total noninterest income
|
|
|
31,819
|
|
|
|
32,697
|
|
|
|
9,129
|
|
|
NONINTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
48,587
|
|
|
|
45,854
|
|
|
|
44,608
|
|
Equipment
|
|
|
6,113
|
|
|
|
6,247
|
|
|
|
8,120
|
|
Occupancy
|
|
|
8,674
|
|
|
|
8,894
|
|
|
|
9,585
|
|
Payment systems related
expense
|
|
|
5,141
|
|
|
|
4,727
|
|
|
|
4,036
|
|
Professional fees
|
|
|
4,118
|
|
|
|
3,991
|
|
|
|
4,342
|
|
Postage, printing and
office supplies
|
|
|
3,265
|
|
|
|
3,148
|
|
|
|
3,201
|
|
Marketing
|
|
|
3,003
|
|
|
|
3,086
|
|
|
|
2,990
|
|
Communications
|
|
|
1,549
|
|
|
|
1,525
|
|
|
|
1,574
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
13,059
|
|
Other noninterest
expense
|
|
|
10,425
|
|
|
|
12,865
|
|
|
|
16,773
|
|
Total
noninterest expense
|
|
|
90,875
|
|
|
|
90,337
|
|
|
|
108,288
|
|
|
INCOME (LOSS) BEFORE
INCOME TAXES
|
|
|
13,565
|
|
|
|
7,015
|
|
|
|
(110,489
|
)
|
PROVISION (BENEFIT) FOR INCOME
TAXES
|
|
|
(20,212
|
)
|
|
|
3,790
|
|
|
|
(19,276
|
)
|
NET INCOME
(LOSS)
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
$
|
(91,213
|
)
|
|
Basic earnings (loss)
per share
|
|
$
|
1.65
|
|
|
$
|
0.16
|
|
|
|
($29.15
|
)
|
Diluted
earnings (loss) per share
|
|
$
|
1.58
|
|
|
$
|
0.16
|
|
|
|
($29.15
|
)
|
|
Weighted average common
shares
|
|
|
19,007
|
|
|
|
17,460
|
|
|
|
3,102
|
|
Weighted average diluted shares
|
|
|
19,940
|
|
|
|
18,059
|
|
|
|
3,102
|
|
57
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31 (Dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
Net income
(loss)
|
|
|
|
|
$
|
33,777
|
|
|
|
|
$
|
3,225
|
|
|
|
|
$
|
(91,213
|
)
|
Other comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the
year
|
|
11,920
|
|
|
|
|
|
4,766
|
|
|
|
|
|
4,082
|
|
|
|
|
|
Tax provision
|
|
(4,695
|
)
|
|
|
|
|
(1,888
|
)
|
|
|
|
|
(1,538
|
)
|
|
|
|
|
Unrealized holding gains arising during the
year, net of tax
|
|
7,225
|
|
|
|
|
|
2,878
|
|
|
|
|
|
2,544
|
|
|
|
|
|
|
Less: Reclassification
adjustment for net other-than-temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impairment losses on
securities
|
|
179
|
|
|
|
|
|
-
|
|
|
|
|
|
192
|
|
|
|
|
|
Tax benefit
|
|
(70
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
Net impairment losses on
securities, net of tax
|
|
109
|
|
|
|
|
|
-
|
|
|
|
|
|
118
|
|
|
|
|
|
|
Less: Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains on sales of
securities
|
|
(713
|
)
|
|
|
|
|
(1,562
|
)
|
|
|
|
|
(833
|
)
|
|
|
|
|
Tax provision
|
|
277
|
|
|
|
|
|
609
|
|
|
|
|
|
320
|
|
|
|
|
|
Net realized gains, net of
tax
|
|
(436
|
)
|
|
|
|
|
(953
|
)
|
|
|
|
|
(513
|
)
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
6,898
|
|
|
|
|
|
1,925
|
|
|
|
|
|
2,149
|
|
Total net comprehensive
income (loss)
|
|
|
|
|
$
|
40,675
|
|
|
|
|
$
|
5,150
|
|
|
|
|
$
|
(89,064
|
)
|
See notes to consolidated financial
statements.
58
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (Dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
$
|
(91,213
|
)
|
Adjustments to reconcile
net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and
accretion
|
|
|
8,994
|
|
|
|
8,778
|
|
|
|
8,281
|
|
Amortization of tax
credits
|
|
|
848
|
|
|
|
1,085
|
|
|
|
1,320
|
|
Deferred income tax provision
(benefit)
|
|
|
(21,661
|
)
|
|
|
(2,540
|
)
|
|
|
11,926
|
|
Amortization of
intangibles
|
|
|
358
|
|
|
|
279
|
|
|
|
358
|
|
Provision for credit losses
|
|
|
8,133
|
|
|
|
18,652
|
|
|
|
90,057
|
|
Goodwill
impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
13,059
|
|
Decrease in accrued interest
receivable
|
|
|
158
|
|
|
|
892
|
|
|
|
591
|
|
Decrease (increase) in
other assets
|
|
|
1,740
|
|
|
|
30,070
|
|
|
|
(15,350
|
)
|
Net other-than-temporary impairment losses
on securities
|
|
|
179
|
|
|
|
-
|
|
|
|
192
|
|
Gains on sales of
securities, net
|
|
|
(713
|
)
|
|
|
(1,562
|
)
|
|
|
(833
|
)
|
Net loss on disposal of premises and
equipment
|
|
|
1,219
|
|
|
|
61
|
|
|
|
186
|
|
Net other real estate
owned valuation adjustments and loss (gain) on sales
|
|
|
3,236
|
|
|
|
4,415
|
|
|
|
26,953
|
|
Gains on sale of loans
|
|
|
(1,335
|
)
|
|
|
(1,197
|
)
|
|
|
(1,738
|
)
|
Origination of loans held
for sale
|
|
|
(40,815
|
)
|
|
|
(34,927
|
)
|
|
|
(66,485
|
)
|
Proceeds from sales of loans held for
sale
|
|
|
41,971
|
|
|
|
34,198
|
|
|
|
69,907
|
|
Increase (decrease) in
interest payable
|
|
|
(2,164
|
)
|
|
|
504
|
|
|
|
359
|
|
Increase (decrease) in other
liabilities
|
|
|
(1,024
|
)
|
|
|
1,294
|
|
|
|
3,345
|
|
Increase in cash surrender
value of bank owned life insurance
|
|
|
(915
|
)
|
|
|
(896
|
)
|
|
|
(892
|
)
|
Stock based compensation expense
|
|
|
1,899
|
|
|
|
2,089
|
|
|
|
1,520
|
|
Excess tax benefit
associated with stock plans
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
-
|
|
Decrease (increase) in trading
securities
|
|
|
61
|
|
|
|
(77
|
)
|
|
|
815
|
|
Net cash provided by
operating activities
|
|
|
33,880
|
|
|
|
64,343
|
|
|
|
52,358
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of available for
sale securities
|
|
|
298,490
|
|
|
|
288,050
|
|
|
|
69,140
|
|
Proceeds from sales of
available for sale securities
|
|
|
45,283
|
|
|
|
77,551
|
|
|
|
36,189
|
|
Purchase of available for sale
securities
|
|
|
(421,154
|
)
|
|
|
(449,665
|
)
|
|
|
(467,360
|
)
|
Purchase of Federal Home
Loan Bank stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,305
|
)
|
Investments in tax credits
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
Loans made to customers
less than principal collected on loans
|
|
|
692
|
|
|
|
138,459
|
|
|
|
185,293
|
|
Proceeds from the sale of other real estate
owned
|
|
|
27,062
|
|
|
|
38,106
|
|
|
|
68,670
|
|
Capital expenditures on
other real estate owned
|
|
|
(528
|
)
|
|
|
(3,234
|
)
|
|
|
(4,881
|
)
|
Capital expenditures on premises and
equipment
|
|
|
(2,216
|
)
|
|
|
(2,265
|
)
|
|
|
(1,275
|
)
|
Net cash provided
(used) by investing activities
|
|
|
(52,371
|
)
|
|
|
87,002
|
|
|
|
(115,538
|
)
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in demand, savings and
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing transaction
accounts
|
|
|
84,050
|
|
|
|
42,752
|
|
|
|
182,273
|
|
Net decrease in time deposits
|
|
|
(102,294
|
)
|
|
|
(249,114
|
)
|
|
|
(59,768
|
)
|
Proceeds from issuance of
short-term borrowings
|
|
|
168,918
|
|
|
|
-
|
|
|
|
347,600
|
|
Repayment of short-term borrowings
|
|
|
(208,118
|
)
|
|
|
(17,600
|
)
|
|
|
(479,600
|
)
|
Proceeds from issuance of
long-term borrowings
|
|
|
120,000
|
|
|
|
4,400
|
|
|
|
192,240
|
|
Repayment of long-term borrowings
|
|
|
(129,399
|
)
|
|
|
(81,500
|
)
|
|
|
(20,000
|
)
|
Proceeds from issuance of
preferred stock, net of costs
|
|
|
-
|
|
|
|
-
|
|
|
|
139,248
|
|
Proceeds from secured borrowings
|
|
|
-
|
|
|
|
7,991
|
|
|
|
-
|
|
Proceeds from issuance of
common stock-Rights Offering
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
Costs of issuance of common stock-Rights
Offering
|
|
|
-
|
|
|
|
(650
|
)
|
|
|
-
|
|
Proceeds from issuance of
common stock-Discretionary Program
|
|
|
-
|
|
|
|
7,856
|
|
|
|
-
|
|
Costs of issuance of common
stock-Discretionary Program
|
|
|
-
|
|
|
|
(817
|
)
|
|
|
-
|
|
Activity in deferred
compensation plan
|
|
|
(27
|
)
|
|
|
262
|
|
|
|
(1
|
)
|
Proceeds from issuance of common stock-stock
options
|
|
|
80
|
|
|
|
4
|
|
|
|
-
|
|
Fractional share
payment
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
-
|
|
Redemption of stock pursuant to stock
plans
|
|
|
(531
|
)
|
|
|
(35
|
)
|
|
|
(22
|
)
|
Excess tax benefits
associated with stock plans
|
|
|
66
|
|
|
|
-
|
|
|
|
-
|
|
Cash dividends paid
|
|
|
-
|
|
|
|
-
|
|
|
|
(471
|
)
|
Net cash provided
(used) by financing activities
|
|
|
(67,273
|
)
|
|
|
(276,451
|
)
|
|
|
301,499
|
|
|
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
|
|
|
(85,764
|
)
|
|
|
(125,106
|
)
|
|
|
238,319
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR
|
|
|
177,991
|
|
|
|
303,097
|
|
|
|
64,778
|
|
CASH AND CASH EQUIVALENTS
AT END OF YEAR
|
|
$
|
92,227
|
|
|
$
|
177,991
|
|
|
$
|
303,097
|
|
See notes to consolidated financial
statements.
59
WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
(Shares and dollars in thousands)
|
|
Preferred
|
|
Common Stock
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income (Loss)
|
|
Total
|
BALANCE, January 1,
2009
|
|
-
|
|
|
3,139
|
|
|
|
92,245
|
|
|
|
107,542
|
|
|
|
(1,600
|
)
|
|
|
198,187
|
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(91,213
|
)
|
|
|
-
|
|
|
$
|
(91,213
|
)
|
Other comprehensive income, net of
tax:
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,149
|
|
|
|
2,149
|
|
Cumulative effect of
adopting ASC 320
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
1,935
|
|
|
|
(1,935
|
)
|
|
|
-
|
|
Cash dividends, $.10 per common
share
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(314
|
)
|
|
|
-
|
|
|
|
(314
|
)
|
Redemption of stock
pursuant to stock plans
|
|
-
|
|
|
(2
|
)
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(22
|
)
|
Issuance of Series A preferred stock, net of
costs
|
|
118,124
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118,124
|
|
|
Issuance of Series B
preferred stock and warrant, net of costs
|
|
21,124
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,124
|
|
Activity in deferred compensation
plan
|
|
-
|
|
|
(9
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
Stock based compensation
expense
|
|
-
|
|
|
-
|
|
|
|
1,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,520
|
|
Tax adjustment associated with stock
plans
|
|
-
|
|
|
-
|
|
|
|
(496
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(496
|
)
|
BALANCE, December 31,
2009
|
|
139,248
|
|
|
3,128
|
|
|
|
93,246
|
|
|
|
17,950
|
|
|
|
(1,386
|
)
|
|
$
|
249,058
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
3,225
|
|
|
|
-
|
|
|
$
|
3,225
|
|
Other comprehensive income, net of
tax:
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,925
|
|
|
|
1,925
|
|
Redemption of stock
pursuant to stock plans
|
|
-
|
|
|
(12
|
)
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(35
|
)
|
Conversion of Series A preferred
stock
|
|
(118,124
|
)
|
|
14,288
|
|
|
|
118,124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common
stock-Rights Offering,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of costs
|
|
|
|
|
1,000
|
|
|
|
9,350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,350
|
|
Issuance of common stock-Discretionary
Program,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of costs
|
|
|
|
|
561
|
|
|
|
7,039
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,039
|
|
Activity in deferred
compensation plan
|
|
-
|
|
|
(3
|
)
|
|
|
262
|
|
|
|
-
|
|
|
|
-
|
|
|
|
262
|
|
Issuance of common stock-stock
options
|
|
-
|
|
|
1
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
Issuance of common
stock-restricted stock
|
|
-
|
|
|
323
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock based compensation expense
|
|
-
|
|
|
-
|
|
|
|
2,089
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,089
|
|
Tax adjustment associated
with stock plans
|
|
-
|
|
|
-
|
|
|
|
(357
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(357
|
)
|
BALANCE, December 31, 2010
|
|
21,124
|
|
|
19,286
|
|
|
$
|
229,722
|
|
|
$
|
21,175
|
|
|
$
|
539
|
|
|
$
|
272,560
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
33,777
|
|
|
|
-
|
|
|
$
|
33,777
|
|
Other comprehensive income, net of
tax
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,898
|
|
|
|
6,898
|
|
Redemption of stock
pursuant to stock plans
|
|
-
|
|
|
(55
|
)
|
|
|
(531
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(531
|
)
|
Activity in deferred compensation
plan
|
|
-
|
|
|
(3
|
)
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(27
|
)
|
Issuance of common
stock-stock options
|
|
-
|
|
|
7
|
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80
|
|
Issuance of common stock-restricted
stock
|
|
-
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock based compensation
expense
|
|
-
|
|
|
-
|
|
|
|
1,899
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,899
|
|
Tax adjustment associated with stock
plans
|
|
-
|
|
|
-
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(159
|
)
|
Fractional share
payment
|
|
-
|
|
|
(1
|
)
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(18
|
)
|
BALANCE, December 31, 2011
|
|
21,124
|
|
|
19,298
|
|
|
$
|
230,966
|
|
|
$
|
54,952
|
|
|
$
|
7,437
|
|
|
$
|
314,479
|
|
See notes to consolidated financial
statements.
60
WEST COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of
Operations.
West Coast Bancorp (Bancorp or
the Company) provides a full range of financial services including lending and
depository services through West Coast Bank and its 60 branch banking offices in
Oregon and Washington. West Coast Trust Company, Inc. (West Coast Trust)
provides fiduciary, agency, trust and related services, and life insurance
products.
Principles of Consolidation.
The accompanying consolidated financial statements include the accounts
of Bancorp, and its wholly-owned subsidiaries, West Coast Bank (the Bank),
West Coast Trust and Totten, Inc., after elimination of material intercompany
transactions and balances. West Coast Statutory Trusts III, IV, V, VI, VII and
VIII are considered related parties to Bancorp and their financial results are
not consolidated in Bancorps financial statements. Junior subordinated
debentures issued by the Company to West Coast Statutory Trusts are included on
the Companys balance sheet as junior subordinated debentures.
Basis of Financial Statement Presentation and the Use of
Estimates in the Financial Statements.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) and with prevailing practices within the banking and securities
industries. Management is required to make certain estimates and assumptions
when preparing the financial statements that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the amounts of income and expense for the
reporting period. Actual results could differ significantly from managements
estimates. Certain material estimates subject to significant change relate to
the determination of the allowance for credit losses, the provision or benefit
for income taxes, and the fair value of investments and other real estate owned.
Immaterial reclassifications related to prior year amounts of excess tax
deficiencies associated with stock plans in the operating activities section of
the consolidated statement of cash flows have been made to conform to current
presentation.
Subsequent Events.
The
Company has evaluated events and transactions for potential recognition or
disclosure through the day the financial statements were issued.
Cash and Cash Equivalents.
Cash and cash equivalents include cash on hand, interest bearing
deposits in other banks, amounts due from banks and federal funds sold.
Generally, federal funds are purchased or sold for one-day periods.
Reverse Stock Split.
On
May 19, 2011, Bancorp implemented a one-for-five reverse split of its common
stock (the "Reverse Stock Split"), pursuant to an amendment to its Restated
Articles of Incorporation approved by shareholders at the Companys annual
meeting of shareholders held on April 26, 2011. All share and per share related
amounts in this report have been restated to reflect the Reverse Stock Split.
As a result of the Reverse Stock Split, every five shares of the
Company's common stock issued and outstanding at the end of the effective date
of May 19, 2011, were combined and reclassified into 1 share of common stock.
Bancorp did not issue fractional shares of common stock and paid cash in lieu of
fractional shares resulting from the Reverse Stock Split. Cash payments for
fractional shares were determined on the basis of the stock's average closing
price on the NASDAQ Global Select Market for the five trading days immediately
preceding May 19, 2011, as adjusted for the Reverse Stock Split.
As a result of the Reverse Stock Split, the number of outstanding shares
of common stock declined from 96.4 million shares to 19.3 million shares. The
number of authorized shares of common stock was reduced from 250 million to 50
million. Proportional adjustments have also been made to the conversion or
exercise rights under the Company's outstanding stock incentive plans, preferred
stock, restricted stock, stock options and warrants.
61
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Supplemental Cash Flow Information.
The following table presents supplemental cash flow information for the
years ended December 31, 2011, 2010, and 2009.
(Dollars in thousands)
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (received) paid in the year
for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
20,085
|
|
|
$
|
21,765
|
|
|
$
|
33,063
|
|
Income
taxes, net
|
|
|
6,550
|
|
|
|
(27,742
|
)
|
|
|
(14,585
|
)
|
|
Noncash investing and
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized gain on available
|
|
|
|
|
|
|
|
|
|
|
|
|
for sale securities, net of tax
|
|
$
|
6,898
|
|
|
$
|
1,925
|
|
|
$
|
2,149
|
|
Sale of SBA loans -
transfer to other assets
|
|
|
-
|
|
|
|
7,991
|
|
|
|
-
|
|
Settlement of secured borrowings
|
|
|
(3,085
|
)
|
|
|
(4,906
|
)
|
|
|
-
|
|
Transfer of long
term debt to short term debt
|
|
|
39,200
|
|
|
|
5,000
|
|
|
|
-
|
|
OREO
and premises and equipment expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued in other liabilities
|
|
|
111
|
|
|
|
74
|
|
|
|
242
|
|
Transfer of loans to
OREO
|
|
|
21,139
|
|
|
|
25,199
|
|
|
|
74,174
|
|
Trading Securities.
Debt and equity securities that are
bought and held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with realized and
unrealized gains and losses included in noninterest income. Trading securities
held at December 31, 2011, and 2010, are related solely to assets held in a
rabbi trust for the benefit of the Companys deferred compensation
plans.
Investment Securities Available for Sale.
Investment securities classified as available for sale are not
trading securities but may be sold before maturity in response to changes in the
Companys interest rate risk profile, funding needs or demand for collateralized
deposits by public entities. Available for sale securities are carried at fair
value with unrealized gains and losses, net of any tax effect, reported within
accumulated other comprehensive income (loss) in stockholders equity. Premiums
and discounts are amortized or accreted over the estimated life of the
investment security as an adjustment to the yield. For purposes of computing
realized gains and losses, the cost of securities sold is determined using the
specific identification method. The Company analyzes investment securities for
other-than-temporary impairment (OTTI) on a quarterly basis. For equity
securities where declines in fair value are deemed other-than-temporary and the
Company does not have the ability and intent to hold the securities until
recovery, OTTI is recognized in noninterest income. The Company considers
whether a debt security will be sold or if it is likely to be required to be
sold prior to the recovery of any unrealized loss. Intent to sell or a
requirement to sell debt securities prior to recovery would result in
recognizing the entire impairment as OTTI in noninterest income. If the Company
does not intend to sell impaired debt securities, will not be required to sell
them prior to recovery, and the Company does not expect to recover its entire
amortized cost basis of the securities, the portion of impairment loss
specifically related to credit losses is recognized in noninterest income. The
portion of impairment loss related to all other factors is recognized as a
separate category in other comprehensive income (loss).
Valuation of Investment Securities Available for
Sale.
Investment securities are valued
utilizing a number of methods including quoted prices in active markets, quoted
prices for similar assets, quoted prices for securities in inactive markets and
inputs derived principally from or corroborated by observable market data by
correlation or other means. In addition, certain investment securities are
valued based on the Companys own assumptions using the best information
available using a discounted cash flow model.
Federal Home Loan Bank Stock.
Federal Home Loan Bank of Seattle (the FHLB) stock is carried at cost
which equals its par value because the shares can only be redeemed with the FHLB
at par and it lacks a market. The Bank is required to maintain a minimum level
of investment in FHLB stock based on specific percentages of its outstanding
mortgages and FHLB advances. Stock redemptions are at the discretion of the FHLB
or of the Company, upon prior notice to the FHLB of five years for FHLB B stock
or six months for FHLB A stock. The Bank considers FHLB stock a restricted
security. The Company periodically analyzes FHLB stock for OTTI. The evaluation
of OTTI on FHLB stock is based on an assessment of the ultimate recoverability
of cost rather than recognizing temporary declines in value. The determination
of whether a decline affects the ultimate recoverability of cost is influenced
by criteria such as (a) the significance of any decline in net assets of the
FHLB as compared to the capital stock amount for the FHLB and the length of time
this situation has persisted, (b) commitments by the FHLB to make payments
required by law or regulation and the level of such payments in relation to the
operating performance of the FHLB, (c) the impact of legislative and regulatory
changes on institutions and, accordingly, the customer base of the FHLB, and (d)
the liquidity position of the FHLB. The Company analyzed FHLB stock for OTTI and
concluded that no impairment exists at December 31, 2011.
