- Quarterly Report (10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2012

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)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

[ ] 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 ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value: 19,294,564 shares outstanding as of July 31, 2012.

Table of Contents

			PAGE
PART I: FINANCIAL INFORMATION			3

	*Item 1.*	*Financial Statements (Unaudited)*	3
		CONSOLIDATED BALANCE SHEETS	3
		CONSOLIDATED STATEMENTS OF INCOME	4
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
		CONSOLIDATED STATEMENTS OF CASH FLOWS	6
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY	7
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

	*Item 3.*	*Quantitative and Qualitative Disclosures About Market Risk*	50

	*Item 4.*	*Controls and Procedures*	50

PART II: OTHER INFORMATION			51

	*Item 1.*	*Legal Proceedings*	51

	*Item 1A.*	*Risk Factors*	51

	*Item 2.*	*Unregistered Sales of Equity Securities and Use of Proceeds*	51

	*Item 3.*	*Defaults Upon Senior Securities*	51

	*Item 4.*	*Mine Safety Disclosures*	51

	*Item 5.*	*Other Information*	51

	*Item 6.*	*Exhibits*	52

SIGNATURES			53

- 2 -

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

WEST COAST BANCORP
CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
(Dollars and shares in thousands, unaudited)	2012		2011
ASSETS

Cash and cash equivalents:
Cash and due from banks	$	55,332		$	59,955
Federal funds sold		2,740			4,758
Interest-bearing deposits in other banks		52,815			27,514
Total cash and cash equivalents		110,887			92,227
Trading securities		793			747
Investment securities available for sale, at fair value
(amortized cost: $694,595 and $717,593, respectively)		708,884			729,844
Federal Home Loan Bank stock, held at cost		12,148			12,148
Loans held for sale		-			3,281
Loans		1,495,797			1,501,301
Allowance for loan losses		(33,132	)		(35,212	)
Loans, net		1,462,665			1,466,089
Premises and equipment, net		23,179			24,374
Other real estate owned, net		25,726			30,823
Bank owned life insurance		26,646			26,228
Other assets		37,511			44,126
Total assets	$	2,408,439		$	2,429,887

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Demand	$	648,819		$	621,962
Savings and interest bearing demand		497,135			495,117
Money market		585,421			625,373
Time deposits		145,510			173,117
Total deposits		1,876,885			1,915,569

Short-term borrowings		15,000			-
Long-term borrowings		112,900			120,000
Junior subordinated debentures		51,000			51,000
Reserve for unfunded commitments		768			771
Other liabilities		23,869			28,068
Total liabilities		2,080,422			2,115,408

Commitments and contingent liabilities (Note 7)

Stockholders' equity:
Preferred stock: no par value, 10,000 shares authorized;
Series B issued and outstanding: 121 at June 30, 2012 and December 31, 2011		21,124			21,124
Common stock: no par value, 50,000 shares authorized;
issued and outstanding: 19,295 at June 30, 2012 and 19,298 at December 31, 2011		231,443			230,966
Retained earnings		66,775			54,952
Accumulated other comprehensive income		8,675			7,437
Total stockholders' equity		328,017			314,479
Total liabilities and stockholders' equity	$	2,408,439		$	2,429,887

See notes to consolidated financial statements.

- 3 -

WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF INCOME

	Three months ended						Six months ended
	June 30,						June 30,
(Dollars and shares in thousands, except per share amounts)	2012		2011	2012		2011
INTEREST INCOME:
Interest and fees on loans	$	18,699		$	20,231		$	37,908		$	40,530
Interest on taxable investment securities		3,601			4,276			7,208			8,345
Interest on nontaxable investment securities		509			535			1,001			1,014
Interest on deposits in other banks		32			61			56			131
Interest on federal funds sold		-			1			1			2
Total interest income		22,841			25,104			46,174			50,022

INTEREST EXPENSE:
Savings, interest bearing demand deposits and money market		184			702			377			1,454
Time deposits		247			774			631			1,831
Short-term borrowings		4			46			5			46
Long-term borrowings		331			1,289			644			2,610
Junior subordinated debentures		302			332			611			608
Total interest expense		1,068			3,143			2,268			6,549
Net interest income		21,773			21,961			43,906			43,473
Provision (benefit) for credit losses		(492	)		3,426			(403	)		5,502
Net interest income after provision for credit losses		22,265			18,535			44,309			37,971

NONINTEREST INCOME:
Service charges on deposit accounts		3,212			3,575			6,030			7,219
Payment systems related revenue		3,084			3,169			6,157			6,099
Trust and investment services revenue		1,457			1,208			2,392			2,356
Gains on sales of loans		722			300			1,457			813
Other real estate owned valuation adjustments
and (loss) gain on sales		(1,030	)		(910	)		(1,604	)		(1,244	)
Gain (loss) on securities, net:
Gains (losses) on sales of securities		228			130			375			397
Other-than-temporary impairment losses on securities		-			(1,636	)		(1,726	)		(1,636	)
Portion of other-than-temporary, non-credit related losses
recognized in other comprehensive income		-			1,457			1,677			1,457
Total net gains (losses) on securities		228			(49	)		326			218
Other noninterest income		821			777			1,623			1,525
Total noninterest income		8,494			8,070			16,381			16,986

NONINTEREST EXPENSE:
Salaries and employee benefits		12,081			12,119			23,559			23,996
Equipment		1,584			1,564			3,246			3,092
Occupancy		2,119			2,232			4,194			4,397
Payment systems related expense		1,075			1,350			2,194			2,597
Professional fees		1,060			976			2,171			1,958
Postage, printing and office supplies		729			862			1,548			1,672
Marketing		255			831			567			1,482
Communications		419			389			799			767
Other noninterest expense		2,154			2,635			4,223			5,550
Total noninterest expense		21,476			22,958			42,501			45,511

INCOME BEFORE INCOME TAXES		9,283			3,647			18,189			9,446
PROVISION (BENEFIT) FOR INCOME TAXES		3,249			(987	)		6,366			(293	)
NET INCOME	$	6,034		$	4,634		$	11,823		$	9,739

Basic earnings per share	$	0.29		$	0.23		$	0.58		$	0.48
Diluted earnings per share	$	0.28		$	0.22		$	0.55		$	0.45

Weighted average common shares		19,082			19,006			19,060			18,983
Weighted average diluted shares		20,256			20,025			20,161			19,982

See notes to consolidated financial statements.

- 4 -

WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands, unaudited)	2012		2011	2012		2011
Net income	$	6,034		$	4,634		$	11,823		9,739
Other comprehensive income, net of tax:
Unrealized holding gains on securities:
Unrealized holding gains arising during the period		1,924			6,734			2,365		5,021
Tax provision		(755	)		(2,653	)		(928	)	(1,986	)
Unrealized holding gains arising during the period, net of tax		1,169			4,081			1,437		3,035

Less: Reclassification adjustment for net other-than-temporary
impairment losses on securities		-			179			49		179
Tax benefit		-			(70	)		(19	)	(70	)
Other-than-temporary impairment losses on securities, net of tax		-			109			30		109

Less: Reclassification adjustment for net
gains on sales of securities		(228	)		(130	)		(375	)	(397	)
Tax provision		89			51			146		155
Gains on sales of securities, net of tax		(139	)		(79	)		(229	)	(242	)
Other comprehensive income, net of tax		1,030			4,111			1,238		2,902
Total net comprehensive income	$	7,064		$	8,745		$	13,061		12,641

See notes to consolidated financial statements.

- 5 -

WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six months ended
(Dollars in thousands, unaudited)	June 30, 2012		June 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,823		$	9,739
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		4,229			4,032
Amortization of tax credits		326			382
Deferred income tax expense (benefit)		4,782			(304	)
Amortization of intangibles		-			119
Provision (benefit) for credit losses		(403	)		5,502
Decrease in accrued interest receivable		691			157
Increase in other assets		(402	)		(326	)
Loss on impairment of securities		49			179
Gains on sales of securities		(375	)		(397	)
Net loss on disposal of premises and equipment		41			9
Net other real estate owned valuation adjustments and (loss) gain on sales		1,604			1,244
Gains on sales of loans		(1,457	)		(813	)
Origination of loans held for sale		(9,510	)		(17,818	)
Proceeds from sales of loans held for sale		14,248			20,983
(Decrease) increase in interest payable		(36	)		258
Increase (decrease) in other liabilities		(2,474	)		868
Increase in cash surrender value of bank owned life insurance		(418	)		(423	)
Stock based compensation expense		792			1,029
Excess tax benefits associated with stock plans		(62	)		(53	)
Decrease (increase) in trading securities		(46	)		27
Net cash provided by operating activities		23,402			24,394

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available for sale securities		129,318			137,577
Proceeds from sales of available for sale securities		32,859			38,611
Purchase of available for sale securities		(141,021	)		(288,064	)
Loans made to customers less (greater) than principal collected on loans		8,013			(2,542	)
Purchase of loans		(8,254	)		-
Proceeds from the sale of other real estate owned		7,607			13,591
Capital expenditures on other real estate owned		(45	)		(358	)
Capital expenditures on premises and equipment		(510	)		(996	)
Net cash provided (used) by investing activities		27,967			(102,181	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand, savings and interest
bearing transaction accounts		(12,687	)		57,873
Net decrease in time deposits		(27,607	)		(67,398	)
Proceeds from issuance of short-term borrowings		62,000			-
Repayment of short-term borrowings		(62,000	)		-
Proceeds from issuance of long-term borrowings		7,900			-
Proceeds from issuance of common stock-stock options		70			38
Fractional share payment		-			(18	)
Redemption of stock pursuant to stock plans		(499	)		(495	)
Excess tax benefits associated with stock plans		62			53
Activity in deferred compensation plan		52			(11	)
Net cash used by financing activities		(32,709	)		(9,958	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		18,660			(87,745	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		92,227			177,991
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	110,887		$	90,246

See notes to consolidated financial statements.

- 6 -

WEST COAST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

											Accumulated
											Other
(Shares and dollars in thousands, unaudited)	Preferred			Common Stock					Retained		Comprehensive
	Stock		Shares		Amount	Earnings		Income	Total
BALANCE, January 1, 2011	$	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

Net income	$	-		-		$	-		$	11,823	$	-	$	11,823
Other comprehensive income, net of tax:		-		-			-			-		1,238		1,238
Redemption of stock pursuant to stock plans		-		(38	)		(499	)		-		-		(499	)
Activity in deferred compensation plan		-		(1	)		52			-		-		52
Issuance of common stock-stock options		-		6			70			-		-		70
Issuance of common stock-restricted stock		-		30			-			-		-		-
Stock based compensation expense		-		-			792			-		-		792
Tax adjustment associated with stock plans		-		-			62			-		-		62
BALANCE, June 30, 2012	$	21,124		19,295		$	231,443		$	66,775	$	8,675	$	328,017

See notes to consolidated financial statements.

- 7 -

WEST COAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The interim unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America for interim financial information. In addition, this report has been prepared in accordance with the instructions for Form 10-Q, and therefore, these financial statements do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The accompanying interim consolidated financial statements include the accounts of West Coast Bancorp (“Bancorp” or the “Company”), and its wholly-owned subsidiaries, West Coast Bank (the “Bank”), West Coast Trust Company, Inc. and Totten, Inc., after elimination of intercompany transactions and balances. The Company’s interim consolidated financial statements and related notes should be read in conjunction with the audited financial statements and related notes, including the Company’s significant accounting policies, contained in the Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 10-K”).

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial information contained in this report reflects all adjustments of a normal, recurring nature that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods. The results of operations and cash flows for the three and six months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, or other future periods.

Supplemental cash flow information. The following table presents supplemental cash flow information for the six months ended June 30, 2012, and 2011.

(Dollars in thousands)	Six months ended
	June 30,
	2012		2011
Supplemental cash flow information:
Cash paid (received) in the period for:
Interest	$	2,305		$	6,291
Income taxes		3,080			6,500

Noncash investing and financing activities:
Change in unrealized gain on available
for sale securities, net of tax	$	1,238		$	2,902
Settlement of secured borrowings		-			(3,085	)
Transfer of long term debt to short term debt		15,000			39,200
OREO and premises and equipment expenditures
accrued in other liabilities	$	36		$	30
Transfer of loans to OREO		4,068			10,367

- 8 -

1. BASIS OF PRESENTATION

New Accounting Pronouncements. In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance within the Accounting Standards Update (“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 Company’s reporting period beginning after December 15, 2011, and was applied prospectively. The adoption of this guidance did not have a material impact on the Company’s 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 were effective for the Company’s reporting period beginning after December 15, 2011, and were applied retrospectively. Early adoption is permitted and there are no required transition disclosures. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of income, its consolidated balance sheet, or its consolidated statement of cash flows.

- 9 -

2. STOCK PLANS

On April 24, 2012, shareholders approved Bancorp’s 2012 Omnibus Incentive Plan (the “2012 Incentive Plan”). Bancorp's 2002 Stock Incentive Plan (the “2002 Plan”) was terminated on March 8, 2012, and no additional awards will be granted under the 2002 Plan. The 2012 Incentive Plan authorizes the issuance of up to 400,000 shares to participants in connection with grants of stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards. The 2012 Incentive Plan has 370,673 shares available for grant at June 30, 2012. The number of shares that may be issued under the 2012 Incentive Plan is subject to adjustment in certain circumstances.

