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Share Name | Share Symbol | Market | Type |
---|---|---|---|
West Coast Bancorp (MM) | NASDAQ:WCBO | NASDAQ | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 24.28 | 0 | 01:00:00 |
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 issuers 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. | Managements 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 Companys interim consolidated financial statements and related notes should be read in conjunction with the audited financial statements and related notes, including the Companys 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 Companys reporting period beginning after December 15, 2011, and was applied prospectively. The adoption of this guidance did not have a material impact on the Companys consolidated statement of income, its consolidated balance sheet, or its consolidated statement of cash flows.
In June 2011, the FASB issued guidance within ASU 2011-05, Presentation of Comprehensive Income. This ASU amends current guidance to allow a company the option of presenting the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for a company to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense (benefit) related to the total of other comprehensive income items. The amendments do not affect how earnings per share is calculated or presented. The provisions of ASU 2011-05 were effective for the Companys 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 Companys 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 Bancorps 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 Bancorps policy to issue new shares for stock option exercises and restricted stock awards. Bancorp expenses stock options and restricted stock on a straight line basis over the applicable vesting term. Restricted stock granted under the 2002 Plan generally 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 Bancorps 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.
- 11 -
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 Companys debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI). Our analysis takes into consideration current market conditions, length and severity of impairment, extent and nature of the change in fair value, issuer ratings, and whether or not the Company intends to, or may be required to, sell debt securities before recovering any unrealized losses.
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 Companys 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 Companys 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:
- 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 |
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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 |
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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 |
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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 Banks exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual 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 Banks 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 customers creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on the Banks credit evaluation of the customer. Collateral held varies, but may include real property, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. 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 customers performance or payment obligation to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Bancorp is periodically party to litigation arising in the ordinary course of business. Based on information currently known to management, although there are uncertainties inherent in litigation, we do not believe there is any legal action to which Bancorp or any of its subsidiaries is a party that, individually or in the aggregate, will have a materially adverse effect on Bancorps financial condition and results of operations, cash flows, or liquidity.
- 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 Bancorps reportable segments and the reconciliation to Bancorps consolidated results are shown in the following table. The Other column includes Bancorps 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 |
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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 instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instruments 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 entitys 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 Companys Asset/Liability Management Committee (ALCO) oversees the banks 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 Companys 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 loans effective interest rate. Loans may also, as a practical expedient, be measured at the loans 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 Bancorps 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 Companys 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.
- 32 -
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the audited consolidated financial statements and related notes to those statements 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 Companys actual results could be quite different from those expressed or implied by the forward-looking statements. Words such as could, may, should, plans, believes, anticipates, estimates, predicts, expects, projects, potential, or continue, or words of similar meaning, often help identify forward-looking statements, which include any statements that expressly or implicitly predict future events, results, or performance. Factors that could cause events, results or performance to differ from those expressed or implied by our forward-looking statements include, among others, risks discussed in Item 1A, Risk Factors of the 2011 10-K, risks discussed elsewhere in the text of this report, as well as the following specific factors:
Furthermore, forward-looking statements are subject to risks and uncertainties related to the Companys ability to, among other things: dispose of properties or other assets obtained through foreclosures at expected prices and within a reasonable period of time; attract and retain key personnel; generate loan and deposit balances at projected spreads; sustain fee generation including gains on sales of loans; maintain asset quality and control risk; limit the amount of net loan charge-offs; adapt to changing customer 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 managements analysis only as of the date of the statements. We do not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.
Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission (SEC).
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:
Management continued to proactively implement and execute certain strategies that have resulted in strengthening of the Companys balance sheet, including:
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.
- 34 -
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% |
- 35 -
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 Companys loan yield and net interest income and margin over the past few years given the extremely low market interest rate environment. If interest rates rise, the Company anticipates yields on loans at floors will lag underlying changes in market interest rates, although the overall effect will depend on how quickly and dramatically market interest rates rise, as well as how the slope of the market yield curve changes.
At June 30, 2012, management estimated that the Companys 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 Companys 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 Companys 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 Companys 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 Companys 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:
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 Bancorps 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 Banks 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 Banks 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 Banks 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 Companys 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 Banks 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 Companys 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 Banks 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 Banks 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 Bancorps troubled debt restructurings and loans, see Note 4 Loans and Allowance for Credit Losses to the Companys audited consolidated financial statements included under the section Financial Statements and Supplementary Data in Item 8 of 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 Companys OREO, see the discussion under the subheading OREO and Critical Accounting Policies included in Item 7 of the Companys 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.
- 44 -
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 managements best estimate, as of the balance sheet date, of probable losses inherent in the loan portfolio. For more information regarding the Companys 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 Companys 2011 10-K.
- 45 -
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 Companys 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 Banks average total deposits in the most recent quarter, a decline from 12% in the second quarter of 2011. The combination of the Banks 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.
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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 Companys 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 |
Bancorps 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 Companys continued profitability. Also, the year-over-year increases in the capital ratios were positively impacted by the effect of fully reversing the Companys 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 Banks 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.
Bancorps 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 Banks 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 Banks 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 Banks 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 Banks commercial real estate loan collateral. The Banks 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 Managements 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 Companys 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 SECs 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 Companys disclosure controls and procedures are effective in ensuring that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SECs 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 Companys 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 |
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