62
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Loans Held
for Sale.
Loans held for sale includes
mortgage loans that are carried at the lower of cost or market value. Market
value generally approximates cost because of the short duration these assets are
held by us. Gains and infrequent losses are recognized in the consolidated
statement of income (loss) as the proceeds from sale less the net book value of
the loan including unamortized fees and capitalized direct costs. Servicing
rights are typically not retained. In addition, we originate loans to customers
under Small Business Administration (SBA) programs that generally provide for
SBA guarantees of 50% to 85% of each loan. We periodically sell the guaranteed
portion of certain SBA loans to investors and retain the unguaranteed portion
and servicing rights in our loan portfolio. SBA loans are recorded and held
within the loan portfolio until designated to be sold. Gains on these sales are
earned through the sale of the guaranteed portion of the loan for an amount in
excess of the adjusted carrying value of the portion of the loan sold. We
allocate the carrying value of such loans between the portion sold, the portion
retained and a value assigned to the right to service the loan. The difference
between the adjusted carrying value of the portion retained and the face amount
of the portion retained is amortized to interest income over the life of the
related loan using a straight-line method over the anticipated lives of the pool
of SBA loans. We record a gain on sale of SBA loans at the date of transfer of
the loan.
Loans.
Loans are reported
at the amount of unpaid principal balance outstanding net of unearned income and
deferred fees and costs. Loan and commitment fees and certain direct loan
origination costs are deferred and recognized over the life of the loan and/or
commitment period as yield adjustments. Interest income on loans is accrued
daily on the unpaid principal balance outstanding as earned.
Nonaccrual Loans.
Loans
(including impaired loans) are placed on nonaccrual status when the collection
of interest or principal has become 90 days past due or is otherwise considered
doubtful. When a loan is placed on nonaccrual status, the Company stops accruing
interest and unpaid accrued interest is reversed. In addition, the Company stops
amortizing deferred fees and costs. For certain real estate construction loans
accrued unpaid interest as well as qualifying capitalized interest is reversed.
When management determines that the ultimate collectability of principal is in
doubt, cash receipts on nonaccrual loans are applied to reduce the principal
balance on a cash-basis method until the loans qualify for return to interest
accruing status. Loans are returned to interest accruing status when management
expects collection of contractual loan payments and the borrower has
demonstrated six months of compliance with the contractual terms of the loan.
63
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Impaired
Loans.
A loan is considered to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due (both interest and principal)
according to the contractual terms of the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loans effective interest rate or, as a practical expedient, at the loans
observable market price or the fair market value of the collateral less selling
costs if the loan is collateral dependent. For loans that are collateral
dependent the Company charges off the amount of impairment at the time of
impairment, rather than placing the impaired loan amount in a specific reserve
allowance. Known impairments on non-real estate secured loans are charged off
immediately rather than recording a specific reserve allowance in the allowance
for loan losses.
Troubled Debt Restructurings.
A loan is accounted for as a troubled debt restructuring if the Company,
for economic or legal reasons related to the borrowers financial difficulties,
grants a concession to the borrower that it would not otherwise consider. A
troubled debt restructuring typically involves a modification of terms such as a
reduction of the stated interest rate or face amount of the loan, a reduction of
accrued interest, or an extension of the maturity date(s) at a stated interest
rate lower than the current market rate for a new loan with similar risk.
Troubled debt restructurings are considered impaired loans and as such are
measured based on the present value of expected future cash flows discounted at
the loans effective interest rate or, as a practical expedient, at the loans
observable market price or the fair market value of the collateral less selling
costs if the loan is collateral dependent. Performing troubled debt
restructurings not on nonaccrual status are measured based on the present value
of expected future cash flows discounted at the loans effective interest rate
based on a current documented evaluation supporting managements expectation of
performance.
Allowance for Credit Losses.
The allowance for credit losses is comprised of two components, the
allowance for loan losses and the reserve for unfunded commitments. The
allowance for loan losses is a calculation applied to outstanding loan balances,
while the reserve for unfunded commitments is based upon a calculation applied
to that portion of total loan commitments not yet funded for the period
reported.
The allowance for credit losses is based on managements estimates.
Management determines the adequacy of the allowance for credit losses based on
evaluations of the loan portfolio, recent loss experience and other factors,
including economic conditions. The Company determines the amount of the
allowance for credit losses required for certain sectors based on relative risk
characteristics of the loan portfolio. Actual losses may vary from current
estimates. These estimates are reviewed periodically and, as adjustments become
necessary, are reported in earnings in the periods in which they become known.
The allowance for credit losses is increased by provisions for credit losses in
earnings. Loan charge-offs reduce the allowance while recoveries are credited to
the allowance.
Commitments to Extend Credit.
Unfunded loan commitments are generally related to providing credit
facilities to customers of the bank and are not actively traded financial
instruments. These unfunded commitments are disclosed as commitments to extend
credit in Note 19 Financial Instruments with Off Balance Sheet Risk in the
notes to consolidated financial statements.
Reserve for Unfunded Commitments.
As a component of allowance for credit losses, a reserve for
unfunded commitments is maintained at a level that, in the opinion of
management, is adequate to absorb losses associated with the Banks commitment
to lend funds under existing agreements such as letters or lines of credit or
construction loans. Management determines the adequacy of the reserve for
unfunded commitments based upon reviews of individual credit facilities, current
economic conditions, the risk characteristics of the various categories of
commitments as well as pooled commitments with similar risk characteristics and
other relevant factors. The reserve is based on estimates, and ultimate losses
may vary from the current estimates. These estimates are evaluated on a regular
basis and, as adjustments become necessary, they are reported in the provision
for credit losses in the income statement in the periods in which they become
known.
Other Real Estate Owned (OREO).
OREO is real property of which the Bank has taken possession
or that has been deeded to the Bank through a deed-in-lieu of foreclosure,
non-judicial foreclosure, judicial foreclosure or similar process in partial or
full satisfaction of a loan or loans. In addition, the Bank owns a closed branch
building that is considered OREO. OREO is initially recorded at the lower of the
carrying amount of the loan or fair value of the property less estimated costs
to sell. This amount becomes the propertys new basis. Management considers
third party appraisals as well as independent fair market value assessments from
realtors or persons involved in selling OREO in determining the fair value of
particular properties. Accordingly, the valuation of OREO is subject to
significant external and internal judgment. Management also periodically reviews
OREO to determine whether the property continues to be carried at the lower of
its recorded book value or fair value, net of estimated costs to sell. Any
further OREO valuation adjustments or subsequent gains or losses on the final
disposition of OREO are charged to other real estate owned valuation adjustments
and (loss) gain on sales. Expenses from the maintenance and operations of OREO
are included in other noninterest expense in the statements of income
(loss).
64
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Premises
and Equipment.
Premises and equipment are
stated at cost, less accumulated depreciation and amortization. Land is carried
at cost. Depreciation is computed on the straight-line method over the estimated
useful lives of the related assets. In general, furniture and equipment is
amortized over a useful life of 3 to 10 years, software and computer related
equipment is amortized over 3 to 5 years and buildings are amortized over
periods up to 40 years. Leasehold improvements are amortized over the life of
the related lease, or the life of the related assets, whichever is shorter.
Expenditures for major renovations and betterments of the Companys premises and
equipment are capitalized. Improvements are capitalized and depreciated over
their estimated useful lives. Minor repairs, maintenance and improvements are
charged to operations as incurred. When property is replaced or otherwise
disposed of, the cost of such assets and the related accumulated depreciation
are removed from their respective accounts. Related gain or loss, if any, is
recorded in current operations.
Goodwill and Intangible
Assets.
At March 31, 2009, based on
managements analysis and continued deteriorating economic conditions and the
length of time and amount by which the Companys book value per share had
exceeded its market value per share, the Company determined it was appropriate
to write off the entire $13.1 million of goodwill related to its acquisition of
Mid-Valley Bank in June, 2006. The Company had no goodwill or intangible assets
at December 31, 2011.
Income Taxes
. Income taxes are accounted for using the asset and liability
method. Under this method, a deferred tax asset or liability is determined based
on the enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in Bancorps income tax returns. The
deferred tax provision (benefit) for the year is equal to the net change in the
net deferred tax asset from the beginning to the end of the year, less amounts
applicable to the change in value related to investment securities available for
sale. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company records net
deferred tax assets to the extent these assets will more likely than not be
realized. In making such determination, the Company assesses the available
positive and negative evidence including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies
and recent financial results. A deferred tax asset valuation allowance is
established to reduce the net carrying amount of deferred tax assets if it is
determined to be more likely than not, that all or some portion of the potential
deferred tax asset will not be realized. The Companys accounting policy is to
exclude deferred tax assets related to unrealized losses on its available for
sale debt securities as these losses are expected to reverse and realization of
the related deferred tax asset is not dependent on future taxable income. The
Company determined that no deferred tax asset valuation allowance was required
at December 31, 2011. It is the Companys accounting policy to include interest
expense and penalties related to income taxes as a component of provision
(benefit) for income taxes. See Note 16 Income taxes of the notes to
consolidated financial statements for more detail.
Operating
Segments.
Public enterprises are
required to report certain information about their operating segments in the
financial statements. The basis for determining the Companys operating segments
is the way in which management operates the businesses. Bancorp has identified
two reportable segments, banking and other which include West Coast Trust.
See Note 21, Segment and Related Information of the notes to consolidated
financial statements for more detail.
Trust Company
Assets.
Assets (other than cash
deposits) held by West Coast Trust in fiduciary or agency capacities for its
trust customers are not included in the accompanying consolidated balance
sheets, because such items are not assets of West Coast Trust.
Borrowings
. Federal funds purchased
and securities sold under agreements to repurchase generally mature within one
to four days from the transaction date. Other short-term borrowed funds mature
within one year from the date of this financial statement. Long-term borrowed
funds extend beyond one year and are reclassed to short-term borrowings when the
long term borrowed funds mature within one year and there is no intent to
refinance.
Earnings (Loss) Per
Share.
Earnings (loss) per share is
calculated under the two-class method. The two-class method is an earnings
allocation formula that determines earnings (loss) per share for each class of
common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. A participating
security is an instrument that may participate in undistributed earnings with
common stock. The Company has issued restricted stock that qualifies as a
participating security. Basic earnings (loss) per share is computed by dividing
net income (loss) available to common shareholders by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
(loss) per share is computed in the same manner as basic earnings (loss) per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if certain shares
issuable upon exercise of options, warrants, conversion of preferred stock, and
unvested restricted stock were included unless those additional shares would
have been anti-dilutive. For the diluted earnings (loss) per share computation,
the treasury stock method is applied and compared to the two-class method and
whichever method results in a more dilutive impact is utilized to calculate
diluted earnings per share.
Service Charges on Deposit
Accounts.
Service charges on deposit
accounts primarily represent monthly fees based on minimum balances or
transaction-based fees. These fees are recognized as earned or as transactions
occur and services are provided.
65
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Payment
Systems Revenue.
Payment systems revenue
includes interchange income from credit and debit cards, annual fees, and other
transaction and account management fees. Interchange income is a fee paid by a
merchant bank to the card-issuing bank through the interchange network.
Interchange fees are set by the credit card associations and are based on
cardholder purchase volumes. The Company records interchange income as
transactions occur. Transaction and account management fees are recognized as
transactions occur or services are provided, except for annual fees, which are
recognized over the applicable period. Volume-related payments to partners and
credit card associations and expenses for rewards programs are also recorded
within payment systems revenue. Payments to partners and expenses related to
rewards programs are recorded when earned by the partner or customer. Merchant
processing services revenue consists principally of transaction and account
management fees charged to merchants for the electronic processing of
transactions, net of interchange fees paid to the credit card issuing bank, card
association assessments, and revenue sharing amounts, and are all recognized at
the time the merchants transactions are processed or other services are
performed. The Company may enter into revenue sharing agreements with referral
partners or in connection with purchases of merchant contracts from sellers. The
revenue sharing amounts are determined primarily on sales volume processed or
revenue generated for a particular group of merchants. Merchant processing
revenue also includes revenues related to point-of-sale equipment recorded as
sales when the equipment is shipped or as earned for equipment
rentals.
Trust and Investment Services
Revenue.
Trust and investment management
fees are recognized over the period in which services are performed and are
based on a percentage of the fair value of the assets under management or
administration, fixed based on account type, or transaction-based
fees.
New Accounting
Pronouncements.
In December 2010, the
Financial Accounting Standards Board (FASB) issued guidance within the
Accounting Standards Update (ASU) 2010-20 Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses. ASU
2010-20 requires entities to provide disclosures designed to facilitate
financial statement users evaluation of (i) the nature of credit risk inherent
in the entitys portfolio of financing receivables, (ii) how that risk is
analyzed and assessed in arriving at the allowance for credit losses and (iii)
the changes and reasons for those changes in the allowance for credit losses.
Disclosures must be disaggregated by portfolio segment, the level at which an
entity develops and documents a systematic method for determining its allowance
for credit losses, and class of financing receivable, which is generally a
disaggregation of portfolio segment. The required disclosures include, among
other things, a roll forward of the allowance for credit losses as well as
information about modified, impaired, nonaccrual and past due loans and credit
quality indicators. ASU 2010-20 became effective for the Companys financial
statements as of December 31, 2010, as it relates to disclosures required as of
the end of a reporting period. Disclosures that relate to activity during a
reporting period are required for the Companys financial statements that
include periods beginning on or after January 1, 2011. The adoption of this
guidance did not have any impact on the Companys
consolidated statement of income (loss), its consolidated balance sheet, or its
consolidated statement of cash flows.
In April 2011, the FASB issued guidance
within the ASU 2011-02 A Creditors Determination of Whether a Restructuring is
a Troubled Debt Restructuring. ASU 2011-02 clarifies when a loan modification
or restructuring is considered a troubled debt restructuring. The adoption of
this guidance did not have a material impact on
the Companys consolidated statement of income (loss), its consolidated balance
sheet, or its consolidated statement of cash flows.
In April 2011, the FASB issued guidance
within the ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs. This ASU amends existing
guidance regarding the highest and best use and valuation assumption by
clarifying these concepts are only applicable to measuring the fair value of
nonfinancial assets. The ASU also clarifies that the fair value measurement of
financial assets and financial liabilities which have offsetting market risks or
counterparty credit risks that are managed on a portfolio basis, when several
criteria are met, can be measured at the net risk position. Additional
disclosures about Level 3 fair value measurements are required including a
quantitative disclosure of the unobservable inputs and assumptions used in the
measurement, a description of the valuation process in place, and discussion of
the sensitivity of fair value changes in unobservable inputs and
interrelationships about those inputs as well disclosure of the level of the
fair value of items that are not measured at fair value in the financial
statements but disclosure of fair value is required. ASU 2011-04 is effective
for the Companys reporting period beginning after December 15, 2011, and will
be applied prospectively. The Company is currently evaluating the impact of this
ASU and does not expect this guidance to have a material impact on the Companys
consolidated statement of income, its consolidated balance sheet, or its
consolidated statement of cash flows.
In June 2011, the FASB issued guidance
within ASU 2011-05, Presentation of Comprehensive Income. This ASU amends
current guidance to allow a company the option of presenting the total of
comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. The guidance does not
change the items that must be reported in other comprehensive income or when an
item of other comprehensive income must be reclassified to net income. The
amendments do not change the option for a company to present components of other
comprehensive income either net of related tax effects or before related tax
effects, with one amount shown for the aggregate income tax expense (benefit)
related to the total of other comprehensive income items. The amendments do not
affect how earnings per share is calculated or presented. The provisions of ASU
2011-05 are effective for the Companys reporting period beginning after
December 15, 2011, and will be applied retrospectively. The Company has adopted
this guidance and the adoption of this guidance did not have any impact on the
Companys consolidated statement of income (loss), its consolidated balance
sheet, or its consolidated statement of cash flows.
66
2. INVESTMENT SECURITIES
The following table presents the
available for sale investment securities as of December 31, 2011, and
2010:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
Cost
|
|
Gross Gains
|
|
Gross Losses
|
|
Fair Value
|
U.S. Treasury
securities
|
|
$
|
200
|
|
$
|
3
|
|
$
|
-
|
|
|
$
|
203
|
U.S. Government agency securities
|
|
|
216,211
|
|
|
3,453
|
|
|
(33
|
)
|
|
|
219,631
|
Corporate
securities
|
|
|
14,351
|
|
|
-
|
|
|
(5,844
|
)
|
|
|
8,507
|
Mortgage-backed securities
|
|
|
419,510
|
|
|
9,351
|
|
|
(136
|
)
|
|
|
428,725
|
Obligations of state and
political subdivisions
|
|
|
56,003
|
|
|
4,736
|
|
|
(7
|
)
|
|
|
60,732
|
Equity investments and other
securities
|
|
|
11,318
|
|
|
749
|
|
|
(21
|
)
|
|
|
12,046
|
Total
|
|
$
|
717,593
|
|
$
|
18,292
|
|
$
|
(6,041
|
)
|
|
$
|
729,844
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
Cost
|
|
Gross Gains
|
|
Gross Losses
|
|
Fair Value
|
U.S. Treasury
securities
|
|
$
|
14,347
|
|
$
|
45
|
|
$
|
-
|
|
|
$
|
14,392
|
U.S. Government agency securities
|
|
|
193,901
|
|
|
836
|
|
|
(507
|
)
|
|
|
194,230
|
Corporate
securities
|
|
|
14,499
|
|
|
-
|
|
|
(5,107
|
)
|
|
|
9,392
|
Mortgage-backed securities
|
|
|
359,965
|
|
|
5,853
|
|
|
(2,200
|
)
|
|
|
363,618
|
Obligations of state and
political subdivisions
|
|
|
51,111
|
|
|
1,789
|
|
|
(255
|
)
|
|
|
52,645
|
Equity investments and other
securities
|
|
|
11,423
|
|
|
437
|
|
|
(25
|
)
|
|
|
11,835
|
Total
|
|
$
|
645,246
|
|
$
|
8,960
|
|
$
|
(8,094
|
)
|
|
$
|
646,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December
31, 2011, the estimated fair value of the investment portfolio was $729.8
million, an increase of $83.7 million or 13% from $646.1 million at year end
2010. The estimated net unrealized gain on the investment portfolio at December
31, 2011, was $12.3 million, or 1.7% of the total portfolio, compared to $.9
million and .1% respectively, at year end 2010. During 2011 the net unrealized
gain on the mortgage-backed securities increased by $5.6 million to $9.2 million
while the net unrealized gains in the U.S Government agency and obligations of
state and political subdivisions categories increased by $3.1 million and $3.2
million, respectively.
At December 31, 2011, the corporate
securities portfolio included four pooled trust preferred securities with
amortized cost of $13.8 million and an estimated fair market value of $8.0
million resulting in an estimated $5.8 million unrealized loss. This unrealized
loss was associated with the decline in market value since purchase of our
investments in pooled trust preferred securities issued by banks and insurance
companies. Continued wide credit and liquidity spreads contributed to the
unrealized loss associated with these securities. These pooled trust preferred
securities are rated C or better by the rating agencies that cover these
securities and they have several features that reduce credit risk, including
seniority over certain tranches in the same pool and the benefit of certain
collateral coverage tests.
Gross realized gains on the sale of
investment securities included in earnings in 2011, 2010, and 2009 were
$1,022,000, $1,562,000, and $833,000, respectively. Gross realized losses were
$309,000 in 2011 and there were no such losses in 2010 and 2009.
Dividends on equity investments for the
years 2011, 2010, and 2009 were $100,000, $105,000, and $106,000,
respectively.
67
During 2011,
in terms of amortized cost, we increased our investment securities balance by
$72.4 million principally due to our efforts reducing cash balances. The
purchases over the past year were primarily of US Government agency securities
with 3 to 5 year maturities and 10 to 15 year fully amortizing US Agency
mortgage backed securities. Our U.S. Government agency securities increased by
$25.4 million from December 31, 2010, to December 31, 2011, as part of our
effort to maintain liquidity and portfolio diversification as well as to provide
collateral for public funds and borrowing sources such as the FHLB.
Our mortgage-backed securities portfolio had a fair value of $428.7
million, an increase of $65.1 million from $363.6 one year ago. This segment of
our portfolio primarily consists solely of U.S. Government agency ten and
fifteen year fully amortizing mortgage backed securities with limited extension
risk. This portfolio consisted of U.S. Agency backed mortgages with an amortized
cost of $332.3 million and U.S. Government backed mortgage securities with an
amortized cost of $87.3 million. Floating or adjustable rate securities
represented $20.5 million of this portfolio while the remainder consisted of
fixed rate securities. Ten and fifteen year pass-through mortgages with a
projected average life of 3.1 years represented the majority of fixed rate
securities with in this portfolio. Mortgage backed securities are subject to
prepayment risk. Rising prepayments reduces the projected average life and
accelerates the amortization of premium thus reducing the income from this
portfolio. At December 31, 2011 the bank owned no privately issued mortgage
backed securities.
Our portfolio of securities representing obligations of state and
political subdivisions had a fair value of $60.7 million, with an amortized cost
of $56.0 million, indicating an unrealized gain of $4.7 million.
At December 31,
2011, our equity and other investment securities had a fair value of $12.0
million and consisted of three investments in mutual fund shares and three
investments in government backed Housing and Urban Development (HUD) Bonds. In
addition to interest income, these investments provide the Bank with a Community
Reinvestment Act (CRA) benefits.