It is Bancorp’s 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 vested over a two to four year vesting period; however, certain grants were 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 Bancorp’s stock on the date the options were granted. Options granted under the 2002 Plan generally vested over a two to four year vesting period; however, certain grants were 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 period shown:

	Six months ended
	June 30, 2012
				Weighted Average
	Common Shares		Exercise Price per share
Balance, beginning of period	257,080			$	70.12
Granted	-				-
Exercised	(6,055	)			11.55
Forfeited/expired	(39,556	)			74.31
Balance, end of period	211,469			$	71.01

The following table presents information on stock options outstanding for the periods shown:

	Six months ended			Six months ended
(Dollars in thousands, except share and per share data)	June 30, 2012		June 30, 2011
Stock options vested and expected to vest:
Number		211,469			257,827
Weighted average exercise price per share	$	71.01		$	69.39
Aggregate intrinsic value	$	527		$	400
Weighted average contractual term of options		4.2 years			4.6 years

Stock options vested and currently exercisable:
Number		211,394			257,206
Weighted average exercise price per share	$	71.03		$	69.59
Aggregate intrinsic value	$	527		$	397
Weighted average contractual term of options		4.2 years			4.6 years

Unearned compensation related to stock options	$	-		$	48

There were no stock option grants for the six months ended June 30, 2012, and 2011.

- 10 -

2. STOCK PLANS

The following table presents information on restricted stock outstanding for the period shown:

	Six months ended
	June 30, 2012
				Weighted Average Market
	Restricted Shares		Price at Grant
Balance, beginning of period	264,631			$	16.98
Granted	29,673				19.05
Vested	(94,975	)			18.19
Forfeited	(13,357	)			15.66
Balance, end of period	185,972			$	16.78

Weighted average remaining recognition period	2.1 years

The balance of unearned compensation related to restricted shares as of June 30, 2012, and June 30, 2011, was $2.9 million and $4.6 million, respectively.

The following table presents stock-based compensation expense for the periods shown:

	Three months ended					Six months ended
	June 30,					June 30,
(Dollars in thousands)	2012		2011		2012	2011
Restricted stock expense	$	380		$	468	$	777	$	975
Stock option expense		3			17		15		54
Total stock-based compensation expense	$	383		$	485	$	792	$	1,029

The income tax benefit recognized in the income statement for restricted stock compensation expense in the three and six months ended June 30, 2012, was $133,000 and $272,000, respectively. The income tax benefit recognized in the income statement for restricted stock compensation expense in the three and six months ended June 30, 2011, was $178,000 and $371,000, respectively.

The cash received from stock option exercises was $18,000 and $70,000 for the three and six months ended June 30, 2012, respectively. The Company recorded $62,000 of 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 six months ended June 30, 2012. No tax benefit was recorded in the six months ended June 30, 2011.

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3. INVESTMENT SECURITIES

The following tables present the available for sale investment portfolio as of June 30, 2012, and December 31, 2011:

(Dollars in thousands)
June 30, 2012	Amortized			Unrealized		Unrealized
	Cost		Gross Gains		Gross Losses	Fair Value
U.S. Treasury securities	$	200		$	-	$	-		$	200
U.S. Government agency securities		200,752			3,936		-			204,688
Corporate securities		14,303			-		(5,925	)		8,378
Mortgage-backed securities		399,028			11,141		(86	)		410,083
Obligations of state and political subdivisions		69,046			4,658		(74	)		73,630
Equity investments and other securities		11,266			662		(23	)		11,905
Total	$	694,595		$	20,397	$	(6,108	)	$	708,884

(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

At June 30, 2012, the corporate securities portfolio included four pooled trust preferred securities issued by banks and/or insurance companies with amortized cost of $13.8 million and an estimated fair market value of $7.9 million resulting in an estimated $5.9 million unrealized loss. This unrealized loss reflects a decline in market value since the purchase of these securities. Credit deterioration and wider credit and liquidity spreads since purchase contributed to the unrealized loss. 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.

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 June 30, 2012	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	200		$	-			$	-		$	-		$	200		$	-
Corporate securities		-			-				7,878			(5,925	)		7,878			(5,925	)
Mortgage-backed securities		11,261			(86	)			-			-			11,261			(86	)
Obligations of state and political subdivisions		5,806			(74	)			-			-			5,806			(74	)
Equity and other securities		597			(3	)			1,180			(20	)		1,777			(23	)
Total	$	17,864		$	(163	)		$	9,058		$	(5,945	)	$	26,922		$	(6,108	)

(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	)

- 12 -

3. INVESTMENT SECURITIES

Management reviews and evaluates the Company’s 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.

The Company recorded a credit related OTTI charge of $.2 million pretax in the second quarter of 2011 related to a pooled trust preferred security in its investment portfolio, which also was placed on nonaccrual status at the same time. An additional credit related OTTI charge of $49,000, pretax, relating to this same security was deemed necessary in the first quarter of 2012. 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 portion of 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 payments in kind, this pooled trust preferred security was placed on nonaccrual status. In October 2011, the Company placed another pooled trust preferred security, with payments in kind, on nonaccrual status. However, while this security had an impairment loss of $1.6 million at June 30, 2012, the security had no credit related OTTI as of June 30, 2012.

The following table presents a summary of the significant inputs utilized to measure the OTTI related to credit losses associated with the above pooled trust preferred security at June 30, 2012, and June 30, 2011:

	June 30, 2012		June 30, 2011
Default Rate	0.75	%		0.75	%
Recovery Rate	15.00	%		15.00	%
Prepayments	1.00	%		1.00	%
Discount rate (coupon) range	2.9%-4.2	%		2.9%-4.2	%

The following table presents information about the securities with OTTI losses for the periods shown:

(Dollars in thousands)
	Three months ended							Six months ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Other-than-temporary impairment losses on securities	$	-		$	(1,636	)		$	(1,726	)	$	(1,636	)
Portion of other-than temporary, non-credit related losses
recognized in other comprehensive income		-			1,457				1,677			1,457
Net other-than-temporary impairment losses on securities	$	-		$	(179	)		$	(49	)	$	(179	)

The following table presents a tabular roll forward of the amount of credit related OTTI recognized in earnings for the periods shown:

(Dollars in thousands)
	Three months ended						Six months ended
	June 30, 2012		June 30, 2011	June 30, 2012		June 30, 2011
Balance of net OTTI losses on securities, beginning of period	$	(228	)	$	-		$	(179	)	$	-
Net OTTI losses on securities in the period		-			(179	)		(49	)		(179	)
Balance of net OTTI losses on securities, end of period	$	(228	)	$	(179	)	$	(228	)	$	(179	)

At June 30, 2012, and December 31, 2011, the Company had $288.8 million and $291.0 million, respectively, in investment securities being provided as collateral to the Federal Home Loan Bank of Seattle (“FHLB”), the Federal Reserve Bank of San Francisco (“Reserve Bank”), the State of Oregon, the State of Washington, and others to support the Company’s borrowing capacities and certain public fund deposits.

- 13 -

3. INVESTMENT SECURITIES

The following table presents the contractual maturities of the investment securities available for sale at June 30, 2012:

(Dollars in thousands)	Available for sale
June 30, 2012	Amortized cost		Fair value
U.S. Treasury securities
One year or less	$	-		$	-
After one year through five years		200			200
After five through ten years		-			-
Due after ten years		-			-
Total		200			200

U.S. Government agency securities:
One year or less		500			501
After one year through five years		150,604			154,174
After five through ten years		49,648			50,013
Due after ten years		-			-
Total		200,752			204,688

Corporate securities:
One year or less		-			-
After one year through five years		500			500
After five through ten years		-			-
Due after ten years		13,803			7,878
Total		14,303			8,378

Obligations of state and political subdivisions:
One year or less		2,158			2,215
After one year through five years		17,193			18,210
After five through ten years		31,681			34,421
Due after ten years		18,014			18,784
Total		69,046			73,630

Mortgage-backed securities		399,028			410,083
Equity investments and other securities		11,266			11,905
Total securities	$	694,595		$	708,884

Certain investments have maturities that will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

- 14 -

4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The compositions and carrying values of the Company’s loan portfolio, excluding loans held for sale, were as follows:

(Dollars in thousands)	June 30, 2012		December 31, 2011
Commercial	$	292,643		$	299,766
Real estate construction		44,026			30,162
Real estate mortgage		308,891			324,994
Commercial real estate		837,415			832,767
Installment and other consumer		12,822			13,612
Total loans		1,495,797			1,501,301
Allowance for loan losses		(33,132	)		(35,212	)
Total loans, net	$	1,462,665		$	1,466,089

The following table presents an age analysis of the loan portfolio, including nonaccrual loans, for the periods shown:

(Dollars in thousands)	June 30, 2012
	30 - 89 days			Greater than		Total			Current		Total
	past due		90 days past due		past due	loans		loans
Commercial	$	1,045		$	4,725	$	5,770		$	286,873	$	292,643
Real estate construction		-			5,687		5,687			38,339		44,026
Real estate mortgage		2,927			2,389		5,316			303,575		308,891
Commercial real estate		5,162			4,823		9,985			827,430		837,415
Installment and other consumer		18			1		19			12,803		12,822
Total	$	9,152		$	17,625	$	26,777		$	1,469,020	$	1,495,797

(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

Loans greater than 90 days past due are classified into nonaccrual status. In addition, certain loans not 90 days past due are on nonaccrual status.

- 15 -

4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The following table presents an analysis of impaired loans for the periods shown:

													Quarter ended
(Dollars in thousands)	June 30, 2012		June 30, 2012
	Unpaid principal			Impaired loans		Impaired loans			Total impaired		Related		Average impaired
	balance ¹		with no allowance		with allowance	loan balance		allowance		loan balance
Commercial	$	17,868		$	6,199	$	443		$	6,642	$	27	$	6,726
Real estate construction		10,777			5,686		-			5,686		-		5,672
Real estate mortgage		25,976			9,283		4,838			14,121		166		17,194
Commercial real estate		22,462			12,384		8,713			21,097		288		23,378
Installment and other consumer		1,926			-		85			85		21		118
Total	$	79,009		$	33,552	$	14,079		$	47,631	$	502	$	53,088

													Quarter 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

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.

The balance of Troubled Debt Restructurings (“TDR”) at June 30, 2012, was $32.1 million, down from $37.6 million at December 31, 2011. The following table presents an analysis of TDRs recorded for the periods ended June 30, 2012, and June 30, 2011:

(Dollars in thousands)	TDRs recorded for the three months ended						TDRs recorded in the 12 months prior to June 30, 2012 that
	June 30, 2012	subsequently defaulted in the three months ended June 30, 2012
	Number of	Pre-TDR outstanding			Post-TDR outstanding		Number of	Pre-TDR outstanding		Amount Defaulted
	loans	recorded investment		recorded investment		loans	recorded investment
Commercial	1	$	40		$	40	-	$	-	$	-
Real estate construction	-		-			-	-		-		-
Real estate mortgage	-		-			-	-		-		-
Commercial real estate	-		-			-	-		-		-
Consumer loans	-		-			-	-		-		-
Total	1	$	40		$	40	-	$	-	$	-

(Dollars in thousands)	TDRs recorded for the three months ended						TDRs recorded in the 12 months prior to June 30, 2011 that
	June 30, 2011	subsequently defaulted in the three months ended June 30, 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	4	$	368		$	366	-	$	-	$	-
Real estate construction	-		-			-	-		-		-
Real estate mortgage	2		789			786	-		-		-
Commercial real estate	2		735			732	-		-		-
Consumer loans	-		-			-	-		-		-
Total	8	$	1,892		$	1,884	-	$	-	$	-

- 16 -

4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

(Dollars in thousands)	TDRs recorded for the six months ended								TDRs recorded in the 12 months prior to June 30, 2012 that
	June 30, 2012		subsequently defaulted in the six months ended June 30, 2012
	Number of			Pre-TDR outstanding		Post-TDR outstanding			Number of	Pre-TDR outstanding		Amount Defaulted
	loans		recorded investment		recorded investment	loans		recorded investment
Commercial		3		$	689	$	689		-	$	-	$	-
Real estate construction		-			-		-		-		-		-
Real estate mortgage		-			-		-		-		-		-
Commercial real estate		-			-		-		-		-		-
Consumer loans		-			-		-		1		88		87
Total		3		$	689	$	689		1	$	88	$	87

(Dollars in thousands)	TDRs recorded for the six months ended								TDRs recorded in the 12 months prior to June 30, 2011 that
	June 30, 2011		subsequently defaulted in the six months ended June 30, 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		9		$	809	$	779		-	$	-	$	-
Real estate construction		1			1,008		744		1		983		983
Real estate mortgage		6			2,071		2,058		-		-		-
Commercial real estate		3			917		913		-		-		-
Consumer loans		-			-		-		-		-		-
Total		19		$	4,805	$	4,494		1	$	983	$	983

TDRs are considered impaired and as such are typically measured based on the fair value of the collateral less selling costs. 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 for the impairment amount.

- 17 -

4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The following table presents nonaccrual loans by category as of the dates shown:

	June 30,			December 31,
(Dollars in thousands)	2012		2011
Commercial	$	6,199		$	7,750
Real estate construction		5,686			5,823
Real estate mortgage		9,283			11,949
Commercial real estate		12,384			15,070
Installment and other consumer		-			5
Total loans on nonaccrual status	$	33,552		$	40,597

The Company uses a risk rating matrix to assign a risk rating to loans not evaluated on a homogenous pool level. At June 30, 2012, $1.11 billion of loans were risk rated and $382.4 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 or 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 management’s “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 been 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.

- 18 -

4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company considers loans assigned a risk rating 8 through 10 to be classified loans. The following table presents weighted average risk ratings of the loan portfolio, including classified loans, by category. The weighted average risk rating of the portfolio exhibited modest improvement from December 31, 2011, to June 30, 2012. However, the Company experienced reductions in all classified loan portfolio categories during over this period.

(Dollars in thousands)	June 30, 2012		December 31, 2011
	Weighted average		Classified		Weighted average	Classified
	risk rating		loans		risk rating	loans
Commercial		5.77		$	20,000		5.84	$	22,401
Real estate construction		6.63			12,242		6.99		13,159
Real estate mortgage		6.40			19,342		6.50		24,004
Commercial real estate		5.64			30,360		5.67		35,255
Installment and other consumer ¹		7.83			244		7.87		358
Total				$	82,188			$	95,177

Total loans risk rated	$	1,113,353				$	1,103,713

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.

The following table presents homogeneous loans where credit risk is evaluated on a portfolio basis by category, and includes home equity loans and lines of credit and certain small business loans. Important credit quality metrics for this portfolio include balances on nonaccrual and past due status. Total loans and lines evaluated on a homogeneous pool basis were $382.4 million at June 30, 2012, and $397.6 million at December 31, 2011.

(Dollars in thousands)	June 30, 2012		December 31, 2011
	Current		Nonaccrual		30 - 89 days	Current		Nonaccrual		30 - 89 days
	status		status		past due	status		status		past due
Commercial	$	43,972		$	1	$	362		$	46,774	$	11	$	112
Real estate construction		-			4		-			-		4		-
Real estate mortgage		243,497			16		1,283			254,107		13		1,480
Commercial real estate		80,416			1		364			81,601		1		283
Installment and other consumer		12,509			1		19			13,146		-		56
Total	$	380,394		$	23	$	2,028		$	395,628	$	29	$	1,931

The following tables present summary account activity relating to the allowance for credit losses by loan category:

(Dollars in thousands)	Three months ended June 30, 2012
				Real estate		Real estate		Commercial		Installment and
	Commercial		construction	mortgage		real estate		other consumer		Unallocated		Total
Beginning balance March 31, 2012	$	6,869		$	2,303		$	8,067			$	11,840		$	1,066		$	4,489		$	34,634
Provision for credit losses		55			134			1,003				(1,145	)		65			(604	)		(492	)
Losses charged to the allowance		(379	)		-			(476	)			(549	)		(252	)		-			(1,656	)
Recoveries credited to the allowance		156			29			48				1,129			52			-			1,414
Ending balance June 30, 2012	$	6,701		$	2,466		$	8,642			$	11,275		$	931		$	3,885		$	33,900

	Six months ended June 30, 2012
				Real estate		Real estate	Commercial		Installment and
	Commercial		construction	mortgage		real estate	other consumer		Unallocated	Total
Beginning balance December 31, 2011	$	7,746		$	2,490		$	8,461		$	11,833		$	1,067		$	4,386		$	35,983
Provision for credit losses		(827	)		(52	)		1,685			(1,097	)		389			(501	)		(403	)
Losses charged to the allowance		(1,014	)		(3	)		(1,715	)		(611	)		(672	)		-			(4,015	)
Recoveries credited to the allowance		796			31			211			1,150			147			-			2,335
Ending balance June 30, 2012	$	6,701		$	2,466		$	8,642		$	11,275		$	931		$	3,885		$	33,900

Loans valued for impairment:
Individually	$	6,642		$	5,686		$	14,121		$	21,097		$	85		$	-		$	47,631
Collectively		286,001			38,340			294,770			816,318			12,737			-			1,448,166
Total	$	292,643		$	44,026		$	308,891		$	837,415		$	12,822		$	-		$	1,495,797

- 19 -

4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

(Dollars in thousands)	Three months ended June 30, 2011
				Real estate		Real estate	Commercial		Installment and
	Commercial		construction	mortgage		real estate	other consumer		Unallocated	Total
Beginning balance March 31, 2011	$	8,735		$	3,989		$	8,137		$	12,790		$	1,118		$	5,660		$	40,429
Provision for credit losses		(556	)		(733	)		3,116			1,605			234			(240	)		3,426
Losses charged to the allowance		(460	)		(866	)		(2,531	)		(564	)		(439	)		-			(4,860	)
Recoveries credited to the allowance		139			5			18			3			71			-			236
Ending balance June 30, 2011	$	7,858		$	2,395		$	8,740		$	13,834		$	984		$	5,420		$	39,231

(Dollars in thousands)	Six months ended June 30, 2011
				Real estate		Real estate	Commercial		Installment and
	Commercial		construction	mortgage		real estate	other consumer		Unallocated	Total
Beginning balance December 31, 2010	$	8,541		$	4,474		$	8,156		$	12,462		$	1,273		$	6,161		$	41,067
Provision for credit losses		(99	)		(842	)		4,470			2,259			455			(741	)		5,502
Losses charged to the allowance		(1,221	)		(1,242	)		(4,016	)		(893	)		(902	)		-			(8,274	)
Recoveries credited to the allowance		637			5			130			6			158			-			936
Ending balance June 30, 2011	$	7,858		$	2,395		$	8,740		$	13,834		$	984		$	5,420		$	39,231

Loans valued for impairment:
Individually	$	9,443		$	8,637		$	21,336		$	25,064		$	1		$	-		$	64,481
Collectively		288,374			23,797			315,388			814,601			14,506			-			1,456,666
Total	$	297,817		$	32,434		$	336,724		$	839,665		$	14,507		$	-		$	1,521,147

The decline in the provision for credit losses and the allowance for credit losses reflected the improving trend in the overall risk profile of the loan portfolio. The allowance for credit losses at June 30, 2012 declined from December 31, 2011, also due to lower overall loan balances as well as adjustments being made to loan category risk rating reserve percentages.

The following table shows the components of the allowance for credit losses:

(Dollars in thousands)	June 30, 2012		June 30, 2011
Allowance for loan losses	$	33,132		$	38,422
Reserve for unfunded commitments		768			809
Total allowance for credit losses	$	33,900		$	39,231

- 20 -

5. OTHER REAL ESTATE OWNED, NET

The following tables summarize Other Real Estate Owned (“OREO”) for the periods shown:

(Dollars in thousands)	Three months ended
	June 30, 2012		June 30, 2011
Balance, beginning of period	$	27,525		$	39,329
Additions to OREO		3,304			4,270
Disposition of OREO		(3,890	)		(6,670	)
Valuation adjustments in the period		(1,213	)		(1,555	)
Total OREO	$	25,726		$	35,374

(Dollars in thousands)	Six months ended
	June 30, 2012		June 30, 2011
Balance, beginning of period	$	30,823		$	39,459
Additions to OREO		4,114			10,749
Disposition of OREO		(7,477	)		(12,622	)
Valuation adjustments in the period		(1,734	)		(2,212	)
Total OREO	$	25,726		$	35,374

The following tables summarize the OREO valuation allowance for the periods shown:

(Dollars in thousands)	Three months ended
	June 30, 2012		June 30, 2011
Balance, beginning of period	$	8,073		$	7,425
Valuation adjustments in the period		1,213			1,555
Deductions from the valuation allowance due to disposition		(464	)		(1,425	)
Total OREO valuation allowance	$	8,822		$	7,555

(Dollars in thousands)	Six months ended
	June 30, 2012		June 30, 2011
Balance, beginning of period	$	8,151		$	7,584
Valuation adjustments in the period		1,734			2,212
Deductions from the valuation allowance due to disposition		(1,063	)		(2,241	)
Total OREO valuation allowance	$	8,822		$	7,555

- 21 -

6. EARNINGS 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 a similar manner to basic earnings per share except that the denominator of weighted average common shares is increased to include the number of additional common shares that would have been outstanding if shares issuable upon exercise of options and warrants were included in earnings per share. In addition, under the two-class method, net income, the numerator, is adjusted to reflect the allocation of net income to participating securities such as preferred stock and non-vested restricted stock. 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 three and six months ended June 30, 2012.

The following table reconciles the numerator and denominator of the basic and diluted earnings per share computations for the periods ended June 30, 2012, and 2011:

(Dollars and shares in thousands, except per share amounts)	Three months ended
	June 30, 2012		June 30, 2011
Net income	$	6,034		$	4,634
Less: Net income allocated to participating securities-basic:
Preferred stock		357			274
Non-vested restricted stock		60			63
Net income available to common stock holders-basic		5,617			4,297
Add: Net income allocated per two-class method-diluted:
Stock options and Class C warrants		22			15
Net income available to common stockholders-diluted	$	5,639		$	4,312
Weighted average common shares outstanding -basic		19,082			19,006
Common stock equivalents from:
Stock options		26			24
Class C warrants		1,148			995
Weighted average common shares outstanding -diluted		20,256			20,025
Basic earnings per share	$	0.29		$	0.23
Diluted earnings per share	$	0.28		$	0.22

Common stock equivalent shares excluded due to anti-dilutive effect		167			189

(Dollars and shares in thousands, except per share amounts)	Six months ended
	June 30, 2012		June 30, 2011
Net income	$	11,823		$	9,739
Less: Net income allocated to participating securities-basic:
Preferred stock		700			576
Non-vested restricted stock		134			143
Net income available to common stock holders-basic		10,989			9,020
Add: Net income allocated per two-class method-diluted:
Stock options and Class C warrants		43			32
Net income available to common stockholders-diluted	$	11,032		$	9,052
Weighted average common shares outstanding -basic		19,060			18,983
Common stock equivalents from:
Stock options		24			23
Class C warrants		1,077			976
Weighted average common shares outstanding -diluted		20,161			19,982
Basic earnings per share	$	0.58		$	0.48
Diluted earnings per share	$	0.55		$	0.45

Common stock equivalent shares excluded due to anti-dilutive effect		180			192

- 22 -

7. COMMITMENTS AND CONTINGENT LIABILITIES

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 Bank’s 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 or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments.

The following table summarizes the Bank’s off balance sheet unfunded commitments as of the dates shown:

	Contract or		Contract or
	Notional Amount		Notional Amount
(Dollars in thousands)	June 30, 2012		December 31, 2011
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit in the form of loans
Commercial	$	241,551		$	251,105
Real estate construction		32,988			23,932
Real estate mortgage
Mortgage		1,970			3,419
Home equity loans and lines of credit		142,560			150,196
Total real estate mortgage loans		144,530			153,615
Commercial real estate		8,069			10,993
Installment and consumer		9,813			9,907
Other		21,854			12,803
Standby letters of credit and financial guarantees		7,774			8,349
Account overdraft protection instruments		96,550			103,642
Total	$	563,129		$	574,346

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the underlying contracts. 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 customer’s 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 Bank’s 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. The Company maintains a reserve for unfunded commitments as a component of the allowance for credit losses.

Standby letters of credit are conditional commitments issued to support a customer’s 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.

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 Bancorp’s financial condition and results of operations, cash flows, or liquidity.

- 23 -

8. SEGMENT AND RELATED INFORMATION

Bancorp accounts for intercompany fees and services at fair value according to regulatory requirements for the service provided. Intercompany items relate primarily to the provision of accounting, human resources, data processing and marketing services.

Summarized financial information concerning Bancorp’s reportable segments and the reconciliation to Bancorp’s consolidated results are shown in the following table. The “Other” column includes Bancorp’s trust operations and corporate-related items, including interest expense related to trust preferred securities. Investment in subsidiaries is netted out of the presentations below. The “Intersegment” column identifies the intersegment activities of revenues, expenses and other assets between the “Banking” and “Other” segments.

(Dollars in thousands)	Three months ended June 30, 2012
	Banking		Other	Intersegment		Consolidated
Interest income	$	22,833		$	8		$	-		$	22,841
Interest expense		766			302			-			1,068
Net interest income (expense)		22,067			(294	)		-			21,773
Provision for credit losses		(492	)		-			-			(492	)
Noninterest income		7,974			787			(267	)		8,494
Noninterest expense		20,798			945			(267	)		21,476
Income (loss) before income taxes		9,735			(452	)		-			9,283
Provision (benefit) for income taxes		3,425			(176	)		-			3,249
Net income (loss)	$	6,310		$	(276	)	$	-		$	6,034

Depreciation and amortization	$	2,046		$	7		$	-		$	2,053
Assets	$	2,402,856		$	15,487		$	(9,904	)	$	2,408,439
Loans, net	$	1,462,665		$	-		$	-		$	1,462,665
Deposits	$	1,886,258		$	-		$	(9,373	)	$	1,876,885
Equity	$	365,798		$	(37,781	)	$	-		$	328,017

(Dollars in thousands)	Three months ended June 30, 2011
	Banking		Other	Intersegment		Consolidated
Interest income	$	25,093		$	11		$	-		$	25,104
Interest expense		2,811			332			-			3,143
Net interest income (expense)		22,282			(321	)		-			21,961
Provision for credit losses		3,426			-			-			3,426
Noninterest income		7,523			817			(270	)		8,070
Noninterest expense		22,287			941			(270	)		22,958
Income (loss) before income taxes		4,092			(445	)		-			3,647
Provision (benefit) for income taxes		(813	)		(174	)		-			(987	)
Net income (loss)	$	4,905		$	(271	)	$	-		$	4,634

Depreciation and amortization	$	1,892		$	8		$	-		$	1,900
Assets	$	2,458,268		$	15,215		$	(10,927	)	$	2,462,556
Loans, net	$	1,482,725		$	-		$	-		$	1,482,725
Deposits	$	1,941,357		$	-		$	(10,360	)	$	1,930,997
Equity	$	323,631		$	(38,062	)	$	-		$	285,569

- 24 -

8. SEGMENT AND RELATED INFORMATION

(Dollars in thousands)	Six months ended June 30, 2012
	Banking		Other	Intersegment		Consolidated
Interest income	$	46,157		$	17		$	-		$	46,174
Interest expense		1,657			611			-			2,268
Net interest income (expense)		44,500			(594	)		-			43,906
Provision for credit losses		(403	)		-			-			(403	)
Noninterest income		15,371			1,545			(535	)		16,381
Noninterest expense		41,183			1,853			(535	)		42,501
Income (loss) before income taxes		19,091			(902	)		-			18,189
Provision (benefit) for income taxes		6,718			(352	)		-			6,366
Net income (loss)	$	12,373		$	(550	)	$	-		$	11,823

Depreciation and amortization	$	4,215		$	14		$	-		$	4,229
Assets	$	2,402,856		$	15,487		$	(9,904	)	$	2,408,439
Loans, net	$	1,462,665		$	-		$	-		$	1,462,665
Deposits	$	1,886,258		$	-		$	(9,373	)	$	1,876,885
Equity	$	365,798		$	(37,781	)	$	-		$	328,017

(Dollars in thousands)	Six months ended June 30, 2011
	Banking		Other		Intersegment		Consolidated
Interest income	$	49,999		$	23			$	-		$	50,022
Interest expense		5,941			608				-			6,549
Net interest income (expense)		44,058			(585	)			-			43,473
Provision for credit losses		5,502			-				-			5,502
Noninterest income		15,912			1,615				(541	)		16,986
Noninterest expense		44,179			1,873				(541	)		45,511
Income (loss) before income taxes		10,289			(843	)			-			9,446
Provision (benefit) for income taxes		36			(329	)			-			(293	)
Net income (loss)	$	10,253		$	(514	)		$	-		$	9,739

Depreciation and amortization	$	4,017		$	15			$	-		$	4,032
Assets	$	2,458,268		$	15,215			$	(10,927	)	$	2,462,556
Loans, net	$	1,482,725		$	-			$	-		$	1,482,725
Deposits	$	1,941,357		$	-			$	(10,360	)	$	1,930,997
Equity	$	323,631		$	(38,062	)		$	-		$	285,569

- 25 -

9. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

Bancorp measures or discloses certain financial assets and liabilities at fair value in accordance with GAAP, which defines fair value 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.