68
2. INVESTMENT SECURITIES
The following
tables provide the fair value and gross unrealized losses on securities
available for sale, aggregated by category and length of time the individual
securities have been in a continuous unrealized loss position:
(Dollars in thousands)
|
|
Less than 12
months
|
|
12 months or
more
|
|
Total
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
As
of December 31, 2011
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
U.S. Government agency securities
|
|
$
|
14,627
|
|
$
|
(33
|
)
|
|
$
|
-
|
|
$
|
-
|
|
|
|
14,627
|
|
|
(33
|
)
|
Corporate securities
|
|
|
-
|
|
|
-
|
|
|
|
8,007
|
|
|
(5,844
|
)
|
|
|
8,007
|
|
|
(5,844
|
)
|
Mortgage-backed securities
|
|
|
26,416
|
|
|
(130
|
)
|
|
|
9,538
|
|
|
(6
|
)
|
|
|
35,954
|
|
|
(136
|
)
|
Obligations of state and political subdivisions
|
|
|
234
|
|
|
(7
|
)
|
|
|
-
|
|
|
-
|
|
|
|
234
|
|
|
(7
|
)
|
Equity and other securities
|
|
|
598
|
|
|
(2
|
)
|
|
|
1,182
|
|
|
(19
|
)
|
|
|
1,780
|
|
|
(21
|
)
|
Total
|
|
$
|
41,875
|
|
$
|
(172
|
)
|
|
$
|
18,727
|
|
$
|
(5,869
|
)
|
|
$
|
60,602
|
|
$
|
(6,041
|
)
|
|
|
(Dollars in thousands)
|
|
Less than 12
months
|
|
12 months or
more
|
|
Total
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
As
of December 31, 2010
|
|
Fair Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
U.S. Government agency securities
|
|
$
|
40,528
|
|
$
|
(507
|
)
|
|
$
|
-
|
|
$
|
-
|
|
|
|
40,528
|
|
|
(507
|
)
|
Corporate securities
|
|
|
-
|
|
|
-
|
|
|
|
8,892
|
|
|
(5,107
|
)
|
|
|
8,892
|
|
|
(5,107
|
)
|
Mortgage-backed securities
|
|
|
110,414
|
|
|
(2,088
|
)
|
|
|
978
|
|
|
(112
|
)
|
|
|
111,392
|
|
|
(2,200
|
)
|
Obligations of state and political subdivisions
|
|
|
4,084
|
|
|
(255
|
)
|
|
|
-
|
|
|
-
|
|
|
|
4,084
|
|
|
(255
|
)
|
Equity and other securities
|
|
|
1,776
|
|
|
(24
|
)
|
|
|
1
|
|
|
(1
|
)
|
|
|
1,777
|
|
|
(25
|
)
|
Total
|
|
$
|
156,802
|
|
$
|
(2,874
|
)
|
|
$
|
9,871
|
|
$
|
(5,220
|
)
|
|
$
|
166,673
|
|
$
|
(8,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were six
investment securities with a 12 month or greater continuous unrealized loss in
the investment portfolio at December 31, 2011, with a total unrealized loss of
$5.9 million. In comparison, at December 31, 2010, there were six investment
securities with a 12 month or greater continuous unrealized loss in the
investment portfolio, with a total unrealized loss of $5.2 million. The
unrealized loss on these investment securities was primarily due to continued
increased credit and liquidity spreads and an extension of expected cash flow
causing a decline in the fair market value of our pooled trust preferred
securities (corporate security category). These securities had a fair value of
$8.0 million compared to a $13.8 million amortized cost at December 31, 2011.
The value of most of our securities fluctuates as market interest rates
change.
There were a total of eight securities in Bancorps investment portfolio
at December 31, 2011, that have been in a continuous unrealized loss position
for less than 12 months, with an amortized cost of $42.0 million and a total
unrealized loss of $.2 million. At December 31, 2010, there were a total of 28
securities in Bancorps investment portfolio that have been in a continuous
unrealized loss position for less than 12 months, with an amortized cost of
$159.7 million and a total unrealized loss of $2.9 million. The fair value of
these securities fluctuates as market interest rates change.
69
2. INVESTMENT SECURITIES
Management
reviews and evaluates the Companys debt securities on an ongoing basis for the
presence of other-than-temporary impairment (OTTI). Our analysis takes into
consideration current market conditions, length and severity of impairment,
extent and nature of the change in fair value, issuer ratings, and whether or
not the Company intends to, or may be required to, sell debt securities before
recovering any unrealized losses.
In the first quarter of 2009, the Company
recorded OTTI charges totaling $.2 million pretax consisting of $.1 million
relating to a Lehman Brothers bond held in our corporate securities portfolio
and $.1 for the investment in Freddie Mac preferred stock held in our equity and
other securities portfolio. Both of these investments were sold in the second
quarter of 2009 for no additional gain or loss.
In the second quarter of 2011, the
Company recorded a credit related OTTI charge of $.2 million pretax related to a
pooled trust preferred security in our investment portfolio which also was
placed on nonaccrual status at the same time. We do not intend to sell this
security, and it is not likely that we will be required to sell this security,
but we do not expect to recover the entire amortized cost basis of the security.
The amount of OTTI related to credit losses recognized in earnings represents
the amortized cost of the security that we do not expect to recover and is based
on the estimated cash flow expected from the security, discounted by the
estimated future coupon rates of the security. We estimate cash flows based on
the performance of the underlying collateral for the security and the overall
structure of the security. Factors considered in the performance of underlying
collateral include current default and deferral rates, estimated future default,
deferral and recovery rates, and prepayment rates. Factors considered in the
overall structure of the security include the impact of the underlying
collateral cash flow on debt coverage tests and subordination levels. The
remaining impairment on this security that is related to all other factors is
recognized in other comprehensive income. Given regulatory guidelines on
expectation of full payment of interest and principal as well as extended
principal in kind payments, this pooled trust preferred security was placed on
nonaccrual status. In addition, in October 2011 the Company placed another
pooled trust preferred security with principal in kind payments on nonaccrual
status. While this security had an impairment loss of $1.6 million at December
31, 2011, based on our projections of future interest and principal payments,
this security had no credit related OTTI as of December 31, 2011. At year end
2011, these securities were rated C or better by the rating agencies that cover
these securities. They have several features that reduce credit risk, including
seniority over certain tranches in the same pool and the benefit of certain
collateral coverage tests.
The following table presents a summary of
the significant inputs utilized to measure the other-than-temporary impairment
related to credit losses associated with the above pooled trust preferred
security at December 31, 2011 and 2010:
(Dollars in thousands)
|
|
|
|
|
|
|
December 31,
2011
|
|
December 31,
2010
|
Default Rate
|
0.75
|
%
|
|
0.75
|
%
|
Recovery Rate
|
15.00
|
%
|
|
15.00
|
%
|
Prepayments
|
1.00
|
%
|
|
1.00
|
%
|
The following table presents information
about the securities with OTTI losses for the years ended December 31, 2011, and
2010:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to date December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
Other-than-temporary impairment losses on
securities
|
|
$
|
(1,636
|
)
|
|
$
|
-
|
|
$
|
(6,738
|
)
|
Portion of other-than temporary, non-credit related
losses
|
|
|
|
|
|
|
|
|
|
|
|
recognized in other comprehensive income
|
|
|
1,457
|
|
|
|
-
|
|
|
6,546
|
|
Net other-than-temporary impairment losses
on securities
|
|
$
|
(179
|
)
|
|
$
|
-
|
|
$
|
(192
|
)
|
70
2. INVESTMENT SECURITIES
The following
table presents a tabular roll forward of the amount of credit related OTTI
recognized in earnings for years ended December 31, 2011, and 2010:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Year ended December
31,
|
|
|
2011
|
|
|
2010
|
Balance of net
other-than-temporary impairment losses on securities, beginning of
period
|
|
$
|
-
|
|
|
$
|
-
|
Net other-than-temporary impairment losses
on securities in the period
|
|
|
(179
|
)
|
|
|
-
|
Balance of net
other-than-temporary impairment losses on securities, end of
period
|
|
$
|
(179
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
At December 31, 2011, and 2010, the
Company had $291.0 and $504.0 million, respectively, in investment securities
being provided as collateral to the FHLB, the Federal Reserve Bank of San
Francisco (the Reserve Bank), the State of Oregon and the State of Washington,
and others for our borrowings and certain public fund deposits. At December 31,
2011, and December 31, 2010, Bancorp had no reverse repurchase
agreements.
The follow table presents the maturities
of the investment portfolio at December 31, 2011:
(Dollars in thousands)
|
|
Available for sale
|
|
|
Amortized cost
|
|
Fair value
|
U.S. Treasury
securities
|
|
|
|
|
|
|
One
year or less
|
|
$
|
200
|
|
$
|
203
|
After one year through
five years
|
|
|
-
|
|
|
-
|
After
five through ten years
|
|
|
-
|
|
|
-
|
Due after ten
years
|
|
|
-
|
|
|
-
|
Total
|
|
|
200
|
|
|
203
|
|
U.S. Government agency
securities:
|
|
|
|
|
|
|
One
year or less
|
|
|
499
|
|
|
502
|
After one year through
five years
|
|
|
185,726
|
|
|
189,062
|
After
five through ten years
|
|
|
29,986
|
|
|
30,067
|
Due after ten
years
|
|
|
-
|
|
|
-
|
Total
|
|
|
216,211
|
|
|
219,631
|
|
Corporate
securities:
|
|
|
|
|
|
|
One
year or less
|
|
|
-
|
|
|
-
|
After one year through
five years
|
|
|
500
|
|
|
500
|
After
five through ten years
|
|
|
-
|
|
|
-
|
Due after ten
years
|
|
|
13,851
|
|
|
8,007
|
Total
|
|
|
14,351
|
|
|
8,507
|
|
Obligations of state and
political subdivisions:
|
|
|
|
|
|
|
One
year or less
|
|
|
1,065
|
|
|
1,107
|
After one year through
five years
|
|
|
16,394
|
|
|
17,391
|
After
five through ten years
|
|
|
28,686
|
|
|
31,584
|
Due after ten
years
|
|
|
9,858
|
|
|
10,650
|
Total
|
|
|
56,003
|
|
|
60,732
|
|
|
|
|
|
|
|
Sub-total
|
|
|
286,765
|
|
|
289,073
|
|
Mortgage-backed
securities
|
|
|
419,510
|
|
|
428,725
|
Equity investments and other
securities
|
|
|
11,318
|
|
|
12,046
|
Total securities
|
|
$
|
717,593
|
|
$
|
729,844
|
|
|
|
|
|
|
|
Mortgage-backed securities, including
collateralized mortgage obligations and asset-backed securities, have maturities
that will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
71
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The following table presents the loan
portfolio as of December 31, 2011 and 2010:
(Dollars in thousands)
|
|
December 31,
|
|
|
2011
|
|
2010
|
Commercial
|
|
$
|
299,766
|
|
|
$
|
309,327
|
|
Real estate construction
|
|
|
30,162
|
|
|
|
44,085
|
|
Real estate
mortgage
|
|
|
324,994
|
|
|
|
349,016
|
|
Commercial real estate
|
|
|
832,767
|
|
|
|
818,577
|
|
Installment and other
consumer
|
|
|
13,612
|
|
|
|
15,265
|
|
Total
loans
|
|
|
1,501,301
|
|
|
|
1,536,270
|
|
Allowance for loan
losses
|
|
|
(35,212
|
)
|
|
|
(40,217
|
)
|
Total loans, net
|
|
$
|
1,466,089
|
|
|
$
|
1,496,053
|
|
|
|
|
|
|
|
|
|
|
Total loans
decreased by 2% or $35 million from the balance at December 31, 2010, and the
decrease reflected the continued challenges in local residential real estate
markets, consumers de-leveraging and uncertainties with respect to the strength
of the economy. Commercial, real estate construction, and real estate mortgage
loan balances declined from year end and more than offset growth in commercial
real estate loan balances. At December 31, 2011, and 2010, Bancorp had $.8
million and $1.3 million, respectively, of overdrafts classified as loans in the
installment and other consumer loan category.
The Company has lending policies and
underwriting processes in place that are designed to make loans within an
acceptable level of risk for the estimated return. Management reviews and
approves these policies and processes on a regular basis. Management frequently
reviews reports related to loan production, loan quality, loan delinquencies and
nonperforming and potential problem loans. Diversification in the loan portfolio
is a means of managing risk associated with fluctuations in economic
conditions.
Commercial loans are underwritten after
evaluating and understanding the borrowers ability to operate profitably and
prudently execute its business. Underwriting standards are designed to promote
relationship banking rather than transactional banking. The Companys lending
officers examine current and projected cash flows to determine the ability of
the borrower to repay their obligations as agreed. Commercial loans are
primarily made based on the identified cash flows of the borrower and
secondarily on the underlying collateral provided by the borrower. The cash
flows of borrowers, however, may not be as expected and the collateral securing
these loans may fluctuate in value. Management monitors and evaluates commercial
loans based on collateral, geography and risk rating criteria. Most commercial
loans are secured by the assets being financed or other business assets such as
accounts receivable or inventory and typically incorporate a personal guarantee;
however, some short-term loans may be made on an unsecured basis. In the case of
loans secured by accounts receivable, the availability of funds for the
repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers.
Commercial real estate loans are subject
to underwriting standards and processes similar to commercial loans. These loans
are viewed primarily as cash flow loans and secondarily as loans secured by real
estate. Commercial real estate lending typically involves higher loan principal
amounts and the repayment of these loans is generally largely dependent on the
successful lease-up of the property securing the loan or the business conducted
on the property securing the loan. Commercial real estate loans may be more
adversely affected by conditions in the real estate markets or in the general
economy. Management monitors and evaluates commercial real estate loans based on
collateral, geography, and risk rating criteria. As a general rule, the Company
avoids financing single purpose projects unless other underwriting factors are
present to help mitigate risk. The Company also utilizes third parties to
provide insight and guidance about economic conditions and trends affecting
market areas it serves.
Our residential and commercial
construction portfolios are portfolios we consider to have higher risk.
Construction loans are underwritten utilizing independent appraisal reviews,
sensitivity analysis of absorption and lease rates financial analysis of the
developers, property owners, and investors as well as on a selective basis,
feasibility studies. Construction loans are generally based upon estimates of
costs and value associated with the complete project. These estimates may be
inaccurate. Construction loans often involve the disbursement of substantial
funds with repayment substantially dependent on the success of the ultimate
project. Sources of repayment for these types of loans may be pre-committed
permanent loans from the Company or other approved third party long-term
lenders, sales of developed property or an interim loan commitment from the
Company until permanent financing is obtained. These loans are closely monitored
by on-site inspections and are considered to have higher risks than other real
estate loans due to their ultimate repayment being sensitive to interest rate
changes, governmental regulation of real property, pre-leasing that does not
materialize, general economic conditions, the availability of long-term
financing, and completion of construction within timelines and costs originally
set forth.
72
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank
originates fixed and adjustable rate residential mortgages. These residential
loans are typically sold on the secondary market with the servicing
responsibility released by the Company. These loan sales have no recourse,
however sales are subject to proper compliance with standard underwriting rules
that if not met, may allow the secondary market buyer to require the Company to
repurchase the note. Upon origination, these residential mortgage loans are
recorded as loans held for sale until the sale has closed.
The Bank originates home equity loans and lines through an online
application system in which all applications are centrally reviewed with
underwriting and verifications completed by an experienced underwriter. Monthly
loan portfolio reports provide home equity loan performance monitoring. Annual
review of credit policies document the acceptance of policy and procedure
changes as needed. Credit risk is minimized by accepting borrowers with a proven
credit history, verified income sources for repayment and owner occupied
properties as acceptable collateral. Portfolio balances, performance and
underwriting standards can be influenced by regional economic cycles related to
unemployment levels, de-leveraging by borrowers, and market values for
residential properties.
The Company originates consumer loans utilizing a computer-based credit
scoring analysis to supplement the underwriting process. To monitor and manage
consumer loan risk, policies and procedures are developed and modified, as
needed, jointly by line and staff personnel. This activity, coupled with
relatively small loan amounts that are spread across many individual borrowers,
minimizes risk. Additionally, trend and outlook reports are reviewed by
management on a regular basis.
The Company maintains credit administration and credit review functions
that are designed to help confirm our credit standards are being followed.
Significant findings and periodic reports are communicated to the Chief Credit
Officer and Chief Executive Officer and, in certain cases, to the Loan,
Investment & Asset/Liability Committee, which is comprised of certain
directors. The loan review process complements and reinforces the risk
identification and assessment decisions made by lenders and credit personnel, as
well as the Companys policies and procedures.
Loans greater than 90 days past due are classified into nonaccrual
status. The following table presents an age analysis of the loan portfolio as of
December 31, 2011 and 2010:
(Dollars in thousands)
|
|
December 31, 2011
|
|
|
30 - 89 days
|
|
Greater than
|
|
Total
|
|
Current
|
|
Total
|
|
|
past due
|
|
90 days past due
|
|
past due
|
|
loans
|
|
loans
|
Commercial
|
|
$
|
849
|
|
$
|
5,692
|
|
$
|
6,541
|
|
$
|
293,225
|
|
$
|
299,766
|
Real estate construction
|
|
|
-
|
|
|
5,522
|
|
|
5,522
|
|
|
24,640
|
|
|
30,162
|
Real estate
mortgage
|
|
|
3,787
|
|
|
6,226
|
|
|
10,013
|
|
|
314,981
|
|
|
324,994
|
Commercial real estate
|
|
|
3,619
|
|
|
6,328
|
|
|
9,947
|
|
|
822,820
|
|
|
832,767
|
Installment and other
consumer
|
|
|
56
|
|
|
1
|
|
|
57
|
|
|
13,555
|
|
|
13,612
|
Total
|
|
$
|
8,311
|
|
$
|
23,769
|
|
$
|
32,080
|
|
$
|
1,469,221
|
|
$
|
1,501,301
|
|
(Dollars in thousands)
|
|
December 31, 2010
|
|
|
30 - 89 days
|
|
Greater than
|
|
Total
|
|
Current
|
|
Total
|
|
|
past due
|
|
90 days past due
|
|
past due
|
|
loans
|
|
loans
|
Commercial
|
|
$
|
953
|
|
$
|
9,984
|
|
$
|
10,937
|
|
$
|
298,390
|
|
$
|
309,327
|
Real estate construction
|
|
|
2,098
|
|
|
4,039
|
|
|
6,137
|
|
|
37,948
|
|
|
44,085
|
Real estate
mortgage
|
|
|
4,662
|
|
|
5,669
|
|
|
10,331
|
|
|
338,685
|
|
|
349,016
|
Commercial real estate
|
|
|
3,988
|
|
|
12,157
|
|
|
16,145
|
|
|
802,432
|
|
|
818,577
|
Installment and other
consumer
|
|
|
53
|
|
|
-
|
|
|
53
|
|
|
15,212
|
|
|
15,265
|
Total
|
|
$
|
11,754
|
|
$
|
31,849
|
|
$
|
43,603
|
|
$
|
1,492,667
|
|
$
|
1,536,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The following
table presents an analysis of impaired loans as of December 31, 2011, and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
(Dollars in thousands)
|
|
December 31,
2011
|
|
December 31,
2011
|
|
|
Unpaid principal
|
|
Impaired loans
|
|
Impaired loans
|
|
Total impaired
|
|
Related
|
|
Average impaired
|
|
|
balance
1
|
|
with no
allowance
|
|
with
allowance
|
|
loan
balance
|
|
allowance
|
|
loan
balance
|
Commercial
|
|
$
|
18,736
|
|
$
|
7,750
|
|
$
|
224
|
|
$
|
7,974
|
|
$
|
1
|
|
$
|
10,504
|
Real
estate construction
|
|
|
9,716
|
|
|
5,823
|
|
|
41
|
|
|
5,864
|
|
|
-
|
|
|
8,405
|
Real estate mortgage
|
|
|
30,732
|
|
|
11,949
|
|
|
6,779
|
|
|
18,728
|
|
|
329
|
|
|
20,892
|
Commercial real estate
|
|
|
25,426
|
|
|
15,070
|
|
|
8,604
|
|
|
23,674
|
|
|
173
|
|
|
25,969
|
Installment and other consumer
|
|
|
1,812
|
|
|
5
|
|
|
175
|
|
|
180
|
|
|
-
|
|
|
54
|
Total
|
|
$
|
86,422
|
|
$
|
40,597
|
|
$
|
15,823
|
|
$
|
56,420
|
|
$
|
503
|
|
$
|
65,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
(Dollars in thousands)
|
|
December 31,
2010
|
|
December 31,
2010
|
|
|
Unpaid principal
|
|
Impaired loans
|
|
Impaired loans
|
|
Total impaired
|
|
Related
|
|
Average impaired
|
|
|
balance
1
|
|
with no
allowance
|
|
with
allowance
|
|
loan
balance
|
|
allowance
|
|
loan
balance
|
Commercial
|
|
$
|
22,692
|
|
$
|
13,377
|
|
$
|
1,679
|
|
$
|
15,056
|
|
$
|
2
|
|
$
|
19,992
|
Real
estate construction
|
|
|
15,570
|
|
|
10,692
|
|
|
323
|
|
|
11,015
|
|
|
2
|
|
|
20,191
|
Real estate mortgage
|
|
|
28,856
|
|
|
15,491
|
|
|
7,828
|
|
|
23,319
|
|
|
443
|
|
|
20,610
|
Commercial real estate
|
|
|
28,717
|
|
|
21,648
|
|
|
5,634
|
|
|
27,282
|
|
|
103
|
|
|
17,187
|
Installment and other consumer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
45
|
Total
|
|
$
|
95,835
|
|
$
|
61,208
|
|
$
|
15,464
|
|
$
|
76,672
|
|
$
|
550
|
|
$
|
78,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The
unpaid principal balance on impaired loans represents the amount owed by
the borrower. The carrying value of impaired loans is lower than the
unpaid principal balance due to
charge-offs.
|
At December
31, 2011, and 2010, Bancorps recorded investment in loans that were considered
to be impaired was $56.4 million and $76.7 million, respectively. A loan is
considered to be impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due including
both interest and principal according to the contractual terms of the loan
agreement. For loans that are collateral dependent; the Company charges off the
amount of impairment at the time of impairment. At December 31, 2011, a specific
reserve allowance in the amount of $.5 million was established related to $15.8
million of impaired loans which were considered to be troubled debt
restructurings (TDR) that were on interest accruing status, compared to a
specific reserve allowance in the amount of $.6 million was established related
to $15.5 million of impaired loans which were considered to be troubled debt
restructurings and were on an interest accruing status at December 31,
2010.