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 were 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.

GAAP established a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:

Level 1 - Quoted prices in active markets for identical assets utilizing 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.
Level 2 - Other observable 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.
Level 3 - Significant unobservable 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.

The estimated fair values of financial instruments and respective level classifications at June 30, 2012, are as follows:

						Fair value measurements using
						Quoted prices in					Significant
						active markets for		Other observable		unobservable
(Dollars in thousands)						identical assets		inputs		inputs
	Carrying Value		Fair Value		(Level 1)	(Level 2)		(Level 3)
FINANCIAL ASSETS:
Cash and cash equivalents	$	110,887		$	110,887	$	110,887		$	-		$	-
Trading securities		793			793		793			-			-
Investment securities		708,884			708,884		1,978			698,528			8,378
Federal Home Loan Bank stock		12,148			12,148		-			12,148			-
Loans held for sale		-			-		-			-			-
Net loans (net of allowance for loan losses)		1,462,665			1,428,836		-			-			1,428,836
Bank owned life insurance		26,646			26,646		-			26,646			-

FINANCIAL LIABILITIES:
Deposits	$	1,876,885		$	1,877,012	$	-		$	1,877,012		$	-
Short-term borrowings		15,000			15,000					15,000
Long-term borrowings		112,900			113,539		-			113,539			-

Junior subordinated debentures-variable		51,000			27,133		-			27,133			-

- 26 -

9. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated 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 Company’s Asset/Liability Management Committee (“ALCO”) oversees the bank’s valuation process and reports such valuations to the Loan, Investment & ALCO Committee of the Board of Directors. 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 June 30, 2012, are recorded at fair value on a recurring basis and related solely to bonds, equity securities and mutual funds held in a Rabbi Trust for benefit of the Company’s deferred compensation plans. Fair values for trading securities are based on quoted market prices.

Investment securities - For substantially all available for sale investment 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 unadjusted, quoted market prices or dealer quotes if available. When quoted market prices are not readily accessible or available, alternative approaches, such as matrix or model pricing or indicators from market makers, are 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 pricing models. Securities measured with these valuation techniques are generally classified as Level 2 of the hierarchy.

Level 3 investment securities measured on a recurring basis consist of pooled trust preferred securities. The fair values of these securities were estimated using discounted expected cash flows. 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 and adjusted for an additional liquidity premium.

Federal Home Loan Bank stock – FHLB stock is carried at cost which approximates fair value and equals its par value because the shares can only be redeemed with the FHLB at par.

- 27 -

9. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

Loans held for sale - Loans held for sale includes mortgage loans that are carried at the lower of cost or market value. The fair value of loans held for sale is based on prices from current offerings in secondary markets. Fair value generally approximates cost because of the short duration of these assets on our balance sheet.

Loans - The fair value of loans disclosed and not measured on a recurring or nonrecurring basis 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. These estimates differentiate loans based on their financial characteristics such as loan category, pricing features, and remaining maturity. Prepayment and credit loss estimates are also incorporated into loan fair value estimates as well as an additional liquidity discount to more closely align the fair value with observed market prices.

Loans that are deemed impaired are measured on a nonrecurring basis and based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Loans may also, as a practical expedient, be measured at the loan’s observable market price or the fair market value of the collateral less selling costs if the loan is collateral dependent.

Bank owned life insurance – Bank owned life insurance is carried at 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.

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.

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 and 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 commitments to extend credit carry current market interest rates if converted to loans.

- 28 -

9. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The tables below present fair value information on certain assets broken down by recurring or nonrecurring measurement status for the periods shown. 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.

Certain assets, such as loans held for sale, loans measured for impairment, and OREO, are measured at fair value on a nonrecurring basis after initial recognition. As of June 30, 2012, loans amounting to $47.6 million in Bancorp’s loan portfolio were deemed impaired. In addition, during the second quarter, certain OREO properties were written down by a total of $1.2 million to reflect additional decreases in estimated fair market value subsequent to the time such properties were placed into OREO.

				Fair value measurements at June 30, 2012, using
				Quoted prices in active
				markets for identical		Other observable		Significant		Impairment
(Dollars in thousands)	Fair Value		assets		inputs		unobservable inputs		recognized
	June 30, 2012		(Level 1)		(Level 2)		(Level 3)
Recurring fair value measurements:
Trading securities	$	793		$	793		$	-		$	-
Available for sale securities:
U.S. Treasury securities		200			-			200			-
U.S. Government agency securities		204,688			-			204,688			-
Corporate securities		8,378			-			-			8,378
Mortgage-backed securities		410,083			-			410,083			-
Obligations of state and political subdivisions		73,630			-			73,630			-
Equity investments and other securities		11,905			1,978			9,927			-
Total recurring assets measured at fair value	$	709,677		$	2,771		$	698,528		$	8,378

Nonrecurring fair value measurements
for the three months ending:
Loans measured for impairment ¹	$	4,934		$	-		$	-		$	4,934	$	1,657
OREO ¹		15,438			-			-			15,438		1,213
Total nonrecurring fair value measurements	$	20,372		$	-		$	-		$	20,372	$	2,870

Nonrecurring fair value measurements
for the six months ending:
Loans measured for impairment ¹	$	11,929		$	-		$	-		$	11,929	$	4,014
OREO ¹		27,114			-			-			27,114		1,734
Total nonrecurring fair value measurements	$	39,043		$	-		$	-		$	39,043	$	5,748

¹ Fair value amounts exclude the estimated selling costs of impaired loan collateral and OREO properties.

The impairment recognized on impaired loans disclosed above represents the amount of the specific reserve and/or charge-offs recognized during the period applicable to loans held at period end. The amount of the specific reserve is included in the allowance for loan and lease losses. The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent write-downs from updated appraisals that were charged to loss on OREO.

- 29 -

9. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

				Fair value measurements at December 31, 2011, using
				Quoted prices in active
				markets for identical		Other observable		Significant		Impairment
(Dollars in thousands)	Fair Value		assets		inputs		unobservable inputs		recognized
	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Recurring fair value measurements:
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

Nonrecurring fair value measurements:
Loans measured for impairment ¹	$	68,466		$	-		$	-		$	68,466	$	15,410
OREO ¹		60,491			-			-			60,491		4,832
Total nonrecurring fair value measurements	$	128,957		$	-		$	-		$	128,957	$	20,242

¹ Fair value amounts exclude the estimated selling costs of impaired loan collateral and OREO properties.

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9. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company made no transfers between hierarchy levels in the second quarter of 2012. It is the Company’s policy to recognize hierarchy level changes as of the end of the reporting period. 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. In addition, the Company had no material changes in valuation techniques for recurring and nonrecurring assets measured at fair value in the quarter ended June 30, 2012.

The following table represents a reconciliation of Level 3 instruments for assets that are measured at fair value on a recurring basis for the three and six months ended June 30, 2012, and 2011:

	Three months ended June 30, 2012
								Reclassification of
				Gains (losses)		losses from
				included in other		adjustment for		Purchases,
	Balance		comprehensive		impairment of		Issuances, and		Balance
(Dollars in thousands)	March 31, 2012		income		securities		Settlements		June 30, 2012
Corporate securities	$	8,517		$	(139	)				$	-	$	8,378
Fair value	$	8,517		$	(139	)		$	-	$	-	$	8,378

	Six months ended June 30, 2012
								Reclassification of
				Gains (losses)		losses from
				included in other		adjustment for		Purchases,
	Balance		comprehensive		impairment of		Issuances, and		Balance
(Dollars in thousands)	January 1, 2012		income		securities		Settlements		June 30, 2012
Corporate securities	$	8,507		$	(178	)		$	49	$	-	$	8,378
Fair value	$	8,507		$	(178	)		$	49	$	-	$	8,378

	Three months ended June 30, 2011
								Reclassification of
				Gains (losses)		losses from
				included in other		adjustment for		Purchases,
	Balance		comprehensive		impairment of		Issuances, and		Balance
(Dollars in thousands)	March 31, 2011		income		securities		Settlements		June 30, 2011
Corporate securities	$	9,850		$	(523	)		$	179	$	-	$	9,506
Obligations of state and political subdivisions		889			(85	)			-		-		804
Fair value	$	10,739		$	(608	)		$	179	$	-	$	10,310

	Six months ended June 30, 2011
								Reclassification of
				Gains (losses)		losses from
				included in other		adjustment for		Purchases,
	Balance		comprehensive		impairment of		Issuances, and		Balance
(Dollars in thousands)	January 1, 2011		income		securities		Settlements		June 30, 2011
Corporate securities	$	9,392		$	(65	)		$	179	$	-	$	9,506
Obligations of state and political subdivisions		957			(153	)			-		-		804
Fair value	$	10,349		$	(218	)		$	179	$	-	$	10,310

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9. FAIR VALUE MEASUREMENT AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The following table presents quantitative information about Level 3 fair value measurements for the three months ended June 30, 2012:

(Dollars in thousands)
	June 30, 2012			Valuation		Unobservable				Weighted
	Fair Value		technique		inputs		Range		average
Corporate securities	$	8,378		Discounted cash flow		Prepayment rate		0 - 1%		0.50%
						Deferral/default rate		.25 - 1.50%		0.88%
						Recovery rate		0 - 50%		25%
						Recovery lag		0 - 5 years		2.5 years
						Discount rate		7.30 - 8.70%		7.90%
Loans measured for impairment		1,696		Income approach		Capitalization rate		6.75 - 8.00%		7.26%
		3,238		Market comparable		Adjustment to appraisal value		.25 - 22.34%		5.58%
OREO		1,680		Income approach		Capitalization rate		6.75%		6.75%
		13,758		Market comparable		Adjustment to appraisal value		.25 - 36.88%		7.95%

The following table presents quantitative information about Level 3 fair value measurements for the six months ended June 30, 2012:

(Dollars in thousands)
	June 30, 2012			Valuation		Unobservable				Weighted
	Fair Value		technique		inputs		Range		average
Corporate securities	$	8,378		Discounted cash flow		Prepayment rate		0 - 1%		0.50%
						Deferral/default rate		.25 - 1.5%		0.88%
						Recovery rate		0 - 50%		25%
						Recovery lag		0 - 5 years		2.5 years
						Discount rate		7.60 - 8.80%		8.10%
Loans measured for impairment		3,507		Income approach		Capitalization rate		6.75 - 8.00%		7.27%
		8,422		Market comparable		Adjustment to appraisal value		.25 - 45.91%		11.02%
OREO		6,248		Income approach		Capitalization rate		6.75 - 8.50%		7.69%
		20,866		Market comparable		Adjustment to appraisal value		0 - 51.46%		7.81%

The Company estimates the fair value of its Level 3 securities quarterly based on both observable and unobservable inputs. Observable inputs include discount rates derived from current rates on traded corporate bonds. Unobservable inputs are primarily estimates of future cash flows from the Level 3 securities. The Level 3 fair value measurements of our corporate securities are highly sensitive to our estimate of the cash flow from these securities. Higher default or deferral rates and lower recovery rates reduce the overall estimated cash flows and would reduce the estimated fair value of these securities. Prepayment assumptions, recovery lag assumptions and discount rates have a reduced relative effect on the fair value estimates.

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Item 2. Management’s 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 of West Coast Bancorp (“Bancorp” or the “Company”) that appear under the heading “Financial Statements and Supplementary Data” in Bancorp's Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 10-K”), as well as the unaudited consolidated financial statements for the current quarter found under Item 1 above.

Forward Looking Statement Disclosure

Statements in this Quarterly 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 Company’s 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 the 2011 10-K, 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 Bank’s 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, higher cost of funding, and changes in the value of our investment securities;
Failure to develop, implement, and distribute competitive and client value added products, which may adversely affect our ability to generate additional revenues;
Any failure to successfully implement expense reduction initiatives and realize expected efficiencies, while retaining revenues, that may result in lower 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 Company’s 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 deposits, 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 management’s 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”).

Community Reinvestment Act (“CRA”)

The Bank received a CRA rating of satisfactory during its most recent CRA examination in September 2010.

- 33 -

Current Regulatory Actions

Holding Company Written Agreement and Memorandum of Understanding. As of June 27, 2012, the Written Agreement between the Holding Company and the Federal Reserve Bank of San Francisco (“Reserve Bank”) and the Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities (“DFCS”) was terminated. The termination of this agreement ends certain restrictions on the Holding Company including the payment of dividends and paying interest on the $51 million in trust preferred securities outstanding. The Holding Company has no deferred interest on its outstanding debentures. West Coast Bank continues to be subject to a Memorandum of Understanding (“MOU”) which requires that during the life of the MOU the Bank may not pay dividends without the written consent of the Federal Deposit Insurance Corporation (“FDIC”) and DFCS and that the Bank maintain higher levels of capital than required by published capital adequacy requirements. For additional discussion of the MOU, see Item 1, “Business – Current Regulatory Actions” in our 2011 10-K.