The average recorded investment in impaired loans for the years ended
December 31, 2011, 2010, and 2009, was approximately, $65.8 million, $78.0
million and $134.3 million, respectively. For the years ended December 31, 2011,
2010, and 2009, interest income recognized on impaired loans totaled $1,035,000,
$568,000, and $526,000, respectively.
74
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
A loan is
accounted for as a TDR if the Company, for economic or legal reasons related to
the borrowers financial difficulties, grants a concession to the borrower that
it would not otherwise consider granting. A TDR typically involves a
modification of terms such as a reduction of the stated interest rate or face
amount of the loan, a reduction of accrued interest, or an extension of the
maturity date(s) at a stated interest rate lower than the current market rate
for a new loan with similar risk.
The following table presents an analysis of TDRs for the periods ended
December 31, 2011, and 2010:
|
(Dollars in thousands)
|
|
TDRs recorded for the
twelve months ending
|
|
TDRs recorded in the
twelve months prior to December 31, 2011 that
|
|
|
|
December 31, 2011
|
|
subsequently defaulted in the twelve months ending December
31, 2011
|
|
|
|
Number of
|
|
Pre-TDR
outstanding
|
|
Post-TDR
outstanding
|
|
Number of
|
|
Pre-TDR
outstanding
|
|
Amount
Defaulted
|
|
|
|
loans
|
|
recorded investment
|
|
recorded investment
|
|
loans
|
|
recorded investment
|
|
|
|
|
Commercial
|
|
11
|
|
$
|
949
|
|
$
|
949
|
|
2
|
|
$
|
115
|
|
$
|
97
|
|
Real estate construction
|
|
1
|
|
|
744
|
|
|
744
|
|
-
|
|
|
-
|
|
|
-
|
|
Real estate
mortgage
|
|
9
|
|
|
2,653
|
|
|
2,653
|
|
1
|
|
|
59
|
|
|
49
|
|
Commercial real estate
|
|
7
|
|
|
1,603
|
|
|
1,520
|
|
1
|
|
|
374
|
|
|
374
|
|
Consumer loans
|
|
3
|
|
|
225
|
|
|
225
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
31
|
|
$
|
6,174
|
|
$
|
6,091
|
|
4
|
|
$
|
548
|
|
$
|
520
|
|
|
|
(Dollars in thousands)
|
|
TDRs recorded for the
twelve months ending
|
|
TDRs recorded in the
twelve months prior to December 31, 2010 that
|
|
|
|
December 31, 2010
|
|
subsequently defaulted in the twelve months ending December
31, 2010
|
|
|
|
Number of
|
|
Pre-TDR
outstanding
|
|
Post-TDR
outstanding
|
|
Number of
|
|
Pre-TDR
outstanding
|
|
Amount
Defaulted
|
|
|
|
loans
|
|
recorded investment
|
|
recorded investment
|
|
loans
|
|
recorded investment
|
|
|
|
|
Commercial
|
|
36
|
|
$
|
16,144
|
|
$
|
15,304
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Real estate construction
|
|
16
|
|
|
7,479
|
|
|
7,479
|
|
7
|
|
|
1,916
|
|
|
1,666
|
|
Real estate
mortgage
|
|
17
|
|
|
7,554
|
|
|
7,554
|
|
-
|
|
|
-
|
|
|
-
|
|
Commercial real estate
|
|
22
|
|
|
22,078
|
|
|
21,586
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
91
|
|
$
|
53,255
|
|
$
|
51,923
|
|
7
|
|
$
|
1,916
|
|
$
|
1,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For TDRs that are collateral dependent,
the Company charges off the amount of impairment at the time of impairment,
rather than creating a specific reserve allowance for the impaired amount. TDRs
that are performing and on an interest accruing status are measured for
impairment based on the present value of expected future cash flows discounted
at the loans effective interest rate. Impairment resulting from this
measurement is recorded as a specific reserve allowance in the allowance for
credit losses.
The following table presents nonaccrual loans by category as of December
31, 2011, and 2010:
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
|
Commercial
|
|
$
|
7,750
|
|
$
|
13,377
|
|
Real estate construction
|
|
|
5,823
|
|
|
10,692
|
|
Real estate
mortgage
|
|
|
11,949
|
|
|
15,491
|
|
Commercial real estate
|
|
|
15,070
|
|
|
21,671
|
|
Installment and other
consumer
|
|
|
5
|
|
|
-
|
|
Total
loans on nonaccrual status
|
|
$
|
40,597
|
|
$
|
61,231
|
Loans on which
the accrual of interest has been discontinued were approximately $40.6 million,
$61.2 million and $99.3 million at December 31, 2011, 2010, and 2009,
respectively. Interest income foregone on nonaccrual loans was approximately
$4.1 million, $6.5 million and $10.7 million in 2011, 2010, and 2009,
respectively.
75
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The Company
uses a risk rating matrix to assign a risk rating to loans not evaluated on a
homogenous pool level. At December 31, 2011, $1.10 billion of loans were risk
rated and $397.6 million were evaluated on a homogeneous pool basis.
Individually risk rated loans are rated on a scale of 1 to 10. A description of
the general characteristics of the 10 risk ratings is as follows:
-
Ratings 1, 2 and 3 - These ratings include loans
to very high credit quality borrowers of investment or near investment grade.
These borrowers have significant capital strength, moderate leverage, stable
earnings and growth, and readily available financing alternatives. Smaller
entities, regardless of strength, would generally not fit in these ratings.
These ratings also include loans that are collateralized by U. S. Government
securities and certificates of deposits.
-
Rating 4 - These ratings include loans to
borrowers of solid credit quality with moderate risk. Borrowers in these
ratings are differentiated from higher ratings on the basis of size (capital
and/or revenue), leverage, asset quality and the stability of the industry or
market area.
-
Ratings 5 and 6 - These ratings include pass
rating loans to borrowers of acceptable credit quality and risk. Such
borrowers are differentiated from Rating 4 in terms of size, secondary sources
of repayment or they are of lesser stature in other key credit metrics in that
they may be over-leveraged, undercapitalized, inconsistent in performance or
in an industry or an economic area that is known to have a higher level of
risk, volatility, or susceptibility to weaknesses in the economy. However, no
material adverse trends are evident with borrowers in these pass ratings.
-
Rating 7 - This rating includes loans on
managements watch list and is intended to be utilized on a temporary basis
for pass rating borrowers where a significant risk-modifying action is
anticipated in the near term.
-
Rating 8 - This rating includes Substandard
loans, in accordance with regulatory guidelines, for which the accrual of
interest may or may not be discontinued. By definition under regulatory
guidelines, a Substandard loan has defined weaknesses which make payment
default or principal exposure likely, but not yet certain. Such loans are apt
to be dependent upon collateral liquidation, a secondary source of repayment,
or an event outside of the normal course of business.
-
Rating 9 - This rating includes Doubtful loans
in accordance with regulatory guidelines. Such loans are placed on nonaccrual
status and may be dependent upon collateral having a value that is difficult
to determine or upon some near-term event which lacks
certainty.
-
Rating 10 - This rating includes Loss loans in
accordance with regulatory guidelines. Such loans are to be charged-off or
charged-down when payment is acknowledged to be uncertain or when the timing
or value of payments cannot be determined. Loss is not intended to imply
that the loan or some portion of it will never be paid, nor does it in any way
imply that there has been a forgiveness of debt.
The Company considers loans assigned a risk rating 8 through 10 to be
classified loans. The weighted average risk ratings did not exhibit material
change from December 31, 2010, to December 31, 2011. Overall classified loan
balances have decreased, however, both in total and as a percentage of the total
loan portfolio. The following table presents weighted average risk ratings of
the loan portfolio and classified loans by category:
|
(Dollars in thousands)
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
Weighted average
|
|
Classified
|
|
Weighted average
|
|
Classified
|
|
|
|
risk rating
|
|
loans
|
|
risk rating
|
|
loans
|
|
Commercial
|
|
|
5.84
|
|
$
|
22,401
|
|
|
5.89
|
|
$
|
32,895
|
|
Real estate construction
|
|
|
6.99
|
|
|
13,159
|
|
|
7.33
|
|
|
24,131
|
|
Real estate
mortgage
|
|
|
6.50
|
|
|
24,004
|
|
|
6.34
|
|
|
20,913
|
|
Commercial real estate
|
|
|
5.67
|
|
|
35,255
|
|
|
5.75
|
|
|
42,045
|
|
Installment and other
consumer
1
|
|
|
7.87
|
|
|
358
|
|
|
7.41
|
|
|
137
|
|
Total
|
|
|
|
|
$
|
95,177
|
|
|
|
|
$
|
120,121
|
|
|
|
Total loans risk
rated
|
|
$
|
1,103,713
|
|
|
|
|
$
|
1,096,859
|
|
|
|
1
|
|
Installment and other consumer loans are primarily evaluated on a
homogenous pool level and generally not individually risk rated unless
certain factors are met.
|
76
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
Important
credit quality metrics for this portfolio include nonaccrual and past due
status. Total loans evaluated on a homogeneous pool basis were $397.6 million
and $439.4 million at December 31, 2011 and 2010, respectively. The following
table presents loans by category that the credit risk is evaluated on a
portfolio basis. The real estate mortgage category includes home equity lines of
credit and home equity loans and certain small business loans:
|
(Dollars in thousands)
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
Current
|
|
Nonaccrual
|
|
30 - 89 days
|
|
Current
|
|
Nonaccrual
|
|
30 - 89 days
|
|
|
|
status
|
|
status
|
|
past due
|
|
status
|
|
status
|
|
past due
|
|
Commercial
|
|
$
|
46,774
|
|
$
|
11
|
|
$
|
112
|
|
$
|
54,217
|
|
$
|
245
|
|
$
|
7
|
|
Real estate construction
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
1,136
|
|
|
-
|
|
Real estate
mortgage
|
|
|
254,107
|
|
|
13
|
|
|
1,480
|
|
|
269,862
|
|
|
4,958
|
|
|
1,931
|
|
Commercial real estate
|
|
|
81,601
|
|
|
1
|
|
|
283
|
|
|
90,782
|
|
|
1,334
|
|
|
8
|
|
Installment and other
consumer
|
|
|
13,146
|
|
|
-
|
|
|
56
|
|
|
14,878
|
|
|
-
|
|
|
52
|
|
Total
|
|
$
|
395,628
|
|
$
|
29
|
|
$
|
1,931
|
|
$
|
429,739
|
|
$
|
7,673
|
|
$
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for credit losses is a reserve established through a
provision for credit losses charged to expense, which represents managements
best estimate as of the balance sheet date, of probable losses that have been
incurred within the existing loan portfolio. The allowance for credit losses is
based on historical loss experience by type of credit and internal risk rating,
specific homogeneous risk pools and specific loss allocations, with adjustments
for current events and conditions. The Companys process for determining the
appropriate amount of the allowance for credit losses is designed to account for
credit deterioration as it occurs. The provision for credit losses is reflective
of loan quality trends, and considers trends related to nonaccrual loans, past
due loans, potential problem loans, criticized loans and net charge-offs or
recoveries, among other factors. The provision for credit losses also reflects
the totality of actions taken on all loans for a particular period.
The allowance for credit losses reflects managements continuing
evaluation of industry concentrations, specific credit risks, loan loss
experience, current loan portfolio quality, present economic, political and
regulatory conditions and unidentified losses inherent in the current loan
portfolio. Portions of the allowance may be allocated for specific loans;
however, the entire allowance is available for any loan that, in managements
judgment, should be charged off. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon
a variety of factors beyond the Companys control, including, among other
things, the performance of the overall loan portfolio, the economy, changes in
interest rates and the view of the regulatory authorities toward loan
classifications.
The Companys allowance for loan losses consists of three key elements:
specific reserve allowances, formula allowance, and an unallocated allowance
that represents an amount to capture risk associated with qualitative factors
and uncertainty that is inherent in estimates used to determine the
allowance.
Specific reserve allowances may be established when management can
estimate the amount of an impairment of a loan, typically on a non real estate
collateralized loan or to address the unique risks associated with a group of
loans or particular type of credit exposure. The Company does not establish
specific reserve allowances on collateral dependent impaired loans. Impairment
on these loans is charged off to the allowance for credit losses when impairment
is established.
The formula allowance is calculated by applying loss factors to
individual loans based on the assignment of risk ratings, or through the
assignment of loss factors to homogenous pools of loans. Changes in risk ratings
of both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors are based on our historical loss experience and such
other data as management believes to be pertinent, and may be adjusted for
significant factors that, in managements judgment, affect the collectability of
the portfolio as of the evaluation date. At December 31, 2011, and 2010, the
allowance for loan losses was $35.2 million and $40.2 million, respectively,
while the reserve for unfunded commitments was $.8 million for both years ended
2011 and 2010.
The unallocated loan loss allowance represents an amount for imprecision
or uncertainty that is inherent in estimates used to determine the allowance. In
determining whether to carry an unallocated allowance and, if so, the amount of
the allowance, management considers a variety of qualitative factors, including
regional economic and business conditions that impact important categories of
our portfolio, loan growth rates, the depth and skill of lending staff, the
interest rate environment, and the results of bank regulatory examinations and
findings of our internal credit examiners. Currently, we have an unallocated
allowance for loan losses that is the result of our judgment about risks
inherent in the loan portfolio due to economic uncertainties, as well as our
evaluation of historical loss experience relative to current trends, and other
subjective factors.
77
3. LOANS AND ALLOWANCE FOR CREDIT
LOSSES
The following
is an analysis of the changes in the allowance for credit losses:
|
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Balance, beginning of
period
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
$
|
29,934
|
|
|
Provision for credit losses
|
|
|
8,133
|
|
|
|
18,652
|
|
|
|
90,057
|
|
|
Losses charged to the
allowance
|
|
|
(15,410
|
)
|
|
|
(19,476
|
)
|
|
|
(82,345
|
)
|
|
Recoveries credited to the
allowance
|
|
|
2,193
|
|
|
|
2,473
|
|
|
|
1,772
|
|
|
Balance, end of
period
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
|
|
Components of allowance
for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
35,212
|
|
|
$
|
40,217
|
|
|
$
|
38,490
|
|
|
Reserve for unfunded
commitments
|
|
|
771
|
|
|
|
850
|
|
|
|
928
|
|
|
Total allowance for credit losses
|
|
$
|
35,983
|
|
|
$
|
41,067
|
|
|
$
|
39,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for credit losses was $8.1 million, $18.7 million, and
$90.1 million for the years ended December 31, 2011, 2010 and 2009,
respectively, while net loan charge-offs were $13.2 million, $17.0 million, and
$80.6 million, over those same years. The provision for credit losses decreased
$10.6 million in 2011 compared to 2010, primarily due to a significant reduction
in unfavorable loan risk rating migration within the Companys loan portfolio
and lower net loan charge-offs in the commercial, residential real estate
construction, and mortgage categories, as well as in nonstandard mortgages,
which was only partially offset by higher home equity and commercial real estate
net charge-offs.
The 2009 provision for credit losses reflected a substantial unfavorable
loan risk rating migration and material net charge-offs within the loan
portfolio in 2009, which resulted in, among other things, a substantial increase
in the general valuation allowances within the allowance for credit losses model
during 2009 and 2010.
The following table presents summary account activity of the allowance
for credit losses by loan category as of December 31, 2011, and 2010:
|
(Dollars in thousands)
|
|
December 31, 2011
|
|
|
|
|
|
|
|
Real estate
|
|
Real estate
|
|
Commercial
|
|
Installment and
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
construction
|
|
mortgage
|
|
real estate
|
|
other consumer
|
|
Unallocated
|
|
Total
|
|
Balance, beginning of
period
|
|
$
|
8,541
|
|
|
$
|
4,474
|
|
|
$
|
8,156
|
|
|
$
|
12,462
|
|
|
$
|
1,273
|
|
|
$
|
6,161
|
|
|
$
|
41,067
|
|
|
Provision for credit losses
|
|
|
1,262
|
|
|
|
(174
|
)
|
|
|
5,853
|
|
|
|
1,849
|
|
|
|
1,118
|
|
|
|
(1,775
|
)
|
|
|
8,133
|
|
|
Losses charged to the
allowance
|
|
|
(3,393
|
)
|
|
|
(2,088
|
)
|
|
|
(5,771
|
)
|
|
|
(2,526
|
)
|
|
|
(1,632
|
)
|
|
|
-
|
|
|
|
(15,410
|
)
|
|
Recoveries credited to the
allowance
|
|
|
1,336
|
|
|
|
278
|
|
|
|
223
|
|
|
|
48
|
|
|
|
308
|
|
|
|
-
|
|
|
|
2,193
|
|
|
Balance, end of
period
|
|
$
|
7,746
|
|
|
$
|
2,490
|
|
|
$
|
8,461
|
|
|
$
|
11,833
|
|
|
$
|
1,067
|
|
|
$
|
4,386
|
|
|
$
|
35,983
|
|
|
|
|
Loans valued for
impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
7,974
|
|
|
$
|
5,864
|
|
|
$
|
18,728
|
|
|
$
|
23,674
|
|
|
$
|
180
|
|
|
$
|
-
|
|
|
$
|
56,420
|
|
|
Collectively
|
|
|
291,792
|
|
|
|
24,298
|
|
|
|
306,266
|
|
|
|
809,093
|
|
|
|
13,432
|
|
|
|
-
|
|
|
|
1,444,881
|
|
|
Total
|
|
$
|
299,766
|
|
|
$
|
30,162
|
|
|
$
|
324,994
|
|
|
$
|
832,767
|
|
|
$
|
13,612
|
|
|
$
|
-
|
|
|
$
|
1,501,301
|
|
|
|
|
(Dollars in thousands)
|
|
December 31,
2010
|
|
|
|
|
|
|
|
Real estate
|
|
Real estate
|
|
Commercial
|
|
Installment and
|
|
|
|
|
|
|
|
Commercial
|
|
construction
|
|
mortgage
|
|
real estate
|
|
other consumer
|
|
Unallocated
|
|
Total
|
|
Balance, beginning of
period
|
|
$
|
8,224
|
|
|
$
|
7,240
|
|
|
$
|
8,211
|
|
|
$
|
9,492
|
|
|
$
|
1,294
|
|
|
$
|
4,957
|
|
|
$
|
39,418
|
|
|
Provision for credit losses
|
|
|
4,474
|
|
|
|
113
|
|
|
|
7,025
|
|
|
|
4,262
|
|
|
|
1,574
|
|
|
|
1,204
|
|
|
|
18,652
|
|
|
Losses charged to the
allowance
|
|
|
(5,229
|
)
|
|
|
(3,576
|
)
|
|
|
(7,461
|
)
|
|
|
(1,321
|
)
|
|
|
(1,889
|
)
|
|
|
-
|
|
|
|
(19,476
|
)
|
|
Recoveries credited to the
allowance
|
|
|
1,072
|
|
|
|
697
|
|
|
|
381
|
|
|
|
29
|
|
|
|
294
|
|
|
|
-
|
|
|
|
2,473
|
|
|
Balance, end of
period
|
|
$
|
8,541
|
|
|
$
|
4,474
|
|
|
$
|
8,156
|
|
|
$
|
12,462
|
|
|
$
|
1,273
|
|
|
$
|
6,161
|
|
|
$
|
41,067
|
|
|
|
|
Loans valued for
impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
15,056
|
|
|
$
|
11,015
|
|
|
$
|
23,319
|
|
|
$
|
27,282
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
76,672
|
|
|
Collectively
|
|
|
294,271
|
|
|
|
33,070
|
|
|
|
325,697
|
|
|
|
791,295
|
|
|
|
15,265
|
|
|
|
-
|
|
|
|
1,459,598
|
|
|
Total
|
|
$
|
309,327
|
|
|
$
|
44,085
|
|
|
$
|
349,016
|
|
|
$
|
818,577
|
|
|
$
|
15,265
|
|
|
$
|
-
|
|
|
$
|
1,536,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
4. PREMISES AND EQUIPMENT
Premises and
equipment consists of the following:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Land
|
|
$
|
4,273
|
|
|
$
|
4,439
|
|
|
Buildings and improvements
|
|
|
29,937
|
|
|
|
31,002
|
|
|
Furniture and
equipment
|
|
|
28,663
|
|
|
|
28,917
|
|
|
Construction in progress
|
|
|
272
|
|
|
|
398
|
|
|
|
|
|
63,145
|
|
|
|
64,756
|
|
|
Accumulated depreciation
|
|
|
(38,771
|
)
|
|
|
(37,982
|
)
|
|
Total
|
|
$
|
24,374
|
|
|
$
|
26,774
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation included in occupancy and equipment expense amounted to $3.4
million, $3.8 million, and $5.9 million for the years ended December 31, 2011,
2010, and 2009, respectively. Depreciation for all premises and equipment is
calculated using the straight-line method. The Company periodically reviews the
recorded value of its long-lived assets, specifically premises and equipment, to
determine whether impairment exists. In 2011, the Company recorded impairment of
$.1 million in conjunction with a Bank branch that was closed and $.5 million of
leasehold improvement charge-offs associated with Bank branch closures. No
material impairments associated with premises and equipment were recorded during
2010 or 2009.