Second Quarter 2012 Financial Overview

During the second quarter 2012, we recorded:

Net income of $6.0 million, an increase of 30% from $4.6 million in second quarter 2011;
Return on average assets of 1.01% for the quarter and 1.00% year to date June 30, 2012;
A net interest margin of 3.93%, an increase of 8 basis points from 3.85% in second quarter 2011;
An average rate paid on total deposits of .09%, a 22 basis point decline from .31% in second quarter 2011;
A benefit for credit losses of $.5 million, a reduction of $3.9 million from a $3.4 million provision for credit losses in the same quarter in 2011;
Net loan charge-offs of $.2 million, a decrease from $4.6 million in second quarter 2011; and
Noninterest expense of $21.5 million, a reduction of $1.5 million or 6% from the same quarter in 2011.

Management continued to proactively implement and execute certain strategies that have resulted in strengthening of the Company’s balance sheet, including:

The Bank’s total and tier 1 risk-based capital ratios increased to 20.88% and 19.62%, respectively, at June 30, 2012, up from 18.56% and 17.30% at June 30, 2011;
The Bank’s leverage ratio improved to 15.02% at June 30, 2012, from 13.04% a year ago; and
Total nonperforming assets decreased by 31% or $26.7 million over the past twelve months, to $59.3 million at quarter end.

Results of Operations

Three and six months ended June 30, 2012 and 2011

Net Income. Net income for the three months ended June 30, 2012, was $6.0 million, as compared to net income of $4.6 for the three months ended June 30, 2011. Earnings per diluted share for the three months ended June 30, 2012, was $0.28, as compared to earnings per diluted share of $0.22 for the three months ended June 30, 2011.

Net income for the first six months of 2012 was $11.8 million or $.55 per diluted share compared to net income of $9.7 million or $.45 per diluted share in the same period of 2011.

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Net Interest Income. 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.

	Three months ended
(Dollars in thousands)	June 30, 2012		June 30, 2011	March 31, 2012
	Average						Average						Average
	Outstanding		Interest	Yield/		Outstanding		Interest		Yield/		Outstanding		Interest	Yield/
	Balance		Earned/Paid	Rate ¹		Balance		Earned/Paid		Rate ¹		Balance		Earned/Paid	Rate ¹
ASSETS:
Interest earning balances
due from banks	$	45,260		$	32		0.28%		$	93,225			$	61	0.26%	$	35,334		$	24	0.28%
Federal funds sold		2,555			-		0.07%			4,790				1	0.07%		2,601			1	0.08%
Taxable securities		664,307			3,601		2.18%			639,930				4,276	2.68%		651,498			3,607	2.23%
Nontaxable securities ²		62,546			782		5.03%			58,186				823	5.67%		58,502			757	5.21%
Loans, including fees ³		1,479,524			18,699		5.08%			1,523,849				20,231	5.33%		1,484,353			19,209	5.20%
Total interest earning assets		2,254,192			23,114		4.12%			2,319,980				25,392	4.39%		2,232,288			23,598	4.25%

Allowance for loan losses		(33,699	)							(38,944	)						(35,249	)
Premises and equipment		23,568								26,279							24,189
Other assets		151,216								153,210							156,948
Total assets	$	2,395,277							$	2,460,525						$	2,378,176

LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest bearing demand	$	374,579		$	33		0.04%		$	365,407			$	79	0.09%	$	366,636		$	22	0.02%
Savings		127,930			16		0.05%			110,683				40	0.15%		123,725			16	0.05%
Money market		596,949			135		0.09%			654,668				583	0.36%		623,111			155	0.10%
Time deposits		151,085			247		0.66%			224,674				774	1.38%		167,417			384	0.92%
Total interest bearing deposits		1,250,543			431		0.14%			1,355,432				1,476	0.44%		1,280,889			577	0.18%

Short-term borrowings		3,143			4		0.51%			6,461				47	2.88%		505			1	0.72%
Long-term borrowings ⁴		175,098			633		1.44%			213,138				1,620	3.05%		171,000			622	1.46%
Total borrowings		178,241			637		1.44%			219,599				1,667	3.04%		171,505			623	1.46%
Total interest bearing
liabilities		1,428,784			1,068		0.30%			1,575,031				3,143	0.80%		1,452,394			1,200	0.33%
Demand deposits		621,547								578,562							585,749
Other liabilities		21,550								24,331							22,782
Total liabilities		2,071,881								2,177,924							2,060,925
Stockholders' equity		323,396								282,601							317,251
Total liabilities and
stockholders' equity	$	2,395,277							$	2,460,525						$	2,378,176
Net interest income				$	22,046								$	22,249					$	22,398

Net interest spread							3.82%								3.59%						3.92%

Net interest margin							3.93%								3.85%						4.04%

¹ Yield/rate calculations have been based on more detailed information and therefore may not recompute exactly due to rounding.

² Interest earned on nontaxable securities has been computed on a 35% tax equivalent basis.

³ Includes balances of loans held for sale and nonaccrual loans.

⁴ Includes junior subordinated debentures with average balance of $51.0 million for the three months ended June 30, 2012, and 2011, and March 31, 2012.

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Second quarter 2012 net interest income of $21.8 million decreased $.2 million from the same quarter in 2011. Net interest income on a tax equivalent basis was $22.0 million in the most recent quarter, down from $22.2 million in the second quarter of 2011. Average interest earning assets of $2.25 billion, for the second quarter of 2012, decreased $65.8 million, or 2.8%, from $2.32 billion in the same period in 2011. Average interest bearing liabilities of $1.43 billion declined $146.2 million or 9.3%, from $1.58 billion over the same period.

The second quarter 2012 net interest margin of 3.93% increased 8 basis points from second quarter 2011, largely due to lower volume and cost of interest-bearing liabilities. The reduction in interest bearing deposit and borrowing costs more than offset the effect of a year-over-year decline in average loan balances and lower yields on loan and investment portfolios. In the second half of 2011 the Bank prepaid $168.6 million in term Federal Home Loan Bank of Seattle (“FHLB”) borrowings with an average interest rate of 3.17% and entered into $120.0 million in new FHLB borrowings at an average interest rate of 1.05%. A reduction in cash equivalent investments and an increase in investment securities along with lower amortization of premiums on mortgage-backed securities in the most recent quarter also contributed to the increase in net interest income and margin compared to the second quarter of 2011.

Net interest income for the six months ended June 30, 2012, was $43.9 million, an increase of $.4 million compared to the same period in 2011. For the six months ended June 30, 2012, net interest margin was 3.98%, an increase of 15 basis points from 3.83% for the six months ended June 30, 2011. The increase in net interest margin and income was due to lower volume and cost of interest bearing liabilities.

As of June 30, 2012, the Bank had $766.3 million in floating and adjustable rate loans with interest rate floors, with $588.9 million of these loans at their floor rate. At June 30, 2011, the Bank had $695.9 million in floating and adjustable rate loans with interest rate floors, with $488.5 million of these loans at their floor rate. The floors have benefited the Company’s 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.

At June 30, 2012, management estimated that the Company’s current balance sheet remained slightly asset sensitive over a twelve month measurement period given instantaneous parallel rate shocks. Asset sensitive means that earning assets are expected to mature or reprice more quickly than interest bearing liabilities over this period under the parallel rate change scenario. Management estimates of the Company’s interest rate risk position are highly dependent upon a number of assumptions regarding the repricing behavior of various deposit, investment, and loan types in response to changes in both short-term and long-term interest rates, balance sheet composition, and other modeling assumptions, including whether interest rate shocks or gradual interest rate changes are utilized in modeling, as well as actions of competitors and customers in response to those changes. For more information see the discussion under the heading “Quantitative and Qualitative Disclosures about Market Risk” in our 2011 10-K.

Provision for Credit Losses. Bancorp recorded a benefit for credit losses for the second quarter of 2012 of $.5 million compared to a provision for credit losses of $3.4 million in the second quarter of 2011. The benefit for credit losses in the second quarter and first half of 2012 reflects a reduction in loan net charge-offs which was heavily influenced by a recovery of $1.1 million related to a commercial real estate loan and lowering certain loan category risk rating reserve percentages. The benefit for credit losses was $.4 million for the six months ended June 30, 2012, compared to a provision for credit losses of $5.5 million in the same period of 2011.

The provision for credit losses in future periods will depend primarily on economic conditions and the interest rate environment, as an increase in interest rates could put pressure on the ability of our borrowers to repay loans. For more information, see the discussion under the subheading “Allowance for Credit Losses and Net Loan Charge-offs” below.

Noninterest Income. Total noninterest income of $8.5 million for the quarter ended June 30, 2012, increased $.4 million from $8.1 million in the second quarter of 2011. The increase can be attributed to a rise in sales of Small Business Administration and residential mortgage loans, along with an increase in trust and investment services revenues. As a result of the ongoing impact related to the FDIC guidance on overdraft programs, second quarter deposit service charges declined $.4 million, or 10%, from the second quarter in 2011. Payment systems related revenues decreased $.1 million or 3% from second quarter 2011. Gains on sales of loans were $.7 million, up from $.3 million in the same quarter of 2011.

Noninterest income for the six months ended June 30, 2012 was $16.4 million, a decline of $.6 million from $17.0 million in the same period in 2011. The year-to-date decrease in noninterest income was primarily due to a $1.2 million decrease in service charges on deposit accounts partly offset by an increase of $.6 million in gains on sales of loans.

- 36 -

The following table illustrates the components of and changes in noninterest income for the periods shown:

	Three months ended											Three months ended
(Dollars in thousands)	June 30,						Change					March 31,			Change
	2012			2011			$			%		2012			$			%
Noninterest income
Service charges on deposit accounts	$	3,212		$	3,575		$	(363	)	-10	%	$	2,818		$	394		14	%
Payment systems related revenue		3,084			3,169			(85	)	-3	%		3,073			11		-
Trust and investment services revenues		1,457			1,208			249		21	%		935			522		56	%
Gains on sales of loans		722			300			422		141	%		735			(13	)	-2	%
Gains (losses) on sales of securities		228			130			98		75	%		147			81		55	%
Other-than-temporary impairment losses		-			(179	)		179		-			(49	)		49		-
Other		821			777			44		6	%		802			19		2	%
Total		9,524			8,980			544		6	%		8,461			1,063		13	%

OREO gains (losses) on sale		183			645			(462	)	-72	%		(53	)		236		445	%
OREO valuation adjustments		(1,213	)		(1,555	)		342		22	%		(521	)		(692	)	-133	%
Total		(1,030	)		(910	)		(120	)	-13	%		(574	)		(456	)	-79	%

Total noninterest income	$	8,494		$	8,070		$	424		5	%	$	7,887		$	607		8	%

Noninterest Expense. Noninterest expense for the three months ended June 30, 2012, of $21.5 million, declined $1.5 million or 6% from $23.0 million in second quarter 2011. As a result of cost savings initiatives and product changes implemented over the past year, marketing, payment system, occupancy and other noninterest expense declined. Comparing the second quarter of 2012 to the corresponding quarter in 2011, lower salary expenses were offset by higher employee benefit costs. The decline in other noninterest expenses was primarily due to a lower FDIC deposit insurance premium assessment.

Noninterest expense for the six months ended June 30, 2012, was $42.5 million, a decrease of $3.0 million from $45.5 million for the six months ended June 30, 2011. The Company’s efficiency ratio, defined as noninterest expense divided by the sum of net interest income on a tax equivalent basis and noninterest income excluding gains and losses on sales of securities, declined to 70.3% in the six months ended June 30, 2012, from 75.1% for the same period in 2011.

The following table illustrates the components of and changes in noninterest expense for the periods shown:

	Three months ended											Three months ended
(Dollars in thousands)	June 30,			June 30,		Change						March 31,		Change
	2012		2011		$	%		2011	$		%
Noninterest expense
Salaries and employee benefits	$	12,081		$	12,119	$	(38	)	0	%		$	11,478	$	603		5	%
Equipment		1,584			1,564		20		1	%			1,662		(78	)	-5	%
Occupancy		2,119			2,232		(113	)	-5	%			2,075		44		2	%
Payment systems related expense		1,075			1,350		(275	)	-20	%			1,119		(44	)	-4	%
Professional fees		1,060			976		84		9	%			1,111		(51	)	-5	%
Postage, printing and office supplies		729			862		(133	)	-15	%			819		(90	)	-11	%
Marketing		255			831		(576	)	-69	%			312		(57	)	-18	%
Communications		419			389		30		8	%			380		39		10	%
Other noninterest expense		2,154			2,635		(481	)	-18	%			2,069		85		4	%
Total	$	21,476		$	22,958	$	(1,482	)	-6	%		$	21,025	$	451		2	%

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, compliance with regulatory guidance, or a failure to manage operating and control environments could adversely affect our ability to control the Company’s expenses in the future.

Income Taxes . The Company recorded an income tax provision for the three months ended June 30, 2012, of $3.2 million compared to a $1.0 million benefit during the second quarter of 2011. The three and six months ended June 30, 2012, provision for income taxes is the result of an effective tax rate of 35% on income before income taxes. The provision for income taxes in the three and six months ended June 30, 2011, reflected the impact of the Company’s deferred tax asset valuation allowance at that time, which was subsequently fully reversed in the fourth quarter of 2011.

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Balance Sheet Overview

Balance sheet highlights are as follows:

Total assets were $2.4 billion as of June 30, 2012, substantially unchanged from December 31, 2011;
Total loans increased $25 million or 2% in the second quarter from March 31, 2012;
The combined average total cash equivalents and investment securities was $775 million, or 34% of average earning assets, during the quarter ended June 30, 2012; and
Total deposits of $1.9 billion at June 30, 2012, were down $39 million or 2% from year end 2011.

Our balance sheet management efforts are focused on increasing loan balances with new loan production within our concentration parameters to targeted customer segments as opportunities arise, limiting loan concentrations within our loan portfolio, maintaining a strong capital position until we have more certainty regarding prospective economic conditions, and retaining sufficient liquidity. We also expect to further reduce nonperforming assets by resolving nonaccrual loans and disposing of Other Real Estate Owned (“OREO”) properties.

Cash and Cash Equivalents

Total cash and cash equivalents at June 30, 2012, of $110.9 million, increased modestly from December 31, 2011, and from June 30, 2011, due to higher interest bearing deposits held in other banks.

(Dollars in thousands)	June 30,			% of		December 31,			% of		Change					June 30,		% of
	2012		total		2011	total		Amount		%	2011		total
Cash and cash equivalents:
Cash and due from banks	$	55,332		50	%	$	59,955		65	%	$	(4,623	)	-8	%	$	54,296	60	%
Federal funds sold		2,740		2	%		4,758		5	%		(2,018	)	-42	%		2,367	3	%
Interest-bearing deposits in other banks		52,815		48	%		27,514		30	%		25,301		92	%		33,583	37	%
Total cash and cash equivalents	$	110,887		100	%	$	92,227		100	%	$	18,660		20	%		90,246	100	%

Investment Portfolio

The compositions and carrying values of Bancorp’s investment securities portfolio were as follows:

	June 30, 2012		December 31, 2011		June 30, 2011
	Amortized Cost					Net				Amortized Cost					Net			Amortized Cost			Net
(Dollars in thousands)		Fair Value			Unrealized					Fair Value			Unrealized				Fair Value		Unrealized
					Gain/(Loss)						Gain/(Loss)					Gain/(Loss)
U.S. Treasury securities	$	200		$	200		$	-			$	200		$	203	$	3		$	4,223	$	4,237	$	14
U.S. Government agency securities		200,752			204,688			3,936				216,211			219,631		3,420			221,331		221,958		627
Corporate securities		14,303			8,378			(5,925	)			14,351			8,507		(5,844	)		14,344		9,506		(4,838	)
Mortgage-backed securities		399,028			410,083			11,055				419,510			428,725		9,215			447,699		454,029		6,330
Obligations of state and political subdivisions		69,046			73,630			4,584				56,003			60,732		4,729			56,067		59,122		3,055
Equity and other securities		11,266			11,905			639				11,318			12,046		728			11,371		11,852		481
Total Investment Portfolio	$	694,595		$	708,884		$	14,289			$	717,593		$	729,844	$	12,251		$	755,035	$	760,704	$	5,669

At June 30, 2012, the estimated fair value of the investment portfolio was $708.9 million, compared to $729.8 million at year end 2011, a decrease of 2.9% or $20.9 million. The net unrealized gain in the investment portfolio was $14.3 million at June 30, 2012, compared to $12.3 million at December 31, 2011.

The investment portfolio decreased $23.0 million since December 31, 2011, principally due to lower mortgage-backed securities and U.S. Government agency securities balances. U.S. Government agency securities purchased over the past year consisted mainly of securities with 4 to 6 year maturities. Mortgage-backed securities consist of 10 and 15 year fully amortizing U.S. Government agency mortgage-backed securities. The expected duration of the investment portfolio was 2.8 years at June 30, 2012, compared to 3.0 years at June 30, 2011, and 2.5 years at December 31, 2011.

The Company recorded a credit related other-than-temporary impairment (“OTTI”) charge of $.2 million pretax in the second quarter of 2011, related to a pooled trust preferred security in our investment portfolio. Based on its assessment, management determined that the impairment for this security was other-than-temporary in accordance with Generally Accepted Accounting Principles (“GAAP”) and that a charge was appropriate. 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. An additional credit related OTTI charge of $49,000 pretax relating to this same security was deemed necessary in the first quarter of 2012. Furthermore, in the fourth quarter 2011 the Company placed another pooled trust preferred security with principal in kind payments on nonaccrual status. However, while this security had an impairment loss of $1.6 million at June 30, 2012, the security had no credit related OTTI as of June 30, 2012.

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For additional detail regarding our investment securities portfolio, see Note 3 “Investment Securities” and Note 9 “Fair Value Measurement and Fair Values of Financial Instruments” of our interim financial statements included under Item 1 of this report.

Loan Portfolio

The compositions of the Bank’s loan portfolio was as follows for the periods shown:

(Dollars in thousands)	June 30,			% of total		Dec. 31,			% of total		Change			June 30,		% of total		Change
	2012		loans		2011	loans		Amount		2011	loans		Amount
Commercial loans	$	292,643		19.6	%	$	299,766		20.0	%	$	(7,123	)	$	297,817	19.6	%	$	(5,174	)
Commercial real estate construction		33,477		2.2	%		17,438		1.2	%		16,039			17,024	1.1	%		16,453
Residential real estate construction		10,549		0.7	%		12,724		0.8	%		(2,175	)		15,410	0.9	%		(4,861	)
Total real estate construction loans		44,026		2.9	%		30,162		2.0	%		13,864			32,434	2.0	%		11,592
Mortgage		59,970		4.0	%		66,610		4.4	%		(6,640	)		72,708	4.8	%		(12,738	)
Home equity loans and lines of credit		248,921		16.6	%		258,384		17.2	%		(9,463	)		264,016	17.4	%		(15,095	)
Total real estate mortgage loans		308,891		20.6	%		324,994		21.6	%		(16,103	)		336,724	22.2	%		(27,833	)
Commercial real estate loans		837,415		56.0	%		832,767		55.4	%		4,648			839,665	55.2	%		(2,250	)
Installment and other consumer loans		12,822		0.9	%		13,612		1.0	%		(790	)		14,507	1.0	%		(1,685	)
Total loans	$	1,495,797		100.0	%	$	1,501,301		100.0	%	$	(5,504	)	$	1,521,147	100.0	%	$	(25,350	)

The Bank’s total loan portfolio was $1.5 billion at June 30, 2012, a slight decrease of $5.5 million from December 31, 2011. The decline was principally a result of lower average commercial, mortgage, and home equity balances partially offset by higher commercial real estate construction and term loan balances. The Bank’s loan portfolio decreased $25.4 million from June 30, 2011, with decreases in all loan categories except commercial real estate construction. New loan commitment production was solid during the second quarter of 2012 and increased significantly from the first quarter of 2012 and from the same period last year.

Interest and fees earned on our loan portfolio are our primary source of revenue, and it will be very important to generate sufficient new loan commitment originations to increase loan balances in order to grow overall revenues. Our ability to achieve loan growth at acceptable spreads will be dependent on many factors, including the effects of competition, economic conditions in our markets, health of the real estate market, retention of key personnel and valued customers, and our ability to close loans in the pipeline.

At June 30, 2012, the Bank had outstanding loans of $.1 million to persons serving as directors, executive officers, principal stockholders and their related interests. These loans, when made, were in the ordinary course of business on substantially the same terms, including interest rates, maturities and collateral, as comparable loans made to customers not related to the Bank. At June 30, 2012, and December 31, 2011, Bancorp had no bankers’ acceptances.

Below is a discussion of our loan portfolio by category.

Commercial. At June 30, 2012, the outstanding balance of commercial loans and lines was $292.6 million or approximately 20% of the Company’s total loan portfolio. The total commercial lines and loans balance decreased by $7.1 million or 2% from $299.8 million at year end 2011.

At June 30, 2012, commercial lines of credit accounted for $186.8 million or 64% of total outstanding commercial loans and lines, while commercial term loans accounted for $105.8 million, or 36% of the total.

Real Estate Construction. At June 30, 2012, the balance of real estate construction loans was $44.0 million, an increase of $13.8 million or 46% from $30.2 million at December 31, 2011. Total real estate construction loans represented approximately 3% of the total loan portfolio at the end of the second quarter compared to 2% at December 31, 2011. Additionally, at the end of the second quarter 2012, the Bank’s real estate construction concentration at 13% 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 100% limit for such ratio.

While the supply and market demand for homes is more in balance than in recent years, the volume of new homes being constructed remains relatively modest compared to the years prior to the most recent recession. There is also uncertainty surrounding the level of shadow inventory that exists in the market. As a consequence, there is limited overall demand for new residential construction loans in our market place. While we participate in a limited way in vertical construction financing we still view residential construction lending as high risk.

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Real Estate Mortgage. The following table presents the components of our real estate mortgage loan portfolio:

											Change from
	June 30, 2012		December 31, 2011		December 31, 2011	June 30, 2011
				Percent of					Percent of									Percent of
				loan					loan									loan
(Dollars in thousands)	Amount		category		Amount	category		Amount		Percent	Amount		category
Mortgage	$	59,970		19	%	$	66,610		21	%	$	(6,640	)	-10	%	$	72,708	22	%
Home equity loans and lines of credit		248,921		81	%		258,384		79	%		(9,463	)	-4	%		264,016	78	%
Total real estate mortgage	$	308,891		100	%	$	324,994		100	%	$	(16,103	)	-5	%	$	336,724	100	%

At June 30, 2012, real estate mortgage loans totaled $308.9 million or approximately 21% of the Company’s total loan portfolio. This loan category included $6.6 million in nonstandard mortgage loans, a decline from $8.5 million at December 31, 2011, and $10.5 million a year ago. At June 30, 2012, mortgage loans excluding nonstandard mortgage loans measured $53.4 million or 17% of total real estate mortgage loans, a decline from $62.2 million and 19%, respectively, a year ago. Standard residential mortgage loans to borrowers represented $27.2 million of the mortgage loan category, while the remaining $26.2 million were associated with commercial interests utilizing residences as collateral. Such commercial interests included $18.3 million related to businesses, $1.9 million related to condominiums, and $2.2 million related to ownership of residential land.

Home equity lines and loans represented 81% of the real estate mortgage portfolio, or $248.9 million at June 30, 2012, and declined $15.1 million from $264.0 million a year earlier. The overall home equity line utilization measured approximately 62% at June 30, 2012, which was relatively unchanged from the line utilization a year ago. The Bank’s home equity portfolio balances have trended lower as new loan and line originations within this portfolio slowed significantly over the past few years.

The following table shows home equity lines of credit and loans by market areas at the dates shown and, with the exception of Bend where we no longer have a branch presence, indicates a geographic distribution of balances remaining fairly representative of our branch presence in these markets:

(Dollars in thousands)	June 30, 2012					December 31, 2011
Region	Amount		Percent of total		Amount	Percent of total
Portland-Beaverton, Oregon / Vancouver, Washington	$	118,201		47.5	%	$	122,543	47.4	%
Salem, Oregon		59,780		24.0	%		61,019	23.6	%
Oregon non-metropolitan area		27,033		10.9	%		27,419	10.6	%
Olympia, Washington		15,784		6.3	%		17,268	6.7	%
Washington non-metropolitan area		12,831		5.2	%		12,859	5.0	%
Bend, Oregon		4,048		1.6	%		4,377	1.7	%
Other		11,244		4.5	%		12,899	5.0	%
Total home equity loan and line portfolio	$	248,921		100	%	$	258,384	100.0	%

Should weaknesses in the housing market continue, coupled with persistent high unemployment in our markets, increased real estate mortgage delinquencies and charge-offs may result going forward. Additionally, there may be requests made in the future for repurchases of real estate mortgage loans previously sold by the Company in the secondary market. At June 30, 2012, the number of repurchase requests and the balances associated with those requests were not material.

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Commercial Real Estate. The composition of the commercial real estate loan portfolio based on collateral type was as follows:

(Dollars in thousands)	June 30, 2012		December 31, 2011		June 30, 2011
				% of loan					% of loan				% of loan
	Amount		category		Amount	category		Amount		category
Office Buildings	$	174,783		20.9	%	$	173,295		20.8	%	$	185,521	22.1	%
Retail Facilities		115,122		13.7	%		118,678		14.3	%		111,832	13.3	%
Multi-Family - 5+ Residential		79,390		9.5	%		63,027		7.6	%		63,368	7.6	%
Commercial/Agricultural		60,229		7.2	%		60,094		7.2	%		59,899	7.1	%
Medical Offices		58,265		6.9	%		60,993		7.3	%		57,162	6.8	%
Industrial parks and related		52,682		6.3	%		55,392		6.7	%		56,325	6.7	%
Manufacturing Plants		47,783		5.7	%		51,852		6.2	%		49,523	6.0	%
Hotels/Motels		44,969		5.4	%		35,893		4.3	%		35,390	4.2	%
Mini Storage		22,437		2.7	%		19,037		2.3	%		22,789	2.7	%
Assisted Living		21,717		2.6	%		22,040		2.6	%		23,196	2.8	%
Food Establishments		19,188		2.3	%		19,054		2.3	%		18,588	2.2	%
Land Development and Raw Land		12,031		1.4	%		17,278		2.1	%		21,289	2.5	%
Other		128,819		15.4	%		136,134		16.3	%		134,783	16.0	%
Total commercial real estate loans	$	837,415		100.0	%	$	832,767		100.0	%	$	839,665	100.0	%

The total commercial real estate portfolio increased $4.6 million or 0.6% from $832.8 million at December 31, 2011, to $837.4 million at June 30, 2012. At June 30, 2012, loans secured by office buildings and retail facilities accounted for 34.6% of the commercial real estate portfolio, relatively unchanged from prior periods shown.

The composition of the commercial real estate loan portfolio by occupancy type was as follows:

	June 30, 2012		December 31, 2011		Change	June 30, 2011
				Mix					Mix					Mix
(Dollars in thousands)	Amount		Percent		Amount	Percent		Amount		Percent	Amount		Percent
Owner occupied	$	362,870		43	%	$	390,589		47	%	$	(27,719	)	-4	%	$	389,930	46	%
Non-owner occupied		474,545		57	%		442,178		53	%		32,367		4	%		449,735	54	%
Total commercial real estate loans	$	837,415		100	%	$	832,767		100	%	$	4,648				$	839,665	100	%

Over the periods shown above, the balance of owner occupied commercial real estate loans has declined while that of non-owner occupied has increased. At June 30, 2012, the Bank’s commercial real estate concentration, at 128% 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.