5. GOODWILL AND INTANGIBLE
ASSETS
The following table summarizes the change in Bancorps core deposit
intangible asset for the periods shown:
|
(Dollars in thousands)
|
|
Core deposit
|
|
|
|
intangible
|
|
Balance, January 1, 2010
|
|
$
|
637
|
|
|
Amortization
|
|
|
(279
|
)
|
|
Balance, December 31, 2010
|
|
|
358
|
|
|
Amortization
|
|
|
(358
|
)
|
|
Balance, December 31, 2011
|
|
$
|
-
|
|
|
|
|
|
|
|
6. OTHER REAL ESTATE OWNED,
NET
The following table summarizes Bancorps OREO for the years ended
December 31, 2011, and 2010:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Balance, beginning period
|
|
$
|
39,459
|
|
|
$
|
53,594
|
|
|
Additions to OREO
|
|
|
21,662
|
|
|
|
28,384
|
|
|
Disposition of OREO
|
|
|
(25,466
|
)
|
|
|
(35,870
|
)
|
|
Valuation adjustments in the period
|
|
|
(4,832
|
)
|
|
|
(6,649
|
)
|
|
Total OREO
|
|
$
|
30,823
|
|
|
$
|
39,459
|
|
|
|
|
|
|
|
|
|
|
|
The following
table summarizes Bancorps OREO valuation allowance for the years ended December
31, 2011, and 2010:
|
(Dollars in thousands)
|
|
December
31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Balance, beginning period
|
|
$
|
7,584
|
|
|
$
|
9,489
|
|
|
$
|
3,920
|
|
|
Valuation adjustments in the period
|
|
|
4,832
|
|
|
|
6,649
|
|
|
|
18,562
|
|
|
Deductions from the valuation allowance due
to disposition
|
|
|
(4,265
|
)
|
|
|
(8,554
|
)
|
|
|
(12,993
|
)
|
|
Total OREO valuation allowance
|
|
$
|
8,151
|
|
|
$
|
7,584
|
|
|
$
|
9,489
|
|
79
7
.
OTHER ASSETS
The following
table summarizes Bancorps other assets for the years ended December 31, 2011,
and 2010:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Deferred tax assets,
net
|
|
$
|
22,964
|
|
$
|
5,789
|
|
Accrued interest receivable
|
|
|
9,364
|
|
|
9,522
|
|
Investment in affordable
housing tax credits
|
|
|
3,251
|
|
|
3,915
|
|
Income taxes receivable
|
|
|
863
|
|
|
-
|
|
Other
|
|
|
7,684
|
|
|
13,715
|
|
Total other assets
|
|
$
|
44,126
|
|
$
|
32,941
|
|
|
|
|
|
|
|
|
Bancorp has invested in two limited partnerships that operate qualified
affordable housing properties. Tax credits and tax deductions from operating
losses are passed through the partnerships to Bancorp. The Company accounts for
these investments using the equity method.
8. BALANCES WITH THE FEDERAL RESERVE
BANK
The Bank is required to maintain cash reserves or deposits with the
Federal Reserve Bank equal to a percentage of reservable deposits. The average
required cash reserve for the Bank was $6.5 million during both of the years
ended December 31, 2011, and 2010.
9. BORROWINGS
The following table summarizes Bancorps borrowings as of December 31,
2011, and 2010:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Long-term
borrowings:
|
|
|
|
|
|
|
|
FHLB
non-putable advances
|
|
$
|
120,000
|
|
$
|
138,599
|
|
FHLB putable
advances
|
|
|
-
|
|
|
30,000
|
|
Total long-term borrowings
|
|
|
120,000
|
|
|
168,599
|
|
Total borrowings
|
|
$
|
120,000
|
|
$
|
168,599
|
|
|
|
|
|
|
|
|
The decrease in long-term borrowings of $48.6 million during 2011 was due
to the prepayment of $168.6 million in long-term FHLB borrowings in the third
and fourth quarter of 2011 offset in part by new long-term FHLB borrowings in
the period of $120 million. As a result of the long-term borrowing prepayments,
the Company incurred a prepayment charge of $7.14 million for the period ending
December 31, 2011, compared to a prepayment charge of $2.3 million associated
with the prepayment of $99.1 million in 2010.
At December 31, 2011, Bancorps long-term borrowings consisted of nine
fixed rate, fixed maturity notes with rates ranging from 0.81% to 1.43%.
Principal payments due at the scheduled maturities of Bancorps long-term
borrowings at December 31, 2011, were $50.0 million in 2013, $30.0 million in
2014, $29.3 million in 2015, and $10.7 million in 2016.
Long-term borrowings at December 31, 2010 consisted of notes with fixed
maturities and putable advances with the FHLB totaling $168.6 million at
interest rates ranging from 2.32% to 5.03%. Total long-term borrowings with
fixed maturities were $138.6 million at December 31, 2010. The Bank had three
putable advances totaling $30.0 million with original terms of five years, and
final maturities in February 2013, August 2013, and March 2014. The FHLB may
under certain circumstances require repayment of these putable advances prior to
their scheduled maturities.
FHLB advances are collateralized, as provided for in an Advances,
Security and Deposit Agreement with the FHLB, by investment securities and
qualifying loans. At December 31, 2011, the Company had additional borrowing
capacity available at the FHLB of $320.4 million based on pledged collateral.
Bancorp had no outstanding Federal Funds purchased from correspondent banks,
borrowings from the discount window, or reverse repurchase agreements at
December 31, 2011, and 2010.
80
10. JUNIOR SUBORDINATED DEBENTURES
At December
31, 2011, six wholly-owned subsidiary grantor trusts established by Bancorp had
issued and sold $51 million of trust preferred securities. Trust preferred
securities accrue and pay distributions periodically at specified annual rates
as provided in each indenture. The trusts used all of the net proceeds from each
sale of trust preferred securities to purchase a like amount of junior
subordinated debentures of the Company. The junior subordinated debentures are
the sole assets of the trusts. The Companys obligations under the junior
subordinated debentures and related documents, taken together, constitute a full
and unconditional guarantee by the Company of the obligations of the trusts. The
trust preferred securities are mandatorily redeemable upon the maturity of the
junior subordinated debentures and may be subject to earlier redemption by the
Company as provided in the indentures. The Company has the right to redeem the
junior subordinated debentures in whole (but not in part) on or after specific
dates, at a redemption price specified in the indentures plus any accrued but
unpaid interest to the redemption date. During the second quarter of 2011, the
Company paid all previously deferred interest on its trust preferred securities
and continues to pay quarterly interest payments as they become due. Under the
Companys December 2009 agreement with the Oregon Department of Consumer and
Business Services, Division of Finance and Corporate Securities (DFCS) and the
Federal Reserve Bank (Reserve Bank), the Company must request regulatory
approval prior to making payments on our trust preferred securities.
The following table is a summary of outstanding trust preferred
securities at December 31, 2011:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred security
|
|
|
|
|
|
|
Rate at
|
|
|
|
Next possible
|
|
Issuance Trust
|
|
Issuance
date
|
|
amount
|
|
Rate type
1
|
|
Initial
rate
|
|
12/31/11
|
|
Maturity
date
|
|
redemption date
2
|
|
West Coast Statutory Trust III
|
|
September 2003
|
|
$
|
7,500
|
|
Variable
|
|
6.75
|
%
|
|
3.51
|
%
|
|
September 2033
|
|
Currently redeemable
|
|
West
Coast Statutory Trust IV
|
|
March
2004
|
|
$
|
6,000
|
|
Variable
|
|
5.88
|
%
|
|
3.35
|
%
|
|
March
2034
|
|
Currently redeemable
|
|
West Coast Statutory Trust V
|
|
April 2006
|
|
$
|
15,000
|
|
Variable
|
|
6.79
|
%
|
|
1.98
|
%
|
|
June 2036
|
|
Currently redeemable
|
|
West
Coast Statutory Trust VI
|
|
December 2006
|
|
$
|
5,000
|
|
Variable
|
|
7.04
|
%
|
|
2.23
|
%
|
|
December 2036
|
|
Currently redeemable
|
|
West Coast Statutory Trust VII
|
|
March 2007
|
|
$
|
12,500
|
|
Variable
|
|
6.90
|
%
|
|
2.10
|
%
|
|
June 2037
|
|
June 2012
|
|
West
Coast Statutory Trust VIII
|
|
June
2007
|
|
$
|
5,000
|
|
Variable
|
|
6.74
|
%
|
|
1.93
|
%
|
|
June
2037
|
|
June
2012
|
|
|
|
Total
|
|
$
|
51,000
|
|
|
|
Weighted rate
|
|
2.41
|
%
|
|
|
|
|
1
|
|
The variable rate preferred securities reprice
quarterly.
|
2
|
|
Securities are redeemable at the option of Bancorp following these
dates.
|
The weighted average interest rate on the trust preferred securities was
2.41% at December 31, 2011. The interest rate on each security resets quarterly
and is tied to the London Interbank Offered Rate (LIBOR) rate. The junior
subordinated debentures issued by Bancorp to the grantor trust are reflected in
our consolidated balance sheet in the liabilities section at December 31, 2011,
and 2010, as junior subordinated debentures. Bancorp records interest expense on
the corresponding junior subordinated debentures in the consolidated statements
of income (loss). The common capital securities issued by the trusts are
recorded within other assets in the consolidated balance sheets, and totaled
$1.6 million at December 31, 2011, and 2010.
81
11. EMPLOYEE BENEFIT PLANS
Bancorp
employee benefits include a plan established under section 401(k) of the
Internal Revenue Code for certain qualified employees (the 401(k) plan).
Employee contributions up to 100 percent of salaries under the Internal Revenue
Code guidelines can be made under the 401(k) plan, of which Bancorp may match 50
percent of the employees contributions up to a maximum of three percent of the
employees eligible compensation. Bancorp may also elect to make discretionary
contributions to the plan. In 2011 and 2010, Bancorp made qualified,
non-elective, discretionary contributions into employee 401(k) plans. Bancorps
401(k) related discretionary contributions expenses for 2011, 2010, and 2009
were $.3 million, $.1 million, and $0, respectively. Employees vest immediately
in their own contributions and earnings, and vest in Bancorps matching
contributions over five years of eligible service. Bancorp had no 401(k) plan
related expenses in 2011, 2010, and 2009 related to the Companys 401(k) plan
match.
Bancorp provides separate non-qualified deferred compensation plans for
directors and executive officers (collectively, Deferred Compensation Plans)
as supplemental benefit plans which permit directors and selected officers to
elect to defer receipt of all or any portion of their future salary, bonus or
directors fees, including with respect to officers, amounts they otherwise
might not be able to defer under the 401(k) plan due to specified Internal
Revenue Code restrictions on the maximum deferral that may be allowed under that
plan. Under the Deferred Compensation Plans, an amount equal to compensation
being deferred by participants is placed in a rabbi trust, the assets of which
is available to Bancorps creditors and recorded as trading securities in our
consolidated balance sheets, and invested consistent with the participants
direction among a variety of investment alternatives. A deferred compensation
liability of $1.6 million was included in other liabilities as of December 31,
2011, relatively unchanged from December 31, 2010.
Bancorp has multiple supplemental executive retirement agreements with
former and current executives. The following table reconciles the accumulated
liability for the benefit obligation of these agreements:
|
(Dollars in thousands)
|
|
Year ended
December 31,
|
|
|
|
2011
|
|
2010
|
|
Beginning balance
|
|
$
|
2,618
|
|
|
$
|
2,514
|
|
|
Benefit expense
|
|
|
878
|
|
|
|
209
|
|
|
Benefit payments
|
|
|
(132
|
)
|
|
|
(105
|
)
|
|
Ending balance
|
|
$
|
3,364
|
|
|
$
|
2,618
|
|
|
|
|
|
|
|
|
|
|
|
Bancorps obligations under supplemental executive retirement agreements
are unfunded plans and have no plan assets. The benefit obligation represents
the vested net present value of future payments to individuals under the
agreements. Bancorps benefit expense, as specified in the agreements for the
entire year 2012, is expected to be $.4 million. The benefits expected to be
paid are presented in the following table:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Benefits expected
to
|
|
Year
|
|
be paid
|
|
2012
|
|
$
|
80
|
|
2013
|
|
|
81
|
|
2014
|
|
|
81
|
|
2015
|
|
|
85
|
|
2016
|
|
|
83
|
|
2017 through 2021
|
|
|
1,690
|
82
12. COMMITMENTS AND CONTINGENT
LIABILITIES
The Company
leases land and office space under 48 leases, of which 45 are long-term
operating leases that expire between 2012 and 2024. At the end of most of the
respective lease terms, Bancorp has the option to renew the leases at fair
market value. At December 31, 2011, minimum future lease payments under these
leases and other operating leases were:
|
(Dollars in thousands)
|
|
Minimum
Future
|
|
Year
|
|
Lease Payments
|
|
2012
|
|
$
|
4,134
|
|
2013
|
|
|
4,031
|
|
2014
|
|
|
3,779
|
|
2015
|
|
|
3,149
|
|
2016
|
|
|
2,615
|
|
Thereafter
|
|
|
8,027
|
|
Total
|
|
$
|
25,735
|
|
|
|
|
|
Rental expense for all operating leases was $4.5 million, $4.2 million,
and $4.2 million for the years ended December 31, 2011, 2010, and 2009,
respectively.
Bancorp is periodically party to litigation arising in the ordinary
course of business. Based on information currently known to management, although
there are uncertainties inherent in litigation, we do not believe there is any
legal action to which Bancorp or any of its subsidiaries is a party that,
individually or in the aggregate, will have a materially adverse effect on
Bancorps financial condition and results of operations, cash flows, or
liquidity.
13. STOCKHOLDERS EQUITY AND REGULATORY
CAPITAL
All share amounts have been restated to reflect the Reverse Stock Split.
Authorized capital stock of Bancorp at December 31, 2011, included 50,000,000
shares of Common Stock, no par value, and 10,000,000 shares of Preferred Stock,
no par value, of which 2,000,000 shares had been designated as Mandatorily
Convertible Cumulative Participating Preferred Stock, Series A (Series A
Preferred Stock) and 600,000 shares had been designated as Mandatorily
Convertible Cumulative Participating Preferred Stock, Series B (Series B
Preferred Stock).
Preferred Stock.
Following the receipt of shareholder approvals on January 20, 2010,
1,428,849 shares of Series A Preferred Stock issued in connection with Bancorp's
private capital raise and outstanding at December 31, 2009, automatically
converted into an aggregate of 14,288,490 shares of Common Stock. As of December
31, 2011, there are no shares of Series A Preferred Stock currently outstanding.
Bancorp also issued an aggregate of 121,328 shares of Series B Preferred
Stock in the private capital raise all of which remains outstanding. These
shares will automatically convert into an aggregate of 1,213,280 shares of
Common Stock upon transfer of the Series B Preferred Stock to third parties in a
widely dispersed offering.
The Series B Preferred Stock is not subject to the operation of a sinking
fund and has no participation rights. The Series B Preferred Stock is not
redeemable by the Company and is perpetual with no maturity. The holders of
Series B Preferred Stock have no general voting rights. If the Board of
Directors declares and pays a dividend in respect of Common Stock, it must
declare and pay to the holders of the Series B Preferred Stock on the same date
a dividend in an amount per share of the Series B Preferred Stock determined in
accordance with the Restated Articles of Incorporation that is intended to
provide such holders dividends in the amount they would have received if shares
of Series B Preferred Stock had been converted into Common Stock as of that
date. There are no accrued dividends or dividends in arrears on Series B
Preferred Stock at December 31, 2011.
Warrants to Purchase Series B Preferred Stock.
In October 2009, as part of a private
capital raise, Bancorp issued Class C Warrants to purchase an aggregate of
240,000 shares of Series B Preferred Stock at an exercise price of $100.00 per
share or $24 million in aggregate. The Warrants were immediately exercisable and
will expire on October 23, 2016. Shares of Series B Preferred Stock issuable
upon exercise of the Warrants will automatically convert into an aggregate of
2.4 million shares of Common Stock upon transfer of the Series B Preferred Stock
to third parties in a widely dispersed offering.
The Company allocated the proceeds of $21.1 million from the issuance of
the Series B Preferred Stock and Warrants between the two based on their
relative fair values. The fair value allocated to the warrants was $11.1
million.
The Company maintains a stock repurchase plan. Under the Companys stock
repurchase plan, the Company can purchase up to 980,000 shares of the Companys
Common Stock. The Company did not repurchase any shares under this plan in 2011
nor does it anticipate repurchasing any shares in the foreseeable future. Total
shares available for repurchase under this plan are 210,400 at December 31,
2011.
83
13. STOCKHOLDERS EQUITY AND REGULATORY
CAPITAL
Regulatory
Capital.
The Federal Reserve and Federal
Deposit Insurance Corporation (FDIC) have established minimum requirements for
capital adequacy for bank holding companies and nonmember banks. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Bancorp and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off balance sheet
items. The Federal Reserve and FDIC risk based capital guidelines require banks
and bank holding companies to have a ratio of Tier 1 capital to total risk
weighted assets of at least 4%, and a ratio of total capital to total risk
weighted assets of 8% or greater. In addition, the leverage ratio of Tier 1
capital to total average assets less intangibles is required to be at least 4%.
Bancorp and its bank subsidiarys capital components, classification, risk
weightings and other factors are also subject to qualitative judgments by
regulators. Failure to meet minimum capital requirements can initiate certain
action by regulators that, if undertaken, could have a material effect on
Bancorps financial statements.
Bancorps total risk-based capital ratio improved to 20.62% at December
31, 2011, up from 18.74% at December 31, 2010, while Bancorp's Tier 1 risk-based
capital ratio increased to 19.36% at December 31, 2011, from 17.47% at December
31, 2010. Bancorps capital ratios improved over year end 2010 principally as a
result of the consistent improvement in the core operating performance of the
Company over the past two years, the impact of the reversal of the deferred tax
asset valuation allowance and a reduction in the Companys risk weighted assets
over the past 12 months also contributed to improved capital ratios at Bancorp.
The following table presents the capital measures of Bancorp and the Bank
as of December 31, 2011, and 2010:
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
Amount
|
|
Percent
|
|
|
|
|
|
|
|
|
Required For
|
|
required for
|
|
|
|
|
|
|
|
Required For
|
|
required for
|
|
|
|
|
|
|
|
|
Minimum
|
|
Minimum
|
|
|
|
|
|
|
|
Minimum
|
|
Minimum
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Capital
|
|
Capital
|
|
|
|
|
|
|
|
Capital
|
|
Capital
|
|
|
Amount
|
|
Ratio
|
|
Adequacy
|
|
Adequacy
|
|
Amount
|
|
Ratio
|
|
Adequacy
|
|
Adequacy
|
Tier 1 risk-based
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp
|
|
$
|
355,498
|
|
19.36
|
%
|
|
$
|
73,461
|
|
4
|
%
|
|
$
|
322,648
|
|
17.47
|
%
|
|
$
|
73,859
|
|
4
|
%
|
West Coast Bank
|
|
|
342,213
|
|
18.66
|
%
|
|
|
73,367
|
|
4
|
%
|
|
|
309,578
|
|
16.79
|
%
|
|
|
73,765
|
|
4
|
%
|
Total risk-based
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp
|
|
$
|
378,616
|
|
20.62
|
%
|
|
$
|
146,923
|
|
8
|
%
|
|
$
|
345,951
|
|
18.74
|
%
|
|
$
|
147,718
|
|
8
|
%
|
West Coast Bank
|
|
|
365,301
|
|
19.92
|
%
|
|
|
146,733
|
|
8
|
%
|
|
|
332,852
|
|
18.05
|
%
|
|
|
147,530
|
|
8
|
%
|
Leverage
ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Coast Bancorp
|
|
$
|
355,498
|
|
14.61
|
%
|
|
$
|
97,301
|
|
4
|
%
|
|
$
|
322,648
|
|
13.02
|
%
|
|
$
|
99,088
|
|
4
|
%
|
West Coast Bank
|
|
|
342,213
|
|
14.09
|
%
|
|
|
97,119
|
|
4
|
%
|
|
|
309,578
|
|
12.51
|
%
|
|
|
98,975
|
|
4
|
%
|
84
14. STOCK PLANS
At December
31, 2011, Bancorp maintained one stock plan, the 2002 Stock Incentive Plan
(2002 Plan) which is shareholder approved and authorizes the grant of stock
options, restricted stock awards and certain other stock based awards. The 2002
Plan permits the grant of stock options and restricted stock awards for up to
820,000 shares. As of December 31, 2011, 67,550 shares remained available for
issuance, of which 53,287 shares may be allocated to restricted stock awards.
Proportional adjustments were made to the per share and related amounts of
shares, as well as the conversion and exercise rights of stock options and other
awards made under the 2002 Plan, in connection with the Reverse Stock Split.
It is Bancorps policy to issue new shares for stock option exercises and
restricted stock awards. Bancorp expenses stock options and restricted stock on
a straight line basis over the applicable vesting term. Restricted stock granted
under the 2002 Plan generally vests over a two to four year vesting period;
however, certain grants have been made that vested immediately or over a one
year period, including grants to directors.
All outstanding stock options have an exercise price that was equal to
the closing market value of Bancorps stock on the date the options were
granted. Options granted under the 2002 Plan generally vest over a two to four
year vesting period; however, certain grants have been made that vested
immediately, including grants to directors. Stock options have a 10 year maximum
term. The following table presents information on stock options outstanding for
the periods shown:
|
|
|
|
|
|
2011
|
|
|
|
|
2010
|
|
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
2011 Common
|
|
Avg. Ex.
|
|
2010 Common
|
|
Avg. Ex.
|
|
2009 Common
|
|
Avg. Ex.