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As shown in the table below, the distribution of our commercial real estate portfolio at June 30, 2012, with the exception of Bend, was fairly consistent with our branch presence in our operating markets. The average size of our commercial real estate loans was approximately $.5 million at June 30, 2012.

(Dollars in thousands)	June 30, 2012
				Number of		Percent of
Region	Amount		loans		total
Portland-Beaverton, Oregon / Vancouver, Washington	$	419,039		690		50	%
Salem, Oregon		171,155		376		20	%
Oregon non-metropoliton area		55,402		153		7	%
Seattle-Tacoma-Bellevue, Washington		36,573		48		4	%
Washington non-metropoliton area		29,825		100		4	%
Olympia, Washington		29,644		74		4	%
Bend, Oregon		22,184		23		3	%
Other		73,593		115		8	%
Total commercial real estate loans	$	837,415		1,579		100	%

The following table shows the commercial real estate portfolio by year of stated maturity:

	June 30, 2012
				Number of		Percent of
(Dollars in thousands)	Amount		loans		total
2012	$	34,065		50		4.1	%
2013		52,275		105		6.2	%
2014 & After		751,075		1,424		89.7	%
Total commercial real estate loans	$	837,415		1,579		100.0	%

At June 30, 2012, commercial real estate loans with stated loan maturities in 2012 and 2013 totaled $86.3 million or a relatively modest 10.3% of the $837.4 million total commercial real estate portfolio. While qualified commercial real estate borrowers may be incented to refinance such loans given the low interest rate environment, commercial real estate markets also continue to be vulnerable to financial and valuation pressures that may limit refinance options for certain borrowers and negatively impact their ability to perform under existing loan agreements. Declining values of commercial real estate or higher market interest rates may also have an adverse effect on the ability of borrowers with maturing loans to satisfy loan to value ratios required to renew such loans.

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Nonperforming Assets, Troubled Debt Restructurings, OREO and Delinquencies

Nonperforming Assets. Nonperforming assets consist of nonaccrual loans, loans past due more than 90 days and still accruing interest and OREO. The following table presents information with respect to total nonaccrual loans by category and OREO for the quarterly periods presented:

	June 30, 2012		March 31, 2012	December 31, 2011		September 30, 2011		June 30, 2011
				Percent of
				loan
(Dollars in thousands)	Amount		category	Amount		Amount		Amount		Amount
Commercial loans	$	6,199		2.1	%		$	6,482			$	7,750		$	9,987		$	9,280
Real estate construction loans:
Commercial real estate construction		3,750		11.2	%			3,749				3,750			3,886			4,357
Residential real estate construction		1,936		18.4	%			1,981				2,073			3,311			3,439
Total real estate construction loans		5,686		12.9	%			5,730				5,823			7,197			7,796
Real estate mortgage loans:
Mortgage		7,044		11.7	%			10,744				9,624			10,877			11,527
Home equity loans and lines of credit		2,239		0.9	%			2,528				2,325			3,285			2,755
Total real estate mortgage loans		9,283		3.0	%			13,272				11,949			14,162			14,282
Commercial real estate loans		12,384		1.5	%			16,648				15,070			21,513			19,263
Installment and other consumer loans		-		0.0	%			1				5			6			1
Total nonaccrual loans		33,552		2.2	%			42,133				40,597			52,865			50,622
90 day past due and accruing interest		-						-				-			-			-
Total nonperforming loans		33,552		2.2	%			42,133				40,597			52,865			50,622
Other real estate owned		25,726						27,525				30,823			30,234			35,374
Total nonperforming assets	$	59,278					$	69,658			$	71,420		$	83,099		$	85,996

Nonperforming loans to total loans		2.24	%					2.86	%			2.70	%		3.52	%		3.33	%
Nonperforming assets to total assets		2.46	%					2.89	%			2.94	%		3.30	%		3.49	%

Delinquent loans 30-89 days past due	$	3,422					$	4,095			$	4,273		$	5,556		$	9,961
Delinquent loans to total loans		0.23	%					0.28	%			0.28	%		0.37	%		0.65	%

At June 30, 2012, total nonperforming assets were $59.3 million, or 2.46% of total assets, compared to $71.4 million, or 2.94%, at December 31, 2011, and $86.0 million or 3.49% a year ago.

Total nonaccrual loans of $33.6 million declined $7.0 million or 17% from year end and $17.0 million or 34% from June 30, 2011. Nonaccrual loans declined in every loan category.

Troubled Debt Restructurings. At June 30, 2012, Bancorp had $32.1 million in loans classified as troubled debt restructurings of which $14.1 million was on an interest accruing status and $18.0 million on nonaccrual status. Troubled debt restructurings were $37.6 million at December 31, 2011, of which $15.8 million was on an interest accruing status and $21.8 million on nonaccrual status. All troubled debt restructurings were considered impaired at June 30, 2012, and at year end 2011. The modifications granted on troubled debt restructurings were due to borrower financial difficulty, and generally provide for a modification of loan terms. For more information regarding Bancorp’s troubled debt restructurings and loans, see Note 4 “Loans and Allowance for Credit Losses” to the Company’s audited consolidated financial statements included under the section “Financial Statements and Supplementary Data” in Item 8 of the 2011 10-K.

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Other Real Estate Owned. The following table presents activity in the total OREO portfolio for the periods shown:

(Dollars in thousands)	Total OREO related activity
	Amount		Number
Full year 2011:
Beginning balance January 1, 2011	$	39,459		402
Additions to OREO		21,662		74
Valuation adjustments		(4,832	)	-
Disposition of OREO properties		(25,466	)	(212	)
Ending balance December 31, 2011	$	30,823		264

First Quarter 2012
Additions to OREO	$	810		9
Valuation adjustments		(521	)	-
Disposition of OREO properties		(3,587	)	(27	)
Ending balance March 31, 2012	$	27,525		246

Second Quarter 2012
Additions to OREO	$	3,304		28
Valuation adjustments		(1,213	)	-
Disposition of OREO properties		(3,890	)	(30	)
Ending balance June 30, 2012	$	25,726		244

Year to Date 2012
Beginning balance January 1, 2012	$	30,823		264
Additions to OREO		4,114		37
Valuation adjustments		(1,734	)	-
Disposition of OREO properties		(7,477	)	(57	)
Ending balance June 30, 2012	$	25,726		244

During the second quarter 2012 the Company added $3.3 million in OREO property, disposed of $3.9 million in OREO property and recorded OREO valuation adjustments of $1.2 million. OREO valuation adjustments are recorded as other noninterest income. At June 30, 2012, the OREO portfolio consisted of 244 properties, which was valued at $25.7 million and reflected write-downs of 55% from original loan principal. The largest balances in the OREO portfolio at June 30, 2012, were attributable to income producing properties, followed by homes and land, all of which are located within the region in which we operate, with the exception of Bend, Oregon, where we no longer have a branch presence. For more information regarding the Company’s OREO, see the discussion under the subheading “OREO” and “Critical Accounting Policies” included in Item 7 of the Company’s 2011 10-K.

The following table presents segments of the OREO portfolio for the periods shown:

(Dollars in thousands)	June 30,			# of		March 31,		# of	December 31,		# of
	2012		properties		2012		properties	2011	properties
Income producing properties	$	8,106		13		$	9,352	15	$	10,282	15
Homes		5,539		20			5,228	16		6,008	17
Land		4,780		15			4,710	14		5,049	16
Residential site developments		3,104		126			3,367	136		3,506	146
Lots		1,999		42			2,453	49		2,932	51
Multifamily		1,570		20			408	4		428	4
Condominiums		325		2			1,641	6		2,252	9
Commercial site developments		303		6			366	6		366	6
Total	$	25,726		244		$	27,525	246	$	30,823	264

Expenses from the acquisition, maintenance and disposition of OREO properties are included in other noninterest expense in the statements of income. Our operating results will be impacted by our ability to dispose of OREO properties at prices that are in line with current valuation expectations. Further decline in real estate market values in our area would lead to additional OREO valuation adjustments or losses upon final disposal, which would have an adverse effect on our results of operations.

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Delinquencies. Bancorp also monitors delinquencies, defined as loan balances 30-89 days past due, not on nonaccrual status, as an indicator of future nonperforming assets. Total delinquencies were $3.4 million or .23% of total loans at June 30, 2012, down from $4.3 million or .28% at December 31, 2011, and $10.0 million or .65% at June 30, 2011.

The following table summarizes total delinquent loan balances by loan category as of the dates shown:

(Dollars in thousands)	June 30, 2012		December 31, 2011	June 30, 2011
				Percent of							Percent of					Percent of
	Amount		loan category	Amount		loan category		Amount		loan category
Loans 30-89 days past due, not on nonaccrual status
Commercial	$	929		0.32	%		$	683			0.23	%	$	1,919		0.64	%
Real estate construction		-		0.00	%			-			0.00	%		-		0.00	%
Real estate mortgage:
Mortgage		657		1.10	%			1,355			2.03	%		988		3.54	%
Home equity loans and lines of credit		782		0.31	%			1,034			0.40	%		302		0.11	%
Total real estate mortgage		1,439		0.47	%			2,389			0.74	%		1,290		0.38	%
Commercial real estate		1,036		0.12	%			1,145			0.14	%		6,746		0.80	%
Installment and consumer		18		0.14	%			56			0.41	%		6		0.05	%
Total loans 30-89 days past due, not in nonaccrual status	$	3,422					$	4,273					$	9,961

Delinquent loans past due 30-89 days to total loans		0.23	%					0.28	%					0.65	%

Allowance for Credit Losses and Net Loan Charge-offs

Allowance for Credit Losses. An allowance for credit losses has been established based on management’s best estimate, as of the balance sheet date, of probable losses inherent in the loan portfolio. For more information regarding the Company’s allowance for credit losses and net loan charge-offs, see the discussion under the subheadings “Credit Management”, “Allowance for Credit Losses and Net Loan Charge-offs” and “Critical Accounting Policies” included in Item 7 of the Company’s 2011 10-K.

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The following table is a summary of activity in the allowance for credit losses for the quarterly periods presented:

(Dollars in thousands)	June 30,			March 31,			Dec. 31,			Sep. 30,			June 30,
	2012		2012	2011		2011	2011
Loans outstanding at end of period	$	1,495,797		$	1,470,848		$	1,501,301		$	1,503,624		$	1,521,147
Average loans outstanding during the period		1,479,226			1,482,522			1,498,437			1,515,091			1,523,170

Allowance for credit losses, beginning of period		34,634			35,983			37,016			39,231			40,429
Total provision (benefit) for credit losses		(492	)		89			1,499			1,132			3,426
Loan charge-offs:
Commercial		(379	)		(634	)		(710	)		(1,462	)		(460	)
Commercial real estate construction		-			-			(136	)		(472	)		(648	)
Residential real estate construction		-			(3	)		(143	)		(95	)		(218	)
Total real estate construction		-			(3	)		(279	)		(567	)		(866	)
Mortgage		(122	)		(691	)		(191	)		(257	)		(230	)
Home equity lines of credit		(354	)		(548	)		(760	)		(547	)		(2,301	)
Total real estate mortgage		(476	)		(1,239	)		(951	)		(804	)		(2,531	)
Commercial real estate		(549	)		(62	)		(834	)		(800	)		(563	)
Installment and consumer		(70	)		(191	)		(130	)		(32	)		(201	)
Overdraft		(182	)		(228	)		(288	)		(279	)		(239	)
Total loan charge-offs		(1,656	)		(2,357	)		(3,192	)		(3,944	)		(4,860	)
Recoveries:
Commercial		156			639			418			281			139
Commercial real estate construction		-			-			88			-			-
Residential real estate construction		29			2			3			182			5
Total real estate construction		29			2			91			182			5
Mortgage		30			157			14			11			8
Home equity loans and lines of credit		18			6			37			31			10
Total real estate mortgage		48			163			51			42			18
Commercial real estate		1,129			21			22			21			2
Installment and consumer		13			26			11			26			16
Overdraft		39			68			67			45			56
Total recoveries		1,414			919			660			597			236
Net loan charge-offs		(242	)		(1,438	)		(2,532	)		(3,347	)		(4,624	)
Allowance for credit losses, end of period	$	33,900		$	34,634		$	35,983		$	37,016		$	39,231

Components of allowance for credit losses
Allowance for loan losses	$	33,132		$	33,854		$	35,212		$	36,314		$	38,422
Reserve for unfunded commitments		768			780			771			702			809
Total allowance for credit losses	$	33,900		$	34,634		$	35,983		$	37,016		$	39,231

Net loan charge-offs to average loans annualized		0.07	%		0.39	%		0.67	%		0.88	%		1.22	%

Allowance for loan losses to total loans		2.22	%		2.30	%		2.35	%		2.42	%		2.53	%
Allowance for credit losses to total loans		2.27	%		2.35	%		2.40	%		2.46	%		2.58	%

Allowance for loan losses to nonperforming loans		99	%		80	%		87	%		69	%		76	%
Allowance for credit losses to nonperforming loans		101	%		82	%		89	%		70	%		78	%

- 46 -

At June 30, 2012, the Company’s allowance for credit losses was $33.9 million, consisting of a $28.7 million formula allowance, a $3.9 million unallocated allowance, a $.5 million specific allowance and a $.8 million reserve for unfunded commitments. At December 31, 2011, our allowance for credit losses was $36.0 million, consisting of a $30.3 million formula allowance, a $4.4 million unallocated allowance, a $.5 million specific allowance and a $.8 million reserve for unfunded commitments. The reduction in provision for credit losses in the second quarter 2012, compared to the same quarter of 2011, reflects lower net loan charge-offs, adjustments being made to loan category risk rating reserve percentages, and an improving risk profile of the loan portfolio. The level of net loan charge-offs and the benefit for credit losses in the second quarter of 2012 were both heavily influenced by a recovery of $1.1 million related to a commercial real estate loan. At June 30, 2012, the allowance for credit losses was 2.27% of total loans, a decrease from 2.40% at December 31, 2011. At June 30, 2012, the allowance for credit losses was 101% of nonperforming loans, as compared to 89% at December 31, 2011, and 78% twelve months earlier.