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Balance, beginning of year
|
|
306,527
|
|
|
$
|
66.89
|
|
349,350
|
|
|
$
|
65.38
|
|
281,503
|
|
|
$
|
82.05
|
|
Granted
|
|
-
|
|
|
|
-
|
|
190
|
|
|
|
13.15
|
|
84,380
|
|
|
|
11.55
|
|
Exercised
|
|
(6,917
|
)
|
|
|
11.55
|
|
-305
|
|
|
|
11.55
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
(42,530
|
)
|
|
|
56.33
|
|
(42,709
|
)
|
|
|
54.78
|
|
(16,533
|
)
|
|
|
74.48
|
|
Balance, end of year
|
|
257,080
|
|
|
$
|
70.12
|
|
306,527
|
|
|
$
|
66.89
|
|
349,350
|
|
|
$
|
65.38
|
|
Exercisable, end of year
|
|
250,462
|
|
|
|
|
|
258,796
|
|
|
|
|
|
249,027
|
|
|
|
|
The average fair value of stock options granted is estimated on the date
of grant using the Black-Scholes option-pricing model. There were no stock
options granted in 2011. The following table presents the assumptions used in
the fair value calculation for 2010 and 2009:
|
|
|
2010
|
|
2009
|
|
Risk Free interest rates
|
|
|
1.43
|
%
|
|
|
1.64
|
%
|
|
Expected dividend
|
|
|
0.00
|
%
|
|
|
0%-1.22
|
%
|
|
Expected lives, in years
|
|
|
4
|
|
|
|
4
|
|
|
Expected volatility
|
|
|
38
|
%
|
|
|
37
|
%
|
|
Fair value of options granted
|
|
$
|
4.16
|
|
|
$
|
3.27
|
|
As of December 31, 2011, outstanding stock options consist of the
following:
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Remaining Years
to
|
|
Weighted Avg.
|
|
|
|
Weighted Avg.
|
|
Exercise Price Range
|
|
Outstanding
|
|
Maturity
|
|
Exercise Price
|
|
Options Exercisable
|
|
Exercise Price
|
|
$
|
11.55
|
-
|
$
|
50.10
|
|
71,928
|
|
$
|
7.08
|
|
$
|
11.66
|
|
71,733
|
|
$
|
11.63
|
|
|
50.10
|
-
|
|
63.75
|
|
31,140
|
|
|
6.20
|
|
|
63.72
|
|
24,717
|
|
|
63.72
|
|
|
63.75
|
-
|
|
103.20
|
|
99,499
|
|
|
1.60
|
|
|
85.53
|
|
99,499
|
|
|
85.53
|
|
|
103.20
|
-
|
|
170.65
|
|
54,513
|
|
|
3.27
|
|
|
122.78
|
|
54,513
|
|
|
122.78
|
|
|
Total
|
|
|
|
|
257,080
|
|
$
|
4.05
|
|
$
|
70.12
|
|
250,462
|
|
$
|
70.32
|
85
14. STOCK PLANS
The following
table presents information on stock options outstanding for the periods shown,
less estimated forfeitures:
|
(Dollars in thousands, except share and per
share data)
|
|
Year ended December
31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
Intrinsic value of options
exercised in the period
|
|
$
|
34
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options fully vested
and expected to vest:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
250,734
|
|
|
298,918
|
|
|
340,890
|
|
Weighted average
exercise price
|
|
$
|
70.12
|
|
$
|
66.90
|
|
$
|
65.40
|
|
Aggregate intrinsic value
|
|
$
|
282
|
|
$
|
190
|
|
$
|
-
|
|
Weighted average
contractual term of options
|
|
|
4.1 years
|
|
|
4.7 years
|
|
|
5.5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options vested and currently
exercisable
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
250,462
|
|
|
258,796
|
|
|
249,027
|
|
Weighted average exercise price
|
|
$
|
70.32
|
|
$
|
73.90
|
|
$
|
78.53
|
|
Aggregate intrinsic
value
|
|
$
|
289
|
|
$
|
123
|
|
$
|
-
|
|
Weighted average contractual term of options
|
|
|
4.0 years
|
|
|
4.1 years
|
|
|
4.0 years
|
|
|
|
Unearned compensation
related to stock options
|
|
$
|
15
|
|
$
|
110
|
|
$
|
323
|
Bancorp grants
restricted stock periodically as a part of the 2002 Plan for the benefit of
employees and directors. Restricted stock grants are made at the discretion of
the Board of Directors, except with regard to grants to certain Company
officers, which are made at the discretion of the Boards Compensation &
Personnel Committee. Compensation expense for restricted stock is based on the
market price of the Company stock at the date of the grant and amortized on a
straight-line basis over the vesting period which is currently one, three or
four years for all grants. Recipients of restricted stock do not pay any cash
consideration to the Company for the shares, have the right to vote all shares
subject to such grant and receive all dividends with respect to such shares,
whether or not the shares have vested, except in the case of performance awards
granted in 2008 for which dividends are collected and will be forfeited if
performance conditions are not met.
Restricted stock consists of the following for the years ended December
31, 2011, 2010, and 2009:
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Avg. Grant
|
|
|
|
|
Avg. Grant
|
|
|
|
|
Avg. Grant
|
|
|
|
2011 Restricted
|
|
Date Fair
|
|
2010 Restricted
|
|
Date Fair
|
|
2009 Restricted
|
|
Date Fair
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Balance, beginning of year
|
|
327,396
|
|
|
$
|
18.99
|
|
27,336
|
|
|
$
|
85.02
|
|
42,154
|
|
|
$
|
91.95
|
|
Granted
|
|
63,659
|
|
|
|
16.77
|
|
322,561
|
|
|
|
16.22
|
|
-
|
|
|
|
-
|
|
Vested
|
|
(101,273
|
)
|
|
|
22.07
|
|
(13,342
|
)
|
|
|
84.18
|
|
(14,237
|
)
|
|
|
104.36
|
|
Forfeited
|
|
(25,151
|
)
|
|
|
22.11
|
|
(9,159
|
)
|
|
|
23.29
|
|
(581
|
)
|
|
|
111.85
|
|
Balance, end of year
|
|
264,631
|
|
|
$
|
16.98
|
|
327,396
|
|
|
$
|
18.99
|
|
27,336
|
|
|
$
|
85.02
|
|
|
|
Weighted avg. remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recognition period
|
|
2.33 years
|
|
|
|
|
|
3.03 years
|
|
|
|
|
|
1.29 years
|
|
|
|
|
The following table presents stock-based compensation expense for
employees and directors related to restricted stock and stock options for the
periods shown:
|
|
|
Twelve months ended
December 31,
|
|
(Dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
Restricted stock
expense
|
|
$
|
1,819
|
|
$
|
1,883
|
|
$
|
1,106
|
|
Stock option expense
|
|
|
80
|
|
|
205
|
|
|
414
|
|
Total stock-based
compensation expense
|
|
$
|
1,899
|
|
$
|
2,088
|
|
$
|
1,520
|
|
|
|
Tax benefit recognized on
share-based expense
|
|
$
|
722
|
|
$
|
793
|
|
$
|
578
|
The balance of unearned compensation related to unvested restricted stock
granted as of December 31, 2011, and 2010, was $3.3 million and $4.5 million,
respectively. The unearned compensation balance at December 31, 2011 is expected
to be recognized over a weighted average period of 2.3 years. The Company
received cash in the amount of $79,891 and $3,523 from stock option exercises
for the twelve months ended December 31, 2011, and 2010, respectively. The
Company had $69,350 and $0 tax benefits from disqualifying dispositions
involving incentive stock options, the exercise of non-qualified stock options,
and the vesting and release of restricted stock for the twelve months ended
December 31, 2011, and 2010.
86
15. EARNINGS (LOSS) PER SHARE
Earnings per
share is calculated under the two-class method. The two-class method is an
earnings allocation formula that determines earnings per share for each class of
common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. A participating
security is an instrument that may participate in undistributed earnings with
common stock. The Company has issued restricted stock and preferred stock that
qualifies as a participating security. Basic earnings per share is computed by
dividing net income available to common shareholders by the weighted average
number of shares of common stock outstanding during the period.
Diluted earnings per share is computed in the same manner as basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if certain
shares issuable upon exercise of options and warrants, conversion of preferred
stock, and unvested restricted stock were included, unless those additional
shares would have been anti-dilutive. For the diluted earnings per share
computation, the treasury stock method is applied and compared to the two-class
method and whichever method results in a more dilutive impact is utilized to
calculate diluted earnings per share. The two-class method was utilized to
calculate diluted earnings per share for the year ended December 31, 2011.
On May 19, 2011, Bancorp implemented the Reverse Stock Split. All share
and per share related amounts have been restated to reflect the Reverse Stock
Split. The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations for the year ended December 31,
2011, 2010, and 2009:
|
(Dollars and shares in thousands, except per share
amounts)
|
|
Year ended
December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Net income (loss)
|
|
$
|
33,777
|
|
$
|
3,225
|
|
$
|
(91,213
|
)
|
|
Less: Net income (loss) allocated to participating
securities-basic:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
1,998
|
|
|
367
|
|
|
-
|
|
|
Unvested restricted
stock
|
|
|
477
|
|
|
37
|
|
|
(728
|
)
|
|
Net income (loss) available to common stock
holders-basic
|
|
|
31,302
|
|
|
2,821
|
|
|
(90,485
|
)
|
|
Add:
Net income (loss) allocated per two-class method-diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and Class C warrants
|
|
|
108
|
|
|
12
|
|
|
-
|
|
|
Net
income (loss) available to common stockholders-diluted
|
|
$
|
31,410
|
|
$
|
2,833
|
|
$
|
(90,485
|
)
|
|
|
|
Weighted average common shares
outstanding-basic
|
|
|
19,007
|
|
|
17,460
|
|
|
3,102
|
|
|
Common stock equivalents from:
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
20
|
|
|
6
|
|
|
-
|
|
|
Class C Warrants
|
|
|
913
|
|
|
593
|
|
|
-
|
|
|
Weighted average common shares outstanding-diluted
|
|
|
19,940
|
|
|
18,059
|
|
|
3,102
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
1.65
|
|
$
|
0.16
|
|
$
|
(29.15
|
)
|
|
Diluted earnings (loss) per share
|
|
$
|
1.58
|
|
$
|
0.16
|
|
$
|
(29.15
|
)
|
|
|
|
Common stock equivalent shares excluded due
to anti-dilutive effect
|
|
|
199
|
|
|
441
|
|
|
377
|
|
87
16. INCOME TAXES
The components of the provision
(benefit) for income taxes for the last three years were:
|
(Dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,349
|
|
|
$
|
6,230
|
|
|
$
|
(24,220
|
)
|
|
State
|
|
|
100
|
|
|
|
100
|
|
|
|
(6,982
|
)
|
|
|
|
|
1,449
|
|
|
|
6,330
|
|
|
|
(31,202
|
)
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(20,206
|
)
|
|
|
(2,483
|
)
|
|
|
10,335
|
|
|
State
|
|
|
(1,455
|
)
|
|
|
(57
|
)
|
|
|
1,591
|
|
|
|
|
|
(21,661
|
)
|
|
|
(2,540
|
)
|
|
|
11,926
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(18,857
|
)
|
|
|
3,747
|
|
|
|
(13,885
|
)
|
|
State
|
|
|
(1,355
|
)
|
|
|
43
|
|
|
|
(5,391
|
)
|
|
Total provision (benefit) for income
taxes
|
|
$
|
(20,212
|
)
|
|
$
|
3,790
|
|
|
$
|
(19,276
|
)
|
The deferred Federal and State tax
expense includes a benefit from the full reversal of the deferred tax asset
valuation allowance of $23.5 million for the year ended December 31,
2011.
The reconciliation between the
Companys effective tax rate on income (loss) and the statutory rate is as
follows:
|
(Dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Expected federal income
tax (benefit) provision
1
|
|
$
|
4,612
|
|
|
$
|
2,385
|
|
|
$
|
(38,671
|
)
|
|
State income tax, net of federal income tax
effect
|
|
|
422
|
|
|
|
66
|
|
|
|
(3,504
|
)
|
|
Interest on obligations of
state and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exempt from federal
tax
|
|
|
(755
|
)
|
|
|
(901
|
)
|
|
|
(1,148
|
)
|
|
Federal low income housing tax
credits
|
|
|
(535
|
)
|
|
|
(427
|
)
|
|
|
(972
|
)
|
|
Bank owned life
insurance
|
|
|
(305
|
)
|
|
|
(302
|
)
|
|
|
(307
|
)
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
4,570
|
|
|
Change in deferred tax
asset valuation allowance
|
|
|
(23,464
|
)
|
|
|
2,465
|
|
|
|
20,999
|
|
|
Other, net
|
|
|
(187
|
)
|
|
|
504
|
|
|
|
(243
|
)
|
|
Total (benefit)
provision for income taxes
|
|
$
|
(20,212
|
)
|
|
$
|
3,790
|
|
|
$
|
(19,276
|
)
|
|
1
|
|
Federal income tax provision
applied at 34% in 2011 and 2010 and 35% in
2009.
|
Based on evaluation of the positive
and negative evidence, management determined it was appropriate to establish a
deferred tax asset valuation allowance of $21.0 million as of December 31, 2009,
and an allowance of $23.5 million as of December 31, 2010. Based on the analysis
of positive and negative evidence at December 31, 2011, including the Companys
return to profitability over the last six consecutive quarters, no deferred tax
asset valuation allowance was deemed necessary as of December 31, 2011. As a
result, the deferred tax asset valuation allowance of $23.5 million was reversed
in the fourth quarter of 2011.
88
16. INCOME TAXES
Net deferred taxes are included in
other assets on the Companys balance sheet. The tax effect of temporary
differences that give rise to significant components of deferred tax assets and
deferred tax liabilities as of December 31, 2011, and 2010, are presented below:
|
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
13,532
|
|
$
|
15,455
|
|
|
Reserve for unfunded
commitments
|
|
|
296
|
|
|
327
|
|
|
Deferred employee benefits
|
|
|
2,247
|
|
|
1,768
|
|
|
Stock option and
restricted stock
|
|
|
732
|
|
|
973
|
|
|
Valuation allowance on OREO
|
|
|
3,133
|
|
|
2,914
|
|
|
Capitalized OREO
expenses
|
|
|
1,050
|
|
|
988
|
|
|
Taxable interest on nonaccrual
loans
|
|
|
2,646
|
|
|
2,207
|
|
|
State net operating loss
carryforwards
|
|
|
3,093
|
|
|
3,195
|
|
|
State business energy and low income housing
tax credits
|
|
|
770
|
|
|
631
|
|
|
Federal low income housing
tax credits
|
|
|
1,776
|
|
|
2,313
|
|
|
Other
|
|
|
3,085
|
|
|
3,514
|
|
|
Total gross
deferred tax assets
|
|
|
32,360
|
|
|
34,285
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
957
|
|
|
868
|
|
|
Net unrealized gain on
investments available for sale
|
|
|
4,813
|
|
|
327
|
|
|
Loan origination costs
|
|
|
1,610
|
|
|
1,645
|
|
|
Federal Home Loan Bank
stock dividends
|
|
|
1,893
|
|
|
1,893
|
|
|
Intangible assets
|
|
|
-
|
|
|
138
|
|
|
Other
|
|
|
123
|
|
|
161
|
|
|
Total gross
deferred tax liabilities
|
|
|
9,396
|
|
|
5,032
|
|
|
Net deferred tax assets
before valuation allowance
|
|
|
22,964
|
|
|
29,253
|
|
|
Deferred tax asset valuation
allowance
|
|
|
-
|
|
|
(23,464
|
)
|
|
Net deferred tax
assets
|
|
$
|
22,964
|
|
$
|
5,789
|
|
Primarily as a result of the Company
reversing its deferred tax asset valuation allowance in 2011, the Companys net
deferred tax asset increased by $17.2 million to $23.0 million at December 31,
2011.
At December 31, 2011, the Company
has state tax net operating loss carryforwards of $3.1 million and state tax
credit carryforwards of $.8 million. In addition, the Company has $1.8 million
of federal tax credits. The following table summarizes the expiration dates of
federal tax credits and state net operating loss and tax credit carryforwards:
|
(Dollars in
thousands)
|
|
|
|
|
Year of expiration
|
|
Type
|
|
Amount
|
|
2023-2026
|
|
State net operating
losses
|
|
$
|
3,093
|
|
2016-2019
|
|
State tax credits- business energy
|
|
|
654
|
|
2013-2016
|
|
State tax credits- low
income housing
|
|
|
116
|
|
2028-2031
|
|
Federal tax credits- low income
housing
|
|
|
1,776
|
Bancorp is subject to U.S. federal
income taxes and State of Oregon income taxes. The years 2008 through 2011
remain open to examination for federal income taxes, and years 2008 through 2011
remain open for State examination. As of December 31, 2011, and 2010, Bancorp
had no unrecognized tax benefits or uncertain tax positions. Bancorp had no
accrued interest or penalties as of December 31, 2011.
17. TIME DEPOSITS
Included in time deposits are
deposits in denominations of $100,000 or greater, totaling $54.5 million and
$87.9 million at December 31, 2011, and 2010, respectively. Interest expense
relating to time deposits in denominations of $100,000 or greater was $1.0
million, $2.7 million, and $5.9 million for the years ended December 31, 2011,
2010, and 2009, respectively. Maturity amounts on Bancorps time deposits
include $132.4 million in 2012, $25.7 million in 2013, $8.8 million in 2014,
$2.4 million in 2015, and $3.8 million in 2016. Included in the maturity amounts
are $1.9 million in variable rate time deposits that reprice monthly with
maturities in the first quarter of 2012.
89
18. FAIR VALUE MEASUREMENT AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
A financial instrument is defined as
cash, evidence of an ownership interest in an entity, or a contract that conveys
or imposes the contractual right or obligation to either receive or deliver cash
or another financial instrument. Examples of financial instruments included in
Bancorps balance sheet are cash, federal funds sold, debt and equity
securities, loans, demand, savings and other interest-bearing deposits, notes
and debentures. Examples of financial instruments which are not included in the
Bancorp balance sheet are commitments to extend credit and standby letters of
credit.
Fair value is defined as
the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
Accounting standards require the
fair value of deposit liabilities with no stated maturity, such as demand
deposits, NOW and money market accounts, to equal the carrying value of these
financial instruments and does not allow for the recognition of the inherent
value of core deposit relationships when determining fair value.
Bancorp has estimated fair value
based on quoted market prices where available. In cases where quoted market
prices were not available, fair values were based on the quoted market price of
a financial instrument with similar characteristics, the present value of
expected future cash flows or other valuation techniques that utilize
assumptions which are subjective and judgmental in nature. Subjective factors
include, among other things, estimates of cash flows, the timing of cash flows,
risk and credit quality characteristics, interest rates and liquidity premiums
or discounts. Accordingly, the results may not be precise, and modifying the
assumptions may significantly affect the values derived. Further, fair values
may or may not be realized if a significant portion of the financial instruments
are sold in a bulk transaction or a forced liquidation. Therefore, any aggregate
unrealized gains or losses should not be interpreted as a forecast of future
earnings or cash flows. Furthermore, the fair values disclosed should not be
interpreted as the aggregate current value of Bancorp.
The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash
equivalents
- The carrying amount is a
reasonable estimate of fair value.
Trading
securities
Trading securities held at December 31, 2011, are related solely to
bonds, equity securities and mutual funds held in a rabbi trust for benefit of
the Companys deferred compensation plans. Fair values for trading securities
are based on quoted market prices.
Investment
securities
- For substantially all
securities within the categories U.S. Treasuries, U.S. Government agencies,
mortgage-backed, obligations of state and political subdivisions, and equity
investments and other securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes if available. When quoted market
prices are not readily accessible or available, the use of alternative
approaches, such as matrix or model pricing or indicators from market makers, is
used. If a quoted market price is not available due to illiquidity, fair value
is estimated using quoted market prices for similar securities or other modeling
techniques. If neither a quoted market price nor market prices for similar
securities are available, fair value is estimated by discounting expected cash
flows using a market derived discount rate as of the valuation date.
Our level 3 assets consist of pooled
trust preferred securities, certain municipal securities and auction rate
securities. The fair values of these securities were estimated using the
discounted cash flow method. The fair value for these securities used inputs for
base case default, recovery and prepayment rates to estimate the probable cash
flows for the security. The estimated cash flows were discounted using a rate
for comparably rated securities adjusted for an additional liquidity premium.
Loans
- The fair value of loans is estimated by discounting the
future cash flows using the current rate at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. An
additional liquidity discount is also incorporated to more closely align the
fair value with observed market prices.
90
18. FAIR VALUE MEASUREMENT AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
Impaired
loans
- A loan is considered to be
impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due (both interest and principal)
according to the contractual terms of the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loans effective interest rate or, as a practical expedient, at the loans
observable market price or the fair market value of the collateral. A
significant portion of the Bank's impaired loans are measured using the fair
market value of the collateral.
Bank
owned life insurance
- The
carrying amount is the cash surrender value of all policies, which approximates
fair value.
Other real estate owned
- Management obtains
third party appraisals as well as independent fair market value assessments from
realtors or persons involved in selling OREO in determining the fair value of
particular properties. Accordingly, the valuation of OREO is subject to
significant external and internal judgment. Management periodically reviews OREO
and obtains periodic appraisals to determine whether the property continues to
be carried at the lower of its recorded book value or fair value less estimated
selling costs.
Goodwill
The method used to determine the impairment charge taken first quarter
2009 involved a two-step process. The first step estimated fair value using a
combination of quoted market price and an estimate of a control premium. It was
determined that the fair value of the Companys Banking reporting unit was less
than its book value and the carrying amount of the Companys Banking reporting
unit goodwill exceeded its implied fair value. The second step calculated the
implied fair value of goodwill which required allocation of the fair value to
all of the assets and liabilities of the reporting unit, including any
unrecognized intangible assets, in a hypothetical analysis.
Deposit
liabilities
- The fair value of demand
deposits, savings accounts and other deposits is the amount payable on demand at
the reporting date. The fair value of time deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.
Short-term
borrowings
- The carrying amount is a
reasonable estimate of fair value given the short-term nature of these financial
instruments.
Long-term
borrowings
- The fair value of the
long-term borrowings is estimated by discounting the future cash flows using the
current rate at which similar borrowings with similar remaining maturities could
be made.
Junior subordinated
debentures
- The fair value of the
variable rate junior subordinated debentures issued in connection with our trust
preferred securities approximates the pricing of a preferred security at current
market prices.
Commitments to extend
credit, standby letters of credit and financial guarantees
- The majority of our commitments to extend credit carry
current market interest rates if converted to loans.
The tables below present fair value
information on certain assets broken down by recurring or nonrecurring
measurement status. Recurring assets are initially measured at fair value and
are required to be reflected at fair value in the financial statements at each
reporting date. Assets measured on a nonrecurring basis are assets that due to
an event or circumstance were required to be re-measured at fair value after
initial recognition in the financial statements at some time during the
reporting period.
Assets are classified as level 1-3
based on the lowest level of input that has a significant effect on fair value.
The following definitions describe the level 1-3 categories for inputs used in
the tables presented below.
-
Quoted prices in active
markets for identical assets (Level 1): Inputs that are quoted unadjusted prices
in active markets for identical assets that the Company has the ability to
access at the measurement date. An active market for the asset is a market in
which transactions for the asset or liability occur with sufficient frequency
and volume to provide pricing information on an ongoing basis.
-
Other observable inputs
(Level 2): Inputs that reflect the assumptions market participants would use in
pricing the asset or liability developed based on market data obtained from
sources independent of the reporting entity including quoted prices for similar
assets, quoted prices for securities in inactive markets and inputs derived
principally from or corroborated by observable market data by correlation or
other means.
-
Significant
unobservable inputs (Level 3): Inputs that reflect the reporting entity's own
estimates about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances.
91
18. FAIR VALUE MEASUREMENT AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
The following table presents fair
value measurements for assets that are measured at fair value on a recurring
basis subsequent to initial recognition:
|
|
|
|
|
|
Fair value measurements at December
31, 2011, using
|
|
|
|
|
|
|
Quoted prices in active
|
|
Other observable
|
|
Significant
|
|
|
|
Total fair value
|
|
markets for identical assets
|
|
inputs
|
|
unobservable inputs
|
|
(Dollars in thousands)
|
|
December 31,
2011
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Trading securities
|
|
$
|
747
|
|
$
|
747
|
|
$
|
-
|
|
$
|
-
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
203
|
|
|
-
|
|
|
203
|
|
|
-
|
|
U.S. Government agency
securities
|
|
|
219,631
|
|
|
-
|
|
|
219,631
|
|
|
-
|
|
Corporate
securities
|
|
|
8,507
|
|
|
-
|
|
|
-
|
|
|
8,507
|
|
Mortgage-backed
securities
|
|
|
428,725
|
|
|
-
|
|
|
428,725
|
|
|
-
|
|
Obligations of state and
political subdivisions
|
|
|
60,732
|
|
|
-
|
|
|
60,732
|
|
|
-
|
|
Equity investments and
other securities
|
|
|
12,046
|
|
|
1,980
|
|
|
10,066
|
|
|
-
|
|
Total recurring assets measured at fair
value
|
|
$
|
730,591
|
|
$
|
2,727
|
|
$
|
719,357
|
|
$
|
8,507
|
|
|
|
|
|
|
Fair value measurements at December
31, 2010, using
|
|
|
|
|
|
|
Quoted prices in active
|
|
Other observable
|
|
Significant
|
|
|
|
Total fair value
|
|
markets for identical assets
|
|
inputs
|
|
unobservable inputs
|
|
(Dollars in thousands)
|
|
December 31,
2010
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Trading securities
|
|
$
|
808
|
|
$
|
808
|
|
$
|
-
|
|
$
|
-
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
14,392
|
|
|
-
|
|
|
14,392
|
|
|
-
|
|
U.S. Government agency
securities
|
|
|
194,230
|
|
|
-
|
|
|
194,230
|
|
|
-
|
|
Corporate
securities
|
|
|
9,392
|
|
|
-
|
|
|
-
|
|
|
9,392
|
|
Mortgage-backed
securities
|
|
|
363,618
|
|
|
-
|
|
|
363,618
|
|
|
-
|
|
Obligations of state and
political subdivisions
|
|
|
52,645
|
|
|
-
|
|
|
51,688
|
|
|
957
|
|
Equity investments and
other securities
|
|
|
11,835
|
|
|
1
|
|
|
11,834
|
|
|
-
|
|
Total recurring assets measured at fair
value
|
|
$
|
646,920
|
|
$
|
809
|
|
$
|
635,762
|
|
$
|
10,349
|
During second quarter 2011, the
Company transferred $2.0 million in equity investments and other securities from
a level 2 instrument to a level 1 instrument. The Company transferred $14.4
million in U.S. Treasury securities from a level 1 instrument to a level 2
instrument at December 31, 2010. In addition, the Company had no material
changes in valuation techniques for recurring and nonrecurring assets measured
at fair value during the year ended December 31, 2011.
92
18. FAIR VALUE MEASUREMENT AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
The following table represents a
reconciliation of level 3 instruments for assets that are measured at fair value
on a recurring basis for the full year 2011 and 2010:
|
|
|
Twelve months ended
December 31, 2011
|
|
(Dollars in thousands)
|
|
Balance January
1, 2011
|
|
Gains (loss)
included in
other
comprehensive
income (loss)
|
|
Reclassification of
losses from adjustment
for
impairment of
securities
|
|
Purchases, Issuances,
and Sales
|
|
Balance
December 31,
2011
|
|
Corporate
securities
|
|
$
|
9,392
|
|
$
|
(1,064
|
)
|
|
$
|
179
|
|
$
|
-
|
|
|
$
|
8,507
|
|
Obligations of state and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
957
|
|
|
(109
|
)
|
|
|
-
|
|
|
(848
|
)
|
|
|
-
|
|
Fair value
|
|
$
|
10,349
|
|
$
|
(1,173
|
)
|
|
$
|
179
|
|
$
|
(848
|
)
|
|
$
|
8,507
|
|
|
|
|
|
Twelve months ended
December 31, 2010
|
|
(Dollars in thousands)
|
|
Balance January
1, 2010
|
|
Gains (loss)
included in
other
comprehensive
income (loss)
|
|
Reclassification of
losses from adjustment
for
impairment of
securities
|
|
Purchases, Issuances,
and Sales
|
|
Balance
December 31,
2010
|
|
Corporate
securities
|
|
$
|
9,753
|
|
$
|
(361
|
)
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
9,392
|
|
Obligations of state and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
973
|
|
|
(16
|
)
|
|
|
-
|
|
|
-
|
|
|
|
957
|
|
Fair value
|
|
$
|
10,726
|
|
$
|
(377
|
)
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
10,349
|
The losses from adjustments for OTTI
of securities were recognized in noninterest income in the consolidated income
statement.
Certain assets and liabilities are
measured at fair value on a nonrecurring basis after initial recognition such as
loans held for sale, loans measured for impairment and OREO. For the twelve
months ended December 31, 2011, and 2010, loans held for sale were subject to
the lower of cost or market method of accounting. There was no impairment
recognized on loans held for sale at December 31, 2011, or 2010. For the twelve
months ended December 31, 2011, loans amounting to $56.4 million in Bancorps
loan portfolio were deemed impaired. OREO that was taken into possession during
2011 was measured at fair value less sales expense. In addition, during 2011,
certain properties were written down $4.8 million to reflect additional
decreases in their fair market value after initial recognition at the time the
property was placed into OREO.
There were no nonrecurring level 1
or 2 fair value measurements in 2011 or 2010. The following table represents the
level 3 fair value measurements for nonrecurring assets for the periods
presented:
|
|
|
Twelve months ended
December 31, 2011
|
|
(Dollars in thousands)
|
|
Impairment
|
|
Fair Value
1
|
|
Loans measured for
impairment
|
|
$
|
15,410
|
|
$
|
68,466
|
|
OREO
|
|
|
4,832
|
|
|
60,491
|
|
Total nonrecurring assets
measured at fair value
|
|
$
|
20,242
|
|
$
|
128,957
|
|
|
|
|
|
|
|
Twelve months ended
December 31, 2010
|
|
(Dollars in thousands)
|
|
Impairment
|
|
Fair Value
1
|
|
Loans measured for
impairment
|
|
$
|
19,476
|
|
$
|
82,910
|
|
OREO
|
|
|
6,649
|
|
|
74,146
|
|
Total nonrecurring assets
measured at fair value
|
|
$
|
26,125
|
|
$
|
157,056
|
1
|
|
Fair value excludes costs to sell
collateral.
|
93
18. FAIR VALUE MEASUREMENT AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial
instruments at December 31, 2011, are as follows:
|
(Dollars in thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
92,227
|
|
$
|
92,227
|
|
Trading securities
|
|
|
747
|
|
|
747
|
|
Investment securities available for sale
|
|
|
729,844
|
|
|
729,844
|
|
Federal Home Loan Bank stock
|
|
|
12,148
|
|
|
12,148
|
|
Net loans (net of allowance for loan losses
|
|
|
|
|
|
|
|
and including loans
held for sale)
|
|
|
1,469,370
|
|
|
1,394,586
|
|
Bank owned life insurance
|
|
|
26,228
|
|
|
26,228
|
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,915,569
|
|
$
|
1,916,030
|
|
Long-term borrowings
|
|
|
120,000
|
|
|
120,032
|
|
|
|
Junior subordinated
debentures-variable
|
|
|
51,000
|
|
|
27,350
|
The fair values of financial
instruments at December 31, 2010, are as follows:
|
(Dollars in thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
FINANCIAL
ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
177,991
|
|
$
|
177,991
|
|
Trading
securities
|
|
|
808
|
|
|
808
|
|
Investment securities available for
sale
|
|
|
646,112
|
|
|
646,112
|
|
Federal Home Loan Bank
stock
|
|
|
12,148
|
|
|
12,148
|
|
Net loans (net of allowance for loan
losses
|
|
|
|
|
|
|
|
and including loans
held for sale)
|
|
|
1,499,155
|
|
|
1,407,366
|
|
Bank owned life
insurance
|
|
|
25,313
|
|
|
25,313
|
|
|
|
FINANCIAL
LIABILITIES:
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,940,522
|
|
$
|
1,942,301
|
|
Long-term
borrowings
|
|
|
168,599
|
|
|
175,305
|
|
|
|
Junior subordinated
debentures-variable
|
|
|
51,000
|
|
|
26,597
|
94
19. FINANCIAL INSTRUMENTS WITH OFF
BALANCE SHEET RISK
The Bank has
financial instruments with off balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheets.
The Banks exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as for on-balance sheet instruments. As of December
31, 2011, and 2010, outstanding commitments consist of the following:
|
|
Contract or
|
|
Contract or
|
|
|
Notional Amount
|
|
Notional
Amount
|
|
(Dollars in thousands)
|
December 31, 2011
|
|
December 31, 2010
|
|
Financial instruments
whose contract amounts represent credit risk:
|
|
|
|
|
|
|
Commitments to extend credit in the form of
loans
|
|
|
|
|
|
|
Commercial
|
$
|
251,105
|
|
$
|
246,702
|
|
Real
estate construction
|
|
23,932
|
|
|
10,568
|
|
Real estate
mortgage
|
|
|
|
|
|
|
Mortgage
|
|
3,419
|
|
|
4,265
|
|
Home equity line of credit
|
|
150,196
|
|
|
154,073
|
|
Total
real estate mortgage loans
|
|
153,615
|
|
|
158,338
|
|
Commercial real
estate
|
|
10,993
|
|
|
7,756
|
|
Installment and consumer
|
|
9,907
|
|
|
10,734
|
|
Other
1
|
|
12,803
|
|
|
10,395
|
|
Standby letters of credit and financial
guarantees
|
|
8,349
|
|
|
8,531
|
|
Account overdraft
protection instruments
|
|
103,642
|
|
|
118,596
|
|
Total
|
$
|
574,346
|
|
$
|
571,620
|
1
|
|
The category other represents commitments
extended to clients or borrowers that have been extended but not yet fully
executed. These extended commitments are not yet classified nor have they
been placed into our loan system.
|
Commitments to
extend credit are agreements to lend to a customer, as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Many of the commitments may expire without being drawn upon; therefore
total commitment amounts do not necessarily represent future cash requirements.
Each customers creditworthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if deemed necessary upon extension of credit, is
based on the Banks credit evaluation of the customer. Collateral held varies,
but may include real property, accounts receivable, inventory, property, plant
and equipment, and income-producing commercial properties.
Total outstanding commitments of $574.3 million at December 31, 2011,
increased by $2.7 million since December 31, 2010. Outstanding commitments for
real estate construction increased by $13.4 million while outstanding
commitments for account overdraft protection instruments decreased by $15.0
million in 2011, primarily as a result of an increase in the number of customers
who have elected to not participate in our overdraft protection program for ATM
and one time debit card transactions.
Standby letters of credit are conditional
commitments issued to support a customers performance or payment obligation to
a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Interest rates on residential 1-4 family mortgage loan applications are
typically rate locked during the application stage for periods ranging from 15
to 45 days, the most typical period being 30 days. These loans are locked with
various qualified investors under a best-efforts delivery program. The Company
makes every effort to deliver these loans before their rate locks expire. This
arrangement generally requires the Bank to deliver the loans prior to the
expiration of the rate lock. Delays in funding the loans may require a lock
extension. The cost of a lock extension at times is borne by the borrower and at
times by the Bank. These lock extension costs paid by the Bank are not expected
to have a material impact on operations. This activity is managed daily.
95
20. PARENT COMPANY ONLY FINANCIAL DATA
The following
sets forth the condensed financial information of West Coast Bancorp on a
stand-alone basis:
WEST COAST BANCORP
UNCONSOLIDATED BALANCE
SHEETS
|
As
of December 31 (Dollars in thousands)
|
|
2011
|
|
2010
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,696
|
|
$
|
10,910
|
|
Investment in bank subsidiary
|
|
|
352,187
|
|
|
309,951
|
|
Investment in other subsidiaries
|
|
|
4,914
|
|
|
5,223
|
|
Other assets
|
|
|
1,901
|
|
|
1,892
|
|
Total
assets
|
|
$
|
367,698
|
|
$
|
327,976
|
|
|
|
Liabilities and
stockholders equity:
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
$
|
51,000
|
|
$
|
51,000
|
|
Other liabilities
|
|
|
2,219
|
|
|
4,416
|
|
Total
liabilities
|
|
|
53,219
|
|
|
55,416
|
|
Stockholders
equity
|
|
|
314,479
|
|
|
272,560
|
|
Total
liabilities and stockholders equity
|
|
$
|
367,698
|
|
$
|
327,976
|
WEST COAST BANCORP
UNCONSOLIDATED STATEMENTS OF INCOME (LOSS)
|
Year ended December 31 (Dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends from Bank
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Other
income
|
|
|
12
|
|
|
|
10
|
|
|
|
10
|
|
|
Total income
|
|
|
12
|
|
|
|
10
|
|
|
|
10
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,178
|
|
|
|
1,143
|
|
|
|
1,483
|
|
|
Other
expense
|
|
|
887
|
|
|
|
961
|
|
|
|
905
|
|
|
Total expense
|
|
|
2,065
|
|
|
|
2,104
|
|
|
|
2,388
|
|
|
Loss before income taxes
and equity in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
undistributed
earnings (loss) of the subsidiaries
|
|
|
(2,053
|
)
|
|
|
(2,094
|
)
|
|
|
(2,378
|
)
|
|
Income tax benefit
|
|
|
801
|
|
|
|
816
|
|
|
|
927
|
|
|
Net loss before equity in
undistributed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings (loss) of
the subsidiaries
|
|
|
(1,252
|
)
|
|
|
(1,278
|
)
|
|
|
(1,451
|
)
|
|
Equity in undistributed earnings (loss) of
the subsidiaries
|
|
|
35,029
|
|
|
|
4,503
|
|
|
|
(89,762
|
)
|
|
Net income (loss)
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
$
|
(91,213
|
)
|
96
20. PARENT COMPANY ONLY FINANCIAL DATA
WEST COAST BANCORP
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year ended December 31 (Dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
33,777
|
|
|
$
|
3,225
|
|
|
$
|
(91,213
|
)
|
|
Adjustments to reconcile
net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed (earnings) loss of subsidiaries
|
|
|
(35,029
|
)
|
|
|
(4,503
|
)
|
|
|
89,762
|
|
|
(Increase) decrease in
other assets
|
|
|
(168
|
)
|
|
|
(892
|
)
|
|
|
1,137
|
|
|
Increase (decrease) in other liabilities
|
|
|
(2,197
|
)
|
|
|
(1,294
|
)
|
|
|
3,222
|
|
|
Excess tax benefit
associated with stock plans
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Stock
based compensation expense
|
|
|
1,899
|
|
|
|
2,089
|
|
|
|
1,520
|
|
|
Net cash (used) provided by operating activities
|
|
|
(1,784
|
)
|
|
|
(1,375
|
)
|
|
|
4,428
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contribution to subsidiaries
|
|
|
-
|
|
|
|
(15,300
|
)
|
|
|
(134,248
|
)
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(15,300
|
)
|
|
|
(134,248
|
)
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in deferred compensation plan
|
|
|
(27
|
)
|
|
|
262
|
|
|
|
(1
|
)
|
|
Proceeds from issuance
of common stock
|
|
|
80
|
|
|
|
16,393
|
|
|
|
-
|
|
|
Fractional share payment
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Redemption of stock
pursuant to stock plans
|
|
|
(531
|
)
|
|
|
(35
|
)
|
|
|
(22
|
)
|
|
Excess
tax benefit associated with stock plans
|
|
|
66
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from issuance
of preferred stock, net of costs
|
|
|
-
|
|
|
|
-
|
|
|
|
139,248
|
|
|
Cash
dividends paid
|
|
|
-
|
|
|
|
-
|
|
|
|
(471
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
(430
|
)
|
|
|
16,620
|
|
|
|
138,754
|
|
|
|
|
Net increase (decrease) in
cash and cash equivalents
|
|
|
(2,214
|
)
|
|
|
(55
|
)
|
|
|
8,934
|
|
|
Cash and cash equivalents at beginning of
year
|
|
|
10,910
|
|
|
|
10,965
|
|
|
|
2,031
|
|
|
Cash and cash equivalents
at end of year
|
|
$
|
8,696
|
|
|
$
|
10,910
|
|
|
$
|
10,965
|
|
During the
year ended December 31, 2010, the Parent Company made non-cash capital
contributions of $.53 million to the Bank in the form of an intercompany tax
settlement. No such contributions were made during the year ended December 31,
2011.
97
21. SEGMENT AND RELATED INFORMATION
Bancorp
accounts for intercompany fees and services at a fair value according to
regulatory requirements for the service provided. Intercompany items relate
primarily to the use of accounting, human resources, data processing and
marketing services provided by the Bank, West Coast Trust, and the holding
company. All other accounting policies are the same as those described in the
summary of significant accounting policies.
Summarized financial information concerning Bancorps reportable segments
and the reconciliation to Bancorps consolidated results is shown in the
following table. The Other column includes West Coast Trusts operations and
holding company related items including activity relating to trust preferred
securities. Investment in subsidiaries is netted out of the presentations below.