Overall, we believe that the allowance for credit losses is adequate to absorb probable losses in the loan portfolio at June 30, 2012, although there can be no assurance that future loan losses will not exceed our current estimates. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. Please see Item 1A “Risk Factors” in our 2011 10-K.

Net Loan Charge-offs. For the quarter ended June 30, 2012, total net loan charge-offs were $.2 million, down from $4.6 million in the second quarter of 2011. Year-over-year second quarter, net loan charge-offs declined across nearly every category. Second quarter 2012 annualized net loan charge-offs to total average loans outstanding was 0.07%, down from 1.22% in the same quarter last year and from 0.39% in the previous quarter.

Deposits and Borrowings

The following table summarizes the quarterly average dollar amount in, and the interest rate paid on, each of the deposit and borrowing categories during the second quarters of 2012 and 2011 and first quarter 2012:

	Second Quarter 2012						First Quarter 2012						Second Quarter 2011
(Dollars in thousands)	Quarterly Average		Percent		Rate		Quarterly Average		Percent		Rate		Quarterly Average		Percent		Rate
	Balance		of total		Paid		Balance		of total		Paid		Balance		of total		Paid
Non-interest bearing demand	$	621,547	33.2	%	-		$	585,749	31.4	%	-		$	578,562	29.9	%	-
Interest bearing demand		374,579	20.0	%	0.04	%		366,636	19.6	%	0.02	%		365,407	18.9	%	0.09	%
Savings		127,930	6.8	%	0.05	%		123,725	6.6	%	0.05	%		110,683	5.7	%	0.15	%
Money market		596,949	31.9	%	0.09	%		623,111	33.4	%	0.10	%		654,668	33.9	%	0.36	%
Time deposits		151,085	8.1	%	0.66	%		167,417	9.0	%	0.92	%		224,674	11.6	%	1.38	%
Total deposits		1,872,090	100.0	%	0.09	%		1,866,638	100.0	%	0.12	%		1,933,994	100.0	%	0.31	%

Short-term borrowings		3,143			0.51	%		505			0.72	%		6,461			2.88	%
Long-term borrowings ¹		175,098			1.44	%		171,000			1.46	%		213,138			3.05	%
Total borrowings		178,241			1.44	%		171,505			1.46	%		219,599			3.04	%

Total deposits and borrowings	$	2,050,331			0.30	%	$	2,038,143			0.33	%	$	2,153,593			0.80	%

¹ Long-term borrowings include junior subordinated debentures.

Second quarter 2012 average total deposits of $1.87 billion declined 3%, or $61.9 million from the same quarter in 2011. This decrease was due to reductions in money market deposits and higher cost time deposit balances, which declined $57.7 million and $73.6 million, respectively, from the same quarter last year. Time deposits represented just 8% of the Bank’s average total deposits in the most recent quarter, a decline from 12% in the second quarter of 2011. The combination of the Bank’s favorable shift in deposit mix and deposit pricing strategies helped reduce the average rate paid on total deposits to 0.09% in second quarter 2012, a decline of 22 basis points from 0.31% in the same quarter of 2011 and a decline of three basis points from .12% in the first quarter of 2012. Whether we will continue to be successful maintaining our low cost deposit base will depend on various factors, including deposit pricing strategies, market interest rates, the effects of competition, client behavior, and the impact of regulatory changes and requirements.

At June 30, 2012, the Bank did not hold any brokered deposits as compared to $6.0 million at December 31, 2011, and $7.6 million at June 30, 2011. Brokered deposits were not replaced as they matured.

The average balance of long-term borrowings decreased $38.0 million to $175.1 million in the quarter ended June 30, 2012, compared to the same period last year. In the second half of 2011, the Company elected to prepay its FHLB term borrowings of $169 million and to enter into $120 million in new term borrowings with the FHLB in conjunction with managing its interest rate sensitivity position. The rate on the new term borrowings is 1.05%, a reduction from 3.17% on the amount prepaid.

At June 30, 2012, the balance of junior subordinated debentures issued in connection with our prior issuances of trust preferred securities was $51.0 million or unchanged from June 30, 2011. Bancorp has no deferred interest on its outstanding debentures.

- 47 -

Capital Resources

The Board of Governors of the Federal Reserve System (“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 these topics, see the discussions under the subheadings “Capital Adequacy Requirements” in the section “Supervision and Regulation” included in Item 1 of the Company’s 2011 10-K. The following table summarizes the capital measures of Bancorp and the Bank for the periods shown:

	West Coast Bancorp			West Coast Bank		Minimum requirements
(Dollars in thousands)	June 30,		December 31,				June 30,		December 31,			Adequately	Well
	2012		2011		2011			2012		2011		2011	Capitalized		Capitalized
Tier 1 risk-based capital ratio	20.33%			17.99%			19.36%				19.62%		17.30%			18.66%		4.00%	6.00%
Total risk-based capital ratio	21.50%			19.25%			20.62%				20.88%		18.56%			19.92%		8.00%	10.00%
Leverage ratio	15.55%			13.55%			14.61%				15.02%		13.04%			14.09%		4.00%	5.00%

Total stockholders' equity	$	328,017		$	285,569		$	314,479			$	365,798	$	323,631		$	352,187

Bancorp’s total risk-based capital ratio increased to 21.50% at June 30, 2012, from 20.62% at December 31, 2011, and 19.25% at June 30, 2011, while Bancorp's Tier 1 risk-based capital ratio increased to 20.33% at the most recent quarter end, from 19.36% at year end 2011 and 17.99% at June 30, 2011. The increases in capital ratios were primarily due to the Company’s continued profitability. Also, the year-over-year increases in the capital ratios were positively impacted by the effect of fully reversing the Company’s deferred tax asset valuation allowance in the fourth quarter of 2011.

The total risk-based capital ratio at the Bank improved to 20.88% at June 30, 2012, from 19.92% at year end 2011, and 18.56% at June 30, 2011, while the Bank’s Tier 1 risk-based capital ratio increased to 19.62% from 18.66% and 17.30% as of the same respective dates. Additionally, the leverage ratio at the Bank improved to 15.02% at June 30, 2012, from 14.09% at year end 2011, and 13.04% a year ago. The total risk based capital ratios of Bancorp include $51.0 million of junior subordinated debentures which qualified as Tier 1 capital at June 30, 2012, under guidance issued by the Federal Reserve. At this time, Bancorp expects to continue to rely on these junior subordinated debentures as part of its regulatory capital, at the level permitted by applicable regulators. The Company will monitor the finalization of the Basel III Capital Rules.

Bancorp’s stockholders’ equity was $328.0 million at June 30, 2012, up from $314.5 million at year end 2011 and $285.6 million at June 30, 2011.

- 48 -

Liquidity and Sources of Funds

The Bank’s sources of funds include customer deposits, loan repayments, borrowings from the FHLB, maturities of investment securities, sales of “Available for Sale” securities, loan and OREO sales, net income, and loans taken out at the Reserve Bank discount window. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows, unscheduled loan prepayments, and loan and OREO sales are not. Deposit inflows, sales of securities, loan and OREO properties, and unscheduled loan prepayments may, amongst other factors, be influenced by general interest rate levels, interest rates available on other investments, competition, market and general economic conditions.

Deposits are our primary source of funds, and at June 30, 2012, our loan to deposit ratio was 80%, relatively unchanged from December 31, 2011, and June 30, 2011. Declining loan balances over the past few years caused the collective balance of interest bearing deposits and investment securities portfolio of $764.4 million to account for a significant 34% of total earning assets at June 30, 2012. In light of our substantial liquidity position we continued to reduce brokered and other time deposits during the most recent quarter.

The following table summarizes the Bank’s primary liquidity, on-balance sheet liquidity, and net non-core funding dependency ratios. The primary liquidity ratio represents the sum of net cash and short-term, marketable assets and available borrowing lines divided by total deposits. The on-balance sheet 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. T he Bank’s primary liquidity, on-balance sheet liquidity, and net non-core funding dependency ratios remained strong at quarter end:

	June 30,			December 31,
	2012		2011
Primary liquidity	50	%		45	%
On-balance sheet liquidity	27	%		26	%
Net non-core funding dependency	5	%		6	%

At June 30, 2012, the Bank had outstanding borrowings of $127.9 million, against its $601.0 million in established borrowing capacity with the FHLB, as compared to $120.0 million outstanding against its $440.4 million in established borrowing capacity at December 31, 2011. The borrowing capacity at the FHLB increased from year end as the FHLB increased the amount they are willing to lend against the Bank’s commercial real estate loan collateral. The Bank’s borrowing facility is subject to collateral and stock ownership requirements. The Bank also had an available discount window primary credit line with the Reserve Bank of approximately $39.9 million at June 30, 2012, with no balance outstanding at either June 30, 2012, or December 31, 2011. The Reserve Bank line is subject to collateral requirements.

On October 6, 2010, the Bank entered into a Memorandum of Understanding with the FDIC and DFCS under which the Bank may not pay dividends to the holding company without the consent of the FDIC and the DFCS. At June 30, 2012, the holding company did not have any borrowing arrangements of its own.

Off-Balance Sheet Arrangements

At June 30, 2012, the Bank had commitments to extend credit of $563.1 million, which was down 2.0% compared to $574.3 million at December 31, 2011. For additional information regarding off balance sheet arrangements and future financial commitments, see Note 7 “Commitments and Contingent Liabilities” in the financial statements included under Item 1 of this report.

Critical Accounting Policies

Management has identified as our most critical accounting policies, the calculation of our allowance for credit losses, valuation of OREO, and estimates relating to income taxes. Each of these policies are discussed in our 2011 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies.”

- 49 -

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the market risks disclosure under Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2011 10-K.

Item 4. Controls and Procedures

Evaluation of 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 SEC’s rules and forms and accumulated and communicated to our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. Our management has evaluated, with the participation and under the supervision of our CEO and 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 Company’s 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 SEC’s 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.

Changes in Internal Control Over Financial Reporting

There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

- 50 -

PART II: OTHER INFORMATION

Item 1. 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.

Item 1A. Risk Factors

Expiration of the Dodd-Frank Deposit Insurance Provision as scheduled on December 31, 2012, may have a material adverse effect on the Bank's ability to grow or retain noninterest-bearing transaction accounts. Extension of the Dodd-Frank Deposit Insurance Provision may impose additional insurance premiums on the Bank.

Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides temporary unlimited deposit insurance coverage for noninterest-bearing accounts at all FDIC-insured depository institutions. All funds in noninterest-bearing transaction accounts held at the Bank are fully insured under the Dodd-Frank Deposit Insurance Provision, which is effective from December 31, 2010, through December 31, 2012. Generally, other transaction accounts are only insured up to $250,000. If the Dodd-Frank Deposit Insurance Provision is not extended past December 31, 2012, depositors may withdraw uninsured deposits in excess of $250,000 from the Bank or may withdraw their entire deposit portfolio from the Bank. If such deposits are withdrawn, the Bank may experience a negative impact on its net interest income and margin. Alternatively, extension of the Dodd-Frank Deposit Insurance Provision may require that the Bank pay additional premiums for coverage of deposits in excess of $250,000, which may have an adverse effect on the Bank's net income.

For detailed discussion of additional risks that may affect our business, see Item 1A, “Risk Factors” in our 2011 10-K .

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)		None

(b)		None

(c)		The following table provides information about repurchases of common stock by the Company during the quarter ended June 30, 2012:

					Total Number of Shares
					Purchased as Part of Publicly		Maximum Number of Shares Remaining
	Total Number of Shares	Average Price Paid			Announced Plans or Programs		at Period End that May Be Purchased
Period	Purchased (1)	per Share		(2)		Under the Plans or Programs
4/1/12 - 4/30/12	21,376	$	20.14		-		210,364
5/1/12 - 5/31/12	3,179	$	18.88		-		210,364
6/1/12 - 6/30/12	16	$	19.17		-		210,364
Total for quarter	24,571				-

	(1)		Shares repurchased by Bancorp include shares acquired from employees in connection with stock option exercises and cancellation of restricted stock to pay withholding taxes totaling 21,376 shares, 3,179 shares, and 16 shares, respectively, for the periods indicated. There were no shares repurchased in the periods indicated pursuant to the Company’s corporate stock repurchase program publicly announced in July 2000 (the “Repurchase Program”) and described in note 2 below.

	(2)		Under the Repurchase Program, the board of directors originally authorized the Company to repurchase up to 66,000 common shares, which amount was increased by 110,000 shares in September 2000, by .2 million shares in September 2001, by .2 million shares in September 2002, by .2 million shares in April 2004, and by .2 million shares in September 2007 for a total authorized repurchase amount as of June 30, 2012, of approximately 1.0 million shares.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

- 51 -

Item 6. Exhibits

Exhibit No .		Exhibit
3.2		Amended and Restated Bylaws of West Coast Bancorp (as amended through February 23,2012).

31.1		Certification of CEO under Rule 13(a) – 14(a) of the Exchange Act.

31.2		Certification of CFO under Rule 13(a) – 14(a) of the Exchange Act.

32		Certification of CEO and CFO under 18 U.S.C. Section 1350.

101.		INS XBRL Instance Document

101.		SCH XBRL Taxonomy Extension Schema Document

101.		PRE XBRL Taxonomy Extension Presentation Linkbase Document

101.		LAB XBRL Taxonomy Extension Label Linkbase Document

101.		CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.		DEF XBRL Taxonomy Extension Definition Linkbase Document

- 52 -

SIGNATURES

Pursuant to the requirements 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.

	WEST COAST BANCORP
	(Registrant)


Dated: August 8, 2012	/s/ Robert D. Sznewajs
	Robert D. Sznewajs
	President and Chief Executive Officer


Dated: August 8, 2012	/s/ Anders Giltvedt
	Anders Giltvedt
	Executive Vice President and Chief Financial Officer

- 53 -

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