The Intercompany column identifies the intercompany activities of revenues,
expenses and other assets, between the Banking and Other segment.
|
|
|
As of and for the year ended
|
|
(Dollars in thousands)
|
|
December 31,
2011
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
Interest income
|
|
$
|
98,629
|
|
|
$
|
46
|
|
|
$
|
-
|
|
|
$
|
98,675
|
|
|
Interest expense
|
|
|
16,743
|
|
|
|
1,178
|
|
|
|
-
|
|
|
|
17,921
|
|
|
Net
interest income (loss)
|
|
|
81,886
|
|
|
|
(1,132
|
)
|
|
|
-
|
|
|
|
80,754
|
|
|
Provision for credit losses
|
|
|
8,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,133
|
|
|
Noninterest income
|
|
|
29,796
|
|
|
|
3,105
|
|
|
|
(1,082
|
)
|
|
|
31,819
|
|
|
Noninterest expense
|
|
|
88,298
|
|
|
|
3,659
|
|
|
|
(1,082
|
)
|
|
|
90,875
|
|
|
Income
(loss) before income taxes
|
|
|
15,251
|
|
|
|
(1,686
|
)
|
|
|
-
|
|
|
|
13,565
|
|
|
Provision (benefit) for income taxes
|
|
|
(19,555
|
)
|
|
|
(657
|
)
|
|
|
-
|
|
|
|
(20,212
|
)
|
|
Net
income (loss)
|
|
$
|
34,806
|
|
|
$
|
(1,029
|
)
|
|
$
|
-
|
|
|
$
|
33,777
|
|
|
|
|
Depreciation, amortization and
accretion
|
|
$
|
8,964
|
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
8,994
|
|
|
Assets
|
|
$
|
2,424,832
|
|
|
$
|
15,636
|
|
|
$
|
(10,581
|
)
|
|
$
|
2,429,887
|
|
|
Loans, net
|
|
$
|
1,466,089
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,466,089
|
|
|
Deposits
|
|
$
|
1,925,567
|
|
|
$
|
-
|
|
|
$
|
(9,998
|
)
|
|
$
|
1,915,569
|
|
|
Equity
|
|
$
|
352,188
|
|
|
$
|
(37,709
|
)
|
|
$
|
-
|
|
|
$
|
314,479
|
|
|
|
|
|
|
As of and for the year ended
|
|
(Dollars in thousands)
|
|
December 31,
2010
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
Interest income
|
|
$
|
105,510
|
|
|
$
|
66
|
|
|
$
|
-
|
|
|
$
|
105,576
|
|
|
Interest expense
|
|
|
21,126
|
|
|
|
1,143
|
|
|
|
-
|
|
|
|
22,269
|
|
|
Net
interest income (loss)
|
|
|
84,384
|
|
|
|
(1,077
|
)
|
|
|
-
|
|
|
|
83,307
|
|
|
Provision for credit losses
|
|
|
18,652
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,652
|
|
|
Noninterest income
|
|
|
30,789
|
|
|
|
3,053
|
|
|
|
(1,145
|
)
|
|
|
32,697
|
|
|
Noninterest expense
|
|
|
87,841
|
|
|
|
3,641
|
|
|
|
(1,145
|
)
|
|
|
90,337
|
|
|
Loss
before income taxes
|
|
|
8,680
|
|
|
|
(1,665
|
)
|
|
|
-
|
|
|
|
7,015
|
|
|
Benefit for income taxes
|
|
|
4,439
|
|
|
|
(649
|
)
|
|
|
-
|
|
|
|
3,790
|
|
|
Net
income (loss)
|
|
$
|
4,241
|
|
|
$
|
(1,016
|
)
|
|
$
|
-
|
|
|
$
|
3,225
|
|
|
|
|
Depreciation, amortization and
accretion
|
|
$
|
8,742
|
|
|
$
|
36
|
|
|
$
|
-
|
|
|
$
|
8,778
|
|
|
Assets
|
|
$
|
2,456,223
|
|
|
$
|
17,650
|
|
|
$
|
(12,814
|
)
|
|
$
|
2,461,059
|
|
|
Loans, net
|
|
$
|
1,496,053
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,496,053
|
|
|
Deposits
|
|
$
|
1,952,780
|
|
|
$
|
-
|
|
|
$
|
(12,258
|
)
|
|
$
|
1,940,522
|
|
|
Equity
|
|
$
|
310,487
|
|
|
$
|
(37,927
|
)
|
|
$
|
-
|
|
|
$
|
272,560
|
|
98
21. SEGMENT AND RELATED INFORMATION
|
|
|
As of and for the year ended
|
|
(Dollars in thousands)
|
|
December 31,
2009
|
|
|
|
Banking
|
|
Other
|
|
Intercompany
|
|
Consolidated
|
|
Interest income
|
|
$
|
112,068
|
|
|
$
|
82
|
|
|
$
|
-
|
|
|
$
|
112,150
|
|
|
Interest expense
|
|
|
31,941
|
|
|
|
1,482
|
|
|
|
-
|
|
|
|
33,423
|
|
|
Net
interest income (loss)
|
|
|
80,127
|
|
|
|
(1,400
|
)
|
|
|
-
|
|
|
|
78,727
|
|
|
Provision for credit losses
|
|
|
90,057
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,057
|
|
|
Noninterest income
|
|
|
7,208
|
|
|
|
3,032
|
|
|
|
(1,111
|
)
|
|
|
9,129
|
|
|
Noninterest expense
|
|
|
105,917
|
|
|
|
3,482
|
|
|
|
(1,111
|
)
|
|
|
108,288
|
|
|
Loss
before income taxes
|
|
|
(108,639
|
)
|
|
|
(1,850
|
)
|
|
|
-
|
|
|
|
(110,489
|
)
|
|
Benefit for income taxes
|
|
|
(18,555
|
)
|
|
|
(721
|
)
|
|
|
-
|
|
|
|
(19,276
|
)
|
|
Net
loss
|
|
$
|
(90,084
|
)
|
|
$
|
(1,129
|
)
|
|
$
|
-
|
|
|
$
|
(91,213
|
)
|
|
|
|
Depreciation, amortization and
accretion
|
|
$
|
8,253
|
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
8,281
|
|
|
Assets
|
|
$
|
2,729,453
|
|
|
$
|
17,370
|
|
|
$
|
(13,276
|
)
|
|
$
|
2,733,547
|
|
|
Loans, net
|
|
$
|
1,686,352
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,686,352
|
|
|
Deposits
|
|
$
|
2,159,342
|
|
|
$
|
-
|
|
|
$
|
(12,458
|
)
|
|
$
|
2,146,884
|
|
|
Equity
|
|
$
|
288,477
|
|
|
$
|
(39,419
|
)
|
|
$
|
-
|
|
|
$
|
249,058
|
|
22. RELATED PARTY
TRANSACTIONS
As of December
31, 2011, the Bank had loan commitments to directors, senior officers, principal
stockholders and their related interests totaling $6.3 million, unchanged from
December 31, 2010. These commitments and the loan balances below were made
substantially on the same terms in the course of ordinary banking business,
including interest rates, maturities and collateral as those made to other
customers of the Bank.
The following table presents a summary of outstanding balances for loans
made to directors, senior officers, and principal stockholders of the Company
and their related interests:
(Dollars in thousands)
|
|
December 31,
|
|
|
2011
|
|
2010
|
Balance, beginning of
period
|
|
$
|
5,039
|
|
|
$
|
3,893
|
|
New loans and advances
|
|
|
587
|
|
|
|
1,237
|
|
Principal payments and
payoffs
|
|
|
(74
|
)
|
|
|
(91
|
)
|
Balance, end of period
|
|
$
|
5,552
|
|
|
$
|
5,039
|
|
99
23. QUARTERLY FINANCIAL INFORMATION
(unaudited)
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
December
31,
|
|
September
30,
|
|
June
30,
|
|
March
31,
|
|
Interest income
|
|
$
|
23,932
|
|
|
$
|
24,721
|
|
|
$
|
25,104
|
|
|
$
|
24,918
|
|
|
Interest expense
|
|
|
5,992
|
|
|
|
5,380
|
|
|
|
3,143
|
|
|
|
3,406
|
|
|
Net
interest income
|
|
|
17,940
|
|
|
|
19,341
|
|
|
|
21,961
|
|
|
|
21,512
|
|
|
Provision for credit losses
|
|
|
1,499
|
|
|
|
1,132
|
|
|
|
3,426
|
|
|
|
2,076
|
|
|
Noninterest income
|
|
|
6,419
|
|
|
|
8,414
|
|
|
|
8,070
|
|
|
|
8,916
|
|
|
Noninterest expense
|
|
|
22,744
|
|
|
|
22,620
|
|
|
|
22,958
|
|
|
|
22,553
|
|
|
Income
before income taxes
|
|
|
116
|
|
|
|
4,003
|
|
|
|
3,647
|
|
|
|
5,799
|
|
|
Provision (benefit) for income taxes
|
|
|
(17,646
|
)
|
|
|
(2,273
|
)
|
|
|
(987
|
)
|
|
|
694
|
|
|
Net
income
|
|
$
|
17,762
|
|
|
$
|
6,276
|
|
|
$
|
4,634
|
|
|
$
|
5,105
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.87
|
|
|
$
|
0.31
|
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
Diluted
|
|
$
|
0.83
|
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
$
|
0.25
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
December
31,
|
|
September
30,
|
|
June
30,
|
|
March
31,
|
|
Interest income
|
|
$
|
25,509
|
|
|
$
|
26,053
|
|
|
$
|
26,816
|
|
|
$
|
27,198
|
|
|
Interest expense
|
|
|
3,620
|
|
|
|
4,178
|
|
|
|
7,906
|
|
|
|
6,565
|
|
|
Net
interest income
|
|
|
21,889
|
|
|
|
21,875
|
|
|
|
18,910
|
|
|
|
20,633
|
|
|
Provision for credit losses
|
|
|
1,693
|
|
|
|
1,567
|
|
|
|
7,758
|
|
|
|
7,634
|
|
|
Noninterest income
|
|
|
8,595
|
|
|
|
8,069
|
|
|
|
9,625
|
|
|
|
6,408
|
|
|
Noninterest expense
|
|
|
23,330
|
|
|
|
23,003
|
|
|
|
22,909
|
|
|
|
21,095
|
|
|
Income
(loss) before income taxes
|
|
|
5,461
|
|
|
|
5,374
|
|
|
|
(2,132
|
)
|
|
|
(1,688
|
)
|
|
Provision (benefit) for income taxes
|
|
|
3,549
|
|
|
|
(676
|
)
|
|
|
1,717
|
|
|
|
(800
|
)
|
|
Net
income (loss)
|
|
$
|
1,912
|
|
|
$
|
6,050
|
|
|
$
|
(3,849
|
)
|
|
$
|
(888
|
)
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
($
|
0.20
|
)
|
|
($
|
0.05
|
)
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.29
|
|
|
($
|
0.20
|
)
|
|
($
|
0.05
|
)
|
100
ITEM 9.
|
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that
information the Company must disclose in its reports filed or submitted under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms and accumulated and
communicated to our management, including our CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Our management has
evaluated, with the participation and under the supervision of our chief
executive officer (CEO) and chief financial officer (CFO), the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act) as of the end of the period covered by this
report. Based on this evaluation, our CEO and CFO have concluded that, as of
such date, the Companys disclosure controls and procedures are effective in
ensuring that information relating to the Company, including its consolidated
subsidiaries, required to be disclosed in reports that it files under the
Exchange Act is (1) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms,
and (2) accumulated and communicated to our management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
Material Changes in Internal Control
over Financial Reporting
None.
Managements Report on Internal
Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining
adequate internal control over financial reporting. The Companys internal
control system is designed to provide reasonable assurance regarding the
preparation, reliability and fair presentation of published financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America. Management is also responsible for
ensuring compliance with the federal laws and regulations concerning loans to
insiders and the federal and state laws and regulations concerning dividend
restrictions, both of which are designated by the Federal Deposit Insurance
Corporation (FDIC) as safety and soundness laws and regulations. Nonetheless,
all internal control systems, no matter how well designed, have inherent
limitations. Even systems determined to be effective as of a particular date can
provide only reasonable assurance with respect to financial statement
preparation and presentation and may not eliminate the need for restatements.
The Companys management assessed the effectiveness of the Companys
internal control over financial reporting as of December 31, 2011. In making
this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in
Internal ControlIntegrated Framework
. Based on our assessment, we believe that, as of December 31,
2011, the Companys internal control over financial reporting is effective based
on those criteria.
The Companys management has assessed its compliance with the designated
safety and soundness laws and regulations and has maintained records of its
determinations and assessments as required by the FDIC. Based on this
assessment, management believes that West Coast Bancorp has complied, in all
material respects, with the designated safety and soundness laws and regulations
for the year ended December 31, 2011.
The Companys independent registered public accounting firm has audited
the Companys internal control over financial reporting as of December 31, 2011,
as stated in their report appearing below.
101
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of
West Coast Bancorp
Lake Oswego, Oregon
We have audited the internal control
over financial reporting of West Coast Bancorp and subsidiaries (the "Company")
as of December 31, 2011, based on
criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Because management's assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA), management's assessment
and our audit of the Company's internal control over financial reporting
included controls over the preparation of the schedules equivalent to the basic
financial statements in accordance with the instructions for the Consolidated
Financial Statements for Bank Holding Companies (Form FR Y-9C). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying managements
report on internal control over financial reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2011, based on the criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have not examined and, accordingly,
we do not express an opinion or any other form of assurance on management's
statement referring to compliance with laws and regulations.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended
December 31, 2011 of the Company and our report dated February 24, 2012
expressed an unqualified opinion on those consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
February
24, 2012
102
ITEM 9B.
OTHER
INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Information concerning directors and executive officers of Bancorp
required to be included in this item is set forth under the headings Election
of Directors, Section 16(a) Beneficial Ownership Reporting Compliance, and
Management in Bancorps Proxy Statement for its 2012 Annual Meeting of
Shareholders to be filed within 120 days of Bancorps fiscal year end of
December 31, 2011 (the Proxy Statement), and is incorporated into this report
by reference.
Audit and Compliance
Committee
Bancorp has a separately-designated standing Audit and Compliance
Committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act. The members of the Audit and Compliance Committee are David Dietzler
(Chair), Nancy Wilgenbusch, and Lloyd Ankeny, each of whom is independent as
independence for audit committee members is defined under NASDAQ listing
standards applicable and SEC rules to the Company.
Audit Committee Financial
Expert
Bancorps Board of Directors has determined that David Dietzler is an
audit committee financial expert as defined in Item 407(d)(5) of Regulation S-K
of the Exchange Act and is independent as independence for audit committee
members is defined under NASDAQ listing standards and SEC rules applicable to
the Company.
Code of Ethics
We have adopted a code of ethics (the Code of Ethics), for our CEO,
CFO, principal accounting officer, and persons performing similar functions,
entitled the West Coast Bancorp Code of Ethics for Senior Financial Officers.
The Code of Ethics is available on our website at www.wcb.com under the tab for
investor relations. Stockholders may request a free copy of the Code of Ethics
from:
West Coast Bancorp
Attention: Secretary
5335 Meadows Road, Suite 201
Lake
Oswego, Oregon 97035
(503) 684-0884
ITEM 11.
EXECUTIVE
COMPENSATION
Information concerning executive and director compensation and certain
matters regarding participation in Bancorps Compensation & Personnel
Committee required by this item is set forth under the headings Executive
Compensation and Board of Directors in the Proxy Statement and is
incorporated into this report by reference.
103
ITEM 12.
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK HOLDER
MATTERS
|
Security Ownership
Information
concerning the security ownership of certain beneficial owners and management
required by this item is set forth under the heading Security Ownership of
Certain Beneficial Owners and Management in the Proxy Statement and is
incorporated into this report by reference.
Equity Compensation Plan
Information
Information concerning Bancorps equity compensation plans, required by
this item is set forth under the heading Executive CompensationEquity
Compensation Plan Information in the Proxy Statement and is incorporated into
this report by reference.
ITEM 13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Certain Relationships and Related
Transactions
Information concerning certain relationships and related transactions
required by this item is set forth under the heading Transactions with Related
Persons in the Proxy Statement and is incorporated into this report by
reference.
Director Independence
Information concerning the independence of Bancorp directors required by
this item is set forth under the heading Election of Directors in the Proxy
Statement and is incorporated into this report by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT
FEES AND SERVICES
Information concerning fees paid to our accountants required by this item
is included under the heading Matters Related to our AuditorsFees Paid to
Independent Registered Public Accounting Firm in the Proxy Statement and is
incorporated into this report by reference.
104
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
|
(a) (1)
|
|
Financial
Statements:
|
|
|
|
|
|
The financial statements and related documents listed in the Index
set forth in Item 8 of this report are filed as part of this
report.
|
|
|
|
|
|
(2)
|
|
Financial Statements
Schedules:
|
|
|
|
|
|
None.
|
|
|
|
|
|
(3)
|
|
Exhibits:
|
|
|
|
|
|
The response to this portion
of Item 15 is submitted as a separate section of this report appearing
immediately following the signature page and entitled Index to
Exhibits.
|
105
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on February 24, 2012.
|
WEST COAST
BANCORP
|
|
|
|
(Registrant)
|
|
|
|
By:
|
/s/ Robert
D. Sznewajs
|
|
|
|
Robert D.
Sznewajs
|
|
|
President and CEO
|
Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
February 24, 2012.
Principal Executive
Officer:
|
|
|
|
|
|
/s/ Robert D.
Sznewajs
|
|
President and CEO and Director
|
Robert D. Sznewajs
|
|
|
|
|
|
Principal Financial
Officer:
|
|
|
|
|
|
/s/ Anders
Giltvedt
|
|
Executive Vice President and Chief Financial Officer
|
Anders Giltvedt
|
|
|
|
|
|
Principal Accounting
Officer:
|
|
|
|
|
|
/s/ Kevin M.
McClung
|
|
Senior Vice President and Controller
|
Kevin M. McClung
|
|
|
|
|
|
Remaining
Directors:
|
|
|
|
|
|
*Lloyd D. Ankeny,
Chairman
|
|
|
|
|
|
*David A. Dietzler
|
|
|
|
|
|
*Henchy R. Enden
|
|
|
|
|
|
*Shmuel (Sam)
Levinson
|
|
|
|
|
|
*Steven J. Oliva
|
|
|
|
|
|
*John T. Pietrzak
|
|
|
|
|
|
*Steven N. Spence
|
|
|
|
|
|
*Nancy A. Wilgenbusch,
PhD.
|
|
|
|
|
|
*By
|
/s/ Robert
D. Sznewajs
|
|
|
|
Robert D. Sznewajs
|
|
|
|
Attorney-in-Fact
|
|
|
106
INDEX TO EXHIBITS
Exhibit
No.
|
|
Exhibit
|
|
3.1
|
|
Restated Articles of
Incorporation (as amended through January 20, 2010). Incorporated by
reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2009.
|
|
3.2
|
|
Articles of Amendment of
Restated Articles of Incorporation (effective May 19, 2011). Incorporated
by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K
dated May 18, 2011, and filed with the Securities and Exchange Commission
on dated May 20, 2011.
|
|
3.3
|
|
Amended and Restated Bylaws of the Company (as amended through
February 9, 2010). Incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K for the year ended December 31,
2009.
|
|
|
|
4.1
|
|
Form of Class C Warrant.
Incorporated by reference to Exhibit 4.2 to the Company's Current Report
on Form 8-K dated October 22, 2009, and filed with the Securities and
Exchange Commission on October 28, 2009 (the "October 2009
8-K").
|
|
4.2
|
|
Tax Benefit Preservation Plan,
dated as of October 23, 2009, between West Coast Bancorp and Wells Fargo
Bank, National Association. Incorporated by reference to Exhibit 4.4 to
the October 8-K.
|
|
4.3
|
|
The Company has incurred
long-term indebtedness as to which the amount involved is less than ten
percent of the total assets of the Company and its subsidiaries on a
consolidated basis. The Company agrees to furnish instruments relating to
such indebtedness to the Commission upon its request.
|
|
10.1
|
|
Form of Indemnification
Agreement for all directors and executive officers. Incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2008 (the "2008 10-K").*
|
|
10.2
|
|
Change in Control Agreement
between the Company and Robert D. Sznewajs dated January 1, 2004, and
amended and restated December 30, 2008. Incorporated by reference to
Exhibit 10.2 to the 2008 10-K.*
|
|
10.3
|
|
Change in Control Agreement
between the Company and Anders Giltvedt dated January 1, 2004, and amended
and restated December 30, 2008. Incorporated by reference to Exhibit 10.3
to the 2008 10-K.*
|
|
10.4
|
|
Change in Control Agreement
between the Company and Xandra McKeown dated January 1, 2004, and amended
and restated December 30, 2008. Incorporated by reference to Exhibit 10.4
to the 2008 10-K.*
|
|
10.5
|
|
Change in Control Agreement
between the Company and Hadley Robbins dated March 5, 2007 and amended and
restated December 30, 2008. Incorporated by reference to Exhibit 10.6 to
the 2008 10-K.*
|
|
10.6
|
|
Supplemental Executive
Retirement Plan adopted by West Coast Bank, the Company and Robert D.
Sznewajs dated August 1, 2003, and amended and restated as of January 1,
2011. Incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K dated January 12, 2011, and filed with the Securities
and Exchange Commission on dated January 14, 2011.*
|
|
10.7
|
|
Supplemental Executive
Retirement Plan adopted by West Coast Bank, the Company and Anders
Giltvedt dated August 1
,
2003, and amended and restated as of January
1, 2009. Incorporated by reference to Exhibit 10.8 to the 2008
10-K.*
|
|
10.8
|
|
Supplemental Executive
Retirement Plan adopted by West Coast Bank, the Company and Xandra McKeown
dated August 1, 2003, and amended and restated as of January 1, 2009.
Incorporated by reference to Exhibit 10.9 to the 2008 10-K.*
|
*Indicates a management
contract or compensatory plan, contract or
arrangement.
107
INDEX TO EXHIBITS (continued)
Exhibit No.
|
|
Exhibit
|
|
10.9
|
|
Supplemental Executive
Retirement Plan adopted by West Coast Bank, the Company and Hadley Robbins
dated April 1, 2007, and amended and restated as of January 1, 2009.
Incorporated by reference to Exhibit 10.11 to the 2008 10-K.*
|
|
|
|
10.10
|
|
401(k) Profit Sharing Plan.
Incorporated by reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-8 (Reg. No. 333-01649) filed March 12,
1996.*
|
|
|
|
10.11
|
|
Directors Deferred
Compensation Plan. Incorporated by reference to Exhibit 10.13 to the 2008
10-K.*
|
|
10.12
|
|
Executives Deferred
Compensation Plan. Incorporated by reference to Exhibit 10.14 to the 2008
10-K.*
|
|
10.13
|
|
2002 Stock Incentive Plan, as
amended. Incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2010.*
|
|
10.14
|
|
Forms of Option Agreements,
Restricted Stock Agreements and Restricted Stock Performance Award
Agreement under the 2002 Stock Incentive Plan. Incorporated by reference
to Exhibits 10.3 through 10.7 to the September 2006 10-Q and Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2008.
|
|
10.15
|
|
Employment Agreement dated
effective as of January 1, 2011, between Robert D. Sznewajs and the
Company. Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated January 12, 2011, and filed with the
Securities and Exchange Commission on dated January 14,
2011.*
|
|
10.16
|
|
Form of Investment Agreement,
dated as of October 23, 2009 by and between West Coast Bancorp and the
investors party thereto. Incorporated by reference to Exhibit 10.1 to the
October 2009 8-K.
|
|
10.17
|
|
Written Agreement, dated as of
December 18, 2009, by and among West Coast Bancorp, the Federal Reserve
Bank of San Francisco and the Oregon Department of Consumer and Business
Services, Division of Finance and Corporate Securities. Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated December 18, 2009 and filed with the Securities and Exchange
Commission on December 21, 2009.
|
|
10.18
|
|
Stipulation and Consent to
Issuance of a Consent Order, Order for Restitution, and Order to Pay,
between the Bank and the FDIC. Incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K dated October 18, 2011 and
filed with the Securities and Exchange Commission on October 24, 2011 (the
2011 8-K).
|
|
10.19
|
|
Consent Order, Order for
Restitution, and Order to Pay, issued by the FDIC, effective as of October
11, 2011. Incorporated by reference to Exhibit 10.2 to the 2011
8-K.
|
|
21
|
|
Subsidiaries of the
Company.
|
|
23
|
|
Consent of Deloitte &
Touche LLP.
|
|
24
|
|
Power of
Attorney.
|
|
|
|
EX-101.INS
|
|
XBRL Instance Document
|
|
|
|
EX-101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
|
|
EX-101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
|
|
EX-101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
EX-101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
EX-101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
*Indicates a management contract or
compensatory plan, contract or arrangement.
108
West Coast Bancorp (MM) (NASDAQ:WCBO)
Historical Stock Chart
From Jul 2024 to Aug 2024
West Coast Bancorp (MM) (NASDAQ:WCBO)
Historical Stock Chart
From Aug 2023 to Aug 2024